The applicants are to pay the respondents' costs of the application including indemnity costs in respect of the proceedings against the third respondent;
The cross-claim is dismissed.
Liberty to the parties to apply in respect of the costs of the cross-claim.
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Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
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WESTERN AUSTRALIA DISTRICT REGISTRY WAD 252 OF 2003
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BETWEEN: FUBILAN CATERING SERVICES LIMITED (INCORPORATED IN PAPUA NEW GUINEA)
[5]
MINERAL RESOURCES STAR MOUNTAINS LIMITED (INCORPORATED IN PAPUA NEW GUINEA)
[6]
EUREST (SOUTH PACIFIC) LIMITED (INCORPORATED IN PAPUA NEW GUINEA)
[7]
COMPASS GROUP PLC (INCORPORATED IN THE UNITED KINGDOM)
[8]
EUREST (SOUTH PACIFIC) LIMITED (INC IN PAPUA NEW GUINEA)
[9]
COMPASS GROUP Plc (INCORPORATED IN THE UNITED KINGDOM)
[10]
REASONS FOR JUDGMENT
Introduction
1 Fubilan Catering Services Ltd (Fubilan) is a subsidiary of Mineral Resources Star Mountain Limited (MRSM). They are the applicants in these proceedings. Both are companies incorporated in Papua New Guinea (PNG). MRSM is the trustee of the Star Mountain Landowner Trust. It holds an interest in the Ok Tedi copper and gold mine in the West Province of PNG in trust for local landowners.
2 At the end of 1999 MRSM won a tender to provide catering services for Ok Tedi Mines Limited (OTML) at the Ok Tedi mine. A landowner company, Fubilan, was set up to provide the services under the OTML Contract. It was a requirement of OTML that a successful landowner tenderer secure the management services of a company with an international reputation in catering of the kind required under the contract.
3 As a result on 6 January 2000 MRSM and Fubilan, together with a statutory corporation, Mineral Resources Development Company Ltd (MRDC) entered into a Management Agreement with two members of the Compass Group of companies. One was the first respondent Compass Group (Australia) Pty Ltd then, and until 9 May 2003, known as Eurest (Australia) Support Services Pty Ltd (Eurest (Australia)). Prior to 19 March 1999 it was known as SHRM (Australia) Support Services Ltd. It is a company incorporated in Australia. The other Compass Group company which was party to the agreement was the second Respondent, Eurest (South Pacific) Ltd (Eurest). It is a company incorporated in PNG. The two companies had been acquired by the Compass Group in November 1999. Under the Management Agreement, Eurest was the manager and Eurest (Australia) guaranteed its performance. The catering contract with OTML, referred to in these reasons as the OTML Contract, was signed by Fubilan on 11 January 2000.
4 The relationship between Fubilan and Eurest was difficult from the outset and continued to be difficult for the life of their agreement. Fubilan, and its consultant Mr William Fenwick, alleged wrongdoing of various kinds by Eurest in connection with the formation and implementation of the agreement. They alleged mismanagement by Eurest and that Eurest (Australia) had obtained and retained the benefit of rebates and discounts in purchasing goods in Australia and PNG for use in the provision of services under the OTML Contract. Fubilan endeavoured to set up its own supply chain with intermediary companies in which it and Mr Fenwick would hold interests. At the end of 2001 Fubilan attempted to terminate its relationship with Eurest and substitute another manager. However OTML's approval for the termination was necessary and was withheld. Ultimately, and despite the commencement of these proceedings in 2003, the catering contract was renewed in August 2005 on the basis of an ongoing management relationship between Fubilan and Eurest which continues to this day.
5 MRSM and Fubilan commenced these proceedings in 2003 against Eurest, Compass Group (Australia) Pty Ltd, Eurest and Compass Group Plc, the United Kingdom holding company. No less than 18 causes of action were raised. They relied, inter alia, upon the Trade Practices Act 1974 (Cth) (TPA), breaches of fiduciary obligations, negligence and breach of contract. The trial of the action occupied 22 hearing days but much of the evidence was documentary. The total number of documentary exhibits was 523.
6 For the reasons that follow, the applicants fail on all their causes of action. They will have to bear the costs of these proceedings that were ill-conceived and made little commercial sense.
Factual History
2.1 The Ok Tedi Mine
7 The Ok Tedi copper and gold mine is a large open pit mine located in the Highlands of the Western Province of PNG near its border with Indonesia. It is situated at Mt Fubilan, roughly in the geographical centre of the island of New Guinea. A road links the mine site to a town called Tabubil, which is 12 kilometres south-east of the mine. Tabubil is linked by road to the town of Kiunga on the Fly River where there is a port facility for the transport of ore from the mine on barges.
8 The mine site lies within a special mining lease. There are four villages within the lease area. They are Bultem, Kavorobip, Finalbin and Atemkit (SML villages). Another six villages are located on land leased for purposes connected with the mine. They are Kumgit, Ankits, Niosikiui, Oktidetau, Wangbin and Migalsimbip (LMP villages). The SML villages together with two LMP villages, Wangbin and Migalsimbip are occupied by members of the Wopkaimin tribe. The tribe is subdivided into clans. The SML villages comprise the Aplamkrmin Clan. The two LMP villages comprise the Kamfaiwolmin clan. The remaining LMP villages belong to another tribe.
9 The ore deposit was discovered in 1968. Mining commenced in or about 1983. It is conducted under an agreement with the PNG government which is the subject of the Mining (Ok Tedi Agreement) Act 1976. The mine is operated by OTML. Until 2002 BHP Ltd had a majority shareholding in OTML. Following protracted litigation involving landowners in connection with environmental damage to the Fly River, BHP entered into an agreement with the PNG government and relinquished its 52% shareholding in OTML in favour of a company newly formed as the trustee of the PNG Sustainable Development Trust (Aua 6-7).
10 The Mining (Ok Tedi Agreement) Act provided that OTML would employ Papua New Guineans in all of its activities under the agreement and in all ancillary and related activities except where the employment of non-nationals accorded with the approved training and localisation program or as otherwise approved by the State (cl 30.1). The company was required progressively to replace foreign technicians, operators, supervisors, clerical, semi-professional, professional, administrative and managerial staff employed with the approval of the State with PNG nationals in accordance with a training and localisation program. This requirement was subject to the qualification that if the training and localisation program were disrupted by circumstances or events which, in the company's view made it difficult or impossible for it to comply with its obligations or to operate profitably by reason of the program, the company could give notice to the State with alternative or revised plans to achieve the objects of training and localisation. If the State did not approve the variations the company was bound by its original obligation (cl 30.3).
11 On 11 January 1991 PNG made an agreement with the Ok Tedi landowners defined in the agreement as "the members of the landowning clans represented in the Star Mountains Local Government Council". It provided for the landowners to take up to 25% of the State's 20% interest in the Ok Tedi mining project (ie 5% of the total equity of the project) (cl 4.1). The acquisition was to be effected by agreement between the landowners, the State and OTML shareholders and by a shareholders agreement (cl 4.2). Royalties received from the Ok Tedi mine were to be paid to the Fly River Provincial Government. Thirty per cent was to be paid by the Provincial Government to the landowners (cl 5). Twenty five per cent was to go to SML villages and 5% to the villages of Wangbin and Migalsimbip (cl 5). The PNG Government also undertook to use its best endeavours to ensure that a program to encourage participation by landowners in businesses associated with the mine operation was implemented by OTML (cl 7). The preceding history was uncontentious and I accept that it was correct.
2.2 Mineral Resources Development Company Ltd (MRDC)
12 There is a statutory corporation known as MRDC. It was established by the PNG Government to provide management services to landowner trustee companies in relation to assets which they held in mining and related projects. A number of MRDC officers were witnesses in these proceedings. They included:
(i) Madiu Andrew, who joined MRDC as a corporate affairs manager on 27 May 1995. From early 1996 to 1999 he served as alternate managing director to the then managing director, Dr Ila Temu. In May 1999 he became the managing director, a position he held until August 2001 when he left to begin working as a consultant. He is now PNG's Gas Project Coordinator attached to the Office of the Deputy Prime Minister.
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(ii) Michael Baitia, who began working for MRDC in 1997 as an assistant manager. He later became a commercial manager there. He is now the manager, corporate development (PNG) for Eurest.
(iii) Ronald Kolalio, who was employed by MRDC as its treasurer/accountant from December 1999. His responsibilities at MRDC included looking after treasury functions for the nine landowner companies that MRDC managed.
(iv) Melvin Yalapan, who was the company secretary for MRDC from 1997 to November 2002.
(v) William Boas, who worked with MRDC in 1999 and became its commercial manager in August 2002.
[12]
(vi) Francis Kaupa, who was appointed as the acting managing director of MRDC in October 2002 and who became managing director on 28 January 2005.
[13]
2.3 Mineral Resources Star Mountains Ltd (MRSM) - the landowners' trustee
13 On 13 February 1997 MRSM was formed initially under the name Mineral Resources Ok Tedi Ltd. By Heads of Agreement dated 26 May 1997 the Star Mountain landowners decided to take up the equity in the project, offered under the 1991 agreement with PNG, to the extent of 2.5% only. The financing of their acquisition was done under an agreement by which they would forego the other half of the 5% equity offered by the State. This history appears from the recitals to a deed dated 29 April 1997 setting up the Star Mountains Landowners Trust. It was a purpose of the Trust that the trustee would hold the Ok Tedi landowners' shares on behalf of those landowners (cl 2). MRSM was the trustee of the Trust. The beneficiaries were identified in a schedule to the trust deed as:
The landowners who are citizens and who belong to the villages listed hereof in Star Mountain Local Government Council Area, Western Province, who have land in OK Tedi Mine Area and who are accepted by custom and who severally and collectively group themselves in ten major villages of:
Atemkit
Bultem
Finalbin
Kavorobip
Migalsimbip
Wangbin
Oktidetau
Niosikiui
Kimguit
Ankits
On 27 March 1998 MRSM entered into an agreement with MRDC under which MRDC would manage MRSM's corporate and business affairs. MRSM officers generally referred to MRDC officers as Management.
14 The directors of MRSM included representatives of the clans making up the landowner group, a representative of MRDC and a representative of the Department of Mining. The directors at relevant times were:
Madiu Andrew, he succeeded Dr Temu as Managing Director of MRDC and as MRDC's representative on the MRSM Board from 1999.
Henry Asekim
John Atmeyok - he replaced his brother Daniel in 2000.
Daniel Atmeyok - he was a director from 1997 until 2000. He is from Kumkit village.
Kumar Aua, who represented the Department of Mining. He is now the PNG Ambassador to South Korea.
William Boas, he was appointed initially as a representative of the Treasury Department. He continued as a director after he left Treasury in 1999 and began working with MRDC. He became Commercial Manager of MRDC in August 2002.
Samson Buretam, who died on 1 February 2004. He was born in Kavorabip village.
Bill Menim - he was appointed as Chairman and remains in that office. He was born in Kavorabip village about 10 kilometres from Tabubil. He now lives in Finalbin village as he married a Finalbin woman.
Dr Ila Temu, who was Managing Director of MRDC and was appointed to the MRSM board from 1997 to 1999.
15 Prior to PNG and the landowners agreeing that the latter would take up a 2.5% equity interest in OTML dividends received by the State in respect of its equity in OTML had been paid to the PNG Treasury Department. This practice continued even after the landowners had acquired their interest. There was about 3 million kina due to MRSM from the State by the year 2000.
16 After its establishment in 1998, the MRSM board began to consider ways in which it could use money received from its shareholding in OTML for the benefit of landowners. Samson Buretam suggested that MRSM become involved in the provision of catering services for OTML. Dr Ila Temu supported that idea which was endorsed by the MRSM board.
2.4 The provision of catering services at Ok Tedi by Poon Bros 1989-1999
17 Catering services for OTML up to 1998 had been provided by Poon Bros (Poons), a Western Australian based company that provided such services to industry and in particular to remote mine sites. It carried on business in Western Australia and in the Eastern States of Australia including Queensland.
18 Mr Les Fereday was Poons' Queensland operations manager in 1980. He was based in Brisbane. He became operations manager for the Eastern Division in 1982. At about that time Poons secured a contract to manage the provision of catering services for Bechtel in connection with construction work at the Ok Tedi mine. When the contract came up for renewal in 1985 it was put out to tender and a Singapore based company called Spinneys was the successful bidder. Mr Fereday was appointed as general manager for the Eastern Division of Poons in 1987. The catering contract came up for tender again in 1989. Poons tendered through its Perth office and won the contract back.
19 In September 1989 the P&O Group acquired Poons' operations. It retained the trading name of Poons so that the operations continued under that name for some time after the acquisition. Mr Fereday was appointed by the P&O Group as director/general manager of the Eastern Division of the operation. PNG was treated as part of the Eastern Division. The provision of catering services at Ok Tedi therefore fell within his area of responsibility.
20 Poons was catering for four camps at the time. One was at the mine on Mt Fubilan, two were in Tabubil and one was at the Ok Menga power station. The management comprised 11 or 12 expatriates predominantly from Australia. So too were the executive chefs. Most of the workforce were PNG nationals who provided unskilled or semiskilled labour. They were trained on the job to a level where they could supervise other nationals, subject to direction from chefs, catering managers and project managers.
21 The term of the Ok Tedi contract was four years to 1993. It was rolled over for two successive one year terms ending in 1995. In that year OTML called for tenders for a new catering contract. Poons retendered and won the contract against Niugini Catering and an Australian-based company, SHRM (Australia) Pty Ltd (SHRM). That company had operated under that name for some 30 years. However on 19 March 1999 it became Eurest (Australia) Support Services Pty Ltd. At some time in 1999 the Cooper Group acquired the Eurest companies. Much later, on 9 May 2003, Eurest (Australia) became Compass Group (Australia) Pty Ltd (Compass), the first respondent in these proceedings. In 1995 SHRM was providing catering services to remote sites in Australia. It also serviced the Bougainville copper mine and some universities and defence sites in PNG.
22 Poons' catering contract was to expire in October 1999. There was no requirement in it for any ownership involvement or joint venture with local landowners. However, Roger Higgins, OTML's executive manager, told Mr Fereday it would be something that OTML would look at for the future. Mr Fereday had already had experience between 1989 and 1995 in developing joint venture arrangements with landowner groups. In February or March 1999 Mr Fereday and Greg McGrath of Poons had some discussions with Dr Ila Temu about the possibility of a joint MRSM/Poons tender proposal. Their discussions did not lead anywhere and Poons subsequently explored the possibility of a joint venture arrangement with another landowner company, Cloudlands Investments Pty Ltd.
2.5 OTML tries to reduce costs - the Fenwick Reviews 1995-1996
23 Between 1995 and 1997 OTML endeavoured to reduce some of its costs. It audited a number of its service contracts, including the catering contract. The executive manager responsible for the audit of the catering contract was Mr Burt Uglinga. He had been with OTML since 1984. He became executive manager at Tabubil in 1996. He was responsible for occupational health and safety, hospital amenities (including catering), recreation and counselling.
24 Mr Bill Fenwick was appointed under Mr Uglinga's supervision to review the catering operations. The appointment was made through his private company, Morocco Holdings Pty Ltd (Morocco). Mr Fenwick who had worked as a chef had a long association with Poons having been employed as their head chef in 1972 at the Windarra Nickel Mine in Western Australia. He was appointed their project manager for the Ok Tedi mine site in 1983. At that time Poons were catering for 5,500 mandays each day in the OTML catering operations. In 1985 Mr Fenwick was made Poons business development manager for Western Australia. In 1987 when Poons had lost the Ok Tedi contract and it went out to tender, he returned to endeavour to regain the contract for the company and in 1989 was successful in doing so. After that he came back to Western Australia and started his own remote site catering business called Fenwick Catering, which he sold in 1990. He moved to Cairns and ran a number of small businesses. In 1994 he returned to Western Australia and became a catering consultant through his company Morocco.
25 In about 1995 Mr Fenwick was contacted by Mr Bob Pink, OTML's superintendent for town services, and asked to undertake a review of Poons' billings under its catering contract. He prepared a report of what he described as overcharging by Poons. Mr Uglinga was concerned about the overcharging. He was told by Mr John Grubb, OTML's managing director, he had authority to recommend how to deal with the contractor. He provided a copy of the Fenwick report to Poons. In late 1996 Mr Fereday met with Messrs Grubb and Uglinga at the OTML office in Tabubil. He then agreed to reduce monthly billing to 776,000 Kina and pay back OTML for overcharging at the rate of 80,000 Kina per month.
26 Mr Uglinga thought there was an opportunity for future landowner involvement in the catering contract. He discussed the possibility with Mr Martin Paining, the OTML executive manager responsible for community business development. He identified different landowner groups at the mine site and at Kiunga.
2.6 Fenwick consults to OTML - 1997
27 Between 1994 and 1996 Mr Fenwick acted as consultant for a number of companies. In 1997 Mr Uglinga and Francis Tike, a business development manager from OTML met with him and representatives of Kiunga landowner groups to discuss a proposal under which the landowners would tender for the catering contract in relation to the Kiunga operations. This led to the incorporation of Kiunga Catering Services Ltd (KCS).
28 Mr Fenwick was engaged by OTML to monitor Poons' monthly billings to ensure that there were no additional charges. He said that he acted in that capacity for approximately 18 months until 1997. He referred to a written agreement between himself and OTML. That agreement however was made on 6 March 1997 and apparently pursuant to a letter of appointment dated 20 December 1996. Under the agreement Mr Fenwick's company, Morocco, was appointed by OTML to provide contract supervision services on all contracts then administered by OTML's Towns and Camps Administration Department. These included the catering services contract with Poons (PNG) Pty Ltd and the Kiunga catering and janitorial services contract with KCS. The obligations of the consultant under the contract with OTML included:
Check and verify all Contractors' claims for monthly progress payments. Discuss and resolve with the Contractor all anomalies and discrepancies. If unsuccessful in resolving such anomalies and discrepancies, refer to OTML for a decision.
Morocco was also required to provide OTML with monthly reports on each contract and three monthly contract review reports.
29 While he was providing consulting services to OTML in 1997 Mr Fenwick contacted Mr Jeff Hayes of what was then known as SHRM in Brisbane about possible opportunities for SHRM because of the problems that OTML was having with Poons. Mr Hayes had long experience in the catering industry. He had worked for the P&O Group for one year in 1981, for SHRM for 16 years and for Compass for four years. He is presently managing director of Cater Care Services Pty Ltd which specialises in the provision of remote site catering. He wrote to Mr Fenwick on 24 April 1997 attaching price structures for catering services provided by SHRM at the Olympic Dam expansion project (OEP). Although the letter bore the group letterhead "SHRM" and the address for SHRM (Australia) Pty Ltd, Mr Hayes signed it as general manager of SHRM (South Pacific) Pty Ltd.
2.7 Landowner interest in providing catering services - the MRSM Move 1997-1998
30 Mr Uglinga asked OTML's contract department to prepare a tender dealing with the Kiunga catering operations separately from those based around the Tabubil and Mt Fubilan operations. Tenders for that contract were received from KCS and Poons and KCS was the successful tenderer. It started providing catering services to OTML Kiunga at the end of 1997. KCS was a 100% landowner owned operation but employed an expatriate as manager of its catering operations. Mr Uglinga began dealing with landowners from the Ok Tedi mine site in relation to the catering contract for that site. He spoke to their representatives including Henry Asekim, Samson Buretam and Bill Menim.
31 The evidence about the origins of MRSM's interest in providing catering services to OTML is a little mixed but the uncertainty is not material to the issues in this case. Mr Buretam suggested that MRSM consider it. The then managing director of MRDC, Dr Ila Temu, supported the idea. It was endorsed by the MRSM board. It was also supported by MRDC professional staff who were assisting MRSM in managing the landowner business. They were Michael Baitia, who was MRDC's corporate affairs manager and Melvin Yalapan the company secretary for both MRSM and MRDC.
32 Samson Buretam took the lead in seeking the catering contract. He drafted a letter which was signed by representatives of each of the villages in the Mt Fubilan area supporting a proposal that the MRSM directors negotiate with a view to taking up the contract for the provision of catering services at Tabubil. He was a highly respected village leader and Mr Menim trusted his recommendation. It emerged from the evidence of more than one witness that Mr Buretam was very influential among the landowners, that people deferred to him and that there was a reluctance to say anything critical of him.
33 In 1997 Mr Uglinga introduced Mr Buretam to Mr Fenwick. Mr Buretam suggested that, because of Mr Fenwick's knowledge of the OTML catering contract, MRSM should appoint him to assist in preparing a proposal for OTML. Mr Baitia made contact with Mr Fenwick who agreed to act as MRSM's consultant. Mr Baitia and Mr Fenwick and MRSM's commercial manager, Ashok Jain, worked on a presentation to put to the MRSM board.
34 On 8 July 1998 Mr Dasim Kel, senior accountant, business development with OTML, wrote to Mr Fenwick. He informed him that OTML wanted to bring its catering and janitorial contracts under one entity upon their expiry on 30 September 1999. At that time the catering contract was held by Poons and the janitorial contract by Camp Administration Pty Ltd (CA). Poons had been advised that if it wanted to secure the next contract it would have to have a local partner approved by OTML. CA and MRSM had been identified as two relevant local groups. Mr Kel advised Mr Fenwick:
Both the two local groups mentioned above have rejected to enter JV arrangements with Poons, instead they have opted to go 100% themselves. So far five meetings have been convened between two groups, the latest being on the 29th June 1998. At that meeting the two groups finally resolved that they would form a new company that is owned 50% each and this company would then bid for the Catering Services Company [sic] as a 100% local company.
Mr Kel said that MRSM had nominated Mr Fenwick as its candidate for any future consultancy work and that CA had nominated a Mr Graham Braisby. He asked Mr Fenwick to provide a detailed CV, the hourly charge out rate of his consultancy service, an indicative salary should he be asked to manage the catering contract and any other information he believed might assist to make his presentation to the board of OTML attractive.
35 Mr Fenwick said that he did not receive the letter of 8 July 1998 until probably a week or two after it was sent. He received it in Medang. He did not know who MRSM was at that time. He didn't know Dasim Kel. He did not want to work for OTML and the letter was of no interest to him. He therefore threw it in the bin. This evidence, which was given by him in cross-examination, contrasted with his witness statement in which he acknowledged receiving the letter from OTML and at about the same time receiving a telephone call from Michael Baitia. The letter was produced by Fubilan and MRSM in the present proceedings which suggested that Mr Fenwick must have retained it and given it to them as part of their discovery. When this was pointed out to him he conceded that he had. He then said that his wife had taken the letter out of the bin, ironed it and put it in a filing cabinet. The original of the letter showed no signs of having been screwed up and ironed. When this was put to Mr Fenwick and the letter shown to him, he claimed to have confirmed with his wife on the previous evening that what he said had occurred, had occurred. This aspect of his evidence was not worthy of belief. Indeed his story about the letter which does not seem to have had any bearing upon any real issue in the case was proffered carelessly and almost recklessly and, in that respect, typified other aspects of his responses in cross-examination which tended to be highly argumentative. Mr Fenwick was on a retainer, up to the time of the trial, of $10,000 per month to assist Fubilan and its solicitors in the preparation of this case. He was financially and emotionally involved in its successful prosecution. In any event his evidence appeared to be that his initial contact with MRSM was the result of a telephone call from Michael Baitia which led to a meeting with Mr Baitia and the directors of MRSM at Port Moresby. His reconstruction, in his evidence, of a dismissive reaction to the letter of 8 July 1998 may be explicable on the basis that it came from OTML and that he regarded OTML as in the enemy camp.
2.8 MRSM and Fenwick negotiate - July 1998-September 1998
36 On 10 July 1998 a memorandum of understanding was executed between MRSM and Mr Fenwick, signed by him and by Mr Yalapan. It was done without the prior authority of the MRSM board. The document stated briefly:
Mineral Resources Star Mountains and Bill Fenwick agree that:
. Bill Fenwick will prepare a complete business plan for actual takeover of catering services in September 1999 by (MRSM).
. In planning, the consultant will always act in the best interest of MRSM to ensure that the proposal is complete within three (3) months.
. Continually consult with MRSM board of Directors and OTML business development (Francis Tike) for all updates plans. [sic]
37 On 8 September 1998 Mr Fenwick sent a letter to the MRSM board under the letterhead of Morocco. The letter affirmed "this company's acceptance to provide MRSM with professional Consultancy services". The services were to include detailed provisions of a business plan and supporting data with a view to presenting a proposal for providing catering services to OTML. A draft copy would be prepared and presented for review at the next board meeting. The letter gave information about Morocco and major clients serviced by it, elements of the proposed business plan, the need for a mobilisation plan and a management plan. Under the heading "Management Plan" Mr Fenwick said:
Management, where possible will be recruited in-country, this can be focused in the final proposal. Providing the client offers sufficient notice of contract award there will be ample opportunity to source a local management team.
He listed other strategies for discussion including MRSM's decision to monopolise the business. This "strategy" had as its objective control by the company of its own business so that it would not be controlled or managed by an offshore company. Mr Fenwick asked for a monthly retainer of A$4,500 initially and a negotiated success fee in the amount of $25,000 payable on contract award. Future project management rates were to be negotiated. He sought reimbursement of approved travel and accommodation. His writing style as evidenced in that letter and in other documents was awkward and rhetorical and frequently involved inappropriate use of words. This is no gratuitous observation as his authorship of various communications made in the name of other persons was a material part of the history of the events which have led to these proceedings.
38 Mr Fenwick prepared documents for consideration by the board of MRSM at its meeting in September 1998. One was entitled "Draft Proposal for MRSM "Business Planning"". Another was entitled "Business Plan MRSM 1999-2003" comprising 15 pages of text followed by various charts and diagrams relating to income and expense analysis and the like. A third document was entitled "Business Plan Presentation". It also bore the subheading "Port Moresby 14/8/98". Mr Fenwick said that the latter document was presented at the September board meeting. In cross-examination he would not remember whether it was a document he used in Port Moresby or at Ok Tedi. Its content suggests it was his speaking notes prepared to commend himself to MRSM. In addition to citing his personal experience and background they referred to opportunities for expansion based on "exhaustive management training measures to facilitate the opportunities".
39 The "Draft Proposal for MRSM "Business Planning"" recited that the directors of MRSM were "well capable people and appear expert in their engineering field" and that they had appointed Morocco "to help define their business and formalise a plan to stimulate future growth". The proposed methodology involved Morocco "directing MRSM through the processes of a Business Plan". The document referred to as the "Business Plan" bore the endorsement "Prepared by Morocco Holdings Pty Ltd (September 1998)". However it seems unlikely that it was prepared for the board meeting of 28 September 1998. Mr Fenwick was not sure when it was prepared or presented.
40 A meeting of the board of MRSM was held on 28 September 1998. Messrs Menim, Asekim, Daniel Atmeyok, Buretam and Temu were present along with Melvin Yalapan and Damien Ase. Francis Tike of OTML was present as was Mr Fenwick. The minutes recorded the Memorandum of Understanding of 10 July 1998 noting that it had been entered into without the approval of the full board. The board asked Mr Fenwick to present the draft business plan. He told them that his assumptions were based on real experience in catering contract activities with OTML. The board should approve his engagement so he could complete the business plan before December 1998 and present it to OTML leaving enough time for its consideration before the contract was awarded. MRDC Management and/or Mr Yalapan, explained to the board that under the current trust arrangement a new company had to be incorporated for the purpose of the catering contract. The company would be wholly owned by MRSM and its dividends put into the trust to be distributed to the beneficiary landowners. The name "Fubilan Catering Services" was discussed. It was then resolved:
1. That the Board formally engage the Consultant, Mr Bill Fenwick to prepare the proposal and plan for the OTML Catering Contract.
2. That a subsidiary company to be called Fubiland [sic] Catering Services be incorporated for purpose of running the OTML Catering Contract. The company will be 100% owned by MRSM.
3. That both the Chairman, Mr Menim, and Dr Temu execute the agreement to engage the Consultant, Mr Fenwick.
4. That the company pays the bills for the Consultant upon receipt of receipts which includes initial expenses incurred by the Consultant.
41 The landowner directors resolved to bid for the Ok Tedi catering contract. It was suggested at the meeting that MRSM could assist the landowners by:
Providing financial assistance or a guarantee to secure the catering contract.
Put into place a catering proposal to be submitted to OTML.
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The requirements for securing the contract were identified including a demonstrated ability by the proponent to efficiently provide the services to OTML.
42 On 26 October 1998 Dr Ila Temu, the managing director of MRDC and also an MRSM director, wrote to Mr Fenwick and informed him of the board's approval of his engagement for consultancy work. The new consultancy agreement superseded the MOU of 10 July 1998. He said:
As agreed, the fees for the Consultancy services will be K4,500.00 per month and a success fee of K25,000 upon successfully securing the contract for the OTML Catering Services. The payment of the consultancy fee will start from September 1998 when you first started work for the Company and includes any costs and expenses incurred.
Mr Fenwick's handwriting appears on his copy of the letter where he crossed out the references to figures in PNG currency and substituted the same figures in Australian dollars. Terms of Reference for the consultancy were attached. They recited the board's decision and required Morocco to prepare a detailed catering contract proposal for the Ok Tedi mine operation. It was to include proposals for financing arrangements, supply lines for food stuffs, the volume and value of stock to be available on site, cash flow forecasts and an indicative management structure. Mr Fenwick was also required to ensure that the catering contract proposal met and complied with OTML contract requirements.
43 The consultancy agreement required Morocco to perform work in accordance with the Terms of Reference to assist MRSM to secure the catering contract from OTML. The agreement was to commence as of September 1998 and would continue until December 1998 unless earlier terminated or extended by mutual agreement. Morocco was to be reimbursed for the costs incurred in performance of the agreement with a total estimated amount payable of A$4,500 per month. A success fee of A$25,000 would be payable if MRSM successfully secured the catering contract from OTML.
2.9 Mr Fenwick's business plan for MRSM - October/November 1998
44 Mr Fenwick's business plan stated that MRSM was formed in 1997 to provide local landowner groups with a vehicle to tender for catering services to OTML. It stated that MRSM would employ 80 staff and four senior managers and that the operation would be managed from Tabubil.
45 Mr Fenwick recited features of the existing catering arrangements for OTML no doubt based upon his own knowledge of those matters derived from his employment by OTML. He referred to the difference which he said was little between Lump Sum/Unit Rate then in use by OTML and the more commonly used Manday method of billing. The latter was gauged by an average daily camp occupancy over the month with set incremental rates inclusive of operational costs, product and profit.
46 Sales figures for 1997 and 1998 were set out with the words "Our sales figures are as follows". Projected figures for 1999 through to 2001 were included in his table. Mr Fenwick conceded in cross-examination that he had used information obtained in confidence as an OTML consultant to prepare the table. Under the heading "Proof of Sales and Profit" there appeared the statement:
MRSM have excellent historical data offering a high degree of commercial comfort.
It was put to Mr Fenwick that the "historical data" referred to OTML data. He conceded that indirectly it was. The business plan went on to say that:
MRSM would pursue and implement the promotion of local Management. Greater emphasis would be given to training to support to [sic] ensure this achievement.
He agreed emphatically with the proposition that this meant he was to implement the promotion of local management. Under the heading "Company Strategy Highlights" the following words appeared:
Successfully gaining the Ok Tedi contract
All vehicles to be replaced immediately.
Review purchasing procedures.
47 Under the heading "Unique Features" the business plan stated:
MRSM will have the best locally managed catering service in the country after initializing new training strategies.
Mr Fenwick accepted that MRSM would need a period of training before it could be locally managed. There had been a history of failed local landowner companies and ventures which might cause OTML to take a negative view of MRSM-based management. He proposed a management team which would include a project manager who would be a person experienced in camps and catering and having field experience in PNG. He also contemplated an assistant project manager, a catering manager and an assistant catering manager. Under the heading "Consulting Project Management Management" [sic] he wrote:
There will be a requirement for short term Project Management either through Morocco or through a preferred International Catering Group. This can be outlined in detail when MRSM decide their preferred option.
He accepted in cross-examination that the project manager contemplated could be his company or a preferred international catering group. His strategy even at that stage appears to have been to bring in a major catering company as a management contractor and then to phase it out. In answer to that proposition in cross-examination he said "it had possibilities" .
48 The business plan appended financial forecasts and cash flow budgets. He projected sales of K8 million in 1998 with a gross profit of K2.4 million and a net profit of K1.2 million. For the following year he projected sales of K9 million, with a gross profit of K2.7 million and a net profit of K1.35 million. It may be noted that at this time on Mr Fereday's evidence Poons were making about K800,000.
2.10 SHRM/Eurest expresses interest in MRSM - late 1998
49 Late in 1998 Mr Fenwick contacted Jeff Hayes who was then the general manager of SHRM (South Pacific) to discuss its possible commercial involvement. Mr Hayes met with Mr Fenwick in Brisbane in early or mid November 1998. Mr Fenwick asked him whether he was interested in exploring an arrangement with MRSM in relation to the pending tender. Mr Hayes and his company "were naturally interested in the project". After the meeting Mr Hayes sent a letter dated 25 November 1998 to the MRSM directors thanking them for their "… approach to discuss the possibility of working with MRSM for the provision of Catering and Janitorial Services at the Ok Tedi mine, Tabubil". He expressed SHRM's interest in developing partnership arrangements suitable to OTML and in keeping with stated OTML policies and directions. He referred to the experience of SHRM (South Pacific) in PNG for over 25 years and attached an outline of projects which it had undertaken over that period together with work currently in hand. SHRM (South Pacific) had recently obtained the catering contract in Port Moresby for the PNG Defence Forces. His letter also said that through SHRM's involvement in PNG it had relied heavily on supporting local business, employment and training and that this was most effectively demonstrated through its management of the Bougainville project:
The training provided by SHRM during those years has produced many of the senior chefs, managers and supervisors currently working in PNG.
Mr Hayes attached examples of SHRM's competency-based training modules. He said:
Our commitment is always training and remains one of our highest priorities.
The letter also referred to SHRM's considerable purchasing power which enabled it to purchase "at the best possible price". He wrote:
This competitive pricing would be passed on directly to the project.
He also said:
All goods, services and labour ordered or supplied on behalf of the project would be reconciled every four weeks, substantiated by the appropriate auditable paperwork.
In the penultimate paragraph of the letter he wrote:
It is our understanding that all costs will be reimbursable to SHRM (South Pacific) Pty Ltd and a Management Fee would apply for the provision of the services, purchases and training.
50 After the September board meeting Mr Fenwick made contact with a number of catering firms to see if they were interested in providing management support for MRSM in connection with the provision of catering services to the Ok Tedi mine. On 16 December 1998 Mr Greg McGrath, the manager of Poon (PNG) Catering and Services wrote to him confirming that P&O (PNG) was keenly interested in discussing with MRSM "possible management, or other mutually beneficial, arrangements associated with tendering for the next OTML catering contract" .
2.11 MRSM approaches OTML - January 1999
51 On 5 January 1999 Dr Temu wrote to Mr Fenwick informing him that MRDC supported the catering proposal in principle and would assist MRSM in seeking financing. He said that the MRDC board decision should pave the way for a formal proposal to be submitted to OTML management and that he was in the process of writing to OTML's managing director, Roger Higgins, advising him of MRSM's intention and MRDC's support. He concluded:
We are conscious of the timing factor once the Contract is open up for public tendering. We intend to undertake this before the end of the month. You will be advised on the timing of MRSM presentation to OTML as you will be MRSM's advisor on the proposal.
52 On 14 January 1999 Dr Temu wrote to Mr Higgins at OTML on behalf of the directors and shareholders of MRSM to express its interest in providing catering services for OTML. He referred to the MRSM board meeting of September 1998, the engagement of Mr Fenwick and his formal submission of the catering proposal on 14 December 1998. He referred to an MRDC board meeting held on 17 December 1998 which had considered the MRSM catering proposal and given its support to assist MRSM in seeking financing for the proposal. He said:
We are indeed grateful for an opportunity to formally present to you, MRSM's Catering Services proposal. We intend to submit this proposal to you in Tabubil at the end of January 1999.
Mr Yalapan drafted both this letter and the letter of 5 January 1999.
53 On 19 January 1999 Mr Fenwick wrote to Mr Baitia at MRDC enclosing "limited notes for the meeting at Tabubil". He emphasised the importance of the opening presentation in overcoming OTML resistance. He said:
Whilst there is a necessity to display professionalism, I would still favour/suggest some landowner oral participation.
A fax from Mr Baitia to Mr Fenwick on 20 January 1999 attached details of arrangements for the MRSM board meeting and presentation of its proposal to OTML management. At this time however the Ok Tedi landowners had threatened to shut down the mine. A further fax from Mr Baitia to Mr Fenwick on 22 January stated that MRSM's "Commercial Manager", a reference to MRDC, was seeking:
Poons' current charges for each category of service item.
The basis for Mr Fenwick's cost estimate for each of the items.
[15]
Mr Baitia also sought cash flow forecasts for the remaining years of the mine life.
54 On 23 January Mr Higgins replied to Dr Temu's letter of 14 January. He referred to the threats of landowner closure in the following week. This closure was evidently related to a dispute between landowners and the national government. Mr Higgins said:
I am not prepared to meet them to discuss the catering contract while this threat exists, or if it is carried out.
He said that OTML expected to issue bid documents in late March and would be seeking cost effective services of high quality. He said:
Our early communications from MRSM on the subject of the catering contract focused on their position as a preferred-area bidder, with no attention to capabilities, cost or quality. This has given me considerable concern, which I have expressed to the MRSM directors.
55 Mr Fenwick prepared a document entitled "MRSM Expression of Interest Catering Services OTML" apparently for presentation to OTML. It set out cash flow assumptions for the period January 1999 to December 1999 and cash flow budgets designated 1A, 1B, 2 and 3 for the period 1 January 1999 to 31 December 1999. The proposed budgets were based on different assumptions about the level of initial capital, stock purchases and catering plant and equipment.
56 On 25 January 1999 Ashok Jain, the manager-commercial of MRDC sent a memorandum to Dr Temu raising questions about the Fenwick proposal. These questions were referred to Mr Fenwick by fax on the same day. As Mr Jain saw it the economic viability of the proposal depended upon assumptions about sales volume, sales price and cost of food and raw material. There had been no supporting information provided. Mr Fenwick had assumed that sales would be made at a 220% profit margin. There was no information to confirm whether such a margin was typical and allowed for food wastage etc. No working capital had been considered. Normally it would be taken as three months' operating costs which would be K2 million. The assumed depreciation for tax purposes of 20% could be higher than what was permissible. Other cost items not considered included rent for the canteen, consumables, recruitment costs and the repairs and maintenance of plant and equipment. The management fee for the catering contract at K100,000 seemed low. There was no sensitivity analysis in the figures provided. There is no record of a response to that inquiry from Mr Baitia.
57 Mr Fenwick prepared some presentation notes for the meeting with OTML. These set out the history of MRSM, the function of MRDC and the relationship between the two companies. It referred to the relevant landowners and in support of the catering contract proposal stated:
. MRSM has the necessary funds immediately available to finance the catering contract.
. MRDC is committed to assisting MRSM in putting together the financing for this contract.
. The State will also provide the necessary guarantee as provided for under the Ok Tedi MOA with the landowners.
Under the heading "Professional Management" the notes stated:
. MRSM is conscious of the requirement of competent professional management
. MRSM has obtained "expressions of interestS" from several reknown [sic] caterers (including the current)
. These expressions of interests provide opportunity for a favourable management group.
. Below are the companies that have expressed interest in providing management to MRSM;
i) SHRM/EUREST
ii) Sodexho/Gardiner Merchant
iii) P&O Catering & Services [sic]
Mr Fenwick claimed in his notes that MRSM had obtained expressions of interest from three major food suppliers, one of which was the supplier to the current contractor. He stated that supply management and purchasing options were available to MRSM and would be further discussed and agreed with the successful supplier. Food stock from the current caterer would be purchased at value (on site/in transit). All other capital items and vehicles would be negotiated.
58 On 11 February 1999 the MRSM board held a special meeting in Tabubil. Madiu Andrew presented Mr Fenwick's proposal. He said MRDC would not provide a financial guarantee to MRSM but was prepared to assist in sourcing funds for the contract if required. Mr Baitia explained the components of the proposal and told the board that the information used to formulate the business plan was based on the content of the current scope of works and billing method. He said financing was a critical factor and that OTML would want to be convinced that the company had the funds available to offer the assurances required initially to finance the contract. He pointed to the two cash flow scenarios covered in the proposal. He also advised the board that a management arrangement would be the best option for the company. The board resolved:
That the Board approve the Catering Contract has presented by the Management (sic)
That the Board approve the Management of the Contract to be managed by a professional catering company under a Management Agreement.
It was also resolved that the proposal be presented to the OTML management with the assistance of Mr Fenwick and that his reengagement be approved as consultant for a further period of three months to put the contract and management arrangements together.
2.12 MRSM presents a proposal to OTML - February 1999
59 The evidence does not indicate the precise date upon which the MRSM proposal was presented to OTML. The recollections of witnesses seemed to vary. It appears likely from the documentary record that it occurred between 11 February 1999 when the board of MRSM met at Tabubil and 16 February 1999 when Michael Baitia wrote to Mr Hayes of SHRM, a communication which will be referred to below.
60 Mr Baitia's evidence was that he and Mr Fenwick made a presentation to OTML representatives comprising Mr Higgins, the managing director, Paul Cox-Martin, the contract superintendent, and three executive managers, Burt Uglinga, Bill Blenkhorn and Martin Paining. Mr Higgins told them that OTML supported landowners and wanted to see them succeed but that MRSM did not have the financial resources or the management experience necessary to undertake the catering contract. It would need to appoint professional offshore management. During the four year term of the contract the landowners would be able to learn how to manage the catering contract properly so they would be in a position to tender for it in their own right when it was next reviewed.
2.13 MRSM approaches various catering companies - February 1999
61 Following MRSM's presentation to OTML Mr Andrew asked Messrs Fenwick and Baitia to try to obtain expressions of interest from professional offshore management companies, to screen those expressions of interest and to preselect a company for consideration by the MRSM board in about three months. Mr Baitia and Mr Fenwick, with input from Ashok Jain, drafted a request for expressions of interest directed to professional offshore management operators identified by Mr Fenwick and Mr Baitia. They approached Sodexho, SHRM, Crocodile Catering and Poons. In his fax to them Mr Baitia said:
As per your Expression of Interest to MRSM in late November, last year, we wish to advise that we have begun discussions with OTML Management on the above. As such we advise that MRSM intend to enter into a Management Arrangement for the Ok Tedi Catering Contract which will be up for renewal before the end of this year.
Attached herewith please find the Terms of Reference for provision of management arrangement for the Ok Tedi Catering Contract.
Please submit a proposal with a management budget covering the Terms of Reference to us by the end of this week. For details on this matter please contact Mr Bill Fenwick on (675) 325 3855.
The attachment was drafted by Mr Baitia and Mr Fenwick. It included the term "Supply to be tendered at a fixed price". Mr Baitia did not recall what he had meant by that. He said he had heard a little about the question of rebates at that time but not the mechanics or technicalities of it. That was a matter he regarded as Mr Fenwick's area.
62 The terms of reference in the attachment contemplated that the management agreement would cover project management, supply, training and performance bonuses. The project management component involved the provision and oversight of catering supervision, administration of contract obligations, client and contract liaison, provision of quality food and service, provision of monthly accounts and quarterly reports to the MRSM board and assurance for providing and sustaining the management team. Suppliers were to be nominated and supply to be tendered at a fixed price. Terms of payment were to be 60 days and:
All rebates attributable to this contract are to be geared towards MRSM for training programs.
63 Mr Hayes of SHRM (South Pacific) responded to Mr Baitia with a letter dated 19 February 1999. He attached a summary entitled "Outline of Management Contract". He said that it should serve to outline items that would need to be considered. He said that SHRM (South Pacific) had specific experience in the kind of operation proposed and would work with MRSM to obtain maximum benefit for all parties concerned. He referred to current Australian operations of SHRM at Century Mine and at Roxby Downs. All of these included initiatives relevant to the OTML project. He said:
In summary we propose a moderate Management Fee clear of operating expenses integrated with a specific Gain-sharing arrangement that allows for remuneration based on performance.
64 The outline attached to the fax proposed that the contract would represent a combination of reimbursable costs and lump sums and, depending on performance, an opportunity for additional fee payments to SHRM through the provisions of an incentive payment program. Compensation estimates would include reimbursable costs. One element of the reimbursable costs was said to be "Consumables and Supplies" although explanatory notes indicated that this comprised consumables, tools and supplies required to perform the work other than catering supplies. I find that the outline of the contract was related to the provision of management services and did not address arrangements for securing food for use in the catering services.
65 Mr Baitia received responses from all the management companies to whom he wrote although the response from Poons was so late it was effectively not considered. Crocodile Catering were unlikely to be in a position financially to properly manage the contract so they were not further considered. The only real prospects for the provision of management services were Sodexho and SHRM.
66 Mr Fenwick's evidence-in-chief suggested that he had had a meeting with Mr Hayes in Brisbane which post dated the OTML presentation and that he had had that meeting in or about November 1998. Mr Hayes said he had been contacted by Mr Fenwick in the second half of 1998. He recalled the meeting which preceded his letter of 25 November 1998 and Mr Fenwick saying that he had been advised by OTML that it was prepared to consider engaging a landowner company provided it was managed by an offshore manager. Mr Fenwick had mentioned the need for such a manager to train MRSM personnel and that such training would be an important task for an offshore manager. Training previously provided by Poons had not been adequate. Despite some conflict abut the dates of their meetings, I accept that Mr Fenwick did make known to Mr Hayes between November 1998 and the end of February 1999 that OTML would only engage the services of a landowner catering company if it were supported by offshore professional management.
67 On 5 March 1999 Mr Hayes wrote again to Mr Baitia outlining his understanding of a "Cost Reimbursable Contract Management Fee". He identified as priorities, "Transparency of transaction, Accuracy of reporting, Quality of performance assessment, Equality of gain share distribution and Accuracy of initial budget criteria". Under the heading "Transparency of Transaction" he said, inter alia:
In establishing any partnership, it is imperative that all transactions are recorded, reported and presented in a professional transparent way, issues such as:
. Payroll costs and ancillaries.
. Food purchases and tendering.
. Rebates negotiated and received.
. Administration costs.
. Legislative and legal costs.
. Insurances.
. Capital expenditure.
2.14 Fenwick's catering management options for MRSM - 5 March 1999
68 In a letter of the same date to Mr Baitia, Mr Fenwick suggested three options for catering management for MRSM. They were:
SHRM/Eurest
Sodexho/Gardiner Merchant
Self-appointed management
[16]
The third option was explained thus:
Option #3 would offer the Group a more favourable position financially/administratively, however OTML would resist/oppose this, preferring commercial stability and professional support. This option, should not be ruled out, as it has been frequently stated by OTML that they are interested in retaining competitiveness. This being the case then the writer would find it difficult to justify the exorbitant cost of retaining off shore Project Management in favour of self management. OTML could not expect MRSM to subsidise Project Managers and at the same time retain equal competitiveness. The bottom line result could show the P/Managers to cost MRSM K40,000/K45,000 per month and for this the writer would question "is the cost prohibitive?" MRSM should take the opportunity to submit their own Management Team with the necessary professional support systems to perhaps encourage/display the Group's ability.
This observation disclosed what was said, by counsel for the respondents, to be a personal agenda pursued by Mr Fenwick to have himself appointed as professional manager for the landowner catering company. He denied in cross-examination that the reference to "the necessary professional support systems" was a reference to himself. Under the heading "Supply" in his letter, he wrote:
Food supply to site should be at a fixed contract rate (6 months). Contracting food prices in this manner affords MRSM the opportunity to forecast budgets and reduces the possibility of price hedging through rebating and re invoicing off shore.
Mr Fenwick also observed in the letter that should MRSM manage its own project it would be necessary to open supplier accounts.
69 Mr Baitia remembered receiving the letter from Mr Fenwick. He accepted that self-appointed management was an option considered by MRSM. He had not discussed with Mr Fenwick the proposition that contracting food prices at a fixed contract rate would reduce the possibility of price hedging through rebating and reinvoicing offshore. He could not recall whether the proposal that food supplies should be at a fixed contract rate was ever accepted by MRSM. Asked whether Mr Fenwick's technical recommendations were taken up, he said:
I cannot comment on that because really that matter was at his - when he was appointed all the technical discussions on the - so I - I cannot comment on the technicalities on that.
He said that he deferred to Mr Fenwick's judgment in matters of his expertise.
70 Mr Fenwick was cross-examined on his observations about the desirability of a fixed contract rate. By that he meant that the food to site should be "a fixed contract rate without a rebate and a net net situation, whereas the current goes through, you know, as I know it, current contractor was rebating and keeping a lot of the profits elsewhere". This characterisation was inconsistent with the terms of his letter. Mr Fenwick's role as advocate rather than witness of the truth in issues of importance in the case emerged early in his evidence.
71 On 8 March 1999 Dr Temu wrote to Mr Fenwick advising him formally of the resolutions of the MRSM board on 11 February and requesting him to undertake a profitability analysis on cash flows over the life of the mine. He also asked Mr Fenwick, when he had done that, to begin the review of any professional managers who had expressed interest in working with MRSM. He said:
This process should begin in Port Moresby next week. SHRM have expressed interest whilst Sodexho/Eurest are yet to submit theirs. Poons Catering may respond to us by early next week.
Mr Baitia and Mr Andrew were involved in the preparation of the letter. Underlying it was the hope that MRSM could be part of the contract for the life of the mine.
72 On 30 March 1999 Mr Baitia sent a fax to Mr Fenwick attaching a letter to Mr Fenwick of the same date from Dr Temu and documents received from Poons, although rather late in the piece. Dr Temu asked Mr Fenwick to undertake a comparative/assessment review of SHRM, Sodexho and Poons and to advise MRSM. His advice would form the basis of their final selection.
2.15 Hayes makes a presentation to the MRSM Board - March 1999
73 Following his letter of 5 March 1999, and on a date which is not clear from the evidence, Mr Hayes travelled to Port Moresby to give a presentation to the MRSM board. He was accompanied by Marcus Gosling. He told the board that SHRM had experience in Papua New Guinea and that it regarded training as important and would implement appropriate programs. He did not say anything about the details of training or give any commitment about the outcome of training programs. During the presentation he handed out brochures which included an SHRM profile and played a corporate video. Following the video, according to Mr Baitia, Mr Hayes told the board that SHRM had the experience and the ability to manage the OTML contract and was committed to working with the landowners to achieve the landowners' objectives. He said that the involvement of SHRM would only be in a limited role as after the initial contract period of four years the landowners would be in a position to move forward without professional offshore management. SHRM was serious about working back-to-back with the landowners and this would provide a real opportunity for it to get back into PNG on a large scale. With the closure of the Bougainville site, SHRM's largest contract in PNG had been terminated. According to Mr Baitia, Mr Hayes said that SHRM had trained PNG people to management level and were committed to ongoing training in management beyond the level of chef and relating to administration, accounts and site management. He pointed out the difference between the attitude of Poons who did not train nationals and that of SHRM. Mr Hayes said that SHRM's training programs had supported the Lae Technical College which they relied upon to train their caterers and also to provide a source of employees with some training and experience. Mr Gosling also spoke of his experience in the management of catering on remote sites and the level of experience he could bring to the operation. Mr Baitia said that at the end of the meeting he thanked Mr Hayes for his presentation.
74 Mr Fenwick's recollection of the same presentation was that Mr Hayes provided a profile of SHRM and a document entitled "SHRM Profile". During his presentation he had spoken about the necessity for training. Mr Hayes also asserted that for 20 years Poons had done nothing in relation to training.
75 Samson Buretam who was at the meeting had met Mr Hayes previously. They had been introduced by Mr Fenwick at Tabubil. At the time Mr Hayes was at Tabubil to discuss options for OTML with Mr Fenwick and Teraupo Apoki of OTML if OTML were not able to resolve the problems they were having with Poons. Mr Buretam recalled Mr Hayes' presentation to the MRSM board taking place at the Ninth Floor of Pacific Place in Port Moresby in the MRDC boardroom. He confirmed that Mr Hayes said that SHRM would provide an effective management service and training for PNG nationals above chef to management level. They would have an open book approach and the board would have access to the accounts. Madiu Andrew recalled the presentation as being "focussed on transparency and honesty". He believed that Mr Hayes and Mr Gosling were trustworthy and felt that the directors were excited by their presentation.
76 Following Mr Hayes' presentation he and his associate left the room and the board then agreed to go ahead and engage SHRM. Messrs Baitia and Fenwick were asked to open negotiations with SHRM with a view to developing a tender proposal.
77 The documentary records show that on 7 April 1999 Mr Hayes wrote to Mr Baitia enclosing what he called "a proposal for the mobilization of the OKTEDI contract". The stated intention was to more specifically define the processes involved, SHRM's perception of the priority and suggest some timeframes for implementation. The document was to assist with initial discussions and to develop the basis of a firm plan to manage and monitor progress. He said he looked forward to meeting Mr Baitia in the near future. The letter, although signed by Mr Hayes as general manager of SHRM (South Pacific), was on a Eurest (Australia) letterhead. (X 21) In cross-examination Mr Hayes accepted the description of the document as a program of work to be done to get to the point of submitting a tender.
2.16 MRSM decides to engage SHRM/Eurest as catering manager - 30 April 1999
78 The board of MRSM next met on 30 April 1999 in Port Moresby. Among the papers placed before it was a letter dated 15 April 1999 from Mr Fenwick attaching his assessment of SHRM, Poons and Sodexho as potential project managers for the catering services contract with OTML. He described SHRM as having a very professional approach. The Eurest group had recently purchased SHRM and this would "put them amongst the world leaders in remote Site Catering and Services". Mr Hayes was "an extremely astute individual with excellent credentials …". He referred to SHRM's existing work for the defence forces in PNG and at PNG universities and colleges. They had offered a far more competitive price than Poons with a further opportunity to restructure and negotiate.
79 Directors present at the meeting on 30 April 1999 were Messrs Menim, Aua, Henry Asekim, Daniel Atmeyok, Buretam and Temu. Michael Baitia and Damien Ase were also in attendance. Mr Baitia led the presentation on the OTML catering contract management proposals. He told the board that it needed to make a decision then and appoint the catering manager of its choice before the current contract between OTML and Poons expired. He pointed to the need for MRSM to enter into a memorandum of understanding with the management company to put tender documents together and value the assets. Supply lines would have to be established and a mobilisation process begun. The board then resolved:
That SHRM/Eurest be engaged to provide management service for MRSM to manage the OTML Catering Contract upon successful tender and awarding of the contract.
That Fubilan Catering Services be incorporated to hold the OTML Catering Contract for the company and to enter into Management arrangements with the management company to manage the contract.
The board was also presented with a report on its 1999 management accounts. Its share of the dividend payment received from OTML represented income of K2,273,684. There was discussion about the imposition of 25% income tax and the desirability of having OTML pay the dividends directly to MRSM and not through the Department of Treasury and Planning.
80 The board resolved, in light of its decision to engage SHRM to provide management services for the OTML Contract, Mr Fenwick's service as a consultant should come to an end. Mr Baitia in cross-examination could not recall whether that resolution was acted on. As appears from the documentary record, Mr Fenwick was offered a new consultancy with MRSM just over six weeks later, on 18 June 1999. Mr Baitia accepted in cross-examination that the reappointment of Mr Fenwick was done essentially to safeguard MRSM's interests in the preparation of tender documentation by SHRM.
81 Following the board meeting Madiu Andrew kept in contact with Mr Higgins of OTML. He spoke to Mr Higgins to keep him informed of MRSM's interest in the catering contract when dealing with him in relation to other issues. He also lobbied the executive manager, Robyn Moyna to support the proposal with Mr Higgins. Mr Higgins told him that he supported the proposal for landowner involvement in the catering contract and took comfort from SHRM's involvement as it dealt with his concerns about ensuring a consistent quality of service to OTML employees.
82 On 10 May 1999 Mr Andrew, on behalf of MRDC, wrote to Mr Hayes informing him that the MRSM board had considered the SHRM/Eurest proposal and had directed that it be discussed in more detail as a necessary step before finalising a Management Agreement. Tender documents were expected at the end of May. It was important that before the tender was put out by OTML discussions proceed with SHRM to firm up details of a management agreement. In a fax dated 14 May 1999 Mr Hayes informed Mr Baitia that he was booked to arrive in Port Moresby on 24 May 1999 and depart on 28 May 1999 and would be able to meet with him during that time.
83 Mr Hayes met with Mr Yalapan and others on 25 May 1999. This resulted in a letter to SHRM/Eurest dated 3 June 1999 in which Mr Yalapan, who signed himself as acting managing director, offered terms of a management agreement between MRSM and SHRM/Eurest. In the meantime on 1 June 1999, Mr Baitia obtained a copy of the OTML tender document. It comprised information to tenderers, tender requirements, the form of tender and the contract documents including general and special conditions, compensation, scope of work, specifications and OTML's standard supplementary conditions. The deadline for tenders was 5pm on Monday, 5 July 1999. Part 1 of the information to tenderers under the heading "Localisation and Local Business Development" stated that, consistent with the requirements of the Ok Tedi agreement, OTML had a policy of giving preference to competitive bids from PNG businesses and individuals, particularly those businesses and individuals originating from the Preferred Area which was defined as the Kiunga and Telefomin sub provinces of Western Province. Foreign companies and companies outside the Preferred Area were strongly advised to consider operating in joint venture or similar suitable arrangements with a local business group. Clause 10.2 of Pt 2 of the tender information stated that OTML would not be bound to accept the lowest or any tender. The statement of preference to tenderers who originated from the Preferred Area was repeated.
