Gough & Gilmour Holdings Pty Limited v Caterpillar of Australia Limited

INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION CORAM: BOLAND J 19 December, 2002 Matter No IRC 5227 of 2000 Gough & Gilmour Holdings Pty Limited & ors v Caterpillar of Australia Limited & ANOR Application under s 106 of the Industrial Relations Act 1996 JUDGMENT [2002] NSWIRComm 354

1 Since 1989 Gough & Gilmour Holdings Pty Limited ("first applicant") and its predecessor companies have been Caterpillar dealers selling and servicing Caterpillar equipment and parts in a territory encompassing New South Wales and the Australian Capital Territory. The company employs over 700 employees and sales revenue for the year ended 30 June 2000 was $360,280,000. Caterpillar Inc. ("second respondent") is a US company and one of the world's largest manufacturers of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. It sells its product under registered trademarks including the marks of "Caterpillar" and "Cat". Caterpillar Inc. is represented in Australia by its wholly owned subsidiary, Caterpillar of Australia Limited ("first respondent").

2 Harcourt David Gough ("second applicant") is the managing director of the first applicant and is the beneficial owner of 90 per cent of the issued share capital in that business. The remaining 10 per cent is owned by Anthony Lansley Gilmour ("third applicant") who is a director of the first applicant.

3 The business relationship between the first respondent and the applicants is governed by three dealership agreements ("the dealership agreements"):

a) Sales and Service Agreement entered into between the applicants and the first respondent on 1 July 1991. b) Distribution Agreement for Engines, Parts and Service made between the applicants and the first respondent dated 1 July 1991. c) Product Support Agreement for Engines, Parts and Service made between the applicants and the first respondent dated 12 November 1997.

4 On 8 June 1999 the managing director of the first respondent, Mr Chris Curfman, advised the second applicant the relationship between the parties was over and that the second applicant should sell his shares in the business. Mr Gough said he did not wish to sell his interests in the business and contended that he only agreed to do so on the basis of an assurance by the first respondent that the sale would be conducted on an amicable and reasonable basis without duress and would provide an opportunity for himself and Mr Gilmour to receive a fair value for the shares; that the first respondent would assist the applicants to achieve such an outcome; and, by implication, that if no agreement for a sale at fair value could be reached the applicants would retain the dealership. In December 1999 the first respondent nominated a potential purchaser for the first applicant's assets and goodwill that it was prepared to appoint as the new dealer for NSW and the ACT, namely, WesTrac Equipment Pty Limited ("WesTrac"), which operates the Caterpillar dealership in Western Australia and north-eastern China. WesTrac, along with the Seven Network Limited, is a division of Australian Capital Equity Pty Ltd ("ACE"), a holding company for interests of Kerry Stokes.

5 From about December 1999 to September 2000 the second and third applicants said they reluctantly conducted sale negotiations with WesTrac. The negotiations were unsuccessful and WesTrac terminated the negotiations in September 2000 although, subsequently, WesTrac attempted in March 2001 to negotiate further with the applicants to enable a sale to proceed but the applicants declined.

6 On 26 October 2000 the first respondent served notices upon the first applicant giving 90 days' notice of the termination of the dealership agreements in accordance with the terms of those agreements. On 27 October 2000 the applicants filed a summons for relief under ss 106 and 107 of the Industrial Relations Act 1996. That summons was amended and in its final form is the third further amended summons filed in the proceedings. For reasons that will later be explained, implementation of the termination notices served by the first respondent on the first applicant has, in effect, been stayed pending the outcome of these proceedings.

7 In their third further amended summons for relief, the applicants claimed the dealership agreements were unfair, harsh, unconscionable and against the public interest and further, or in the alternative, there was an "overall arrangement" made between the first applicant and the respondents in or about February 1989 that was unfair, harsh, unconscionable and contrary to the public interest. The overall arrangement was said to be constituted as follows: (a) the three dealership agreements;

(b) the alleged plan or understanding between the first respondent and the second respondent concerning the terms of the dealership agreements;

(c) the alleged plan or understanding between the first respondent and the second respondent concerning the selection and appointment of the first applicant as a Caterpillar dealer in New South Wales and the Australian Capital Territory (the "Territory");

(d) the alleged plan or understanding between the first respondent, the second respondent and the first applicant concerning the financing of the Caterpillar dealership conducted by the first applicant;

(e) the alleged plan or understanding between the first respondent, the second respondent and the first applicant concerning the operations of the Caterpillar dealership conducted by the first applicant;

(f) the alleged plan or understanding between the first respondent, the second respondent and the first applicant concerning the review of the performance of the Caterpillar dealership conducted by the first applicant;

(g) the alleged plan or understanding between the first respondent and the second respondent concerning the termination of the Caterpillar dealership conducted by the first applicant;

(h) the alleged assurances by the first respondent and second respondent to the applicants that the applicants could reasonably expect to be secure in the dealership in the Territory provided good PINS ("PINS" is an acronym for "Percentage of Industry Net Sales" and is a measure of market share) and good profit were maintained (the " First Assurance " );

(i) the alleged assurances by the first respondent and second respondent to the applicants that the 90 days' notice of termination provision of the dealership agreements would only operate in the event of serious and wilful misconduct or sustained and significant poor performance (the " Second Assurance " );

(j) an alleged arrangement between the applicants and the first respondent wherein the latter gave assurances with respect to the use of the 1997 Review of the operation of the applicants' dealership (the " Third Assurance " );

(k) an alleged arrangement between the applicants and the first respondent wherein the latter gave various assurances as to the proposed sale process for the dealership, being assurances that were intended to and did induce the applicants to enter the said sale process (part of the " Fourth Assurance " ); and

(l) an alleged arrangement between the applicants and the second respondent wherein the latter gave various assurances as to the proposed sale process for the dealership, being assurances that were intended to and did induce the applicants to enter the said sale process (balance of the " Fourth Assurance " ).

8 The applicants sought relief at two alternative levels. The primary relief sought was continuation of the dealership agreements, albeit with substantial variations that the applicants contended were necessary to reflect what they considered was the intention of the parties at the time they entered into the dealership agreements. Variations were also sought to what the applicants alleged constituted an "Overall Arrangement". Details of the proposed changes to the dealership agreements are set out later in this judgment. 9 The alternative relief sought by the applicants in the event the dealership agreements are varied by the Court, but not in the manner sought by the applicants, is compensation. In this regard, in Gough & Gilmour Holdings Pty Limited v Caterpillar of Australia Pty Limited (unreported, Boland J, 23 November 2000) the Court acceded to a request by the applicants for a split hearing. That is, the first part of the hearing would deal with the issue of the applicants' claim for variation of the dealership agreements. If it became necessary, for the reason that the Court decided there was unfairness and the dealership agreements should be varied but not in the manner proposed by the applicants, there would be, in effect, a second hearing to determine whether any alternative form of relief was available and if so the form of that relief.

10 In light of the decision to split the hearing, and putting aside momentarily the questions of jurisdiction and power, this part of the proceedings is, firstly, concerned with the question of whether the contracts or arrangements between the applicants and the respondents are unfair or became unfair because of any conduct of the respondents. The second question is whether the primary relief sought by the applicants should be granted pursuant to s 106(1) of the Industrial Relations Act 1996. If the Court finds there was unfairness but decides it does not have the power to grant the primary relief sought by the applicants or, as a matter of discretion, decides not to grant the primary relief, the parties have reserved their right to make further submissions on the question of relief.

11 The respondents vigorously opposed the orders sought by the applicants and contended the Commission does not have jurisdiction to hear and determine the application for relief. The respondents further, or in the alternative, contended the orders sought are beyond power. Irrespective of jurisdiction and power, the respondents contended that: (a) The dealership agreements are not unfair;

(b) The dealership agreements have not become unfair by reason of the conduct of any party;

(c) Alternatively, if the applicants are entitled to any relief (which is denied), it ought not include: (i) Orders varying the dealership agreements in the manner sought by the applicants;

(ii) Orders prohibiting the first respondent from entering into a dealership agreement in respect of New South Wales and the Australian Capital Territory.

12 The proceedings have been lengthy and involved. The case consumed 106 hearing days and nearly 7000 pages of transcript. There were 381 exhibits and 20 witnesses, seven of whom travelled from overseas to give evidence. During the proceedings the Court made 10 interlocutory judgments on issues including joinder of a foreign corporation, imputed waiver of legal professional privilege and the Commission in Court Session's implied power to make interlocutory orders. The applicants were represented by Mr M J Kimber SC, Mr R Goot SC and Mr I Taylor of counsel and Mr A B Gotting of counsel. The respondents were represented by Mr P M Hall QC, Mr W T Houghton QC and Mr M Connock of counsel. The Court expresses its appreciation to counsel and their instructing solicitors for the manner in which they conducted their respective cases. The Court was also greatly assisted by the clarity and comprehensiveness of counsels' written and oral submissions.

13 The proceedings involved an exceptionally wide range of issues, some of which were complex. It would be helpful at the outset, I believe, to provide an overview of the parties' respective cases.

14 Mr Kimber outlined the applicants' case as follows: 1) The applicants entered into the dealership agreements on the basis of both representations and the legitimate expectation that provided they achieved acceptable market share and were profitable, they would be able to retain the dealership indefinitely, both for their benefit and that of their children (as anticipated successors in the business).

2. In spite of their intention to retain the dealership for the very long term and despite the fact they achieved strong market share and more than acceptable profitability, the applicants: (a) were induced to enter into a sale process for the dealership on the basis that the second respondent had already made a decision that they could not retain the dealership (with the implication being that a cancellation would result if they refused to agree to a sale process); and (b) when that sale process failed, through no fault of the applicants but courtesy of, inter alia , the respondents' breaches of various assurances as to how that sale process would be conducted, had their dealership cancelled without notice and "without cause". 3) Contrary to the repeated assertions of the respondents that this case is somehow "unique", the applicants contend that it is a typical (and indeed a classic) section 106 case, as is apparent from the following incontrovertible propositions, namely: (a) prior to February 1989, the dealership was owned and operated by Waugh & Josephson for many years, but during the 1980s it was poorly managed and had fallen into a parlous state; (b) the respondents were looking for new blood that could turn the dealership around, i.e. return it to a well managed and profitable state. The applicants were chosen as the most suitable individuals to achieve these goals, not only because of their individual qualities but also because of their extensive experience with the management and operation of Caterpillar dealerships; (c) the applicants took enormous personal financial and business reputation risks in the belief that they could turn the dealership business around and on the basis that, if they did so, they could hold on to the dealership indefinitely. Their understanding and belief was that the only condition was that they continued to achieve acceptable market share, were profitable and did not misconduct themselves (whether that be in a criminal sense or otherwise); (d) the applicants upheld their side of the arrangement in that they undoubtedly turned the business around, and expanded it dramatically, and made it into an extremely profitable and sought after business. They had complied with the terms of the Sales and Service Agreement and had not otherwise misconducted themselves so as to provide "cause" for the termination of the arrangement; (e) the respondents, on the other hand, after having received substantial direct and indirect financial and other benefits associated with the success that the applicants have achieved with the dealership, have exercised the power that they have under the Sales and Service Agreement to bring the whole arrangement to an end "without cause". This power has been exercised by the second respondent: (i) without a proper foundation for such exercise, as in fact the applicants were performing well; and (ii) the decision was based on false and misleading reports provided by the first respondent which did not convey the true state of facts relating to the dealership or the sale process. (f) the first respondent induced the second respondent to approve Gough being approached with a "request" that he sell the dealership, by misleading the second respondent into believing, inter alia , that the first applicant was a poorly performing dealer (and had been so for many years); (g) the first respondent, in conjunction with the Vice President - Asia Pacific of Caterpillar Inc. (Mr Ramseyer) and the Stokes' organisation (owner of WesTrac) induced the second respondent into approving the cancellation of the dealership by inducing the second respondent to believe (erroneously) that the applicants had not negotiated in good faith, had deliberately prolonged the sale process, had reneged on a commercial agreement with the Stokes' organisation such that they were responsible for the failure of that process and also to believe either that there were no options to cancellation or that such available options had already been explored without success; (h) the first respondent and Mr Ramseyer engaged in the above misleading conduct so as to disguise their true intention and motivation which was to effect a rationalisation of dealerships in Australia. Their conduct was designed to circumvent the second respondent's overarching policy against dealership rationalisation (save in circumstances where a dealership is already going to "change hands" for other reasons). In any event, and regardless of the motive behind the termination, the first respondent in recommending termination failed to act in good faith or with any proper justification; (i) the applicants were never afforded any opportunity to respond to the March 1999 allegations of poor performance and irreconcilable differences in the relationship; were never given a chance to formulate and/or discuss an "improvement plan to re-establish their viability as a dealer"; were never warned as to the prospect of cancellation unless significant changes or improvements occurred; were never afforded an opportunity to put their side of the story as to why the sale process failed; and were never warned in August/September 2000 that unless a deal was soon finalised then they would be cancelled; (j) the respondents, whilst firm in the view that dealership cancellation only occurred as a "last resort", totally ignored that well established and understandable policy not only by denying the applicants natural justice but also by refusing to take (or even attempt) any one or more of a number of different steps/options that would have (or may have) obviated the need to resort to cancellation (eg the development and implementation of a relationship improvement plan; the Gough "step back" from day to day management idea; permitting the applicants to sell to another Australian or overseas dealer). The first respondent (in conjunction with Mr Ramseyer of the second respondent) misled the second respondent into adopting such a stance by convincing it that there were no options to cancellation that were worth pursuing (especially the "step back" idea and the development of an improvement plan).

15 The respondents' case may be outlined as follows: 1) The Commission in Court Session does not have jurisdiction to hear and determine the applicants' claim, nor does it have the power to grant relief of the kind sought.