84 In his letter of 3 June 1999 to SHRM/Eurest, Mr Yalapan put MRSM's offer. Its essential elements were that SHRM/Eurest would manage the catering services contract on behalf of MRSM and would prepare a proposal for the tender to OTML as MRSM's catering contract manager. The tender proposal would be subject to MRSM's prior approval and formally submitted by MRSM. A draft MOU would be prepared to formalise the arrangement and would be superseded by a management agreement between the parties to be entered into in July 1999. MRSM would cooperate with SHRM/Eurest in providing its financial commitment to the contract and other necessary information to facilitate the tender proposal. The letter was countersigned by Mr Hayes on 9 June 1999 and endorsed with the following words in his handwriting:
Subject to demonstration that MRSM has adequate funds to finance the operation of mobilization of the OTML Contract 99046.
85 On 9 June 1999 the prospective tenderers went to Tabubil for what was described as a "Bidwalk Visit". Messrs Gosling and Hayes attended from SHRM/Eurest, Messrs Moore, Fereday and McGrath from Poons and two representatives from Crocodile Catering. Mr Baitia attended from MRSM. OTML was represented by Messrs. Cox-Martin, Ani, Musio and Artekain.
2.17 MRSM reengages Fenwick - mid June 1999
86 In the middle of June 1999 Mr Fenwick was reengaged by Mr Baitia as a consultant of MRDC and MRSM in relation to the preparation of the tender documents. His consultancy services were set out in his letter of 16 June 1999. They included ensuring that SHRM/Eurest provided a quality tender document, preparing budgets from the bid document, negotiating the most attractive financial arrangement for the group in association with SHRM/Eurest and outlining and discussing strategies for reducing operational expense. He also offered to ensure that the training program provided would meet OTML's expectations. He offered to scrutinise the Management Team Proposal and Localisation Schedule. He offered professional advice in relation to the nomination of food supply agents and the putting in place of period contracts. He proposed a fee of A$5,500 per month for a total period of two months and reimbursement of travel, accommodation and meals expenses, together with a vehicle for his use in Brisbane.
87 Mr Andrew responded to Mr Fenwick's letter on 18 June 1999. He invited him to provide his services for two weeks to safeguard MRSM's interest in the preparation and documentation of the tender proposal. The scope of his services was as set out in Mr Fenwick's letter. Mr Andrew also required that the existing fee of A$4,500 be maintained on the basis that a change to A$5,500 would require a board resolution. On the same day he sent a letter to Mr Gosling, the general manager of SHRM/Eurest, advising that Mr Fenwick would be in Brisbane on Wednesday, 21 June "to team up and work the proposal with you".
2.18 MRSM and SHRM/Eurest make an agreement - July 1999
88 On 24 June 1999 OTML issued a notice to tenderers designated "Notice No 3" and on 25 June 1999 another notice designated "Notice No 4". Notice No 3 stated that preference for employment of catering staff under the new contract had to be given to PNG nationals employees of the current catering contractor. Notice No 4 extended the tender closing date by seven days from 5 July 1999 to 13 July 1999.
89 On 25 June 1999 Mr Baitia sent a draft Memorandum of Agreement between MRDC and SHRM/Eurest to solicitors, Fiocco Posman and Kua for their comment. The draft was copied to Messrs Hayes and Fenwick and to SHRM's solicitor, Mr Lewin at Holding Redlich in Brisbane. On 6 July 1999 Mr Hayes wrote to Mr Baitia pointing out that the OTML contract would require undertakings and assurances from the contractor including a requirement that the Memorandum of Understanding between SHRM and MRSM be executed before lodgment of the tender.
90 On 7 July 1999 Mr Hayes of SHRM signed a letter to Mr Yalapan who was still acting managing director of MRSM. The letter, which was subsequently included in the MRSM/SHRM tender, set out the relationship between those two parties. It recited SHRM's understanding that MRSM intended to incorporate a wholly owned subsidiary to carry out the catering services and that the subsidiary would be party to the contract with OTML should the tender be successful. Additionally the subsidiary would be the other party to a management agreement with SHRM. The obligations of SHRM set out in the letter included preparation of the tender in accordance with the requirements of OTML and the delivery of the first draft of that tender to MRSM by 8 July 1999. MRSM was to lodge the tender by 13 July 1999. The company tendering would be MRSM (or its subsidiary). If the tender were successful MRSM or its subsidiary would pay to SHRM:
(i) an annual management fee payable by equal monthly instalments … includes offshore support costs not identified as direct project related expenses.
(ii) the amount of the management fee will be increased annually during the term of the Contract with OTML by an amount to be agreed … and absent agreement by the same percentage as the fees payable to MRSM (or its subsidiary) by OTML under the Contract increase.
There was provision for an additional incentive fee comprising 50% of any net profit before tax in excess of guaranteed profits per annum to MRSM achieved from the project. There would also be a 50/50 profit split between MRSM and SHRM to cover items not noted in the tender documents with OTML and later agreed to be carried out.
91 MRSM or its subsidiary agreed to provide all financing for the project estimated to be approximately K3 million, including purchase of stock, security deposit, salaries and other mobilisation costs for staff, cost of food for approximately 30 to 60 days and equipment purchases or lease costs. SHRM nominated Messrs Hayes and Gosling as its representatives for the purposes of the tender and the Management Agreement. MRSM nominated Melvin Yalapan and in his absence Michael Baitia. Clause H1.5 of the letter stated:
Nothing in this document constitutes:
(a) a joint venture;
(b) a partnership; or
(c) the relationship of principal and agent or employer and employee
between the parties, and this document does not create any such relationship. Neither party has authority to bind the other by any representation, declaration or admission, or to make any contract or commitment on the other's behalf, or to pledge the other's credit.
The letter was countersigned by Mr Yalapan on 9 July 1999.
2.19 Poons submits its tender to OTML - July 1999
92 Poons' tender went into OTML on 11 July 1999. It attached a Memorandum of Understanding for a joint venture between Poons (PNG) Ltd and Western Catering said to represent many "Preferred Area" businesses, groups and individuals. Poons proposed to continue with training and localisation programs commenced under its existing contract. Mr Fereday said that in 1997 Poons began an apprentice training school at Tabubil for employees on the OTML contract and in 1998 introduced management training for PNG nationals who were employees. The management training was done with a program called "Frontline Management". It was coordinated out of Poons' Brisbane office. Mr Fereday recalled that in 1999 two of Poons' employees Lucas Togemas and Jacob Moro were flown to Brisbane to take part in the course.
2.20 MRSM Board approves OTML tender - July 1999
93 A special board meeting of MRSM was held on 12 July 1999. Members present were Messrs. Menim, Henry Asekim, Daniel Atmeyok, Samson Buretam, Mr Kumar Aua, William Boas and Melvin Yalapan as an alternate to Madiu Andrew. Mr Baitia and Damien Ase were again in attendance. Mr Fenwick was also in attendance by invitation. According to Mr Yalapan, Mr Fenwick did not have very much to say. The proceedings were conducted in pidgin.
94 Mr Yalapan thanked the board for the confidence it had in the Management for putting the arrangement together with Mr Fenwick for the OTML catering contract. Mr Baitia then presented the tender documentation including the MOU signed between the company and SHRM/Eurest. He explained some of the background and the fact that there would be no immediate cost to MRSM. He then called upon Mr Fenwick to explain financial aspects.
95 Mr Fenwick told the board he had been working with SHRM/Eurest in Brisbane for the previous two weeks. The management fee that had been negotiated was against an assured profit margin of K1.2 million per year. It would be A$18,500 per month, amounting to A$225,000 per year. It was a fixed fee and only adjustable in accordance with CPI increases in Australia. Mr Fenwick agreed in cross-examination that that was the "key negotiation" with SHRM/Eurest. Mr Aua asked whether SHRM/Eurest had any experience with the catering business in PNG. Mr Fenwick told the board that SHRM/Eurest was an international company with an annual turnover of A$8 billion. It was already involved in the Bougainville copper mine and operated the catering contract for universities in PNG and the PNG defence force.
96 The board was advised that training was included as an important component of the contract but would be at a cost to the company. The training requirement had to be assessed for three to six months before Management could put a firm training program to the board for approval. The management company SHRM/Eurest had put a lot of emphasis on training and this was said to be well documented in the tender documents.
97 The board passed a number of resolutions. The first approved and endorsed the Memorandum of Understanding between MRSM and SHRM/Eurest and its execution by Mr Yalapan. The tender document was accepted and approved and approval given for the company to formally tender for the OTML catering contract. A resolution was also passed in the following terms:
That the Board approve and rectify (sic) the services provided by Mr Bill Fenwick of Morocco Holdings to date and approve payment for services provided in the last five (5) weeks where he assisted with the Tender documentation.
By a further resolution the board approved the engagement of Morocco during the mobilisation period of the contract to assist with the valuation and assessment of the tender document for the OTML contract and to assist and where necessary supervise the mobilisation process. MRDC was authorised to negotiate the terms of a management agreement with SHRM/Eurest and to submit it to the board for approval.
98 The executive summary in the tender document identified as critical issues training and development, localisation of the workforce, quality operating performance and financial considerations. Under the heading "Management Agreement with MRSM" it was said that Eurest would operate the OTML contract under its management agreement with MRSM and that "Full operating and contractual autonomy will rest with Eurest". Arrangements with MRSM would be through an independent board.
99 In the introduction to the tender it was stated:
Eurest is part of Compass Group, the world's leading catering and services management company. Compass Group enjoys a leading position in the world foodservice market, employing in excess of 170,000 staff in over 49 countries. Annual turnover for financial year 1997 was Ł3,703.0 million ($AUD10,391 million) with net assets of Ł1,385.2 million ($AUD3,886.9 million).
100 Under the heading "Staff Development" reference was made to the institution of a Eurest Training and Quality College. All courses were said to be based directly or indirectly on the Australian National Training Authority. The document continued:
Eurest will institute a training and development program to guarantee the required job skill levels are maintained by all employees and that skills and knowledge are continually improved. Further details regarding Eurest's proposed Training and Localisation plans are included in Attachment 4.
And at p 24 of the tender it was said that:
A key focus of Eurest would be the ongoing development of National Workers achieved through predetermined Training and Localisation programme (identified in Attachment 4). This program will comprise of both on-site training and further training opportunities within PNG and in Australia.
101 The tender document attached a schedule of rates which comprised Schedule 3. It included what were referred to as "Localisation Price Adjustments". These were adjustments to be made to certain monthly lump sum payments following localisation of expatriate positions within the contractor's on-site organisation. These evidently reflected a reduction in the rates payable to particular staff upon the replacement of expatriates with locals. They were a guide to anticipated localisation dates which included July 2000 for a Training Chef Instructor, December 2000, July 2001 and July 2002 for successive Chef Instructors and July 2003 for a Catering Manager.
102 A Training and Localisation Plan was set out over some four pages. A work skills analysis of all employees, the structuring of training courses and schedules and the implementation of concerted training for immediate lift in standards was the objective for the first year. The introduction of advanced training with an emphasis on supervisory and leadership training was contemplated for year two, and management training for year three. A training and localisation flow chart was included. A local employment strategy with nine elements occupied some 22 pages.
103 Key expatriate project personnel were identified. They were:
Barry McKinlay, Project Manager.
Noel Morrison, Catering Manager.
Stephen Ehlers, Executive Chef Instructor.
Phillip Hart, Training and Quality Assurance Officer.
Chris Dale, Chef Instructor.
Armand Watters, Chef Instructor.
There was no localisation plan in respect of the project manager's position.
2.21 OTML seeks price variations on tender - August 1999
104 OTML prepared its own "shadow bid" to enable it to assess the tenders submitted to it. On or about 17 August 1999 it also prepared a comparison of the tenders received. The highest figure was that of Crocodile at K114,902,416, MRSM came in next at K59,293,890. Poons offered the lowest figure of K54,481,829. The shadow bid estimate was K60,534,346.
105 On 23 August 1999 OTML wrote to Mr Andrew at MRSM. The letter was headed "Request for Tender Clarification No 1". It requested pricing for items 3.1 and 3.3 in Schedule 3-1 of the tender document based on varied sample menus which were attached. It also requested that MRSM give an onsite presentation of the tender sometime in the week commencing 6 September 1999. Somewhat belatedly, on 31 August 1999, Mr Baitia faxed a copy of the letter and attachments to Mr Hayes and also to Mr Fenwick. Mr Hayes responded to Mr Baitia the following day asking whether OTML would accept email or direct fax of the response documents before closing time on 3 September. Time being short, he sent his response to the Request for Tender Clarification direct to OTML on 3 September. It was addressed to Mr Paul Cox-Martin, the Superintendent Contracts Administration. Mr Hayes pointed out that the proposed menus from OTML reflected a general reduction in the quality and variety of foods which had been proposed in the tender. He accepted that the variations would warrant a reduction in price. He adjusted the tender schedules accordingly.
2.22 OTML, MRSM and SHRM/Eurest meet at Tabubil - 9 September 1999
106 On 9 September 1999 the foreshadowed meeting between representatives of OTML, MRSM and SHRM took place at Tabubil. Representatives of OTML's Contract Administration and Towns Departments and its Superintendent for Health and Safety attended, as did Mr Hayes, Mr Baitia and Mr Damien Ase, a corporate lawyer employed by MRDC. Mr Ase recorded, in a memorandum dated 17 September 1999, that Messrs Baitia and Hayes explained the relationship between MRSM and SHRM/Eurest. OTML representatives questioned how OTML would be involved in the arrangement between MRSM and SHRM/Eurest. They were told that it would have access to the group's accounts and the operation would be transparent so that OTML could see how it was managed. The OTML Business Development Section would be involved in reviewing the agreements between the two parties. Mr Hayes said that training was an important part of the arrangement and would include overall training for the catering contract and the training of local participants. Mr Ase's memorandum further recorded:
The OTML representatives raised the issue of the menu's which were submitted on the tender document because the costs are very high. Whether there will be alternative menu's and what effect this will have on the price and profitability? They were advised by Mr Hayes that there substantial changes have already been made to the pricing. [sic]
2.23 SHRM/Eurest acquires Poons - October 1999
107 At the annual general meeting of the principal P&O Group company in the United Kingdom early in 1999 the chairman announced that the Group would be disposing of "non-core" businesses including the P&O Services Division in Australia. This included the Catering Services business of Poons. According to Mr Fereday's evidence which was not in contention on this point, the catering business was effectively put out to tender. Ultimately two serious contenders emerged, one of which was a joint venture between Eurest and the Spotless group of companies.
108 In September 1999 it appeared that SHRM/Eurest had become the preferred bidder for the acquisition of Poons' business. Mr Hayes received an inquiry from Mr Cox-Martin of OTML about the acquisition on 17 September 1999 to which he gave an immediate reply by a handwritten return fax. On 20 September 1999 he wrote to Mr Cox-Martin confirming that Eurest had been selected as the exclusive preferred bidder. The businesses to be acquired included the domestic food services business in Australia and PNG covering business and industry, education, leisure and remote site food services. He said that he anticipated the agreement would be signed by the end of September 1999, with completion by the end of October 1999. He wrote:
A transition team is being established to manage the integration. At this stage, we believe OTML should make the relevant decisions based on commercial and local issues. We however are available to discuss with OTML, any specific concerns they have in order to ensure the most effective service is delivered.
109 On 24 September 1999 Mr Hayes sent to Mr Cox-Martin revised tender schedules reflecting the change in menu selection and implications of a 37% duty rate. Mr Baitia had not been involved in the process of revising the schedules but he was aware of it. He accepted in cross-examination that he had no complaint with OTML's request for a variation of the tender schedules based on reduced menus. He was sent a copy of Mr Hayes' letter to Mr Cox-Martin of 24 September 1999.
110 On 1 October 1999 Mr Copdevila, managing director of SHRM/Eurest, wrote to Mr Higgins confirming that SHRM/Eurest was the successful bidder for the Poons' business, which he referred to as P&O Catering & Services. He said:
Owing to the advanced stages of the tender evaluation process, we wish to advise you of our absolute support for the decisions made by OTML which we understand needs to address the local and commercial interest of OTML and local communities.
He also said that the company name would be changed to Eurest (PNG) Pty Ltd in the near future. The letter was copied to Mr Baitia.
111 Before the Christmas break in 1999 Mr Hayes met Mr Baitia at the MRDC office in Port Moresby and told him that SHRM/Eurest had taken over Poons so that he had two bids, one from Poons and the other from MRSM. According to Mr Baitia, Mr Hayes told him that he now had to work out who he was going to represent. Mr Baitia asked which one he was going to support and, according to his evidence, Mr Hayes responded:
I assure you Michael that I will be going with the MRSM/bidFCS bid.
112 In cross-examination Mr Baitia accepted that the letter to OTML of 1 October 1999, which had been copied to him, did not state that Eurest was supporting the MRSM bid. He was asked whether he raised any complaint with Mr Hayes or anyone about SHRM/Eurest saying to OTML that it should choose between the MRSM/SHRM bid and the Poons' bid. He said:
At the time, I think it was the - really it was beyond our control, if I can remember.
113 On 28 September 1999 Damien Ase sent a memorandum to Mr Andrew on the subject of the MRSM tender. He advised that the OTML management had met on the previous day to decide on the award of the contract and that it looked certain that MRSM would be awarded the contract to be managed by SHRM/Eurest. It was therefore necessary to put in place financing and legal arrangements pursuant to the MRSM board decision of 12 July. He proposed the incorporation of a subsidiary of MRSM to be called Fubilan Catering Services but raised the possibility that because of MRSM's tax exemption under the MRSM Trust, it would be preferable for MRSM to trade under the registered business name Fubilan Catering Services. He referred to the need for K400,000 for a security bond and to meet costs relating to mobilisation and other costs for management of the contract. The current contract was being rolled over to November to give the new contractor time for mobilisation and to put other necessary arrangements in place. Mr Ase then referred to the acquisition of the Poons' businesses by SHRM/Eurest and said:
This is a new development which the MRSM consultant, Mr Bill Fenwick, is current [sic] working on with the supply company based here. Under the proposed arrangement, MRSM and other landowner companies including that for Ramu and Kutubu project will buy shares in Logistics Network Limited which will supply everything from food to chemicals and other necessary equipment for mining operations in PNG. This is another opportunity to diversify investment from the Trust Funds which will result in another dividend payment for MRSM.
He reported that OTML management seemed to be supporting the arrangement as it was hoped that the company would provide all the necessary supplies for the OTML mine and catering operations. Mr Ase asked that MRDC management provide guidance and advice.
2.24 OTML seeks an amalgamated proposal - 1 October 1999
114 On 1 October 1999 Mr Higgins wrote to Mr Fereday at Poons, Mr Menim at MRSM and Mr Hayes at SHRM advising that OTML was very close to finalising its evaluation of the bids received "for the above contract". He said that the merging of the catering business of Poons (PNG) Ltd and SHRM (South Pacific) Pty Ltd provided an opportunity to ensure the best possible outcome for all the parties, OTML, the caterers and the interested landowner groups. He wrote:
OTML has two proposals which are now in effect from a common catering industry source. Each of the proposals is superior to the other in certain respects, and is inferior in other respects.
OTML would obviously like to obtain the best contract possible in terms of economic value as well as relationships. This should now be achievable from the present positions, with little further effort.
Rather than proceed with competing proposals from a single industry source, we would like to amalgamate the proposals as soon as possible with a view to an immediate award.
We also note that we must yet finalise the contractual standard menu and the applicable meal prices. The prices also need to be reviewed and finalised in the light of the likely effects of import duties and credits which may arise from third party sales.
He proposed a meeting of the parties on 5 and 6 October in Port Moresby. A few days after receiving the letter Mr Fereday, who was still based in Brisbane, went to see Mr Hayes and gave him an electronic copy of the spreadsheet supporting the Poons' tender. Mr Hayes in turn provided him with a copy of the schedules for the Eurest tender which Mr Fereday used to make a simple comparison of the respective rates back at his office.
115 Mr Menim, on behalf of MRSM, replied to Mr Higgins on 4 October 1999. He said, inter alia:
We wish to advise you that we will attend the meeting but if Mr Les Fereday is present at this meeting we (MRSM Reps) will boycott the meeting.
We would rather have this meeting without his presence, therefore we strongly request that an alternate person to replace him for Poons. [sic]
116 On 5 October 1999 Mr Baitia also wrote to Mr Higgins. He said that while there had been a merger between SHRM/Eurest and Poons, MRSM did not believe that this would substantially affect the tender proposal. He wrote:
We have independently tendered for the contract with SHRM/Eurest as our manager and hence, should be awarded the contract, as tendered.
He acknowledged OTML's desire to amalgamate specific aspects of the tenders and said MRSM representatives would be available to discuss those matters with Mr Higgins. He said:
May we suggest that the meeting be held between SHRM, MRSM and OTML. We do not see any need for Poons (PNG) Limited's involvement. Accordingly, I do not intend to copy this letter to them.
Mr Fenwick said he had not seen this letter.
117 Mr Cox-Martin replied to Mr Baitia's letter to Mr Higgins immediately. He said:
Thank you for your letter dated 5 October, 1999. Unfortunately we would be unable at this stage to award the contract on the basis of your tender as you suggest. Whilst your tender is attractive in many aspects, in some areas it is incomplete and in certain respects not competitive.
However through the recent merger, your proposed catering manager now has taken over the competing bid originating from Poons (PNG). This of course provides the opportunity to amalgamate the bids, and to put in place a contract which gives the best outcome for all parties. It is envisaged that the proposed Cairns meeting will accomplish this.
He also said that the question of Poons attendance would be a matter for SHRM. Two days earlier, on 4 October 1999, Mr Cox-Martin had sent a fax to Mr Hayes pointing out that the contractual standard menu and its pricing remained to be finalised. He told Mr Hayes that the preferred menu standard was somewhere between that offered by Poons and that offered by SHRM/Eurest. The contractual standards, decided by OTML, should be:
. the Western food menu as attached to Mr Cox-Martin's communication;
. the Healthy Choice menu offered by SHRM without soup; and
. the Kaikai bar menu as offered by SHRM without the soup
118 On 6 October 1999 Mr Higgins wrote to Mr Baitia referring to the proposed meeting in Cairns. His letter was a reply to Mr Menim's letter of 4 October 1999. He said that OTML had called the meeting and reserved the right to decide who should attend. Neither the MRSM nor the Poons' tender had been accepted at that time. He said:
Failure to cooperate with the process will act to the disadvantage of the bid by either MRSM or Poons.
I trust that we will receive your cooperation in concluding this matter.
A copy of the letter was sent to Mr Andrew and Mr Hayes. Mr Baitia then sent a fax to Mr Hayes attaching Mr Higgins response. He sought clarity on the status of the Poons' acquisition and whether it was a sale or a merger. He asked who would represent SHRM/Eurest at the meeting and who would represent Poons. He also asked:
What will be Eurest's position in respect of MRSM's current situation in light of the acquisition or merger.
Mr Hayes sent a reply fax to Mr Baitia on the same day in which he reassured him that SHRM/Eurest fully recognised MRDC/MRSM as partners in the OTML contract. He said that the final form of agreement would be determined on receipt of the OTML agenda and a meeting to be held in Cairns.He received a fax on the same day from Gerhard Poelzl, the managing director of Poons. Poelzl expressed "strong concern" about what seemed to him to be unnecessary pressures on OTML from MRSM and MRDC. He expected all parties to meet in accordance with OTML's request.
119 Paul Cox-Martin sent an agenda for the Cairns meeting to Mr Baitia on 6 October. The first item related to the identity of the merged catering arrangements. OTML also prepared points of discussion for the meeting in a spreadsheet form.
120 The meeting between OTML, MRDC, MRSM and SHRM/Eurest took place at Cairns on 9 October 1999 at the Cairns International Hotel. OTML was represented by Mr Cox-Martin and Terupo Apoki. MRSM and the future Fubilan were represented by Messrs. Aua, Baitia, Menim and Yalapan. Mr Fenwick was in attendance at Mr Baitia's invitation. Mr Baitia said he wanted Mr Fenwick present so that he could assist in dealing with the agenda and responding to OTML. He described Mr Fenwick's relationship to him and the board of Fubilan Catering as that of a "trusted consultant". Also attending on behalf of SHRM were Mr Hayes, Mr Gosling and Mr Greg McGrath from Poons. Mr Fereday was not in attendance. Mr Poelzl from Poons' Perth office had instructed him not to attend because of landowner opposition to his involvement.
121 Mr Cox-Martin told the meeting that OTML wanted new contract rates to be provided picking up the best from the previous MRSM and Poons' tenders. He said that OTML had not accepted either of the MRSM or Poons' tenders. He made an overhead presentation setting out aspects of the SHRM/Eurest and Poons' tenders. Mr Menim had meeting notes which had been prepared for him by the press office at MRDC. According to those notes he appealed to OTML management to award the contract as soon as possible when satisfied that all contractual requirements had been met. He said that MRSM did not wish to tamper with its proposal and proposed management structure. The notes went on to say:
However, appropriate adjustments to the technical aspects of our tender proposals we appreciate may require further considerations. Our managers SHRM/Eurest will discuss these with you. And in this regard, may I state that we have every confidence in them and are prepared to work with SHRM/Eurest.
122 Mr Baitia prepared a short memorandum to Mr Andrew about the meeting. He said that OTML had organised it to align the proposals from MRDC/MRSM, Poons and SHRM/Eurest. Mr Hayes had reaffirmed SHRM/Eurest's commitment to MRSM under the terms of the tender document and would manage that contract on behalf of MRSM. SHRM/Eurest would use the Poons' tender document to extract necessary technical information to complement the MRSM tender and any other information required by OTML. He said that the matter had been discussed with Greg McGrath of Poons and agreements had been reached on technical matters. He concluded:
OTML was comfortable with SHRM/Eurest's position which means that the Contract will be awarded to MRSM after the additional prices of services, contract menu and duties are provided by SHRM/Eurest.
He anticipated that mobilisation of the contract would begin on 1 November 1999. MRDC/MRSM would need to identify financing requirements to facilitate Fubilan that would be managed by SRHM/Eurest.
123 On 15 October 1999 Mr Hayes wrote to Mr Cox-Martin presenting what he called a "unified proposal to incorporate the Poon and MRSM tenders under the single entity of MRSM/Eurest". He confirmed that Fubilan would be the vehicle for the contract and would be 100% owned by MRSM. He said, inter alia:
We have recalculated our prices to represent the most accurate and competitive prices for the services required. The attached schedules consolidate the following:
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2.31 Training program approved and accelerated OTML payment sought - May 2000
171 On 19 May 2000, Eurest submitted a Training and Localisation Program for 2000/2003 to the Training Division of the Department of Labour and Employment for Papua New Guinea. This was a submission relating to employees of Eurest. One of the positions it referred to in the list and accompanying job descriptions was that of Project Manager at Tabubil. There were a number of other management positions at Tabubil mentioned including that of Catering Manager. The Department of Labour wrote to Mr Poelzl on 22 May 2000 approving the company's training plan for the positions of:
General Manager
GRP Purchasing Manager
Project Manager
Catering Manager
Warehouse Manager
Chef Supervisor
Training Supervisor
172 On 22 May 2000, OTML agreed to an accelerated payment procedure for May, June and July 2000. It would make an interim payment of K800,000 on an invoice from Fubilan on about the 15th day of each month. The balance would be the subject of an invoice at the end of the month. In each case invoices would be paid within 14 days. From August 2000 the payments would revert to the OTML Contract terms.
173 Eurest prepared an operations report covering the period February through to June 2000 inclusive. It is likely that the report was prepared towards the end of July. The report identified lack of funding as an outstanding issue for Fubilan. Although the company operated on a continuing "positive basis" that had only been achieved with the non-payment for goods received from Eurest, Eurest was no longer able to continue to fund the operation. There was an exposure of K321,000 for unpaid duty which was brought to the attention of the handover team and documented in previous reports. Although Eurest was paying aged debtors as per normal accounting procedure, the sum of K2.6 million from its mobilisation/purchases had not been paid. Eurest required that account to be cleared by 1 August 2000. Nevertheless it stated that it was pleased with the results up to date taking into consideration other capital costs.
2.32 Mr Fenwick is appointed Fubilan representative under the OTML Contract - May 2000
174 On 26 May 2000, Mr Andrew wrote to the Senior Contract Administrator at OTML advising that Mr Fenwick was "now being appointed as the Contractors [sic] Representative of Fubilan Catering Services". This was said in the letter to be consistent with cl 7 of the General Conditions of the OTML Contract tender document. A copy of the letter was sent to Mr Younger at Eurest.
175 On 5 June 2000, Mr Fenwick, under a new letterhead "PNG Group Consultancy Ltd", wrote to Mr Poelzl and signed his own name over the designation "FCS Contractors [sic] Representative". He complained that visits to the site before mobilisation to determine stock and equipment levels and values had provided varying results. Nine containers of food which had arrived mid February had not been disclosed. The value of the containers was in excess of K1 million and applicable duty. During the same visit he and Fubilan representatives were advised that the site vehicles were mostly unserviceable and unsafe to use therefore replacement was considered essential. He asserted also that correspondence from Eurest did not give it the right to levy unauthorised interest charges against Fubilan. MRDC had never agreed to such a payment. As to contract representation, he wrote:
FCS Contract Representation will be consistent with the Management Agreement and not as advised by OTML through Clause 7 of the Tender Document. You are advised that PNG Group Consultancy Ltd will be acting as the Appointed Representative for FCS effective 26/5/00.
In reply Mr Poelzl, on 15 June 2000, said he had no issue in working with Fubilan's representatives. He reiterated however that the interface had to be in accordance with the Management Agreement.
176 The appointment of Mr Fenwick as Contractor's Representative for the purposes of liaising with OTML was also discussed at a meeting held on 20 June 2000 at Tabubil between representatives of OTML, Eurest and MRDC. OTML accepted the appointment but Eurest was not particularly pleased. Eurest regarded itself as the representative in the context of the OTMLContract. Mr Kolalio stated in his minutes of the meeting:
It is important that someone of Bill's stature, with the technical knowledge of Catering business be the representative to ensure the contract is managed in the best interest of Fubilan Catering Services.
Mr Fenwick accepted that this statement reflected his relationship with MRDC. It relied a lot upon his advice.
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2.33 Contract performance issues - OTML concerns - June/July 2000
177 OTML had concerns about the quality of the service it was receiving under the Contract in the first few months. According to a board minute prepared by Ronald Kolalio on 23 June 2000, OTML expressed concern at a meeting at Tabubil on 20 June 2000, that the quality of food had declined, the quantity was at times insufficient and that meals at two mine site messes had run out during serving. Eurest had undertaken to rectify the problem immediately. A second complaint related to frequent changes of on-site managers with lack of effective supervision being blamed for the declining quality and quantity of food. Again Eurest agreed that it would address the problem immediately.
2.34 MRSM finances and the establishment of the Fubilan board - July 2000
178 In his minute of 23 June 2000 Mr Kolalio also reported to the MRDC board on an informal meeting with MRSM directors who expressed serious concern about delays by MRDC in finalising the composition of the Fubilan board. Mr Kolalio said that a list of preferred directors had been submitted to the MRDC legal division.
179 Because of financial constraints affecting MRSM the acquisition of assets from Poons at the beginning of the OTML Contract was under funded, as noted by Mr Kolalio, by K2 million. These costs had been carried by Eurest for the previous five months and Eurest had charged Fubilan interest. The MRSM board resolved that MRSM obtain commercial finance to extinguish the debt. Nothing had been done to secure the funds at that date. That inaction was attributed by Mr Kolalio to the hope that OTML dividend payments would arrive which could be used to reduce the debt. Mr Fenwick was asked to secure the necessary finance.
180 The first meeting of the MRSM board for 2000 was held on 27 July 2000 at Tabubil. Among the board papers were MRSM quarterly accounts ending 31 March 2000 and 30 June 2000. No dividend income had been received. A report on the OTML Contract indicated that dividends for MRSM which had been declared by OTML in September 1999 had not been paid over by the government. Letters had been written to the Department of Treasury and the Department of Mineral Resources. The MRSM account with Bank of PNG did not have funds. An amount of K4 million including interest was due. The report also noted that although the OTML Contract had been in place since 1 February 2000, MRSM was yet to inject the additional K2 million to complete the acquisition "of the contract from Eurest". This was a reference to the acquisition of stock and equipment used by Poons under the previous catering contract. It was recommended in the report that the chairman of MRSM write to the Minister for Mining about the outstanding dividend payments of K4 million. It was also recommended that the board confirm Mr Fenwick's appointment as Contractor's Representative and that the management approach other banks for loan finance.
181 Messrs Menim, Buretam, Atmeyok and Baitia were present as board members. MRSM officers presented the accounts on behalf of the management. Mr Baitia reported on the OTML Contract. He introduced Messrs Younger and Kroeger from Eurest. Mr Younger presented an Operations Report on behalf of Eurest. He reported that Fubilan had gained acceptance as the contractor in the past five months. He referred to the localisation requirement for senior expatriate positions under the contracts. He said that an expatriate chef supervisor would be replaced on 1 August by a PNG national who would be promoted to that position. In fact, on 1 August 2000 Lucas Togemas was promoted to chef supervisor. He had successfully completed a management course in Australia to qualify him for this position. Three apprentices had completed six weeks training in Cairns. Reports from instructors highlighted their quality. The company would increase the number of apprentices by four in September and would assist OTML with the placement of ten trainees. Mr Mike Kroeger would be the new on site Project Manager. Mr Younger referred to complaints from OTML about the quantity and quality of food. He said the menus had been changed and positive feedback had been received. He asked the board if it was getting funding because as of 1 August there would be no more funding from Eurest. Discussion followed about the repayment of the loan to Eurest and Mr Baitia spoke of the ANZ loan and pending inquiries with other banks.
182 Mr Younger stated that within the Management Agreement Eurest had outlined the Corporate Manual to allow monthly reports on cash flow. The manual had to be ratified before the Fubilan board was created. It would allow the board to understand how the company operated. Mr Baitia thanked Mr Younger for presenting a commendable report. He expressed his thanks to Eurest for its patience in relation to the repayment of the loan.
183 The MRSM board resolved that a shareholders' meeting of Fubilan be held to appoint a board for Fubilan and that the recommended membership of the board be four landowners, the Managing Director of MRDC and Mr Fenwick. That meeting was convened on the same day. Those present were Mr Menim as representative of MRSM and Mr Baitia as representative of MRDC. They resolved that Messrs Buretam, Nokim, Yekim, Musolok, Itulam and Fenwick be appointed.
184 On 17 August 2000, MRSM having raised loan finance from the ANZ Bank, transferred K2 million into Eurest's account. It was still the case however that MRSM faced cash flow problems. It now had loan commitments to the bank and the OTML dividends had not been released to it by the State.
185 On 30 August 2000, Fubilan paid the sum of K3,451,063.03 to Eurest.
2.35 Fubilan and Eurest - complaints about Eurest - October/November 2000
186 From late February or early March 2000 until the end of 2000 Mr Younger attended regular meetings with the Fubilan management including Michael Baitia and Mr Fenwick. Operational matters were discussed at those meetings. From his point of view the operation of the Management Agreement generally went to plan during that period. Eurest prepared an operations report for Fubilan for September 2000. The report referred to the appointment of Mr Togemas as Chef Supervisor. It also reported that apprentices had been increased by four, with one female and three males all from the "Preferred Area" having been recruited.
187 On 2 October 2000, the first meeting of the newly constituted Fubilan board took place. Mr Yalapan prepared the minutes. There was no criticism by the board of the standard of reporting or the conduct of Eurest. The operations report for September 2000 was presented and accepted as tabled. It was also resolved that Management should work on a budget for presentation to the board.
188 Under the heading "Appointment of Mr Bill Fenwick" the minutes of the meeting record Mr Fenwick's advice to the board that Fubilan was not being publicised by Eurest as the contractor under the OTML Contract. He proposed that in the next twelve months a manager be appointed to manage Fubilan. He said the appointment would require 100% of the manager's time. He was invited to present his terms for possible engagement. He told them that his budget for twelve months would be A$60,000 plus the cost of an economy air ticket, accommodation and other onsite expenses. The board accepted his proposal in principle "… to investigate on behalf of FCS Company for 12 months at AUD60,000". It was also resolved that Mr Fenwick's fees, costs of accommodation and direct costs be accepted and paid for by the company and that he write a management proposal for review and acceptance by the board. Mr Yalapan, in his evidence, said they wanted Mr Fenwick "to keep an eye on Eurest".
189 The board adjourned to 3 October 2000 and on the second day of that meeting Mr Boas advised that management had met with Eurest at 8 am that day over the budget which Eurest had presented. He suggested that the board meet again in two weeks time. He and Mr Fenwick and a Eurest officer would meet in Port Moresby to follow up the flow chart of the company and other technical issues to be discussed.
190 The board meeting was adjourned again to 16 October 2000 when Ms Janet Sios led the MRDC management team in explaining the terms of a Loan Agreement made with Fubilan. The minutes recorded that the company had operated under the management of Eurest for the previous seven months without a board being established to direct its affairs. In the absence of the board MRDC had assisted Mr Fenwick in managing the company. It was important that the operations and financial affairs of the company now be audited to ensure that the board was informed of those matters for the past month. It was resolved that the board review the engagement of an external auditor at its next meeting.
191 The financial report for August 2000 showed total income of K11,856,603 against a budgeted income of K9,558,988. The profit after tax was K1,313,552. The board resolved to take note of the report and approve it after auditing. The board also recommended that Mr Fenwick undertake the responsibility for signing all Fubilan cheques with Eurest.
192 Under the heading "Terms and Conditions of Mr Bill Fenwick's engagement" the minutes recorded that the delay in formalising the Fubilan board had provided Eurest with "open and uncontrolled activity". Mr Fenwick proposed that Morocco:
. provide professional technical and administration support services to ensure that Fubilan gained maximum benefit from catering contract # 99046
. assist in the development of Fubilan as a recognised provider of catering and allied services;
. "remain flexible with regard to services".
[19]
Mr Fenwick also advised that he and Mr Kolalio were going to meet with Eurest on 19 October 2000 to do an internal audit of the company.
193 Mr Fenwick sent a memo to Mr Kolalio on 9 October 2000 pointing to "a number of issues that need attention". These he described as:
Mainly for Eurest to respond to our many requests which hopefully will be forth coming at our next Board Meeting in Tabubil (16/17 October).
He said that Mr Kolalio would have noticed from their visit that there was no indication that Eurest was promoting Fubilan as the operators and owners. They were promoting their own brand. Many people would be unaware that there had been a change in ownership. He also referred to the need to inform OTML of the new Fubilan board appointments.
194 Mr Younger met with Ms Sios on 15 October 2000. He wrote to her on 16 October 2000 thanking her for her input at the meeting:
We are extremely pleased that after operating for a period of 8 months that we are able to receive some constructive direction from the Board of Fubilan and the officers of MRDC.
He referred to her wish to adopt a more aggressive approach to the accounts and disclose maximum profit. He pointed out that certain accruals provided under normal accounting principles to protect Fubilan against future charges could be written back if so desired. These represented K407,864.32.
195 On 17 October 2000 Ms Sios wrote to Mr Younger referring to a board meeting of Fubilan "duly convened at the MRDC Board Room yesterday". There is no record of such a meeting and it seems that some of the matters to which she referred emerged from the meeting of 2 October 2000. She told him that Messrs Fenwick and Buretam were to be signatories for all Fubilan bank accounts and that all cheques were to be signed by one of them and countersigned by one of the current signatories. She advised that the Eurest cash flow budget, as presented together with the September 2000 financial statements had been reviewed by the board and accepted with some changes and additions deemed necessary to accommodate necessary board expenses. An updated version was enclosed "for your adoption and implementation". The board had resolved to institute semi-annual internal audits of its operations to be performed by MRDC with full costs being reimbursed. An internal audit team from MRDC would commence work on 19 October 2000. External audits would be subject to the normal process of tendering and board approval.
196 Mr Kroeger recalled seeing the Sios letter, a copy of which was sent to him and to Mr Fenwick. He said that Eurest did not agree to the proposal that Messrs Fenwick and Buretam be signatories to all Fubilan bank accounts. At that time Fubilan was operating under a loan from MRSM. Cheques had to be signed quickly. Neither Mr Fenwick nor Mr Buretam were on site at Tabubil very often. Mr Kroeger accepted that the budget referred to in the letter of 17 October 2000 was the first budget produced in the life of the Contract and had been prepared by Mr Younger who also prepared the initial budget during the start up of the Contract.
197 Mr Fenwick wrote to Mr Kroeger on 24 October 2000 listing what he referred to as outstanding issues which had to be addressed with some urgency. He wrote:
There is some hope to conduct a launch this year and should this occur then it would be reassuring to observe the presence of Fubilan Catering Service in a well marketed image. I am aware that Eurest management have on many occasions endeavoured to stimulate/encourage these issues and I therefore hope that this letter will serve to provide authority on the matter.
He proposed that stationery relating to the OTML Contract not bear the Eurest name or logo. Suppliers should be told to direct invoices to Fubilan. Uniforms for the OTML Contract should be standardised and display the Fubilan logo. Decals with the current Fubilan logo should be ordered as soon as possible and affixed to vehicles. Mr Kroeger said, in evidence which I accept, that when he took up his role on site in April 2000 the staff were already wearing uniforms bearing the Fubilan name. Some wore shirts of different colours and this was changed to a standard colour. It had taken a few weeks to get the decals printed and fixed to vehicles. Originally they were hand painted. As to the heading of invoices that happened slowly. He thought it was happening before 24 October 2000. Fubilan did not have any arrangements itself with suppliers in PNG.
198 On 3 November 2000 a meeting took place between Mr Fenwick, Mr Kolalio and Ms Patricia Hobart from MRDC and Messrs Younger, Armstrong and Kerr representing Eurest. Prior to this meeting during September and October 2000, according to Mr Fenwick, he and Mr Kolalio had gone to the site at Tabubil to review Eurest invoices and identify any overcharging. A number of concerns were raised at the meeting about Eurest's accounting practices. Minutes of the meeting which were prepared apparently by Ms Hobart but betrayed Mr Fenwick's writing style, recorded the following points:
Entanglement of Eurest activities in managing the Fubilan contract and other non-Fubilan activities carried on by Eurest. Mr Fenwick had stated that Eurest had utilised Fubilan's bank account for non-Fubilan business transactions. There was also a continuing use of Fubilan administration in support of other Eurest ventures. And:
In fact, more shattering to find that Eurest have been posting invoices direct from Port Moresby for Management Services to FCS contracted clients.
The need for Eurest to revisit invoicing procedures and discontinue the use of Poons PNG, P&O Services and SHRM invoices.
Salary advances to staff which must cease.
New uniforms should be ordered with Fubilan logo without the Eurest emblem. All stationery should be headed "Fubilan Catering Services" and Fubilan decals should be ordered and affixed to vehicles.
Payment of duties on P&O handover stocks. Fubilan had been asked to pay K320,000 by Barry Moore. The claim should be rejected as OTML only billed P&O for the duty component applicable to January 2000. Eurest had no entitlement to claim other than for that amount.
Mr Mike Kroeger having been appointed Manager of the Contract for Eurest, Barry Moore should be removed from Tabubil immediately. Fubilan would not reimburse his salary. Mr Moore's house would be utilised by Fubilan for its office requirements.
199 Following the meeting Mr Fenwick wrote a letter to Mr Younger setting out the various points. The tone of his letter differed from that of the minutes. He said that the supply of food for the OTML Contract was to be directed through FCS Supply Co "… an entity capable of supplying quality product, competitive pricing and timely freight forwarding arrangements". He said that "Further discussions will ensure a smooth transition and interface". In cross-examination Mr Fenwick accepted that there was no FCS Supply Co. This seems to have been a reference to a non-existent entity which in his view should have existed. It was put to Mr Fenwick that what he was trying to do from the very outset was to take over the supply of food for the OTML Contract. He agreed that he was trying to do that and said that he was doing it for Fubilan. Ultimately, as it turned out, he proposed the use of companies in which he himself would have had a 20% equity. His letter continued:
Your assistance both on site and through Port Moresby has been encouraging and very helpful throughout the difficult task. We recognise the internal difficulties experienced by both parties during Mobilisation and would hope that this audit will extinguish these problems. In order to retain a calm understanding by the Board our approach will be on a constructive note. Please be aware that the findings presented today were indicative only and not complete, we should be in a position to complete the audit report by the 21/11/00. At this time we will be in Port Moresby and should look forward to a meeting with you.
Mr Yekim who was cross-examined about this letter had not been told of any proposal involving an FCS Supply Co. He had not been consulted by Mr Fenwick before the letter was sent to Eurest.
200 Mr Armstrong told Mr Poelzl of the concerns raised by Mr Fenwick. Mr Poelzl directed him to instruct the accounting firm Deloittes to carry out a review of the financial matters which were of concern to Fubilan. Mr Armstrong said that he and Mr Younger saw Deloittes in Port Moresby and instructed them to carry out a comprehensive review of the Eurest operations.
2.36 Mr Kolalio and Mr Fenwick's first audit report on the Eurest performance - November 2000
201 Mr Kolalio produced a report on 14 November 2000 which he described as a report of the "first audit visit of Fubilan Catering Services Ltd". It was submitted to Mr Andrew, Ms Sios and Mr Baitia. Mr Kolalio said that he had carried out the audit with the assistance of Mr Fenwick. Its object was to provide the Fubilan board with an independent update of the operations and financial position of the company. He wanted to verify whether balances presented in the financial statements were fairly stated and reliable and to ensure that the operations of the company were in accordance with the contracts and agreements between the different parties.
202 A number of points emerged from the report. Many employees viewed the operations of the company as continuing under the former caterers Poons. Most food and other supplies were acquired from overseas, mainly Australia. Purchases of stock for Fubilan passed from the supplier to Eurest (Australia) which then billed Eurest which in turn billed Fubilan. Fubilan stood to lose money on the costs involved in this multiple handling. Mr Kolalio also referred to imbalances in the reconciliation of bank accounts. There were imbalances in debtor records and in stock records. Supervision of the site accountant, Mr Fred Nana, by a senior person was lacking. This was evidenced by the imbalances and the unreliable state of the financial statements. Mr Kolalio observed:
FCS has paid a very significant amount of money to Eurest as managers of the operations, and we noted that the lack of supervision was a blatant disregard for basic duties required of management to ensure that reports presented to the Board and shareholders are accurate and reliable.
Mr Kolalio said in his evidence that there should have been an expatriate accountant supervising. He pointed out in the report that during the meeting with Eurest in Port Moresby a point had been made that there should be adequate supervision from managers in Port Moresby given that none of the site managers were accountants.
203 Messrs Kolalio and Fenwick recommended that Star Business Consultants, an accounting firm based in Tabubil, complete the process which they had started. They anticipated that at the conclusion of the audit Fubilan would recoup hundreds of thousands of Kina from Eurest. Their report referred to the probability that Fubilan had been paying for goods and services acquired in connection with Eurest's other business activities. Payments taken out of the Fubilan account for the relevant period for services obtained by Eurest or other businesses controlled by Eurest and having nothing to do with Fubilan were said to amount, at that stage, to K350,000.
204 There had been an agreement with Eurest that all third party sales were to be invoiced with a 20% mark up. However Eurest had been selling stock to different parties at differing mark up rates. Mostly they were lower than the 20% rate. Mr Kolalio acknowledged that there was contention about the contractual support for that mark up as it was not set out in any of the agreements.
205 In dealing with stock purchases, Mr Kolalio pointed out that they netted K10 million per year. Because of the transit of stock through different parties, Fubilan as final recipient bore a greater cost. He recommended that a separate supply line be considered. He wrote:
The advantages are that cost savings will be significant, as goods pass direct from supplier to FCS. Additionally, the rebates, if any, on the volume of goods purchased will be to the benefit of FCS, whereas these are currently enjoyed by Eurest.
He noted that Fubilan did not benefit from rebates on purchases of goods obtained locally by Eurest. He also referred to the meeting with Eurest and the appointment of Star Business Consultants to complete the audit for a period of two weeks at a cost of K12,000.
206 Mr Buretam said that after Mr Kolalio pointed out the problems with the administration of the OTML Contract, it changed his attitude to Eurest's managers. He did not have the same level of trust that he had had in Mr Hayes and was concerned whether Eurest would look to landowner interests.
207 The board of MRSM met on 16 November 2000. Mr Yalapan advised that the government had presented a cheque of K3.211 million to MRSM. K211,000 was deposited into the MRSM account and K3 million placed in an interest bearing deposit. The Management sought approval to use K2 million out of the K3 million held by MRSM to pay off the ANZ loan. A meeting of the board of Fubilan took place on the same day immediately following the MRSM board meeting. Mr Fenwick recommended that the board approve the purchases of two new vehicles to support Fubilan. That recommendation was adopted.
2.37 Mr Fenwick looks for independent food suppliers - November 2000
208 On 18 November 2000 Mr Fenwick wrote to Mr Baitia informing him of the results of the internal audit conducted by Fubilan to that point. He reported that Eurest had committed its accountant, John Kerr, in company with an independent auditor from Deloittes to investigate Fubilan's claims. He set out a list of the matters which had emerged from the Kolalio report. He said that it was apparent that there was little if any support provided by the Eurest mobilisation team to institute correct accounting procedures. The findings were "far greater" than originally expected. It was necessary therefore to appoint a local accountant to verify the data and endeavour to reconcile the accounts. He described the accounts as in "an abominable mess". Mr Fenwick continued:
Further to the foregoing it is essential that we commence negotiations to capture the added benefit from supply.
Mr Fenwick told Mr Baitia in his letter that the board proposed to search for suitable suppliers. Hotel and travel arrangements had been made for the chairman, Mr Kolalio and himself. They proposed to visit a variety of major supply houses in Australia. He had secured appointments with a number of companies including John Lewis Food Service (JLFS) in Brisbane. He conveyed a sense of urgency about the matter saying:
It remains imperative that we commence discussions with these major suppliers to ensure an early entry into this profitable value-added venture. The actual time frame necessary for overseas product will be a minimum of six (6) weeks to the point of delivery. Local product can be ordered, shipped and transported to Tabubil two (2) weeks in normal circumstances.
209 Mr Fenwick argued that setup costs for an independent supply arrangement would be minimal as Fubilan was already paying duties, customs and local transport levies. The Tabubil warehouse could handle greater stock levels. The market could be captured without increasing account staff levels. He said:
It is opportune that Eurest are in Default of Contract, this being the situation I strongly believe that this motion will be unchallenged. It has been commercially acceptable in the past that P&O and Eurest have fought to retain the supply chain. However I believe that FCS are now in a position to capture this most valuable value added business. Through this venture we can achieve in excess of K500,000 whilst at the same time retaining one hundred (100%) per cent of this value and not having to split the gains with Eurest. This can be achieved by registering a separate company, which would be outside the Management Agreement. As agreed with Eurest they were to return a margin of K1.2 million in year one (1), this target now appears achievable therefore we need to be prepared for the 50/50 which is geared once this target is achieved.
(Emphasis added)
Mr Fenwick attached an itinerary for himself and Messrs Kolalio and Buretam which covered the period 19 November to 28 November 2000.
210 It was put to Mr Kolalio in cross-examination that some parts of his report were written or suggested by Mr Fenwick. This was based on the kind of language that was used. Mr Kolalio said that he had written the passages that were put to him. Notwithstanding that, I accept that it is very likely that Mr Fenwick had some input particularly into those aspects of the report relating to the desirability of Fubilan setting up its own supply arrangements.
211 Following his visit to Australia with Mr Buretam to talk with potential suppliers, Mr Fenwick wrote, on 1 December 2000, to Mr Mark Stansfield of JLFS at Cairns. He advised that Mr Buretam had given approval for negotiations with JLFS as the possible preferred supplier to the Ok Tedi project. He suggested that Mr Stansfield visit Ok Tedi on 14 December 2000. He proposed an agreement under which supply would be provided at the current rate for 12 months with a single discount rebate of 25% off invoice and no other rebate advantage to Fubilan. This would be based on provision of supply out of Australia. Mr Fenwick acknowledged that this was not part of the Fubilan business plan. He followed up with a fax dated 4 December 2000 to Mr Stansfield attaching a Eurest price list with a covering note "Please find following Confidential rices for supply to Ok Tedi". Mr Fenwick said in cross-examination that he used the word "confidential" so that Mr Stansfield "… didn't pass them around in the trade in the industry…".
2.38 Eurest acknowledges some shortcomings and denies others - Yamil and Limay foreshadowed - December 2000
212 Mr Armstrong prepared a confidential internal memorandum dated December 2000 commenting on the points raised by Fubilan at the meeting of 3 November 2000. He accepted in cross examination that the document was prepared in late November or early December. He acknowledged that the Fubilan bank account had been used to make payments for Eurest's other operations in the Tabubil area. The regular use of the account in this way ceased in April 2000 and reimbursement of all but minor amounts was completed soon after that date. The practice went in two directions with Eurest's operations account being used to make payments to Fubilan employees and then receiving reimbursement. The importance of keeping bank accounts properly segregated had been stressed to local management and accounting staff. The Port Moresby finance manager would supervise the Fubilan accountant and accounts and would make regular supervisory visits to the site. Some incorrect charges were acknowledged and others claimed were rejected. As to interest charges raised, it was pointed out that Eurest had given Fubilan additional credit and, after 14 March 2000, had notified Fubilan that an interest charge would be applicable on outstanding debt. A senior Fubilan representative had agreed to the interest charge in writing. As to mark ups, he noted that the percentage mark up on the computer system in the warehouse showed contractual requirements and the third party mark up. There were fixed contracted sale prices for a number of "smoko items". The use of Fubilan invoices and letterheads had been implemented. Stationery bearing the Fubilan logo was being brought in. New uniforms had been ordered. Salary advances were being paid from the Eurest bank account. It was reiterated in a memorandum dated 7 December 2000 from Mr John Kerr, Eurest's financial manager, to Mr T Thomas of Star Business Consultants that salary advances to staff on site had already been paid from the Eurest bank account. Mr Barry Moore had left the site. Mr Armstrong said in cross-examination that the information contained in the final summary of his memorandum derived from a report by Deloittes which had been commissioned by Eurest.
213 Mr Armstrong was referred in cross examination to a document given to him by Mr Fenwick and entitled "Fubilan Catering Services Special Audit" The document contained a list headed "Amounts Requiring Adjustments and Payments". It included figures for rebates on offshore and onshore purchases of K589,694 and K540,695 said to represent 10% and 8% respectively of those purchases. The document was not received in evidence as to the truth of its contents. Mr Armstrong did not know the source of the figures for the alleged rebates. In fact he said he did not discuss rebates with Mr Fenwick until after February 2001 but sometime before May 2001.
214 A meeting was arranged between Messrs Armstrong, Younger and Kerr from Eurest and Messrs Fenwick and Kolalio from Fubilan for 12 December 2000. Prior to the meeting Mr Fenwick prepared a document entitled "General Notes and comments". This document was not made available to the Eurest representatives. It appears to have been a rehearsal of a position he wished to put at the meeting. It referred to the revelation of "a myriad of unacceptable practises which were not to the commercial benefit of FCS and at the same time provided a cloud of doubt in respect to the transparency of accounts both on-site and in Port Moresby" [sic]. It contained a statement of desire to settle current and outstanding matters acceptable to both parties and provided "… a solid platform for the future site operations". Mr Fenwick set out 16 points to form the basis of resolution of disputes between Eurest and Fubilan. Point 5 read as follows:
Yamil/Limay Supply Company Limited to be the only method of supply to FCS business (for both in country and overseas requirements). This will [be] effective as of 1/2/2001. Details will be provided for the placement of orders. Phone/fax contacts.
Yamil was a local dialect word meaning "gold". Limay is Yamil spelt backwards. It was Mr Fenwick's intention to establish companies using these names as the end line suppliers to Fubilan of foodstuffs acquired from other suppliers in Australia and PNG respectively. He proposed to take a 20% equity in each of them for himself through Morocco. In my opinion, this self interest was a significant factor in his desire to get Eurest out of the business of acquiring and supplying food for the OTML Contract.
215 The references to Yamil Supply Co Ltd (Yamil) and to Limay Supply Co Ltd (Limay) was explained on p 5 of Mr Fenwick's notes. It would be necessary to register two companies. Yamil would deal with Australian supply out of Brisbane and would have as its shareholders Fubilan as to 40%, Karma Foods as to 40% and Mr Fenwick's company, Morocco, as to 20%. Karma Foods was then supplying to the Ok Tedi store in Lihir and other major customers from a supply centre in Townsville. If Fubilan were to proceed with its appointment as a supplier Karma would relocate to Brisbane to ensure supply requirements were met. Limay was to deal with PNG supply out of Lae. Its proposed shareholdings were the same as for Yamil.
216 On 12 December 2000 Messrs Armstrong, Younger and Kerr from Eurest met with Messrs Fenwick and Kolalio. Mr Kerr prepared minutes of the meeting which he sent to Mr Kroeger and to Mr Fenwick. The minutes recorded discussion of "… the report prepared by Eurest" which was a reference to Mr Armstrong's internal memorandum. The figures mentioned in that memorandum were reproduced in the minutes. They recorded that Eurest would refund Fubilan K59,735.47 under the heading "Financial" and that there would be adjustments for incorrect charges amounting to K109,774.65. Under the heading "Contractual Disputes" the minutes recorded that the Star Business Consultants' report commissioned by Fubilan had only been received the day before and a copy left with Eurest for its response. Messrs Armstrong and Fenwick agreed on the need for a resolution. Mr Armstrong said they should aim for resolution by 31 January 2001.
217 The minutes made no reference to rebates. However under the heading "Supply" the following appeared:
Yamil Supply Co (Brisbane based) and Limay Supply Co based in Lae will be functional from February 2001. Both are landowner Companies. FCS to talk to site to coordinate the changes.
218 The reference in the minutes of the meeting to Yamil and Limay as "landowner companies" was not consistent with Mr Fenwick's already clear vision of them as having only a 40% landowner shareholding through Fubilan, with a 40% holding by Karma Foods and 20% by himself through Morocco. It was put to him in cross-examination that he had lied to Messrs Younger and Armstrong as to the proposed ownership arrangements. He claimed that they both knew the position of those companies. In my opinion he did not disclose this matter. He claimed that the matter had been discussed with MRDC. He said he was either to get a 20% equity or MRDC would pay him $15,000 per month by way of a consultancy fee. To the extent that the minutes suggested that Yamil and Limay were already in existence, they were incorrect. Yamil was incorporated by Mr Fenwick in Australia on 22 January 2001. Limay was subsequently incorporated in Papua New Guinea.
2.39 Fubilan and Karma Foods Memorandum of Understanding - 21 December 2000
219 On 21 December 2000, a Memorandum of Understanding was signed between Mr Buretam on behalf of Fubilan, Mr Fenwick and Mr Malcolm Reynolds as a Director of Karma Foods of Townsville in Queensland. It recited that Mr Reynolds had expressed a desire to create, manage and operate a wholesale foodstuff supply business to the Ok Tedi mine under a subcontract to Fubilan. Clause 2 of the memorandum stated that the essence of the agreement was that:
(i) Fubilan will sub-contract the procurement of all locally produced foodstuffs and associated products to MBF Supply Company Ltd created for this purpose of which the Directors shall be Malcolm Reynolds, William Fenwick and Samson Buretam being the chairman of Fubilan Catering Services Ltd;
(ii) Fubilan will sub-contract the procurement of all foreign produced foodstuffs and associated products to Wulip created for this purpose of which the Directors shall be Malcolm Reynolds, William Fenwick and Samson Buretam being the chairman of Fubilan Catering Services Ltd.
It was further provided that the shareholdings of Wulip would be 40% to Reynolds, 20% to Fenwick and 40% to Fubilan. A similar shareholding would be allocated for MBF Supply Co. MBF Supply and Wulip appear to have been alternative early designations for what later became Yamil and Limay.
220 Clause 5 of the Memorandum of Understanding provided that, for the life of any subcontract agreements, Mr Reynolds personally (not in his capacity as a director or shareholder of the companies) was to receive 4% of gross revenue of both the national company and the foreign company as a management/consultancy fee in allowing them to utilise the benefits of agreements, associations and developments of contracts within PNG by Mr Reynolds. In cl 8 Fubilan and/or its directors would give a personal guarantee that any subcontract agreement would remain in full force and effect for a minimum of 10 years.
221 Mr Fenwick was asked in cross-examination whether he had prepared the Memorandum of Understanding with Messrs Reynolds and Buretam. He said he had not. He didn't know who had prepared it. He accepted that the reference to MBF Supply Co and Wulip were references to the entities Yamil and Limay, which he envisaged as the supply companies to Fubilan. He could not explain the proposed personal commission of 4% of gross revenue to be paid to Mr Reynolds by both the national company and the foreign company. He said that Fubilan agreed to all the transactions and his advice was that the company needed a supply company to operate on their behalf. It would enable them to retain the rebates and expand their business in PNG using the supply company. In my opinion it is more likely than not that Mr Fenwick either prepared this document or was involved in, or directed, its preparation.
222 Mr Menim was cross examined about the Memorandum of Understanding. He was asked whether he had been told of it by Mr Buretam. He said that Mr Buretam had engaged with "these two companies" to supply the food. He took that to the Fubilan board and they made the decision. He was, however, unaware that Fubilan had only a 40% interest and that 40% would be held by Mr Reynolds and 20% by Mr Fenwick. Nor was he aware that Mr Reynolds would get 4% of gross revenue as a fee. He did not know whether Messrs Buretam and Fenwick wanted to substitute a new supplier for Eurest. Mr Menim's evidence was taken through an interpreter and it was not always clear that he understood the questions put to him. I infer however from his answers that he was unaware of the detail of the agreement between Messrs Buretam, Reynolds and Fenwick and in particular that he was unaware of Mr Fenwick's interest and the limit on Fubilan's interests under the new arrangements.
223 Mr Yalapan had seen the document before. He was not certain who had prepared it. He could not recall when he saw it. He did not think that the board had given prior approval to it. His recollection was that the board had resolved that the shares in the supplier companies would be held by Fubilan.
2.40 Fubilan and John Lewis Food Services - Memorandum of Understanding - 21 December 2000
224 On 21 December 2000, Mr Stansfield of JLFS sent a fax to Fubilan marked for Mr Fenwick's attention. In the fax he proposed terms for all overseas supply to Tabubil sites. He proposed a 4 x 2 year term of supply commencing in January 2001. This could be renewed after an 8 year term by both parties. He proposed a rebate of 10% of purchases paid by cheque 30 days after settlement of each account. Fubilan would confirm details of payment requirements and payment authorisation to Yamil. The fax was returned with a handwritten endorsement signed by Messrs. Buretam and Fenwick in the following terms:
Mark, We accept this in the form of a MOU (draft). It is now appropriate to formalise a document to present to the FCS board/Mineral Resources Development Corp.
Fubilan Catering Services Ltd (Chairman) S Buretam
Fubilan Catering Services Ltd (Director/Business MNGR) W Fenwick
A postscript was added in handwriting:
Please accept my instructions to act immediately on our behalf to secure National deals. Congratulations and we look forward to a long & rewarding association.
It is clear that this response was written by Mr Fenwick.
225 It was put to Mr Fenwick that by giving the handwritten instruction on the Memorandum of Understanding he was committing Fubilan to the transaction. He said he did appreciate that. He thought it was a good deal. He did it without taking the proposal to OTML notwithstanding that he knew that OTML's consent was required before another contractor could be engaged. In my opinion this reflected his determination to take food supply out of the hands of Eurest and ultimately to route it through intermediary companies in which he would have a 20% interest.
2.41 Fenwick Business Plan for Fubilan - December 2000/January 2001
226 At some time in December 2000 or January 2001, prior to 22 January 2001, Mr Fenwick prepared a business plan for Fubilan for the period 2001-2003. It commenced with the rather odd statement that:
The growth potential available to Fubilan Catering Services is limited only by careful planning.
He warned that Fubilan must remain cautious and accept professional advice with respect to business expansion. He proposed guidelines. He proposed that future expansion of Fubilan's business be under the guidance of "… the appointed Business Manager and MRDC with the Boards [sic] approval". The "appointed Business Manager" he had in mind was himself. He listed seven numbered current business opportunities for Fubilan which included the establishment of Yamil as Fubilan's Australian supply company and of Limay as its PNG supply company.
227 The business plan contained a schedule for 2001. Under the heading "February 2001" the first item mentioned was Yamil. It was proposed that the company be registered and established as an invoice centre for supply from JLFS. The rebate offered by JLFS was described as substantial. Mr Fenwick noted that "rebating has always been strongly denied by Eurest and previously P&O". In relation to Limay he named as Associate Consultant, Mr Malcolm Reynolds of Karma Foods. Karma offered the ability to "conjunct the Lihir supply with Ok Tedi requirements to facilitate the best buying capabilities in PNG through the volume and creditability" [sic]. He referred to rebate opportunities and again stated in bold lettering "Rebating has always been denied by Eurest and P&O likewise". Mr Fenwick agreed in cross examination that the issue of rebating had been on his mind for a long time and that he had been discussing it with Mr Armstrong. In the business plan Mr Fenwick observed that because Yamil was an Australian company, Fubilan could use it to access Aus Trade export market development grants.
228 On a separate page, headed "Morocco Holdings Pty Ltd Consultancy/Business Participation", Mr Fenwick proposed that Morocco provide skills to ensure contractual obligations were adhered to by Eurest, to expand and market Fubilan's business and knowledge and to provide maximum profitability at Ok Tedi. He requested a three year consultancy term, a monthly fee of A$7,500, monthly accommodation and travel allowances of A$2,000 each and a 20% equity in the new business. The latter, he said in cross-examination, had already been agreed under the Memorandum of Understanding signed with Messrs Buretam and Reynolds. Another table followed showing shareholdings for Yamil and Limay. The shareholders in each case were to be Fubilan, Karma Foods and Morocco. This was headnoted with the observation that "Equity is a choice to relieve the burden of high Consultancy Fees". That is to say his equity in those companies would reduce the level of consultancy fees he would otherwise be charging. He proposed a management structure for the new ventures. He would be the business consultant for Fubilan, a Mr Herman would be the supply manager consultant for Yamil, Mr Malcolm Reynolds the export manager for Limay and a Mr A Fogarty the procedures and quality assurance consultant for the combined companies. The business income anticipated from the new ventures included K347,000 per annum from Yamil and K292,800 per annum from Limay.
229 The business plan contained a list of claimed savings and adjustments "captured through audit". These were offered as an overview of the adjustments "necessary and agreed by Eurest" which had been accepted by Fubilan. It was put to Mr Fenwick that the proposed 20% equity in Yamil and Limay constituted a very valuable asset to him. He said:
It was either that or $15,000 a month consultancy fee. Work out the difference. They got a good deal.
The business plan was not put to the Fubilan board until its meeting on 8 March 2001. In the meantime Yamil was incorporated on Mr Fenwick's instructions on 22 January 2001. Its address was shown as his home address in Carine. Initially he was its only director and shareholder.
2.42 Fenwick and Armstrong meet at Coco's - 2 February 2001
230 Mr Armstrong received a copy of the Deloittes' report commissioned by Eurest in December 2000. The Star Business Consultant's report was provided to him at about the same time. He considered both reports and concluded that there were various areas in which their findings coincided. In some other respects they differed. He had some discussions with Mr Fenwick about them. They agreed that the way forward would be for the two of them to work up a compromise under which various items from each report would be taken into account to reach a dollar figure which would be the amount which Eurest would repay or credit Fubilan to resolve the issues in dispute at that time. They agreed to meet in Perth with a view to finalising the details of the proposed financial resolution.
231 On 2 February 2001 Mr Fenwick and Mr Armstrong met by arrangement at Coco's Restaurant in South Perth. Mr Armstrong had a good working relationship with Mr Fenwick. He had met him in the 1980s when they were both working for Poons. The lunch meeting began at 12.30pm and went until late in the afternoon. During that time they worked out a financial compromise in order to resolve the concerns that Fubilan had identified. Mr Armstrong agreed that Eurest would pay Fubilan K85,750 in full settlement of the various claims that Fubilan had identified to that point in time. According to Mr Fenwick, he told Mr Armstrong that rebates on food purchases by Eurest which had not been passed on to Fubilan was an issue to be resolved. He said that he also raised the question of supply arrangements being made by Fubilan direct. According to Mr Fenwick's evidence, Mr Armstrong said he didn't know anything about rebates. That was Mr Poelzl's responsibility. In evidence, however, Mr Armstrong said that Mr Fenwick did not mention anything to him about rebates. Strangely it was put to Mr Armstrong in cross-examination that he did not discuss rebates with Mr Fenwick until May 2001. This was inconsistent with the evidenceadduced in-chief from Mr Fenwick by the applicants. Mr Armstrong said that it was not until after February 2001 that they discussed rebates. In cross-examination about the meeting at Coco's, Mr Fenwick emphatically reaffirmed that he had raised the issue of rebates at that meeting. Mr Fenwick's evidence was characterised by emphatic answers which I took as expressive of his argumentative style rather an indication of any carefully considered recollection of the truth. I accept Mr Armstrong's account of what occurred and that rebates were not discussed at the meeting at Coco's. Specifically it was not agreed that they be left as an issue to be resolved. Mr Fenwick of course was well aware of industry practice and, in my opinion, aware that the Compass Group would have been receiving rebates in respect of its purchasing of food stuffs for the OTML Contract.
232 Mr Fenwick said in evidence that he told Mr Armstrong that Fubilan was negotiating with JLFS and with Limay to handle supply directly in both Australia and PNG. This was despite the Memorandum of Understanding signed with JLFS by himself and Mr Buretam. Mr Armstrong recalled him saying that Fubilan would want to carry out the purchasing of products itself and not have this done by Eurest. He told Mr Fenwick that he would discuss that issue with Mr Poelzl.
2.43 Fubilan commits to JLFS and takes over purchasing - January 2001
233 A Product Supply Agreement was signed between JLFS and Fubilan on a date in January 2001 which does not appear in the document itself. Its specified commencement was "January 2001". The expiry was "January 2004". The agreement required that prices specified for each product in a Product List excluding meat, fruit and vegetables would be fixed on the date of the agreement and on each anniversary for the following 12 month period. Meat, fruit and vegetables were to be supplied at "best available market price and quality". A rebate of 10% of the value of all purchases would be paid by JLFS within 14 days of full payment of any invoice in accordance with the "Trading Terms" set out in the agreement.
234 On 19 January 2001 Mr Fenwick visited the Eurest office and explained the proposed new purchasing procedures to Michael Kroeger and Karl Reisenbauer. Mr Reisenbauer prepared a file note of that meeting and of subsequent discussions into February 2001. He reproduced, in his notes, a diagram which Mr Fenwick drew on a whiteboard showing the proposed functions of Yamil and Limay. He said Mr Fenwick declared that he had no involvement in Yamil. He had used his own money to set up the company in Australia as Fubilan would not have been able to do it as a foreign company. It had since been handed over to Fubilan and was a subsidiary of Fubilan, as was Limay. Mr Fenwick said in cross-examination that he could not remember whether he had told Messrs Kroeger and Reisenbauer that he had no involvement in Yamil beyond arranging for its incorporation. He accepted that if he had said that, it would have been a lie.
235 There is no reason to suppose that this record of the meeting would have been fabricated by Mr Reisenbauer. It was internally consistent. Mr Fenwick might have considered that the question of his equity in Yamil and Limay was a matter between him and Fubilan and of no concern to Eurest. In my opinion however the more likely explanation is that he was keen to shield his personal interest in the arrangement from external scrutiny which might have led to suggestions being made to MRSM and/or Fubilan that it was not in their interests to have such an arrangement. I find he did make the statement attributed to him in the file note and he knew it was untrue when he made it. It was untrue as to his involvement in Yamil. It was also untrue to the extent that it stated, without qualification, that Yamil and Limay were subsidiaries of Fubilan.
236 Mr Fenwick sought immediate implementation of the new arrangements. He asked for orders to be placed with Limay forthwith and for Eurest to ensure that any containers already in place for existing orders were handed over to Limay. There was discussion about the cancellation of orders already made by Eurest and of Karma Foods contacting suppliers to take over the orders and place new purchase orders. Mr Fenwick told Messrs Kroeger and Reisenbauer that he thought it should be alright and that since Eurest had agreed to the arrangements already they might as well go ahead with them.
237 Fubilan told Eurest of the new relationship with JLFS. On 19 January 2001 Mr Kroeger sent a fax to Mr Perianus at OTML telling him that he had been instructed by Fubilan to inform OTML that as of 1 February 2001 all orders for food products both local and overseas for the OTML Contract would be placed and expedited through Yamil. Mr Jansma, the Acting Superintendent of Contracts Administration for OTML, responded to Mr Kroeger on 24 January 2001 saying that Fubilan's instruction was not accepted by OTML. He drew Mr Kroeger's attention to cl 6.3 of the OTML Contract which stated that:
Eurest (PNG) Ltd remain employed to manage, control and supervise the whole of the services on behalf of the Contractor.
He also sought information about Yamil including its relationship with Fubilan. A copy of his letter was sent to Mr Fenwick by Mr Younger. Mr Fenwick said he did not see it until 1 February 2001 in Tabubil. It may be noted that Yamil was not incorporated until 22 January.
238 The Fubilan board met on 24 January 2001. Mr Fenwick presented his business plan including the proposal to expand the business of Fubilan into the area of food supply. He advised the board that he had incorporated Yamil in Australia at his own expense. The board endorsed his business plan "subject to perusal of cash flow and financial information". It directed the secretary to proceed with the incorporation of Limay in PNG. It resolved to reimburse Mr Fenwick's expenses incurred in the incorporation of Yamil. The meeting also discussed Mr Fenwick's remuneration in his absence. The chairman proposed that his remuneration be increased to A$5,000 per month. The board resolved that Management (ie MRDC) inform the board of the current basis of Mr Fenwick's remuneration and that the issue of an increase in his package be adjourned to the next meeting. There was brief discussion of Mr Fenwick's proposed equity in Yamil and Limay. It was resolved that the issue of equity participation in Yamil and Limay be formally noted and that Management inform the board about the implications of the different shareholdings in the company and their bearing on the status of the companies in Australia and PNG.
239 On 26 January 2001 Mr Younger wrote to OTML providing the information requested in Mr Jansma's letter of 24 January 2001. He said that Fubilan had informed Eurest that Yamil was a 100% owned subsidiary of Fubilan and that JLFS of Australia had been contracted to supply all goods for the OTML Contract. He said:
Eurest have no objection to purchasing through Yamil as all profits are returned to FCS. We will however monitor both price and quality to ensure that contractual and budgetary requirements are met and maintained.
240 On 28 January 2001 Mr Buretam signed a letter on Fubilan letterhead, drafted by Mr Fenwick, and directed to Mr Jansma. Mr Buretam was to take the letter to a meeting with OTML. Mr Fenwick's drafting style can be seen in the text of the letter not least in the use of the first person in what was obviously a reference to himself and not to Mr Buretam. The letter indicates the extent to which Mr Buretam was under Mr Fenwick's influence at the time. He could not have signed it with any real understanding of its detail. The letter said, inter alia:
It would seem that your concerns regarding Yamil Supply Pty Ltd are unfounded and I advise you accordingly that Morocco Holdings Pty Ltd were instructed by this Board to register Yamil Supply Pty Ltd in Australia with MRCDs knowledge. The cost of this registration (A$1,094.50) was borne by myself through my registered accountant (Gardiner Pope) in Western Australia. Understandably you will be well aware that Business Registration requires the nomination of Directors. My nomination was provided to facilitate the process until the Board had elected their chosen bodies.
(Emphasis added)
There was no reference in the letter to Mr Fenwick's equity in Yamil. It continued:
Further and more importantly to the above I am remiss to advise that the Board of Fubilan Catering Service are disappointed with the recent FCS Audit result. Hence the reason for exploring the possibilities of other benefits including the supply-line. As a Board we have been very mindful of the derelict management procedures offered by Eurest last year and have shown due consideration and patience during a very embarrassing time. Our investment in the provision of Catering Services to OTML leaves little change from K4 million, a sizeable investment on PNG standards. Therefore we believe that as a responsible Board the members have a mandate to operate FCS at a maximum return for Kina invested, this has not been the case.
The letter went on to complain that the board felt "unjustly scrutinized". It concluded:
Finally at no time in the past history of the Catering Contract has there been record of OTML directing the Caterer with regard to supply, when in fact there where [sic] numerous occasions that offered good commercial/financial reason to investigate the situation. The least of which is the subject of this Board's concern, Rebating.
Copies of the letter were sent to a number of OTML officers, to Messrs Baitia and Kolalio and to Messrs Yekim, Fenwick, Andrew and Menim.
241 According to a file note made by Mr Reisenbauer and dated 5 February 2001, Mr Fenwick came to the Eurest office that morning and said he had heard that OTML was waiting on a letter from Eurest. Mr Kroeger rang Mr Jansma in his presence. Mr Kroeger then explained to Mr Fenwick that Mr Jansma had asked, in a meeting with Mr Buretam, for a letter from the board of Fubilan outlining new purchasing procedures and supply lines. Mr Buretam happened to be in the office at the time of this conversation and acknowledged that he was asked for a letter. He had not previously mentioned anything about a letter. Mr Fenwick then said he would draw one up. Mr Buretam asked him if he could have it ready in 20 minutes for a meeting that he was about to have with OTML. Mr Fenwick subsequently told Mr Reisenbauer that he would not be getting a copy of the letter. An argument ensued. Mr Reisenbauer later apologised. Mr Fenwick said that he had no intention of terminating Eurest, all he had been trying to do was to get "the purchasing". Mr Reisenbauer told Mr Fenwick that he thought they were both working for the benefit of the same company, namely Fubilan, and that he could not understand his attitude and why there should be animosity. These matters and associated communications with Mr Fenwick were recorded in file notes made by Mr Reisenbauer for 8, 9 and 10 February 2001.
242 On 7 February 2001 Mr Armstrong received a letter from Mr Kolalio referring to double charging by Eurest in respect of certain stock which Fubilan had taken over in February 2000. He also referred to invoices paid by Fubilan to Territory Cellars and British American Tobacco for alcohol and cigarettes noting however that Fubilan did not take over nor did it keep any line of such stock. The amounts involved in the double charging were K348,079.81 and in relation to the alcohol and cigarettes amounted to K63,936.43.
2.44 Fubilan and Eurest settle differences - 13 February 2001
243 Mr Armstrong and Mr Younger met with Mr Fenwick at the Crown Plaza Hotel in Port Moresby on 13 February 2001. Mr Armstrong had prepared a written settlement proposal which incorporated the agreement that he had reached with Mr Fenwick on 2 January 2001 at Coco's Restaurant in South Perth. He made provision in his proposal for some of the issues that had been raised by Mr Kolalio in his letter of 7 February 2001. According to Mr Armstrong, he and Mr Fenwick agreed that the settlement was in full settlement of all claims to that point in time arising out of the Management Agreement. He provided a cheque for K470,000. The document which he had prepared was headed "Agreed Settlement Offer". It covered invoices paid using Fubilan funds and additional overpayments. Those amounts totalled K267,648. There was a credit for reimbursements made by Eurest totalling K108,408 and a further credit of K85,490 owing to Eurest by Fubilan. Figures for under marked third party sales, double charges for containers, the writeback of offsite labour charges and interest on double payment of purchases were also included. A sum of K85,000 was allowed for out of pocket expenses for Fubilan and its costs of engaging Star Business Consultants. The addition of these amounts came to K470,000 against the entry "Eurest Pay FCS in full settlement". The document then bore a handwritten endorsement signed by both Mr Fenwick on behalf of Fubilan and Mr Younger. It read:
The payment of K470,000 by Eurest to Fubilan Catering Services releases Eurest from any further claim by Fubilan Catering Services up to 31/12/00.
Mr Armstrong and Mr Younger both shook hands with Mr Fenwick. Mr Armstrong and Mr Fenwick expressed their mutual satisfaction that the dispute had been resolved.
244 According to Mr Fenwick, however, he signed off on the adjustments on the basis that Fubilan was to handle supply directly and that Poelzl was to meet him to resolve the issue of rebates. In cross-examination he was asked why he didn't identify the issue of rebates as an outstanding issue on the settlement document. He said it was well understood that the questions of rebates and supply were outstanding issues. There was no reference to this in his evidence-in-chief. He also said that Mr Kolalio was present at the settlement meeting. Mr Kolalio, whose evidence had been completed before Mr Fenwick gave his evidence, made no mention, in his evidence-in-chief or his cross-examination, about his own presence at the settlement meeting. The financial settlement was put to him and he said:
I know that there was a settlement in which the issues that were encountered during that audit were discussed and a settlement made. But the entire settlement and that, I wouldn't - I cannot really say.
This and other responses in his cross examination on the settlement meeting were quite inconsistent with Mr Fenwick's evidence in cross-examination that Mr Kolalio was present. I find that he was not present.
245 In his evidence-in-chief Mr Yalapan said that Mr Armstrong of Eurest had agreed to pay K470,000 to Fubilan and make adjustments of K370,000 to the accounts in favour of Fubilan. He said:
It was also agreed that the rebates issue would be settled and the landowners would be able to take over supply themselves.
He was not at the meeting. He did claim that the proposed way forward from the settlement had been discussed with him. He said in cross-examination it would get Eurest to agree that they had actually been receiving rebates. It was put to him that he could not speak of his personal knowledge of any agreement with Eurest that the rebate issue would be settled and the landowners would be able to take over supply themselves. He said he could because he endorsed the proposed settlement. He said he had discussed the matter generally with Messrs Fenwick and Kolalio before the settlement sheet was signed and after it was signed they also discussed the matter. This aspect of his evidence I do not find particularly convincing. I do not accept that Mr Yalapan discussed with Messrs Fenwick and Kolalio reserving Fubilan's position on the rebates for future discussions.
246 In my opinion the settlement reached on 13 February 2001 objectively regarded was an effective compromise of all outstanding matters in relation to the financial aspects of the Management Agreement to that point. In my opinion, it was also effected to preclude Fubilan from thereafter raising the question of its entitlement to the benefit of rebates obtained by the Compass Group to that point. As subsequent events unfolded however, the question of rebates became an ongoing issue. They were not treated as having been resolved by the settlement agreement.
2.45 Fubilan tells OTML about new purchasing arrangements - 14 February 2001
247 On 14 February 2001 Mr Yalapan sent a letter to Bill Blenkhorn, the Acting Managing Director of OTML with a copy to Mr David Wissink, the Manager- Rural Economic and Rural Development of OTML. He referred to "our meeting of yesterday with Eurest in Port Moresby". This could not have been a reference to Mr Fenwick's meeting with Mr Younger on 13 February 2001 as Mr Yalapan was not present at that meeting. He referred to the audit results, the failure of Eurest to pass on rebates to Fubilan and Eurest's poor financial management of Fubilan accounts. Under the heading "Eurest/FCS Supply" he said that it had become apparent through the audit that Fubilan had been significantly disadvantaged by Eurest placing supply requirements. He alleged that regardless of past negotiations and promises to pass on supply rebating, Eurest had unduly retained significant Fubilan "dues". He described the rebate issue as "significant". The fact that Fubilan did not get the rebates was a serious matter warranting corrective action. He then referred to the arrangements that Fubilan had made for direct supply.
248 Mr Yalapan referred, in his letter of 14 February 2001, to the establishment of Yamil and Limay as authorised by the board of Fubilan and guided by MRDC. Both companies were and would be owned by Fubilan. He cited the resolutions of the Fubilan board at its meeting of 24 January 2001. If OTML was having difficulties approving the arrangement with Yamil and Limay then it should guarantee Fubilan that it would reimburse Fubilan for the losses that Fubilan would incur which, on then current estimates, were more than K1 million per company per annum. He invited OTML to be present at the signing of the supply agreement to take place at the JLFS distribution centre in Brisbane on 19 February 2001. He sought OTML's support on behalf of the stakeholders of Fubilan.
249 On the same day Mr Reisenbauer sent a fax to Mr Fenwick advising that OTML would not release, to Limay or Yamil, containers of food already ordered. They would release them to Eurest in accordance with the Contract. OTML would not agree to a contract amendment. Fubilan should get something satisfactory to OTML that morning if it wanted the issue resolved since the general manager would be leaving for 2 ˝ weeks and would not be back until 3 March 2001. Mr Reisenbauer also advised that Mr Wissink worked for himself and had no right to represent OTML.
2.46 Fubilan. MRDC and Eurest meet - 15 February 2001
250 A meeting took place on 15 February 2001 between Messrs Fenwick and Buretam representing Fubilan, Armstrong and Younger representing Eurest, Kolalio representing MRDC and Mr Wissink. Mr Wissink explained he was not representing OTML but he had a title, Manager - Rural and Economic Development for OTML, which required him to monitor potential disputes involving landowners. Mr Kolalio tabled a schedule of amounts which he believed were owing to Fubilan by Eurest. Mr Armstrong referred to the agreement which had been made on 2 January 2001. A list of 10 items was discussed which included the following:
[20]
This was inconsistent with the approach taken at the meeting at Coco's between Messrs Fenwick and Armstrong. Mr Yalapan said he did not review that board paper which came from Mr Baitia. It also reported receipt of a "Settlement Cheque" for K470,000 and listed agreed adjustments. The adjustments totalled K896,876. There was a list of items designated "FCS Benefits". These appeared to be references to projected benefits from FCS's acquisition of the supply business, its recovery of on-site management charges, reduction in management fees and interest payable to Eurest and "Tabubil Management Rights". This figure totalled K2,330,000. Under the heading "Further Negotiations" the following appeared:
. Supply rebating to be repaid to FCS (year 2000) Approx K600,000
. Eurest performance benefits to be penalised TBN
(Emphasis in original)
256 Another board paper proposed the establishment of bank accounts for Yamil and Limay through which business could be transacted. In both cases the proposed bank was the ANZ.
257 The minutes of the board meeting of 8 March 2001 were not in evidence. However on that day Fubilan signed a consultancy agreement with Mr Fenwick's company, Morocco. The term of the contract was to be the same as the term of the product supply agreement between Fubilan and Yamil. The services to be provided included seeking out opportunities and promoting the marketing of Fubilan's business, advising and assisting Fubilan in various respects and managing and enhancing relationships with existing customers. The consultancy fee was A$10,000 per month with the issue of or transfer of 20% of the ordinary shares in Yamil to be done by 1 March 2001. If there were any dilution of Morocco's interest "of any nature or of any extent" then it would be entitled to an additional monthly fee of A$10,000 from the commencement date of the consultancy agreement as a liquidated sum due and owing. This was an extraordinary provision which it was hardly in Fubilan's interests to accept. The agreement was drafted by Mr Fenwick's Perth based solicitors, McKie & Associates.
2.48 Eurest writes to Fubilan about rebates - 8 March 2001
258 On the day of the board meeting Mr Younger wrote to Mr Kolalio responding to his letter of 27 February 2001. On the subject of "rebates" he wrote:
Whilst a lot of statements have been made in regard to rebates, we have not received any supportable claim from FCS. Most of the claims put forward to date have been based on third party hearsay, but no tangible claim has been put forward to Eurest.
Eurest (PNG) does not receive rebates for goods purchased for use in PNG. If at all, any price reductions are offered to Eurest they are substantiated as follows:
. Requisition discounts
These reductions are due to the fact that Eurest in extending its business operations may negotiate with some suppliers that due to the increase in supply that Eurest be offered a discount on supply. This discount helps Eurest to fund any acquisition of companies, and is not relevant to third parties.
. Early Payment Discounts. If such discounts are offered to Eurest to pay creditors within an agreed timeframe (we are talking about perhaps 7-14-21 and 30 day terms), such benefits would not, understandably be passed onto FCS as they have, from commencement of the contract, been remitting funds to Eurest on 90-120 day terms. [sic]
259 Mr Younger wrote that Eurest was extremely concerned at the very limited supplies that had been ordered and received by Fubilan since it had taken responsibility for purchasing. He also noted that, based on local purchases only, summaries which were attached to the letter highlighted the fact that Fubilan had paid K34,237.50 more compared to the prices previously used by Eurest. Eurest said that this could be extrapolated to Fubilan paying K410,850 more than the price Eurest could get. His comments related to local purchases only. He said that Eurest would be performing a similar check on goods received from Australia once they were landed on site.
2.49 Eurest rejects Fubilan complaints - 9 March 2001
260 On 9 March 2001 Mr Poelzl wrote to Mr Buretam complaining about the letter from Fubilan to Mr Jansma of OTML on 28 January 2001. He said that Eurest had done far more than required under the terms of the Management Agreement. He cited events which would have been adverse to Fubilan's commercial credibility were it not for Eurest's resolve to ignore breaches of the Management Agreement brought about by Fubilan and to pursue operational excellence. He identified in particular the unreasonably short mobilisation period and the failure by Fubilan to inject sufficient funds until some six months after the contract had commenced. Eurest was still providing extended credit terms of 90-120 days. Moreover, Fubilan had not had a board of directors until five months after commencement of the contract and during that time there was no direction from it as to operational strategies. He acknowledged, on behalf of Eurest, that it had made some administrative errors to the detriment of Fubilan. Deloittes had performed an on-site audit at Eurest's insistence to verify abnormalities. Eurest had never denied or argued its findings and had "remunerated to the satisfaction of FCS a negotiated settlement".
261 On 15 March 2001, Mr Younger wrote three letters, one to Mr Kolalio and two to Mr Buretam as chairman of Fubilan. In the letter to Mr Kolalio he said, inter alia, that the matter of rebates was currently under investigation and Eurest would formally report back in due course. In the first letter to Mr Buretam he made an inquiry in relation to payments for directors' expenses and the absence of explicit receipt documentation for some of them. His second letter to Mr Buretam expressed his concern on behalf of Fubilan about the cost of purchases made by Limay in February 2001. Eurest had monitored the cost prices obtained by Limay and compared them to the prices obtained by Eurest. The exercise had been performed on an item by item basis. Mr Younger said:
The attached spreadsheets demonstrate that during the month of February, Limay has paid K34,237.50 more when compared to the prices available to Eurest.
He promised, as before, to perform a similar exercise on goods received from Australia and report accordingly. The letter was written at the direction of Mr Armstrong who gave evidence, which I accept, that he had personally ascertained that the purchase of food stuffs by Fubilan for the Management Agreement was at prices higher than those that Eurest could source.
262 On 21 March 2001 Mr Younger wrote to OTML acknowledging its letter of 24 January 2001 that it would not accept the new purchasing arrangements by Fubilan. He advised that Eurest had been directed by Fubilan to place its orders for food products locally through Limay and overseas through Yamil. He advised also that Eurest had complied with this directive. He had been informed that OTML containers which it was intended to load with food from Yamil suppliers for transport to Tabubil were being held at the wharf in Townsville by OTML and not shipped for delivery.
2.50 Fubilan sues OTML and complains to Eurest - March 2001
263 Mr Fenwick instigated proceedings against OTML in the name of Fubilan in the National Court of PNG. The statement of claim alleged that OTML was required under the OTML Contract to provide transport services for containerised food stocks and to provide, at no cost to Fubilan, both freezer and dry containers to service the contract. The statement of claim alleged that Strang International Pty Ltd, OTML's shipping agent in Australia, had been instructed by Mr Higgins not to release containers to Fubilan or to JLFS. On 20 March 2001 six containers were finally shipped to Port Moresby by OTML. Three contained perishable goods and the other three were freezer containers. However a further six dry boxes were said to have been held back on instructions from Mr Higgins. An interim injunction was obtained but later dissolved at a hearing on 11 April 2001.
264 In the meantime, acrimonious correspondence was exchanged between Mr Younger and Mr Fenwick. On 28 March 2001 Mr Younger wrote on behalf of Eurest to Mr Fenwick at Fubilan pointing out that Fubilan had informed OTML, MRDC and Eurest representatives at a meeting on 15 February 2001 that under its agreement with JLFS, Yamil would receive food supplies at the same price as charged by Eurest and that the quality of the goods would be equal to that delivered by Eurest in 2000. The same guarantees had been given to in-country supplies to be purchased by Limay. Fubilan would receive a 10% rebate. Mr Younger said that JLFS had informed Eurest that it had no agreement with Fubilan to hold prices for the next 12 months. The cost of goods supplied locally to date had been more expensive. He attached a calculation. Small goods were being provided by a supplier which Eurest would not use because of quality control issues. It had also come to Eurest's attention that some suppliers had been asked to increase costs of product to ensure a rebate which, in turn, had increased the cost of goods on site. Eurest required the guarantees given by Fubilan to be met in order to ensure that the contract remained commercially viable.
265 Mr Fenwick responded with a letter of the same date. The response was aggressive and not entirely coherent. He complained about direct communication between Eurest and OTML. He said that the reasons for the change in supply arrangements were Eurest's "IMPROPER MANAGEMENT PRACTISES/INCORRECT FINANCIAL ACCOUNTING/IMPROPER USE OF FCS BANK ACCOUNTS/GROSS OVER BILLING to name but a few". He acknowledged the settlement but advised that Fubilan would be convening a special board meeting in the following week "to seek the Boards recommendations as a result of last years performance" [sic] OTML would be advised accordingly. This was plainly a threat of action of some kind against Eurest. Mr Fenwick referred to the six containers held in Townsville and suggested to Eurest that they "respond to this situation with immediate action by informing the Board of your participation in the speedy resumption of shipping the same to site". As for Eurest's concerns he asserted:
It is Eurests responsibility to inform this Board of operational matters and not to question the Boards decision to partner JLFS. As Business Manager of FCS I advise you that your information unsound and I again find your method of reporting to be unpalatable. [sic]
(Emphasis in original)
In relation to costs he referred to statutory increases for rice and flour and price increases for chickens. Small goods were being obtained from the only two suppliers in the country. He asked for details of Eurest's quality control concerns. He then went on the offensive and called on Eurest to calculate rebates owed to Fubilan for 2000. He listed a number of matters of concern. These included the use of an unqualified accountant, Mr Fred Nana at site, Eurest's involvement with Tabubil Golf Club which was said to be contrary to the Management Agreement, changes in expatriate rosters and lack of advice from Eurest in respect of the recent blocking of supply on the part of OTML.
266 On 31 March 2001 Mr Fenwick responded to queries raised by Mr Younger with Mr Buretam about insufficiently documented directors' expenses. Eurest had expressed its concern in a letter dated 25 March 2001 that the transactions would not be acceptable to external auditors. Payments queried included consultancy fees and accommodation charges paid to Mr Fenwick for October, November and December 2000 without supporting invoices or receipts. There were expenses reimbursed to Mr Buretam including private car hire and payments in excess of his director's allowance in November and December 2000. There were other payments which were not invoiced or which did not appear to relate to the affairs of Fubilan. The reply letter was signed by Mr Fenwick purportedly on behalf of Mr Buretam. Its style makes it clear that it was drafted by him. It counter-attacked with reference to, inter alia, "the myriad of Eurest mistakes identified in last years [sic] accounts". He called for an urgent meeting between Eurest, himself and Mr Kolalio to set the "re adjusted Budget" [sic]. A further letter signed by Mr Fenwick on behalf of Mr Buretam and obviously drafted by Mr Fenwick was sent to Mr Younger on 1 April 2001 alleging that Eurest's records were "in a positive sense of disarray". He said "I provide the following information to assist your plight". There followed 16 numbered points responding to the various discrepancies or inadequately documented transactions cited by Eurest. It is not necessary for present purposes to enter upon the merits of those matters. It is sufficient to say that there were at this time significant tensions between Fubilan and Eurest and that Mr Fenwick's personal style exacerbated them to the detriment of a constructive working relationship. This is well illustrated by the last paragraph of his letter of 1 April 2001 where it was said:
Finally you are reminded that you (Eurest) are appointed as Managers for FCS. It is therefore your duty to ensure that the accounts are kept in order and I fail to understand why you have outlined these problems for my attention. My advise [sic] to you should your correspondence be correct (which it is not) would be to tighten your administration with some urgency as it has an atrocious record from last year.
(Emphasis in original)
2.51 Fubilan supply arrangements lead to higher prices - April 2001
267 On 3 April 2001, Mr Reisenbauer sent Mr Fenwick a "provisional price comparison" of the prices charged by Eurest and those charged by JLFS. The covering fax was addressed to him at Yamil. One of the attached sheets related to the month of March 2001. I infer that the comparisons generally related to that month. They disclosed consistently higher prices charged by JLFS across all categories of food stuffs. The differences were not disputed and I accept that they existed as reported by Eurest.
268 On the same day, OTML sent a letter to Fubilan indicating its intention to defend the action in the National Court. Mr Jansma, on behalf of OTML, repeated that company's previous position that the new supply arrangements were in breach of the OTML Contract. OTML would also be instituting proceedings for breach of contract.
269 On 6 April 2001, Mr Buretam sent a letter, which he signed as Chairman of Fubilan and "Coordinator Principal Landowners", to the Chief Operating Officer- Minerals for BHP in Melbourne. The letter called for the removal of Mr Higgins as managing director of OTML. Mr Fenwick denied in cross-examination that he had any hand in that letter. However, having regard to its style and tone and its proximity in time to the letter from OTML threatening action for breach of contract, I think it likely that he was its instigator and that he drafted or contributed to its drafting. The OTML threat in relation to the supply arrangements with Yamil and Limay impinged on his personal interests as an equity holder in those companies as well as his personal standing in Fubilan as architect of the arrangements.
270 Mr Fenwick began to have concerns himself about the JLFS' prices. He met sometime in the first week of April with Mr Coventry of JLFS and wrote a follow-up letter on 8 April 2001. He complained that the prices charged by JLFS were "grossly over stated". He also complained that prime quality meat had not been ordered and that groceries, frozen goods and dairy goods supplied had not agreed with contracted rates. He said:
The situation remains that our engaged Managers Eurest are scrutinising the pricing with abated [sic] breath as they have unwillingly succumbed [sic] to release their stronghold on the supply. It would therefore be advantageous for Eurest to politicise any deficiency detected in the chosen supply route. Whilst FCS can live with the difficulties of logistics and at the same time appreciate the patience shown by JLFS over the past month it is unrealistic to expect that FCS can support any method of supply unless the same is extremely competitive.
He sought adjustments to pricing to reflect similar prices charged by Eurest. He said that the negotiations with JLFS had at all times been based on it matching or bettering the Eurest prices. Asked in cross-examination why he wrote the letter, Mr Fenwick said he wanted to let JLFS know that Fubilan was not happy with the situation and the invoice prices and that JLFS had not honoured the agreement.
271 On 10 April 2001 Mr Younger wrote to Messrs Fenwick and Buretam pointing out that for the period of February and March 2001 supplies received from Limay and Yamil had exceeded the prices available to Eurest by K340,000. The value included additional VAT and duty paid due to the inflated prices. The additional cost to the Fubilan/OTML Contract amounted to around three months budgeted profit. Mr Younger added:
Additionally, we finding [sic] the in country logistical systems are not acceptable, as goods are sent in incorrect containers and documentation not completed correctly. We believe that there must be a qualified representative based in all departure locations to ensure the required standards are met.
He said that, as manager, Eurest was the guardian for the landowner investment in the OTML Contract and as manager it regarded the prices charged to Fubilan as unacceptable. He then said that Fubilan, presumably here referring to Eurest, acting on behalf of Fubilan, would only pay Yamil and Limay the agreed prices. It was the responsibility of Yamil and Limay to apply for credits for the overcharges to date. Eurest's project manager would supply a detailed breakdown of all over charges in the March operational report.
272 It was put to Mr Fenwick in cross-examination that Limay was so under-prepared to carry out its functions that it didn't even have credit facilities to purchase goods and had to apply to Eurest to pay its invoices. Mr Fenwick did not dispute that proposition save to say that the money used to pay the invoices would come from Fubilan. Eurest were merely the money manager. By way of example, he was shown a memorandum from Mr Kolalio of 10 April 2001 concerning payment due from Limay to Pelgen's Small Goods which was overdue by over a week "… as a result of Limay's bank accounts not being finalised". Mr Fenwick accepted that what Mr Kolalio said was correct.
2.52 Fubilan threatens to terminate Management Agreement - 11 April 2001
273 On 11 April 2001 Mr Buretam sent a letter to Mr Younger which was not received until 17 April 2001. Mr Fenwick prepared the letter. In it Mr Buretam stated that the Fubilan board's ongoing review of operations had highlighted "… issues of great concern that must be brought to management's attention for appropriate action". He referred to the leniency that Fubilan had shown to Eurest given the damaging results of the internal audit. The board was said to be very seriously concerned about the return on its investments and the performance of management and hoped that the expected or promised returns on investment were delivered. A number of areas were identified which were said to highlight the "incompetence and lack of due care persistently demonstrated by the Eurest Management despite numerous liaison [sic] by MRDC and the Board office". Those items were as follows:
. Debtors' accounts - long outstanding - over K500,0000 review of aged receivables as at 30 March 2001 were said to indicate over K500,000 uncollected over 60 days.
. Rise and fall billings - over K300,0000. OTML had awarded a rise and fall adjustment in February 2001. This was said to be over 9% back chargeable to October 2000. Mr Buretam's letter estimated that the total amount to be claimed for the period was over K300,000. Eurest had not promptly submitted the award to OTML for payment. Swift action was required to bill and receive the money.
. OTML billings. Mr Buretam complained that client billings to OTML were not being submitted on time for payment in accordance with timing agreed with the Towns Office. This was said to be an example of a situation which Fubilan lost money on the time taken to cash its receivables.
. Change of roster. Fubilan was not aware of any agreement to change the expatriate roster from 8/3 to 6/3 after 12 months of operations. Management was required to provide Fubilan with copies of the agreement to substantiate its actions.
. Insurance on damaged goods. Preparation and lodgment of insurance claims had not been done for goods received to site in damaged condition. Particular reference was made to a container of potatoes said to have been received in bad condition. No claim had been lodged with the insurers for the K20,000 loss.
. Issue of credit notes. Goods sold to Eurest worth K66,504.64 were returned to Fubilan minus 12 cartons of fish. The full sale amount was credited against Eurest's account without any consideration for stock not returned. The full amount of the goods not returned was to be charged to Eurest.
. Supervision of K2 million warehouse. Mr Buretam complained that the warehouse had been under the care of a student on vacation/casual employment for a period of four weeks namely Steven Mipi. Eurest had failed to provide a suitably qualified person to manage the warehouse during the absence on leave of the warehouse supervisor. The Fubilan board demanded an explanation of the "persistence of such disgraceful and unprofessional management practices".
. Leanne Broadbent. Fubilan instructed Eurest that the engagement of Ms Broadbent was to be discontinued. Fubilan had a trainer and did not require an additional trainer.
The letter concluded:
The FCS Board reneged on pursuing termination of the services of Eurest despite contractual rights to do so, especially after the damaging results of the internal audit, in the hope of forging long-term business relations. However, it now appears from the persistent misdemeanour as demonstrated by the foregoing issues, that the FCS Board's genuine business expressions have been taken for granted. Consequently, Eurest is now reminded, that this letter serves as a last warning. All issues of concern must be brought under control immediately. Should this be seen to fail the FCS Board will have no further alternative, but to pursue termination of Eurest's management services.
274 It was put to Mr Fenwick that he had decided that, in order to maintain the valuable supply company arrangement in which he had a 20% equity, he would find a basis for terminating the contract between Eurest and Fubilan thus forcing OTML to allow Fubilan to continue its arrangements. He said, unpersuasively, that it was a board decision. It was a matter of the board taking the best decision for the company and Fubilan was the company. If Fubilan as a board decided not to go ahead with supply that was the way it was. He would not decide that. In my opinion however, Mr Fenwick was aggravating the board's discontent with Eurest over problems capable of resolution in order to advance his own ends. The discord between Fubilan and Eurest was driven to a large extent by Mr Fenwick.
275 The letter suggested that there had been a board meeting since the meeting of 8 March 2001 when it referred to the board's "ongoing review of operations". There had been no such board meeting although Mr Fenwick, in his letter to Mr Younger of 28 March 2001, had foreshadowed a special board meeting to be convened in the following week. He had in the two letters both foreshadowed and referred retrospectively to a board meeting which did not occur.
276 The student, Steven Mipi, who Mr Fenwick said had been put in charge of the warehouse for a period of four weeks in the absence of the supervisor, was a person he himself had introduced to Fubilan. He had employed him as a cadet manager at Bige in 1998. He had done two years of college. He accepted that Mr Mipi was in charge of the warehouse for a period of one week and two days and not four weeks as set out in the letter. In cross-examination he claimed that he had drafted the letter under Mr Buretam's instructions. He said that Mr Buretam was a very educated man and he didn't have to sign off anything that he, Fenwick, put before him. He said that at that time Mr Buretam wanted to terminate Eurest and was not happy with Eurest after the first year's operation. Mr Buretam had been wanting to have Eurest dismissed for about eight months at that stage. He said "everybody wanted to get rid of Eurest bar me at that particular time". Although Mr Fenwick said earlier in his evidence that he had prepared this letter, he said in cross-examination that that was a mistake. The letter had been copied to himself and Mr Baitia and he thought it looked like the auditor's writing. I do not believe Mr Fenwick's evidence in this respect.
1.53 OTML requires Fubilan to purchase through Eurest - 12 April 2001
277 On 12 April 2001 OTML again wrote to Fubilan about the proceedings in the National Court. Mr Jansma who signed the letter, observed that during the course of the proceedings the National Court judge had indicated that it was a "requirement of the Contract for Fubilan to utilise the services of Eurest to procure food". Mr Jansma said that had always been OTML's understanding of the contract and that was the basis on which it was reluctant to transport food which had not been ordered by Eurest. He referred to evidence that the new supply arrangements had incurred higher costs for Fubilan and that significant quantities of poor quality food had been received. OTML would not accept any flow-on from these higher costs. It would transport any containers which had been presented to the wharf prior to the close of business on 12 April 2001 although it was not obliged to do so. He continued:
We also advise that any current or outstanding FCS Purchase orders with suppliers (not yet delivered to our shipping locations) be cancelled and orders placed by Eurest in accordance with the contract agreement. We do intend to require that Fubilan comply with the terms of the Contract. However, we have no desire to be on bad terms with Fubilan and we would welcome the opportunity of re-establishing a good working relationship.
The letter concluded with a request that Fubilan not present any containers for transport unless they had been procured through Eurest. The letter was received by Mr Fenwick on the same day. It was put to him in cross-examination that it was plain that Eurest was thereby directed by OTML to resume direct purchase of supplies. He said:
It was very plain to me that our managers, Eurest, being a professional world wide organisation, should have known that we should have never taken over supply without the acceptance and/or OTML from 1 February.
He said that in any event Fubilan had instructed Eurest to discontinue the Fubilan supply arrangements and for Eurest to take up supply arrangements.
278 Mr Coventry of JLFS also wrote to Mr Fenwick on 12 April 2001. He said supply negotiations for groceries, dairy and frozen goods had not been completed when JLFS commenced supply and therefore prices varied up and down. He accepted responsibility for overcharges and would give credits on all prices charged above contract. The price and quality of meat supplied was a matter he would discuss with Mr Stansfield. He said it was now clear that all the details about the Eurest supply arrangements had not been presented prior to the contract between Fubilan and JLFS. He suggested that a cost-to-cost comparison of prices with Eurest was not possible as Fubilan in fact had been picking up most of those costs by way of direct payment or management fees. He wrote:
We need to consider the 10% FCS rebate for the landowners as requested and cost of services as outlined in our contract, after all of this is a margin for JLFS as it is not involved in any further production of the goods and cannot recoup money further down the line as the other parties may.
Mr Fenwick agreed in cross-examination that JLFS had "got it wrong". It could not deliver the prices it had promised to deliver under the agreement. It was put to him that Mr Coventry was pointing out that the perception that Eurest was overcharging was wrong. JLFS could not match the Eurest price. Mr Fenwick answered:
As an executive manager for John Lewis I would be saying probably the same sort of rhetoric myself in there.
2.54 Eurest response to Fubilan's complaints - 19 April 2001
279 Mr Fenwick was cross-examined on the alleged breaches of contract on the part of Eurest. These were set out in the letter of 11 April 2001 from Mr Buretam and dealt with in an internal Eurest memorandum from Mr Kroeger to Mr Younger of 19 April 2001. Mr Kroeger had responded in substance as follows:
As at 31 March 2001, debtors' accounts stood at K291,913.58 over sixty days and not K500,000 as alleged. Third party sales of K91,346.84 would be paid by 20 April 2001. Payment was slow because OTML departments were invoiced separately to smoko and functions. The balance was being actively followed up.
The rise and fall claim chargeable back to October 2000 was submitted to OTML in February. It sat there for three weeks until the OTML accountant returned the invoices seeking a line by line itemised invoice to justify the increases. This was a delaying tactic by the Town's Department of OTML to avoid adjusting their budget.
On occasions billing to OTML had been late because of the amount of information required including contractor meal numbers and third party sales to OTML departments.
The insurance claim for potatoes from Limay that arrived in an unsuitable container was open to discussion. The question of who was liable for the loss had been discussed with Mr Fenwick. The invoice for the potatoes had not been processed and paid.
Mr Kroeger had not been informed of any short stock and this had been rectified. An invoice would be raised to Eurest totalling K2,856.34 and paid the following week.
Mr Steve Mipi was the son of the manager of Wangbuilt Store owned by Mr Yekim. He had been accepted for entry into the University in Queensland and was of above average intelligence. Mr Fenwick had requested that Eurest take him on as a casual employee. He was taken on as a casual storeman and later as a warehouse clerk. During a period of four months he was trained in all aspects of warehouse operation. The warehouse supervisor went on leave from 2 April 2001 to 12 April 2001. During that time all permanent warehouse staff were present. Both Mr Kroeger and Mr Reisenbauer went to the warehouse several times each day to check that everything was alright and to oversee Mr Mipi.
Leanne Broadbent commenced employment as a Poons' employee in November 1999 as a part time trainer at the Poons' training centre. She was taken over by Eurest after the buyout of Poons. She had a Bachelor of Education degree, Diploma of Teaching Technical and was a fully qualified TAFE teacher. All her qualifications were required in PNG and Australia to train apprentices. Practical cookery training was done by Mr Jock Turner, but she did the theory, lesson plans and teaching.
280 Cross-examined on Mr Kroeger's response Mr Fenwick did not dispute the figures for outstanding debtors. He accepted that OTML usually took 60 days to pay on invoices to departments for smoko and functions. He did not know whether the explanation for the delay in the processing of the rise and fall claim was reasonable. He maintained that bills had not been submitted to OTML on time. He did not dispute that there was an enormous amount of information required for that billing. As to the insurance claim in relation to potatoes, he accepted that it was still open for discussion. He disputed the correctness of Mr Kroeger's account of the use of Steve Mipi in the warehouse. He said he knew how the warehouse was operated and that the contention that Messrs Reisenbauer and Kroeger went down at separate times each day was not right. As to Leanne Broadbent's qualifications he said it wouldn't be to his satisfaction but if the Fubilan board accepted it that would be fine.
281 Mr Kroeger was not cross-examined on his document. It was amongst a large number of documents tendered by the respondents without objection from counsel for the applicants, who was explicitly reminded of his right to object to the tender of any of them. So far as the memorandum sets out Eurest's response to the complaints raised in the letter of 11 April 2001 from Fubilan, I take it as factually correct. Mr Fenwick does not seem to have been in a position to dispute any of it in detail.
2.55 Fubilan's contract with JLFS causes difficulties - April 2001
282 On 23 April 2001, Mr McKenzie of JLFS sent a fax to Mr Fenwick referring to their discussions in Brisbane and stating that JLFS was "absolutely committed" to meeting the needs of Fubilan as set out in the contract. Pricing errors would be fixed and a credit passed through. Mr Coventry would get back to him in relation to the meat supplied in the first order.
283 On 25 April 2001 Mr Fenwick sent a memo, under the letterhead of Morocco, to Mr Buretam saying he had been advised that Eurest had recommenced ordering supplies through their own network on behalf of Fubilan without board authority. This had serious ramifications for Fubilan, the least of which was the current "supply agreements" in place with JLFS and Karma Foods. He pointed out that Fubilan could be liable to damages claims from those suppliers. He accused Eurest of having acted in a "selfish manner throwing caution to the wind". He presumed that Eurest had preferred to act on correspondence from Mr Jansma of OTML which had offered an opinion and not a court ruling. He said:
These actions by Eurest are serious and I fore warn [sic] you that the legal implications are far reaching. There must be an urgent meeting called with Senior Eurest Management to discuss the situation failing issuing Eurest with a Notice of Termination effective immediately as they are in serious breach of their Management Agreement with Fubilan Catering Services.
284 It was put to Mr Fenwick in cross-examination that Eurest was simply doing what it had been directed to do by OTML. He said it should have been the Fubilan board's decision. Asked whether he had supplied Eurest with a copy of Fubilan's agreement with JLFS, he said he did not personally give them a copy. In his memorandum of 25 April 2001 he had dismissed the observation, said by Mr Jansma to have been made by the National Court, that it was a "requirement of the Contract for Fubilan to utilise the services of Eurest to procure food". He said it was an opinion of Mr Jansma's rather than a court ruling. He was cross-examined on that comment. He said he knew the court in Port Moresby had ruled that Fubilan was not to do supply, but he was not too sure of the technicalities and legal ramifications of what had happened. It was put to him that on its face his advice to the chairman of Fubilan exaggerated the position. He said "it could be taken that way yes". I find that the memorandum from Mr Fenwick to the Fubilan board was calculated to blame Eurest for a situation which was of his own making. As a result of his procuring the supply agreement with JLFS in a way that was not compatible with the requirements of the OTML Contract, Fubilan had become potentially liable for breach of that agreement if it did not continue to acquire supplies from JLFS. He perceived that one way out of the problem was to accelerate the moves he had already begun with the Fubilan board to terminate the Management Agreement with Eurest.
285 A notice of default was sent to JLFS by McKie & Associates acting as solicitors for Fubilan. The defaults alleged related to the prices charged for goods ordered which were said to have required Fubilan to pay extra duty of K31,809.20 and extra VAT of K22,486.16. The notice required the cancellation of purported invoices, the issue of invoices applying the price set out in the product list for products delivered, payment of K54,295.35 in relation to surplus duty and VAT and payment of legal costs associated with the notice in the amount of A$1,000. JLFS was given 20 business days after service of the notice to rectify the defaults. It seems that the notice may have been regarded by Mr Fenwick and by JLFS at that time as something of a formality. Mr Coventry wrote to Mr Fenwick on 1 May 2001 offering a credit of A$18,812.46 plus relevant duties. He said in the course of that letter:
It would now seem that unlike originally indicated Eurest were not openly over charging for the purchase of goods, however, their costs recovered by FCS and they had other methods of creating income.
In relation to outstanding matters he expressed the view that they could negotiate "a go forward situation for all parties".
[21]
2.56 Fubilan, MRDC and Eurest meet to resolve differences - 21 May 2001
286 On 8 May 2001 Mr Buretam signed a letter to Mr Younger referring to OTML's suggestion that it was a requirement of the contract between OTML and Fubilan that Fubilan utilise the services of Eurest to procure food. Purporting to exercise Fubilan's rights under the Management Agreement, he directed Eurest as manager to:
1. Place any orders in accordance with the contract agreement with John Lewis Food Services Pty Ltd.
2. Ensure that the food procured from John Lewis Food Group through Eurest is delivered for transport by OTML.
Mr Fenwick's recollection was that Fubilan had stopped its own supply in Port Moresby on 10 April 2001 after the decision by the National Court. But the Court's decision was apparently made on 11 April 2001 so Fubilan's response would have occurred on 11 April or shortly thereafter. He claimed that the letter of 8 May 2001 was not drafted by him. Mr Younger responded on 9 May 2001 saying that the issue would be discussed at a meeting between MRDC, Fubilan and Eurest in Brisbane to be held on 21 May 2001. According to a memorandum from Mr Fenwick to Mr Yalapan of 3 May 2001 it was he who arranged that meeting.