2. If the Court finds that it does have the necessary jurisdiction and power contrary to the respondents' submissions, the dealership agreements are not unfair and have not become unfair by reason of the conduct of the parties for the reasons that follow: (a) the agreements and their terms - including the reciprocal termination clause and its proper construction and operation that entitled the first respondent to terminate the dealership agreements without cause on 90 days' notice of termination; (b) the unique nature of the Caterpillar/dealer relationship which has at its heart the need for trust, respect, cooperation and open communication; (c) the circumstances in which the applicants acquired Waugh & Josephson and the extensive business, financial and other experience, knowledge and advice they had at the time regarding, inter alia , the manner in which dealership operated and the terms of the reciprocal termination clause; (d) the beneficial use to which the applicants put the reciprocal termination clause (and the nature of the dealership) at the time of the restructure in 1991 and the manner in which that demonstrated their level of understanding and appreciation of the true nature of the relationship. (e) the history of the relationship, and: (i) the demonstrably apparent and acknowledged recurring lack of trust, respect, cooperation and communication between the parties; (ii) the differences in approach and philosophy in relation to various initiatives and business matters; (iii) the difficulties and inability to cooperatively, effectively or expeditiously work through business issues or points of difference; (iv) the personal characteristics and approaches of the applicants - Mr Gough in particular, and the number of people with whom he had difficulty dealing; (v) the numerous attempts over the years by the respondents to restore the relationship to what it should have been and the failure to do that in the face of the applicants' conduct. (f) At all relevant times the second respondent was properly advised of the first respondent's actions in relation to the applicants and was not misled in any way; (g) As to the applicants' conspiracy theory that the first respondent sought to terminate the dealership agreements in order to achieve a rationalisation of the number of dealers without the consent of the second respondent, the first respondent did not do so and there is no substance to the rationalisation conspiracy theory; (h) Despite the nature of the relationship justifying it being brought to an end at a much earlier point in time, the first respondent did not do so and persevered with it until June 1999. (i) Despite its entitlement to do so the first respondent did not in June 1999 seek to rely upon its 90 days' without cause termination right in order to bring the relationship to an end, but rather sought to discuss and agree upon a process with the applicants that would result in a smooth transition with the process involving:

(i) the appointment of a new dealer for the Territory; (ii) the sale of the applicants' shares or assets for a fair price to the first respondent's preferred dealer candidate. (j) The genuine and appropriate process undertaken by the first respondent in its selection of WesTrac as the preferred dealer candidate - and the absence of any need, motive or desire to create a sham or charade;

(k) The true circumstances of the sale process including the time allowed for it to occur; the conduct of the respondents; the fundamental flaws in the conspiracy theories posed by the applicants; the price agreed; the absence of any impact of the termination on the applicants on their opportunity to proceed with the agreement reached with WesTrac; the strategy embarked upon by the applicants to delay and frustrate the sale process; and, the applicants' conscious election not to realise the opportunity available to them; (l) The evidence demonstrates that the applicants were always extensively advised and aware of all legal possibilities, remedies or options. It also reveals that the applicants' conduct involved conscious, informed and strategic elections and decisions, including using the Commission proceedings as part of its commercial strategy. 3) With respect to the question of relief: (a) The issue only arises if the agreements are found to be unfair. (b) In that event, two separate but related exercises are required to be undertaken: (i) whether any relief ought be granted; (ii) whether that relief ought be in the nature of the rewriting orders. (c) When regard is had to the relevant principles and the facts of this case it is submitted that:

(i) no relief ought be granted; (ii) alternatively, no relief of the kind sought by the applicants ought be granted; (iii) operates unfairly against the respondents; (iv) would be disproportionate to any of the alleged unfairness and/or detriments and not be in any sense remedial. (v) would be to rewrite the agreements on a basis never contemplated so as to: (A) grant specific performance of the agreements as rewritten on a basis that could operate in perpetuity; (B) make a profitable contract more profitable by creating future commercial advantage for the applicants' and disadvantage for Caterpillar. (vi) would be unprecedented; (vii) would fall foul of the caution counselled by the High Court because it would be to: (A) interfere with a bargain freely made by a person who was under no relevant disadvantage or inequality; and (B) permit itself to become a refuge not only for parties disgruntled with their bargains but those that are happy with it but wish to be even happier. (d) The granting of the relief sought: (i) would have the effect of granting an order for specific performance; (ii) would involve keeping parties together in a relationship which requires trust, respect and co-operation to exist at its core when it is plain that such characteristics cannot and do not exist; 4) Given the necessarily close relationship between the respects in which any contract is found to be unfair and the nature of any relief that is to be granted, if the agreements are found to be unfair, it will be necessary to consider the basis of these findings and make further submissions regarding any proposed orders. Accordingly, the respondents reserve that right. JURISDICTION Submissions on jurisdiction

16 The first matter to consider is whether the Court has jurisdiction to hear and determine the applicants' claims for relief. Mr Hall QC, for the respondents, contended "the contracts constituting the transaction between Caterpillar of Australia Limited and the applicants are beyond the scope of s 106." Mr Hall in his submissions made a careful and thorough analysis of the law relating to jurisdiction under s 106 of the Act and, hopefully, without doing any injustice to those submissions, they may be summarised as follows: (a) The legislative history of s 106 shows that it was originally designed as part of measures to close legal loopholes that permitted the avoidance of the employer-employee relationship and the industrial obligations arising therefrom. The protective measures put in place were in the interests of employees and quasi-employees alike. (b) It is unlikely in the extreme that in 1959 (when s 88F was introduced) Parliament intended the section to reach contracts of sale which led to work being performed in an industry only because employees would work for the purchaser or the purchaser would work for himself: Production Spray Painting & Panel Beating Pty Ltd v Newnham (1991) 27 NSWLR 644 at 656; (1991) 37 IR 46 at 57 per Priestley and Handley JJA. (c) The various legislative amendments to s 88F have not changed the original purpose of the section. (d) In construing the present s 106 and the contracts and arrangements to which it was intended to apply, it is necessary to apply the approach to statutory interpretation which determines the legislative intention behind it: Kingston v Keprose Pty Limited (1987) 11 NSWLR 404 at 421; Production Spray Painting (1991) 27 NSWLR at 648-649; Project Blue Sky Inc. v Australian Broadcasting Authority (1998) 194 CLR 355 at 381. In Isherwood v Bulter Pollnow Pty Ltd (1996) 6 NSWLR 363, McHugh JA (as he then was) referred to the role in approaching the construction of general words in a statute of identifying and using the 'mischief' behind the statute. There McHugh JA emphasized that if the plain words of a provision are read in light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance: see also CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 187 CLR 384 at 408. (e) In Production Spray Painting , Mahoney JA identified the mischief to which the section was directed, the remedy chosen to meet it and the reason behind it. He stated at 649: ".... The mischief to which the section was directed is not a narrow one and should not be artificially restricted. But it lay generally in the area of, as it may be described compendiously, employee protection. The context of the section, its enactment as an amendment of the Industrial Arbitration Act , and the terms of the section itself support this view: see, for example, the reference in the earliest form of the section, to "public interest" and what that term is seen to comprehend." … ".... The mischief included, not merely employment in the strict sense, but the substitutes or stratagems for avoiding employment in the area of the performance of work in an industry. But it was, I think, essentially to mischief in that general area that the section was directed". (f) Under s 146 of the Industrial Relations Act 1996, the Commission is required to have regard to the objects of the Act. The objects are wholly industrial and not commercial. Within the sphere of state industrial legislation and regulation they were neither designed nor intended to either interfere with trade or commerce or to protect corporations or investment/managerial partnerships in entrepreneurial ventures whose interests, it can be assumed, are protected by specialist legal representatives, financial advisors, merchant bankers and accountants. (g) The correct view of jurisdiction, which gives effect to the 'mischief' behind the legislation, involves two elements, both of which must be present in a particular case before s106 can apply: 1. The purpose and effect of the transaction must lead directly to the performance of work by a person in an industry and it must have that as its purpose: See Mahoney JA in Production Spray Painting at 648; Euphoric Pty Ltd v Ryledar Pty Ltd [2002] NSW IRComm 136. 2. The work directly arising from the agreement must be work required as a contractual obligation by one person to be performed for another: see Production Spray Painting at 654 - 657; Becker v Harry M Miller Attractions Pty Ltd (1972) AR (NSW) 298 at 305. (h) The first requirement for jurisdiction referred to as the purpose test, was analysed and explained in Production Spray Painting by Mahoney JA. This approach placed emphasis on a correct identification of the purpose of the transaction. (i) The purpose test may be stated in the following four propositions: 1. The term "whereby" is a word that connotes a causal relationship. Its ordinary signification, however, would lead to unthinkable results, as it would literally sweep up commercial contracts in that it could be said that they in one sense of "causation" in fact lead to work in an industry. There must be limitations, consistent with accepted canons of construction, imposed on the phrase whereby , and upon the substitutes that have at times been advanced, such as in consequence of, in fulfilment of and in contemplation of the parties etc. 2. The means or mechanism propounded is one based on ascertaining the 'mischief' behind the legislative provision and in the light of it to ascertain the 'purpose' of the transaction that is in question. 3. Jurisdiction is only conferred where the transaction has, as its purpose, the performance of relevant work ( Production Spray Painting at 650G). 4. It is necessary to pay regard to the different meanings of purpose. In particular, there is a distinction between the purpose of a transaction and that which the parties have stipulated shall be done in order for that purpose to be achieved. (j) There will be many transactions requiring the performance of work but the performance of work is not a relevant purpose of the transaction. It is clear that in many such cases the work is not, in concept, the purpose of the contract but rather is what, as a matter of obligation, is required to be done in order that the purpose of the transaction be achieved: Euphoric at par [36] per Schmidt J. (k) It is, for jurisdictional purposes, insufficient that work be contemplated by the transaction. It is not uncommon that work will be performed, as a matter of obligation, by or under one party to the transaction entered into by the obligee. The terms and conditions and the means for effecting it, however, may not be under the control or knowledge of the other party to the transaction. The identifiable purpose of the transaction in this case is to promote the marketing and sale of Caterpillar products. The purpose of the transaction is not, in the relevant sense, the performance of work. (l) Section 106 was not intended to interfere with the commercial life of the business community, which is regulated by the general law, the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW), along with legislation for the regulation of corporations generally. (m) As to the second jurisdictional requirement, namely that there must be performance of work for another, In Davies v General Transport Development Pty Limited (1967) 67 AR (NSW) 371 at 373, Sheldon J stated: ".... There is no general charter in the s88F to rescind or vary contracts because they are thought to be oppressive. Its place is in the Act because its basic purpose is industrial. The crucial and restrictive words are 'whereby a person performs work in any industry" (n) Prior to the decision of the High Court in Stevenson v Barham (1977) 136 CLR 190 the accepted approach to jurisdiction required the existence of a contractual obligation in one person to perform work for another. This, it was held, gave the 'industrial colour or flavour': see Ex parte VG Haulage Services Pty Limited: Re Industrial Commission of New South Wales (1972) 2 NSWLR 81 at 87 - 88 per Jacobs JA; see also In Re Becker & Harry M. Miller Attractions Pty Limited (No. 2) (1972) AR (NSW) 298 at 305; Player v Kacy (1971) AR (NSW) 125. Following Stevenson v Barham a broader interpretation of the section emerged: see Mitchell v Vending Machine Co of Australia Pty Limited (1977) AR (NSW) 30. (o) In 1991, the New South Wales Court of Appeal in Production Spray Painting v Newnham re-examined Stevenson v Barham and judgments in other leading cases on the question of jurisdiction. The Court of Appeal was of the view that the Commission in Court Session in the decision under challenge had "purported to follow and apply the majority judgments of the High Court in Stevenson v Barham .... and the decision of the Privy Council in Caltex Oil (Australia) Pty Limited v Feenan ..." but that in fact an incorrect approach had been adopted due to a misunderstanding of the principle as to jurisdiction and, in particular, the context in which that principle has been stated by the High Court. The effect of the decision in Production Spray Painting v Newnham was to reveal as a correct statement of jurisdiction the original and narrower interpretation of the provision by the Industrial Commission in Court Session in Re Becker and Harry M. Miller Attractions Pty Limited (No. 2) and in Player's case, at least insofar as Sheppard J in the latter case had emphasised the importance of the presence of a contractual obligation in a person to perform work for another before jurisdiction could attach. (p) What a detailed examination of the 'jurisprudential story' behind s106 reveals is that the interpretation of what the majority of the High Court had said and done in Stevenson v Barham had been misunderstood by the Commission in Mitchell v Vending Machine Co of Australia Limited . What the Commission in that case had taken the High Court to have said in Stevenson v Barham and which the Commission regarded as "the premise" of the majority decision - (namely - "(the majority judgment) ... must be based on the premise that, so long as a transaction leads directly to work in an industry, it falls under s88F regardless of whether work is for another or not. ...") was quite erroneous. There must be, the Court of Appeal pointed out, the additional element of an obligation on a person performing work for another. A proper understanding of what the majority in Stevenson v Barham had said was not at all contradictory of that proposition. (q) The acceptance of the test expounded upon by the Court of Appeal as embodying the correct test has since been applied by the Commission. After referring to earlier decisions in Myer Stores Ltd t/as Grace Bros v Stowart (1994) 55 IR 21, the licences cases ( Caltex v Feenan ) and the franchise cases ( Australian Business Systems v Smith (1989) 29 IR 172, 184), Peterson J in Mitchell v Interstate Pipelines Pty Limited (1998) 8 7 IR 324, 332 stated: In each of these cases, and in cases generally of each class, the applicant is found to be operating his "own business" but in the relevant sense for another … (r) The decision of the Full Bench in Chrysler Jeep Automotive Distributors Australia Pty Limited v Canberra Star Motors Pty Limited & Ors (1997) 79 IR 452 did not address the second of the two jurisdictional prerequisites, namely the work directly arising from the agreement must be work required as a contractual obligation by one person to be performed by another. It was not asked to do so. Whether or not the first prerequisite (the purpose/causative element) was concluded by the Full Bench's decision in that case or not, the second element remains an issue that has not been addressed by the Industrial Relations Commission of New South Wales in Court Session in relation to a dealership transactions such as are involved in these proceedings. It is this issue and the 'purpose' test referred to as the first jurisdictional requirement that lies at the centre of the respondents' objection to jurisdiction and their defence. (s) Licence agreements such as those in Caltex Oil (Australia) Pty Limited v Feenan and franchise agreements as in Majik Markets Pty Limited v Brakes and Service Centre Drummoyne Pty Limited (1991) 39 IR 169 are within jurisdiction because of the particular terms and conditions that require the performance of work by a person or persons for another. (t) In relation to the Caterpillar dealership in these proceedings: 1. The Agreements do not require or provide for the licensing or operation of premises for the conduct of a business thereon on behalf of or for the benefit of Caterpillar. 2. The primary purpose of the agreement is the development and promotion of the sale of engine products and to provide a high standard of parts availability and mechanical service, in accordance with Clause 2(a) of the Sales and Service Agreement. 3. The Agreement does not provide for the franchising or licensing of a business and does not require the applicants to conduct a business of Caterpillar or a business of their own under Caterpillar's name. 4. The relationship between Caterpillar and Gough & Gilmour is that of ".... independent contractors and vendor and vendee", (cl 27). 5. The Sales and Service Agreement (Clause 2(c)) contains a provision that the principals "will continue in the act of management of a dealer or will continue to own a substantial financial interest in dealer" (emphasis added). This is neither a condition precedent to the operation of the Agreement as in the Majik Markets franchise agreement nor does it impose a contractual obligation upon the dealers to perform work in the business of Caterpillar (as was the case in the Majik Markets franchise). Importantly, they are the working proprietors in their own business. Clause 2(c) provides an option for the principals to either manage or to maintain a financial interest. 6. There are no contractual obligations in the dealers to work for Caterpillar in Caterpillar's business (cf. the Caltex service station business and the Majik Markets Convenience Store franchise). The dealership "business" carried on in the name of Gough & Gilmour is operated by the corporate entity, (the first applicant) and the dealer principals as its proprietors. The sale by Caterpillar pursuant to the Sales and Service Agreement on a wholesale basis of Caterpillar manufactured products to the dealers for the purpose of retail sale by them to third parties does not involve obligations upon them to work for Caterpillar in its (Caterpillar's) business. There is no contractual obligation in them to work for Caterpillar in the accepted and restrictive jurisdictional sense. The fact that, in a general sense, Caterpillar products in due course reach consumers via dealers neither creates nor converts the terms and conditions of the Sales and Service Agreement into a legal relationship by which one works for the other. Although the businesses of Caterpillar and a dealer are interfaced (as is the case in many commercial relationships) by the Sales and Service Agreement, they are separate in terms of assets, goodwill, capital and employment. As Jacobs JA (as he then was) in Ex parte V-G Haulage: Re Industrial Commission at 88 indicated, a contract that simply in a commercial sense involves the provision of goods and services with a consequent performance of services does not satisfy jurisdictional requirements. See also Euphoric Pty Limited v Ryledar Pty Limited . 7 In relation to contractual obligations to provide mechanical services to third parties, such obligations and the performance of them are neither in a direct nor in a legal sense for the financial benefit of Caterpillar. Firstly, the services are not provided to Caterpillar but are rendered by Gough & Gilmour to third parties. They are not services constituting the performance of work or services for Caterpillar in the sense that the Court of Appeal was at pains to emphasize. They are services rendered by Gough & Gilmour pursuant to supplier/service relationships established by service agreements entered into by them with their customers. The remuneration payable for such services, of course, goes to the dealer and not to Caterpillar. In these respects, the necessary element of the provision of services that existed in Stevenson v Barham is absent. There the contract was one under which the share-farmer undertook to do and provide work for the benefit of the farmer owner. It involved a contractual obligation vis-a vis the two for the working of the farm with the milk quota maintained, the farmer benefiting from half the net profits as a result of the work performed by the share-farmer for the owner (and himself). 8. Unlike either the licence agreement in Caltex or the franchise agreement in Majik Markets , no monthly periodic licence fees or other remuneration has been paid or is payable by the dealer to Caterpillar. There is no division of profits for the performance of service work between Caterpillar and the dealer as occurred in Stevenson v Barham . 9. Further, the dealership assets and employees constituting 'the dealership business' were originally owned and operated by Waugh & Josephson Holdings Pty Limited until 1989 when the shareholding was transferred across to the corporate entity then called Elemental Pty Limited. The Agreements were not the instrument which gave rise to the then existing workforce working in the industry and are therefore not within jurisdiction: see Williams v Mathews (1978) 1 NSWLR 78 ( Cahill J). (u) The Agreements in these proceedings do not satisfy the necessary jurisdictional requirements. They do not impose a contractual obligation to perform work on the applicants for Caterpillar or for anyone else. The applicants invested in a multi-million dollar business of which they were proprietors and from which they received remuneration as they determined in the form of profits from the sale by them of products and from providing services to their customers. Their business, though operating commercially under a commercial contract with Caterpillar, was the business for which they worked - not in Caterpillar's business that Caterpillar of Australia owns and operates as a separate business. 17 Mr Kimber SC, for the applicants, maintained there was jurisdiction for the Commission in Court Session to hear and determine the applicants' claim. His submissions in this regard may be summarised as follows:

(a) The legislative history of the unfair contract provisions indicates that Parliament did not intend to limit the scope of section 106 as contended by the respondents. Although the original objective of section 88F was to protect the system of industrial arbitration and awards, and disallow arrangements which would "…lower standards of wages and working conditions built up over many years of intense union organisation and industrial action" ( Industrial Arbitration (Amendment) Bill 1959, Minister's Second Reading Speech, Hansard, Assembly, 18 November 1959 at 2130), the original purpose has been considerably broadened over time. (b) It could reasonably be expected that, if Parliament were dissatisfied with the unfair contract provisions extending to "commercial cases", an amendment would be passed removing such cases from the jurisdiction of the Court. Despite the enactment of section 275 of the Industrial Relations Act 1991 and s 106 of the Act providing an opportunity to Parliament to remove "commercial cases" from the jurisdiction (as well as the introduction in 1998 of s 109A into the Act providing the same opportunity), no such removal has occurred. In June 2002 the legislature amended the unfair contract provisions again: Industrial Relations Act (Unfair Contracts) Amendments Act 2002. The effect of the Amendments Act is to limit the jurisdiction in respect of employment and partnership contracts. No limitation was introduced with respect to other types of agreements, including "commercial" agreements, even though the legislature would have been aware of the Court accepting it had jurisdiction in such cases. (c) A review of the legislative evolution of the unfair contract jurisdiction shows that it has evolved well beyond merely being a measure to protect certain workers, not covered by award, from exploitation in their employment conditions. It shows the legislature being aware of this evolution, yet not amending the legislation to prevent such jurisdiction continuing. This is consistent with the jurisdiction of the Commission being widened in respect of the definition of industry, and also by the inclusion in the objectives of the 1996 Act (section 3) to promote efficiency and productivity in the economy of the State. (d) Whilst it is true that s 106 is found in industrial legislation, the "industrial flavour" of the provision is reflected in the requirements that the contract or arrangement be one providing "directly" for the performance of work in an industry (see: Production Spray Painting at 58.2-58.4). (e) It is well-established that there is no jurisdictional limitation with respect to "commercial" cases. The Court and its predecessors have long recognised that the unfair contract provisions extend to so called "commercial cases". A Full Bench has recently confirmed that "merely because a contract or arrangement might be characterised as 'commercial' that is not a basis upon which to conclude it cannot be challenged under section 106": Mitchforce Pty Limited v Starkey [2002] NSWIRComm 85. (f) The respondents contended that one of the jurisdictional requirements is the purpose test and rely on Mahoney JA in Production Spray Painting and the Full Bench decision in Euphoric. The respondents submit that, on Mahoney JA's analysis, the purpose of the transaction must be the purpose of both parties and further in applying it there is, in principle, a distinction between the purpose of a transaction and that which the parties have stipulated shall be done in order that the purpose be achieved. There are a number of responses to this submission: (i) Only one member of the Court of Appeal ( Mahoney JA) stated the jurisdictional requirement in terms of "purpose" - the remaining members ( Priestley and Handley JJA) stated the test in terms of the contract or arrangement providing "directly" for the performance of work, without any reference to "purpose". Accordingly, the "purpose" aspect emphasised by the respondents does not form part of the ratio of Production Spray Painting v Newnham ; (ii) The width of "purpose" is sufficient to cover franchise agreements, given that Mahoney JA agreed generally with the reasons of Priestley and Handley JJA (see: 27 NSWLR at 646B) and the majority referred to franchise agreements (implying that such agreements were within jurisdiction) when applying their reasoning to the impugned contract (see: 27 NSWLR at 657F); and (iii) Since Production Spray Painting the Commission in Court Session has on a number of occasions considered the decision in Production Spray Painting and held that it stands for the proposition that the contract or arrangement must be one providing "directly" for the performance of work in an industry as against in a remote or inconsequential manner, for example, Mitchforce v Starkey at pars [35]-[37]; and Chrysler Jeep v Canberra Star Motors at 459. (g) The respondents refer to the distinction between transactions requiring the performance of work and transactions where the performance of work is the relevant purpose of the transaction, and refer to Euphoric at par [36]. The present proceedings are distinguishable from the factual background considered in Euphoric and Production Spray Painting . In both Euphoric and Production Spray Painting the agreements considered involved a completed transaction which did not require an ongoing relationship between the parties requiring work to be performed. The agreement considered in Euphoric had as its purpose simply the sale of goods; the agreements considered in Production Spray Painting were simply for the sale of business. In neither case did the contracts in question attempt to govern how the person was to operate the business/deliver the goods. (h) The purpose of the transaction that is the subject of the present proceedings was to appoint a dealer to sell and service Caterpillar equipment and related services in a geographic area. That is, the purpose of the contract was that work be performed (in both selling and servicing the equipment and related services). (i) The second jurisdictional requirement contended for by the respondents was that a party be under a contractual obligation to perform work "for another": Production Spray Painting. This is not correct, for the following reasons: (i) There are many decisions of this Court, since Production Spray Painting where no such jurisdictional requirement was held to be required. The clearest example (in circumstances of this case) being Chrysler Jeep. See also Starkey v Mitchforce ; Booth v Kritikos Developments ; and, the franchise cases. (ii) The Court of Appeal in Production Spray Painting did not state the jurisdictional requirement in terms of a contractual obligation to perform work "for another" - in fact the only limitation enunciated by the Court was the contract or arrangement must provide "directly" for the performance of work. (iii) The Court of Appeal referred to franchise agreements in analysing whether the impugned contract was within jurisdiction (see: 27 NSWLR at 657F), thereby implicitly accepting that a franchise agreement was within jurisdiction. If the Court of Appeal had intended to adopt the test of performance of work "for another", a franchise agreement would fail to meet such a test because a franchisee does not work (solely) for another but works (at least in part) for itself. The reference to franchise agreements thus shows that the Court of Appeal did not adopt the test that the respondents urge upon the Court. (iv) Production Spray Painting applied the decision of the High Court in Stevenson v Barham. There Mason and Jacobs JJ, (with whose conclusion and reasons Barwick CJ expressed agreement) stated (at 201) as follows: "… if the contract is one which leads directly to a person working in any industry it has the requisite industrial character - it is a contract 'whereby a person performs work in any industry'. This is the relevant jurisdictional fact which needs to be established." (v) It is instructive that in the view of the majority in Stevenson v Barham they did not need to determine whether the relationship between Stevenson and Barham was in fact a partnership agreement. Unless a very wide view of the proposed test is applied, a partnership would not be considered a contract whereby one person works for another person's business rather, as Stephen J stated in the case of a partnership, "they are working together". That the High Court ultimately determined that it did not matter whether Stevenson and Barham were in partnership leads to the conclusion that the High Court did not believe that the appropriate test could be whether one person is working for another person's business. Parliament cannot believe that is the test either, given the recent amendments to the Act. One of those amendments is to limit the ability of partners to take claims in respect of partnership contracts. Parliament clearly believes that partnership claims can be brought, suggesting that Parliament does not consider the section limited to those circumstances where one person works for another person's business. (j) In any event, if contrary to the submissions in the three previous paragraphs, the Court was to apply the "purpose" and "for another" tests urged by the respondents, the dealership agreements that are the subject of these proceedings satisfy those tests: (i) Franchise cases were held to be within jurisdiction by Handley JA ( Kirby P agreeing) in Majik Markets Pty Limited v Brake & Service Centre Drummoyne (1991) 28 NSWLR 443 at 464-465. There Handley JA stated: "while the franchisees, if natural persons, are working for themselves, they also in a very real sense working for the franchisor. If the business was not operated by some franchisee, the franchisor would either have to employ staff of its own or sell or lease the site to an independent purchaser or lessee". In the same way, if the respondents did not enter into an agreement for the applicants to distribute its products in NSW/ACT then it would need to employ its own staff to do that. (ii) The dealership agreements are akin to a franchise agreement (note the fact that the termination notices issued on 26 October 2000 were to constitute notices for the purposes of the Franchising Code). (iii) The applicants clearly work (at least in part) 'for' the respondents in the same way a franchisee works 'for' the franchisor. The Overall Arrangement was said by the respondents to have the effect of creating a 'partnership' between the parties. (iv) The dealership agreements specifically require or provide for the conduct of the business on behalf of Caterpillar. The agreements are not simply commercial contracts for the provision of goods and services, and in that regard can be distinguished from Production Spray Painting and Euphoric . The agreements provide continued contractual obligations on the dealers to work for Caterpillar in work which Caterpillar would have had to undertake themselves if not undertaken by the applicants. The fact that the work undertaken by the applicants is undertaken for the applicants themselves as well as for the respondents is not a bar to jurisdiction. (k) The respondents clearly have a continued interest in the conduct of the applicants' business and the applicants were obliged to comply with the various provisions of the Agreements that specially regulated the performance of work under the contract. This is to be contrasted with, for instance, the contract in Euphoric which did not deal with how the work in delivery of the goods was to be performed by or for the other party, and, therefore, the obligation to deliver the petroleum products purchased was not a purpose of the contract in itself, but rather what the parties had stipulated be done in order that the sale of the petroleum products be achieved. (l) As in Caltex Oil , Majik Markets and Chrysler Jeep the terms of the agreements relate specifically to how the applicants are to operate their dealership arrangement with Caterpillar and thereby directly require work to be performed in accordance with them. Pursuant to the agreements the applicants are required to undertake work for Caterpillar as well as for themselves, and the work they did was work they were required to do by the terms of the contract. (m) The Sales and Service Agreement dated 1 July 1991; the Distribution Agreement for Engines, Parts and Service dated 1 July 1991; and the Product Support Agreement for Engines, Parts and Service dated 12 November 1997 are contracts whereby a person performs work in any industry. In particular: (i) Paragraph 2 of the Sales and Service Agreement dated 1 July 1991 states that the primary purpose of entering into the agreement is to develop, promote and sell lift truck products and provide a high standard of parts availability and mechanical service and to ensure satisfaction by users of lift truck products. Specifically, that this is a personal contract entered into by the respondents in reliance upon the capability of the applicants to provide such sales and service to customers. Without the express written consent of the respondents, the applicants agreed not to appoint others to perform such sales and service responsibilities. Additionally, that the respondent relies upon the qualifications and abilities of the particular individuals named as principals (being the Second and Third applicants) and that those applicants would continue in the active management and continue to have substantial financial interests in the arrangement. These requirements are replicated in the Distribution Agreement for Engines, Parts and Service dated 1 July 1991 (at paragraph 2) and the Product Support Agreement for Engines, Parts and Service dated 12 November 1997 (at par 2). (ii) Each of these agreements also require the applicants to undertake sales and service of the vehicles (as well as maintain a suitable place of business) and to employ an adequate number of qualified sales people and service people; to undertake product safety and improvement and promotion; as well as to keep a proper inventory and sales record of all products and services. (n) Where the Commission has considered particular transactions, such as a simple sale or hire of a business, to fall outside the unfair contract jurisdiction, it would appear that these cases could be distinguished on the basis that there was lacking the direct relationship between the contract being considered and the work that has been performed in the industry. In such cases, the work may be regarded by the Commission to be only a consequential or incidental result of the contract: see Lane & Anor v Industry Equity Ltd & Ors (1985) 2 NSWLR 720; Autobake Pty Ltd v Budd & Anor (1986) 19 IR 18; Little Chelsea Pty Ltd v Mulroad Pty Ltd (1987) 20 IR 132. (o) The dealership agreements would even fulfil the narrow jurisdiction test prior to the High Court's decision in Stevenson v Barham . Even applying such a narrower test of jurisdiction, a wide range of arrangements were held to be within the jurisdiction of the Commission: for example see Larkin's case (1971) AR (NSW) 930 (retail liquor distributorships); Re Williams and Calmex Products (1971) AR (NSW) 264 (wholesale selling); ex parte Ashfield Brokers & Consultants Pty Limited re Witek [1972] 14 AILR 486 (plastic moulding manufacture); ex parte Richardson re Hildred IJ & Ors [1972] 2 NSWLR 423 (entertainment industry); Custom Credit Corporation Limited v Goldsmith & Ors (1976) AR (NSW) 98 (tent hire and distribution). (p) The respondents have placed reliance on Cribb v Korn (1911) 12 CLR 205. The respondents rely on that case for the proposition that in order to establish jurisdiction under s 106 there must be a contract or arrangement the terms of which require work to be done by one person for the benefit of the other party. Such a proposition misunderstands the position clearly established by the case law. Cribb was a case brought under s 10 of the Workers' Compensation Act 1905 and Korn, an injured employee employed by Rano, had failed to prove that Cribb stood in a relationship to him of an employer liable to him in compensation. However, clearly the requirement, that the work being executed by Korn was directly a part of a process in the trade or business of Cribb, arose from the specific statutory framework of the workers' compensation legislation that did not impart liability on anyone who was not the principal of the immediate employer. Such a requirement cannot be translated into the jurisdictional test of s 106. Consideration as to jurisdiction