287 On 9 May 2001 Mr Younger sent an internal Eurest memorandum entitled "Provisions and Accruals at December 2000". Mr Armstrong received a copy and was cross-examined on it. The memorandum set out a list of potential provisions and accrued liabilities. Item 13 was entitled "Provision for Fubilan Catering Services". It stated:
In the year 2000 in [sic] Poon PNG made administration errors in regards to the Fubilan Catering Services Contract. A negotiated settlement of K470,000 was paid to FCS by Poon.
FCS has since presented further claims to Poon indicating that they are seeking further compensation.
He noted that the claim from Fubilan exceed K1,200,000. It was put to Mr Armstrong in cross-examination that the compensation claimed at that date related in part to rebates. Mr Armstrong described it as a general ambit claim but accepted that it included a claim for rebates.
288 The board of MRSM met on 17 May 2001 in Port Moresby. Mr Baitia presented a report on Fubilan to the board. He reported an initial capital injection from MRSM of K3.5 million and Fubilan's gross turnover which, at that time, stood at K19 million. He said an internal audit had highlighted some issues and resulted in a refund from Eurest of K800,000 to MRSM. Investigations on rebates were ongoing. He complained that Eurest was not performing under the Management Agreement and not bringing Fubilan to the level of agreed profitability. The accounts were not properly maintained and Fubilan believed that up to K1.2 million could be recouped from Eurest. The managing director of MRSM stated that Fubilan had a board which ran the company and that MRSM should not interfere in the running of Fubilan.
289 Accounts to 31 December 2000 were presented at the meeting and management accounts to 31 March 2001. No dividend had been received from OTML as at 31 December 2000. No dividend income was received in the quarter ended 31 March 2001.
290 Mr Poelzl wrote to Mr Buretam on 18 May 2001 referring to his letter of 8 May 2001 concerning acquisition of supplies from JLFS. He said that Fubilan could not give directions under the Management Agreement requiring Eurest to place orders with JLFS.
291 Mr Fenwick prepared typed notes for the meeting between MRDC, Fubilan and Eurest in Brisbane on 21 May 2001. He gave copies to MRDC representatives coming to the meeting. He maintained that Fubilan had held a firm position during contract negotiations with Eurest with regard to rebates being in favour of Fubilan and not their managers. The notes were replete with rhetoric condemnatory of Eurest. He suggested that the court action could have been avoided with "firmer supportive action from Eurest as our Managers". He added:
The constant innuendo with regard to Yamil was a farce and should be fully understood by all present that this company was intended to facilitate the Austrade benefits available to fledging exporters and not as portrayed, for personal interests. Yamil Supply Pty Ltd (a company fully owned by Fubilan Catering Services Limited) has to date been non functional.
He spoke of "constant titter tatter" between OTML and Eurest which had "bedded a psychological disadvantage for Fubilans [sic] desire to expand its business interests". He then spoke of what he called "significant misnomers" [sic] which had emerged during the previous months and required immediate attention:
. overcharging by Eurest for handover stock
. payment by Fubilan of premium interest of K200,000 to Eurest for non-provision of funds when in fact Eurest now advise they have a 90-120 day credit with all suppliers;
. difficulties in fulfilling JLFS contractual arrangements at Eurest 2000 prices;
. JLFS prepared to consider supply of food service lines only at current Eurest prices with a rebate;
. rebates and invoice credits received by Eurest with the comment that:
The stripping of profitability by the retainment of rebates falls against the nature of this agreement.
[22]
A list of necessary actions was set out in the notes including a requirement that Eurest credit all rebates connected with the management of Fubilan's business since February 2000. Various other complaints about Eurest were made in the memorandum. The meeting took place as arranged on 21 May. Messrs Buretam, Yekim and Fenwick represented Fubilan, Baitia and Yalapan, MRDC and Poelzl, Younger and Armstrong, Eurest. It appears however that Messrs Buretam and Yekim left early in the meeting. Mr Yalapan said in cross-examination that he thought they had personal matters to attend to. Mr Fenwick chaired the meeting. It lasted from 9.25am to 1pm.
[23]
2.57 Fubilan and Eurest dispute the draft minutes - May 2001-July 2001
292 On 25 May Mr Armstrong sent Mr Fenwick a set of draft minutes of the meeting and invited him to review and comment on them and to advise him of any changes. The opening discussion recorded in the draft minutes concerned Fubilan's supply arrangements involving JLFS and Karma Foods, the rebate which they offered and the rebate enjoyed by Eurest but not passed on to Fubilan. Mr Fenwick was said to have asserted that rebates paid to Eurest by its suppliers ranged from 4% through to 10%. He listed specific suppliers and rebates. Mr Poelzl was recorded as saying that Eurest did not get the rebates claimed by Mr Fenwick. It was a major purchaser in Australia and PNG and was able to negotiate excellent prices. Those charged to Fubilan reflected economies of scale and payment arrangements which had been negotiated with suppliers. Information suggested that early payment discounts on average were in the order of 2%. The same was true in country. Eurest had funded purchases for Fubilan and so Fubilan had not benefited from payment arrangements.
293 Mr Poelzl referred to Fubilan's advice that it would continue doing its own purchasing. Eurest would agree to that if price, quality and delivery were good. However to that date they had been unsatisfactory. There was discussion about containers of rotten potatoes, short supply and an overcharge of K70,000 on meats. Mr Poelzl said that supply, quantity and price and "[lack of] clarity on company structures" was a problem with supply through Fubilan. Eurest could not agree to any arrangements other than purchasing through Eurest until these were solved. He said that Eurest had contractual obligations under the Management Agreement and could not follow instructions "contrary to a court's decision or the intent of the agreement". He said stock prices as at February 2000 were not inflated. Eurest had obtained 30% better prices than those available on the stock system on site. Mr Fenwick was recorded as saying that suppliers were prepared to give Fubilan the same prices as Eurest plus a minimum of 6% rebate. Mr Poelzl asked for evidence of Mr Fenwick's claims about rebates. He said:
Eurest is interested to move forward and is prepared to offer FCS/WF access to Eurest's Supply Chain arrangements.
The minutes then stated that:
The meeting endorsed this motion and considering GGP's explanation on payment terms, no past rebate or supply claims will be pursued.
It was evidently agreed that Mr Fenwick and Mr Ellis, the National Supply Chain Manager for Eurest (Australia), would meet and negotiate prices with JLFS. If the prices obtained were equal to or better than those available to Eurest through their nominated suppliers, Eurest would purchase through JLFS. Mr Baitia was said to have endorsed the proposal. Mr Younger made the point that Fubilan had been making payments to Eurest on 90 to 120 day terms. This could not go on otherwise rebates would be forfeited. Mr Fenwick referred to the agreements that Fubilan had in place with JLFS and Karma Foods and his wish to honour them if possible. Mr Baitia was recorded as agreeing that a joint effort was preferable to work through pricing together. The rebate issue would evolve through exercises. Messrs Fenwick, Baitia and Yalapan agreed that there was no intent to alter the management fee in any form. They also agreed not to pursue the rebate issue. The minutes recorded:
Agreed not to pursue the rebate issue, it was now finished, and agreed with GGP to go forward and build a united strong partnership together.
Discussion then followed on the management accounts, the Golf Club issue, the incentive fee under the Management Agreement and other matters. Mr Younger was said to have stated that two expatriate site managers were necessary. He would look for a trainee manager candidate. He would approach OTML for financial assistance to place a supernumerary trainee manager. At the end of a twelve month period he would place the trainee into a fulltime management position. This was to be raised at the next Fubilan meeting and a proposal to be submitted to OTML by Eurest.
294 Mr Fenwick's evidence-in-chief on this meeting was spare. It appeared at [133] of his statement of evidence of 22 June 2006. It was in the following terms, which reflected an error as to the date of the meeting:
On 25 May 2001 I attended a meeting at the Hilton Hotel in Brisbane with Eurest in relation to negotiating settlement of outstanding claims. A copy of the minutes prepared by Eurest and a letter of response from Melvin Yalapan were prepared.
Mr Yalapan's evidence-in-chief was that Mr Poelzl said "we do not get rebates in our operations". Mr Yalapan said "so absolutely not, no rebates at all?", to which Mr Poelzl replied "no". According to Mr Yalapan he repeated his question three times and Mr Poelzl denied each time that Eurest received rebates. Mr Yalapan said that Fubilan believed there were rebates and they needed to get a final audit done as this was a big issue on site. Mr Baitia made no mention of the meeting of 21 May 2001 in either of his witness statements. Mr Buretam, in his witness statement, said the meeting took place on 21 May 2001 and that Lee Yekim was present. His statement also recorded that "Before we left the meeting Gerhard Poelzl said that Eurest did not receive rebates. I clearly remember this." Unfortunately as Mr Buretam was deceased by the time the matter came to trial, his recollection could not be tested in cross-examination. Mr Yekim's statement did not refer to the meeting.
295 In Mr Armstrong's evidence-in-chief he placed the meeting at or about 24 May 2001. He said that Mr Baitia stated that Fubilan considered it was entitled to rebates that Eurest was receiving from suppliers and that they were in a range of up to 10%. Mr Poelzl acknowledged that Eurest did receive rebates but not at the percentage amount claimed by Mr Baitia. Moreover, according to Mr Armstrong, Mr Poelzl said Eurest was not obliged to pay the rebates to Fubilan. Mr Poelzl said they were in the order of 2% only. Mr Armstrong said in his evidence-in-chief:
At the meeting both Melvin Yalapan and Michael Baitia both stated that whether there was a claim or not for rebates against Eurest, it would there and then be waived.
Mr Poelzl's evidence-in-chief was that he said that Eurest did receive rebates but that Fubilan was not entitled to the benefit of them. He then said he recollected Messrs Baitia, Yalapan and Fenwick saying at the meeting that whether or not there was a claim for rebates against Eurest they did not wish to proceed with that claim.
296 Mr Baitia was cross-examined on the meeting. It was put to him that Mr Poelzl said that Eurest received an early payment discount but didn't get the rebates claimed by Mr Fenwick. He said:
I don't exactly recollect that one, but.
He agreed with the statement contained in the minutes that the meeting endorsed the proposition that Eurest offer Fubilan and Fenwick access to its supply chain arrangements and that in light of Mr Poelzl's explanation about payment terms, no past rebate or supply claims would be pursued. It was also agreed that he, Mr Fenwick and Mr Yalapan said there was no intention of altering the management fee.
297 In cross-examination Mr Yalapan recalled that Mr Poelzl said something to the effect that his information suggested Eurest was receiving 2% early payment discounts only. Mr Yalapan added "Effectively that they were not receiving any rebates". In his witness statement he had alleged that Eurest's draft minutes "did not accurately reflect what occurred at the meeting, particularly in relation to the issue of rebates". He said the minutes were "cooked up to reflect a particular perspective". He then retracted that characterisation. Mr Yalapan did not in fact dispute much of the content of the minutes when taken through them in cross-examination. He denied however that Fubilan had agreed not to pursue the rebate issue. Mr Fenwick and nominated Eurest people would work out rebate issues together. They would ascertain whether rebates were provided and discounts given. He wanted to be sure there were no rebates.
298 Mr Yalapan wrote a letter to Messrs Poelzl and Armstrong on 16 July 2001 in which he said that the draft minutes "substantially reflect the matters discussed". He also said that the significant issue on which he differed was the recorded resolution in relation to the issues on suppliers and rebates. He said in the letter that he did not recall agreeing to "give up the issue". The purpose of the discussions which were to take place after the meeting between Mr Fenwick and Eurest's technical person (ie Mr Ellis) was "… to ascertain whether the additional benefits in terms of rebates will be available, whether Eurest had been receiving these benefits and that these could be passed on to FCS". [sic] The letter alleged that Eurest had attempted to use the minutes to "hedge" its position. It was put to Mr Yalapan in cross-examination that he was speaking prospectively. The reference to the benefits being passed on to Fubilan meant that if JLFS were prepared to give a 10% discount at a better price than Eurest they should buy through them. He replied:
It is a diplomatic business letter yes.
He agreed that it was intended to reflect his understanding of what was resolved at the meeting.
299 In cross-examination of Mr Fenwick the following exchange occurred in relation to the discussion about the rebates at the meeting of 21 May 2001:
Q. Now, the denial by Mr Poelzl was that Eurest didn't get rebates as you contended, wasn't it?
A. - - - he certainly denied it.
Q. Get the rebates that you contended. "Eurest does not get rebates as stated by WAF" WF? …
A. That's right.
300 Mr Fenwick was taken to the passage in the draft minutes which said that no past rebate or supply claims would be pursued. Asked whether that was said, he replied:
That's more for a retort, that. What - yes, what actually happened, Mr Bennett, is that Mr Poelzl said that we could go and talk with the Supply Manager in Sydney who would reveal everything about supply, assist us to get on with supply and do it in a proper fashion. The Supply Manager in Sydney gave us the cold shoulder, closed the door on us and we flew back to New Guinea, as simple as that.
Then he was asked:
Q. It is correct, isn't it, that Mr Baitia, Mr Yalapan and yourself at the conclusion of the meeting, when Mr Poelzl said let's forget the past, we will move forward and grow together, you agreed not to pursue the rebate issue, it is now finished and agreed?
A. Yes
301 Mr Poelzl was cross-examined about rebates recovered by Eurest in 2000. He agreed that, as at February 2000, it was part of the business practice of Eurest to obtain rebates or discounts from suppliers. He was asked for the highest rebate figure in 2000. He could not give an accurate figure. He said there may have been early payment discounts. To the best of his knowledge, if they were averaged out, the average would have been about 3%. He added that he had mentioned this "in a meeting". I took this to be a reference to the meeting of 21 May 2001 although that was not specifically put to him.
302 Mr Poelzl was referred in cross-examination to a rebate of 7% mentioned in a letter from Pelgen's Small Goods received in September 2001. Mr Poelzl said that his 3% figure was an average rebate. Other cross-examination of Mr Poelzl on the rebate question was based in part on a document he had never seen and of which he knew nothing. He was not cross-examined about the meeting of 21 May 2001. Nothing he said was inconsistent with his evidence-in-chief in relation to that meeting. In particular, his evidence that Messrs Baitia, Yalapan and Fenwick said at the meeting that whether or not there were a claim for rebates, they did not want to proceed with a claim, was not challenged. Mr Armstrong was not cross-examined at all about the meeting.
303 The record contained in the draft minute and the responses of Messrs Yalapan, Baitia and Fenwick in cross-examination on it lead me to reject their statements in evidence-in-chief that Mr Poelzl denied receiving any rebates. The emphatic character of their witness statements, particularly that of Mr Yalapan, raises a question about the extent to which they were reconstructed from self-serving correspondence post-dating the meeting rather than reflecting any actual recollection. I find that at the meeting Mr Poelzl rejected Mr Fenwick's claim about the level of rebates being sought. I accept that the draft minutes reflected the substance of the discussions that took place at the meeting of 21 May 2001 and that the parties agreed then and there to put behind them the question of rebates received by Eurest up to that time. What they agreed to do was to compare the benefits that could be obtained through JLFS and those obtained from Eurest purchasing through its suppliers.
304 Mr Fenwick, having received a copy of the draft minutes, wrote to Mr Baitia on 29 May 2001 raising concerns about them. He foreshadowed a meeting in Sydney with Mr Russell Ellis of Eurest. He said:
At this stage I personally feel that the rebate issue was not addressed satisfactorily by Eurest and that FCS have significant claims to lodge against Eurest. To accept their statement that they do not receive rebates simply is not convincing against every supplier stating that they do. Perhaps it would be wise to measure their statement against the recently completed Deloittes audit. A good result may encourage FCS to offer leniency in past rebates however a poor result will determine a prompt recovery.
He then referred to the acquisition of JLFS by another organisation, Burleigh Mars, with whom Eurest had dealt directly. He regarded this as a stroke of luck as there would be no dispute about pricing and there was a solid contract agreement to provide a 10% rebate.
305 It was put to Mr Fenwick in cross-examination that, on 21 May 2001 only eight days before he wrote the letter, he had agreed not to pursue the rebate question. He did not disagree but said that when he went to see Mr Ellis, Mr Ellis did not know anything about rebates. The problem with that answer was that he had not seen Mr Ellis when he wrote the letter. He changed tack and said his change of heart about the rebates occurred because Mr Armstrong rang him after the meeting and wanted him to sign off on the minutes. Further pressed, he said it was "probably discussions from the board after the meeting". By this he evidently meant discussions between himself and other board members who had been present at the meeting. There was no reference to the Armstrong telephone call in his witness statement.
306 In my opinion, Mr Fenwick's explanations of his change of mind were made up in the run of cross examination. It is most likely that he had decided, upon receiving the draft minutes, that he had too readily given away a bargaining chip in his ongoing dispute with Eurest and his drive for purchasing to be done by Fubilan involving companies in which he had an equity. Although there was no direct evidence on the point, in my opinion the probability is that he influenced Messrs Yalapan and Baitia to accept his interpretation of what had occurred at the meeting.
307 On 1 June 2001, Mr Fenwick wrote to Mr Armstrong apparently in response to a fax seeking his reaction to the draft minutes. He wrote that both Messrs Baitia and Buretam felt that the question of rebates was a matter for the board to be considered at a meeting in Port Moresby on the following Thursday. He requested that references in the minutes to rebates and subsequent conclusions be struck out until the board was fully advised. He also said he had spoken with Mr Yalapan who stated his belief that the rebate issue was put into the "hard basket" to be addressed between the nominated Eurest representative, Russell Ellis, and Mr Fenwick. He added:
Noting that it was stated categorically by G Poelzl that Eurest received no Rebates other than maybe 2% for early payment.
308 Mr Poelzl responded to Mr Fenwick's letter, sending copies to Messrs Baitia and Yalapan. He expressed his extreme disappointment that Fubilan and Eurest had returned to "Pre-Meeting" conduct. He said that Eurest would not issue the minutes while Fubilan, MRDC and Eurest were unable to agree on their content. Nor would they delete any items. He stated his clear understanding that the draft minutes were a true record of intent of the meeting. He said:
Until all matters that remain outstanding are resolved to the satisfaction of both parties, Eurest will not issue the Minutes and will continue to enforce purchasing for the Tabubil Contract per the terms and conditions of its Management Agreement and in accordance with OTML's instruction of 12/04/01 to FCS.
309 A meeting of the Fubilan board took place the following day. Minutes of the meeting indicate that Mr Fenwick told the board that he had a letter from OTML confirming that Eurest had been receiving rebates, a fact which Eurest had denied. He also advised of the takeover of JLFS by Burleigh Mars, the national suppliers for Eurest. He advised that there was nothing wrong with Eurest doing the order supply for Fubilan, but he disagreed with them collecting the rebates. Mr Yalapan told the board about the meeting of 21 May 2001. The minutes record:
The understanding in the meeting was that Mr Fenwick and Eurest managers were to work together to try and establish firstly if there were any rebates and secondly how much dollars the suppliers were paying.
The minutes record Mr Yalapan's contention that Eurest consistently denied that it was receiving any rebates. There was discussion of the question of supply. Mr Buretam said that landowners were calling for a meeting with OTML because they believed that OTML was protecting Eurest. However Mr Yalapan advised Mr Buretam not to drive the issue too hard and risk a knockback from OTML. Mr Buretam was recorded as stating that the landowners had concerns about the managing director of OTML.
310 The board resolved:
1. That the Management formally write a letter to Eurest on the amendment of the Minutes of Meeting that Eurest minuted and agree to that effect.
2. That FCS and Eurest agree on the rebates offered on how much they are and for a better price.
2.58 The Fubilan board meets - 2 July 2001
311 The next Fubilan board meeting took place in Brisbane on 2 July 2001. Mr Reynolds of Karma Foods attended. Mr Fenwick explained that he was there to propose that Limay deal with both local and off shore supply. According to the minutes Mr Fenwick advised the board that the proposed arrangement for supply utilising Yamil had never been implemented. Mr Reynolds is recorded as having reported that Yamil had not traded and had not been able to fulfil its contractual obligations with JLFS. An arrangement to supply Fubilan, bypassing Yamil, and using Limay as the only intermediary company for both local and off shore supply, should be created. Mr Fenwick agreed in cross-examination that the minutes reflected accurately what was said. A contract to give effect to the proposal was tabled. Fubilan at that time was effectively being supplied by JLFS. The board resolved that the draft contract be noted and endorsed subject to further review. The draft contract was not before the Court. Mr Fenwick was unable to explain where it was.
312 The minutes of the meeting of 2 July 2001 also recorded Mr Fenwick saying that Eurest had been withholding the benefit of rebates and that he had letters from suppliers confirming this. Mr Yekim proposed that the evidence be presented to OTML with a view to the termination of the Management Agreement. The board resolved to send a letter to Eurest giving it 14 days "to rectify the situation regarding rebates", that a copy be forwarded to OTML and that they endeavour to meet with OTML. Alternative management arrangements were considered at the meeting. Mr Boas tabled a letter from Niolam Catering Services of Lihir (Niolam) offering management services. Mr Fenwick was requested to get quotes from possible alternative firms. The board also resolved that legal proceedings be commenced against Eurest for breach of the Management Agreement. The board additionally relied upon Mr Fenwick's advice to send a notice of termination to JLFS for failure to give correct invoices.
313 Mr Fenwick said that the operations on the ground were running fairly well but that Eurest had made major changes without board approval. This comment concerned the alleged employment by Eurest of eight expatriates. The board resolved to seek an explanation for their employment. Eurest was also to be given written notice that the information contained in financial statements provided by it was inadequate. The acknowledgment that operations on the ground were running fairly well stood in sharp contrast to the strident denunciations of Eurest that were to follow from the hand of Mr Fenwick in the lead up to the attempted termination of the Management Agreement in November 2001. On the other hand, Mr Fenwick was to make very similar acknowledgments on the very day, 29 November 2001, that he delivered the notice of termination of the Management Agreement to Eurest.
2.59 - Fubilan sends notice of termination to JLFS - 13 July 2001
314 On 13 July 2001 McKie & Associates on behalf of Fubilan sent JLFS a Notice of Termination of the Product Supply Agreement of January 2001. The notice was based on JLFS's failure to comply with the notice of default of 27 April 2001. Mr Fenwick said in cross-examination that he had two meetings in Brisbane with JLFS and senior management. Both meetings were "to rectify the situation". Neither resulted in the agreed prices or rebates, "That is what prompted the termination".
2.60 - Fubilan sends a "show cause" letter and "Technical Paper" to Eurest - 16 July 2001
315 On 16 July 2001 Mr Baitia sent a letter to Mr Poelzl on MRDC letterhead stating that there were "too many unresolved issues affecting ("FCS") relationship on the accounts of the Catering business and yourself ("Eurest") as our manager". He complained that matters raised in the Brisbane meeting of 1 June 2001 had "not been ratified". He said:
The follow-up actions have not been followed through your performance as managers had been poorly indescribable. [sic]
The letter required Eurest to "show cause for the following issues within fourteen (14) days". The issues included non-compliance with the Chairman's directive about supply and failure to credit Fubilan with rebates. On the latter issue, the letter threatened recovery action in the PNG or Australian courts. Other "issues" related to changes in site rosters without approval, unacceptable Operational Reports, incorrect accounts, failure to "gear" the level of expatriate management to allow the introduction of local management and billing Fubilan for the payment of a relief manager's salary at the Tabubil Bakery. The letter attached a "Technical Paper" purporting to relate various of the deficiencies in Eurest's performance to provisions of the Management Agreement.
316 On the same day a letter was sent to Eurest, again on MRDC letterhead, signed by Mr Yalapan. This was the letter, referred to earlier in which he stated that he disagreed with what the minutes of the meeting of 21 May 2001 recorded as to rebates. The letter concluded:
… I want to once again place on record that we are determined to work within the spirit of the Brisbane meeting to resolve all outstanding issues. Perhaps it is appropriate that a further meeting is held before issues become too contentious.
317 The language of these letters and of the Technical Paper indicate Mr Fenwick's close involvement in their preparation. Drafts had been exchanged between him and Messrs Yalapan and Baitia. It is clear that he also prepared the Technical Paper. He sent a draft version of it to Mr Yalapan and a copy of it to Mr Baitia on 12 July 2001. The letters were laying the groundwork for the termination of the Management Agreement. The letter signed by Mr Baitia had the tone of a default notice. The letter signed by Mr Yalapan was clearly designed to try to maintain the contention that the rebates' issue had not been resolved on 21 May 2001. It was put to Mr Fenwick that the Technical Paper was a log of claims "put up to consider the termination of the contract". He replied "possibilities". I take this to mean that he accepted that the Technical Paper set out possible grounds for termination of the Management Agreement.
318 The cross-examination of Mr Yalapan and of Mr Fenwick bore out the proposition that at the beginning of July 2001 they decided to send out a number of documents simultaneously. The documents were prepared and sent to Mr Fenwick on 4 July 2001. He returned them on 11 July. He forwarded the Technical Paper on 12 July and the two letters and the Technical Paper were despatched on 16 July 2001. Mr Yalapan agreed that it was primarily Mr Fenwick who put together the Technical Paper. This was inconsistent with his evidence-in-chief that he had had Mr Kolalio prepare it. Mr Fenwick agreed that he prepared the Technical Paper although he said he did so under instructions from Mr Yalapan. He denied "absolutely" the proposition that the exercise was undertaken in order to organise a termination. It may be noted that in the last paragraph of the Technical Paper which was sent out to Mr Poelzl with the letter from Mr Baitia the following appeared:
I would strongly advise the Board of Fubilan Catering Services to review their Management Agreement with Eurest and consider other alternatives.
This is the second incident in which Mr Fenwick's personal pronoun intruded into a document sent out under the name of his putative client. The document also bore the notation:
This Document is Confidential and prepared for the Board of Fubilan Catering Services.
It appears that neither the letter of 13 July 2001 nor the two letters of 16 July 2001 nor the Technical Paper was put before the board of Fubilan, MRDC or MRSM. The timeframe of their preparation did not permit that and that is consistent with Mr Fenwick's evidence.
2.61 Eurest responds to the show cause letter - 24 July 2001
319 Mr Poelzl responded on 24 July 2001 to Mr Baitia's letter of 16 July 2001. He expressed his extreme disappointment at its content. He asked what had gone wrong since the meeting in Brisbane in May. Eurest had only sent draft minutes for confirmation and there had only been a dispute about one aspect of the minutes, namely the rebate discussions. Mr Poelzl wrote:
The fact that the correspondence directed to myself, is the first that we have received on this matter since the meeting on 21st May 2001 is mystifying.
He then responded to each of the points listed in Mr Baitia's letter. In summary his responses were:
The Fubilan chairman was not empowered under the Management Agreement to direct Eurest to purchase from JLFS but the matter was extensively discussed at the Brisbane meeting and a strategy was put in place with the agreement of both parties.
Rebates. The issue was discussed and settled at the Brisbane meeting. Mr Fenwick had subsequently reneged on that agreement. Further discussion was warranted between the parties.
Change of site rosters. A full explanation of change of site rosters was provided to Mr Fenwick at Tabubil. It was also detailed in a letter to Mr Kolalio on 19 March 2001. For the year to June 2001 there had been a saving on labour budgets of K301,557.
Operational reports. The letter of 16 July 2001 was the first that Eurest had heard that operational reports were unacceptable as a true/concise account of events.
Accounts presented incorrectly. For the previous six months there had been no queries as to account presentation. The accusation was unfounded.
Level of expatriate management. The OTML Contract stipulated the number of expatriates to be employed on site. Eurest had reduced the level by one person and the position was filled by a national employee. OTML had stated that the level of expatriates was not to be decreased any further. At the Brisbane meeting Eurest had agreed to look for a trainee manager candidate.
Relieving manager's salary at Tabubil Bakery. Eurest was unaware of that situation. Immediate checks did not support the accusation. If an adjustment was necessary after checking a credit would be processed.
320 The letter then went on to say:
Bill Fenwick's desire is obviously to manage the purchasing function. To date, despite Eurest's assistance, his proposals were operationally and economically unsound and would require OTML's and Eurest's agreement. Nevertheless in our Brisbane meeting Eurest offered Supply Chain assistance which will further aid FCS. This was based on our understanding that all the past issues were resolved.
Mr Poelzl concluded by saying that Eurest wanted to move forward but if continuously confronted with past issues, it would have no option but to talk to OTML about the workability of the arrangements. The letter in evidence bore Mr Fenwick's handwritten notes including a number of rhetorical comments such as "not wrong here", "save your breath" and "sure!".
321 Mr Poelzl replied on the same day to Mr Yalapan's letter of 16 July 2001 noting that Mr Yalapan and Mr Baitia could have communicated with him direct to discuss the content of the minutes of the meeting of 21 May 2001. He then said:
Eurest will no longer deal with Mr Fenwick on the issue of rebates in his single capacity. We believe that this whole issue together with other issues, has tainted the credibility and understanding of all parties.
He said that Eurest would be happy to convene another meeting such as that held in Brisbane.
[24]
2.62 Additional Costs incurred by Fubilan supply arrangements - 18 July 2001
322 Shortly after the letters of 16 July 2001 were sent Mr Kroeger prepared a memorandum to Mr Younger dated 18 July 2001 setting out additional costs incurred by Fubilan as the result of its use of consultants in the supply system and through the pricing arrangements with JLFS. Additional consultant costs included fees and expenses for Messrs Herman, Reynolds, Fogarty, Fenwick and Kolalio as well as directors' travel costs for the signing of the Product Supply Agreement with JLFS. These totalled K133,427.38 over the period February and March 2001. Costs incurred through the new purchasing system, by reference to local and overseas orders totalled K345,824 for February and March 2001. The memorandum containing this calculation was not objected to nor was it tendered on a limited basis. I accept it as evidence that Fubilan incurred significant additional costs in February and March 2001 as a result of its arrangement with JLFS and its use of consultants and that these additional costs were in excess of K400,000.
323 On 25 July 2001 Mr Younger wrote to Mr Fenwick pointing to the additional costs of the OTML Contract of K345,824 for February and March 2001 flowing from Fubilan's purchasing arrangements with Yamil and Limay. He said that Mr Fenwick had failed to secure credits for overcharges raised in the course of those purchases. He pointed out that Mr Fenwick had told the meeting on 21 May 2001 that he had obtained the credits but later told Mr Kroeger that he had not. Mr Fenwick replied on 27 July 2001. His reply was lengthy and not easy to follow. He did say however that Fubilan had not paid "a penny for the goods from John Lewis Food Services". The thrust of the letter seemed to be that the dispute over pricing with JLFS was unresolved.
2.63 Fubilan threatens to "review" the Management Agreement - 3 August 2001
324 On 3 August 2001 Mr Baitia wrote to Mr Poelzl referring to his letter of 16 July 2001 and said:
In view of the fact that you have failed to respond to the issues raised in that letter within the 14 days time frame, we have little choice but to review the Management Agreement.
This letter therefore serves to advice that we are now reviewing the management agreement. [sic]
Mr Poelzl replied by fax pointing out that Eurest had despatched its reply on 24 July 2001 from its Perth office. Copies of the same correspondence had been hand delivered to MRDC on 1 August 2001. Mr Baitia responded on 7 August 2001 acknowledging Mr Poelzl's earlier letter. Mr Fenwick's drafting was apparent in his letter. It stated, inter alia:
It appears that you have again missed the main thrust of the letter;
1. Transparency/Honesty/Commitment - all essential components for the "go forward" position as discussed in Brisbane.
2. Your lack of recognition of the technical paper as supplied by us to prove the extent of the problems.
I am remiss to advise that none of the foregoing are acceptable. Advice received post-Brisbane Meeting highlighted the actions taken to reneg on the outcome. Our shareholders' protection is paramount, therefore, you may be comfortably assured that we had good reason not to sign off on the minutes as presented. [sic]
The letter concluded by thanking Mr Poelzl for his comprehensive response to the letter of 16 July 2001 but requested "similar attention to the Defaults as outlined in the Technical Paper".
325 On 8 August 2001 Mr Fenwick wrote to Mr Baitia pressing him to expedite the completion of the "internal audit" of Fubilan's affairs and accounts. He said, inter alia:
It would appear that based on the information received from suppliers both in Australia and Papua New Guinea that we have good reason to advise the Board of Fubilan Catering Services with respect to their position in this matter. In order to support this presentation it would be advantageous to complete the outstanding investigative work in Tabubil thereby ensuring Fubilan Catering Services recover all monies rightly due to them.
He went on to stress "the urgency relating to this matter". He expressed his confidence that Mr Kolalio would "speedily identify the necessaries to formulate an accurate and substantial dossier for reference by all".
2.64 Fubilan complains to OTML about Eurest -8 August 2001
326 Mr Baitia wrote to Mr Blenkhorn of OTML on 8 August 2001 alleging that in 2000 Fubilan had "identified that Eurest were performing unacceptable practices both in Accounts and Operations". He referred to the settlement payment to Fubilan of K840,000 but went on to say:
There remained other outstanding issues from this settlement in January 2001 to be reviewed when Mr G Poelzl (Eurest Chief Operating Officer) was available.
While some meaningful results had been achieved from the meeting of 21 May 2001 it was "disappointing to later find that Eurest had misrepresented their position". This was a reference to the rebate discussion. He alleged that Eurest was retaining a significant benefit by way of supply rebates, credits and other pre-arranged bonuses. Eurest had categorically denied its involvement in any such benefits. He said:
Information from responsibility of the Directors of Fubilan Catering Services to ensure these matters are curtailed and not allowed to permeate throughout our business as they are totalling unacceptable. [sic]
He foreshadowed that if there were not a satisfactory response to those issues within 60 days there might be "a necessity to call for their termination to their Management Agreement with Fubilan Catering Services". He asked Mr Blenkhorn to give consideration to an early meeting with the chairmen of MRSM and Fubilan and with himself at a convenient time. Copies of this letter were sent to Mr Jansma and Mr Wissink.
2.65 The MRSM and Fubilan boards meet - 9 August 2001
327 Meetings of the MRSM and Fubilan boards were held on 9 August 2001. A paper produced for the Fubilan board referred to "past and current experiences with Eurest" and "countless attempts to overcome these problems". Eurest was said to have failed to perform in accordance with the Management Agreement. It had serious problems with the rebating issue. The paper stated:
The Board should fully comprehend this matter and implement a go forward position to ensure maximum compensation results from any proposed action.
328 The possibility of termination of the Management Agreement between Fubilan and Eurest was canvassed. The style of the paper was suggestive of Mr Fenwick's drafting. It acknowledged the requirement that OTML support or authorise termination and added:
Considering past encounters with OTML it would seem highly unlikely that Eurest would go any where failing them committing mass genicide. [sic]
Reference was made to recourse by other channels to recover "monies misappropriated through rebates". If those entitlements were "proven in Court" then OTML would have no alternative but to support a change or review of the current management. The paper proposed that McKie & Associates be appointed "to fully remedy the situation of rebates by instituting proceedings against Eurest (Australia) ASAP". Eurest should be given a notice "to remedy the Rebate issue within sixty (60) days" and the "Business Manager (ie Mr Fenwick) and a representative from MRDC to fully brief Barristers in Perth ASAP". The paper reported the notice of termination issued to JLFS and added:
This situation is very encouraging for Fubilan Catering Services as we now have the ability to negotiate directly with Eurests National supplier (as they have bought John Lewis Food Services), interesting times ahead. [sic]
329 The board paper also discussed the outstanding insurance claim for potatoes delivered to site rotten. Eurest was said to have finally relented with a payment of K20,000 credited to the Fubilan account. The paper stated:
Eurest have continuously challenged FCS ability to supply by providing the potato saga as an example of incompetence only to eventually display their own stupidity. [sic]
Mr Fenwick said that the words "mass genicide" [sic], used in the board paper, were not his. He didn't remember the document at all. He had already engaged McKie & Associates to provide advice in relation to JLFS and Eurest. He instructed them on advice from MRDC. In my opinion Mr Fenwick drafted most, if not all, of the board paper.
330 The minutes of the meeting of the Fubilan board on 9 August 2001 included the following observation, derived from the board paper:
However, it should be fully understood that recourse by other channels to recover monies misappropriated through rebates remain. Hence, should this be proven to Court, OTML would have not option but to change or review the current Management. [sic]
The minutes recorded that the board was advised "to provide a direction that will satisfy the shareholders, remembering that monies owed to FCS are retained by Eurest through secret commissions on [sic] supply". The Fubilan board resolved to authorise Mr Baitia to work with the chairman to recover money due to Fubilan from Eurest. It resolved that the company secretary formally advise OTML of the pending legal action and that every effort be taken to raise Fubilan's concerns about Eurest with OTML. The board also resolved that it should seek the support of the Secretary-Department of Mining to pursue the matter with OTML management.
331 It was put to Mr Fenwick in cross-examination that the purpose of the legal action against Eurest was to force OTML to agree to the removal of Eurest as manager. Mr Fenwick denied this. He said it was necessary to commence court action because Fubilan could not get rebates that were due to it or the balance of adjustments required. I do not accept his evidence in this respect. In my opinion he was actuated by the desire to get rid of Eurest by whatever means it took. The other members of the board were greatly influenced by his views. His role in heightening antagonism between the board and Eurest was illustrated in a letter he wrote to Mr Buretam on 27 August 2001. He told Mr Buretam that Eurest had informed Fubilan on numerous occasions that Fubilan was "going broke" and had threatened to liquidate its business. They had even taken that threat to OTML in May 2000. In cross-examination Mr Fenwick said that these things were true. Asked why he was raising with Mr Buretam things that were said to have happened more than a year before, he said:
Well, they're degrading the company so, you know, that was a very important thing but the landowners of FCS were very proud to have this as their company and by being degraded in this manner that - that Eurest applied in the early day, it's a very important point, a very valid point I thought.
He said he thought it was part of his function to continue to remind the board of things of that nature. This exchange in my opinion indicated, as counsel for the respondents rather colourfully put to him in cross examination, that he "wanted to keep pressing the nerve ending". Mr Fenwick was, in my opinion, working to maintain a level of antagonism towards Eurest by members of the Fubilan board so that they would not lose enthusiasm for proceeding against Eurest and terminating the Management Agreement.
2.66 Eurest responds to the "Technical Paper" - 15 August 2001
332 On 13 August 2001 Mr Poelzl again wrote to Mr Baitia observing that the contents of the letter of 16 July 2001 made no mention of the Technical Paper and did not request any response to such a paper from Eurest. He advised that Eurest would formulate a reply to the document and forward it in due course. He reiterated his suggestion in the email which he had sent on 4 August 2001 that there be a meeting to discuss the Management Agreement and key areas of interpretation. Mr Poelzl requested that Mr Hayes attend the meeting. He suggested it be set for either 28 or 29 August 2001 in Brisbane or Port Moresby.
333 A response to the Technical Paper was prepared by Mr Armstrong of Eurest on 15 August 2001. In a summary section Mr Armstrong observed that letters from both parties clearly indicated that their interpretation of the Management Agreement was inconsistent. Eurest had been, and still was, willing to meet with Fubilan and MRDC. He asserted that Eurest continue to operate the business as professional diligent managers for Fubilan. In the majority of cases it disputed the breaches of contract alleged by Fubilan. The rebates issue required further discussion. The in-country management fee would not be refunded as Eurest had demonstrated on numerous occasions that it was a legitimate charge. Mr Fenwick had accepted the charges as correct at the Brisbane meeting. Eurest rejected any claim for a refund flowing from alteration of expatriate rosters and the claim for repayment of management fees collected from third parties. Mr Poelzl sent Mr Armstrong's response to MRDC on 21 August 2001.He described the Technical Paper as a deliberate attack on Eurest. He reiterated his disappointment about Fubilan's "turn about" after the acceptance of resolutions reached at the meeting on 21 May 2001. Copies were sent to Mr Blenkhorn of OTML and Messrs Armstrong, Younger and Hayes.
2.67 JLFS refuses to accept Fubilan's Notice of Termination - 22 August 2001
334 On 22 August 2001, the corporate solicitor for Metcash Trading Limited (Metcash), the holding company for JLFS, wrote stating that JLFS did not recognise Fubilan's right to terminate the Product Supply Agreement. JLFS had acted in good faith at all times, relying on an incorrect list provided by Fubilan on 12 April 2001 as evidence that it could offer competitive pricing. It incurred expense negotiating the agreement and it would seek damages against Fubilan. Payment of the outstanding sum of $617,279.16 was demanded within 7 days. McKie & Associates forwarded a copy of the letter to Mr Fenwick who wrote back on 23 August 2001 disputing the Metcash claims. He said that JLFS were aware at all times that goods had to be invoiced to site at prices equal to or better than Eurest's and that failure to do so would result in "Operational complications".
2.68 Fubilan moves towards termination of Eurest - OTML resists - August 2001 to November 2001
335 In his evidence-in-chief Mr Baitia said that after the appointment of McKie & Associates to act for Fubilan he was contacted by Mr Younger to arrange a meeting to discuss how to resolve problems with the Management Agreement. Over the months that followed there were numerous meetings in Cairns, Brisbane, Port Moresby and Tabubil with members of Fubilan, MRDC, MRSM, OTML and Eurest. There was no agreement on any common ground to move forward on the contract so ultimately the boards of MRSM and Fubilan resolved to terminate the Management Agreement with Eurest. Some of that history follows.
336 On 27 August 2001, Mr Baitia wrote to Mr Blenkhorn at OTML about a meeting at Tabubil at which MRDC had briefed OTML executive management on Fubilan's concerns about Eurest. There were issues which he believed to be significant financially and which posed threats to the survival of Fubilan as a "fledgling company". First, was the failure of Eurest to pass on rebates to Fubilan. He alleged that Eurest had also breached its fiduciary duty to Fubilan in utilising Fubilan bank accounts for its own purposes and that it had "embezzled funds through duplicate invoicing". He said:
A total of K 884,000 was recovered both in cash and in adjustments through the book of accounts. To be specific, K 470,000 was received in cash and the balance in adjustments.
Under the heading "Operational Issues" he accused Eurest of "an element of insubordination to the FCS Board, which is the highest governing power of the company". This was said to be evidenced by the alteration of the expatriate roster, the attempted use of Fubilan bank accounts to finance Eurest operations, slow collection of outstanding debts, untimely submission of billings and non-investment of excess cash. Mr Baitia said that MRDC deplored "in the strongest terms, the unprofessional and unethical management style of Eurest". He went on to say:
We also believe that OTML envisions the advancement of business ventures by local landowners, and therefore, agree with us that such detestable practises shown by Eurest be appropriately dealt with. [sic]
Mr Fenwick denied any part in the preparation of this letter. It was evidently written as part of the process of enlisting OTML's support for the termination of the Management Agreement.
337 On 30 August 2001, McKie & Associates, prepared a Notice of Default addressed to "Eurest (Australia) Support Services Pty Ltd" and "Eurest (South Pacific) Limited". Mr Fenwick delivered the notice to the Tabubil site office. The alleged defaults included failure to pass on rebates and obtaining rewards or payments directly or indirectly in relation to Tabubil Bakery, Bige JV, KCS and the Tabubil Golf Club in breach of cl 2.4 of the Management Agreement. They extended to a failure to exercise due care and skill in performing obligations to Fubilan resulting in additional costs, failure to exercise due care and skill in relation to the value of stock purchased from Poons as at 31 January 2000 and failure to observe a direction from the board of Fubilan in breach of cl 10.2(a)(ii) of the Management Agreement.
338 It appears that at about that time Eurest began to move to a net price arrangement rather than receiving the benefit of any rebates. Mr Michael Hutton of Zenag Chicken wrote to Mr Povey, the Manager Papua New Guinea Operations-Purchasing-Logistics for Eurest on 7 September 2001. He referred to a telephone conversation in which Mr Povey had requested a new net Fubilan price effective 7 September 2001. A price list was attached as a net price with no other discounts or rebates available. In similar vein, Pelgen's Small Goods sent a fax to Mr Povey on 10 September 2001 stating:
As requested Pelgens Smallgoods Ltd have cancelled Eurest PNG's 7% rebate structure and amended your customer pricelist to reflect net pricing. This pricing structure will be effective 10th September 2001.
339 On 11 September 2001, Mr Fenwick wrote to Mr Baitia with copies to Mr Buretam and Mr Kolalio concerning the purchase of shares in the Tabubil Bakery. In the course of that letter he said:
It would seem that during Eurests nine (9) year partnership with the Bakery they have failed to disclose and pass on REBATES for the good commercial benefit of all partners. This does not require a full explanation but it would be beneficial to understand that the Tabubil Bakery has purchased on average 1.5 containers of Coke a Cola per month over the nine (9) year term. This equates to Eurest having received K324,000 in rebates which have not been recorded in the Tabubil Bakery accounts at any stage. (Emphasis in original)
He wrote to Mr Younger at Eurest on the same day in relation to JLFS costs and the future of the JLFS contract. Mr Younger responded on 19 September 2001 pointing out that Eurest was not privy to any agreement entered into by Fubilan and JLFS. He stood by his contention of overcharging by JLFS. Eurest would not reconcile Yamil's accounts. Yamil's relationship with Fubilan and JLFS was a matter for those parties to resolve.
340 On 28 September 2001, Messrs Kroeger and Younger met with OTML to answer concerns raised at the earlier meeting between MRDC and OTML. Mr Younger expressed extreme concern about the allegations of embezzlement and fraud in Fubilan's letter of 27 August 2001. He accepted that there were some issues of Eurest's administration in the past which had required attention but those aspects had been remedied and "signed off" by MRDC several months previously. Nothing about those issues could be construed as "unlawful". He said he would refer the matter to Eurest lawyers should untrue and scurrilous comments about Eurest's integrity again be made. He referred to an alleged overcharge of K300,000 based on an invoice raised by Eurest for K912,000. He said Eurest was unaware of the invoice or the overcharge.
341 Mr Younger responded to a statement by OTML representatives that they had been informed that Eurest had not produced any profit for 2001, the second year of the contract. He attached a copy of a budget accepted by the board and highlighted the actual operation profit against forecasted budget. The figures were:
Budget February to August 2001 K980,512
Actual February to August 2001 K999,939
He noted that directors' costs for the year to date were K426,888, double the budget forecast. The interest paid to MRDC was K553,332. Mr Younger contended that although the year to date figure was unaudited it showed that Eurest had exceeded the budget. Had Fubilan not been purchasing through Yamil and Limay there would have been an additional K326,801 profit to that date to bring the year to date profit to K1,326,740. This represented an excess to budget of K346,228 which equated to 35% above budget. He pointed out that ongoing repetitive expenses were the direct result of Mr Fenwick entering into a business venture without proper care and attention.
342 On 4 October 2001 Mr Baitia wrote to Mr Poelzl and suggested that they meet in Port Moresby on 9 November 2001. He said that the Fubilan board had lost total confidence in Eurest's ability to properly manage its business in accordance with the Management Agreement. In the meantime, on 8 October 2001, Mr Faulkner the General Manager Operations of OTML wrote to Mr Baitia requesting a meeting at OTML's office in Tabubil on Friday, 12 October 2001. He expressed OTML's extreme disappointment about the decline in the relationship between Fubilan and Eurest and required that matters of dispute be resolved properly in the shortest possible time. He also reminded the directors of Fubilan of cl 6 of s 2 of the OTML Contract which stated that:
The Contractor shall employ and … keep employed Eurest … unless otherwise approved in writing by OTML.
OTML had no intention of giving any such approval. He said:
If you do not have Eurest as your Manager, you will not have a contract.
He pointed out that the Management Agreement formed part of the OTML Contract and could not be terminated or varied without OTML consent. It contained provisions for dispute resolution which Fubilan had not sought to use. OTML management had tried unsuccessfully to facilitate a resolution by meetings and correspondence. Mr Baitia responded on 8 October 2001 indicating that MRDC management would attend the meeting on 12 October 2001 at Tabubil.
343 Mr Younger sent Mr Buretam finalised audited statutory accounts for the period 1 February 2000 to 31 December 2000. The accounts were audited by Deloittes. For the period mentioned the operating profit for Fubilan before any financing costs or directors' expenses was K972,313. After the deduction of financing costs and directors' expenses the profit reduced to K159,863. Mr Younger also wrote to OTML on 9 October 2001 indicating that Messrs Armstrong, Kroeger and Reisenbauer would attend the meeting at Tabubil on 12 October 2001 "with a positive attitude and a goal to stabilise our relationship with both OTML and Joint Venture Partners".
344 Mr Buretam acknowledged the receipt of the audited accounts in a letter dated 12 October 2001. He stated that it was regrettable that the audit process had taken an unacceptably long period of time to complete. He said the board would not accept the draft audit in its current form and would require a completion of the internal audit conducted by Mr Kolalio.
345 A meeting was held on 12 October 2001. Messrs Faulkner, Jansma, Blenkhorn, Moyner and Musio were present from OTML. Messrs Baitia, Yalapan, Kolalio and Ms Hobart represented MRDC, Messrs Buretam and Fenwick represented Fubilan and Mr Menim represented MRSM. Eurest was represented by Messrs Armstrong, Kroeger and Reisenbauer. Early in the meeting Mr Baitia told Mr Faulkner that he did not want to discuss the catering contract as OTML had no intention "of dismissing Eurest". Mr Faulkner reiterated that Eurest would not be terminated. Mr Yalapan also said that MRDC wanted Eurest terminated. Mr Buretam warned OTML that if it did not fix the problem, it would have big problems. This was its last warning. The landowners had invested K4 million and all they had was a problem. Mr Yalapan said that Fubilan intended to commence litigation against Eurest and wanted full settlement of all past claims. According to the notes of the meeting in evidence, "MY looked RWA in the eye" and stated:
We are going to get you, and we are going to get you good. There will be civil and criminal actions.
Mr Faulkner said that OTML would prepare a draft Operations Manual aligned to the Management Agreement. It would define the responsibilities of MRDC, Fubilan and Eurest. Mr Yalapan assured everybody that the proposed litigation against Eurest would commence on 1 December 2001 unless some form of satisfactory negotiation had occurred. Despite his name appearing on the notes of the meeting Mr Fenwick did not think he had attended. I accept that the meeting was unproductive.
346 On 13 October 2001 Mr Younger wrote to Mr Boas providing, as requested, an overview of charges raised by Eurest for interest on operational funds provided for Fubilan in the initial stages of the OTML Contract. Finance for the OTML Contract had not been forthcoming as stated in the tender document. To ensure that the company remained solvent, Eurest had continued to pay operating costs. He supplied documentation covering the issue. He said that in June a commitment had been made at an MRSM board meeting to pay Eurest the moneys outstanding within two weeks. Eurest had agreed to reduce its then accumulated interest to K50,000 but the funding was not received. Eventually, in July, Eurest agreed to charge K50,000 up to the end of June and 2% less than bank interest until the debt was paid.
347 Mr Fenwick wrote to Mr Younger on 14 October 2001 about the operational report. He referred to "regular problematic misrepresentations conveyed by yourself". He instructed Eurest to hold the line on JLFS and not to pay any JLFS invoices until advised that correctly priced invoices had been received.
348 On 15 October 2001 Mr Faulkner wrote to Mr Buretam about the meeting of 12 October 2001 and restating OTML's commitment to the success of the contract. OTML was quite satisfied with the level and quality of service provided by Fubilan through Eurest and did not want to see that situation jeopardised. Under the OTML Contract, OTML, Fubilan and Eurest were bound together. Much of the difficulty between them arose from the lack of clarity in their responsibilities and reporting relationships. OTML was prepared to provide resources to draft a Corporate Manual and facilitate agreement between Fubilan and Eurest. It was of vital importance that Mr Buretam, as chairman, and the board of Fubilan should take an active role in the process so that they had a clear understanding of the workings of the business in which their shareholders had invested. This was a clear indication that they should not leave it all in the hands of Mr Fenwick. Mr Faulkner said he would be pleased to meet with the board of Fubilan or MRSM. Mr Buretam responded on 16 October 2001, laying blame at the feet of Eurest. He accused OTML of seeking a way forward without addressing the core problem. He rejected the proposition that their dispute had anything to do with clarity of responsibilities and reporting relationships. He accused Eurest of fraudulent conduct. He said that the MRSM and Fubilan boards were willing to discuss current and future local business development plans provided that their gestures were viewed "in a professional and unbiased business attitude".
349 Mr Poelzl wrote to Messrs Baitia and Yalapan on 26 October 2001 repeating Eurest's request and invitation to MRDC to meet to discuss issues currently outstanding between them. He rejected the claim that at the meeting on 21 May he had denied knowledge of the rebate issue. He referred to the draft minutes of the meeting which, he said, clearly stated he did acknowledge early payment discounts and further commented on why they had not been afforded to Fubilan.
350 On 8 November 2001, Mr Poelzl wrote to Mr Baitia stating that MRDC's determination to seek Eurest's termination rendered a meeting pointless. There was no legitimate basis for MRDC or Fubilan to seek termination. Fubilan had met its budget for the first year of operation and was operating well in advance of its budget for its second year. He then said:
Eurest has undertaken extensive analysis of the early payment/discounts that it receives from its suppliers, and is willing to table such data, with the view of a negotiated settlement/offset with Fubilan Catering Services; and the further aim of then putting behind both parties old issues, and working together to ensure continued operational profitability and success.
We hasten to add that the amount of early payment discounts does not even come close to the percentage being quoted by MRDC.
He requested an assurance that MRDC wanted to move forward and wanted to work with Eurest for the continued betterment of Fubilan. Upon receipt of a statement of a positive position, Eurest would willingly arrange to meet with MRDC.
2.69 Mr Kolalio's audit report - 9 November 2001
351 On 9 November 2001, Mr Kolalio wrote to Mr Kroeger at Eurest saying that his internal audit had revealed issues for the attention of management. They would also be brought to the attention of the Fubilan board. Many of the financial issues raised in the previous audit had resulted from erroneous and double payments. The most recent audit was concentrated on all large payments made to suppliers to ensure that they were proper. The site accountant had done a very good job of ensuring that duplicate payments did not occur. However, because of the way in which Eurest (Australia), Eurest (South Pacific) and Eurest (Lae) charges were billed, the tendency to make double payments had been high. He had noted incidences of the same charges being communicated to site through invoices, correspondences and journal entries. He gave examples. One was the management fee. He said charges for the months of February 2001 to April 2001 were paid twice resulting in a double payment to Eurest of K104,029.99. These however were subsequently recouped through deductions on subsequent payments to Eurest. Expatriate salaries for the pay period ending 31 January 2001 were paid twice. The board of Fubilan would formally request a cheque for K74,249.93 plus three months interest from Eurest. Expatriate staff were said to have been taking advances from Fubilan which were repaid through salary deductions. Such advances should not be allowed. Staff travel costs were high given the number of staff travelling on breaks and leave. He claimed Mr Reisenbauer had incurred excessive travel costs including a sum of over K10,000 for a single trip. He sought an explanation. Stock receipts showed that for the period January 2001 to October 2001 "a huge amount of stock" had been short supplied. Fubilan could not be liable for the charges on stock it had not received. He sought reimbursement of K119,758.47. This was net of "stock received" and "over received" from overseas suppliers. He also referred to expenditure control. In connection with the management of bank accounts, a sum of K1,500,000 had been placed in an interest bearing deposit with the BSP Bank. That deposit, however, had been liquidated and the funds transferred to operating accounts to meet creditors' liabilities. He complained that the withdrawal was done without the knowledge of the Fubilan board. It was not necessary because there were sufficient funds to cover maturing obligations. It represented careless financial management. Mr Kolalio referred to proper management of the cash flow. There were insufficient checks and management supervision at the warehouse. Purchase orders had been used without carbon copies to back up procurement. He concluded:
A lot of the above issues were addressed in past correspondences. However, the existence of same problems only indicates a lack of urgency on the part of the management to take corrective action. A schedule of the total claim will also be presented to management together with the notes on the systems.
2.70 Fenwick arranges for Niolam to replace Eurest - November 2001
352 Messrs Fenwick and Baitia were at this time communicating with Mr Colin Vale of Niolam as the prospective replacement for Eurest. On 7 November 2001 Mr Baitia wrote to Mr Vale referring to a telephone conversation "in relation to the opportunity and assistance by Niolam to provide supportive management services to Fubilan Catering Services". He suggested that Mr Vale meet Mr Fenwick at Crowne Plaza Hotel in Port Moresby. That meeting took place on Saturday 10 November 2001. A memorandum from Mr Vale to Mr Fenwick of 11 November indicated his understanding that it was Fubilan's intention to remove the incumbent caterer by the end of November and that Niolam should be ready to take over the management of the contract "at a moment's notice". Fubilan would be responsible for payment of accounts. Fubilan and Niolam had agreed that Karma Foods would be the agent for all supplies except local produce procured on site. Fubilan would give Niolam a letter of intent that basically stated that subject to agreement with OTML and the removal of Eurest, Fubilan would appoint Niolam as managers of the Fubilan Catering Contract. A fee structure had not been established.
2.71 Fubilan lobbies the Minister for Mining - 13 November 2001
353 On or about 13 November 2001 Mr Fenwick sent Mr Baitia a draft letter to go to Mr C Haiveta, the Minister for Mining, who was travelling to Tabubil on the following day. The letter was to be signed by Mr Baitia. It complained about OTML's failure to attend to Fubilan's concerns about the performance of Eurest. It stated:
It is quite apparent that there is a 'Big Boy Small Boy' ploy being acted out by OTML/Eurest and we find this unacceptable on our soil. The opportunity to rectify these difficulties has been offered without recognition, we remain frustrated and our patience is diminishing rapidly. The Board of Fubilan Catering Services through MRDC have provided instructions for the termination of Eurest forthwith.
Should OTML not support the removal of Eurest in these circumstances it may place Fubilan Catering Services with the prospect of facing a protracted legal battle in the Courts. This is unethical and immoral, for OTML to protect an Off shore contractor who has knowingly stolen monies from the Land owners.