18 In considering the question of whether the Commission in Court Session has the jurisdiction to hear and determine the applicants' claims in these proceedings, the appropriate starting point is the latest relevant judgment of the High Court on that question, that is, Stevenson v Barham.

19 Stevenson was the owner of some farming land and in 1968 he entered into an agreement with Barham, a farmer, to work the land for five years as a dairy farm. Barham was to supply the cattle, machinery and labour and Stevenson was to supply the milking machines and other plant. All other plant and equipment necessary for running the business was to be purchased by the parties in equal shares and was to remain joint property. On the termination of the agreement either party was to have the right to purchase the interest of the other in the joint plant at an agreed price. The profits were to be shared equally. The agreement was a share-farming agreement within the meaning of the Agricultural Holdings Act 1941 (Cth). Apparently, according to the judgment of Barwick CJ, the venture was proving less profitable than Stevenson hoped and he exercised his right to terminate the agreement. Barham then sought to have the agreement declared void under s 88F of the Industrial Arbitration Act 1940. The Industrial Commission held that it had no jurisdiction to entertain Barham's application. On appeal to the Supreme Court an order was made directing the Commission to hear and determine Barham's application. Stevenson appealed to the High Court.

20 There were four separate judgments in Stevenson v Barham. The first was that of Barwick CJ, who said in the oft-quoted passage from 192 of the report: Notwithstanding the wide language of s. 88F, I have found difficulty in becoming convinced that it was within the contemplation of the legislature that agreements for business ventures, of which the present may be a specimen, freely entered into by parties in equal bargaining positions, should be so far placed within the discretion of the Industrial Commission as to be liable to be declared void. However, I have come to the conclusion that the language of s. 88F of the Act is intractable and must be given effect according to its width and generality. The legislature has apparently left it to the good sense of the Industrial Commission not to use its extensive discretion to interfere with bargains freely made by a person who was under no constraint or inequality, or whose labour was not being oppressively exploited. 21 This statement by the Chief Justice is an important one because it brings to light in unambiguous language the "width and generality" of s 88F and its successor provisions, and the remarkably broad discretion that lies with the Commission in applying the unfair contract provisions of the Act. 22 Beyond the statement quoted above, the Chief Justice agreed with the conclusion of Mason and Jacobs JJ and the reasons expressed by them for dismissing the appeal. Before going to the judgment of Mason and Jacobs JJ, I should deal with the separate minority judgments of Stephen and Aickin JJ. Stephen J took the view that s 88F was concerned with "any contract in consequence of which a person performs work for another in any occupation etc. in which persons are employed for hire or reward." As to the relationship between Stevenson and Barham, Stephen J said "the present agreement is not one in consequence of which Barham was to perform work for Stevenson." His Honour did not find it necessary to decide whether or not the parties were partners but after referring to Cribb v Korn Stephen J said: The case ( Cribb v Korn ) provides an illustration of a contract, in some respects very similar to the present, which did not create any partnership and in which the farmer who was engaged in working the land was held to be working it not for the owner but for himself. If, in the present case, there was a partnership it might not then be accurate to describe Barham as working for himself but it would be no less inappropriate to describe him as performing his work on the farm for Stevenson in the sense in which s. 88F speaks; he might perhaps best be described, if a description of this concept be sought, as working in the interests of the partnership, which comprised the two of them (at 195).

23 Aickin J regarded the agreement between Stevenson and Barham as a partnership agreement. At 205 his Honour said: In my opinion it is also clear that it is a partnership agreement in the proper sense of that term. The agreement is one under which each partner is to provide certain capital assets for the purposes of the partnership as particularized in the agreement itself. Each is to supply the requisite labour for certain specified partnership activities. It is I think also clear that the agreement does not require either partner to perform personally the work involved in that aspect of the partnership activities for which he is to supply labour. However, I think it fair to say that the agreement contemplated that Barham would supply at least some of the labour by his own individual work.

24 Aickin J took the view that the agreement did not fall within s 88F. His Honour said at 212-213: It is not an agreement by which one person works for another. It is an agreement by which each party agrees to provide substantial capital assets to a partnership business, each retaining ownership of such assets, and to join with the other in subsequent purchases where requisite of other capital equipment which will become partnership property, and to use all such assets in conducting the partnership business of dairy farmers. Each is to be responsible for certain identified work in the business and to provide or supply the necessary labour to carry out such work. There is no obligation to perform the work personally, though, as I have said above, the agreement contemplated that the respondent Barham would perform personally at least some of the work for which he was responsible. Under such an agreement neither party performs work for the other. Each performs or procures the performance of work for the partnership, i.e. for himself and his partner. For that reason this agreement does not meet the statutory requirement of being one whereby a person performs work for another. Nor can it be said of this agreement that it "discloses a purpose that by the adoption of the arrangement the industrial objectives of the legislation will be more or less defeated". I can see nothing in the Act generally with which such a partnership agreement is inconsistent in terms or in policy. The Act is concerned with employment generally and by s. 88E and s. 88F is extended to include other situations regarded as substantially equivalent to, or as substitutes for, employment but the present agreement does not come within the words or the spirit of those extensions. This is not to say that every agreement cast in the form of a partnership agreement or of a share-farming agreement is necessarily for that reason alone outside the section, but the present agreement certainly is. 25 The joint judgment of Mason and Jacobs JJ, together with the judgment of Barwick CJ, made up the majority. At 201 Mason and Jacobs JJ said: …if the contract is one which leads directly to a person working in any industry it has the requisite industrial character - it is a contract "whereby a person performs work in any industry". This is the relevant jurisdictional fact which needs to be established.

And further at 202: The share-farming agreement provided directly for the employment of the first respondent in the dairy farming or dairying industry and, in accordance with the provisions of the agreement, he performed work in that industry. This, so it seems to us, is the end of the appellant's case in this Court.

26 Stevenson v Barham was closely analysed by the New South Wales Court of Appeal in Production Spray Painting. That case concerned the sale of a ladies' boutique business in 1987. The contract for sale was described as "routine" and contained no unusual terms. The purchasers of the business, Mr and Mrs Newnham, quickly became dissatisfied with the purchase and commenced proceedings under s 88F. Glynn J held that the contract was unfair and made certain orders granting relief. Her Honour's judgment was appealed and the Full Bench, by majority, dismissed the appeal. The claimants sought prerogative relief by way of certiorari in the Court of Appeal.

27 There were two judgments in Production Spray Painting, one by Mahoney JA and the other was a joint judgment of Priestley and Handley JJA. Mahoney JA indicated that whilst he agreed with the conclusions and in general the reasons expressed by the majority, he considered that it was appropriate to add "some observations of my own as to jurisdiction of the Commission and how the extent of it is to be determined."

28 After analysing the majority judgment in Stevenson v Barham, Priestley and Handley JJA in Production Spray Painting said at 27 NSWLR at 654E: It is clear therefore that the majority held that the share farming agreement led directly to the performance of work in an industry because the agreement required the share farmer either to do the work himself or to employ others for that purpose. Moreover, the share farmer would not simply be working for himself, he would be working for the farm owner as well (my emphasis ).

The majority conclusion that a contract which leads directly to a person working in an industry is within the section must be understood with reference to the facts of that case. The contract was one under which the share farmer would do or provide work for the benefit of the farm owner (my emphasis). In our opinion the majority judgments in Stevenson v Barham , properly understood, do not directly support any wider proposition.

29 In holding that the Commission had no jurisdiction under s 88F to grant the relief to Mr and Mrs Newnham, Priestley and Handley JJA said at 654-655: In our opinion … Stevenson v Barham is not authority for the proposition that a contract for the outright sale of a business to a purchaser who intends to be a working proprietor is within the section.

30 Priestley and Handley JJA noted that Stephen J and Aickin J in Stevenson v Barham dissented. In elucidating the nature of the issue that divided the Court, Priestley and Handley JJA referred to the statements by the two minority High Court judges where they referred to the requirement that a person must be performing work for another in order to attract jurisdiction under s 88F except that Stephen J found that the share farmer was doing work for himself, while Aickin J held he was doing it for a partnership between himself and the farm owner. Thus, it seems to me that on the analysis of Priestley and Handley JJA, the issue that divided the Court in Stevenson v Barham was, on the one hand, the majority found that the share farmer worked for the farm owner and, on the other hand, the minority found that he did not.

31 Priestley and Handley JJA considered the judgment in Caltex Oil (Australia) Pty Limited v Feenan [1981] 1 NSWLR 169 and at 655 observed: It is clear therefore that the Feenans were working for Caltex as well as for themselves, and the work they did was work they were required to do by the terms of the contract (my emphasis). 32 Priestley and Handley JJA referred (at 27 NSWLR 655) with approval to the statement of Jacobs JA in Ex parte V G Haulage Services where his Honour said at 88: It seems to me that the legislature was concerned to empower …the Commission … to examine contracts and arrangements which led directly to the employment of persons and the performance of work in any industry, not simply because the contract or arrangement in a commercial sense involves the provision of goods and services, with a consequent performance of work in an industry, but rather because the impugned agreement or arrangement itself directly envisages the employment of a person or persons in industry and has a recognisable impact upon the conditions of that employment (my emphasis). 33 At 27 NSWLR 656 Priestley and Handley JJA approached the question of jurisdiction as one of "bare statutory interpretation". Reference was made to the definition of "industry" in s 5 of the Act as meaning: craft, occupation or calling in which persons of either sex are employed for hire or reward, and unless otherwise indicated by the context or any provisions of this Act any division of an industry or combination, arrangement or grouping of industries.

34 Reference was also made by their Honours to the expression "industrial matters" which was defined in the Act as "matters or things affecting or relating to work done or to be done ... in any industry" and to s 88F(1)(d) which provided that one of the grounds for granting relief under the section was that the contract etc., "provides ... a total remuneration less than a person performing the work would have received as an employee performing such work".

35 Priestley and Handley JJA went on to say at 657: In our opinion consideration of the section in the light of these other provisions demonstrates that this Court was correct in Ex parte V G Haulage Services Pty Limited in holding that a contract is only within the section if it has "an industrial colour or flavour". It is not sufficient to establish jurisdiction that a contract "involves the provision of goods and services, with a consequent performance of work in an industry" ( Ex parte V G Haulage at 88) (Our italics.) The impugned contract etc therefore must directly, that is under or pursuant to its terms, provide for the performance of work in an industry. Accordingly, the contrast drawn by this Court in Ex Parte V G Haulage Services and approved by the High Court in Stevenson v Barham is between a contract that leads directly to the performance of work in an industry on the one hand, and on the other a contract which does so only indirectly or in a remote or consequential manner. 36 It seems to me what Priestley and Handley JJA decided in Production Spray Painting was that in order to attract the provisions of s 88F the impugned contract has to have about it "an industrial colour or flavour". That industrial colour or flavour is present if the contract under or pursuant to its terms, leads directly to the performance of work in an industry. An "industry" as defined by s 5 of the Industrial Arbitration Act 1940 was one in which persons were employed for hire or reward. In other words, "industry" involved the notion of "employment" which in turn involved the notion of the engagement of one person by another. So that, in my opinion, it is arguable that the majority in Production Spray Painting decided that in order to attract the provisions of s 88F the impugned contract must lead directly to the performance of work by a person or persons for another. It is, therefore, arguable Production Spray Painting had the effect of overruling the decision of the Commission in Court Session in Mitchell v Vending Machine Co of Australia Pty Ltd (No 2) (1977) 77 AR (NSW) 30 where it was held at 36 that: The conclusion of the majority in Stevenson v Barham must be based on the premise that, so long as a transaction leads directly to a person working in any industry, it falls under s 88F regardless of whether the work is performed for another or not. That is our understanding of the majority judgments.

37 Further, in order to "lead directly to the performance of work" the contract must require the work to be in fulfilment of it (the contract) and not merely a remote consequence.

38 It is to be observed that the definition of "industry" under the Industrial Arbitration Act 1940 is significantly different to that which exists under the Industrial Relations Act 1996. Under the latter statute "industry" is defined as including: (a) any trade, manufacture, business, project or occupation in which persons work, or (b) a part of an industry or a number of industries.