Allegations made in the letter were:
. Retainment of supply commissions/rebates
in excess of K1 million
. Facilitating the FCS bank account for third party business
In excess of K1 million
. Categorical denial of receiving supply rebates
as stated to MRDC/FCS Board and Managers
. Inadequate internal control systems
Note current audit report - 9th November 2001 - conducted by MRDC
The letter concluded by stating that the board of Fubilan stood firm in its decision to terminate Eurest as managers on 29 November 2001. Alternative managers had been approached. Niolam was a fully accredited service provider. Mr Fenwick was cross-examined about the draft letter. He repeatedly denied that he had drafted it. Yet it was plain on the face of the covering document that he was sending it to Mr Baitia. It was his style of writing. It represented an attempt on his part, through Mr Baitia, to exploit political concerns about the position of landowners and their relationship with a large mining company to advance the cause of terminating the Management Agreement with Eurest.
354 On 14 November 2001 Mr Fenwick sent a memorandum to Mr Baitia of his meeting with Mr Vale on 10 November 2001. He said, inter alia, that Niolam was awaiting instructions for the next move which at that stage should be Wednesday 21 October 2001. He wrote as though the termination of Eurest and the takeover of its functions by Niolam was a fait accompli.
2.72 Eurest responds to Kolalio's audit - 19 November 2001
355 Mr Kroeger responded to Mr Kolalio's internal audit report on 19 November 2001. He observed that Mr Kolalio had not consulted with Eurest management at Tabubil and if he had done so most of the issues he raised in his report would have been explained. Mr Kroeger's response to each of those concerns was, shortly, as follows:
There were internal control systems in place to control food issues from warehouse, contractor meal ticket and purchase orders. They were consistently reviewed and upgraded.
An inadvertent double payment to which Mr Kolalio referred had been discovered and a credit raised immediately. A credit had also been raised for the double payment of expatriate salaries for January 2001 and a copy of the credit given to Mr Kolalio in Tabubil before he wrote his report. No expatriate staff advances had been made through Fubilan accounts since 1 November 2000. All subsequent advances were through a Eurest account.
All expatriate staff returned to Australia on rest and recreation leave and the amount varied according to the fluctuation in the exchange rate.
Spreadsheets relevant to stock receipts compiled from warehouse information showed that Eurest was owed K1,398.91 by Fubilan for oversupply. Fubilan was owed K100,240.73 by Yamil in respect of goods ordered without reference to Eurest. Lamberts had short-supplied K22,760.85 worth of food and a request for credit had been raised.
Expenditure control was in hand. He responded to particular matters raised by Mr Kolalio. The Bakery would be charged for photocopying and fax services. Eurest did not control the Golf Club.
Bank accounts - surplus funds of K1,500,000 placed in an IBD for three months. Eurest was no longer paying for Fubilan local and overseas goods and reinvoicing Fubilan. Fubilan was now paying Eurest who would then pay suppliers. The funds in the IBD were required to pay local and overseas suppliers over 30 days.
He rejected Mr Kolalio's statements in relation to cash flow management. Payment from OTML would not have covered Eurest's liabilities at the time.
Warehouse management - management was present at the warehouse on a daily basis.
All Fubilan purchase order books were self-carbonating in triplicate.
356 Mr Kroeger's response to Mr Kolalio's audit concerns was tendered without objection and with no limitation as to its effect. He was not cross-examined on it. Some other documents were tendered subject to express limitation as to the purposes for which they were tendered. So far as it stated matters of fact apparently based on his own knowledge or upon an examination of the records of Eurest, it may be received as evidence of those facts and particularly matters relating to payments, stock receipts, expenditure control, bank accounts, warehouse management and purchase order books.
2.73 OTML refuses to approve the termination of Eurest - 26 November 2001
357 On 21 November 2001 Mr Buretam wrote to Mr Higgins at OTML complaining about Eurest and about OTML's failure to recognise Fubilan's problems with Eurest. He requested OTML support "to terminate Eurest forthwith". He advised that Eurest would be served with a notice of termination on 29 November 2001. He indicated that Niolam was Fubilan's preferred replacement manager. Lengthy discussions with Niolam over the past two months had provided the Fubilan board with genuine commercial comfort. He believed that, subject to Eurest agreeing, there was an opportunity to discuss an out-of-court settlement relieving Eurest from further litigation. Copies of this letter were sent to the Minister for Mining, the OTML General Manager-Operations, Mr Faulkner, to MRDC and to other officers of OTML.
358 On 26 November 2001 Mr Higgins replied to Mr Buretam. He noted that the letter was received by OTML that morning following a blockade of the Mine Access Road on the weekend. This was a blockade which he attributed to Mr Buretam and people associated with him. He spoke of the confrontational approach that Fubilan had taken from the outset to both Eurest and OTML. He referred to the tender history. In this he was inaccurate for he suggested that Fubilan had submitted a proposal which was commercially and technically unsatisfactory, that the winning bid had been submitted by Eurest (presumably a reference to the Poons' bid) and that rather than accept the Eurest bid OTML arranged for Eurest and Fubilan to resubmit jointly. He said:
I believe that it is important that we work within the terms of the existing contract, as a principal [sic] of good business and for the benefit of all parties. I remind you again of Clause 6 of the Special Conditions of our Contract with FCS (Contract OTML 99046). This condition permits termination of the Management Agreement between FCS and Eurest only with the written permission of OTML. Should FCS terminate the management agreement with Eurest without the consent of OTML, then the FCS contract is immediately subject to termination. OTML would then seek new proposals from all interested parties in open competitive bidding.
Mr Fenwick saw the letter. He was therefore aware that if Fubilan purported to terminate without the consent of OTML it would render the OTML Contract subject to immediate termination.
359 On 28 November 2001 Mr Poelzl wrote to Messrs Baitia and Yalapan suggesting a meeting on 6 December 2001 between representatives of Eurest, Fubilan, MRDC and OTML in Sydney. Eurest was prepared to meet travel and accommodation costs for up to three delegates representing MRDC and Fubilan. The major strain on the business relationship was the question of rebates. Eurest proposed to table and discuss its recent detailed investigation into that issue in order to clear up any misunderstanding.
2.74 Notice of Termination served on Eurest - Eurest removed as signatory of bank accounts - 29 November 2001
360 On 29 November 2001, McKie & Associates, on instructions from Mr Fenwick, drafted a Notice of Termination of the Management Agreement. It recited the Notice of Default of 30 August 2001 and Eurest's alleged failure to remedy the defaults set out in it within 60 days of service of the notice. It recited that OTML had approved the termination of the Management Agreement by Fubilan pursuant to the terms of the Contract. It gave notice that Fubilan terminated the Management Agreement and also stated:
Further, FCS reserves its right to exercise such powers in relation to the Management Agreement and enforce any or all of its rights and remedies under the Management Agreement, statute, at common law or in equity, as it may think fit including but without limitation commencing proceedings in the Federal Court of Australia against Eurest (Australia) pursuant to the Secret Commission Act 1905 and/or clause 15.1 of the Management Agreement.
It was signed by MRSM and Fubilan and contained provision for signing by OTML. It appears that another Notice of Termination was drafted without the inclusion of any provision for OTML to sign. At the date that the Notice of Termination issued, the Secret Commissions Act 1905 (Cth) to which it referred had been repealed. It was repealed with effect from 24 May 2001 by the Criminal Code (Amendments Theft Bribery and Related Offences) Act 2000 (Cth) (No 137 of 2000) Schedule 2 Item 365. Astonishingly, the applicants' solicitors and counsel persisted with the claim up until the trial of these proceedings.
361 A meeting of the Fubilan board took place at 2pm on 29 November 2001 at Tabubil. Mr Baitia presented an overview of events relating to Eurest's alleged mismanagement of Fubilan "as revealed by the recent audit conducted by Ronald Kolalio". He said that Eurest had been given ample time to fix the problem with respect to rebates received by Eurest. He advised the termination of the Management Agreement. Mr Yalapan claimed that "corporate fraud and mismanagement" had been evident. He acknowledged that Fubilan was profitable but that Eurest retained "by other means FCS profits". The board resolved "… to move the motion of terminating Eurest" [sic] and to "appoint Niolam Catering Services as replacement of Eurest". It also resolved:
THAT the Bank Accounts are frozen from Eurest immediately [sic]
Mr Baitia advised Mr Buretam to speak with Mr Higgins with a view to gaining his support for the termination. According to the minutes the meeting closed at 4.30pm. It appears, however, that the Notice of Termination was served at about 3.30pm.
362 Mr Kroeger and Mr Reisenbauer prepared a file note of what passed at the Eurest office. According to the memorandum Messrs Fenwick, Baitia and Uglinga came into the office and said "sorry that we have to do this but this is the termination notice of the management contract between FCS and Eurest.". The memorandum then recorded the following exchange:
Mike told them to cut the bullshit that this is what they have been after for a long time it cannot be denied that we managed well and always beat budget we probably have the best running and managed site in the South Pacific here. Fenwick acknowledged that this was the case and said there is no denying that you guys have managed very well. Bill then outlined that this is their decision and they have the right to terminate the contract. He then pointed out that they had the right to take over management immediately but they will be coming tomorrow morning to introduce the new manager which will be NIOLAM under Colin Vale, and the new project manager will be Gus McKenzie. They pointed out that it was not signed by OTML but that does not matter since FCS own the contract and Samson is talking to Roger at this moment and we should have OTML's approval shortly.
Messrs Baitia and Uglinga then left and Mr Fenwick stayed on to discuss handover procedures. He told Messrs Kroeger and Reisenbauer that Eurest staff had 14 days to leave site, that they would be talking to some people and if they wanted to stay on, they could stay on. Everything had to be in place to mobilise a complete team within 24 hours. On two further occasions it was recorded that Mr Fenwick acknowledged that Eurest had managed the contract well and profitably.
363 Mr Fenwick agreed in cross-examination with the substance of the record of his comments. He said that he did not think that Fubilan would get OTML's approval. He appeared to suggest in cross-examination that by saying at the Eurest office that Fubilan should get OTML's approval shortly, he had meant that OTML ought to give its approval. His responses in this respect were not credible. It was put to Mr Fenwick that he had engineered the whole procedure to try and bluff OTML. He denied that. He said it would have been an absolute waste of time as he knew OTML too well. If by this, he meant, that he did not believe that OTML would ever approve the termination, then his promotion of the appointment of Niolam as Eurest's replacement would seem to have been pointless. The most likely explanation is that he was endeavouring to pressure OTML into accepting Niolam as a replacement for Eurest.
364 Mr Baitia sent a letter to Eurest (Australia) on the same day enclosing the Notice of Termination of the Management Agreement. Mr Buretam wrote to Mr Higgins. He said that Fubilan could not and would not be forced to do business with a party that institutionalised and executed dishonest business practices. The OTML Contract was "owned by FCS". He attached the Notice of Termination and appealed to OTML to endorse it. He rejected the proposition that the OTML Contract was subject to termination by OTML. He advised that arrangements were in place for Niolam to be "deployed immediately" as replacement managers.
2.75 OTML threatens termination of the OTML Contract - November 2001
365 Mr Buretam and Mr Higgins met on the same day. Immediately after their discussions, Mr Higgins sent Mr Buretam a letter. He said that OTML accepted that the relationship between Eurest and Fubilan had broken down and was probably not recoverable. The breakdown was their responsibility. The relationship between OTML and Fubilan was also very poor although hopefully recoverable. OTML would not sign the Notice of Termination. It insisted that proper contract procedures were followed. He wrote:
OTML is prepared, if FCS will agree to the same, to use best endeavours between now and 1 February 2002 to agree by discussion and negotiation new contract arrangements which allow the contract to continue to be held by FCS and which satisfy good business and contract management practices.
I look forward to hearing from you as soon as possible that this arrangement is acceptable to FCS.
This elicited a response on 4 December 2001 from Mr Buretam in which he wrote to Mr Higgins:
Thank you for your letter of the 29th November 2001. As Chairman of Fubilan Catering Services Limited I wish to express my delight that OTML have recognised the problems that we are experiencing with our managers, Eurest.
Your offer to use best endeavours between now and 1st February 2002 is accepted. We look forward to the first of these meetings on 11th December 2001 as agreed with Mr Keith Faulkner on 30th November 2001.
366 Eurest's solicitors wrote to Westpac at Port Moresby about the change in signatories on the Fubilan operating account. They stated that Eurest did not accept that the direction was valid and requested that the bank not allow funds to be withdrawn on the account until further notice. Confirmation of the change came in a letter dated 5 December 2001 from Westpac in Port Moresby to Mr Yalapan. The signatories for the two relevant accounts were to be any two of Messrs Buretam, Fenwick, McKenzie, Uglinga and Baitia. Mr McKenzie was Mr Gus McKenzie who was brought to Tabubil under the proposed arrangements with Niolam which was to take the place of Eurest. Mr McKenzie was to be the new project manager.
367 A meeting was scheduled for 11 December 2001 between OTML and Fubilan to open discussions about their ongoing business relationship. In a letter dated 10 December 2001 to Mr Baitia, Mr Higgins said that the purpose of the meeting was to allow both sides to place on the table the issues that must be addressed if the contract were to continue. They had until 1 February 2002 to see if they could address the issues to everyone's satisfaction. If the contract between OTML and Fubilan could not be performed in accordance with its terms, it would be of no worth and should be terminated. Mr Higgins attached a letter giving notice of breaches of the OTML Contract by Fubilan. He added:
As we have advised on previous occasions, we believe that a significant impediment to the resolution of issues has been the involvement of Mr Bill Fenwick. I draw your attention to Clause 7.1 and 8.7 of the Contract, which allows OTML to exercise veto over the employment by FCS of particular persons in the performance of the Contract. Please be advised that Mr Fenwick is not welcome at meetings that are intended to create a satisfactory contractual relationship between OTML and FCS.
368 The breaches alleged against Fubilan in the accompanying letter were:
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The latter was a reference to Fubilan procuring food supplies in Australia through Yamil and seeking to prevent OTML's ship departing from Australia without the unauthorised food supply on board. The proposed meeting was rescheduled to 14 December 2001 in Port Moresby.
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2.76 Eurest restored as signatories of Fubilan account by court order - 12 December 2001
369 Eurest and Eurest (Australia) instituted proceedings in the Papua New Guinea National Court over the removal of Eurest signatories from Fubilan accounts. On 12 December 2001 the court ordered that Fubilan direct Westpac Bank-PNG Ltd to restore Messrs Bond, Povey, Rotor, Kroeger, Reisenbauer and Trapett of Eurest as co-signatories to the two relevant accounts at Westpac. The order was made "returnable before the Court" on 17 December 2001.
2.77 OTML, MRDC and Fubilan meet - 14 December 2001
370 The OTML-Fubilan meeting took place on 14 December 2001. Minutes were prepared by OTML. They recorded the attendance of Messrs Faulkner, Blenkhorn and Jansma from OTML, Messrs Baitia and Yalapan from MRDC and Mr Buretam from Fubilan. The OTML representatives stated that the contract would remain with Fubilan and would continue to be managed by Eurest. If Fubilan could not work with Eurest, OTML would have no alternative but to terminate the OTML Contract and re-tender the catering requirements. It had no reason to remove Eurest based on the accusations and information supplied to it by Fubilan. The MRDC representatives said that the situation could be "workable" but that further discussion was needed to move forward under the current contractual arrangements. The OTML representatives stated that in re-tendering the contract the selective contractor pre-qualification criteria would be enforced and that Fubilan might not meet those criteria on the basis that it had not successfully managed the current contract.
371 It was OTML's position that Mr Fenwick should not have any further involvement in Fubilan's relationship with OTML and Eurest. OTML could, at its discretion, veto his employment under the provisions of the OTML Contract. Nor should Mr Uglinga be involved further as he had a conflict of interest in relation to Fubilan.
372 Mr Faulkner emphasised the immediate need for the "Corporate Manual" which was to have been produced by Eurest to be agreed and utilised by both parties. OTML would assist Fubilan in producing the manual as a platform to build on and define the requirements and responsibilities of the parties to allow Fubilan and Eurest to work successfully together. He also canvassed the possibility that OTML fund and undertake an investigative audit into the accounts of Fubilan and Eurest to determine whether breaches of the management and financial responsibility in relation to the OTML Contract were occurring. If that were to be done, Fubilan would have to abide by decisions OTML took about the outcome of the audit. If Eurest were found to be substantially at fault, OTML would authorise termination of the Management Agreement.
373 A copy of the minutes of the meeting of 14 December 2001 were sent to Mr Baitia on 20 December 2001 by Mr Faulkner. He said in his covering letter that he had initiated the process of developing the Corporate Manual through OTML's Business Development Department. I accept the minutes as a substantially correct record of what occurred on 14 December 2001.
2.78 MRDC lobbies the Prime Minister about OTML - 17 December 2001
374 Notwithstanding what passed at the meeting, the new managing director of MRDC, Mr Dan Kakaraya, prepared a brief to the Prime Minister on 17 December 2001 advising him of MRDC's involvement in OK Tedi and the management of MRSM and Fubilan. He complained about OTML's refusal to support Fubilan in disciplining Eurest and trying to prevent Eurest from mismanaging landowner funds. He referred to OTML's refusal to endorse the Notice of Termination. He said that frustration by landowners continued and had reached a stage where the Minister responsible needed to assist to resolve the matter. The brief proposed an amicable resolution that would allow Fubilan to change Eurest and put in place a reputable manager "like Niolam Catering Services". Mr Kakaraya recommended that the Prime Minister remind OTML of its obligation under the 1991 MOA and the Ok Tedi Mining Agreements and direct it to comply with those commitments, that he direct OTML to endorse Fubilan's appointment of a new contract representative on site and that he direct OTML to put in place a system to phase out Eurest over the next two years beginning 1 February 2002. A copy was sent to the Minister for Mining.
2.79 Fubilan profitable for year ended 31 December 2001
375 A draft set of financial statements for Fubilan prepared by Deloittes for the year ended 31 December 2001 showed revenue of K21,654,140 against costs of sales at K17,568.738. This left a gross profit of K4,085,402 together with operating income of K798,981. Administrative expenses were K2,062,534 with a profit of K2,821,849. Directors' fees totalled K650,605, finance costs K829,999 and the incentive fee payable to Eurest, K810,925. The profit before tax was K530,320 and the net profit after tax was K408,121. For the year 2000 there had been a net loss of K113,699.
2.80 Mr Buretam's antipathy to Eurest - January 2002
376 On 2 January 2002 Mr Buretam wrote to Mr Kroeger demanding that a vehicle which he claimed the Fubilan board had authorised him to have be delivered to his yard no later than 5pm that afternoon. He said:
You have refused to have it released to me and by doing so you have crib bled me long enough. [sic]
He added:
You don't own this contract. You are just the employee. I am the owner and Boss of this Company. Don't act, as you own this contract. [sic]
The letter was indicative of the level of antipathy between Mr Buretam and Eurest. It was not written by Mr Fenwick. Mr Kroeger responded on the same day pointing out that because one vehicle was being refurbished Fubilan was down one. Eurest had a responsibility to ensure there were sufficient resources on hand to fulfil the contract with OTML. There was nothing personal about his dealings with the board and whenever there was a spare vehicle or personnel to carry out Mr Buretam's requests those requests had been fulfilled.
2.81 New MRDC Managing Director briefed against Eurest by Fenwick - January 2002
377 Mr Andrew who held the office of Managing Director of MRDC from May 1999 had left the company in 2001 and commenced practice as a private consultant in finance, industrial relations and landowner issues. His successor, Mr Daniel Kakaraya, met Mr Fenwick in Port Moresby in the second week of January 2002. Mr Fenwick wrote to him after the meeting in a letter dated 21 January 2002. The letter was replete with denunciation of Eurest:
All business opportunities to date have been fiercely stone - walled with the cunning of a fox supported by the long term business prowess of the commingling parties, Eurest/OTML. Eurest have only one gate available and that is to hide unde OTMLs skirt and taking protection from the client, at the same time detracting focus from the real issues. Whilst the parties continue to enjoy each other company at the expense of the Landowners we observe the following… [sic]
There followed a litany of complaints of undue expense, poor profitability, unacceptable management practices, fraudulent actions, retention by Eurest of money belonging to Fubilan, illegal operation of a business in Bige and incorrect operation of the Kiunga Catering Services contract in Kiunga. Mr Fenwick continued:
Various reports and correspondence have transpired all alluding to the misgivings and fraudulent actions by Eurest. There remains little to add that has not already been argued and proven. Mc Kie & Associates (FCS lawyers, Australia) are presently preparing a Notice in draft to be served on Eurest Australia. This Notice will have specific emphasis on the retainment (by Eurest) of secret commissions or rebates. OTML believe that FCS should take this action to Arbitration/Mediation as per the Management Agreement. FCS are advised that Eurests actions are leaning on criminal repercussions and should rely on the Courts to decide the outcome and not a Arbitrator, criminality and contract disagreement are a mile apart. [sic]
He asserted that Eurest had "failed miserably in managing to provide the profit target". His proposed solution was that OTML terminate the contract on the basis that it was untenable in its current form and that Fubilan commence working a pre-tender schedule with Niolam and continue with litigation against Eurest. He listed a variety of alleged business opportunities lost because of Eurest, moneys recovered from Eurest to that date, moneys retained by Fubilan and adjustments required. He set out what he described as "current agreements" to which Fubilan was a party. He accused OTML of misleading the courts in April 2001 by advising that it was Eurest's responsibility to purchase goods for and on behalf of Fubilan and that this had created a "mine field of perplexing probable situations". He said:
In conclusion there must be mention of the client (OTML), it is indeed understandable that OTML want a simple solution favouring their operations but at the same time this cannot be achieved at the land owners cost. This is not simply a compendious issue relating to rebates, it relates to partnership, commitment, honesty, transparency and all the other tantalising offerings promised by Eurest. [sic]
378 It was put to Mr Fenwick in cross-examination that his purpose in writing the letter was to poison Mr Kakaraya's assessment of Eurest. He responded that Mr Kakaraya's assessment had already been poisoned by his executive manager, Michael Baitia. He said he was presenting a case to the managing director. The letter speaks for itself. It illustrates Mr Fenwick's unwillingness and indeed incapacity to offer the kind of calm and detached advice which was required in these circumstances.
2.82 Fubilan, OTML and Eurest meet in Cairns - 29 January 2002
379 On 29 January 2002 representatives of Eurest met with OTML and Fubilan representatives at Cairns. Mr Poelzl attended with Messrs Armstrong, Younger and Kroeger from Eurest. Mr Faulkner attended from OTML. When Mr Fenwick arrived with Fubilan board members, Mr Faulkner refused to continue the meeting in his presence. The meeting with the full board did not take place. Mr Poelzl nevertheless went ahead with a power point presentation to Messrs Yalapan and Baitia. Mr Yalapan was very agitated at the beginning of the presentation and accused him of having lied about the question of rebates. Mr Poelzl said that while Eurest did not have to account to Fubilan for its rebates it had in any event set off rebate benefits against the interest it had paid on the capital needed to run the catering contract from its commencement in 2000. He offered to settle the dispute on the rebate by waiving the claim for outstanding interest and to pay Fubilan K600,000. He said that following his presentation Mr Yalapan said he now understood what the position was and apologised for his outburst at the start of the presentation. According to Mr Poelzl, Messrs Baitia and Yalapan said that his financial calculations about rebates would be checked by Sarah Ellis, an accountant employed by Fubilan. In the event that checking did not take place.
380 In his presentation Mr Poelzl pointed out that Eurest had given Fubilan the benefit of a K2 million, six week interest free loan for goods and a 40% discount on some stocks at hand over. It had funded working capital. Fubilan had had no funds for wages or for paying suppliers on normal commercial terms. Eurest took the initiative in asking OTML for an advance payment. There were mobilisation accounting errors which were rectified. He set out in a slide under the heading "Commercial Issues", a calculation of interest costs against credit payment terms. Eurest's funding had incurred a net cost of K1,022,000. Credits received by Eurest in PNG after payment of K104,000 to Fubilan netted K256,000. Credits received in Australia totalled K306,000 making an overall total of K562,000. When that was subtracted from the net costs of Eurest's funding there was a balance owed to Eurest of K460,000. That is to say, in commercial terms, Eurest believed that it had contributed approximately K460,000 to Fubilan.
381 Mr Poelzl proposed, in relation to rebates, that there should, in future, be net pricing purchases for PNG and that primary rebates in Australia should go to Fubilan if payment terms could be met. Eurest would no longer deal with Mr Fenwick. The previous year's audit had to be signed and six monthly audits should be implemented. He made the point that the direct purchasing experiment by Fubilan using the Yamil/Limay arrangement would have incurred costs over a period of twelve months of K1,642,000. By effectively stopping direct Fubilan purchases Eurest had saved it K1,642,000. Eurest had contributed K460,000 by way of net interest in funds used by Eurest to purchase supplies in the earlier stages of the contract. It had therefore helped Fubilan to save a total of K2,102,000. His evidence as to what passed at the meeting was not the subject of cross-examination. Mr Yalapan's evidence-in-chief characterised the power point presentation as involving an admission that Eurest had been receiving rebates. He had called Mr Poelzl a liar. He also claimed to have said to Messrs Armstrong and Younger that they had heard Mr Poelzl say there were no rebates. As a result of the Cairns meeting he had no trust or confidence in Eurest. Mr Baitia also said in his witness statement that Mr Poelzl admitted during the power point presentation that Eurest had been receiving rebates that had not been passed on to Fubilan. Mr Armstrong's evidence-in-chief about the meeting was brief. He said the presentation was given by Mr Poelzl in the presence of himself, Messrs Yalapan and Baitia. Mr Younger was excluded to ensure there were only two Eurest and two Fubilan/MRDC representatives present. Mr Faulkner joined the meeting at the end. He described the outcome of the presentation as identifying only a few matters then still in dispute between Fubilan and Eurest. These related to the audit of Eurest cash flow costs, PNG payment terms and rebates and Australian payment terms and rebates. MRDC was to carry out its own investigation of Yamil and Limay arrangements and to advise of any rebates due and Mr Yalapan to advise of any outstanding operational matters, sign off statutory accounts and review and approve the Corporate Manual/statutory audit for 2001. Following the presentation Mr Poelzl directed him to ensure that Eurest's purchases of food stuffs under the Management Agreement would be on a net/net with no rebate. As Mr Armstrong put it, this meant that Fubilan received, from February 2002, the full benefit of whatever rebates would have accrued to Eurest.
382 I accept the evidence of Mr Poelzl and Mr Armstrong as to what occurred at the meeting. I do not regard Mr Baitia and Mr Yalapan as reliable witnesses on the issue of what was said in relation to rebates, particularly having regard to the differences between their evidence-in-chief and their evidence in cross examination in relation to the Brisbane meeting. There was a difficulty with a number of the Fubilan witnesses that they were so affected, during the events of which they spoke, by Mr Fenwick's relentless campaigning that their detailed recall in that context could not be relied upon. This was reflected in the tone of their correspondence and internal memoranda.
383 On 6 February 2002 Mr Poelzl wrote to Messrs Baitia and Yalapan attaching the content of his presentation with some explanatory notes and backup documentation. He expressed Eurest's concern that figures submitted to MRDC might be made available to Mr Fenwick and used to find competitors to the business of Fubilan and Eurest. He requested that MRDC conduct its own investigation and exclude Mr Fenwick from it. He proposed that the following actions occur:
. Audit of Eurest Cashflow costs
. Audit of PNG Payment Terms/Rebates
. Audit of Australian Payment Terms/Rebates
. MRDC to carry out own investigations on Yamil/Limay arrangements and advise of any rebates due
. Melvin Yalapan to advise of any outstanding operational matters
In addition there was a need to sign off on the year 2000 statutory accounts, to review and approve the Corporate Manual and conduct the statutory audit for 2001.
2.83 The Fubilan board meets on 8 March 2002
384 The Fubilan board met on 8 March 2002 and reaffirmed, for the record, its resolutions of 29 November 2001 in relation to the termination of Eurest, the appointment of Niolam and the alterations to bank account signatories. This followed advice from Mr Yalapan that the resolutions of the previous meeting should remain on the record. The board also resolved that KPMG accountants be engaged to undertake an independent audit of the company's operations and that the sum of K30,000 be authorised to pay for those fees. Mr Baitia presented a report on the Corporate Manual. He said that basically the manual was highlighting clauses in the Management Agreement. He advised the board to read through the draft manual and advise management of any changes required in it. The proposed manual would be further considered by the next meeting of the board. He also presented the operations report on Fubilan prepared by Eurest.
2.84 The Corporate Manual is discussed - 25 March 2002
385 A Corporate Manual for Fubilan dealing with the OTML Contract and the Management Agreement was prepared in draft on 13 February 2002 by OTML's consultant Mr Crane, and made available for consideration by Fubilan and Eurest. A meeting to discuss the manual took place on 25 March 2002. Messrs Buretam, Yekim, Kaiyakim, Musolok and Itulam attended from Fubilan. Mr Menim and Mr Asekim represented MRSM. Mr Kroeger attended for Eurest together with three officers from OTML and Mr Crane. The meeting concluded with a commitment by the Fubilan and MRSM boards to hold a joint meeting to ratify the manual. The meeting was postponed with a tentative date being fixed for 26 April. Mr Crane wrote to Mr Buretam on 23 April 2002 indicating that he had received no instructions from the Fubilan board that the intended meeting was to proceed. He expressed his disappointment with the apparent unwillingness of the board to reach closure on the matter of the Corporate Manual. In the event, the manual was rejected by the Fubilan board. Mr Yekim said in evidence:
Well we took it to the OTML management and told the management that this document was in the best interests of all managers and not FCS. So we wouldn't sign.
More than one draft of the Corporate Manual was refused by Fubilan.
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2.85 Fubilan rejects expert determination and seeks mediation - 13 May 2002
386 On 15 April 2002 Phillips Fox wrote on behalf of Eurest to McKie & Associates. They referred to earlier correspondence of 3 April 2002 from McKie & Associates. They said that if Fubilan wished to pursue mediation in relation to the dispute it should follow the procedures laid down in the Management Agreement and in particular cl 17. Clause 17 provided for a dispute resolution mechanism involving an expert determination before recourse to arbitration. On 13 May 2002 McKie & Associates responded to Phillips Fox seeking a formal mediation of issues between Fubilan and Eurest rather than an expert determination. They stated, inter alia, that the allegations raised by their client related to fraudulent and/or criminal conduct by Eurest (Australia), Eurest and by officers, agents and employees of both entities in PNG and in Australia. They said that:
The allegations may give rise to issues under Australian Legislation including the Secret Commissions Act, the Commonwealth Criminal Code, the Western Australian Criminal Code and the Queensland Criminal Code.
They also claimed that the allegations raised issues about whether the contract was induced by misleading and/or deceptive pre-contractual representations by Eurest. They added that the relevant parties in relation to the allegations extended beyond the parties to the Management Agreement. There was therefore no agreement between all relevant parties to settle the dispute by expert determination or otherwise. They added:
It is entirely inappropriate for an expert, not bound by the rules of natural justice, without hearing evidence or having the benefit of cross-examination to determine the issues set out above where that determination is final and binding and the expert is not required to provide reasons for the determination.
It was put to Mr Fenwick that it was Fubilan's intention to sue Eurest and other Eurest companies in Australia in order to place maximum pressure on them to settle the litigation. Fubilan was not prepared to go through the dispute determination provision under the Management Agreement but wanted to take the matter out of PNG and bring in allegations of criminal conduct for the purpose of pressuring OTML to accept the termination of Eurest. Mr Fenwick denied these propositions. It is hard to escape the conclusion that this was the strategy being pursued by Mr Fenwick and ultimately by Fubilan. The determination to pursue the matter in Australia rather than in PNG, to avoid the expert determination process, to raise allegations of criminal conduct the function of which in the context of the civil proceedings was not clear, and the joinder of the UK holding company, all point to a litigious process designed to maximise pressure and extract a settlement rather than deal with the matter under the alternative dispute resolution mechanisms of the Management Agreement in a commercially sensible way.
[28]
2.86 Fubilan board meets - 17 May 2002
387 The Fubilan board met on 17 May 2002 at Tabubil. Mr Kroeger presented the 2001 operations report. Management accounts for the quarter ended 31 March 2002 were also presented and showed a profit for the quarter of K1,181,856. The net assets of the company at that point were K13,493,480. In the course of the meeting Mr Buretam expressed concern about MRDC management's incompetence reflected in its failure to attend to Fubilan's affairs on a fulltime basis.
2.87 The KPMG audit is carried out - May and June 2002
388 In May 2002 KPMG had taken its first steps in the investigative audit seeking accounts for the year ended 31 December 2001 and access to books and records. The audit proper commenced with site visits by Gillian McTernan of KPMG to Tabubil and Lae in June 2002. It was not without incident. There was an exchange of solicitors' correspondence about whether Eurest was attempting to interfere in the conduct of the audit. Allegations to that effect raised by McKie & Associates were rejected by Phillips Fox on behalf of Eurest. There seems to have been nothing in them. It appears that Mr Fenwick endeavoured to have some involvement in the KPMG audit. He agreed in cross-examination that he had put together folders of documents and marked them up for the assistance of the auditors. That is not to say that KPMG took any notice of them. However it is clear enough that Mr Fenwick and the board regarded the KPMG audit report as a potential weapon in their dispute with Eurest.
389 The Fubilan board met on 12 July 2002. Ms McTernan outlined her progress. She anticipated that a final report would be ready by the end of July or early August. The board resolved that KPMG complete its audit within a month. There was discussion about Fubilan acquiring the contract to provide catering services to the PNG defence force barracks. Eurest was the current provider of those services. Mr Yekim advised the board to wait for the KPMG report. Once Eurest was "exposed" Fubilan could target the army barracks contract.
390 An MRSM workshop was conducted at Madang on 24 June 2002. Mr Fenwick prepared a presentation for it which recited complaints about Eurest and JLFS. It listed what he called "outstanding adjustments to be confirmed by KPMG report". These included rebates in excess of K1 million on Australian purchases by Eurest and the same figure for PNG purchases. He referred to a sum of K1,200,000 not paid to JLFS on the basis that JLFS had failed to produce correctly priced invoices. An incentive fee of K800,000 claimed by Eurest was also included as an adjustment. This appeared to be premised on non-payment of the incentive fee to Eurest. Pending litigation against Eurest (Australia) was to await the KPMG report.
2.88 Mr Buretam accuses OTML of interference in the affairs of Fubilan - 18 July 2002
391 In July 2001 shareholders in MRSM and Fubilan had been in communication with the Business and Community Affairs Department of OTML. Mr Buretam wrote a letter on 18 July 2002 to Mr Martin Painning, the General Manager of that Department, entitled "No Interfering and Instigation". He told Mr Paining he should stop "instigating problems and interfering with the landowners with regards to MRSM or FCS business". He warned him and his officers against "implicating Mr Bill Fenwick and MRDC" saying that this was detrimental to Fubilan. The letter was highly critical of OTML. I accept, having regard to the phrasing of the letter, that Mr Fenwick did not draft it. He said in cross-examination that he did not know what was behind it and only received a copy well after it had been sent. Mr Paining wrote back to Mr Buretam on 22 July 2002 saying that the shareholders of MRSM and Fubilan had asked OTML Business Development to assist them in relation to the exercise of their rights as shareholders because no information was reaching them about their business affairs. He pointed out that the shareholders had rights under Companies legislation and had waited "long enough to exercise their rights at Annual General Meetings and that has not happened since MRSM and FCS were incorporated". He told Mr Buretam he had a moral and legal obligation to allow shareholders to exercise their rights at annual meetings.
2.89 Localisation proposition - 23 July 2002
392 On 23 July 2002 Mr Kroeger wrote to Mr Apoki with reference to the localisation plan for Fubilan under the OTML Contract and the reduction of the number of expatriate supervisors required to meet the level of service expected by OTML. He said that up to October 2002 Fubilan had complied with the localisation schedule according to its contract but that because of the high safety risk and importance of the catering contract to the ongoing operation of OTML the following points be considered:
1. Localisation of Training position in October 2002 as Leanne Broadbent has resigned with effective [sic] 27 July 2002 and Mark Mondoro will take over that position once he has obtained Certificate 4 assessment course.
2. The further localisation of an expatriate Chef Supervisor position in April 2003.
3. Retain the following expatriate supervision positions to close of contract to ensure proper service and training.
a. Support Service Manager and relief Project Manager
b. Catering Manager
c. Chef Supervisor/Relief Trainer
d. Relief Catering Manager/Relief Chef Supervisor
2.90 A quality assurance management system proposed for Fubilan - July 2002
393 In or about July 2002 Mr Fenwick had discussions with a Mr Jon Macindoe of JSE Management Ltd (JSE Management) concerning the design, development and implementation of a quality management system for Fubilan. A proposal for the development of such a system had been submitted to Fubilan in September 2001. It involved a thorough review of its current business processes, the design, development and implementation of an internationally recognised and acceptable quality management system and certification of the system as compliant with the ISO9000:2000 series of Quality Standards. The objective of the project, according to the letter from JSE Management was to position Fubilan so that it could assume responsibility for the management of its own affairs. It was proposed that the project commence on 2 September and be completed and the system receive certification by 8 December. The letter attached an implementation schedule. Personnel proposed for the project comprised Mr Jon Macindoe as project manager, Mr Paul Macindoe for quality management systems design and documentation, Mr Gus McKenzie for implementation and training and Mr Ern Payne for training and system design. Mr McKenzie was said in the letter to have had more than 20 years experience in the catering industry and to have previously worked closely with nation wide catering services in PNG and the south-west Pacific region. Mr McKenzie had been involved with Niolam, Mr Fenwick's replacement choice for Eurest and had come to Tabubil at the end of 2001 as the proposed project manager for the post-Eurest OTML Contract.
394 Mr Younger sent a letter to Mr Buretam on 14 August 2002 saying that Eurest had become aware that Fubilan wanted to implement a quality management system. Eurest reserved the right to be responsible for any implementation of the system. It had fully trained and competent personnel to carry out that task. Mr Baitia wrote to Mr Younger on 15 August 2002. He said that before engaging the consultants Fubilan had advised Mr Kroeger who had agreed with the arrangement. The consultants had been engaged without any financial assistance from Fubilan as Eurest controlled Fubilan's funds. The European Union could provide the business assistance to enable the exercise to go ahead. He said that the exercise would be of benefit to Eurest.
395 In a letter dated 16 August 2002 to Mr Boas at Fubilan, Mr Faulkner said that he had told Mr Buretam on 14 August 2002 that the implementation of the quality management system was a matter between Fubilan and Eurest provided that the third parties engaged in the task were acceptable to OTML. He said that Mr Buretam was well aware that Mr Fenwick and persons or organisations associated with him were not acceptable to OTML. He had been told by Mr Buretam that none were involved. He had subsequently discovered that among the persons brought to Tabubil purportedly to implement the quality management system were the same associates of Mr Fenwick who in November 2001 sought to assume control of the catering contract. This was a reference to Mr McKenzie. Mr Faulkner expressed his extreme displeasure at the "deceit employed in this matter". He said:
You are now formally notified that the engagement of JSE Management Limited and its employees or agents in the operations of Contract 99046 is unacceptable to OTML. Their involvement with the Contract must cease immediately. They do not have authority to remain within the Tabubil township lease, and are required to leave without delay.
396 This letter elicited a response from McKie & Associates dated 23 August 2002 noting that in his letter of 16 August 2002 Mr Faulkner had indicated that the relationship between OTML and Fubilan was unsatisfactory and that OTML reserved its rights to terminate the OTML Contract. The solicitors' letter said:
Our client is keen to ensure the relationship between OTML and FCS is satisfactory. To this end, so that our client can take appropriate action, we are instructed to request that you specifically identify, to this office, OTML's concerns in relation to:
(a) Mr Bill Fenwick; and
(b) the persons or organisations associated with Mr Fenwick in relation to the Quality Management Program.
397 Mr Faulkner responded on 26 August 2002 noting that Posman Kua Aisi Lawyers of Port Moresby in Papua New Guinea acted for Fubilan. He suggested that McKie & Associates ascertain the authority of the person from whom they had received instructions. He referred them to the terms of the OTML Contract. Persons engaged on site were required to be approved by OTML. Mr Fenwick and his associates were not approved.
2.91 Fubilan seeks to invest money owing to JLFS - August 2002
398 In the meantime another issue arose in respect of K1.2 million held back from JLFS. In August 2002 there was a liability in the balance sheet of Fubilan by way of its debt to JLFS in the sum of K1,157,175.53. Mr Fenwick had indicated that a sum of K1.2 million was being held back from JLFS because of its failure to provide invoices at correct prices. In a letter dated 25 July 2002 Mr Baitia had written to Mr Younger attaching a Fubilan board resolution that K1.2 million from JLFS and any surplus funds be deposited into the Investment Account for the purpose of pursuing investment activities for the company. Mr Bond, the Financial Manager PNG for Eurest, responded to Mr Baitia on 5 August 2002 stating that the board's request would be met as soon as surplus funds were available. He referred to the debt which, according to the balance sheet, was owing to JLFS and said that until it was discharged it would be wrong to proceed with the transfer unless there were a provision or understanding with the board that the funds could be recalled when required. He asked the Eurest manager to seek confirmation from JLFS that there was no debt outstanding. On 9 August 2002 he sent Mr Baitia a cash flow projection for the period to 27 September 2002. While it showed a healthy cash position the liability to JLFS was still outstanding. He said:
In the event you can provide to us written notice from John Lewis, which formally releases FCS (as regards the OTML contract) from the relevant debt, it will present a more positive outlook to the cash position, and may make sufficient funds available to comply with your request and I will be most happy to do so.
Mr Bond gave notice in his letter that, under cl 11.2 of the Management Agreement, the incentive fee to Eurest from year 2001 operations was due and payable. The fee amounted to K810,925 in accordance with the audited financial statements for the year ended 31 December 2001.
2.92 The Fubilan board meets - 24 August 2002
399 The Fubilan board met on 24 August 2002 in Port Moresby. There was discussion of an investment in New Ireland Seafood Limited (NIS) previously approved by the board. Money for the investment had not been released by Eurest. The board resolved to take full responsibility for the Investment Account and all surplus funds transferred to it for investment purposes. It also resolved that "Management prepare a letter for signing by the Chairman to Eurest stating the Resolution of the Board". It resolved that Messrs Boas and Yekim travel to Townsville to view a fishing vessel which was to be purchased by the company as part of its investment in NIS.
400 Mr Boas presented a report on the proposed Quality Management Program and about OTML's refusal to allow the consultants to attend on site. Mr Fenwick "categorically denied any personal association with JSE Management". The board resolved that the Management should write to OTML and "qualify Director Fenwick's position on the Board and the requirement for his presence on site; and confirm Mr Fenwick's appointment on his merits". At this time Mr Baitia, who was still a member of the Fubilan board, had ceased to be an employee of MRDC. Mr Boas was appointed "contract representative" of the company in accordance with the OTML Contract. There was discussion in Mr Baitia's absence about his continuation as a director. Consideration was given to his appointment as a consultant. Mr Fenwick supported that idea. But because of concerns raised by Mr Yekim that OTML would query the need for another consultant, given the consultancy arrangements with Messrs Fenwick and Uglinga, it was proposed that MRSM be approached to hire Mr Baitia.
2.93 A Fenwick briefing paper for a ministerial meeting - 3 September 2002
401 Mr Buretam had arranged a meeting with the Minister for Mining on 3 September 2002. Mr Fenwick was involved in the preparation of a briefing paper for the meeting. It set out matters of which the Minister was to be made aware. It said that Fubilan had experienced profound difficulties with Eurest and OTML senior management. The Eurest managers had "persistently stolen Fubilan Catering Services monies and mismanaged financial accounts to an unacceptable degree". OTML management had taken "a negative and unsupportive view preferring to side with the Management (who had had a long association with BHP globally)". Fubilan had conducted many audits, both internal and external, which had indicated that the board was correct and that there were "serious problems afoot". KPMG had been given instructions to conduct an investigative audit which had taken four months "due mainly [to] the lack of assistance and provision of accounts and records from both Eurest and Deliottes" [sic]. KPMG's interim report supported every concern that Fubilan had about Eurest. A list of "facts" was set out. OTML was accused of wrongly refusing to take part in meetings in which Mr Fenwick or his associates were present. It had refused to allow JSE Management to conduct the proposed quality assurance management program. It had also refused to support the termination of Eurest "knowingly aware that Eurest have fraudulently operated FCS business". It does not appear from the evidence whether a meeting with the Minister took place or any outcome of such meeting.
402 The MRSM board met on 3 September 2002. Mr Fenwick was present by invitation. A 90 page draft report had been prepared by KPMG following its audit. Fubilan was unable to receive the final version until KPMG was paid. Fubilan was unable to do this unless Eurest approved it. Mr Buretam advised the MRSM board that Fubilan needed MRSM's assistance in paying KPMG's fees of K80,000. It required an additional K500,000 to fund its participation in NIS and a quality assurance review of its catering facilities and services.
403 Mr Aua stressed the need for the MRSM board to review Fubilan's financial information. Mr Kakaraya said that the investment proposals would have to be presented to the MRSM board. MRSM resolved to settle any fees payable to KPMG by Fubilan to enable release of the final report into the operations of Fubilan. It also resolved that Fubilan reimburse MRSM for any moneys expended on its behalf in paying KPMG. Management was to conduct an immediate legal review of the catering contract.
2.94 McKie & Associates - correspondence about JSE Management and JLFS - September/October 2002
404 On 13 September 2002, McKie & Associates wrote to OTML confirming that they acted for Fubilan. They asked OTML to confirm that JSE Management would be given access to the site to carry out its assignment on the basis that Eurest or OTML would nominate a team leader and that Mr Fenwick would not be further involved. They reiterated their request that OTML identify its concerns about Mr Fenwick and his associates. Mr Faulkner replied on 23 September 2002. OTML had put its position in previous correspondence and he repeated that position. Under the terms of the OTML Contract, OTML had the right to prohibit involvement in the execution of the Contract by any individual and it exercised that right in respect of Mr Fenwick, JSE Management and their associates. He repeated that Mr Fenwick did not have permission to enter Tabubil.
405 On 3 October 2002, McKie & Associates wrote to Phillips Fox about the dispute with JLFS. They confirmed that JLFS had made demand of Fubilan for $617,279.16 and that Fubilan disputed the claim. They asserted that Fubilan had a potential claim against JLFS for a 10% rebate on purchases over a three year period and that, on their instructions, the value of the claim against JLFS was approximately $1.2 million. They referred to Eurest's requirement for a written release from JLFS in respect of the claim and its statement that in spite of Fubilan's direction to the contrary, it would communicate with JLFS as and when it saw fit. Eurest's position had forced Fubilan to contact JLFS to obtain a release in respect of the relevant funds. Fubilan reserved its rights in relation to Eurest's conduct including the right to claim against Eurest for any loss or costs in relation to the approximately $1.2 million claim against JLFS if Eurest did not comply with Fubilan's requests. The letter was apparently written in anticipation of any claim that Eurest might raise that Fubilan had failed to mitigate its loss in relation to Eurest's conduct and its position in connection with JLFS.
2.95 Another ministerial briefing paper - October 2002
406 Another meeting with the Minister for Mining was scheduled for 4 October 2002 and a briefing paper prepared. Mr Fenwick was involved in its preparation. In that paper it was alleged, inter alia:
All efforts by the Landowners to expand their business interests have been halted by both OTML and Eurest eg
. JSE consultants quality management program
. Limay Supply Ltd
. Yamil Supply Ltd
. Aus Trade benefits
. Proclean Cleaning Services
. New Ireland Seafoods
. Professional consultants.
The statements were false. Eurest had not blocked the use of JSE Management nor of Yamil or Limay. It was OTML that had concerns about those matters. The proposed Aus Trade benefits were linked to the use of Yamil as a supply company. Asked how Proclean Cleaning Services were halted by OTML and Eurest, Mr Fenwick said:
It was a development business that could have been looked at by the group and because of the circumstances that we were undergoing at that time we couldn't proceed with it.
This answer contained no hint that OTML or Eurest was involved in "halting" that possible acquisition. As to the New Ireland Seafoods acquisition, Mr Fenwick did not recall how it was halted by OTML and Eurest. In truth it was MRDC that had concerns about that acquisition. The statements were made in a way that was careless of the truth. They were part of Mr Fenwick's ongoing campaign, and that of Fubilan, against Eurest.
2.96 Fubilan board meeting - 7 and 8 November 2002
407 The Fubilan board next met on 7 and 8 November 2002. Mr Kroeger presented the operations report for the period ended October 2002. He reported that the company was not complying with tax laws as financial reports had not been signed off by the board. The operations report was accepted. A question was raised about the status of Mr Baitia's directorship. The company secretary confirmed that he was still a director and entitled to attend the board meeting.
408 Mr Boas presented a report on the acquisition of NIS. MRDC management had a major concern about the amount of money Fubilan was required to inject into the venture compared with the contribution of the other two proposed shareholders. As part of its purchase price Fubilan had acquired a fishing vessel for $25,000 and had deposited K50,000 into the NIS account. Doubts were expressed by MRDC representatives, at the meeting on 7 and 8 November, about the acquisition of NIS.
2.97 Fubilan's finances - December 2002
409 On 3 December 2002 Mr Younger wrote to Mr Boas referring to a telephone conversation about amounts overdue to Australian creditors. Fubilan had purchased goods from Australia between June and September from Eurest suppliers. The invoices from those purchases were now overdue for payment. The amount involved was A$858,908.75. If paid to the Australian creditors on that day the value in PNG currency would be K2,232,671.56 which would generate an exchange loss for Fubilan of K329,308.18. The import value was K1,903,363.38. Eurest made a "once off" offer to Fubilan that if Fubilan paid K1,903,363.38 to Eurest (PNG) on that day, Eurest (PNG) would settle the debt in Australia on behalf of Fubilan.
410 For the year ended 2002 the financial statements for Fubilan showed a gross profit of K6,367,160. After subtracting administrative expenses and adding back other operating income, the profit from the operation was K1,896,226. Directors' fees of K569,250 and finance costs of K860,259 left a profit before tax of K466,717. The after tax profit was K353,068.
411 Fubilan board papers for a meeting to be held on 21 March 2003 included an operations report for February 2003. One of the board papers entitled "Updates on Outstanding Issues" indicated that copies of the KPMG report had been distributed to Eurest and OTML for review. It was intended to start formal negotiation on Fubilan's claims against Eurest.
2.98 Mr Buretam writes to Mr Aua - 2 April 2003
412 On 2 April 2003 Mr Buretam wrote to Mr Aua in his capacity as secretary of the Department of Mining. He signed himself as chairman of Fubilan and as the "Landowners Coordinator". He said that he did not believe that the State, OTML, Eurest and MRDC were genuine about coming to the table to resolve the long standing issue amicably. He said:
If we cannot be able receive any form of response from these other parties after the 30th April 2003, mine will come to standstill until this problem is fix. If this happens it will be a major disruption and would take longer period than what has been experienced. [sic]
Mr Fenwick was unaware of the letter. He said he had nothing to do with its drafting. Mr Aua responded to Mr Buretam stating that making threats in letters did not show rational thinking but represented an unbalanced assessment of the situation. He had spoken to Mr Boas with a view to organising a follow-up meeting at Tabubil with OTML and Eurest. He thought it was unfair on Mr Buretam's part to assume that OTML management had secret plans to pull the contract away from MRSM and Fubilan. He reminded Mr Buretam of his responsibility to maintain cordial business relations at the corporate level with contracting parties in order to ensure continuity of their business relationship. He said:
I believe the current OTML Management is willing to assist you if your attitude and approach are adjusted to reflect more business like approaches than the present.
2.99 The Fubilan board meets - 6 June 2003
413 The Fubilan board met on 6 June 2003. Mr Michael Young of Eurest presented an operational report for May 2003. The audit reports for the years 2000 and 2001 were yet to be signed and accepted by the board. Absent those reports Fubilan could not pay its company taxes which put it in a precarious position with OTML. It was noted in the minutes that if OTML became aware of the non-compliance 10% could be deducted from the monthly invoices submitted by Fubilan. Mr Young also reported that Eurest did not have nationals at the management level at that time but that there were opportunities available. He said there were several nationals undergoing managerial training courses to undertake the roles of responsibility but it was difficult to train someone within a year or two to take up a managerial post. The operations report was accepted.
414 Under the heading "Updates on Outstanding Issues" Mr Boas presented a paper about the claim against Eurest. Mr Buretam said that because Eurest was an Australian-based company litigation was in order in Australia in a bid to expose Eurest's activities. He also said that the on-going feud between Fubilan and Eurest had to be settled once and for all. The board resolved that A$100,000 be paid as a deposit to McKie & Associates to commence legal proceedings against Eurest in the Federal Court. MRDC was to provide a deed of release for the JLFS funds to be released to Fubilan. A firm of accountants called Kiddie & Associates would be engaged to audit the company's books. The next minutes in evidence were of a joint MRSM/Fubilan strategic planning meeting held on 4 October 2003 at Cairns. Mr Fenwick apparently reported that the claim against Eurest could amount to K30 million. Affidavits of witnesses were being prepared with PNG witnesses being interviewed and statements sworn within the next fortnight.
415 On 16 October 2003 Mr Andagali, the Manager-Corporate Development, for Eurest met with Mr Boas and other representatives of MRDC. Mr Andagali said that the OTML Contract was a successful operation and that profits had exceeded expectations. It was important to keep communication lines open. Mr Poelzl had requested a meeting at Mr Kaupa's office on 29 October 2003. Eurest was prepared to fly Mr Kaupa and Mr Boas to Brisbane on a suitable day between 29 and 31 October 2003. It does not appear from the evidence whether that meeting ever occurred.
2.100 OTML gives notice of non-renewal of catering contract - December 2003
416 On 8 December 2003 Mr Reading, manager, logistics for OTML, wrote to Mr Kaupa at MRDC advising that the OTML contract was due to expire on 31 January 2004 and that OTML would not be renewing the contract. He also advised that the new catering services contract would not be tendered out. A formal close out agreement would be forwarded. On 10 December 2003 Mr Aua wrote to Mr Faulkner about the decision to "cancel" the OTML contract with Fubilan. He identified two areas of concern. The first was a proposal by OTML to set up another landowner company. The other was its failure to appreciate Fubilan's concerns about the results of the KPMG audit report which showed mismanagement by Eurest. Mr Faulkner responded on 15 December 2003. He told Mr Aua that after an approach from the landowners OTML had developed the idea of all 12 mine villages having clan companies each with shares in a company called Star Mountain Investment Holdings Ltd (SMIH). OTML had signed a memorandum of understanding with SMIH and had brokered an agreement for it to enter a joint venture to operate the Tabubil supermarket. Its next major project would be the catering contract. He pointed out that OTML was not cancelling the catering contract with Fubilan. It would expire on 31 January 2004.
417 Mr Faulkner wrote of OTML's numerous attempts to resolve differences between Fubilan and Eurest over the four years of the contract. He identified as a major shortcoming the absence of a Corporate Manual required by the Contract to define the respective roles of Fubilan and its manager. Such a manual had been developed but the Fubilan board had refused to endorse it. He acknowledged that there had been mistakes which Eurest had made genuine attempts to correct but was "firmly of the opinion that the relationship between the parties has been actively poisoned by external influences". He was aware of the KPMG report which he said did not have the clear cut conclusion drawn by Mr Aua.
2.101 The present proceedings are instituted - 19 December 2003
418 On 19 December 2003 the present proceedings were commenced by Fubilan and MRDC. On the same day, Mr Faulkner met with the Minister for Mining at Waigani. On 29 December 2003 the Minister sent Mr Faulkner a letter about their discussions to "reaffirm my views on this issue". He was convinced that OTML's approach to resolving the "core issues" was not appropriate. He did not think that the decision, apparently foreshadowed in their discussions, to award the catering contract to SMIH for a year was commercial in nature. He said OTML had not carefully considered the sensitivity of the catering contract. While landowner leaders were divided on the question, OTML's decision which seemed to favour a particular faction would create disharmony and conflict. Mr Faulkner responded on 8 January 2004. He said he had told the Minister that he had met with Mr Buretam that morning and put a proposition which he explained as follows:
OTML will extend the catering contract (OTML Contract 99046) for a period of six months from February 1st 2004, until July 31st 2004 under exactly the same conditions as now apply. For clarity, this includes FCS retaining Eurest as Manager for the duration of the contract, which is a current condition of Contract 99046. Mr Buretam agreed that FCS does not have issue with the Eurest site management's conduct of the contract and therefore this should not give rise to any problem.
He foreshadowed that OTML would call for competitive tenders for a new contract to commence after 21 July 2004. An independent third party would be invited to scrutinise its management of the tenders. He also wrote to Mr Kaupa then acting managing director of MRDC on 13 January 2004 to inform him of the proposal.
2.102 Fubilan and OTML move towards accommodation - January 2004
419 Mr Buretam wrote to Mr Kaupa on 15 January 2004 stating that a six month extension would be sufficient for Fubilan to put together a new management team to take over from Eurest. He had stressed to Mr Faulkner that Eurest must leave within the next six months. Mr Faulkner had insisted that Eurest would remain as managers. Mr Buretam denied saying that Fubilan had no issue with the conduct of Eurest's site management. All he had said was that the site managers were good operators. He was referring to Mr Kroeger.
420 Mr Buretam wanted Eurest's management contract to end at the end of July 2004 and a contract rollover of the catering contract for the remaining life of the mine. MRDC, MRSM/Fubilan and OTML should work together to have new management in place to conduct business by the end of July. Fubilan would get ready to be self-managed. No tender should be let and there should be no competition between SIMH and MRSM/Fubilan. Mr Kaupa conveyed Mr Buretam's views to Mr Faulkner in a letter dated 20 January 2004.
421 Mr Buretam died on 1 February 2004. The Fubilan board met on 13 and 18 February 2004. None of the resolutions passed at the first of those meetings addressed the extension of the contract.