39 Unlike the definition in the 1940 Act there is no notion of a person working for another in the definition of industry under the 1996 Act. Further, the definition in the 1996 Act does not refer to either the concept of employment or to the concepts of hire or reward. In light of the definition of industry in the 1996 Act, I do not consider it can be said that "whereby a person performs work in any industry" is to be taken to mean that in order to attract jurisdiction an impugned contract must lead directly to the performance of work by a person or persons for another. A person may be performing work in a business or trade or occupation for himself or herself and thereby be performing work in an industry.

40 In any event, my attention has not been drawn to any decision of the Commission in Court Session post-Production Spray Painting that even hints that the test to be applied is "working for another". I have reviewed Chrysler Jeep, Starkey v Mitchforce, Kostakis & Anor v New World Oil & Developments (unreported, Schmidt J, 25 July 1997; [1997] NSWIRComm 84) and Booth v Kritikos Developments and no reference is made to any requirement about the applicants in those proceedings having to work for another in order to attract jurisdiction.

41 The Industrial Relations Act 1996 was recently amended by the Industrial Relations Amendment (Unfair Contracts) Act 2002 No 32 by inserting a new s 108A(2) as follows: (2) An application cannot be made for an order under this Division by a person who is a partner carrying on a business if: (a) the application relates to a contract between that partner and the other persons carrying on that business in partnership, and (b) the share of the net profits, or payments contingent on the net profits, of the business that are paid to or received by (or payable to or receivable by) the applicant during the period of 12 months immediately before the application is made (or, if the application relates to a contract that has been terminated, immediately before the termination) exceed: (i) $200,000, or (ii) if an amount is prescribed for the purposes of paragraph (b) of the definition of "remuneration cap" in subsection (3)---that amount. 42 In Stevenson v Barham, Aickin J was generally of the view that the agreement between the litigants was a partnership agreement. His Honour said at 212: Under such an agreement neither party performs work for another. Each performs or procures the performance of work for the partnership i.e. for himself and his partner. For that reason this agreement does not meet the statutory requirement of being one whereby a person performs work for another.

43 There is no reason I can see why a partnership agreement whereby a partner working in "any trade, manufacture, business, project or occupation" would not come within the scope of s 106; clearly the Legislature considers this to be so otherwise it would not have gone to the trouble of limiting the application of s 106 in relation to partnerships. 44 It seems to me, therefore, that if Aickin J and, indeed, Stephen J had been considering s 106 of the 1996 Act and not s 88F of the 1940 Act, they would have been driven to a different conclusion, namely, that in order to attract jurisdiction there is no requirement for a person to be working for another.

45 I should also make the observation at this point that it may be presumed that in amending the Act to limit its application in respect of partnerships (and certain contracts of employment) the Parliament would have been aware of the Commission in Court Session's view expressed in the recent Full Bench judgment in Mitchforce v Starkey handed down on 30 April 2002 that "merely because a contract or arrangement might be characterised as "commercial" that is not a basis upon which to conclude it cannot be challenged under s 106 of the Industrial Relations Act". If the Parliament had wished to limit the Commission's jurisdiction in respect of "commercial" cases it would have been open to it to do so in June 2002 at the time of legislating for the Industrial Relations Amendment (Unfair Contracts) Act 2002. Parliament must also be assumed to have been aware of the view of the Commission in Court Session (Fisher P, Cahill V-P, and Bauer J) in Rolles v Donald Scott Surgicals Pty Ltd (unreported, 19 February 1998) where it was said: Section 88F has developed from an adjunct to the powers of the Industrial Commission to enforce the awards of the Commission in an industrial context to a major commercial jurisdiction exercised in circumstances frequently having little to do with the industrial arbitration and similar litigation normally encountered by industrial tribunals.

46 I turn to the second jurisdictional requirement contended for by the respondents, namely, the purpose and effect of the transaction must lead directly to the performance of work by a person in an industry and it must have that as its purpose. This proposition springs from the judgment of Mahoney JA in Production Spray Painting. As I stated earlier, his Honour was in general agreement with the joint judgment of Priestley and Handley JJA but his Honour indicated that he wished to add some observations of his own on the jurisdictional issue.

47 The proposition that the transaction must lead directly to the performance of work by a person in an industry, and it must have that as its purpose, is a stricter test than that applied by Priestley and Handley JJA and to that extent it is a different test. In my opinion, the test applied by Mahoney JA is not the ratio of the judgment in Production Spray Painting and whilst it may be persuasive, it is not binding. 48 Euphoric Pty Limited v Ryledar Pty Limited was an appeal from a single member of the Commission in Court Session. Schmidt J, with whom the other members of the Full Bench (Wright J, President and Walton J, Vice President) generally agreed, said at pars [38] to [40]: 38 In my view, that a contract for the sale of a product imposes an obligation upon the seller to deliver the product to the purchaser, at a particular place or places, is of itself not a sufficient basis to ground jurisdiction under s106, irrespective of how much or little work is required, as a practical matter, in order to effect such delivery. Once the contract seeks to deal with the work required to effect delivery, a different conclusion might result. This, however, was not such a case. 39 The purpose of this contract was to provide for the sale of petroleum by the appellant to the respondents, at regular intervals over the life of the agreement. In order that this purpose would be achieved, the contract stipulated that delivery of the petroleum to the respondents was to be effected at the various sites where the products were to be retailed, by the respondents and third parties. That obligation ensured that the purpose of the contract was achieved, namely that the petroleum which the respondents had purchased be delivered to it, in accordance with its express instructions as to the place of delivery. The transfer of the goods sold was thereby achieved, as contemplated by the Sale of Goods Act 1923 . 40 The transportation of the petroleum to the specified sites in order to affect the required delivery, was a consequential result of the sale contract. The respondents had no interest in how this was done, on what terms, or by whom. They could only complain if they did not receive delivery of the petroleum purchased, at the sites specified. It follows that this contract was simply not one which enlivened the Court's jurisdiction as the result of the delivery obligation.

49 At pars [47] to [48] her Honour contrasted the situation in Euphoric with that in other cases, including Booth v Kritikos Developments: 47 Analogies were sought to be drawn with other decided cases, for example Booth v Kritikos Developments Pty Limited (1995) 59 IR 228 and Kostakis & Anor v New World Oil & Developments (1997) NSWIRComm 84 (25 July 1997). Those comparisons did not avail the respondents' arguments here. Those contracts imposed express and ongoing obligations for the performance of work. In Kritikos , for example, an obligation to renovate a hotel and to operate the business of a hotel, during the period of a lease and in Kostakis, to operate a particular type of business at the shop in question, during the period of the lease. No such obligations were imposed in this contract. 48 I thus agree with the conclusion reached by Marks J as to the allegation made by the respondents in the initiating summons, that the contract did not require the performance of work by the respondents. There were no such contractual obligations and no jurisdictional fact flowed from the performance of any work, by or for the respondents, in connection with this contract.

50 It may be seen from the above extracts that, in broad terms, the Full Bench viewed the situation in Euphoric as similar to the arrangements before the Court of Appeal in Production Spray Painting; in both cases the contracts were contracts for sale and did not impose express and ongoing obligations for the performance of work. It is not surprising, therefore, that the Full Bench in Euphoric would seek to apply the two tests in Production Spray Painting in order to test the validity of similar arrangements. However, I do not consider that the Full Bench in Euphoric went so far as to determine that where, in any proceedings under s 106, jurisdiction is an issue, a single member of the Court should always apply the two tests in Production Spray Painting. That case is authority for the propositions enunciated by Priestley and Handley JJA and it is their Honours' test, as I have interpreted it, that I am bound to apply in these proceedings. If I come to the view that the contractual arrangements in the present case bare a resemblance to those in Production Spray Painting it may be appropriate, as the Full Bench did in Euphoric, to have regard to the test proposed by Mahoney JA.

51 I do observe that in Production Spray Painting Mahoney JA took a purposive approach to the construction of s 88F, whereas Priestley and Handley JJA adopted a literal approach (i.e., "bare statutory construction"). Whatever view one takes regarding which approach might be preferable I remain bound to follow the majority.

52 As Mr Hall submitted, in determining whether the relevant jurisdictional fact exists it is necessary to give close attention to the impugned agreements, which in this case are:

· The Sales and Service Agreement dated 1 July 1991. · The Distribution Agreement for Engines, Parts and Service dated 1 July 1991. · The Product Support Agreement for Engines, Parts and Service dated 12 November 1997.

53 It is not only the written agreements that must be examined but also the alleged broader arrangements that were said to exist between the applicants and the respondents. Further, in considering the agreements and arrangements it is important not to lose sight of the overall context in which the agreements and arrangements existed. Caterpillar Inc., through its wholly owned subsidiary the first respondent, had established a dealership network in Australia to sell product and parts manufactured by Caterpillar Inc. and to service those products and parts. Without a dealership network, the respondents would need to set up their own premises at various locations around the country and employ their own staff to sell and service their products.

54 The business relationship between the applicants and the respondents is based to a significant degree on cooperation, trust, confidence and loyalty to the Caterpillar brand. The fact that it was the alleged lack of trust and confidence that was the main driver in the respondents deciding to end the relationship with the applicants, underscores the importance of these factors. Later in this judgment I have referred to Bobux Marketing Limited v Raynor Marketing Limited [2001] NZCA 348 and the decision of Thomas J in that case where his Honour discusses "relational contracts". Thomas J described relational contracts thus at par [44]: In a relational contract is one which involves not merely an exchange but a relationship between the contractual parties. The parties are not "strangers" in the accepted sense and much of their interaction takes place "off the contract" requiring a deliberate measure of communication, co-operation, and predictable performance based on mutual trust and confidence. Expectations of loyalty and interdependence mark the formation of the contract and become the basis for the rational economic planning of the parties.

55 In my opinion, the contracts and arrangements between the applicants and the respondents were in the nature of relational contracts with a strong personal element characterising the relationship. Again, this distinguishes the relationship between the applicants and the respondents from the arm's length relationships that characterise other commercial relationships.

56 In 1996 the former chairman of the second respondent, Mr Don Fites, wrote an extensive article published in the March-April edition of the Harvard Business Review. The article was entitled "Make Your Dealers Your Partners". Mr Fites said in the article:

· [O]ur single greatest advantage over our competition was and still is our system of distribution and product support. The backbone of that system is our 186 independent dealers around the world who sell and service our machines and diesel engines. · I believe the tight working relationships we have forged with our independent dealers to meet our customers' needs hold lessons for other manufacturers … · [F]ew companies have integrated their dealers into their business systems to the degree we have. · It is not uncommon for our competitors to bypass their distributors and sell directly to the customer if they think a deal is important enough. We'd sooner cut off our right arm than do that. · It is somewhat misleading, however, to talk about "us" and "them", because we genuinely treat our system and theirs as one. Our joint distribution operations are all linked by a worldwide computer network. I can turn to the computer on my desk and find out how many machines in the world are waiting for a part. · Our Partners in Quality program … links personnel at a factory responsible for building a particular machine with people at selected high volume dealerships. They meet quarterly to discuss quality issues. In addition, those dealers audit each machine they receive from the plant, and if there's something wrong, they feed that information back to the plant immediately. · Besides helping us manufacture better products, our dealer network also generates extraordinary and timely market intelligence. · We have good relationships with our dealers not just because they like us but because the investment is good for them and for Caterpillar, and because both parties work to strengthen the relationship built on trust, confidence, shared interests and rewards. · I hear a lot of talk about trust between manufacturers and their suppliers and distributors, but few companies really put their talk into practice. The kind of trust that exists between Caterpillar and its dealers is something that could be built up only over generations. Our dealership agreements are documents that run just a few pages. They have no expiration date, and either party can terminate without cause on 90 days' notice. But turnover is rare because we recognise we're in this together. · Caterpillar helps its dealers finance purchases by customers. It supports dealers in inventory management and control, logistics, equipment management, and maintenance programs. The company … underwrites technical training and support for dealers' personnel in such areas as managing quality, continuous improvement, benchmarking, cost management, and communications. And we are prepared to respond to any need for training that a dealer identifies, whether it be in planning, forecasting, information systems, marketing and advertising, or other business functions. · When we see particular dealers not performing well, we jump in and help them. · Although it is a rare occurrence, the hardest situation is when the problem is the owner's poor leadership. Even in those cases we won't sit on the sidelines. We try to find a solution that the owner can accept. Maybe it's giving a son or a daughter a chance. Maybe it's hiring an outsider to run the business until someone else in the family is ready. Whatever the solution, we will not simply watch while a dealership declines. · There are no secrets between our dealers and us. We have the financial statements and key operating data of every dealer in the world. Dealers wouldn't give us that information if they didn't trust us. In addition, virtually all Caterpillar and dealer employees have real-time access to continually updated databases of service information, sales trends and forecasts, customer satisfaction surveys, and other critical data. · It would be easy for an outside observer to assume that the structures we have created … are the backbone of the relationship with our dealers. But the form is the easy part. What caused the deep relationships to develop are the close personal ties that have been nurtured. Those ties form a kind of family relationship. · Continuity reinforces mutual trust, limits disputes, encourages sharing of information, and generates larger gains for everyone. To that end we prefer to work with privately held enterprises … · We actively help dealers keep the business in the family. For example, when the principal of a privately held dealership is about 50 years old, we hold seminars for the family on tax issues and succession planning - both financial and management. · We also take proactive steps to try to interest children of dealership owners in the business. 57 None of the statements by Mr Fites in his 1996 article were disavowed by the respondents. Indeed, in a letter in April 1996 Mr Nitto commended the article to Mr Gough as a "very compelling description of our partnership." Mr Nitto also said in his letter that the partnership was unique "because no other competitor in this industry and, for that matter, other industries, have the kind of commercial and personal bond that I believe we share with you and your company." The article, I believe, reflects the degree of importance that Caterpillar places on the dealership network and, clearly, Caterpillar regards the network as an essential and integral part of its business. The article does refer to dealers as being "independent" but it also reveals an unusually close relationship that gives it a character that one would normally associate with franchise arrangements. In my opinion, therefore, there is considerable strength in Mr Kimber's submission that the relationship between the applicants and the respondents is akin to that of a franchisor and franchisee. In that respect, I note that the notices issued on 26 October 2000 purporting to terminate the relationship were to constitute notices for the purposes of the Franchising Code.

58 The fact that the relationship between the applicants and the respondents is akin to a franchise arrangement is not determinative of whether the relevant jurisdictional fact exists but it does suggest that the nature of the relationship lies closer to the class of ongoing arrangements that have been held to attract the provisions of s 106 and its predecessors than arms length, one-off commercial transactions which have not.

59 As I observed earlier, because the dealership agreements might be said to represent commercial transactions, this does not necessarily put the agreements outside the class of agreements to which s 106 may have application: see Mitchforce v Starkey [2002] NSWIRComm 85 at [36]. Because such transactions might be described as commercial, it does not rob them of the necessary "industrial flavour", which is present if the contract or arrangement leads directly to the performance of work in an industry: Production Spray Painting at 58.

60 I turn to the written Agreements that underpin the relationship between the applicants and the first respondent. The Sales and Service Agreement contains a number of provisions relevant to the question of whether the contract leads directly to the performance of work in an industry. Clause 2(a) of the Agreement provides that: Both Dealer's and Company's primary purpose in entering into this agreement is to develop and promote the sale of products and to provide a high standard of parts availability and mechanical service to insure (sic) satisfaction by users of products. Within the service territory… Dealer shall be primarily responsible for fully and adequately developing and promoting the sale to customers and prospective customers located within such territory and for the servicing of all products … This is a personal contract entered into by Company in reliance upon the capability of Dealer to provide such sales and service to customers. Without the express written consent of Company, Dealer agrees not to appoint others to perform such sales and service responsibilities. 61 "Dealer" is defined to mean the dealer party to the individual dealership agreement and "Company" is Caterpillar of Australia Ltd. Clause 2(b) provides that the dealer cannot have any financial or management affiliation with any end user without Company's consent. Clause 2(c) of the Agreement provides: Company relies upon the qualifications and abilities of the particular individuals named as principals… to achieve such primary purpose. Dealer agrees that such individuals will continue in the active management of Dealer, or will continue to own a substantial financial interest in Dealer. No substantial change shall be made in the management positions, ownership or voting control of such principals without prior approval of Company.

· Dealer will maintain a suitable place or places of business at the points shown in Exhibit A to provide adequate sources of products and mechanical service for the benefit of users …All places of business will be maintained by Dealer in a neat and attractive manner with adequate quantities of products specified in Exhibit A - all to the satisfaction of Company (cl 4). · Dealer will employ an adequate number of qualified salesmen to solicit orders for products …and will employ an adequate number of parts and service sales personnel at all times to serve the needs of the territory - all to the satisfaction of the Company (cl 5). · Dealer will at all times render prompt, competent, diagnostic and mechanical service to all users in Dealer's service territory of … products specified in Exhibit A … (cl 6(a)). · Dealer will employ an adequate number of experienced and competent service men, maintain adequate supplies of replacement parts and provide adequate field and shop service facilities to perform all required services to the satisfaction of the Company. · For the benefit of both Dealer and itself, Company will promote its products at its own expense and in its own name to such an extent and in such manner as in its judgment will best tend to support sales thereof, and, when specifically agreed upon in writing, will participate with Dealer in the expense of promoting such products and Dealer's services in Dealer's name in Dealer's territory (cl 8(a)). · Dealer, to the satisfaction of Company, will develop and execute promotion and market development programs to support sales of products specified in Exhibit A …(cl 8(b)). · Dealer to promptly provide warranty for all products in the territory, to the applicable warranty as set out and/or designated by Company (cll 10 and 11). · Dealer to provide detailed regular reports to Company of all inventories, sales, names and addresses of customers and, annually, full detailed financial reporting in Company designated format (cll 24, 25, 26). 63 The 1991 and 1997 Product Support Agreements contain equivalent provisions to those described above with the additional requirement to appoint TEPS dealers where and when instructed by the Company.

64 The dealership agreements confirm the first respondent's very close involvement in the applicants' business and the first respondent's right to exercise direction and control over important aspects of the dealership. I note that cl 27 of the Sales and Service Agreement provides that the relationship existing between the parties shall be "that of independent contractors and vendor and vendee." But that is stated in the context of a provision that the Dealer is not to be regarded as an agent for the Company. I do not consider that I should view that bare provision as indicating the true nature of the relationship.

65 The agreements, if anything, again strengthen Mr Kimber's contention that the relation between the first respondent and the applicants are akin to that of franchisee and franchisor. The agreements require the applicants to set up a business in a certain way; they require the principals of the dealership to use their qualifications and abilities to achieve the primary purpose of the Agreements, for example, the development and promotion of the sale of products; they directly require the applicants to employ personnel to perform work in the business - the business could not operate unless relatively large numbers of personnel were employed to perform work for the business. Whilst the dealership does not operate under the business name of Caterpillar, the dealership is synonymous with that name. The dealership, through its employees, is required to develop and execute promotion and market development programs to support the sale of Caterpillar products and to solicit orders for Caterpillar products.

66 Given the foregoing, it may be said the agreements lead directly to the performance of work in an industry (indeed, it may be said the agreements lead directly to the performance of work by a person or persons for another) and Caterpillar has a real interest in the performance of that work. Moreover, the performance of work is not merely a remote consequence of the agreements but a necessary requirement that, in the absence of the performance of such work, would render the agreements meaningless.

67 It was submitted for the respondents that the dealership agreements "do not require or provide for the licensing or operation of premises for the conduct of a business thereon on behalf of or for the benefit of Caterpillar" and, therefore, it could not be said that the arrangements between the applicants and the first respondent were the same as that which applied in Majik Markets. Similarly, it was submitted that the agreements do not provide for the franchising or licensing of a business and do not require the applicants to conduct a business of Caterpillar or a business of their own under Caterpillar's name.

68 In determining whether the relevant jurisdictional fact exists, I do not consider it is necessary for there to be licensing or operation of premises for the conduct of the first respondent's business. The dealership agreements do, however, provide that the applicants shall maintain a suitable place or places of business; require the applicants to provide adequate sources of products and mechanical service for the benefit of users and that all places of business will be maintained by the applicants in a neat and attractive manner with adequate quantities of Caterpillar products - all to the satisfaction of the first respondent. The agreements also require the applicants to maintain branches in specified locations.

69 I also do not consider it necessary for the dealership agreements to provide for the franchising or licensing of a business or for the applicants to conduct a business of Caterpillar or a business of their own under Caterpillar's name. Franchising or licensing arrangements are not the only such arrangements that may attract the provisions of s 106 and it would be a most artificial distinction to say that the agreements the subject of these proceedings do not come within the ambit of s 106 because they are not specifically franchise or licence arrangements. The dealership in this case is for all intents and purposes an integral part of the Caterpillar organisation.

70 The arrangement between the applicants and the first respondent, which includes the agreements is, except for the reference to land, indistinguishable from those that were the subject of proceedings in Majik Markets. Handley JA described it thus at 188: The franchisees are independent contractors conducting retail businesses on the land of the franchisor and selling motor fuel purchased from the franchisor. The franchisees, or in some cases, their employees, work in the businesses both in consequence of the agreements and in fulfilment of them. The form of agreement requires the franchisee to perform work in the retail industry either personally or through employees and therefore it leads directly to the performance of work in that industry. The franchisor has a real interest in the performance of that work. It results in the sale of motor fuel purchased from the franchisor and tends to maintain and improve both the value of its general goodwill, and the value of the local goodwill attached to the premises.

71 If one were to transpose the observations of Handley JA in Majik Markets to the present proceedings it would read as follows: The applicants are natural persons and a corporate entity conducting a sales and service business on land at a location determined by Caterpillar and required by Caterpillar to be suitable for the purpose, and selling Caterpillar equipment purchased from Caterpillar. The applicants, or their employees, work in the business both in consequence of the agreements and in fulfilment of them. The form of the agreement requires the applicants to perform work in the sales and service industry either personally or through employees and therefore it leads directly to the performance of work in that industry. Caterpillar has a real interest in the performance of that work. It results in the sale of Caterpillar products purchased from Caterpillar and tends to maintain and improve the value of its general goodwill.

72 I find that the contracts or arrangements between the applicants and respondents meet the necessary jurisdictional requirements of s 106. Accordingly, I find there is jurisdiction to hear and determine the applicants' claims for relief under s 106 of the Act.

73 The respondents contended that the Court does not have the power to grant the primary relief sought by the applicants. Before addressing the question of power it is appropriate to again summarise, with greater precision, what is sought by way of primary relief. Any summary is complicated by the fact that the applicants have proposed three different sets of variation to the Sales and Service Agreement: the Preferred Model; the First Alternative; and, the Second Alternative. The applicants' preferred model of a new Sales and Service Agreement would contain the following new elements: 1. No termination without cause.

2. Termination with cause: (a) for significant and sustained poor performance - 24 months to remedy, if not remedied, then 12 months' notice; (b) for serious and wilful misconduct - 12 months' notice; (c) for change in control - 12 months' notice; (d) for reasons within clause 30 [Automatic Termination] other than (e) bankruptcy/winding up - 12 months' notice; (e) for bankruptcy/winding up - automatic.

· 12 months to sell dealership; · help/not hindrance re sale during notice; · guarantee of assumption of contractual responsibilities (if no sale); · if no sale by end of notice period, offer by respondent to purchase at fair market value as at that time; · process for determining fair market value where disagree. 4. Service responsibilities - Caterpillar to provide all necessary assistance and support. 5. Audits, Performance Reviews and Customer Surveys - criteria and methodology to be by agreement between dealer and Caterpillar. 6. Dispute Resolution - provisions dealing with good faith bargaining, mediation and arbitration. 74 The first and second alternative positions proposed by the applicants are variations on the theme. For example, the first alternative position proposes that the Sales and Service Agreement would provide for termination without cause on 24 months' notice subject to certain conditions being met. The second alternative position also proposes the retention of termination without cause but subject to five years' notice and with different conditions to the first alternative.

75 It should be emphasised that the variations sought by the applicants to the dealership agreements are quite significant. The preferred model would take away the first respondent's right to terminate without cause and, even if there were cause, up to 24 months' notice would be required to terminate. Whilst the alternative models retain the first respondent's right to terminate without cause, the right is severely curtailed.

76 Further, or in the alternative to the claim for re-writing the dealership agreements, the applicants seek variations to the "Overall Arrangement" as pleaded in the Summons. The variations sought to the Overall Arrangement included requirements that:

· Termination of the dealership had to be by authorisation or approval of the Chairman of the second respondent; · Certain procedural fairness conditions had to be met before termination notices were issued; · The second respondent was to be a buyer of last resort.

77 The respondents contended that the Court does not have the power to grant the primary relief sought by the applicants. That is, the Court does not have the power to re-write the agreements in the manner sought by the applicants so that the agreements might continue on foot. The respondents also contended that even if the Court found it did have power there were strong reasons why the Court should not exercise that power to grant the relief sought. In this part of the judgment I propose to limit my consideration to the question of power. I will address the question of whether I should exercise that power, if it exists, after I have dealt with all of the evidence.

78 The respondents' contentions relating to the absence of power to grant the relief sought relied on the following propositions: (a) The primary relief sought is beneficial and not remedial in nature; the Court should adopt the principles relating to remedial relief applied by other courts under statutory provisions comparable to s 106. These principles provide that the relief should be proportionate to the wrong and do not involve reconstruction of existing rights and liabilities. Moreover, relief sought in the nature of specific performance will not be granted. (b) The power to "vary" contracts under s 106 does not embrace a power to change the very nature of the contractual/commercial relationship.

79 Fundamentally, the respondents contended that the primary relief sought by the applicants is massively disproportionate to any loss or damage that could possibly have been suffered by the applicants (the respondents, of course, deny any loss or damage caused by unfairness). 80 It was submitted that s 106(1) of the Industrial Relations Act is closely related to s 87(2)(b) of the Trade Practices Act 1974 (Cth). Reference was made to the decision of Munro J in Re Transport Workers Union of Australia (1993) 50 IR 171, where his Honour referred to s 88F of the Industrial Arbitration Act 1940 in relation to s 87 of the Trade Practices Act (at 221): Under section 127B [of the Industrial Relations Act 1988 (Cth)] it is therefore now open to me to make an order to set aside part of the contract, or to vary it. But such an order can only be for the purpose of placing the parties as near as practicable on such a footing that the unfairness found to exist no longer applies. The scope of the Commission's power to make an order is markedly narrower than that under s88F of the former NSW Act . But it broadly resembles that part of the power in the former Industrial Commission under s88F(1) to make a remedial order declaring void or varying a contract (Hall op cit, 125-127). There is of course a difference between an order declaring the contract void, and one to set it aside. It is based on the time from which the order speaks and the limits of the Commission's powers in determining existing rights. An order to set aside speaks only prospectively. The width of the power in s88F(1) of the former NSW Act to vary a contract is expounded in Sheldon J's comments on "Remaking Contracts" already quoted. That section in the NSW Act was identified as the model for a similar power in s87 of the Trade Practices Act (ACP Mills NSW Industrial Law, 356) which includes a power in s87(2)(b) for the Court to make: 'an order varying such a contract or arrangement in such manner as is specified in the order and, if the Court thinks fit, declaring the contract or arrangement to have had effect as so varied on and after such date before the date on which the order is made as is so specified' While it appears that the Court has not frequently been asked to rewrite contracts under the power … it has been prepared to do so when thought necessary: 'The power conferred by s87(2)(b) is extremely wide. In terms, the discretion is unlimited but the Court would not be justified in varying a contract beyond the extent necessary to provide a result which conformed with the Act and was reasonable between the parties' ( Pont Data Aust v. ASX Operations (1990) 21 FCR 385 at 426 per Wilcox J).' I consider that a similar approach should be applied by the Commission in exercise of its power under s127B to vary a contract. Any exercise of the power must also be for the purpose of placing the parties in such a footing that the recorded ground of fairness etc in the contract no longer applies.

81 The respondents also referred to the judgment of the Full Bench of the Commission in Court Session in Westfield Holdings Limited v Adams (2002) 114 IR 241 where the Full Bench set out principles as to the operation of section 106(5) in relation to sections 82 and 87 of the Trade Practices Act. At par [114] the Full Bench said: The language of s106 is arguably even wider than that in ss82 and 87 of the Trade Practices Act . If, on the basis of its scope and purpose, there is no foundation for limiting the language of the Trade Practices Act as expressed in ss82 and 87, by drawing some analogy with the law of contract, tort or with equitable remedies, similarly, in our view, there is no basis for doing so in respect of section 106 of the Industrial Relations Act , except to the extent that, in State of New South Wales v. Health & Research Employees Association and " Harcourt Brace" , the Court referred to such arguments by analogy being, in appropriate circumstances, "persuasive."

82 At par [125] the Full Bench further stated: It may readily be seen that the test under ss82 and 87 [of] the Trade Practices Act in determining what might be appropriate by way of compensation is quite different to that required under s106 of the Industrial Relations Act . Accordingly, it is neither logical nor appropriate when assessing compensation under s106(5) of the Industrial Relations Act to follow the approach adopted by other courts to the assessment of compensation under the Trade Practices Act .