2.103 Fubilan board meeting - 18 February 2004
422 Mr Yekim was appointed as interim chairman of the board at the meeting of 18 February 2004. Mr Rumsley of McKie & Associates Lawyers was present. He reported that JLFS had agreed to mediation. On the Eurest issue, it was resolved that the report, designated the "litigation brief", be noted and accepted. Morocco, Mr Fenwick's company was appointed to make arrangements for mediation with JLFS. Further costs of A$200,000 were approved for payment to McKie & Associates' trust account. The meeting also considered the renewal of Morocco's consultancy arrangements. The board resolved, in Mr Fenwick's absence, that the consultancy agreement was to be referred to management to negotiate and to come back to the board with an appropriate recommendation.
2.104 Fubilan settles with JLFS - 10 March 2004
423 The dispute with JLFS was settled as reflected in a settlement agreement dated 10 March 2004. Under the agreement Fubilan was to pay to Metcash the sum of A$425,000 by 19 March 2004. On 31 March 2004, a cheque in the amount of K1,057,214.20 issued to Metcash pursuant to the terms of the settlement.
2.105 Fubilan board meeting - 20 and 23 April 2004
424 A board paper prepared by Mr Boas for a meeting of the board of MRSM on 20 April 2004 reported on the JLFS settlement and also on the Eurest and Fubilan litigation. Under the heading "Board Directorship and Consultancy" Mr Boas stated that the board needed to decide on the involvement of Mr Fenwick. He indicated that there had been discussions with Mr Fenwick about the need for him to formally resign from the Fubilan board and for his consultancy with Fubilan and MRSM to be limited to the litigation proceedings against Eurest.
425 The MRSM and Fubilan boards met jointly on 20 April 2004. The minutes were lengthy. Mr Boas said that Mr Fenwick should move away from Fubilan. Mr Yekim, who was still chairman of Fubilan, said that Mr Fenwick should stay with Fubilan until the litigation was over. The Fubilan board met again on 23 April 2004 with Mr Yekim in the chair. The directors present were Messrs Kayangkim, Musolok, Itulam and Fenwick. Mr Paul Povey was present by invitation. There was discussion of a draft memorandum of understanding between OTML and Fubilan which had been prepared by Messrs Crane and Faulkner. Mr Fenwick said that documents pertaining to the memorandum of understanding should be reviewed before anything was signed off. He recommended that they be reviewed by the Minister of Mining, the Secretary of Mining and the managing director of MRDC. He advised that the proposal, which was outlined in a paper prepared by OTML, could have an adverse impact on the litigation against Eurest. According to the minutes he claimed that the proposal could reduce the amount of the claim against Eurest by as much as 80%. He said it was important that the legal proceedings not be compromised. If, as seems likely, this was an attempt to avoid a situation in which Fubilan's alleged damage would be reduced, it was hardly advice in Fubilan's interests. It was put to Mr Fenwick in cross-examination that he was concerned Fubilan would not be able to claim for the loss of the OTML contract for the life of the mine if it continued with a new catering contract. He responded evasively and rather unconvincingly. In my opinion his concern was that which counsel put to him.
426 The board resolved that the draft memorandum of understanding must be reviewed by all stakeholders and must be in favour of Fubilan. The business structure proposed was not to be adopted.
2.106 MRSM and Fubilan boards meet - 19 June 2004
427 The boards of MRSM and Fubilan met again jointly on 19 June 2004. Mr Bill Menim chaired the meeting. Renewal of the OTML contract was discussed. Mr Yekim advised that OTML expected MRDC and MRSM to withdraw their involvement with Fubilan and that Mr Fenwick would resign as a director of Fubilan. If the restructure proposed were undertaken by Fubilan, OTML would have no problem issuing the catering contract for the life of the mine but management would be put to an international tender. It was then proposed that Mr Fenwick resign as a director of Fubilan but "be retained as a key witness in the FCS/Eurest litigation". Mr Yekim suggested he be retained by MRSM. That way there would be no further association between him and Fubilan. The board passed a number of resolutions. The board terminated the engagement of Morocco and noted an undertaking by MRDC to withdraw from management of Fubilan. Mr Yekim expressed thanks to Mr Fenwick for his contribution as director and consultant. The OTML contract was rolled over for a further six month period from 1 July 2004.
428 In his witness statement dated 22 June 2006, Mr Fenwick said he was currently a director of Fubilan. In a supplementary witness statement he said that he remained a director of Fubilan until 20 April 2005. He swore to the truth of both. In cross-examination he accepted that each of those statements was incorrect.
2.107 Fubilan and OTML move closer to accommodation - August 2004
429 On 5 August 2004, Fubilan sent a letter signed by Messrs Yekim, Menim, Asekim, Kayangkim, Itulam and Musolok to Mr Faulkner at OTML. It attached an extract of the minutes of the meeting of 19 June 2004. The directors outlined the following proposal:
. MRDC to cease all involvement with FCS so that FCS can operate as an independent company based in Tabubil
. MRSM shareholding in FCS to be transferred to the ten mine villages and MRSM will cease all involvement with FCS.
. The engagement of Mr William Fenwick (through Morocco Holdings) as the FCS business manager & consultant to be terminated and William Fenwick to resign as a Director of FCS.
. OTML to award the catering contract (Tabubil) to FCS on the basis that OTML will source a suitable remote catering firm to provide full management services.
. MRSM will continue the legal action against Eurest on behalf of FCS and will retain Bill Fenwick as a key witness.
The letter stated:
While it is our desire to fully manage this contract, we understand that OTML can not entertain this notion until FCS proves it has the commercial skill and corporate stability to under take this task. Therefore, we support OTML's to tender for the management of the contract and will support OTML's final choice. [sic]
430 On 6 October 2004, following a series of meetings Mr Faulkner wrote to Mr Yekim stating:
I wish to confirm by this letter that upon expiry of OTML contract 99046, OTML proposes to award a new service contract to FCS provided that FCS ratifies the 'Agreement of Business Relationship' (attached) and complies with the conditions contained within that Agreement to the satisfaction of OTML on or before the 1st of November 2004.
2.108 Fubilan's incapacity as a stand alone contractor - the real problem exposed - November 2004
431 Correspondence ensued between OTML and MRDC. On 18 November 2004 Mr Faulkner wrote to Mr Kaupa stating that OTML had never undertaken that Fubilan would manage the contract in its own right after the first four year term was completed. Fubilan had been told that it would be granted the Tabubil catering contract for the life of the mine. Such an undertaking would be contrary to OTML's business processes. He went on to say:
We may have considered local management of the catering without an internationally experienced caterer had the business conduct of FCS been satisfactory however in the past the business conduct of FCS and the Board have been unsatisfactory. This has been documented and communicated several times in the past to FCS, MRSM and MRDC. Further, as you know these local commercial enterprises can only succeed when managed locally where the beneficiaries can see the fruits of their efforts, and can also hold their leaders accountable on the ground.
Mr Faulkner referred to the proposed "Agreement on Business Relationship" between OTML and Fubilan which he said had been developed during negotiations with the chairman of Fubilan and its board of directors. OTML did not propose to further extend the contract. This had been done for two six month periods. He said:
Should OTML choose to award a new contract to FCS, it will be on the basis that, to our satisfaction, FCS is locally controlled, and managed by an internationally recognised catering firm.
Mr Kaupa responded on 1 December 2004 asserting, inter alia:
It is clear that after almost 5 years of Eurest's management FCS have not received the training to be in a position to manage the contract in its own right. As a direct result of this FCS and MRSM took action against Eurest in the Australian Federal Court. This step was taken only after 4 years of ongoing disputes and unsuccessful attempts to resolve them.
432 The difficulty OTML had experienced however was not related to Fubilan's incapacity to deploy management staff. Rather it arose from the business conduct of Fubilan and its board. The history of the OTML Contract and the Management Agreement make it clear that many of the difficulties experienced between the parties were related to the conduct of Mr Fenwick and of the board in the way they dealt with Eurest and OTML, their ill-fated attempt to set up a supply channel for Fubilan and the hamfisted attempt to terminate the Management Agreement. There was a lack of commercial maturity and good corporate governance which would give pause to any third party considering a relationship unmediated by an operator experienced in the industry and in the conduct of civil business relationships.
433 OTML's perception of Fubilan was indicated in a presentation prepared by OTML about future relationships with Fubilan and entitled "The development of FCS as a preferred contractor to OTML". In setting out in a power point presentation a list of points which were agreed upon, OTML stated:
OTML would like FCS to manage the OTML Tabubil Catering Contract in its own right, but notes that FCS has not established any commercial credibility with OTML
And in relation to Fubilan's desire to manage the OTML Tabubil catering contract:
Given the corporate history of the Company, OTML Management insist that FCS must firstly establish credibility and trust with OTML before it can be considered as a stand alone contractor. (emphasis in original)
It proposed that Fubilan operate as a joint venture. OTML had two preferred candidates in that respect. OTML would, after negotiation of final details, award to Fubilan the Tabubil catering contract in its own right without a manager or management agreement. Exit strategies would be written into the agreement that would provide for one of the shareholders in the future to sell its interest. Under the proposal Fubilan would adopt a new constitution covering the makeup of the board, proceedings at meetings of the board, appointments and change of directors, governance and the audit committee. It was proposed that if the offer were acceptable it would be a condition of the catering contract that appropriate commercial arrangements be in place by the end of June 2005.
434 Mr Crane wrote to Mr Yekim on 8 July 2005 referring to a letter which he had written on 4 July 2005 to the OTML managing director. This concerned the proposed changes to the structure of Fubilan. Each of the ten mine villages was to have a 10% equity in Fubilan. Mr Crane asked Mr Yekim to consider the idea of issuing shares to the existing clan investment companies that comprised the shareholding of SMIHL.
2.109 Fubilan and OTML reach accommodation - Eurest continues as manager - August 2005
435 In the event OTML decided that Eurest was its preferred bidder for the management of catering services in Tabubil. A new management agreement was put in place between Eurest and Fubilan. It was based upon the Management Agreement of 2000. The new Management Agreement between Fubilan and Eurest was signed on 30 August 2005.
2.110 Mr Fenwick's role in the litigation - June 2004 to June 2006
436 Mr Fenwick said in cross-examination that since his resignation from the Fubilan board on 19 June 2004 he had been paid, evidently by MRSM, a monthly retainer of $10,000 and reimbursement for travel and expenses. He was acting as a consultant on behalf of Fubilan and MRSM. After some evasion he agreed that he was acting as a consultant "in respect of this litigation". It was put to him that at the time he gave evidence on 30 June 2007 he would have received approximately $240,000 in such payments. He did not dispute this but said that it was not a large amount in the way of consultancy for catering firms. His consultancy role, as he described it, had been "probably analysing the paperwork and things that have been - gone through in the past a few years, in the early years of the contract". He had no documentation of his consultancy arrangements with MRSM.
437 Mr Fenwick continued as a consultant in connection with this litigation at least up to the time of the hearing. He was asked whether in discussion of the litigation with Fubilan there had ever been any discussion of the downside risk, namely the cost exposure, if the litigation were unsuccessful. He could not recall any such discussion.
3. Pricing discounts and rebates in the catering industry
438 Mr Les Fereday who was called as a witness for Fubilan and MRSM gave evidence of industry practice in relation to rebates and discounts. From his experience working for Poons from 1980 to 2000 and being responsible for the Ok Tedi contract from 1989 to 1999, he was aware that discounts or rebates in the order of 7% to 15% were paid by large suppliers on the kinds of quantities of food needed for the Ok Tedi mine site.
439 He accepted in cross-examination that a buyer with bargaining strength could obtain a lower price or a rebate. He drew a distinction between a discount, which is a price reduction, and a rebate, which is a payment made to the purchaser by the supplier of goods. In the majority of cases rebates are offered where the purchaser is operating under a management contract such as a canteen or cafeteria and the purchase price is paid by the client of the manager. In such cases he said:
… there is a management fee, and from those purchases there is a rebate or a discount that goes back to the operator.
There was, according to Mr Fereday's evidence, a degree of flexibility in the structuring of discounts and rebates. A purchasing company might ask a supplier to allow 10% of the purchase price, structuring 5% as a discount and 5% as a rebate. The level of rebate or discount would depend upon the skill of the procurement officer. A national buyer buying for a number of contracts could get more significant rebates than a local buyer. The same to national buyers. So a group might negotiate rebates through its head office.
440 Mr Fereday agreed that the practice of providing rebates or discounts or some sort of hybrid was well known in the industry. He added that discounts could also be made available in the form of extended terms for payment. While the range of the discount or rebate was usually in the order of 7% to 15% it could be lower. He accepted that his assessment of the percentage of price which could be reduced under a discount or rebate scheme was not precise.
441 I accept Mr Fereday's evidence as a description of industry practice.
4. Training programs for Fubilan employees
442 Evidence of the implementation by Eurest of training programs for Fubilan employees was given by Leanne Broadbent, whose statement was received by consent. Ms Broadbent is a qualified TAFE teacher of adult students. She holds a Bachelor of Education Technical Degree from the Sydney College of Advanced Education. She has been involved in writing and delivering training programs for employees since 1982. She has provided such programs either as an employee or, during the period 1989 to 1991, when she operated her own training business.
443 Ms Broadbent was employed by Eurest (Australia) Support Services Pty Ltd as training and chef supervisor in respect of the OTML Contract. She said her duties were to develop and deliver training programs for the Fubilan employees involved in the performance of the Contract. More specifically she was to organise the training department, analyse training needs and develop and deliver programs to those requiring the training.
444 She drew up a training needs analysis audit. A copy, which was comprehensive and detailed, appeared as an annexure to her statement. She also prepared and began implementation of a training program. A copy was also attached to her statement. She provided the needs analysis and the program to Mr Kroeger. Ms Broadbent wrote the training programs for two levels of trainees. The first level was of a basic type so that trainees could acquire generic skills for use in the catering industry. The second level was for supervisory positions. All trainees were to be PNG nationals with emphasis on the first level of training for locals from the Preferred Area designated in the OTML Contract.
445 The programs were delivered in early 2000. There were two other PNG nationals in the catering department who provided Ms Broadbent with assistance in that delivery and an expatriate in the catering section whom she could call on for assistance. From early 2000 until about 26 July 2002 a number of programs were carried out. She gave many of them herself and supervised others. Some were given by trainers whom she had trained to deliver the courses which they provided.
446 Ms Broadbent was required to provide senior management with reports on the training which she conducted. She provided those reports initially on an intermittent basis, but in 2001 was instructed to provide them monthly. She attached to her statement copies of examples of the training reports which she put out from time to time.
447 Ms Broadbent referred to the original tender which required localisation of chef instructor positions in July and December 2000, July 2001 and July 2002 and a catering manager's position by July 2003. The first position localised was that of a chef supervisor/trainer. A PNG national called Roland was appointed to that position which was renamed warehouse supervisor. The second chef supervisor/trainer position was localised in July 2000 with the appointment of Lucas Togemas, as training chef instructor. His position was renamed as executive chef. The executive chef was responsible as senior chef and to assist with the training of other employees. After his appointment Mr Togemas completed a Chef (Frontline) Management course in Queensland. Ms Broadbent mentored him for the purposes of that course which he completed and passed. A third chef supervisor/trainer position was localised in December 2000 with the appointment of Kevin Soko. His title was changed to national supervisor. The next position of chef supervisor/trainer was localised in July 2001 and renamed national supervisor mine/mill. Mr John Getsy was the PNG national appointed to that position. A further localisation was effected in November 2001 when Mark Mondoro was appointed to the chef supervisor/trainer number 5 position. He was appointed as her understudy. His position was renamed chef trainer (assistant to the training supervisor).
448 Ms Broadbent described the localisation process. As a particular expatriate employee left employment the position would be filled with a PNG national. The person was not usually a local person from the "Preferred Area" because she had found that these persons generally had not completed education levels to the equivalent of Year 6. They lacked the basic educational levels needed for the training she was providing and lacked any prior work exposure. She reported to her manager, Mr Kroeger, that it was evident that many of the locals did not have sufficient basic education to enable them to benefit from training at high levels.
449 Ms Broadbent's own position of training supervisor/chef supervisor was localised in July 2002 with the appointment of Mark Mondoro in her place. She returned to Australia on 26 July 2002. Since that time the training provided by Eurest under the Management Agreement was under the day to day supervision of Mr Mondoro until he was dismissed.
450 Ms Broadbent said that while training was under her supervision she met all localisation and training requirements and deadlines. During the period July 2002 to May 2004 she would return to Tabubil during school holidays to monitor and check the training programs then being given by Mr Mondoro and his staff. On 17 May 2004 following Mr Mondoro's departure she resumed employment at Tabubil providing more training. In her new capacity she was required to be mentor/supervisor and an overseer of the training process. She continued in that role until 4 June 2005 when she returned to Australia.
451 In her various capacities as a trainer under the catering contract, Ms Broadbent wrote annual training reports for 2000/2001 and 2001/2002. She attached copies of the reports to her statement. She also viewed monthly training reports from April 2002 to May 2004 although they were ultimately written by Mark Mondoro without her endorsement as to their contents. There was no dispute about Ms Broadbent's evidence and I accept it.
452 Mr Kroeger gave evidence about the training program. He had provided a copy of Ms Broadbent's analysis of training needs and the proposed program to Mr Baitia at a time when Mr Baitia was the daily contact between himself and MRSM. MRSM was still in control of the Contract as Fubilan had no operating board of directors until October 2000. He also provided training reports initially to Mr Baitia and sometimes Mr Fenwick and later on to the board of Fubilan.
453 Mr Kroeger recalled being present at a meeting of the Fubilan board in November 2002 at which Mr Fenwick complained that Eurest was not training managers. He responded that there was no requirement under the tender document for managers to be trained other than the catering manager. In any event there were no candidates to be trained for such senior positions. He told the board that if Fubilan wished to nominate people they thought would be eligible for training for managerial positions, they should do so. He had never received from Mr Fenwick, nor from any other official from Fubilan, any nomination of persons to be trained as managers. The position of catering manager was localised ultimately with the appointment of Mr Togemas in 2003.
454 Mr Kroeger equated the training requirements set out in the tender documents to those required under the OTML Contract. He said in cross-examination that Eurest did not do anything to find candidates for training for senior positions. There was no requirement under the OTML Contract to train senior managers.
455 Mr Kroeger said that as manager he was responsible for liaison with OTML and their management. From time to time he would discuss the localisation program with Terupo Apoki of OTML. He recalled Leanne Broadbent reporting to him that many of the locals did not have sufficient basic education to enable them to benefit from training at higher levels. He discussed this with Mr Apoki. On 23 July 2002 he sent Mr Apoki a memorandum about the matter. In it he said:
Fubilan has up to October 2002 complied with the localisation schedule as per the contract, however due to the high safety risk and importance of the catering contract to the ongoing operation of OTML I would suggest the following points be considered.
1. Localisation of Training position in October 2002 as Leanne Broadbent has resigned effective 27 July 2002 and Mark Mondoro will take over that position once he has obtained the Certificate 4 assessment course.
2. The further localisation of an expatriate Chef supervisor position in April 2003.
3. Retain the following expatriate supervision positions to close of current contract to ensure proper service and training.
a. Support Service Manager and relief Project Manager
b. Catering Manager
c. Chef Supervisor/Relief Trainer
d. Relief Catering Manager/Relief Chef Supervisor
As a result of this he said that various localisation dates were extended by OTML in accordance with a document signed by OTML on 29 November 2002. This document was also attached to his statement. On 10 April 2002 Mr Reisenbauer signed an agreement which was countersigned by Mr Mullins of OTML varying the OTML Contract by extending the anticipated localisation date for the catering manager by six months from April 2002 to October 2002.
456 On 17 March 2003 Mr Kroeger reported to Mr Buretam that localisation of the last expatriate position under the current OTML Contract would take place on 11 April 2003. The retiring expatriate would be Mr Ian Trappett. Mr Jock Turner would take up the position of Catering Manager with further training being given to Lucas Togemas to eventually take over. On 8 April 2003 Mr Younger submitted a "Training and Localisation Program" for the years 2003 to 2006. That program was submitted to the Labour and Employment Training Division of the Department of Labour and Employment and was approved by a letter from the Department dated 22 April 2003.
457 Mr Kroeger had prepared a summary of all training carried out by Eurest between 2000 and April 2004. He attached a copy to his statement together with a summary of external training provided in the same period.
458 In 2003 the PNG Ministry of Labour and Industrial Relations carried out an audit of the training conducted by Fubilan under Eurest's management. According to Mr Kroeger the audit was successfully passed. He said that Fubilan is now, and has been since 3 January 2005, an approved Training Provider in PNG pursuant to the National Training Council Act. He attached a copy of a registration certificate evidencing that fact. Mr Kroeger was cross-examined about the number of expatriates working on the OTML Contract during its life. He agreed that at the end of the first four year period of the Contract, ie 31 January 2004, there were seven expatriate positions that had not been localised. One was a relief position, leaving six substantive positions. This, he said, was in accordance with the variation which had been authorised by OTML.
459 It was put to Mr Kroeger that the nationals who had been employed should have come from the Preferred Area. He agreed but added "… unless those people aren't qualified or have the educational background or the desire to work". It was then put to him that Eurest had done nothing about "giving them the educational background". He pointed out that the education of which they were speaking was primary or high school education. It was not his responsibility to make arrangements for people to have a high school education.
460 There was some debate in cross-examination of Mr Kroeger about the proportion of employees who came from the Preferred Area. He said that 59 out of 87 PNG nationals employed came from that area. 32 came from West Sepik and Sandown Province. The remaining came from the West Province and, according to their records and his familiarity with the area, they came from the Telefomin area within the Preferred Area.
5. Expert accounting evidence - John Campbell and Jonathan Coraton
461 Mr John Campbell, who was called by the applicants as an expert witness, qualified as a chartered accountant in 1967. Between 1962 and 1997 he worked as an auditor. He became a partner of KPMG in 1981 and retired as a partner in 1997. He has acted as a director, company secretary and/or financial controller of companies with trading operations. He has never had experience of the catering industry and claimed no expertise in it, although he has been involved in the audit of a company operating in the industry. In his role as auditor of a number of public listed and proprietary companies when he was a partner and manager of KPMG, he reviewed the propriety of charges made from one entity to another.
462 Mr Campbell produced three reports dated 8 April 2006 (his original report), 26 May 2006 (his first supplementary statement) and 23 July 2006 (his second supplementary statement). His first report responded to a request to provide opinions as to the following matters:
1. Whether or not the accounts of Fubilan complied with the requirements of the Management Agreement.
2. What documents he would require to conduct an audit of Fubilan to determine if benefits had been derived by the respondents in the supply of materials to Fubilan.
3. Whether there were any irregularities in the invoices or supporting documents which he had been given.
4. The proper accounting treatment to be given to a transfer of accrued employee entitlements and the re-employment by Eurest of existing employees of Poons as at 1 February 2000.
5. A comparison of the rates contained in the original and revised schedules of rates submitted to OTML by Eurest as part of the tender process.
The materials relied upon by Mr Campbell in preparing his report included a letter from the applicants' solicitors and purchase records provided to him on compact disc in a pdf format. He was also provided with schedules of the tender and contract rates.
463 Mr Campbell's report primarily highlighted areas of uncertainty or inadequacy in the records which he was asked to review. Some of these matters were addressed in the responding evidence of Jonathan Coraton, who was called for the respondents. Mr Coraton is a certified practicing accountant who has worked as an external auditor for Deloittes. He has carried out auditing work for large companies in the manufacturing, trading and catering industries. He was the lead auditor from Deloittes engaged by Eurest to perform its audit on Fubilan. He is now the financial controller and company secretary of Eurest. At the time of his report in July 2006 he had held that position for two years.
464 In his evidence Mr Coraton responded to specific aspects of Mr Campbell's evidence. There seemed to be no substantial factual dispute between them on the matters they dealt with although there were differences in relation to some inferences and observations. In reviewing Mr Campbell's report Mr Coraton examined all of the records there referred to and some financial records which were relevant because of what was said in the report. It may be accepted that Mr Coraton was not an independent expert but his credibility was not under substantial challenge. His evidence, like that of Mr Campbell, was careful and considered. He explained his approach to analysing Mr Campbell's report. He would go back to the basic underlying documentation to determine whether Mr Campbell's factual observations were consistent with it. In some cases he was able to locate many supporting documents inconsistent with Mr Campbell's observations and drew attention to them in his report. In cross-examination he said that he had obtained extra supporting documents from Mr Nana, the site accountant and from Eurest's Brisbane office.
465 In opening his report Mr Coraton made a general statement about rebates. He could say of his own knowledge and from his inspection of Compass Group operations that, since early 2002, invoices for the supply of goods for the Management Agreement had been provided by suppliers on a net/net basis. That is to say all suppliers in Australia and PNG were requested to invoice Compass their supplies at the net amount (and resultant lower amount after deduction of such rebate as was allowable but subject in any event to price fluctuations). He attached emails and letters from Compass records concerning the direction to invoice net/net. I accept his evidence in that respect and find accordingly. Mr Campbell agreed that he was not purporting to express an opinion on the question whether rebates should have been passed on to Fubilan but rather that there should have been consistency in their accounting treatment.
466 Mr Campbell considered what documents he would require to conduct an audit of Fubilan to determine whether benefits were being derived by the respondents in the supply of materials to it. The initial source of such information would be Fubilan accounting records. He would also need access to a copy of the Corporate Manual provided by Eurest under the Management Agreement. Absent a Corporate Manual alternative documents, providing information about internal control procedures would be necessary. He would also need to observe the internal control processes in operation. It would be necessary to obtain access to purchase documents comprising Eurest and other Compass Group companies' invoices to Fubilan and appropriate support, including supply invoices. Third party supplier invoices would need to be examined because of the agency role undertaken by Eurest in these operations. I took him to use "agency" in its commercial rather than legal sense. He said it would be impracticable to specify all the types of documents which might be required to support charges from Compass Group companies to Fubilan as these might vary dependent upon the nature of the charges. He was not confident that the documents discovered comprised the total "population" of documents supporting the charges raised.
467 There were five appendices to Mr Campbell's report which comprised the following:
Appendix 1 - Tender Schedule of Rates
Appendix 2 - Contract Schedule of Rates
Appendix 3- List of Compass Group Australian dollar invoices to Fubilan per discovered documents
Appendix 4 - List of Compass Group PNG (Kina) invoices to Fubilan per discovered documents.
Appendix 5 - Comparison of Fubilan billings to OTML as invoiced versus tender rates - year 2000.
468 I do not have regard to the comparisons which Mr Campbell made and extrapolations he drew from the tender and contract rates referred to in Appendices 1 and 2. These were relevant to claims of unconscionable conduct, breach of fiduciary duty and negligence on the part of the respondents in relation to the submission of varied tender rates to OTML late in 1999. For reasons set out below, I consider these claims to have no basis whatever. It is not necessary to assess the asserted losses.
469 Mr Campbell was asked to advise whether any irregularities were disclosed by his review set out in Appendices 3 and 4. He said a number of pages in the pdf files with which he had been provided were difficult to read or illegible. He expected that Eurest invoices seeking recovery of purchases made on behalf of a third party would be supported by a package of documentation including supplier's invoice, purchase order and delivery evidence. He also expected to see bills of lading for items shipped by sea. There were generally deficiencies in the completeness of supporting copies. He noted 39 instances from the Appendix 3 invoices where the packing slip included what appeared to be a Eurest internal charge referred to as a "container charge" (eg invoice 48006312), or "packing charge" ( eg invoice 48006312) or "service fee" (eg invoice 48006331). In most instances the fee charged was $300 but in some cases significantly more (eg Eurest invoice 48005618 for $613.75). Compass invoices 48011969 and 48011979 each charged $400. In a small number of other cases it was less (eg invoice 48006984 for $266.60). Mr Campbell was unsure whether this constituted a situation where Eurest had profited from the supply of goods to Fubilan.
470 Mr Coraton said that a standard charge of A$300 applied to all dry containers. Charges for freezer containers differed based on volume and content. He set out reasons for those disparities. It is not necessary to go into these for present purposes. He also obtained payment details for various container consolidation charges which Mr Campbell had said were not supported. He concluded that all container consolidation charges queried by Mr Campbell were duly supported by details of payments made to suppliers.
471 Mr Campbell referred to an invoice mentioned in Appendix 3, being a P&O Catering Service invoice dated 11 November 1999 for $15,995.83 which had an attached packing slip number 1198. The first page of that slip totalled $15,995.83 but it continued on a second page with a grand total of $48,054.04 meaning that P&O had undercharged Fubilan. In other instances packing slips supported the amounts invoiced. Mr Coraton pointed out that the invoice referred to by Mr Campbell related to 11 November 1999 prior to the award of the contract to Fubilan. The issue raised was of no relevance to Fubilan.
472 Mr Campbell listed at the end of Appendix 3 a group of 12 invoices and 2 credits headed "Other invoices and credits". The first 11 were addressed to Eurest and comprised recharges of expenses incurred by Eurest (Australia) Support Services Pty Ltd in Australia and charged to Eurest stating such items as "per attached schedule". There was no attachment in the scanned invoices provided to him. He said it was not possible to determine if these recharges constituted irregularities without reviewing support available and obtaining explanations of why recharges should be charged to Fubilan. He thought there was a risk of duplicate charging.
473 Mr Coraton said that the first 11 invoices referred to in Mr Campbell's report were identified as "Schedule D charges". These were miscellaneous charges from Eurest BNE to Eurest (PNG). Charges listed in the Schedule D could be related to various sites in PNG. Each charge in Schedule D was identified by site location for simplicity in recharging respective sites. Mr Coraton obtained copies of the 11 invoices referred to. He reviewed the accompanying back up documents supporting the Eurest invoices. He noted a clerical error made by Eurest in one case where Fubilan had been overcharged for an amount of K420.96. This had evidently not been credited back to Fubilan.
474 Mr Coraton pointed out that from 2000 to mid 2003 all Eurest (Australia) (now Compass Group (Australia)) invoices were sent to Eurest. During those times Eurest had settled some of the debts owed by Fubilan to Eurest (Australia) upon receipt of funds from Fubilan. There were instances in which Eurest had settled, in advance, debts of Fubilan in advance relating to Eurest (Australia) invoices. This occurred particularly when Fubilan's cash flow did not permit payment or when there were delays in payments from OTML. Under no circumstances did Eurest (Australia) send invoices direct to Fubilan prior to mid 2003. In Mr Coraton's opinion there was very little chance that duplicate charges had been raised against Fubilan during those periods. I accept that evidence.
475 Two credit notes included in Appendix 3 represented the transfer of supplier credits for purchase rebates from Eurest (Australia) to Fubilan. These were invoices issued during the period 18 January 2002 to 5 February 2003. They represented less than one month's transactions amounting to a rebate of $24,236.40. Another credit note related to a 5% rebate on a single Golden Circle invoice, the amount being $76.80. These were the only instances Mr Campbell saw in the discovered documents of rebates being transferred to Fubilan. He would have expected there to be one or more credit notes for rebates due in respect of each accounting period. While it was possible that credits were passed to Fubilan it seemed to him that if this had not occurred Eurest (Australia) would have profited from the supply of goods to Fubilan in this respect and that the amount involved might be in excess of 5% of the total of the goods supplied ($8.1 million as per Appendix 3) depending on the percentage rebate obtained from the supplier. Mr Coraton said he was unable to obtain the supporting documentation for the two credit notes. He was therefore not in a position to comment on the assertions.
476 Mr Campbell referred to the last item listed in Appendix 3 to his report. This document indicated that Fubilan was charged for expenses incurred by Eurest including an account for $5,000 being a fee for Hayes Consulting without any explanation or reason for the service or its relevance to Fubilan. Mr Coraton said that the Hayes Consulting invoice dated 10 May 2004 for $5,000 was incorrectly charged to Fubilan by Eurest. However the total amount had been refunded to Fubilan on 12 August 2005 with the inclusion of interest at 9%. I accept that evidence.
477 Mr Campbell referred to documents listed under the heading "Invoices for the Supply of Goods" in the first section of Appendix 4 and identified the following matters:
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Mr Coraton acknowledged that an insurance claim had been received from AON for an amount of K18,182.38. He verified that that amount was credited to Fubilan on 24 November 2003 as evidenced in its bank statement. It formed part of a K949,098.55 credit transaction in the Fubilan bank statement. In relation to the four invoices mentioned by Mr Campbell, Mr Corotan noted that they were ex-Lae invoices. This meant that goods supplied to Fubilan were supplied from the Lae warehouse and an internal Eurest invoice generated to recharge Fubilan. The Lae warehouse, being the purchasing department of Eurest in PNG, maintained certain inventory items for the purpose of supplying sites around PNG when goods were not readily available from local suppliers. It was impossible to trace or provide an attachment to the supporting Eurest invoice as the goods supplied could have related to current or previous month's purchases.
478 In relation to documents listed under the heading "Specific Recharges" in the second section of Appendix 4 to Mr Campbell's report. Mr Campbell said that none of the invoices included in the respondents' discovery was supported by third party documentation which would have demonstrated that Eurest was only recovering a cost incurred by it on Fubilan's behalf. Absent that support, it was not possible to determine whether irregularities had occurred. Mr Corotan said in reply that most of the items listed in Appendix 4 were in fact supported by third party documentation. Mr Campbell's assertion was not correct. He referred to Appendix 2 of his report which identified invoices for which supporting documentation was attached.
479 Mr Campbell next commented on documents listed under the heading "Recharges of invoices from other Compass Group Companies" in the second section of Appendix 4. He said that none of the invoices, as they applied to container consolidation charges, was supported by third party documentation or by copies of the invoices referred to in most instances. Six of these were issued in July to September 2000 by Poons and totalled over K4.5 million and presumably related to invoices of the type listed in Appendix 3. The documents were unsupported. There was a gap in dates between the last Poons' invoice in March 2000 and the first Eurest (Australia) invoices in August 2000 as shown in Appendix 3. The total of relevant invoices in Appendix 3 was A$8.1 million covering a 4.5 year period. This suggested an average of A$400,000 to A$500,000 per quarter as normal.
480 Mr Corotan said he obtained third party supporting documentation for invoices 00951 and 00950 out of the six invoices referred to by Mr Campbell. The other four invoices and supporting documentation for them could not be found. However, they agreed with the total amount of the Poons' invoice. He noted variances. For invoice number 00951 he noted a difference of K17,212.36. In that case the Poons' invoice was less than the total amount of all third party supplier invoices. He thought it possible there might be some invoices in the batch that should not form part of the summary. It was also possible that Poons could have made an error in billing Fubilan by omission of certain invoices which could have led to under billing. For invoice 00950 he noted a difference of K2,099.91. In that case the Poons' invoice was greater than the total amount of all third party supplier invoices. It was possible that there were invoices included in the batch summary that he prepared that should not form part of the summary. It was also possible that Poons had overcharged Fubilan for an amount of K2,099.91.
481 Mr Campbell referred in the third section of Appendix 4 to a Eurest invoice to Fubilan in August 2002 for K37,611.56 for Eurest (Australia) "back charges". This appeared to be a duplication of amounts charged on three invoices mentioned in Appendix 3. Mr Corotan reiterated that under no circumstances did Eurest (Australia) bill directly to Fubilan until mid 2003 when the accounting procedure was changed. The invoices referred to in Mr Campbell's report were not double charged to Fubilan. They were made to Eurest and the dates reflected on them were prior to mid 2003. The goods were sent to site without a copy of the Eurest BNE invoice on some occasions and the accountant on site requested the Eurest head office for a copy. Upon request, the accountant received a copy of the Eurest BNE invoice from Eurest head office and both were translated using the exchange rate ruling at that date and journalised into the Fubilan general ledger.
482 In his review, Mr Corotan noted a double posting in the "Age Payable Ledger" where invoice 48006292 for K7,530.80 and invoice 4800626 for K2,582.83 were posted in the ledger forming part of the June 2002 age payable listing. He also noted that invoice number 00108 for K37,611.56 was posted subsequently to the ledger forming part of the August 2002 age payable listing. This was erroneously posted in the ledger as the two Eurest BNE invoices had already been posted in the prior period. Subsequently the two Eurest BNE invoices mentioned were deleted from the ledger. He further extended his verification procedure by requesting Eurest (Australia) to confirm whether the payments were partially received from Fubilan for the three invoices. No payments were received from Fubilan. Mr Corotan requested Fubilan to confirm whether payments were made by them directly to Eurest (Australia) and further payments made to Eurest. Fubilan confirmed that no payments were made to Eurest (Australia) in respect of those invoices.
483 Under the heading "Invoices and Credits for Management Salary Recharges" in the fourth section of Appendix 4, none of the invoices in the respondents' discovery was supported by appropriate documentation such as management approval of salaries paid or payrolls. There was a question whether Eurest was entitled to recover some or all management salaries from Fubilan or whether its management fee, pursuant to cl 11 of the Management Agreement, should cover management salaries. The invoices covered only the calendar year 2002. They included recovery of other Eurest's costs in some instances. Mr Campbell identified a risk that some of these might represent duplications of amounts charged on Eurest (Australia) invoices or taken up as a portion of the amounts charged.
484 Mr Corotan referred to the Management Agreement and the definition of the term "management fee". He asserted, on the basis of what Mr Younger had told him, that the management fee did not relate to on-site management. The management fee was for services supplied to the operation team which included supply and upgrade of policies, procedures and safety documentation, procurement from within PNG and Australia where Fubilan would benefit from Eurest's purchasing power. Off-site labour for consolidation did not form part of a management process. This, of course, was a matter of construction of the agreement which is dealt with separately. As to the comment that the invoices covered only calendar year 2002, Mr Corotan said he had obtained all invoices and supporting payroll costing reports by employee detail as listed in Appendix 4 of Mr Campbell's report. He had also obtained management salary invoices together with all supporting payroll costing reports pertaining to the years 2003 and 2004.
485 Mr Campbell said that the invoices included recovery of other Eurest costs in some instances and there was a risk that some of them might represent duplications of amounts charged on Eurest invoices or taken up as a portion of other amounts charged. So Eurest invoice 00103 included an amount for K1050 which was also charged in invoice 00307 referred to in the second section of Appendix 4 of Mr Campbell's report. As to that Mr Corotan said that invoice 00103 was sent by Eurest's head office to Fubilan. It included Lae warehouse issued document 3307 as a back up document. He agreed that the document 3307 could be mistakenly identified as an invoice.
486 In the final section of Appendix 4 headed "Invoices for Management Charges under the Management Agreement" Mr Campbell listed invoices from Eurest for management fees for January to November 2002. It was probable that there were other invoices covering 2000, 2001, 2003 and 2004/05 evidenced by the inclusion of some of them in invoices scanned by the applicant's solicitors. Questions arose from the charges in these invoices.
487 Incentive fees had been invoiced for 2002. Invoice 00113 dated 23 August 2002 charged Fubilan with K810,925 which was said to be in accordance with cl 11.2 of the Management Agreement. Audited financial statements were necessary to confirm the amount of the net profit before tax on which it was based. Other incentive fees might have been charged for other "calendar semesters" as it seemed to him that all invoices were yet to be provided. Another Eurest invoice 2024 dated 31 May 2004, charged Fubilan an amount of K431,079.59 which represented CPI increases on management fees since the commencement of the OTML Contract. He had no instructions as to the extent of fee increases payable by OTML under the Contract. The Management Agreement did not contain the clause on VAT application. VAT had been applied to this and other management fees invoiced.
488 Mr Corotan said that the Management Agreement stipulated that the incentive fee was an amount equal to 50% of any net profit before tax in excess of K1,200,000 per annum to Fubilan achieved from the operations, not including the sale of surplus assets, after payment of the management fee. He claimed that Eurest had informed Fubilan on numerous occasions that the incentive fee was calculated on the profit from the operation without consideration of board expenses and finance costs as Eurest had no direct control over them. In addition the budget presented to MRDC prior to the Management Agreement being drafted, which was accepted by all parties as the benchmark for Eurest's performance, did not include board expenses and finance costs. This, however, was ultimately a matter of construction of the Management Agreement and not a matter for Mr Corotan.
489 As to the Eurest invoice 2042 of 31 May 2004, Mr Corotan stated that the management fee was subject to review under cl 11.1(b) of the Management Agreement. Absent agreement as to its adjustment, an upward adjustment would apply based on the same percentage adjustment as was applicable to the fees payable by OTML to Fubilan. The CPI rate used by Eurest in this calculation was based on the same CPI rates applied by Fubilan in its billing to OTML. He referred to a copy of an email from Mr Kroeger of 1 June 2004 which indicated the CPI rate for each year from 2001 to 2004. In relation to Mr Campbell's question about the application of VAT, he referred to s 10 of the PNG VAT statute and its definition of "taxable activity". He contended that the management fee fell within the definition of taxable activity. This was not however within his expertise.
490 Mr Campbell referred to invoices scanned by the applicants' solicitors and irregularities which he had observed in them. Legibility was a problem with a number of documents. Mr Corotan agreed that most of the scanned documents were very hard to read. He said that Eurest (Australia) invoices scanned by the solicitors for the applicants were usually supported by copies of suppliers' invoices. There were deficiencies in such supporting copies. A number of supporting supplier invoices did not indicate that the shipment was for the Ok Tedi mine site or otherwise so as to satisfy him that they were intended to be shipped to Fubilan at Ok Tedi. Mr Corotan said that Mr Campbell's comment in relation to three Eurest invoices numbered 600, 625 and 632 was correct. He had requested Eurest BNE to provide supporting supplier invoices. He also agreed that the comment made in relation to four scanned documents numbered 556, 565, 579 and 582 was correct in that the total of the batch of all supplier invoices pertaining to a Eurest BNE invoice did not agree with the total of the Eurest BNE invoice charged to Fubilan. There was a possibility that some supplier invoices were not attached to the Eurest BNE invoice and that this caused the variance. At the time he gave his evidence he had not received a response from Eurest BNE. Mr Campbell commented that in respect of documents numbered 561, 563, 581, 626, 627, 634 and 640, the supporting documents did not agree exactly with the amount charged but either exceeded it or were within a few dollars of it. Mr Corotan agreed. In his review he noted that all the scanned documents under review did not exactly agree to the amount charged in the Eurest BNE invoice, but either exceed it or were within a few dollars difference.
491 Mr Campbell said that a number of supporting supplier invoices did not indicate that the relevant shipment was for the Ok Tedi mine site or otherwise to satisfy him that the goods were intended to be shipped to Fubilan at Ok Tedi. He gave as examples documents 577 and 579. It would be necessary to examine the purchase order and goods received records to obtain that satisfaction. In other instances only the last page of a multi page supporting document was attached. He referred to documents 580 and 616. Mr Corotan noted that both documents 577 and 579 with a corresponding Eurest BNE invoice number of 480024778 and 48002480 respectively had indicated in the attached supplier invoices that the shipment was for Ok Tedi. He noted also however that Eurest BNE invoice 48002480 did not agree with the total of the supplier invoices attached. There was a difference of K161.20. Eurest BNE had been requested to provide an explanation. In relation to documents 580 and 616, he found in his review that both documents contained the relevant supporting documentation agreeing with the total amount of the invoice charged to Fubilan.
492 Mr Campbell referred to Eurest invoices 562, 568 and 581 where he said suppliers' invoices for goods shipped ex-Australia included GST which had been passed on to Fubilan. He said his understanding of GST legislation was that export sales were exempt. The GST should not have been on-charged to Fubilan. The amount involved was $2,791.06. Mr Corotan agreed with Mr Campbell's comment that the relevant supplier invoices included GST credits for which Eurest BNE had charged Fubilan. There was a difference between the total amount calculated by Mr Campbell in his calculation. His calculation showed a total of K2,386.33 GST credits. He also noted that supporting supplier invoices did not agree to the total of a Eurest BNE invoice 48002484 of A$37,425.72. The total of all the supplier invoices attached to that Eurest BNE invoice came to A$36,528.38 (exclusive of GST). He had requested Eurest BNE to provide an explanation in respect of that matter.
493 Mr Campbell referred to documents 559 and 578 which included credit notes from suppliers for rebates of amounts invoiced totalling $1,543.17, representing 5% of the amounts invoiced in those two instances. Such rebates were usually to be related to overall volumes purchased and more usually documented by a single monthly or quarterly credit issued from the supplier's head office to the purchaser which might have exceeded 5% in some instances. He thought it fortuitous that the two credit notes were attached to the invoices concerned, numbers 559 and 578, and he believed there may have been many more of the documents in the sample scanned by the applicants' solicitors. Mr Corotan noted that invoice number 41000046 relevant to document 559 and invoice 4800247 relevant to document 578 were dated 15 November 2000 and 18 January 2001 respectively. He understood that Eurest had acknowledged receiving certain rebates and agreed with Mr Campbell's comment that the attachments included credit notes from the suppliers for rebates of amounts invoiced totalling A$1,543.17. He agreed that there was no evidence that these credit notes had been passed on to Fubilan.
494 Mr Campbell noted the absence of shipping, port and P&G customs charges from the sample selected. Marine insurance costs had not been included. However he understood that OTML provided those services free of charge for Eurest (Australia) shipments. Mr Corotan agreed. It was his understanding that Fubilan was "freight free" ex Port Moresby. A consignment identified by Mr Campbell for which Fubilan was apparently charged, document 641, originated from Lae.
495 In the case of Eurest invoices in Kina to Fubilan for recovery of expenses and goods supplied, Mr Campbell said the majority were unsupported by external supplier documentation. In some cases there were supporting documents which did not agree with Eurest invoice amounts. In one case third party invoices only supported 50% of the quantity invoiced. A number of Eurest invoices to Fubilan for salaries incurred by Eurest and recharged to Fubilan were not supported by copies of the payroll in all instances. He raised a question whether the management fee should include all management salaries. Mr Corotan was able to identify third party invoices to support a number of the documents to which Mr Campbell referred. As to the question whether the management fee should include management salaries, Mr Corotan's comments were based upon Mr Younger's understanding of the management fee. Mr Corotan claimed that the management fee referred to an annual management fee in the initial flat amount of A$225,000 covering all of the expenses of the manager incurred in the performance or discharge of its obligations under the Management Agreement. He contended that it did not relate to on-site management. Rather, it covered the services supplied to the operations team which included supply and upgrade of policies, procedures and safety documentation, and procurement from within PNG and Australia where Fubilan benefited from Eurest's purchasing power. Off-site labour for consolidation would not form part of a management process. This also involved a question of construction which was not within Mr Corotan's expertise.
496 Mr Campbell referred to an invoice dated 23 August 2002 for K576.92 for the supply of baseball caps. There was a deposit slip attached indicating that amount was overpaid and refunded but no indication that the benefit of the refund was passed on to Fubilan. Mr Corotan said it was true there was a duplication of charge to Fubilan on the relevant invoice. However, the overcharge was refunded on 17 December 2003.
497 Mr Campbell then referred to instances (eg in document 613) where PNG VAT had been added to the total amount invoiced by Eurest while no VAT was shown on supporting vouchers. He was unaware whether the relevant foodstuffs were exempt from VAT in PNG. Mr Corotan observed that document 613 referred to a Lae invoice for a supply of banana prawns to Fubilan. He referred to the relevant section of the VAT legislation which provides for a 10% VAT on supply (not including exempt supply) in PNG of goods and services by a registered person in the course of a "taxable activity". He did not comment on the application of that provision to the supply of which Mr Campbell spoke.
498 Mr Campbell referred to documents 623 and 624 posting summaries of amounts charged to Fubilan which might represent the same items invoiced to Fubilan on documents 613 and 614. Mr Corotan said that the relevant documents represented two different consignments which were not double charged to Fubilan. There was a 5% administration fee charged by Eurest in Port Moresby for the supply of milk powder. Mr Corotan said the 5% was a mark up charged by Eurest as the milk powder was supplied from its UPNG warehouse.
499 Mr Campbell noted a charge to Fubilan of K5,843.95 in respect of a travel allowance for Mr Kroeger absent any supporting claims or explanation. It also appeared that Fubilan was charged for expenses incurred by Eurest (Australia) including an account for $5,000 being a fee for Hayes Consultant. Mr Corotan reviewed the documents numbered 608 and 631 to which Mr Campbell referred. He noted no duplication of charges in the work papers under review. Mr Corotan agreed that there was no supporting document in Mr Kroeger's personal file stating that his entitlement of A$2,500 per quarter travel allowance was correct. As to the Hayes Consulting invoice, Mr Corotan said it was incorrectly sent and charged to Fubilan by Eurest. The total cost of the invoice had been refunded to Fubilan on 12 August 2005 with a 9% interest figure which has already been mentioned.
500 On the question of employee entitlements, after referring to the relevant accounting standards Mr Campbell said that generally entitlements are recognised and provided for as they accrue on the basis of the expected amount payable. He was confident that the relevant standard would have required Fubilan to recognise a liability for accrued employee entitlements immediately upon taking over their employment. If disclosed to the board of Fubilan at the time he would have expected the directors to seek compensation from Poons for the expense involved. This issue was not raised on the pleadings and so I do not consider it further.
501 Mr Campbell went on to consider the varied tender rates applicable under the OTML Contract. As already noted, having regard to the conclusion which I have reached in relation to the claims arising out of the variation of the tender rates, I do not propose to refer to that evidence. His second report focussed entirely upon that question.
502 In his third report, Mr Campbell referred to Mr Buretam's evidence. He did not dispute it.
503 In cross-examination Mr Corotan was taken to signed financial statements for Fubilan for the year ended December 2000. He had prepared those statements which were not actually signed off until November 2005. They showed a loss of K113,699 which was a correct statement on the financial position at the end of that period. There had of course been much debate with Fubilan directors about the inclusion of directors' fees and expenses in the calculation of net profit or loss.
504 The expert evidence generally was not supportive of any inference of dishonest or systemic managerial incompetence on the part of Eurest. Undoubtedly there were errors and anomalies and differing perspective views about Eurest's managerial obligations. However, it is not surprising that such things could occur in an operation as complex as that involved in the provision of remote catering services. Issues which turn on the proper construction of the Management Agreement are dealt with below to the extent they are relevant to a pleaded cause of action. To the extent that Mr Corotan was able to explain deficiencies or anomalies identified by Mr Campbell, I accept his evidence.
6. The causes of action
505 The causes of action raised by the applicants against the respondents were grouped, in the statement of claim, in part under headings and in part without headings. Grouped by reference to the paragraph numbers in the statement of claim, they were:
Unconscionable conduct - [10] to [48]
Misleading or deceptive conduct - [49] to [76]
Breach of fiduciary duty by all respondents in respect of varied tender rates - [77] to [115]
Breach of fiduciary duty by Eurest in respect of rebates - [116] to [126]
Breach of fiduciary duty by Compass Group (Australia) in respect of rebates - [127] to [131]
Breach of fiduciary duty by Eurest in respect of bank account - [132] to [147]
Compass Group's involvement in breach of fiduciary duty by Eurest - [147] to [151]
Negligence of first and second respondents in respect of varied tender rates - [152] to [163]
Negligence of first and second respondents in respect of available rebates - [164] to [172]
Negligence of Eurest in management of Contract - [173] to [194]
Breach of contract in relation to rebates - [195] to [208]
Breach of contract in relation to payment of expenses covered by management fees - [209] - [215]
Breach of contract in relation to purchase of Poons' stock - [216] to [220]
Breach of contract in relation to competitive activity - [221] to [224]
Breach of contract in relation to inability of Fubilan to bid for subsequent contract in its own right - [225] to [232]
Breach of contract by failure to comply with directions re JLFS - [237] to ]249]
Compass Group (Australia) breach of contract re Management Agreement - [250] to [262]
It is not necessary for present purposes to outline these causes of action in any greater detail. They will be discussed further below.
The relief claimed
506 From the opening of the case the statement of claim required clarification and particularisation of the damages sought in respect of each of the causes of action pleaded. In the closing submissions those damages were particularised under each head as follows:
A. Unconscionable conduct K7,717,578. This amount was said to represent the difference between revenue that Fubilan earned under the OTML Contract and revenue that would have been earned had the respondents "withdrawn the P&O tender". The calculation was said to be based on the evidence of Mr Campbell.
B. Misleading or deceptive conduct
(a) K1,072,981 representing management fees paid from February 2004 to December 2004 plus K587,782 representing management fees paid from January 2005 to August 2005, a total of K1,660.763;
(b) A$1,824,000 from September 2005 to August 2009. These are management fees payable under the new management agreement that would not have been paid or be payable had the respondents' representations as to training been true.
(c) K7,903,368 being K1,975,842 per annum from February 2004 to February 2008 for the loss of opportunity to cater to other sites in PNG.
C. Breach of fiduciary duty.
(a) K7,717,578 representing the difference between the original tender rate and the contract rate.;
(b) K10,915,503.48 being the value of a 15% rebate on total purchases by Compass Group (Australia) and Eurest for the period February 2000 to August 2005 constituted by K4,684,338.98 for purchases from Australia and K6,231,164.50 for purchases within PNG. The same sum is claimed in relation to the causes of action for negligence and breach of contract.
D. Negligence
(a) K7,717,578 being the difference between the original tender rates and the contract rates;
(b) K10,915,503.48 being rebates retained by the respondents;
(c) K3,987,091.07 being:
(i) K816,735.79 for overpayment on stock in warehouse at the commencement of the contract;
(ii) K2,844,456.00 for overpayment by Eurest on its invoices 1311 and 1312;
(iii) K321,707.65 for the duty component to be deducted from the stock figure K1,798,329.30;
(iv) K4,191.02 for an additional overpayment on invoice 1312.
In the alternative to (i) and (iv) the applicants seek an account of profits on the basis that they do not have the original source documents used to enter MYOB data for the whole of the period from February 2000 to August 2005. This is said to be necessary if forensic analysis of payments allowed are to be conducted. That is to say the original purchase orders, invoices and payment documents should be obtained.
(d) K65,808.90 fees and interest paid by MRSM to ANZ Bank on borrowing to fund purchase of the stock in the warehouse; and
(e) K7,903,368 being K1,975,842 per annum from February 2004 to February 2008 for the loss of an opportunity to cater in PNG. This claim is in the alternative to the misleading or deceptive conduct claim.
E. Breach of contract by retention of rebates.
K10,915,503.48 being rebates retained. This cause of action is raised as an alternative to the claim for breach of fiduciary duty and for negligence.
F. Breach of contract for expenses incorrectly charged.
(a) K5,907,892.62 for expatriate salary expenses of Eurest from February 2000 to August 2005 that Eurest paid out of Fubilan's bank account; plus
(b) the taking of an account for the expenses of Eurest's expatriate employees in relation to travel and accommodation.
G. Eurest competing for catering business in the contract area
K1,823,380 being K455,845 per annum for four years and, alternatively, the taking of an account. This claim is said to arise from the no compete clause 2.4(a)(ii) of the Management Agreement.
H. Claim against Compass Group (Australia)
The claim is made pursuant to the guarantee and indemnity said to be provided by Compass Group under cls 15.1(a)(i) and (ii) of the Management Agreement. The notice of demand relied upon in respect of the guarantee is exhibit 228. The claim is against Compass Group (Australia) for Eurest's breaches of the Management Agreement. The indemnity claim is said to be to the same effect, but not requiring a notice of demand.
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The amounts for which each of the cheques was drawn were broken up in the summary by reference to particular invoices. The invoices relevant to the opening stock and equipment at the Poons' warehouse and at the messes appear to have been invoices 1311 and 1312. Invoice 1311 was for an amount of K2,014,365.80. Invoice 1312 was for an amount of K600,699.29. Those sums referred back to the two totals shown on the breakdown of invoices for final stock and equipment and containers in transit sent to Mr Armstrong. The greater sum covered food stock and equipment on hand at the Poons' warehouse and in the messes at 31 January 2000 together with the Hino truck. The lesser sum covered the cost of four containers in transit. On the face of it there does not appear to have been an overpayment.
606 In a Schedule of Damages dated 11 August 2005 under the heading "The amount paid to the First Respondent in excess of the cost of the original stock paid by the First Respondent" the following appeared:
14. The First Applicant paid the First Respondent 2,615,065.09 Kina in or about August 2000 for stock in the warehouse at Tabubil. The prices paid for the stock were approximately 29% higher than the prices paid for the same stock later in 2000.
15. The First Applicant's loss or damage is approximately 758,368.88 Kina ($493,440.61) being 29% of the price paid for the stock.
That claim appears to be based on considerations entirely different from those now raised by the applicants in connection with the payment made for the opening stock. Counsel for the respondents objected to cross-examination of Mr Armstrong that proceeded on the basis that overpayments for stock in fact amounted to K3,661,000. In the event, in closing submissions the applicants claimed a total of K3,987,091.07 for alleged stock overpayments. That total was made up of the following:
(a) K816,735.79 for the over payment on stock in the warehouse at commencement of the contract [SOC 180B]; plus
(b) K2,844,456.00 for the over payment by Eurest (South Pacific) Ltd on its invoices 1311 and 1312; plus
(c) K321,707.65 for the duty component, to be deducted from the K1,798,329.30 stock figure; plus
(d) K4,191.02 for an additional overpayment on invoice 1312.
In the alternative an account of profits was claimed.
607 I do not propose to allow the applicants to seek the additional claims over and above the claimed overpayment of K816,735.79. The additional payments were not identified in the statement of claim nor in the Schedule of Damages. Nor was any such claim foreshadowed in the document entitled "Cross Referencing of Paragraphs in the Amended Statement of Claim to the Applicants' Schedule of Damages" which was extracted from the applicants at trial in an endeavour to achieve some clarity about the nature of their claims.
608 The additional claims were based in part upon cross-examination of Mr Armstrong who was the last witness at trial. The respondents correctly contended that this effectively denied them any real opportunity to make enquiries about the cheques relied upon.
609 Counsel for the applicants invoked [180E.2] of the statement of claim. That was quite inapposite to the additional matters that are claimed as appears from the sequence of the pleading which are set out as follows:
180. The Second Respondent did not inform or advise the Applicant that:
180.1 under the terms of the P&O acquisition the First Applicant was not required to pay for the stock held in the warehouse until October 2000; and
180.2 the price of the stock in the warehouse included charges in excess of the cost of the stock to the First Respondent that the Applicants were not required to pay.