83 The respondents sought to distinguish Westfield on the basis that the observations by the Full Bench were made in the context of an assessment of damages. The issue here, however, it was submitted is not about damages or compensation but rather whether the dealership agreements should be varied pursuant to s 106(1) of the Act. The respondents submitted that: It follows that even if any unfairness were found (it being denied that there has been any unfairness), the discretion under section 106(1) is a similar power to that contained in other legislative provisions and that in determining whether that discretion should be exercised (and, if so, in what manner), similar legislative powers and similar common law principles, should be taken into account.

84 The respondents referred to a number of other cases in support of their contention that s 106 was analogous to s 87 of the Trade Practices Act and s 7(1) of the Contracts Review Act 1980 (NSW) and canvassed a number of decisions about the approach to be taken to remedial relief under those statutes including: Akron Securities Limited v Iliffe (1997) 41 NSWLR 353; Marks v GIO Holdings Ltd (1998) 196 CLR 494; Krambousanos v Jedda Investments Pty Ltd (1996) 64 FCR 348 at 356; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 43; Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 at 298; ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (1991) 27 FCR 492 at 503; McPhillips v Ampol Petroleum (Victoria) Pty Ltd (1990) ATPR ¶51-247 per Woodward J; S H Lock (Australia) Ltd v Kennedy (1988) 12 NSWLR 482 at 487 per Samuels JA and 492 per Priestley JA; Esanda Finance Corp Ltd v Tong (1997) 41 NSWLR 482 at 489 per Handley JA citing Priestley JA in Lock; Elders Rural Finance Ltd v Smith (1996) 41 NSWLR 296 at 310 per Handley JA. A number of contentions were made as to the principles to be derived from these cases but, in particular, it was contended that these cases "hold that the remedial response should be proportionate to the wrong without necessarily having to reflect the extent of the plaintiff's (likely) loss or damage" and that the principles to be derived from these cases "strike the balance between what a plaintiff/applicant wishes and what in the judgment of a court seeking to do justice between both parties it considers "appropriate"".

85 In seeking to apply these principles to s 106 the respondents submitted: The choice of remedies is influenced by the loss or disadvantage resulting from conduct found to be unfair, not to reconstitute a contract in terms (for example, as to termination) which, had the applicants insisted upon at the point of entry, would have resulted in Caterpillar's refusal to enter into contractual relations with them at all. The remedies, it is submitted, under s106 do not envisage: (i) A reconstruction by order of the Commission of existing contractual rights and liabilities with no regard to the impact from such a 'reconstruction' on the underlying commercial basis for the relationship. (ii) The use of the section as a means of obtaining a prescription by means of an order of the Commission for new rights that materially enhance and override the previously agreed rights at the expense of the other party (Caterpillar). The Applicants moreover in these proceedings seek 'beneficial' rather than 'remedial' relief and do so without them providing or offering to provide any quid pro quo in the consideration for the 'new' rights they seek. (iii) The use of the section for the purpose of perpetuating and maintaining a commercial contract that has been fair, because it is lucrative, is neither 'remedial' in intent nor in effect. The orders sought in these proceedings, it is submitted, travel beyond the purpose of the legislation and seek a provision by order of the Commission which will continue the financial enrichment of the three Applicants' for the indefinite future. In this respect, the variation orders sought contravene the very rationale for the legislative provision. As Kirby J in Marks v GIO Australia Holdings (1998) 196 CLR 494, 547 pointed out, legislation of this kind "should be construed to achieve its remedial purposes".

86 In seeking to strengthen the validity of the application to s 106 of principles applying to remedial relief under the Trade Practices Act the respondents referred to Beahan v Bush Boake Allen Australia Ltd (1999) 93 IR 1 at 13, where the Commission in Court Session (Wright J, President, Walton J, Vice President and Hungerford J) described s 106 as remedial in nature: The former s 88F and hence the present s106, has been, properly in our view, described as remedial in nature in enabling a person (including an employee) aggrieved by a contract within the scope of the section to obtain relief: see Manni v Scully (1967) AR (NSW) 606 at 615. 87 As to the issue of specific performance, the respondents submitted that "the relief sought by the applicants is unmistakably relief in the nature of specific performance." The respondents referred to a number of cases where courts have rejected, or thrown serious doubt on, the proposition that there is power to order specific performance under s 87(2)(b) of the Trade Practices Act: Futuretronics International Pty Limited v Gadzhis (1992) 2 VR 217 at 245 per Ormiston J; Courtney Creche Pty Limited v Okko's Fine Art & Custom Framing Pty Limited (1995) 7 BPR 14,337 at 14,350 per Young J.

88 The respondents referred to Beard v Caltex Oil (Australia) Pty Limited (1979) AR (NSW) 601 where the Industrial Commission of New South Wales refused to make orders where to do so would have the effect of enforcing a contract for personal service and also Bennett v B.P. Australia Limited (unreported, No.632 of 1983, 28 March 1984) where an order was sought to extend the term of a lease and retail agency agreement. In that case Macken J stated: … were I to rewrite the contract I would face all the difficulties which in the past have prompted Courts to refuse orders for specific performance of contracts of personal service. The future conduct of BP would be governed by the terms of a lease rewritten by the Industrial Commission, but the conduct of the applicants in carrying out their obligation under that lease (the area in which personal endeavour and initiative resides) would be altogether outside the control of the Court …

89 It was submitted that the point raised in Bennett v B.P. Australia Limited is the one that identifies both the impracticability and the unfairness in rewriting a contract as sought in the present proceedings in that: ... the respondents' power of termination would be circumscribed but the applicants' conduct in terms of commitment to ongoing trust and confidence over the pursuit of their personal interests would be quite beyond the control of the Court. By acquiring a tenure that they never bargained for the applicants' would secure an unfair windfall as the dealership would, for all practical purposes, be converted into an exclusive agency for the state of New South Wales and the Australian Capital Territory terminable only in limited circumstances. In the event of the further or continued erosion of the relationship, a circumstance beyond the new 'grounds' for termination, Caterpillar would be powerless to bring it to an end. The Commission, it is respectfully submitted, would never countenance its power being used to bring about a commercially unfair result of that kind.

90 In summary, the respondents' propositions regarding remedial relief were as follows: 1. The broad scope of the statutory provision and the range of remedies provided by it requires the Court to consider all the circumstances before it in the exercise of its discretion. 2. In exercising that discretion, the Court must examine loss or damage suffered or likely to be suffered in and relevant causation issues including whether the person seeking relief has or is contributing to the loss or damage. Only then will the Court choose the most appropriate remedy. 3. Any orders to be made should be remedial in nature in light of the issues in 2. 4. The selection of the remedy must be preceded by a scanning of the available remedies before the selection of the most appropriate one can be made. 5. There is a need to distinguish clearly between the factual circumstances that enliven the power of the Court to grant relief from the circumstances which are relevant to the nature of the relief which it is appropriate to grant. 6. There is "remedial overkill" when a greater measure of relief is granted than is required to administer justice as between both parties.

91 The applicants submitted that notwithstanding the similarities between s 87 of the Trade Practices Act and s 106 of the Industrial Relations Act, there are significant differences "which account for the different approach to section 87 that the Respondents have identified, that is, that section is "remedial" and is limited to correcting the loss or damage identified by the court."

92 It was submitted for the applicants that the emphasis on damage under the Trade Practices Act comes from the wording of section 87 itself. Under that section, jurisdiction is only enlivened where the court finds that a party "has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged in … in contravention of a provision of Part IV, IVA, IVB or V". Where such a finding is made, the court may make such order or orders as it thinks appropriate "if the court considers that the order concerned will compensate … in whole or part for the loss or damage or will prevent or reduce the loss or damage" (section 87(1)).

93 However, as the Full Bench noted in Westfield "The test ... under section 106 is not "what loss and damage has been caused by the conduct contravening the Act" but rather whether there is unfairness. The applicants submitted: It is not necessary to choose out of a "smorgasbord" of discretionary remedies - or to "scan the table" - as the Court is faced with a decision only whether the contract is found to be unfair and whether that contract should be avoided or varied. Damages are not an "alternative" under section 106 - money orders can be made where an order varying or avoiding a contract has been made, if it is "just in the circumstances". Under section 106, there is no long list of alternative remedies which the court must consider and from which the court must choose. It was submitted a similar contrast holds true under the Contracts Review Act .

· Once the jurisdiction of the Court is established (as is the case here), then, provided the Court finds relevant unfairness, it has broad power to set aside or vary the contracts/arrangements under consideration and, in appropriate circumstances, to make monetary orders to remedy such unfairness. The breadth of the Court's power is apparent on the face of sections 106(1) and 106(5). The High Court has observed that the language of the unfair contracts provisions is "intractable and must be given effect to its width and generality": see Stevenson v Barham (1977) 136 CLR 190 at 192. It has been long recognised that the Court and its predecessors have "massive power" pursuant to the unfair contracts provisions to reformulate contracts and arrangements: see Davies v General Transport Developments Pty Limited [1967] 67 AR (NSW) 371 at 373; see also Gough & Gilmour Holdings Pty Limited v Caterpillar of Australia Limited [2001] NSWIRComm 260 at 43. · The Court and its predecessors have long recognised that the unfair contract provisions extend to so-called "commercial cases". A Full Bench of this Court has recently recognised that the unfair contracts provisions extend to "commercial cases", noting: "It is also quite clear that merely because a contract or arrangement might be characterised as 'commercial' that is not a basis upon which to conclude it cannot be challenged under s 106 of the Industrial Relations Act : Loupos v Basa t/as Robert R Andrews Real Estate (1995) 62 IR 397 at 400; Zakrzewski v Rodgers (2000) 106 IR 1 at 10; Gough & Gilmour Holdings Pty Limited v Caterpillar of Australia Limited (No 9) [2001] NSWIRComm 260 at [42]." See Mitchforce Pty Limited v Stark ey [2002] NSWIRComm 85 at par [36]. · Providing that the variation is related to the remediation of the found "unfairness", there appears to be nothing contained in the section itself that prevents the Court varying a contract in such a way that the contract is kept alive. Indeed, the power to vary stands in contradistinction to the power to declare a contract void. A declaration of voidness carries with it the assumption that the contractual relationship has ended or will, by that declaration, end. · The legislation is clearly remedial or beneficial in nature and the Court is therefore required to adopt a broad approach to the construction of the section (see: Euphoric Pty Limited v Ryledar & Anor [2002] NSWIRComm 136 at par [7] per Wright J, President and Walton J, Vice-President, and at pars [49] to [69] per Schmidt J). Section 106 does not restrict the orders that can be made to orders in connection with those parts of the contract concerned with the performance of work (see: Euphoric, par [7] per Wright J, President and Walton J, Vice-President, and at pars [49] to [69] per Schmidt J). Rather section 106 will "be construed so as to give the fullest relief which the fair meaning of the language will allow" (see: Euphoric, par [55] per Schmidt J, citing Bull v Attorney General (NSW) (1913) 17 CLR 370 at 384 per Isaacs J). · The Court has both had occasion to indicate that it has power to make orders varying contractual arrangements so as to keep them on foot and has in fact made such orders: See A & M Thompson Pty Ltd and Others v Total Australia Ltd [1980] 2 NSWLR 1; Elliot v Royal Motor Yacht Club of New South Wales, Newcastle Branch & Ors (1988) 42 IR 35; Starkey v Mitchforce Pty Ltd (2000) 101 IR 177 (see also on appeal Mitchforce v Starkey and Anor [2002] NSWIRComm 85). · To the extent that the equitable principles may be relevant (see Gough & Gilmour Holdings Pty Ltd and Ors v Caterpillar of Australia Ltd and Anor (No. 9) [2001] NSWIRComm 260 at par [54], these principles, increasingly, are even in their application to specific performance, applied with concepts of justice in mind and not as automatic exclusionary principles. The previous reticence of courts to order specific performance must now be read subject to the decision of the High Court in Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1. There the High Court rejected the rule as a basis (of itself) for refusing a decree of specific performance. The Court noted, in its joint judgment (at 46, per Brennan CJ, McHugh, Gummow, Kirby and Hayne JJ) that: Constant supervision by the Court by itself is no longer an effective or useful criterion for refusing a decree of specific performance.

95 To some extent the submissions by both the respondents and the applicants on power blur the distinction between the question of whether the Court has the power to grant the primary relief and the separate question of whether it should exercise its discretion to do so. What I am concerned with at this point in the judgment is the question of whether the Court has the power.

96 I consider that it is clear from the Full Bench judgment in Westfield that the exercise of power under s 106 is not subject to the same limitations as those that apply to s 87 of the Trade Practices Act or s 7 of the Contracts Review Act. Whilst it is true that the discussion about s 87 in Westfield related to s 106(5) of the Industrial Relations Act, I consider that the implications of what the Full Bench said extend to s 106 generally. In other words, whilst there is no prohibition against having regard to the principles applying to the granting of remedial relief under s 87 of the Trade Practices Act in the exercise of a judge's discretion under s 106, the judge is not bound by those principles. Section 106 is a unique provision standing on its own two feet.

97 What is required of the Court under s 106, subject to there being jurisdiction is, firstly, to determine whether the contract is an unfair contract within the meaning of s 105. The Court may find that it was an unfair contract at the time it was entered into or that it subsequently became an unfair contract because of any conduct of the parties, any variation of the contract or any other reason (s 106(2)). The test under s 106 is not whether a party has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged in in contravention of the provisions of the statute, which is the test under s 87 of the Trade Practices Act.

98 Secondly, if the Court finds unfairness it may declare the contract wholly or partly void, or vary it, either from the commencement of the contract or some other time (s 106(3)). Any variation to the contract would obviously be moulded to overcome the unfairness according to the circumstances of the particular case. The Court may then make an order as to the payment of money in connection with the impugned contract (s 106(5). It is not the position under s106 of selecting a remedy from a "remedial smorgasbord" (see Akron at 366 per Mason P) as provided by the statute, which is the case under s 87 of the Trade Practices Act.

99 There is no doubt about the width and generality of the provisions of s 106: see Stevenson v Barham (1977) 136 CLR 190 at 192 per Barwick CJ; Walker v Industrial Court of New South Wales (1994) 53 IR 121 at 135 per Kirby P; Davies v General Transport (1967) 67 AR (NSW) 371 at 373 per Sheldon J; Rolles v Donald Scott Surgicals Pty Ltd (unreported, 19 February 1988) BNY Australia v James (1992) 26 NSWLR 57; (1992) 40 IR 1 at 50 per Hungerford J; Beahan v Bush Boake Allen Australia Limited (1999) 93 IR 1 at 15, 16; Westfield at par [113].