The payment of K2,615.065.09 was then pleaded [180A]. The fact that it included charges in excess of the cost of the stock to Eurest that Fubilan was not required to pay was pleaded with a promise of particulars of the excess payments after discovery [180(b)]. The fact that MRSM borrowed K2 million from the ANZ Bank to provide funds to Fubilan to make the payment to Eurest pleaded in [180A] was also pleaded together with the additional allegation that payment was not required to be made until October 2000 [180C]. The pleading then continued:
180D. By failing to inform or advise the applicants of the matters pleaded in paragraph 180 above, the First and Second Respondents breached the duty of care pleaded in paragraph 154, above.
180E. As a result of the First and Second Respondents' breach pleaded in paragraph 180D above the applicants have suffered loss or damage and continue to suffer loss or damage.
Particulars of First Applicant's Damage
180E.1The loss or damage suffered by the First Applicant includes the amount paid to the First Respondent for stock in excess of the cost of that stock to the First Respondent and unnecessary cost in making payments made prior to October 2000.
180E.2Further particulars of the First Applicant's loss or damage will provided after the parties have provided discovery.
Particulars of Second Applicant's Damage
180E.3The loss or damage suffered by the Second Applicant includes the cost of borrowing funds to provide to the first applicant was pleaded in paragraph 180C above.
180E.4Further particulars of the Second Applicant's loss or damage will be provided after the parties have provided discovery.
610 The loss or damage claimed in [180E] as pleaded flowed from an alleged failure on the part of the respondents to advise the applicants of the matters pleaded in [180]. Paragraph 180E.2 did not entitle the applicants to raise additional claims of the kind which they now seek to raise and which seem to bear little relationship to the head pleading in [180]. In respect of the alleged overpayment for opening stock which, in my opinion was not made out on the evidence, I accept that, whether or not it occurred, it was covered by the settlement of 13 February 2001, which was pleaded in the defence at [115].
611 The various matters alleged under the general heading of "Negligence" in the Management of the Contract in [181] to [185] of the statement of claim related to alleged failures by Eurest in the period February 2000 to October 2000. They did not lead to any discrete claim for damages, but rather into the plea in [194] for the loss of opportunity to Fubilan, in its own right, to make profits by providing catering services in the national market of PNG. The various failings of Eurest alleged in [180] to [185] were covered by the settlement agreement of 13 February 2001. In any event, for the reasons already outlined, these and the other matters said to have been outlined in the KPMG report were not causative of Fubilan's inability to provide catering services in its own right. It is significant that despite the fact that these failures were alleged against Eurest, OTML insisted on retaining Eurest as the manager in the new catering contract.
612 As to the contention that under the terms of the acquisition of the Poons' stock the stock was not to be paid for until October 2000, it was a condition of the tender set out in Notice No 3 issued on 24 June 1999 that:
… if there is a change of contractor, the incoming contractor has one month to arrange transfer of personnel and purchase the stocks of food stuffs and consumables on site and in transit from the existing contractor.
In the event it was not really in dispute that at the time the Management Agreement commenced, Fubilan had no funds at all to finance its operation.
613 There was a claim for K65,808.90 by way of fees and interest paid by MRSM to the ANZ Bank on borrowings to fund the purchase of the stock in the warehouse. This is actually the only claim which was made by MRSM itself. The respondents point out that the cost of the loan was fully reimbursed at a profit to MRSM. The financial statements for Fubilan for the 11 months ended 31 December 2000 contain a balance sheet entry of K3,531,910 by way of borrowings. Note 11 to the financial statements reads:
During the year the Company has acquired a loan of K3.5 million from Mineral Resource Star Mountains Ltd to finance the operations of Fubilan Catering Services Ltd for the Ok Tedi Catering Contract. Security pledged under this contract is fixed and floating charge over the assets and liabilities of the Company and an unlimited guarantee from Fubilan Catering Services Ltd. Interest charge on this loan is 23.5% per annum with a term of 3 years.
614 For the preceding reasons, the claim based in negligence in the management of the Contract fails.
20. Breach of contract in relation to rebates
615 The applicants pleaded clauses 5.13(a) and 5.13(b) of the Management Agreement that Eurest was required to pass on any consideration either directly or indirectly received from suppliers, including, without limitation, discounts, rebates and incentives [198]. The provisions of cl 5.13 were concerned with the engagement by Eurest of subcontractors. They did not, for reasons already set out, have any application to Eurest's purchasing arrangements. The allegation of breach of contract in relation to the obtaining or passing on of rebates fails. The allegations set out in [206] to [208] of the statement of claim relating to payments made out of the Fubilan bank account, which do not account for rebates, discounts or incentives, are dependent upon the construction of the Management Agreement for which the applicants contended and which I do not accept.
21. Breach of contract in relation to payments of expenses covered by management fee
616 The applicants pleaded cl 11 of the Management Agreement whereby Eurest was entitled to charge a fixed fee of $225,000 per annum. They then alleged that:
210. The Management Fee includes all expenses that the Second Respondent incurs in the performance or discharge of its obligations under the Management Agreement.
211 At all material times from 1 February 2000 the Second Respondent has charged the First Applicant for expenses that the Second Respondent incurred in performing or discharging its obligations under the Management Agreement in excess of $225,000, including, without limitation, salaries, accommodation and travel expenses in relation to employees of the First and Second Respondents.
These unwarranted charges were said to have been paid by Eurest out of the Fubilan bank account at all material times since 11 February 2000. The payments so made were said to have been in breach of cl 4.2(a) and 11.1(a) of the Management Agreement. The loss and damage said to have been incurred was K5,907,896.92 covering a period from February 2000 to August 2005. The applicants also sought an account of the expenses of Eurest's expatriate employees in relation to travel and accommodation.
617 The respondents denied the allegations generally and contended that the management fee was payable after deduction of all expenses including salaries, accommodation and travel expenses. In closing oral submissions counsel for the respondents referred to the letter dated 7 July 1999 from Mr Hayes to Mr Yalapan which was included in the tender submitted by MRSM to OTML. That letter set out what was described in it as "the legally binding intention of SHRM (South Pacific) Pty Limited … to enter into a management agreement with Mineral Resources Star Mountains Limited … in relation to the proposed tender by MRSM to carry out catering services for OTML pursuant to the Contract". Under the heading "Fees and Financing" the letter stated:
C.2. If the tender is successful. MRSM (or its subsidiary) will pay the following to SHRM:
(a) (i) an annual management fee payable by equal monthly instalments on the first day of each month in arrears with the first payment commencing one month after commencement of the Contract. The management fee includes offshore support costs not identified as direct project related expenses; …
618 The letter was countersigned by Mr Yalapan and witnessed by Mr Baitia. Counsel for the respondents pointed out that the reason for the exclusion of direct project related expenses from the management fee was that they were on-billed to OTML. The management fee was intended to cover costs not recoverable from OTML. The letter of 7 July 1999 forms part of the background to the formation of the Management Agreement against which that agreement may be better understood. The construction of the agreement is to be determined by what a reasonable person in the position of the parties would have understood it to mean. As the High Court said in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 (at 462):
That requires consideration not only of the text of the document, but also the surrounding circumstances known to [the parties], and the purpose and object of the transaction.
Their Honours quoted Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 995-996, also quoted by Mason J in Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 350:
In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.
619 The question for determination in this case, is what the parties are taken to have intended by the reference in the definition of "Management Fee" to "all of the expenses that the Manager incurs in the performance or discharge of its obligations under this Agreement …". In my opinion that is a reference to expenses which the manager itself must bear and which were not included in the calculation of moneys recoverable by Fubilan from OTML. It cannot have been intended that expenses which were built into the lump sum payments recoverable from OTML by Fubilan were not able to be charged to Fubilan by the manager. The Management Agreement should be read in this respect in light of the compensation provisions of the OTML Contract which formed part of the factual matrix against which it was drafted.
620 Section 3 of the OTML Contract dealt with compensation and the provision of, inter alia, monthly lump sum payments for fixed and variable operating and overhead costs. Clause 1.4.1 of the compensation provisions stated:
Item 2.1, Schedule 3-1 specifies the lump sum payable each calendar month as full compensation for Contractor's operating and fixed costs for the work which shall be deemed to include, but not be limited to management, supervision and all staff costs, burden, overheads and training; motor vehicle procurement, operating and maintenance costs; office furniture, equipment, communication and consumables cost, insurance, and all other costs whatsoever incurred in operation of the contract; but shall specifically exclude landed cost of foodstuffs (including condiments and the like) and all Contractor profit for all of the Services.
Fubilan received the benefit of those costs and as such suffered no loss. The inclusion of expatriate salary costs and expenses in the calculation of the lump sum payments was confirmed by Mr Kroeger in his re-examination when he said:
… all the expats salaries and conditions are basically covered, paid for by Ok Tedi within the lump sum billing, which is done monthly back to Ok Tedi. The lump sum covers travel, salaries, etcetera for expats and also nationals award and staff.
621 Counsel for the respondents also pointed to cl 11.3 which provides for renegotiation of the management and incentive fees payable under the Management Agreement. The basis for that renegotiation was dependent upon variations in occupancy levels. There was no provision for negotiation based on a greater or lesser component of expatriate salaries and expenses.
622 In my opinion the construction of the Management Agreement for which Fubilan contends would effectively confer upon it a windfall. It would recover from OTML the monthly compensation calculated by reference, inter alia, to the salaries and expenses incurred by Eurest onshore. In my opinion this cannot have been intended. This aspect of the claim also fails.
623 Mr Kroeger was also asked about a bonus payment to staff dependent upon financial performance. Such a payment was disbursed by Eurest and backcharged to Fubilan. There was a percentage in the lump sum charged to OTML that was "used as a buffer for things like that in the lump sum". The word "not" appeared in the transcript of the evidence before the word "used" but the sense of the answer suggested that that was either an error or preceded a break in the testimony.
624 No objection was taken that this evidence took the applicants by surprise, nor was it challenged or controverted by other evidence.
22. Breach of Contract in relation to competitive activity
625 The applicants alleged in the statement of claim that at all material times from 1 February 2000 Eurest has directly or indirectly engaged in businesses of a nature similar to or competitive with that carried out by Fubilan within the Contract Area [221]. The relevant activities were said to have been carried out at the Bige dredging site on the Fly River in relation to catering services provided by KCS Limited at Kiunga, operations at the Tabubil Golf Club and at the Tabubil Bakery. In engaging in each of these operations it is said that Eurest breached cl 2.4(a)(ii) of the Management Agreement as a result of which Fubilan suffered loss or damage. The nature of the loss was said to be the consideration, benefit, reward or payment that Fubilan would have been able to obtain in providing the same or similar services. A sum of K1,823,380 was claimed representing K455,845 per annum for four years. In the alternative, an account was sought. In their defence the respondents said that the Bige dredging site activities were not within the Contract Area as defined under the Management Agreement. In relation to the Tabubil Golf Club and Bakery operations, they said that both activities were in place and known to the applicants at the time the Management Agreement commenced. Both were permitted by the applicants at the time and terminated, when requested, in the normal course of business by the respondents.
626 Mr Poelzl gave evidence in cross-examination that in 2000 Eurest operated a number of sites in PNG and derived revenue from them. They were inclusive of the Tabubil Bakery and Bige/Lotic. A document dated 2 August 2000, tendered without objection from Eurest, showed an annual turnover for the Tabubil Bakery of K2.3 million. It also showed an annual turnover for OTML Lotic of K2.2 million.
627 Reliance was also placed upon a document obtained from Eurest's discovery entitled "MONTHLY TRADING SUMMARY" which related to a number of Eurest's operations including the Tabubil Bakery, Lotic and the Tabubil Golf Club. (X 439) It seems that the claimed profit derived from these sites was calculated as 12% of revenue from each of them. This was the only evidence referred to in closing submissions on this claim along with the reference to the cross-examination of Mr Fereday to the effect that there were two national firms tendering for catering work in PNG with some success. Bige/Lotic was not shown to be within the Contract area.
628 The evidence, in my opinion, was simply insufficient to establish that Fubilan was displaced by Eurest in relation to its activities in the areas pleaded or that it would have, on a stand alone basis, been able to provide the relevant services and make the profit alleged. This claim also fails.
23. Breach of Contract in relation to inability of Fubilan to bid for subsequent contracts in its own right
629 The applicants pleaded that it was their intention and that of the respondents and OTML in entering into the OTML Contract and the Management Agreement that Fubilan would have the opportunity during the four year term of the contract to learn enough of the business to be able to bid in its own right for the contract on renewal [225]. It was alleged that there was an implied term of the Management Agreement that Eurest would do "whatever is reasonably necessary to give [Fubilan] the benefit of the Management Agreement and to refrain from doing anything that would interfere with, frustrate or deprive [Fubilan] of the benefit of the Management Agreement" [227]. The applicants alleged that Eurest had not made available or provided sufficient training to Fubilan's employees to the level necessary for Fubilan to gain the benefit of the Management Agreement [228]. In this respect it was in breach of the implied term [230A]. In the alternative, it was alleged that Eurest's conduct was in breach of cl 4.2(a) of the Management Agreement [230B]. The statement of claim then alleged the non-renewal of the contract by OTML, a plea which of course has been overtaken by events with the awarding of the new contract involving Fubilan and OTML [231]. The applicants claim that as a result of the breach of the implied term and alternatively cl 4.2(a) of the Management Agreement, Fubilan suffered loss or damage [232]. The loss claimed was the loss of opportunity to make profits in providing industrial catering services in the national market of PNG in its own right [232.2]. It also claimed any fee paid to Eurest for the supervision and management of Fubilan's conduct in providing catering services to OTML after 31 January 2004 [232.3].
630 It is not open, in my opinion, to imply the term which the applicants sought to imply. It amounted to a guarantee that Eurest would put Fubilan in a position to undertake the renewed management agreement in its own right. Moreover Eurest had no obligation to train a cohort of executive managers who would put Fubilan in that position. There was no evidence that any personnel with the relevant education and aptitude were available for such training. The evidence of Ms Broadbent, which was unchallenged, indicates that Eurest took its training responsibilities seriously and did what was reasonably within its power to discharge them. Nor in my opinion have the applicants shown any breach of cl 4.2(a) of the Management Agreement which could be said to be causative of the loss and damage claimed.
631 In the event and for the reasons already given, Fubilan was unable to take the benefit of the Management Agreement in its own right for reasons unrelated to any failures on the part of Eurest to provide training. This claim also fails
24. Breach of contract by failure to comply with directions re JLFS
632 The applicants pleaded the Product Supply Agreement entered into between Fubilan and JLFS on 19 February 2001 under which Fubilan was to purchase all of its supplies from outside PNG through JLFS. According to the plea, JLFS was to equal or better the prices charged by Eurest and pay a rebate of 10% of the value of purchases within 14 days of payment of any invoice. The applicants pleaded the placement of orders with JLFS in February and March 2001 and Eurest's subsequent advice to Fubilan that the prices charged by JLFS were in excess of the prices charged by Eurest for the same or similar goods. Then the applicants pleaded that Fubilan requested JLFS to adjust the prices charged for the relevant goods to the prices supplied by Eurest. They pleaded that by a letter dated 8 May 2001 they directed Eurest to place any orders for supplies from outside PNG in accordance with the Product Supply Agreement. They alleged that Eurest was required to comply with this direction. By continuing to place its orders with Eurest (Australia) rather than with JLFS Eurest was said to have acted contrary to Fubilan's direction and to have breached cl 10.2(a)(ii). It was alleged that, as a result of Eurest's breach of the Management Agreement, Fubilan agreed to settle its dispute with JLFS on 26 March 2004. The terms of the JLFS settlement were pleaded. It was said that Fubilan agreed to pay JLFS based on prices provided by Eurest with a 10% rebate and to give up any claim for rebates for the balance of the three year term of the Product Supply Agreement, estimated at $900,000. In return JLFS released Fubilan from any claim arising out of Eurest's breach of the Management Agreement.
633 The claim was hard to follow. In his closing oral submissions counsel for the applicants handed up a two sheet summary of what were called "the primary claims". He accepted that the claims set out in the sheet were the only claims being advanced. There was no claim identified in that list in relation to the alleged breach of contract relating to JLFS. Nor were any such damages set out in the closing written submissions. In my opinion there was no substance in this claim and I will simply treat it as not having been pressed.
25. Eurest (Australia) breach of contract re Management Agreement
634 Under this heading it was alleged that, by a notice of default, the applicants made demand on both respondents for the due and punctual performance of Eurest's obligations under the Management Agreement and that the respondents had not complied with the demand in that notice of default. It followed that Eurest (Australia) was in breach of the guarantee given under cl 15.1(a)(i) of the Management Agreement. This claim cannot succeed as it depends upon the causes of action for breach of the Management Agreement which, as I have already found, do not succeed. The claim against Eurest (Australia) will also therefore be dismissed.
26. Claim for declaration in reply
635 In the reply of the applicants to the amended defence, a declaration was sought pursuant to s 87 of the TPA that the settlement agreement of 13 February 2001 was void ab initio. This was on the basis of representations said to have been made to Mr Fenwick by Mr Armstrong that Mr Poelzl was the only person who could deal with the rebates issue. It was pleaded that the settlement document of 13 February 2001 related only to the accounting adjustments identified in the first and second audits and the Deloittes' audit and did not extend to other matters in issue including the rebates and supply issues. I have already made findings adverse to the conclusion for which the applicants contended in the reply. The further contention in the reply that Mr Fenwick was induced to sign the settlement document by misleading or deceptive conduct on the part of the applicants is rejected and the claim for a declaration refused.
27. Cross Claim
636 The respondents cross-claim against Morocco and Mr Fenwick for an indemnity in respect of any liability that they may have to the applicants and, alternatively, for contribution under the Law Reform (Contributory Negligence and Joint Tort Feasors) Act 1947 (WA). An alternative cross claim was also raised for contribution by way of equitable contribution. The applicants having failed on all of their causes of action, the cross-claim will be dismissed.
I certify that the preceding six hundred and thirty-six (636) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.
[31]
Counsel for the Applicant: Mr P Clifford and Mr A Rumsley
[32]
Counsel for the Respondent: Mr M Bennett and Mr I Curlewis
[33]
Solicitor for the Respondent: Lavan Legal
Counsel for the Cross Mr T Retallack
Respondents: Maxim Litigation Consultants
Solicitor for the Cross
Respondents:
[34]
Dates of Hearing: 13 June - 4 July 2006, 14 July 2006, 25 July - 2 August 2006
Final Submissions: 11 September 2006
Criminal Code (Amendments Theft Bribery and Related Offences) Act 2000(Cth)
Law Reform (Contributory Negligence and Joint Tort Feasors) Act 1947(WA)
Cases Cited (19)
Fubilan Catering Services Limited v Compass Group (Australia) Pty Ltd
[2007] FCA 1205
Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd ( 2003) 214 CLR 51 cited
Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301 cited
Commercial Bank of Australia v Amadio(1983) 151 CLR 447 cited
Wardley Australia Ltd v Western Australia (1995) 175 CLR 514 cited
Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526 cited
Marks v GIO Australia Holdings (1998) 196 CLR 494 cited
Ting v Blanche (1993) 118 ALR 543 cited
Phoenix Court Pty Ltd v Melbourne Central Pty Ltd (1997) ATPR (Digest) 46-179 cited
Australian Competition and Consumer Commission v Universal Sports Challenge [2002] FCA 1276 cited
Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 cited
Bill Acceptance Corporation Ltd v GWA Limited (1983) 50 ALR 242 cited
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 cited
Breen v Williams (1996) 186 CLR 71 cited
Phipps v Boardman [1967] 1 AC 46 cited
Norberg v Wynrib (1992) 92 DLR (4th) 449 cited
Paul Dainty Corp Pty Ltd v National Tennis Centre Trust (1990) 22 FCR 495 cited
Elders Trustee and Executor Co Ltd v EG Reed Pty Ltd (1987) 78 ALR 193 cited
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 cited
Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 cited
Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 cited
(2002) 117 FCR 301
(1983) 151 CLR 447
(1995) 175 CLR 514
(1992) 37 FCR 526
(1998) 196 CLR 494
(1993) 118 ALR 543
(1984) 2 FCR 82
(1983) 50 ALR 242
(1984) 156 CLR 41
(1996) 186 CLR 71
(1990) 22 FCR 495
(1987) 78 ALR 193
(2004) 218 CLR 451
(1982) 149 CLR 337
(2003) 214 CLR 51
(1991) 171 CLR 506
(1985) 100 CLR 342
Impact of 3rd party sales.
Revised menus and theme nights.
Duty allowance of 26%.
Rates for Kiunga Catering Services.
Review pricing for Functions and Inflight Catering.
Revised warehouse pricing.
124 Mr Baitia knew that Mr Hayes was working after the Cairns meeting to bring the two bids together. Mr Baitia mixed up the dates of the Cairns meeting in his evidence-in-chief thinking it was in January 2000. He said that he had met Mr Hayes at the Airways Hotel in Port Moresby to discuss the work he had done to bring the two bids together. Mr Hayes told him that he had done the numbers and in order to bring the two bids together they needed to reduce the return to MRSM/Fubilan. Mr Baitia's evidence-in-chief was that he told Mr Hayes that MRSM/Fubilan had moved forward on the basis of an assured return of K1.2 million per annum. He was not authorised to agree to any reduction in that return. According to Mr Baitia their meeting continued late into the night until they could both sign off on a document containing the outline of issues which they had agreed. In a supplementary statement which corrected some of the evidence in his primary statement, he said that following the October meeting he and Mr Fenwick on one side and Mr Hayes on the other had worked together on the renegotiation of the tender rates. The work was done largely by Mr Hayes and Mr Fenwick. He was involved to some extent working up the terms of the Management Agreement. In the event, Mr Hayes submitted to OTML recalculated schedules of prices for the tender under a covering letter dated 15 October 1999. His letter was copied to Messrs Baitia, Fereday and Poelzl. No complaint was made by MRSM at that time concerning the reworked tender rates. Relevant officers of MRDC and MRSM (including Mr Fenwick as MRSM's consultant) were aware of the reworking of the prices and did not dispute it.
125 Mr Fereday had no further involvement with the handling of the OTML Catering Contract after the instruction from Mr Poelzl that he not attend the October 1999 meeting. He took a negotiated severance package from Poons at the time of its acquisition by Eurest. He was employed by Eurest for the last three months of 1999 and provided consultancy services during January 2000. At the end of that month he left to work for Morris Corporation Pty Ltd.
126 In the latter part of October 1999 Mr Fenwick continued to work on a cash flow budget for MRSM. He sought information from SHRM/Eurest about a number of matters related to that exercise on 26 October. On 3 November he rendered a final account to MRDC for A$25,000. The account was sent to Mr Baitia with a covering letter congratulating him on the award of the catering services contract.
2.25 Fubilan Catering Services Ltd established - November 1999
127 It is common ground on the pleadings that on or about 4 November 1999 MRSM acquired as a wholly owned subsidiary a shelf company Yuwai No 80 Ltd, which changed its name on the same day to Fubilan Catering Services Ltd. Messrs Andrew and Baitia were appointed as its initial directors. However some two months were to elapse before a contract was signed between Fubilan and OTML. The delay was caused in large part by the time taken to settle the terms of the Management Agreement between Fubilan and Eurest.
2.26 Concluding the catering rates and the Management Agreement
128 In a fax dated 4 November 1999 to Mr Hayes, Mr Cox-Martin identified the major outstanding issue awaiting resolution as the Management Agreement between Fubilan and Eurest. He said OTML's requirement that the agreement provide for Eurest to be employed by Fubilan for the duration of the contract and that it could not be terminated by either party without the agreement of OTML. In a letter to Mr Cox-Martin, copied to Mr Baitia, Mr Hayes advised that Mr Poelzl had been appointed Chief Operating Officer, Remote Sites for Australia and PNG for Eurest. Eurest's representative in Port Moresby for remote site business would continue to be Greg McGrath, supported by his existing logistics and administration team. Mr Steve Ehlers was appointed Transition Manager to be based on site. Mr Hayes expressed his confidence that a final draft of the Management Agreement would be available by Monday, 29 November 1999. Mr Baitia faxed Mr Hayes the same day advising that the MRSM board would have to endorse the agreement before it could be executed. MRSM directors were in Sydney at a conference on PNG mining and petroleum. He proposed that OTML award the contract on 1 December 1999 and that the Management Agreement be signed off in the week beginning 6 December but backdated to 1 December 1999.
129 Mr Fenwick suffered an angina attack on 24 November 1999 and was flown to Perth where he remained after undergoing an angiogram and related procedures.
130 In a letter dated 13 December 1999 to Mr Baitia, Mr Hayes said that because of the renegotiation of the rates at the meeting in Cairns with OTML, MRSM and Eurest, the profit expectation from the contract would need to be reduced. That was a result of the reduction in menu requirements, reduction in the duty rate to 26% and price variables between the Eurest and Poons' tenders. He said:
The impact of these items resulted in reduced turnover and the need to decrease the margin from 10% to 7.5%. The attached schedule indicates the basis of the reduction calculation from K1.2 million per annum to K941,000.00 per annum.
He attached a schedule showing the rates as originally submitted and as revised.
131 Although Mr Fenwick said in his witness statement that he had no further involvement in the tender process until January 2000, it appears that he forwarded a document to Mr Baitia in December 1999 entitled "MRSM Catering Contract Cash Flow Assumptions for the Period October 1999 to December 2007". This document contained projected profit and loss and other figures for that period. It contained some alternative scenarios. It was later used by Mr Armstrong of Eurest as the initial budget document for the purposes of the Management Agreement.
132 On 22 December 1999 Holding Redlich sent a fax to Messrs Baitia and Yalapan with comments on the draft Management Agreement. Mr Fenwick's handwritten notes appeared at the bottom of a copy of the fax which was in evidence. They asserted, inter alia, that Eurest was aware that MRSM had an equity interest in a supply providing company. Mr Fenwick accepted in cross-examination however that MRSM had no such equity at that time. He said that he envisaged setting up a supply company in which MRSM would have an equity and which would take over supply for the OTML contract. His plan "was well and truly" current before the Management Agreement was signed. He claimed to have spoken to Mr Hayes about the proposal notwithstanding that it was not an element of the tender accepted by OTML.
133 Mr Cox-Martin became impatient about the delays in concluding the Management Agreement. On 24 December 1999 he wrote to Mr Hayes requiring that it be finalised before the catering contract was awarded. He asked for confirmation that it would be in place by 30 December 1999. In the event the Management Agreement was signed on 6 January 2000. On the following day Mr Higgins sent a letter to Mr Baitia advising that the OTML Catering Services Contract was awarded to Fubilan to provide catering services to OTML's operations at Tabubil and Kiunga in the Western Province. Its term was to be four years commencing 1 February 2000. A formal agreement was to be executed in the format included in the tender invitation documents. The OTML representative for the contract was the OTML Superintendent Towns and Camps, Mr Terupo Apoki. Mr Fenwick was in Tabubil for the signing of the Management Agreement although in his evidence he could not recall being there. He did not read the Management Agreement in its final form. It was put to him that he had formed the view that the best way forward for his company (Morocco) and for his clients was to sign off on the Management Agreement with Eurest and then find a basis for terminating Eurest's appointment and presenting OTML with a fait accompli so that MRSM and Fubilan would hold the OTML Contract alone. He denied that but in the events that followed, it was a plan that developed even if not fully formed at the time that the Management Agreement was signed.
134 Mr Hayes recalled a discussion in early January 2000 with Mr Fenwick about the staffing of the proposed OTML Contract. Mr Fenwick asked him to confirm that no staff previously employed by Poons would be used on the contract. Mr Hayes could not give such an undertaking indefinitely but said that, during the initial operation, no Poons' staff would be employed in the day to day operations of the contract in PNG. He had appointed a previous Eurest manager, Mr Steve Ehlers as Transition Manager to operate the Management Agreement. However, he said, it was apparent that after Mr Poelzl, a former Poons' manager, was appointed Chief Operating Officer, Poons' staff would be involved with the contract management.
135 After the Management Agreement was signed Mr Hayes ceased to have any further involvement with its operation. That job was taken over by the Perth office of Eurest under the management of Mr Poelzl. Mr Hayes said that before the completion and signing of the Management Agreement he had no employment relationship or representative relationship with any company of the Compass Group other than the local PNG or Australian companies. He was appointed Vice President Asia Pacific Region of the Compass Group in or about June 2000.
2.27 The Management Agreement
136 The Management Agreement executed on 6 January 2000 named as parties, MRDC, MRSM, Fubilan, Eurest (Australia) Support Services Pty Ltd and SHRM (South Pacific) Ltd which, it was recited, was to be renamed Eurest (South Pacific) Ltd. The latter company is from now on in these reasons referred to as Eurest. Clause 1.1 contained a number of definitions including the following:
Management Fee means an annual management fee in the initial flat amount of AUD25,000 that covers all of the expenses that the Manager incurs in the performance or discharge of its obligations under this Agreement and is payable in accordance with clause 11.
Incentive Fee means an amount that is equal to 50% of any net profit before tax in excess of K1,200,000 per annum to Fubilan Catering Services achieved from the Operations (not including the sale of any surplus assets) after payment of the Management Fee and is payable in accordance with clause 11.
137 By cl 2.2 SHRM/Eurest was appointed as Manager and engaged by Fubilan to manage, supervise and conduct the Operations. The "Operations" were defined in cl 1.1 to mean all the undertakings, activities and operations engaged by Fubilan in carrying out, performing or providing the Services under the contract with OTML. Under cl 2.4 of the it was provided:
(a) The Manager is engaged by Fubilan Catering Services and during the continuance of its engagement, the Manager:
(i) shall promote, develop and extend the business of Fubilan Catering Services in terms of the Contract; and
(ii) is allowed without the previous consent of the Board of Fubilan Catering Services to -
A. perform or undertake any other assignment for reward or payment, or engage in, directly or indirectly, for its own or a third party's account, any other activities for reward or payment (including but not limited to sale of goods or its services to a third party); and
B. engage in sales of whatever nature to third parties, directly or indirectly, and may invest or engage in any other business of a nature similar to or competitive with that carried out by Fubilan Catering Services
but only to the extent that such assignment, engagement or investment relates to an activity, sale of goods or services, or business that is carried out or undertaken outside of the Contract Area.
138 The Manager was required to perform the duties and responsibilities set out in the agreement "competently and diligently" (cl 4.1). It was to be responsible for and supervise the activities of Fubilan which were listed and included the custody, maintenance, operation and protection of the assets of Fubilan and the employment, training and localisation of executive, management, technical, operational and other staff. The latter was to be at the discretion of the Manager and OTML to be exercised by agreement between them in accordance with the OTML Contract (cl 4.2(a)(i) and (ii)). Eurest was also to be responsible for the acquiring by Fubilan of goods, materials, supplies, machinery and equipment and services in accordance with the parameters of approved programs and budgets (cl 4.2)(iii)). Clause 5.1 provided:
The Manager shall prepare proposed Programs and Budgets and shall (subject to compliance by MRSM of its obligations under this Agreement) carry out the Operations in accordance with the Programs and Budgets in the manner provided for in this Agreement.
The Manager could not make or incur any expenditure unless it was included in a program or budget or otherwise approved by the board of Fubilan (cl 5.2(a)(i)). This was subject to exceptions for emergency action (cl 5.2(a)(ii)). The Manager was required to submit proposals for a Corporate Manual for approval and adoption by Fubilan, covering the board's requirements as to accounts, procedures and instructions for the maintenance of projections and records (cl 5.3).
139 The Manager was to keep the accounts and records required by the Corporate Manual (cl 5.6). It was to furnish on request to the Fubilan board and to MRSM unaudited monthly accounts and monthly progress reports summarising the services performed or provided by Fubilan (cl 5.7). Interim quarterly accounts were to be lodged within 40 business days after the close of each quarter. Audited annual financial statements were also to be provided (cl 5.7). A credit current bank account was to be opened and maintained by the Manager on behalf of and in the name of Fubilan and money received by the Manager pursuant to the Management Agreement and the Contract paid into it (cl 5.11).
140 The Manager was authorised to engage subcontractors on behalf of Fubilan on an arms-length basis and on the best commercial terms obtainable "to carry out or perform any but not all of the Services". The subcontracts were required to be in writing and their terms notified to the board of Fubilan (cl 5.13(a)). This provision was to apply to "Sub-Contracts exceeding K20,000 in value with suppliers of foodstuffs, consumables or other goods or services required for carrying out the Operations" (cl 5.13(b)).
141 There were restrictions upon the powers of the Manager (cl 6). It was required to give prior notice to the Fubilan board of the dismissal of any of its key senior employees (cl 6.1(a)(ii)). It could not make loans of Fubilan's funds without prior board approval (cl 6.1(a)(iv)) nor could it do anything that would or would be likely to allow Fubilan to breach its constitutionor be inconsistent with the OTML Contract (cl 6.1(a)(vi)).
142 Clause 8 dealt with the preparation of programs and budgets. It required consultation and cooperation with the Fubilan board. The Manager was to prepare and submit to the Fubilan board and MRSM before 1 November and 1 May each year a proposed program and budget for the following four quarters (cl 8.1(b)). Its content was specified and included details of proposed expenditure on the performance of each type of service (cl 8.2(a)). Approval by the Fubilan board of a program and budget would authorise and oblige the Manager to carry out operations and to incur company expenses accordingly (cl 8.3(b)). By the last day of each month the Manager was to submit to Fubilan, MRSM and MRDC a current cash estimate of company expenses expected to be incurred or otherwise falling due during the next expenditure period commencing on the first day of the next month. This estimate was referred to in the Management Agreement as a "Call Notice". The Call Notice was required to set out the proportion of company expenses to be contributed by MRSM or MRDC by way of contributions to share capital in relation only to MRSM or loans in relation to either of them and the proportion of company expenses to be funded by third party borrowings or from cash on hand (cl 8.5(b)). Upon receipt of a Call Notice MRSM and MRDC were bound to make the relevant contribution specified in the Notice (cl 8.5(c)).
143 Clause 10 dealt with the role and powers and functions of the board of Fubilan. One of its powers and functions was to give directions to the Manager in relation to the performance of Fubilan's duties under the OTML Contract provided that such directions were not inconsistent with nor imposed any greater obligations on the Manager than its obligations under the Management Agreement (cl 10.2(a)(ii)). Fubilan's obligation to pay a monthly management fee was set out in cl 11.1. The Manager was also entitled to an incentive fee after each calendar semester (cl 11.2).
144 Clause 12.1 of the Management Agreement provided:
Unless otherwise directed by the Board of Fubilan Catering Services, the Manager shall ensure that Fubilan Catering Services strictly complies with its obligations under the Contract including, without limitation, complying with any directions from the Board of Fubilan Catering Services that relate to those obligations.
145 There was a dispute resolution mechanism set up under cl 17.1 which provided, inter alia:
If a dispute arises out of or relates to this Agreement or its breach, termination, validity or subject matter, the parties to the agreement and the dispute expressly agree to settle the dispute by expert determination administered by the PNGCDC before having recourse to arbitration.
A dispute which could not be settled under cl 17.1 was to be submitted to a single arbitrator (cl 17.2).
146 Clause 18.1 provided for termination of the Management Agreement automatically on certain external events including termination of the OTML Contract by OTML and Fubilan. Under cl 18.3 if either the Manager or Fubilan were to default in the performance of a terminal condition of the Management Agreement and failed to remedy the default (if capable of being remedied) 60 days after being required to do so in writing, the management arrangements could be terminated at the option of the party not in default without prejudice to any other remedies (cl 18.3). There were some standard clauses requiring each party to do all things necessary, desirable or convenient to give effect to the provisions of the agreement (cl 20.2) and a confidentiality provision (cl 21.1).
2.28 The OTML Catering Contract
147 The OTML Contract was executed by OTML on 8 January 2000 and by Fubilan on 11 January 2000. It comprised the following documents in order of their precedence:
Notice of Award of Contract
The Agreement - under which each party promised to perform its obligations defined by reference to the documents comprised in the Contract
Section 2 - Special Conditions of Contract
Section 1 - General Conditions of Contract
Section 4 - Scope of Work
Section 5 - Specification
Section 3 - Compensation
Section 6 - OTML Standard Supplementary Conditions
148 Clause 4 of the General Conditions of Contract required the provision by Fubilan of a performance security by way of a performance bond or unconditional and irrevocable bank guarantee in a form acceptable to OTML for the amount specified in s 3 - Compensation. No payment would be made to Fubilan until that request had been met. The amount of the performance security specified in cl 2 of s 3 was K400,000.
149 Clause 5.5 provided that the terms and conditions of the OTML Contract so far as applicable would be included as terms and conditions of any subcontract and were not to be varied or departed from without the prior written approval of OTML. Any request to approve a subcontractor had to be submitted to OTML (cl 5.5).
150 Clause 6 of the Special Conditions of Contract provided, inter alia:
6.1 The Contractor shall employ, and subject to Clause 6.2 below keep employed, Eurest (PNG) Ltd, unless otherwise approved in writing by OTML, to manage, control and supervise the whole of the Services on behalf of the Contractor. The Contractor and the Manager shall enter into a contract for the provision of such services by the Manager (the "Management Contract"), and the terms of the Management Contract shall be those of the pro forma at Schedule 2-11.
6.2 The Contractor shall not terminate the Management Contract without reasonable cause and shall in any case obtain the prior written agreement of OTML before such termination. Reasonable cause shall be the causes described at Clause 16 of the Management Contract.
6.3 The Contractor shall not vary the terms of the Management Contract, neither shall the Contractor issue any instruction varying the duties and responsibilities of the Manager without the prior written agreement of OTML.
151 Section 3 of the OTML Contract dealt with compensation. Clause 6 of s 3 provided for a localisation adjustment in the following terms:
The monthly lump sum prices entered at Item 2.1, Schedule 3-1, shall be adjusted in accordance with Schedule 3-4 upon each occasion that an Expatriate employee engaged on the on-Site services is replaced by a PNG National pursuant to the Contractor's obligations under Clause 13 of Schedule 6-1- Labour Practices.
In the event that the monthly lump sum prices at Item 2.1, Schedule 3-1, are adjusted pursuant to clause 4 above, the amounts entered at Schedule 3-4 shall be adjusted in the same proportion in which monthly lump sum prices at Item 2.1, Schedule 3-1 are adjusted.
Localisation price adjustments were specified against anticipated localisation dates as follows:
Chef Supervisor (1) - April 2000
Chef Supervisor (2) - April 2000
Catering Manager - April 2002
Chef Supervisor (3) - October 2002
Assistant Project Manager - April 2003
Chef Supervisor/Training - October 2003
152 The documents comprised in the OTML Contract were designated Volume 1. A further four "volumes" of documents accompanied the contract, but did not form part of it. Volume 4 contained in Schedule 2-10 a "Training and Localisation Plan" and in Schedule 2-11 the "Form of the Management Contract". The Training and Localisation Plan was that proposed by Eurest in its tender. The Plan stated that Eurest had based its planning on the assumption that the Training and Localisation Plan would commence from stage 1 on the awarding of the contract. This would require a concentrated "start-up period" especially with training before further progress towards Localisation and Business Development could be undertaken. Eurest proposed to utilise training consultants who had first hand experience in PNG (Lihir) with proven results. It was the company's intention to create structured, accredited training that would enable all employees, ranging from front line operational staff to senior supervisors, to improve their skill levels. It was also proposed that an in-house local training coordinator be appointed to ensure that training was a continuous program. Career development for employees would include training programs relating to general work skills, kitchen attending, literacy and numeracy, train-the-trainer, supervisory leadership, supervisory quality assurance, first aid, basic office administration, keyboarding skills, customer service skills and a la carte table service. Under the heading "Employment Opportunities" it was said Eurest would undertake a program focussing on, inter alia, supervisor/management development. There was a three year training plan. Year 3 under the heading "Management Training" involved train-the-trainer elements, supervisory skills/leadership and advanced training.
2.29 The OTML Contract commences -initial cash flow problems - February - March 2000
153 Fubilan and Eurest commenced the process of providing catering services under the OTML Contract on 1 February 2000 and Mr Steven Ehlers as Eurest's project manager. Mr Greg McGrath who had been working for Poons up to the time of its acquisition by Eurest decided to take a payout rather than accept a position with Eurest that would have required him to work in Australia. However he agreed to work for Eurest for an initial transition period of three months or so. Mr Ehlers was supposed to report to Mr McGrath, but in fact communicated directly with Mr Hayes. Mr McGrath completed his commitment to remain with Eurest at the end of March 2000 and Mr Ken Younger became general manager in his place.
154 Mr Baitia was responsible for organising the funding requirements of MRSM. MRSM was to provide Fubilan with K3 million as start up capital, part of which would be used to establish the K400,000 performance security required under cl 4 of the General Conditions of Contract. A budget estimate had been made as part of the tender preparation between Mr Baitia and Mr Fenwick. However, as Mr Baitia saw it, the start up capital was to be paid into Fubilan's account after preparation by Eurest of the budget required under the Management Agreement.
155 Mr Baitia made a number of requests of Eurest's site management and PNG manager for a budget for board approval so that payment of the K3 million start up capital could be made. MRDC was acting as the manager for MRSM and held the necessary funds on trust for the landowners with strict requirements on their release particularly funds of the magnitude required under the OTML Contract. He did not receive the budget from Eurest during the start up phase. As time went by it became obvious that unless some capital was paid into Fubilan, it would be in default under the OTML Contract and at risk of losing it. Ultimately, the start up capital was paid across without the benefit of a budget from Eurest. This occurred in about September 2000. Eurest's position was that it operated off Fubilan's cash flow budget as the initial budget under the Management Agreement.
156 The initial capital requirement was referred to in an Operations Report for February 2000 which was prepared by Eurest in mid April 2000. The report stated that funding had been insufficient to meet operational requirements. Eurest financed the operation during the period in order that contractual obligations could be met. It did not intend to continue that funding. To meet contractual and ongoing operational expenses Fubilan needed an injection of K3 million. K2,600,000 due from Fubilan to Eurest on 14 March had not been paid because of lack of funds. Eurest stated its intention to charge for overdue accounts interest at the rate of 5% over the prime lending rate in PNG. The report included a draft profit and loss statement for the period 1 February 2000 to 25 February 2000 which showed a gross profit of K683,264.35.
157 An invoice from Poons for food stock and equipment on hand at the Poons' warehouse and the messes and Poons' offices as at 31 January 2000 totalled K2,014,365.80. In addition, there was a break down for four containers of food in transit totalling K600,699.29. The total for both invoices was K2,615,065.09.
158 Messrs Baitia, Fenwick, Poelzl and Younger, who was Eurest's general manager for PNG, met on 7 February 2000. Mr Younger wrote to Mr Baitia on 16 February 2000 about the meeting. He responded to issues which had been raised by Mr Baitia. He said that Eurest would provide backup invoices for goods purchased in country and overseas. He attached a document showing total values for stock and equipment. He said that Eurest had established suppliers in both PNG and Australia and an order criteria for financial assessments and quality to meet the contractual requirement and value for money. It would purchase in country whenever possible and when commercially advantageous. He pointed out that there was a cash requirement for K4,068,060 less stock holdings for the Golf Club of K28,237. Eurest needed weekly cash and sought confirmation of the availability of funds. Mr Younger also pointed out that all employees were employed by Fubilan. The payroll would be in its name. He attached a cash flow matrix to show cash flow for wages.
159 On 17 February 2000 Mr Kolalio advised Fubilan and Eurest that MRDC had transferred K818,500.00 to Fubilan. K400,000 had gone into an imprest account and K418,500 into the main account. On 18 February 2000 he sent Mr Fenwick copies of a schedule of cash flow requirements received from Eurest on 17 February and his letter authorising a transfer of funds. Mr Fenwick contended in cross-examination that Fubilan had not received advice from Eurest about its cash flow requirements. He claimed that his information from MRDC was that it did not want to pay money to Eurest because cash flow payments and budgets had not been presented. The documentary evidence is inconsistent with Mr Fenwick's claim in evidence-in-chief to have been told by Mr Baitia that he had not received cash flows.In any event it was not a matter of which Mr Fenwick had direct knowledge. I accept that Eurest had provided its cash flow requirements.
160 On 22 February 2000 Unni Meetinay, Assistant Project Manager with Eurest, sent a fax to Mr Kolalio advising that out of the transferred amount of K818,500, K400,000 had been allocated to the imprest account and K418,500 to the main account of Fubilan. Payments to be made or which had already been made on the funds at that time totalled K563,912.95. That amount was already well in excess of the imprest account. The requirement of additional funding for the imprest account was urgent. The sum of K563,912.95 included a figure of K353,750.10 for the purchase of motor vehicles and K120,485.59 being duty to be paid on containers. The duty figure appears to have related to nine containers of goods which had arrived at the wharf. Mr Kolalio wrote back pointing out that the initial transfer of K818,500 was based on a cash flow budget supplied by Eurest. He required details of additional costs for which funds could be made available.
161 On 15 February 2000 Mr Reg Armstrong was appointed as commercial manager Eurest. He had previously worked as a consultant to P&O Catering Services (PNG) but had had no part in the negotiations leading up to the Management Agreement. He was asked by Mr Poelzl to oversee administrative and financial support for the operation of the Management Agreement. He spent a few days reading the agreement. On 29 February 2000 he went to the Ok Tedi mine to observe the catering operation. He carried out checks of the administrative and financial requirements of the operation including banking facilities, cheque book use, ordering procedures and payroll. He had to "iron out the initial operational matters" that he identified or which were reported to him by Fubilan or OTML.
162 On 1 March 2000 Mr Armstrong met with Messrs Fenwick, Baitia and Kolalio representing MRDC at the MRDC offices in Port Moresby. At that time there was no operating board of directors for Fubilan. Mr Baitia told Mr Armstrong that MRDC's involvement in the Management Agreement would not be on a day to day basis. It was agreed that until the Fubilan board was established Eurest would report on a monthly basis to MRDC. Mr Kolalio was to arrange a bank guarantee for K400,000 through MRDC. The document upon which Mr Armstrong relied initially in 2000 as a budget was the cash flow budget prepared by Mr Fenwick.
163 Fubilan failed to make payments for the purchase of assets associated with the OTML Contract by the agreed date of 14 March 2000. The payment had been due on 1 February 2000 but Eurest had agreed to delay payment until 14 March 2000 without charging any interest. On 15 March 2000 Mr Younger wrote to Mr Kolalio seeking MRDC's acknowledgement of the situation. He said that Eurest was not in a position to continue providing operational funding for Fubilan:
It is imperative that sufficient funds are made available immediately so that operations can proceed according to the provisions of our agreement.
Fubilan's cash flow problems led Mr Andrew to write to OTML on behalf of MRSM on 15 March 2000 requesting that OTML release payments withheld for February 2000. Payments for the first month, which totalled K1,365,000, had been withheld by OTML because of Fubilan's failure to lodge the performance security of K400,000 required under the OTML Contract. This had resulted in "very serious cash flow problems for Fubilan Catering Services". Mr Younger wrote again to MRDC on 23 March 2000 and pointed out that Eurest had still not been paid in respect of assets acquired for the Catering Services Contract as part of the process of taking over from Poons.
164 On 28 March 2000 Mr Kolalio sent OTML a bank guarantee in an amount of K400,000 in satisfaction of the performance security requirement. That was acknowledged on 1 April 2000 by OTML which said it would release K400,000 which had been withheld from the amounts payable to Fubilan under the Contract as performance security.
165 Mr Boas acknowledged in cross examination that there were cash flow problems affecting Fubilan's capacity to finance the OTMLContract for the first eight months of its operation. He agreed that this was essentially because the PNG government had not distributed the OTML dividend to MRSM. He accepted also that Eurest financed the Contract during this period. On 28 March however MRSM deposited K600,000 into Fubilan's main account.
166 The cash problem resulting from the failure of the PNG government to remit OTML dividends to MRSM was highlighted by a facsimile dated 17 April 2000 from Janet Sios, Manager-Accounts for MRSM to Mr Aua, then Secretary for Mining. It showed an amount of K4,015,722 owing to MRSM inclusive of lost interest calculated at K546,175. Mr Baitia met Mr Wanjik, Acting Director of the Mining Division of the Department of Mining on 27 April 2000. MRSM's concern about delay in the remitter of dividend payments was raised. Mr Baitia proposed that if there were no funds immediately available to government out of dividends already received, then OTML should be advised to deduct the equivalent of the withheld dividends from the State's share of the next dividend plus interest at the prevailing commercial rate and that future dividends equivalent to 2.5% be paid directly to MRSM by OTML.
2.30 Fenwick becomes MRSM consultant - exchanges with Eurest - May 2000
167 On 12 May 2000 Fubilan paid Eurest the sum of K1,092,760.23.
168 On 2 May 2000 the chairman of MRSM, Mr Menim, wrote to Mr Fenwick inviting him to provide his services:
… in setting up of a business management company to manage all our current and future spin off businesses of MRSM.
He requested that Mr Fenwick meet with MRSM officers in Port Moresby. Mr Fenwick did not have a clear recollection of the letter. He presumed that he responded to it. Mr Boas could not recall why Mr Fenwick was offered a consultancy at that time. In any event Mr Fenwick was engaged by MRSM and adopted the business name PNG Group Consultancy. This appears from a letter which Mr Baitia sent on 15 May 2000 to Mr Poelzl at Eurest. The letter was written in Mr Fenwick's style. He agreed in cross examination that it sounded like his language and I infer that he drafted it. In the letter Mr Baitia told Mr Poelzl that Fubilan would be appointed "PNG Group Consultancy (Bill Fenwick) effective on the 25th May 2000 as [Fubilan's] Authorized Contractors Representatives." [sic]
169 Mr Baitia asserted, in his letter of 15 May 2000, that Fubilan had never agreed to pay interest on monies owed to Eurest for food purchases under the Management Agreement. While accepting that there had been an "initial cash flow crisis" and while appreciating Eurest's leniency on the matter there have been "joint complications". These were then listed. They were:
(a) failure by Eurest to provide Cash Flow Budgets as requested;
(b) failure by Eurest to take a more positive approach in representing Fubilan's request to OTML for early payment in March 2000;
(c) advice from Eurest pre-tender that existing Poons' vehicles were unserviceable leading to the decision to provide a new fleet;
(d) confusion in relation to "P&O/Eurest" which "presented a myriad of problems" not taken into account during the tender process.
There was also a complaint about Eurest having direct discussions with OTML about its difficulties with Fubilan:
The Client (OTML) should not have the pleasure of being advised by the Managers regarding Fubilan Catering Service accountability unless authorized by the FCS Board. It is expected that confidentiality be paramount in all FCS business matters and we are remiss to advise that this is not the case at present.
The letter stated in conclusion that Mr Fenwick's appointment would "… assist both parties achieve their expected targets and provide a constant point of contact for all matters relating to your Management Agreement". This hope drafted by Mr Fenwick and expressed through Mr Baitia proved not to be well founded.
170 Mr Poelzl replied to the Baitia letter on 19 May 2000 with copies to Messrs Younger and Armstrong. His responses may be summarised as follows:
Finance. MRDC had produced documents to Eurest in July 1999 showing funds of K3,026,264 available to FCS for the operation of the new contract. Eurest understood on this basis that FCS would easily meet its financial obligations for contract commencement. As at 19 May 2000 Fubilan had supplied only about K1.9 million from the supposedly available funding. The cash flow situation demanded MRDC and Fubilan provide the outstanding K2 million as soon as possible.
Interest charges. Mr Poelzl attached correspondence which he said clearly indicated Eurest's intention to charge Fubilan an interest charge and MRDC's acceptance of that charge.
Early payments from OTML. At Eurest's initiative in March 2000 Messrs Armstrong, Younger and Poelzl had raised the issue of early payment with OTML. OTML refused the request because the performance security had not been lodged. A further aggressive pursuit of the matter by Eurest may have undermined Fubilan's reputation with OTML.
Confidentiality. That Fubilan was facing financial hardship was not a difficult conclusion for industry to draw in the early stages of the Contract where:
(a) due to non-payment of government duty, containers were left idle on the wharf;
(b) at Eurest's request, vehicles were not released from Ela Motors due to non-payment.
These types of occurrences it was said have been contained as a result of Eurest
funding.
Vehicle hire. It was Fubilan's responsibility to fund or provide vehicles on site. Eurest had agreed to lease two vehicles to Fubilan at a cost of K100 per week.
Contract representation. Eurest's legal advice was that Mr Fenwick's appointment appeared inconsistent with the terms and conditions of the Management Agreement. Eurest's management responsibility included liaising with OTML. It was necessarily to be carried out by an officer of Eurest. Eurest could anticipate a breach of the terms of the Management Agreement or the OTML Contract in the event that arrangements were made on its behalf by Mr Fenwick which were inconsistent with its obligations.
Rebates Offshore 589,964
Rebates Onshore Purchases 510,695
Mr Younger undertook to investigate, inter alia, the claims in relation to offshore and onshore purchase rebates. He said that Eurest did not have any problems with Fubilan operating purchasing requirements for Tabubil. If they were to do that the associated "logistics" should also be handled by Fubilan. Eurest would not want to handle the logistics as they did not have control over purchasing. On the matter of rebates, he said that if Eurest Corporate in Australia did receive rebates it could be for reasons of growth on the acquisition of a new business or the provision of early payment terms.
251 In the course of the meeting Mr Fenwick accepted that a lot of the problems that Eurest and Fubilan were facing arose from delays in Fubilan funding the operation at its commencement. The first part of the meeting ended at midday. At 2.30 pm Messrs Armstrong, Kolalio and Fenwick met again. They agreed that settlement had been reached other than on specific items which included rebates on offshore and onshore purchases. The settlement amount was K470,000. This represented the figure agreed between Messrs Fenwick and Younger on 13 February 2001.
252 The following day, on 16 February 2001, Mr Younger wrote to MRDC for the attention of Messrs Fenwick and Kolalio. He began diplomatically by congratulating Fubilan on the commencement of its "Logistic businesses". He acknowledged the agreement that Yamil had with JLFS, that prices were fixed at 2000 rates and that Yamil and Fubilan had obtained a discount for early payment. He pointed out that creditors were currently being paid by Eurest between 90 and 120 days in line with available funds. To facilitate the new agreement and to service current creditors it would be necessary to have an injection of funds as creditors averaged K1.4 million per month. The additional funds would be required by the end of April.
253 A rider to the supply agreement with JLFS was signed on 19 February 2001. The rider provided that prices on the product price list should be at least equal to or better than current Eurest prices as at September 2000 for the first 12 months of supply excluding meat, fruit and vegetables.
254 Mr Kolalio wrote to Mr Younger on 27 February 2001 thanking him and Mr Armstrong for their efforts to settle the issues at hand between Eurest and Fubilan. He requested their urgent attention to ensure that certain matters discussed at the meeting were resolved promptly. He referred to rebates as one of the issues which awaited further discussion and negotiation with Mr Poelzl. He stated his belief that Fubilan had lost significant benefits on the purchases made during 2000 and said that it intended to pursue some form of redress. Mr Fenwick said he played no part in the preparation of that letter.
2.47 Fubilan board meeting - 8 March 2001
255 A meeting of the Fubilan board took place on 8 March 2001. Papers for the meeting were prepared under Mr Yalapan's direction. Among them was the settlement sheet signed by Messrs Fenwick and Younger. In a board paper entitled "FCS Audit results" reference was made to the "less than pleasing" results from audits conducted in Tabubil on behalf of Fubilan. They were said to provide the board with "good reason to doubt the professionalism of our appointed Managers". The tone and text of the paper generally indicated Mr Fenwick's hand in its drafting. It described the "Settlement Offer" as "… the result of many long hours investigating months of accounts". It concluded with the statement:
The attached Agreed Settlement Offer has already been accepted and should be viewed as an interim amount as there are a number of other issues outstanding which could increase this settlement amount."
Fubilan's purported termination of the Management Agreement.
The roadblock arranged by the Fubilan managing director, Mr Buretam, on 25 November 2001.
Unauthorised procurement of food supplies.
Eurest Lae invoice 3202 in March 2002 contained a handwritten comment "received insurance claim from AON K18,182.38 on 11/6/03". There was no indication that the benefit of that insurance claim was passed on to Fubilan.
There were no third party supporting documents for Poon invoice 2453, Lotic Poon invoice 142 and Eurest invoices 3141 and 3322 without which it was not possible to determine if irregularities had occurred.
The claims against Compass Group Plc
507 Compass Group Plc is the company incorporated according to the laws of the United Kingdom which is the ultimate holding company of Compass Group (Australia) Pty Ltd. So much was admitted on the pleadings. In [5] of the statement of claim it was asserted that Compass Group (Australia) Pty Ltd was the agent of Compass Group Plc in relation to the dealings of each of the respondents with the applicants.
508 The Compass Group acquired Eurest in November 1999. There is however no evidence to suggest that Compass Group (Australia) Pty Ltd was acting as agent of the Compass Group Plc in relation to dealings with the applicants. The ill-conceived nature of the pleading so far as it relates to Compass Group Plc was illustrated by [19] of the statement of claim which asserted that all respondents "were, at all material times, aware of or ought to have been aware of, the International Management Requirement". This was a reference to OTML's requirement that the applicants appoint an internationally reputable firm to be their catering managers to manage and implement the OTML Contract before OTML would consider any proposal in relation to the contract. This requirement, as pleaded, was raised in 1998, the year before the Compass Group acquired Eurest. In [22] it is stated that:
In or about mid 1999 the first, second and third respondents were aware of the pending incorporation of the first applicant …
Again, so far as Compass Group Plc is concerned this seems to make little sense. So too did the allegation that it made various representations to MRSM in November 1998 as pleaded in [49] and following.
509 After its acquisition by Compass Eurest promoted itself as part of the international Compass Group. That, however, did not establish an agency relationship nor draw the holding company Compass Group Plc into any of the causes of action that have been pleaded in this case.
510 The claims against Compass Group Plc in this case approach abuse of process. On the evidence there seems to have been no warrant for them. Their inclusion raises the suspicion that it was designed to put pressure on the international holding company by having it named as a respondent in an action by indigenous landowners. I will dismiss the application as against Compass Group Plc. The applicants should be required to pay its costs which, in these circumstances, should be indemnity costs.
Unconscionable conduct claim - the statutory provisions and relevant principles
511 Before turning to the merits of the applicants' claim that the respondents engaged in unconscionable conduct in contravention of ss 51AA and 51AC of the TPA it is convenient to set out the relevant parts of those provisions and principles governing their application so far as they are relevant to this case.
512 Section 51AA of the TPA provides:
(1) A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.
(2) This section does not apply to conduct that is prohibited by section 51AB or 51AC.
Section 51AC is also invoked. The relevant prohibition in that section is found in s 51AC(1):
A corporation must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a person (other than a listed public company);
…
engage in conduct that is, in all the circumstances, unconscionable.
Section 51AC(3) sets out a non-exhaustive list of factors which a court may have regard to in determining whether a corporation has contravened subs (1). They include the relative strengths of the bargaining positions of the supplier and the business consumer and whether, as a result of the supplier's conduct, the business consumer was required to comply with conditions not reasonably necessary for the protection of the legitimate interests of the supplier. Other factors include the capacity of the business consumer to understand documents relating to the supply or possible supply of goods or services and whether any undue influence or pressure was exerted on, or unfair tactics used against, the business consumer. Factors less directly material here include the extent to which the supplier was willing to negotiate the terms and conditions of any contract for the supply of goods or services with the business consumer and the extent to which the supplier and the business consumer acted in good faith. Other factors relevant to the supplier's conduct in similar transactions and the requirements of industry codes are not material for present purposes.
513 The concept of unconscionable conduct as used in s 51AA was discussed by the High Court in Australian Competition and Consumer Commissioner v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51. The case was argued on the basis that it involved, as does this case, an allegation of unconscionable conduct comprising the knowing exploitation by one party of the special disadvantage of another. The idea of special disadvantage was propounded in Berbatis Holdings 214 CLR 51 as "… a disabling circumstance seriously affecting the ability of the innocent party to make a judgment in [that party's] own best interests". Gleeson CJ accepted that formulation as "… consistent with what the Act calls the unwritten law concerning unconscionable conduct, bearing in mind that the Act also allows for the development of the law from time to time" (at [5]). The Chief Justice went on to say, referring to the judgment of the Full Court of the Federal Court in Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301 that (at [11]):
A person is not in a position of relevant disadvantage, constitutional, situational, or otherwise, simply because of inequality of bargaining power. Many, perhaps even most, contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests.
514 In their joint judgment Gummow and Hayne JJ quoted a passage from the judgment of Mason J in Commercial Bank of Australia v Amadio (1983) 151 CLR 447 at 462 in which his Honour referred to the underlying general principle applicable where one party takes unfair or unconscientious advantage of an opportunity created by the special disadvantage of another. Mason J said:
I qualify the word "disadvantage" by the adjective "special" in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasise that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.
Gummow and Hayne JJ pointed out that Mason J had gone on to emphasise the need for the plaintiff seeking relief to establish that the defendant took unconscientious advantage of the plaintiff's disabling position or circumstance. Their Honours said (at [55]):
It will be apparent that the special disadvantage of which Mason J spoke in this passage was one seriously affecting the ability of the innocent party to make a judgment as to that party's own best interests.
515 Section 51AC has a wider field of operation than s 51AA. The unconscionable conduct which it prohibits is not limited in its range to "unconscionable conduct within the meaning of the unwritten law" as is that prohibited by s 51AA. In this case, however, the difference in the fields of operation of the two provisions is immaterial. The applicants rest their causes of action in unconscionable conduct upon the proposition that they were at a special disadvantage and that the respondents took unfair advantage of that special disadvantage.
Unconscionable conduct claim - the pleadings and the merits of the claim
516 The elements of the statutory cause of action for unconscionable conduct asserted by the applicants appeared from [16] and following of the statement of claim. Fubilan and MRSM pleaded OTML's requirement that they appoint an internationally reputable firm as catering manager before OTML would consider any proposal from Fubilan and MRSM in relation to its catering contract. It was designated in the statement of claim as the "International Management Requirement". It was said at [17]:
As a result of the International Management Requirement the applicants were unable, or had a diminished ability, to protect and conserve their own interests.
517 Fubilan and MRSM alleged that, as a result of the International Management Requirement imposed by OTML, they were at a special disadvantage as against the respondents. The respondents were or ought to have been aware of that special disadvantage. Through their agent Mr Hayes they agreed to prepare a proposal for the OTML Contract on behalf of the applicants and to act as their catering contract manager if the proposal were successful. Reference was then made to elements of the Tender Proposal.
518 The applicants pleaded the lodgment of the Poons' tender which did not include a joint venture or similar arrangement with any individual or group from the Preferred Area as defined in the OTML tender document. The effect of the Poons' tender proposal, if successful, was that Poons would not have been required to share any profits or benefits from the OTML Contract.
519 The applicants also pleaded the acquisition of the Poons' business by Eurest as part of the acquisition of P & O (PNG) Ltd and related companies in Australia. The material effect of the acquisition was said to have been that the respondents had two tender proposals with OTML for the OTML Contract including the Poons' proposal. The Poons' proposal was more beneficial to the respondents and detrimental to the applicants than the tender proposal submitted by Eurest on behalf of MRSM.
520 Fubilan and MRSM alleged that in November or December 1999 the respondents assured them that they would only proceed with the Eurest tender proposal. They said they were in a position before November 1999 where they were not reasonably aware, or able to be reasonably aware, of the need to appoint a company to replace the respondents for the purposes of the International Management Requirement. For this reason also they were unable or had a diminished ability to protect and conserve their own interest and were at a special disadvantage as against the respondents.
521 The applicants pleaded the variation of the tender proposal to remove price differences identified by OTML leading to an annual reduction of K3,451,200 in their income from the contract. Based solely on the respondents' advice the varied proposal was approved by MRSM and lodged with OTML in or about early January 2000. In maintaining the two tender proposals for the OTML Contract, the respondents and, alternatively, Eurest (Australia), placed them in a position where they were not reasonably able to replace the respondents in order to meet the International Management Requirement. The respondents thereby took advantage of the special disadvantage of the applicants in a manner that was, in all the circumstances, unconscionable and thereby in contravention of s 51AA of the TPA. In the alternative, it was alleged that the respondents had engaged in unconscionable conduct contrary to s 51AC(1)(a) of the TPA.
522 MRSM and Fubilan said that they were inexperienced in understanding and assessing the financial implications of the original tender and the varied tender and were unable to properly protect and conserve their respective commercial interests in relation to those proposals. The respondents were said to have been aware of, or to have had reason to be aware of, these matters. In support of the invocation of s 51AC it was said that the remuneration due to MRSM under the Management Agreement did not exceed the amount of A$3 million referred to in s 51AC(9) of the TPA. Fubilan claimed to have suffered loss and damage as a result of the conduct of the respondents.
523 It was a common feature of the allegation of unconscionable conduct raised under both provisions that because of the so-called International Management Requirement the applicants were unable or had a diminished ability to protect and conserve their own interests. On that basis it was said they were "at a special disadvantage" as against the respondents. This aspect of the pleading was the foundation upon which the causes of action in unconscionable conduct rested. It was a foundation without substance. Mr Higgins wrote to Mr Hayes on 1 October 1999 saying that OTML wanted to amalgamate the two competing proposals that it had received from Poons and from Eurest as soon as possible with a view to an immediate award. Mr Baitia protested in his letter of 5 October 1999 that MRSM had independently tendered for the contract with Eurest as its manager and should be awarded the contract as tendered. The response from Mr Cox-Martin at OTML was clear:
Unfortunately we would be unable at this stage to award the contract on the basis of your tender as you suggest. Whilst your tender is attractive in many aspects, in some areas it is incomplete and in certain respects not competitive.
Mr Cox-Martin also specifically referred to the opportunity provided by Eurest's acquisition of Poons to amalgamate the bids and put in place a contract which would give the best outcome for all parties. Mr Higgins in his response to Mr Baitia on 6 October pointed out that neither of the MRSM or Poons' tenders had been accepted at that time. At the meeting which took place in Cairns on 9 October 1999 Mr Cox-Martin told representatives of MRSM and the future Fubilan as well as Eurest that OTML wanted new contract rates to be provided picking up the best from the previous MRSM and Poons' tenders.
524 Mr Baitia's memorandum, after the meeting, to his managing director, Mr Andrew, included the observation that OTML had organised the meeting to achieve an alignment of the proposals from MRSM, Poons and Eurest. Mr Baitia was well aware that Mr Hayes was working after the Cairns meeting to bring the two bids together. Mr Fenwick was involved in that work. In subsequent correspondence in December 1999, Mr Hayes quite properly told Mr Baitia that because of the renegotiation of the rates the profit expectation from the contract would need to be reduced.
525 In none of the circumstances surrounding the creation of the varied tender is there any basis for the contention that MRSM or Fubilan was unable to look after its own interests or that it was at a special disadvantage as against Eurest. MRSM had competent advisers available to it and therefore to Fubilan. The pressure for revision of rates came from OTML which indicated that neither tender was satisfactory as it stood. There is nothing to support the proposition that Eurest took advantage of MRSM in any way. Eurest was not bargaining with MRSM or Fubilan. It was bargaining with OTML. The claims of unconscionable conduct should never have been made. They will be dismissed.
Misleading or deceptive conduct - the pleaded case
526 The claim for misleading or deceptive conduct was based upon a variety of representations said to have been made by or on behalf of the respondents which representations are said to have adduced MRSM to engage the respondents to prepare a tender proposal and to have induced them into the Management Agreement.
527 The representations variously relied upon were broken up into groups designated the "Initial Representations", the "Assurance Representations", the "Further Representations", the "Tender Proposal Representations", the P&O Representations, the "Varied Tender Proposal Representations" and the "Continuing Representations". The latter category was a collective term for all of the other groups of representations.
528 The "Initial Representations" contained in the letter of 25 November 1998 relating to the provision of training to employees of MRSM, the assembly of a strong management team from Australian, PNG and international resources, the highest possible involvement of PNG residents, training and staff development programs, clearly demonstrated accounting procedures, reconciliation of goods and services supplied every four weeks, substantial administrative and operational support, benefits through purchasing, operational and management expertise and an awareness of the benefits and requirements of training PNG citizens. In addition it was said the respondents represented that they would pass on directly to Fubilan the benefit of their large PNG, Australian and global purchasing power which allowed them to purchase at the best possible price [ 49].
529 The "Assurance Representations" were said to have been made at a meeting at the Sheraton Hotel in Brisbane in or about November 1998 through Mr Jeff Hayes. The Initial Representations were confirmed and Fubilan was told through Mr Fenwick that the respondents could handle the Management Agreement and that management and training provided during the term of the OTML Contract would enable the applicants to acquire adequate knowledge and experience to bid for the renewed contract in their own right. In addition, it was said that Mr Hayes assured Fubilan through Mr Fenwick that the respondents would rectify the failure of Poons to promote localisation of management positions in PNG.
530 The "Further Representations" were said to have been made in the period from November 1998 to June 1999 in negotiations relating to the Management Agreement and the tender proposal. They were said to have been "consistent with the Initial Representations and the Assurance Representations".
531 The applicants said that based upon the Initial Representations, the Assurance Representations and the Further Representations, MRSM engaged "the respondents" under the First Retainer [54] and would not have done so if the representations had not been made [55]. The pleading of the engagement under the First Retainer however did not seem to lead anywhere in terms of a cause of action for misleading or deceptive conduct.
532 The Tender Proposal Representations were said to have been made in or about July 1999 in the tender proposal for the OTML Contract. They related to the status of the respondents as outstanding providers of support services and the world's leading catering and services management company, their organisation structure for the OTML Contract and their promises to provide monthly performance reports and comprehensive reporting mechanisms, weekly service audits and monthly management audits. Another representation identified was that the focus of the respondents would be the ongoing development of national workers achieved through a predetermined training and localisation program. A more specific representation pleaded was that the respondents would localise expatriate positions in the operations on a predetermined basis providing for the localisation of five expatriate positions to commence in July 2000.
533 The P&O Representations were said to have been made by Mr Hayes between November 1999 and January 2000 in answer to assurances requested by Fubilan that the respondents still intended to provide training and benefits which they had not previously provided including localisation of management and that employees of Poons would not be involved in the management of the OTML Contract.
534 The Varied Tender Proposal Representations were said to have been made between December 1999 and January 2000 in the content of the Varied Tender Proposal to the effect that 27 Australian suppliers and 25 PNG suppliers were nominated that would supply Fubilan under the OTML Contract and that the respondents would localise expatriate positions in the operations on a predetermined basis for six expatriate positions commencing April 2000. They were said to embody the original Tender Proposal Representations which were thereby remade. It was said to follow that the representations made by the respondents, including the Initial Representations, the Assurance Representations, the Further Representations, the Tender Proposal Representations, the P&O Representations and the Varied Tender Proposal Representations continued in effect at all material times on both applicants. These were referred to collectively as the "Continuing Representations". It is alleged that in reliance on those representations the applicants entered into the Management Agreement.
535 The applicants alleged the Continuing Representations were false. The bases of falsification were set out in [67] of the statement of claim. They were all in the nature of a failure to honour promissory aspects of the representations relied upon. It was then said in [68]:
It follows that in making the Continuing Representations, the Respondents had engaged in conduct that is misleading or deceptive or is likely to mislead or deceive, contrary to Section 52 of the Trade Practices Act 1974, including without limitation, by operation of Section 51A of the Trade Practices Act 1974.
This pleading appeared to misconceive the operation of s 51A. It was not pleaded that the respondents did not have reasonable grounds for making the various statements of a promissory or predictive character attributed to them. Then it was pleaded that "in reliance upon the Continuing Representations the applicants entered into the Management Agreement" [65] and would not have entered into it if those representations had not been made [66].
536 The pleading thereafter lost its way logically. Three new paragraphs 71A, 71B and 71C had been included by amendment to the statement of claim. By those additional paragraphs the applicants alleged that in January 2002 they met with the respondents and OTML in Cairns to discuss management problems. OTML recommended that a third party auditor be appointed to carry out an investigative audit. The applicants alleged that they appointed KPMG. In or about June 2003 KPMG produced a report "which identified ongoing problems with the Second Respondents' management and supervision of the conduct of the Contract, as pleaded at paragraph 186, below". The pleading of the report was not a pleading of the problems it identified. The KPMG report itself was never put into evidence.
537 The pleading then alleged that in July 2003 the applicants agreed to take an interest in Pacific Catering Services Ltd, a PNG company, to provide catering services for other mining operations in PNG, "… instead of doing so in their own right" [72]. It was said that the conduct of the respondents prevented the applicants from obtaining the reputation and training to provide the customer service and management skills necessary to provide services to other mining operations in PNG in their own right [73].
538 The applicants pleaded the notice given by OTML on 8 December 2003 that the OTML Contract would not be renewed [74]. It followed that they would not be able to provide catering services to OTML and had thereby suffered loss or damage. This pleading was of course drafted well before August 2005 when OTML awarded the new catering contract to Fubilan with Eurest as its manager. No amendment was made to the statement of claim to reflect this.
539 Paragraph 76 of the statement of claim read as follows:
The respondents' conduct in contravention of s 52 of the Trade Practices Act 1974 was a cause of loss or damage suffered by the applicants.
Particulars of Loss
76.1 The loss or damage suffered by the applicants includes:
76.1.2 the benefit of rebates available to the respondents for the purchase of materials for the Contract;
76.1.3 the loss of the opportunity to make profits in providing industrial catering services in the national market of Papua New Guinea in their own right.
540 As may be seen from the particulars of damage now claimed under this head the applicants have shifted their ground in response to the extension of the OTML Contract and the awarding of a new catering contract. They have now claimed management fees paid to Eurest under the extensions. They have also claimed management fees payable under the new management agreement and a sum for loss of opportunity in relation to catering for other sites in PNG. It is necessary in considering the merits of this cause of action to have regard to its elements.
Misleading or deceptive conduct - the elements of the cause of action
541 The cause of action for damages for misleading or deceptive conduct in contravention of s 52 of the TPA is created by s 82 which provides:
(1) Subject to subsection (1AAA) a person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV, Part IVA, Part IVB or V and section 51AC may recover the amount of loss or damage by action against that other person or against any person involved in the contravention.
Section (1AAA) is not material for present purposes.
542 The loss or damage recoverable under s 82 is loss or damage suffered "by conduct of another person that was done in contravention … of Part V". So where misleading or deceptive conduct is alleged it must be shown that the applicant suffered loss or damage as a result of that conduct. Mason CJ, Dawson, Gaudron and McHugh JJ in Wardley Australia Ltd v Western Australia (1995) 175 CLR 514 said (at 525):
The statutory cause of action arises when the plaintiff suffers loss or damage "by" contravening conduct of another person. "By" is a curious word to use. One might have expected "by means of", "by reason of", "in consequence of" or "as a result of". But the word clearly expresses the notion of causation without defining or elucidating it. In this situation, s 82(1) should be understood as taking up the common law practical or common-sense concept of causation recently discussed by this Court in March v Stramare (E & M H) Pty Ltd (1991) 171 CLR 506, except in so far as that concept is modified or supplemented expressly or impliedly by the provisions of the Act. Had Parliament intended to say something else, it would have been natural and easy to have said so.
543 The test of causation therefore is a practical or common sense one. It does not require that the contravening conduct be the only cause of the applicant's loss. Nor is it necessary, where the misleading or deceptive conduct involves a misrepresentation, that the applicant who suffered loss or damage relied upon that misrepresentation. It may be that misleading or deceptive conduct will set in train a chain of events where one person is led into error on the basis of that conduct and induces some other person to do something that causes them to suffer loss or damage. As Lockhart J said in Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526 (at 529):
What emerges from an analysis of the cases (and there are many of them) is that they do not impose some general requirement that damage can be recovered only where the applicant himself relies upon the conduct of the respondent constituting the contravention of the relevant provision.
See also: Marks v GIO Australia Holdings (1998) 196 CLR 494 at 528 (Gummow J) where the above passage was quoted.
544 In this case s 51A was invoked in the statement of claim. The section provides in the relevant parts:
51A Interpretation
(1) For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.
(2) For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.
(3) Subsection (1) shall be deemed not to limit by implication the meaning of a reference in this Division to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead.
545 The way in which the section was pleaded was close to unintelligible. Paragraph 68 seemed to suggest that it was invoked as an element of the prohibition imposed by s 52. But s 51A "… does not of itself create a cause of action, nor … define a norm of conduct": Ting v Blanche (1993) 118 ALR 543 at 552 (Hill J). It does not create a cause of action independent of that created by s 52 when read with s 82. There are authorities which say that it casts a burden of proof on the respondent: see Ting 118 ALR 543; Phoenix Court Pty Ltd v Melbourne Central Pty Ltd (1997) ATPR (Digest) 46-179 at 54,432 (Goldberg J). It certainly casts the "evidential burden" on the respondent in the sense of an obligation to adduce evidence on the issue of whether there were reasonable grounds for making the representation. It does not impose on the representor the legal or persuasive burden to prove that it had reasonable grounds for making the representations alleged. As Emmett J said of s 51A in Australian Competition and Consumer Commission v Universal Sports Challenge [2002] FCA 1276, the section does not reverse the onus of proof when it applies. It merely requires the alleged representor to "adduce evidence to the contrary". There may be a question whether a representor can discharge the evidential burden by pointing to evidence which forms part of the applicant's case. In my opinion a respondent may rely upon evidence called by an applicant which answers the description "evidence to the contrary".
546 To make a promise which is not performed or a prediction which is not fulfilled is not of itself misleading or deceptive: Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 at 88; Bill Acceptance Corporation Ltd v GWA Limited (1983) 50 ALR 242. The making of a promise or prediction may contain implied representations of present fact such as the promisor's intention or capacity to perform the promise. Such representations if false may be misleading or deceptive within the meaning of s 52. A prediction which is apparently based on the expertise or experience of the representor may carry with it an implied representation as to the existence of that necessary expertise or experience and perhaps also an implied representation that relevant inquiries have been undertaken to support the opinion being offered.
547 It is important however to bear steadily in mind that s 51A does not introduce a rule of law that a promise which is not performed or a prediction which is not fulfilled is thereby misleading or deceptive. Section 51A(1) requires that a statement about a future matter made without reasonable grounds will be treated as if it is misleading or deceptive. It may be that in many if not most cases a person making a statement about the future will be treated as making the implied representation that he or she has reasonable grounds for the statement. If the reasonable grounds do not exist, the statement will generally be misleading or deceptive although that need not always be the case. Section 51A(1) may be said to involve a limited extension of the scope of s 52 to the extent that it transforms a logical proposition which is of broad scope into a rule of universal application. In my opinion a pleading of misleading or deceptive conduct which relies upon s 51A should make clear that it involves the allegation that the representor did not have reasonable grounds for making the statement alleged. Section 51A will then operate, to require the conduct of the representor, if established, to be treated as misleading or deceptive for that is its substantive operation. Its adjectival operation puts the evidential burden upon the representor and supports it with a powerful deeming provision. If a pleading of misleading or deceptive conduct based upon a statement about future facts does not expressly plead want of reasonable grounds yet invokes s 51A, then it should be taken to so plead or if that implication is not open it should be regarded as deficient.
548 The preceding analysis has consequences for dealing with the way in which the cause of action for misleading or deceptive conduct based upon statements of future fact is set up. The causal connection between the respondent's conduct in such a case and the loss or damage claimed is not the breaking of the promise or the failure of the prediction. The causal connection which must be shown to exist is a causal connection between the loss or damage claimed and the making of the promise or prediction without reasonable grounds.
Misleading or deceptive conduct - the merits of the case
549 The misleading or deceptive conduct alleged in this case rests upon the Continuing Representations. These were said to be false entirely on the basis that things said to have been promised were not done, or things were done contrary to promises made [67]. The applicants alleged that "the Continuing Representations have proved to be false in that …" [67]. There followed a list of failures to do the various things which it was said were promised. As already noted it is elementary that a promissory statement is not falsified by failure to perform the promise.
550 The applicants' case is that they were induced to enter into the Management Agreement by the false promises of the respondents. They then say, in effect, that because of the various failures of the respondents to perform according to their promises, Fubilan was prevented from obtaining the necessary reputation and skills to secure the renewal of the OTML Contract in its own right and to secure catering contracts in other areas. The loss or damage flowing from that comprises the management fees paid under the extended OTML Contract and the new OTML Contract and the loss of opportunity to Fubilan to undertake work in its own right in the future.
551 I have already found that the operative obstacle to Fubilan's capacity to secure the renewal of the OTML Contract in its own right was not any deficiency on the part of Eurest but its own lack of capacity at the level of its board and senior management to conduct reasonably workable commercial relationships with Eurest and OTML. To the extent that Fubilan lacks "the reputation and training to provide the customer service and management skills necessary to provide services to other existing and developing mining operations in their own right" the evidence did not, in my opinion, establish that that was due to the entry into the Management Agreement with Eurest. Given its composition and particularly its choice of advisor in Mr Fenwick, it would have faced the same difficulties, of which there was little direct evidence, whoever its manager had been.
552 At the threshold of this cause of action lies the contention that the various representations attributed to the respondents were made without reasonable grounds. In my opinion, putting aside puffing statements about strong management teams, status as "an outstanding provider of Support Services", as "the world's leading catering and services management company" and the achievement of "operational excellence", for which there were no falsifying allegations, the evidence adduced from Eurest was sufficient to establish reasonable grounds for making each of the statements alleged. The respondents plainly had the organisational capacity to do the things allegedly promised. There is no suggestion that Mr Hayes was other than honest in his intentions. It cannot be said that the respondents lacked the relevant intent to give effect to any promises they made and I find that, to the extent that their intention derived from Mr Hayes' they had that relevant intention. In so saying, I have not made particular findings about whether each of the alleged representations was in fact made. At least in part they are constructed from documents. But even if they were all made as alleged the causal connection to the loss and damage alleged is not made out. There was no evidence to support the proposition that had Fubilan not entered into the Management Agreement with Eurest it might, in some other way, have achieved the capacity to provide catering services in its own right to OTML or any other client. Even with appropriate levels of employee competency, Fubilan fell well short of the commercial maturity at board level necessary to maintain ongoing commercial relationships in a complex service delivery exercise conducted in its own right.
553 In my opinion the causes of action based on misleading or deceptive conduct are not made out and the claims based on them will be dismissed.
Breach of fiduciary duty - varied tender rate
554 To the extent that the applicants allege a breach of fiduciary duty in relation to the presentation of the varied tender to OTML their claim fails for essentially the same reasons as the claim for unconscionable conduct fails. Assuming the existence of a relevant fiduciary duty, there was no relevant wrong doing on the part of Eurest in this respect.
Breach of fiduciary duty - failure to pass on rebates - the pleaded case
555 It was effectively common ground on the pleadings that between 1 February 2000 and 24 November 2001, Eurest placed its food orders with Eurest (Australia), earlier known as Eurest (Australia). Eurest (Australia) would order the goods from Australia or from within PNG. It would retain invoices from Australian suppliers at its Brisbane office. Copies were not provided to the applicants, although the respondents maintained that copies were provided from time to time upon request. Eurest (Australia) would arrange for the goods to be delivered to OTML's freight forwarder's depot at Townsville for transportation by OTML to PNG for use by Fubilan in delivering services under the OTML Contract.
556 Eurest (Australia) issued Fubilan with its own invoices for the cost of the goods so provided. The applicants pleaded admission statements allegedly made by Mr Poelzl in an email to Mr Younger dated 6 October 2000 in which it was said that Eurest (Australia) "recovers about A$500,000 per annum in rebates for PNG purchases" [93]. This was denied. The applicants pleaded a further admission by the respondents on 24 August 2001, in a response to the MRDC technical paper. They allegedly admitted:
94.1 payment rebates were not afforded to FCS.
94.2 Eurest may receive some early payment discounts. These had not been passed on to FCS.
94.3 Eurest have received early payment discounts from some "in country" suppliers. These discounts were not passed on to FCS in the year 2000.
These admissions were admitted. In so doing the respondents said that Eurest was not obliged to pass the benefit of rebates or early payment discounts on to Fubilan. The applicants' pleading was curious. What were alleged were admissions rather than the facts admitted. That was a pleading of evidence rather than of material facts. A similar plea was made by the applicants, and admitted by the respondents, that on 29 January 2002 in Cairns Mr Poelzl admitted that the respondents had received rebates estimated at K88,000 which rebates had not been passed on to Fubilan [96].
557 Schedules provided by Eurest (Australia) to KPMG relating to Australian and PNG suppliers were alleged to have set out applicable rebates received in relation to each supplier and the volume of supplies for the period from the commencement of the Contract to 30 September 2001 [98]. That matter was also admitted although again it was in the nature of a plea of evidence rather than of a material fact.
558 In [100] of the statement of claim the applicants pleaded that KPMG had provided a report, in December 2002, based on information provided by Fubilan and MRSM. Statements made in the report were pleaded. They were to the effect that KPMG found Eurest had estimated the amount of rebates for the period 1 February 2000 to 31 December 2001 as A$159,000. KPMG's calculated rebates of A$205,464 due to Fubilan were said to be based on total purchases posted to the books and records of Fubilan for Eurest (Australia) at the same rebate percentage of 3.63%. KPMG was also said to have calculated outstanding rebates due for the period 1 February 2000 to 31 December 2001 on PNG supplies as K355,730. It was said that the findings in the KPMG report were qualified on the basis that KPMG did not have access to all supplier agreements. Finally it was pleaded that KPMG concluded that Eurest had received rebates relating to the purchases of Fubilan from the commencement of the Contract. This pleading was not an allegation of the facts set out in the KPMG report. It was an allegation of what the KPMG report contained. It had no place in the pleading. Nevertheless the statement of claim went on to treat the conclusions in the KPMG report as though they were allegations of material fact pleaded by the applicants. The report itself was not put in evidence. Absent its author it would have been inadmissible hearsay.
559 It was said that Fubilan at all material times had no knowledge of the invoicing and rebating arrangements allegedly undertaken by Eurest (Australia).
560 The statement of claim went on to plead matters relevant to the alleged breach of fiduciary duties by the respondents in advancing the varied tender proposal. In that context it was also pleaded that the respondents acted, in all dealings with the suppliers of goods or services to be used in providing the services under the OTML Contract, as the representative and agent of the applicants [100.4]. This, however, was said, in [110] to be "as part of and in furtherance of the First Retainer and the Second Retainer". The terms "First Retainer" and "Second Retainer" referred back to the engagement of the respondents to prepare a proposal for the OTML Contract for and on behalf of the applicants (the First Retainer) and to act as the applicants' catering contract manager if the proposal the subject of the First Retainer was successful [22]. This was on the basis that MRSM intended to incorporate Fubilan as a wholly owned subsidiary. The alleged agreement by the respondents through Mr Hayes to act as the applicants' catering contract manager was designated the "Second Retainer" [22.2]. That agreement was outside the framework of the Management Agreement. It would have been subsumed by its terms. The pleading then descended into further confusion. By reason of the matters pleaded in [106] to [110], none of which raised the Management Agreement, it was alleged that the respondents occupied a position and were, and each of them was, in a relationship of agency with the applicants in their dealings with OTML and in their dealings with the suppliers of goods or services to be used in providing services under the OTML Contract. The applicants were said to have reposed their complete trust and confidence in the respondents to act in their best interests. They depended upon the respondents acting in their best interests in all their dealings with the suppliers of goods or services to be used in providing the services under the OTML Contract [111].Then it was alleged in [112] that the respondents and each of them owed a duty to the applicants not to:
Not allow their self interest in obtaining benefits themselves or for or through the other respondents, including, without limitation, discounts and rebates, in dealing with the suppliers of goods or services to be used in providing the Services to detract from or effect in a manner disadvantageous to the applicants the duties and undertakings pleaded in [109].
The double negative was obviously a drafting error.
561 The fiduciary duties alleged to have been owed by the respondents to the applicants were said to have been breached in relation to the negotiation of the rates in the tender proposal ultimately accepted by OTML. That aspect has already been dealt with.
562 The applicants claimed that there was a breach of fiduciary duty by Eurest in relation to rebates. In substance they alleged that, while engaging in purchasing and invoicing of supplies from PNG suppliers, Eurest directly or indirectly accepted or obtained or agreed to accept or obtain from the suppliers consideration, including, without limitation, discounts, incentives and rebates which consideration was not passed on to the applicants [122]. In so doing it acted to their detriment and in breach of the fiduciary duties pleaded in [110], [111] and [112]. As a result Fubilan was said to have suffered loss and damage [126]. The damages were said to have included "the value of the rebates received by the respondents for the purchase of goods and materials for the Contract". Similar allegations were made against Eurest (Australia) which was also said to have been in breach of fiduciary duties owed to Fubilan.
563 Related to the rebate question was another alleged breach of fiduciary duty by Eurest. This derived from its operation of the Fubilan bank account. It was said that in operating the bank account Eurest owed a fiduciary duty to Fubilan not to pay out funds to Eurest (Australia) or otherwise without accounting for any consideration that the respondents directly or indirectly accepted or obtained, or agreed to accept or obtain, from suppliers including, without limitation, discounts, rebates or incentives [136]. Eurest was said to have paid out funds from the bank account to Eurest (Australia) without accounting for consideration received by way, inter alia, of discounts or rebates. Eurest (Australia) was said to have been involved in this breach of fiduciary duty on the part of Eurest by, with knowledge, receiving payments from Eurest in breach of its fiduciary duty and by reason of the fact that it took part in, and directed and controlled, Eurest's purchasing activities.
564 Eurest (Australia) admitted that it had not passed on any discounts, incentives and rebates to Fubilan and said it was not obliged to do so. It said that even if it were obliged to pass on such benefits to Fubilan it was entitled to set off the amount owed against interest paid by Eurest on moneys advanced to Fubilan to fund its operation during 2000. Eurest also contended that it was not obliged to account for discounts, incentives or rebates received from suppliers. In the event, it was not really in dispute that Eurest (Australia) had received rebates or discounts on goods supplied for the OTML Contract. The quantum of those rebates and/or discounts was not clearly established.
Breach of fiduciary duty - rebates - the contentions and merits
565 The pleaded basis for the existence of fiduciary duties owed by Eurest and Eurest (Australia) to Fubilan was the nature of the relationship between MRSM and Eurest prior to the commencement of the OTML Contract and the Management Agreement, ie under the so-called First and Second Retainers. The relationship thereafter was defined by the Management Agreement. How that contractual relationship gave rise to fiduciary obligations was never explained on the pleadings or in the closing submissions.
566 In the applicants' closing written submissions some generally uncontentious propositions about fiduciary duties were advanced. It was said that a fiduciary duty will arise where there has been an undertaking to act in the interests of another party together with the power to affect that interest in a practical sense and as a consequence of that power to affect the interests of the person to whom the duty is owed. Where the person is vulnerable and the power is abused breach of duty is established. Reliance was placed upon Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96-97 (Mason J). The critical feature of a fiduciary relationship was said to be the reposing of trust or confidence in the fiduciary who undertook to act for, and on behalf of, and in the interests of, vulnerable persons in the exercise of a power or discretion which would affect the interests: Breen v Williams (1996) 186 CLR 71 at 82. The obligation of the party owing the fiduciary duty to act reasonably and in good faith was referred to.
567 Without rectifying the discontinuity in the pleading, the closing submissions moved from general statements about fiduciary duties to the calculation of damages. The applicants submitted that they had produced evidence of the quantum of damages to the extent that it was available to them and that their evidence had not been contradicted by evidence put on by the respondents. Mr Fereday's evidence of rebates of up to 15% in the industry, read with Eurest documents showing that rebates were taken, entitled them to claim rebates on the basis of a percentage of total purchases for the taking of an account of profits in the relevant period. Mr Younger's email to the effect that rebates for goods sent to PNG were $500,000 per annum was said to confirm that the amounts in issue were substantial.
568 The respondents pointed out that it was settled in evidence, at least until mid 2003, that Eurest spent its own money purchasing stock for the Contract. This was not disputed. There was no clear evidence that reinvoicing was done by either Eurest or Eurest (Australia). Critically, neither Eurest nor Eurest (Australia) was spending Fubilan's money. They were spending their own. I accept that submission. They were supplying stock at the fixed price contemplated by the OTML Contract. This reflected Mr Fenwick's insistence, as early as March 1999, in correspondence with Mr Baitia, that food supply to site should be at a fixed contract rate. His letter clearly demonstrated his awareness of the availability of rebates and discounts in the industry. He wrote that if food prices were set in this manner MRSM would have the opportunity to prepare forecast budgets. Moreover the possibility of price hedging through rebating and invoicing offshore would be reduced.
569 At the heart of this claim was the applicants' contention that there was a fiduciary relationship between them and Eurest. The relevant relationship in this case was in fact defined by the Management Agreement although not pleaded in reliance upon it.
570 The Management Agreement was made, because, as appeared from Recital D:
It is a requirement of the [OTML] Contract that Fubilan Catering Services employ the Manager and keep the Manager employed for the duration of the Contract to manage, control and supervise the provision of the Services unless otherwise approved by OTML.
Its purpose was set out in Recital E:
In engaging the Manager in terms of the agreement Fubilan Catering Services will be able to managed by an entity that will make available to Fubilan Catering Services qualified and the high level of experience and skill that it has to enable Fubilan Catering Services to perform the Services in … satisfaction of the provisions of the Contract.
The Services were then defined by the OTML Contract.
571 Eurest was "appointed and engaged by Fubilan Catering Services to manage, supervise and control the Operations" (cl 2.2). The operations were "all the undertakings, activities and operations engaged in by Fubilan in carrying out, performing or providing the Services under the Contract …". This paragraph must be read in the light of cl 6.1 of the Special Conditions of the OTML Contract which required Fubilan to employ Eurest unless otherwise approved in writing by OTML to:
… manage, control and supervise the whole of the Services on behalf of the Contractor.
Eurest was to be responsible for, and to supervise the various activities of Fubilan including the acquiring of goods and services in accordance with the parameters of approved programs and budgets and the proper disbursing of all funds provided by Fubilan. The latter obligation included ":the payment of all sums payable by Fubilan Catering Services with respect to its acquisition of all services and remedies …". (cl 4.2(iii) and (vii)).
572 Reliance was placed by the applicants, in the context of the claims of breach of contract in relation to the rebates, upon cl 5.13. That clause related to the engagement of subcontractors by Eurest "to carry out and/or perform any but not all of the Services". The engagement of subcontractors was to be by written subcontract. This requirement was applicable to subcontractors "exceeding K20,000 in value with supplies of food stuffs, consumables or other goods or services required for carrying out the Operation". In my opinion however this provision did not extend to require written subcontracts to be entered into between Eurest and those from whom it purchased food in Australia or Papua New Guinea. The purchasing of food was an element of the Services to be provided under the OTML Contract. To purchase food from a supplier did not involve entering into a subcontract. As was pointed out by counsel for the respondents in his closing oral argument, one of the stated duties of Eurest under the Management Agreement was to notify the Fubilan board of any suspected breach of a subcontract.
573 In Schedule 2-7, Volume 2 of the OTML Contract there was a list of "subcontractors and suppliers whom the contractor proposes to use in the performance of the Services". But that Schedule was not part of the contract. The terms and conditions of the Contract appeared in Volume 1 of the Contract documents.
574 Eurest was to be paid a fixed management fee. The relationship between Eurest and Fubilan was that of manager and client. It was not a relationship of agent and principal. Eurest was not authorised to, and did not, purchase supplies for OTML as an agent for Fubilan. At all times it was required to act consistently with the rather general terms of the Management Agreement. Eurest (Australia)'s purchases for which Fubilan was said to have been directly invoiced by it were, strictly speaking, outside the framework of the Management Agreement. To the extent that it invoiced Fubilan directly it avoided any suggestion that Eurest was imposing a mark-up on a purchase from a member of its own corporate group.
575 Under the OTML Contract Fubilan was paid compensation which comprised:
(i) A lump sum payment for mobilisation and site establishment;
(ii) Monthly lump sum payments for Fubilan's fixed and variable operating and overhead costs (excluding costs of food stuffs and the contractor's profit);
(iii) Monthly lump sum payments for Kiunga camp services;
(iv) Unit rates on a per plate basis which shall be the contractor's full compensation for costs of food stuffs and for all the contractor's profit for all of the work. (s 3 cl 1.1)
576 Section 3-1 of the OTML Contract set out the unit rates for various classes of meal by reference to menus, designated menus 1, 2, 3 and 4. This was to be read with cl 1.5, Unit Rates:
Item 3, Schedule 3-1 specifies the unit rates payable to the Contractor for landed cost of all foodstuff consumables (but excluding cleaning materials, crockery, cutlery, cooking utensils and the like and excluding services provided by OTML at no cost to contractor); and for Contractor's profit for all of the services. Compensation shall be on a per plate basis for each service actually provided in accordance with the scope of work at section 4.
As appears from these provisions OTML was to pay Fubilan at a fixed rate per plate which covered the cost of food stuffs. So the lower the price at which food could be acquired for the OTML Contract, the greater the profit to Fubilan.
577 The matter at issue in relation to the cause of action for breach of fiduciary duty in relation to the rebates is whether there was a fiduciary obligation imposed on Eurest as manager or upon Eurest (Australia) by virtue of the relationship defined by the Management Agreement. In considering that question, it is not necessary to explore the range of all possible fiduciary obligations which might be superimposed on the contractual obligations in this case. In operating Fubilan's bank account pursuant to the authority given to it by cl 5.11 of the Agreement, Eurest might have a fiduciary obligation not to apply Fubilan's funds for its own benefit for purposes outside those related to the performance of the agreements. Plainly reimbursement for expenses incurred would fall within the scope of a proper use of the account. This is the kind of obligation that attaches to any person given funds to be applied for a particular purpose.
578 In my opinion Eurest was authorised, under the Management Agreement, to purchase foodstuffs both offshore in Australia and onshore in PNG in order to provide the services which Fubilan had contracted to provide under the OTML Contract. There was a debate about the requirement that in so doing it was to operate within the parameters of an approved program and budget (cl 4.2(iv)). That debate is not however relevant to the question whether there was a fiduciary obligation imposed on either it or Eurest (Australia) in relation to such purchases.
579 It is clear that a fiduciary relationship can co-exist with a contract and may be an incident of all or some aspects of the contractual relationship.
580 In Hospital Products Ltd 156 CLR 41, the High Court was concerned with a distribution agreement for hospital products between an American company and an Australian distributor. The Australian distributor acquired a large quantity of the company's demonstration products, sterilised them and sold them in competition with, or in substitution for, the company's products. He later manufactured the same products locally. While he was held in certain respects to be in breach of the distribution agreement, the High Court held by majority (Gibbs CJ, Wilson and Dawson JJ, contra Mason and Deane JJ) that there was no fiduciary relationship between the parties.
581 Gibbs CJ observed that the categories of fiduciary relationships are not closed, the difficulty being however to suggest a test by which it may be determined whether a relationship, if not within one of the accepted categories, is fiduciary (at 68). His Honour said (at 70):
… the fact that the arrangement between the parties was of a purely commercial kind and that they had dealt at arm's length and on an equal footing has consistently been regarded by this Court as important, if not decisive, in indicating that no fiduciary duty arose.
Wilson J in like vein said (at 118):
In a commercial transaction of the kind here under consideration, where the parties are dealing at arm's length and there is no credible suggestion of undue influence, I am reluctant to import a fiduciary obligation. The courts have often expressed a cautionary note against the extension of equitable principles into the domain of commercial relationships so as "not to strain [them] beyond [their] due and proper limits", to use the words of Lord Selborne LC in Barnes v Addy ([1874] 9 Ch App 244 at 251).
And further (at 119):
As the cases referred to by the Chief Justice in his judgment show, this Court has refused, on several occasions, to find a fiduciary relationship in circumstances where the parties contract with each other freely and more or less on an equal footing in a commercial dealing.
582 On similar grounds Dawson J also found that there was no fiduciary relationship arising out of the distributorship agreement. As to the relevance of trust and confidence between the parties, he observed (at 147):
A fiduciary relationship does not arise where, because one of the parties to a relationship has wrongly assessed the trustworthiness of another, he has reposed confidence in him which he would not have done had he known the true intentions of that other. In ordinary business affairs persons who have dealings with one another frequently have confidence in each other and sometimes that confidence is misplaced. That does not make the relationship a fiduciary one. … A fiduciary relationship exists where one party is in a position of reliance upon the other because of the nature of the relationship and not because of a wrong assessment of character or reliability. That is to say, the relationship must be of a kind which of its nature requires one party to place reliance upon the other; it is not sufficient that he in fact does so in the particular circumstances. Of course, where a relationship is fiduciary in character it will be so whether or not the party in whose favour the fiduciary obligations are imposed actually trusts the party upon whom the obligations are imposed.
583 Mason J, while in dissent on the existence of a fiduciary relationship, essayed a helpful and frequently quoted discussion of the circumstances in which fiduciary relationships may arise. He cited Phipps v Boardman (1967) 2 AC 46 for the proposition that relationships of trust and confidence or confidential relations such as those between trustee and beneficiary, agent and principal, solicitor and client, employer and employee, director and company and between members of a partnership are accepted fiduciary relationships. A mere subcontractor is not a fiduciary. Although the subcontractor's work could be described as work carried out in the interests of the head contract, the subcontractor "cannot in any meaningful sense be said to exercise a power or discretion which places the head contractor in a position of vulnerability".
584 In relation to the coexistence of contractual and fiduciary relationships, Mason J said (at 97):
… it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.
585 In Breen v Williams 186 CLR 71, the High Court decided that a doctor owes a patient no general duty to provide access to the patient's medical records. The decision did involve a consideration of whether fiduciary obligations arose out of the doctor/patient relationship. Gummow J accepted that the mere presence of a contract does not exclude the coexistence of the concurrent fiduciary duties and that it may in particular circumstances provide the occasion for their existence. His Honour relied upon what was said by Mason J in Hospital Products Ltd 156 CLR 41. Gaudron and McHugh JJ cited Mason J and also, with approval, the statement of Sopinka JA in Norberg v Wynrib (1992) 92 DLR (4th) 449 at 481 (at 118):
Fiduciary duties should not be superimposed on … common law duties simply to improve the nature or extent of the remedy.
586 In the Fourth Edition of Equity, Doctrines and Remedies (Meagher, Heydon and Leeming), the judgment of Mason J in Hospital Products Ltd 156 CLR 41 is cited with the added observation by the learned authors:
However where there is a contract and no established category of fiduciary relationship (for example partnership or agency) applies, it must be remembered that trust and reliance may be tempered by caution and self-interest and vulnerability to abuse remedied in the particular mutual accommodation of competing interests achieved in the contract itself, so that these considerations are relevant to the decision whether the contract has wholly excluded any fiduciary relationship. Fiduciary duties are less likely to be identified in commercial transactions between parties at arms' length effective in written form: Artifakts Design Group Ltd v NP Rigg Ltd [1993] 1 NZLR 196 at 231; Auag Resources Ltd v Waihi Mines Ltd [1994] 3 NZLR 571. See generally Re Gold Corp Exchange Ltd (In Receivership) [1995] 1 AC 74 at 98 …
And further at 5-105:
… there are not many cases outside the "accepted" categories in which courts have found fiduciary relationships to exist.
And (at 5-020):
"Commercial" relationships are, of course, capable of being fiduciary. A trust or an agency, for instance, is none the less fiduciary because it happens to arise in the commercial context. The more difficult question is, to what extent will courts, in a commercial context, find fiduciary relationships to exist outside the "accepted" categories. Traditionally there has been considerable reluctance to do so.
587 Courts have traditionally been reluctant to superimpose fiduciary duties upon contractual obligations outside the accepted categories of fiduciary relationships. That observation is supported not only in Meagher, Gummow and Leeming, but also in the 31st Edition of Snell's Equity (2005, Thomson) which states (at 149):
The reason fiduciary duties do not commonly arise in commercial settings is that it is normally inappropriate to expect a commercial party to subordinate its own interests to those of another commercial party. But if that expectation is not inappropriate in the circumstances of the relationship between the parties, and this will be presumed in a settled category of fiduciary relationships, then fiduciary duties will arise.
See also Lehane JRF, "Fiduciaries in a Commercial Context" in Finn (ed) Essays in Equity (Law Book Co, 1985) at 104.
588 In Paul Dainty Corp Pty Ltd v National Tennis Centre Trust (1990) 22 FCR 495 the Full Court said (at 515):
The authorities make it clear that equity will not impose fiduciary obligations on parties who have entered into ordinary and arm's length commercial relationships, which fully prescribe the respective powers and duties of the parties. This is particularly so when the parties involved are substantial corporations, having equal bargaining power.
And in Elders Trustee and Executor Co Ltd v EG Reed Pty Ltd (1987) 78 ALR 193, Gummow J referred to the circumstances in which parties are acting in commercial transaction, at arms length and with the assistance of independent professional advice and observed:
Whilst these considerations are not of themselves decisive indicia of the absence of fiduciary obligations of disclosure … they are of significance: Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1985) 100 CLR 342 at 350-1; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 70, 119 and 146.
589 Although the Management Agreement in the present case was entered into to meet a condition imposed by OTML for an experienced provider of catering services to manage the contract for the successful tenderer it was not thereby anything less than an arm's length contract. MRSM which initiated the discussions with Mr Hayes did so with the backing of MRDC and the assistance of the advisor of its choice, Mr Fenwick a person widely experienced in the industry although, as events turned out, he was not a good choice for a long term relationship. The terms of the Management Agreement which required competence and diligence on the part of the Manager, responsibility for and supervision of the activities of Fubilan, preparation of programs, budgets and a Corporate Manual and of accounts and records, as well as reports, do not convey the sense of a relationship of a fiduciary character. The relationship under the Management Agreement was commercial and arm's length. Indeed, the provision of programs, budgets and reports presupposes the existence of the capacity in Fubilan to consider and make decisions based on those matters. That Fubilan may have been constrained in its ability to terminate its manager or to do certain other things by reason of OTML's powers under the OTML Contract does not change the relationship under the Management Agreement into a fiduciary one.
590 The question that then arises is whether in some more limited way Eurest and Eurest (Australia) had fiduciary obligations to Fubilan in relation to the purchase of foodstuffs for the OTML Contract.
591 Eurest (Australia) had no fiduciary obligation to Fubilan arising out of the Management Agreement. Its obligations under the Agreement were those imposed by cl 15 whereby it guaranteed to MRSM and Fubilan Eurest's performance of its obligation to indemnify them against any loss or liability suffered in connection with any default or delay by Eurest in the performance of those obligations. It was not in any sense a representative or agent of Fubilan in relation to the purchase of food stuffs. Nothing about its relationship to Fubilan or MRSM outside the framework of the Management Agreement gave rise to any such obligation. No basis for such a duty was pleaded. The First and Second Retainers which were relied upon generally for establishing the claimed fiduciary obligations, were subsumed in the Management Agreement. To the extent that it was able to secure rebates or discounts in respect of purchases of food stuffs for which it invoiced Fubilan, Eurest (Australia) was not in breach of any fiduciary obligation to Fubilan. And if Eurest had breached fiduciary obligations owed to Fubilan they were not contractual obligations and not within the scope of Eurest (Australia)'s guarantee and indemnity obligation.
592 To the extent that either Eurest or Eurest (Australia) purchased food stuffs for use in the provision of the services under the OTML Contract, they did not purchase as agent for Fubilan as principal. Rather each purchased as a principal in its own right. Although Eurest can be said, in a loose sense, to have been acting in a representative capacity, the terms of the Management Agreement were sufficiently prescriptive in relation to expenditures to be incurred by the manager that a fiduciary relationship cannot properly be superimposed upon its terms.
593 It is important in the present case to put to one side, in determining whether there was a fiduciary obligation, questions about the alleged failure by Eurest to comply with requirements of the Management Agreement relating to budgets and programs under which expenditure was to have been authorised. Such failures, if made out, would not change the character of the relationship to which the contract gives rise so as to superimpose upon it fiduciary obligations. Nor is it to the point that Fubilan was a company effectively controlled by indigenous landowners who were not commercially sophisticated. As already noted in connection with the unconscionable conduct claim, there was no basis for the contention in any of the circumstances surrounding the creation of the varied tender that MRSM or Fubilan was unable to look after its own interests or that it was at a special disadvantage as against Eurest or Eurest (Australia). MRSM had competent advisors available to it and to Fubilan. It had management services provided to it by MRDC. Fubilan had Mr Fenwick engaged as its consultant in the relevant period. These structural arrangements along with the terms of the Contract themselves tell against the imposition of any fiduciary obligations.
594 Consistently with the weight of authority and the textbook writings, the law will not lightly impose fiduciary obligations, outside settled categories, on parties to well defined contractual relationships entered into at arms length and prescribing in detail their rights and obligations. When a contract is entered into at arm's length by parties properly advised, the court should not shadow the contractual obligations of one of them with judge-made fiduciary obligations simply because the other is commercially inexperienced. Too great a readiness to impose such duties is apt to give rise to uncertainty and associated risks in commercial relationships. This may be to the disadvantage of those who, although commercially unsophisticated, wish to enter into such relationships with the assistance of their own advisors.
595 In my opinion the claim for breach of fiduciary duty against the respondents in respect of rebates and discounts cannot succeed. These conclusions apply to the claims for breach of fiduciary duty by Eurest and Eurest (Australia). They also extend to the alleged breach of fiduciary duty by Eurest in respect of dealings on the Fubilan bank account and the alleged involvement by Eurest (Australia) in the breach of fiduciary duty by Eurest.
Negligence of Eurest and Eurest (Australia) in respect of varied tender rates
596 The applicants allege that from or about 13 July 1999 the respondents knew or ought to have known that Poons had lodged the Poons' tender proposal and that from or about 1 November 1999 that proposal included rates less than the rates contained in the tender proposal lodged by Eurest [156]. Moreover it was said that at all material times from their acquisition of Poons, the respondents knew or ought to have known that unless the Poons' tender proposal were withdrawn it was likely that it would detrimentally affect the applicants' position on the basis that the tender proposal would either be unsuccessful or need to be varied [157]. Eurest and Eurest (Australia) were said to have failed to advise the applicants of the likelihood of problems with the tender proposal [158]. By failing to advise the applicants of those matters, Eurest and Eurest (Australia) were said to have breached their duty of care to exercise "the standard of care and skill normally exercised by the world's leading catering and services management company". Then it was said that if Eurest and Eurest (Australia) knew the potentially detrimental effect of the Poons' tender proposal on the applicants' position, the applicants would have been able to require them to withdraw their proposal. If the Poons' proposal had been withdrawn, OTML would not have had a competing tender against which to request a reduction in the prices contained in the tender proposal.
597 On the basis of the facts found in relation to the variation of the tender proposal including the insistence by OTML for a revised tender, it is difficult to see what, if any, difference the withdrawal of the Poons' tender would have had. Eurest and Eurest (Australia) acted reasonably in the circumstances. It did so in conjunction with Mr Fenwick. There was no negligence. This claim is dismissed.
Negligence of Eurest and Eurest (Australia) in respect of available rebates
598 In [164] to [172] of the statement of claim, the applicants say that Eurest and Eurest (Australia) in providing management services under the Management Agreement were responsible for negotiations with suppliers in relation to terms and conditions including payment terms, credit periods and rebates or discounts on supplies [164]. Suppliers to the catering industry provide discounts and rebates based on the volume of purchasing and/or payment times directly to the customer. Primary rebates provided by suppliers with international supplier networks were said to be available at three levels, namely locally, nationally and internationally [166]. Where the supplier was not also the manufacturer, rebates, discounts or incentives were available from the manufacturer directly [167]. These were referred to as secondary rebates and were said also to be available at the local, national and international levels [168].
599 It was said that Eurest and Eurest (Australia) were aware, or ought to have been aware, of these matters. Primary and secondary rebates were available to all the respondents through their purchasing networks in PNG, Australia and globally. At [171] it was said:
In beach [sic] of the duty of care pleaded in paragraph 154 above, the First and Second Respondents have failed to obtain, or to pass on, the benefits of Primary Rebates and Secondary Rebates available for the First, Second, and Third Respondents' Papua New Guinea, Australian and global purchasing networks, to the Applicants.
It was alleged that the breach of duty caused the applicants to suffer loss or damage particularised as:
The value of rebates received by the respondents for the purchase of goods and materials for the contract.
The value of rebates available to the respondents for the purchase of goods and materials for the contract.
600 The Court did not receive any substantial submissions from the applicants in relation to this claim. The essence of their complaint was not that the respondents failed to secure rebates from purchases of food for use in the catering contract, it was rather that in breach of their contractual and/or fiduciary obligations they failed to pass them on to the applicants. It is difficult to see how any question of breach of duty of care properly arose here. The matter is determined essentially by the existence or non-existence of fiduciary or contractual obligations. No basis for negligence on the part of the respondents in this respect is shown and this complaint to will be dismissed.
Negligence of Eurest in relation to management of contract
601 There were numerous allegations in the statement of claim of negligence on the part of Eurest in its performance of the Management Agreement. These were set out in [173] to [194]. Each of the matters was said to constitute a breach of a duty of care pleaded in [154] of the statement of claim. That duty of care was said to have arisen under the First and Second Retainers which, as has already been noted, were subsumed by the terms of the Management Agreement.
602 The applicants alleged failure on the part of Eurest to provide timely advice about or include in any proposed budgets or cash flow projections reference to nine containers of goods ordered by the respondents which arrived at Kiunga in or about February 2000. No relevant loss or damage was identified in the pleading or in the particulars of damages. The respondents referred in their submissions to Fubilan's own cash flow projections showing a requirement to pay K1 million for transit food on 31 March 2000. A report sent to Mr Baitia by Mr Ehlers on 7 January 2000 referred to transit goods worth K1.4 million described as "overseas and local due late January 2000". Mr Fenwick was cross-examined about this complaints. It was clear from his evidence that there was no basis for it.
603 Eurest was also said to have failed to advise Fubilan and MRSM that under the terms on which it had acquired Poons' business, Fubilan was not required to pay for the Poons' stock held in the OTML warehouse at Tabubil until October 2000 and that the price of the stock included charges in excess of the stock to Eurest. Fubilan was said to have paid Eurest K2,615,065.09 for the purchase of the stock in or about August 2000. The figure paid was not disputed on the pleadings. According to particulars, the overpayment was K816,735.79 representing the difference between the sum paid and the opening stock value shown in a document obtained from the respondents' discovery opened with the words:
Reggie/Fred the following is the break down for the invoice for the final stock and Equipment. It is to be invoiced to MRSM (Mineral Resources Star Mountains) which operates as FUBILAN CATERING SERVICES. The invoice is from Poon (PNG) Ltd. [sic]
I infer it was an internal memorandum addressed to Mr Armstrong and to Mr Nana. Mr Armstrong said he had received it but there was no more specific evidence about its provenance.
604 The document showed food stock on hand at the Poon warehouse on 31 January 2000 as K1,798,329.30. Equipment on hand at the warehouse on the same date was shown as K44,958.46. The total value of food stocks at the messes on 31 January 2000 was shown as K79,621.47 already discounted by 40%. Total equipment in the messes, warehouse office and main office was shown at K190,040.06. A figure of K40,000 was shown as the valuation for a Hino truck. After deducting the duty component on overseas product and adding VAT, the total for these items came to K2,014,365.80. In addition to that figure, the document contained a breakdown for four containers in transit which, together with duty paid by Poons and VAT, totalled K600,699.29. The sum of both invoices was K2,615,065.09. Mr Armstrong accepted that the deduction for duty on the overseas product was made because OTML had paid that duty.
605 A second document put to Mr Armstrong comprised a report printed off the Eurest MYOB Excel system on 17 September 2004. It set out a summary of supplier payments made by Eurest for the period 1 January 2000 to 31 December 2000. Evidently they were made from the Fubilan Imprest account. The document identified three cheques as follows:
Cheque 259601 dated 1 June 2000 for a total amount of K1,569,356.73
Cheque 259783 dated 25 August 2000 for a total amount of K606,606.42
Cheque 386553 dated 25 May 2000 for a total amount of K1,092,763.23.