100 As Schmidt J observed in Euphoric at par [55] s 106 is to "be construed so as to give the fullest relief which the fair meaning of the language will allow". Accordingly, I consider there is no basis for reading down the provisions of s 106 to the effect that the Court may not rewrite a contract in whatever terms it considers appropriate to remedy the unfairness subject to acting judicially. As Sheldon J said of s 88F in Davies v General Transport at 373: Section 88F acts with drastic and pervasive effect. It certainly plays havoc with the classic principles relating to contracts … in the ordinary case the Court will not remake a contract … but Section 88F has no such inhibitions … as to remaking contracts, this can be done either by omitting parts and retaining the rest, or by adding new terms. Thus destruction, dilution, renovation and patching are all weapons in the section's arsenal.

101 Given the power vested in the Court regarding the remaking of contracts, particular regard must be had to what Barwick CJ said in Stevenson v Barham at 192: The legislature has apparently left it to the good sense of the Industrial Commission not to use its extensive discretion to interfere with bargains freely made by a person who is under no restraint or inequality, or whose labour was not being oppressively exploited.

102 As to the question of specific performance, I note the general reluctance of the Commission in Court Session to grant specific performance: see Beard v Caltex Oil. However, in that case I do not understand Macken J to have said there was no power under s 88F to order specific performance, only that "just as a matter of decree of specific performance would not issue as a matter of common law policy, so too, an order under s 88F maintaining such a contract on foot ought not be made." (at 609).

103 Whether the primary relief sought by the applicants amounts to the seeking of an order for specific performance is a matter I will address in the context of considering whether, as a matter of discretion, I should grant the primary relief. The power to "vary" contracts

104 The respondents submitted that the power to "vary" contracts under s 106 does not embrace a power to change the nature of the contractual/commercial relationship. To do so, it was submitted, would not be to "vary" a contract. It would be to convert an existing legal relationship into one which is juridically of a different character. The Commission does not have the power, under colour of a power to "vary", to change the character of the legal relationship which the parties established for themselves. Further, that the power to vary does not include or embrace a power to impose a buyer of last resort obligation on Caterpillar.

105 I consider that this issue is more appropriate to be considered in the context of the exercise of the Court's discretion. That is, I do not agree that the word "vary" as it is used in s 106 should be read as though it meant "modify". However, whether as a matter of discretion I should vary the dealership agreements to the extent of changing the very nature of the relationship, is quite another question.

106 As the applicants pointed out, the Macquarie Dictionary defines "vary" in terms of: "To change or alter, as in form, appearance, character, substance, degree, etc."

107 There is no warrant for moving away from the ordinary meaning of the word "vary" in interpreting its use in the context of s 106. Conclusion as to power

108 The Court finds that it has power to grant the primary relief sought by the applicants.

109 The evidence in these proceedings was extensive and covered a period from 1925 to 2001, although the core period was 1989 to 2000. I propose to identify the relevant issues in roughly chronological order, and address them accordingly. Before coming to particular issues it is appropriate to address the relevant background to the proceedings. Caterpillar

110 Mr Matthew Tong, the first respondent's finance director from 1993 until his retirement in July 2000, gave evidence of the early history of Caterpillar: Caterpillar Tractor Company was formed in April 1925 as a result of a merger between two leading companies that built agricultural equipment being Holt Brothers and CL Best & Co. The name "Caterpillar" was a trademark of Holt Brothers having been adopted following the development of the first agricultural equipment to utilise the idea of replacing wheels with tracks so as to increase area of contact with the ground thereby spreading the load of the equipment and increasing traction. This first Holt track-tractor was tested in 1904. After the test of this first tractor machine, the Caterpillar trademark was coined by Holt. 111 Mr Tong also gave evidence of the reporting lines within Caterpillar: (a) The parent company is Caterpillar Inc, based in Peoria Illinois, USA. (b) Caterpillar Inc is administered by a Board of Directors (including a chairman) and its executive management team. (c) Operationally, Caterpillar Inc has five Group Presidents. Each Group President is responsible for a geographic region and also for certain functional areas of responsibility within the Caterpillar Group as a whole. For example, one Group President might be responsible for the Asia Pacific region and also for the Caterpillar Group finances. Group Presidents report to the Chief Executive Officer, who also serves as Chairman of the Board. The Group Presidents and Chairman are referred to within Caterpillar as the Executive Office. (d) Each Group President has a number of vice presidents. Each vice president has particular roles or functions divided in a similar way to the Group Presidents. That is, they are typically divided by region and by function. For example, there may be a vice president for Asia Pacific (as a geographic region) and also a vice president for a particular function of the Caterpillar Group as a whole - financial operations, for example. (e) The functions that each vice president has are determined by the responsibilities and geographic regions for which the particular Group President is responsible. (f) Each vice president has a number of managing directors or department managers responsible for different areas in the region for which the Group President is responsible. Again, for example, the Asia Pacific region has a number of areas each of which has a managing director responsible to a particular vice president. (g) The vice presidents that deal with functions rather than regions (eg finance) have senior executives reporting to them in relation to the particular function for which they are responsible. (h) Reporting lines at levels below managing director follow what I would describe as a reasonably orthodox corporate approach with various positions created being determined by the requirements of the particular business, region or function. 112 The key personalities within Caterpillar during the period 1989 to 2001 and the positions they held are set out below. Those who gave evidence for the respondents are marked with one asterisk. Those who gave evidence for the applicants are marked with a double asterisk. Caterpillar of Australia is abbreviated to "C of A" in the table: Position Dates Name Chairman of Caterpillar Inc. 1999 - present Mr G Barton " " " 1989/91 - 1999 Mr D Fites Group President of Caterpillar Inc. 1995 - present Mr J Owens* Vice President - Asia Pacific of Caterpillar Inc. 1992 - 2001 Mr S Ramseyer* " " " 1991 - 1992 Mr R Petterson " " " 1985 - 1991 Mr D Coonan** Managing Director of C of A 1999 - present Mr C Curfman* " " " 1991 - 1999 Mr R Nitto* " " " 1987 - 1991 Mr T Thorstenson Regional Manager Australia of C of A 1980s - 1990 Mr N McKay " " " 1990 - 2001 Mr K Barrett* Finance Director of C of A 1993 - 2000 Mr M Tong* District Manager - NSW for C of A 1999 - present Mr P Forsyth " " " 1999 - 1999 Mr G Bowring " " " 1998 - 1999 Mr J Langmore* " " " 1995 - 1997 Mr R Beeler* " " " 1991 - 1995 Mr R Frazer " " " 1987 - 1991 Mr A Wickert** Finance Manager - C of A 1983 - 1992 Mr M Tong* Product Manager - 1999 - 2001 Mr A Mason Jefferies* C of A Sales Development Manager - C of A 1997 - 1999 Mr A Mason Jefferies* 113 Mr Tong gave evidence that "Caterpillar has always relied upon a network of dealers for the distribution of its products." He said:

Its [Caterpillar's] philosophy is to provide the best equipment, product support or customer service to purchasers of Caterpillar equipment and Caterpillar has always considered that the best way to do this is through a dealer network. The thinking behind this philosophy is that a local dealer network enables a more effective interface between the customer and Caterpillar. Caterpillar has always had a " customers first philosophy ", as explained in the publication " All in a days work - 75 Years of Caterpillar ": "a formula for success can be stated briefly: Find out what products customers want. Design and build them. Keep 'em running. When they wear out, rebuild or recycle. Do it better than anybody else. The "keep them running" part has always been top priority because customers depend on our products for their livelihood - sometimes for life itself, as with generator sets for standby power to hospitals. Caterpillar, dealers, suppliers - and customers themselves - work as a team to provide what we believe is the most extraordinary product support system in the world". Caterpillar has always emphasised and operated on a basis of co - operation and trust as between Caterpillar, the dealers and customers. 114 Mr Tong described in his evidence the importance of trust in the relationship between Caterpillar and a dealer: Caterpillar's business is founded upon a relationship of co-operation and trust with dealers and customers with its objectives including quality products and unbeatable product support and customer service; Caterpillar's business has been built around this relationship-based philosophy. The importance of the relationship of co-operation with dealers was emphasised in the 1926 publication " Across the Table-Caterpillar Tractor Co and its Dealers "… Extracts on pages 5 - 7 read as follows: "The Company markets its products entirely through its authorized dealers, to each of which it assigns a certain territory, in which, with certain exceptions, the dealer's rights are exclusive as is set forth in the General Agreement, which governs the relations between it and its dealers. Before the Company will enter into a dealership relation it has to be satisfied that the prospective dealer has the necessary qualifications and the means with which to give adequate representation in the Territory to be allotted. These qualifications in the order of their importance are: 1. Good character and a sustained reputation for square dealing. 2. Business capacity and enterprise and proven organisation ability. 3. Working capital and established bank relationships. 4. Experience with the line itself or with allied lines. 5. Acquaintance in and knowledge of the Territory. Almost no dealer can be expected to have all these qualifications at the outset, but all must have the qualifications numbered "1" because the dealership relationship with this Company is so close that both manufacturer and dealer must have unbound mutual confidence in and respect for one another. Our dealer organization is our chief pride, and we have good reason to feel that all "Caterpillar" dealers highly regard the Company, its products, policies and methods. It is only upon the basis of such mutual esteem that an enduring relationship can be built. Granting that the purpose of all this activity is profit, how can it be achieved in the best, easiest, and quickest ways? The answer to that question is, "By energy, enterprise and the fullest co-operation between the several dealers and between each dealer and manufacturer." As the dealer has to have the necessary energy and enterprise and the special qualification of good character and should have all or most of the other qualifications above outlined, or be able to develop or attain them, it ought to be a rather simple matter for the fullest co-operation to exist from the start or at least to develop rapidly. The reason for the lack, if any, of the fullest co-operation is not that the company or any of its dealers does not wish for it. The trouble is that it is principally wished for and not worked for. No one ever got anything but "left" by merely wishing. If we aim at nothing, we will hit it. If every dealer will read with understanding all that follows and will act upon it, the profits sought for should come faster and more amply than otherwise would be the case. This is a frank appeal to the dealer's self interest and is offered by us in an equally frank recognition of the fact that "As the dealer profits-so do we". But-as "He profits most who serves best," let us now consider how the dealer should be organized to best serve and so to profit most." 115 There was a particular emphasis in the evidence of the respondents' witnesses on this issue of trust and confidence between Caterpillar and its dealers. For example, in his evidence Mr Ramseyer said: Caterpillar has always regarded positive, trusting and co-operative relationships with its dealers as being central to its business. 116 Mr Barrett, the first respondent's regional manager, said in his evidence: Caterpillar Australia works and co-operates with its dealers so that they focus on their customers and the customers' needs. In this way, the customers can count on Caterpillar Australia, via the dealers, to be working with them to solve problems, provide support and technical expertise. The customer satisfaction achieved by the dealers necessarily affects the volume of orders placed by customers. Caterpillar Australia does not have many set procedures which guide the relationship between it and its dealers. Accordingly, there must be a lot of trust and co-operation between Caterpillar Australia and each dealer in order for the relationship to progress and be workable.

117 In his evidence Mr Nitto said: The Caterpillar Group has always relied upon positive working relationships with its dealers as being central to the success of its business. It has always distributed its products and services through a dealer network in Australia and has taken great pride in its ability to maintain long term, cooperative, trusting, open and successful working relationships with its dealers. It has always considered its dealers to be part of the "Caterpillar Family". Although there will always be differences of opinion, frank exchanges, and give and take between Caterpillar and its subsidiaries and its dealers, it has never operated on the basis that its relationships with dealers are combative or adversarial. Rather Caterpillar's relationship with its dealers is founded upon a cooperative trusting approach where each is working towards the same end in a positive and open framework. In my experience with dealers for over 30 or more years this has proved to be not only a personally and professionally rewarding way to conduct business but one which operates to the mutual economic benefit of both Caterpillar and the dealer. The key to Caterpillar's approach and its success has been its customer focus and emphasis upon providing customer value through the building of relationships. It has never been its philosophy to gain short term profit at the expense of long term goals. The nature of the equipment and services means that to remain competitive in the industry and ensure maintenance and growth of market share, customer satisfaction and relationship building with the customers through the dealers, is critical.

118 The applicants never seriously questioned the need for trust and confidence in their relationship with the respondents but they submitted that the loss of trust and confidence alleged by the respondents was a general assertion and it was not of such a degree that it constituted a proper foundation to terminate the dealership agreements. The applicants emphasised that the relationship was an arm's length commercial relationship that involved "a different and lesser degree of trust and confidence between the parties" than that which might be expected in an employment relationship. I will return to the central issue of trust and confidence later in this judgment. The Second Applicant

119 If there is a central character in these proceedings it has to be Harcourt David Gough. It is essentially through his drive, intelligence and business acumen that the first applicant is the multi-million dollar business it is today. It is also the case that Mr Gough is the main reason why the respondents have sought to cancel the Gough & Gilmour dealership. The quintessential reason for seeking to cancel the dealership was not the dealership's performance, investment or profitability but rather Mr Gough's attitude and personality. Both Mr Ramseyer and Mr Nitto made it very clear in their evidence that the termination of the dealership was not based on poor performance or lack of investment and nor could it have been. I will need to return to this issue, but as Mr Ramseyer agreed in his evidence, the termination of the dealership "was all about Mr Gough's personality".

120 Mr Gough was variously described as "control-oriented", "combative", " very confrontational", "a very difficult individual to deal with", "authoritarian approach to management", "authoritative, direct and challenging", "win at any cost mentality", "very aggressive", "a person who hates to lose", "hard headed", "a person who doesn't much like criticism". On the other hand, Mr Gough was described as a "likeable, personable man", "engaging", "superb with customers".

121 The respondents made a strong attack on Mr Gough's credibility as a witness, describing him as "a most unsatisfactory and unreliable witness". There were indeed, a number of unsatisfactory aspects of Mr Gough's evidence and I will deal with those as they arise in this judgment. It must be said, however, that a number of the respondents' witnesses were also unsatisfactory when it comes to their credit.

122 Mr Gough was born and grew up in New Zealand where his family had been involved in a Caterpillar dealership since 1932 (Gough, Gough & Hamer). He graduated from Canterbury University in Christchurch, New Zealand in 1969 with a Bachelor of Engineering in civil and structural engineering. He then travelled to the United Kingdom where he worked for two years as an engineer. Mr Gough became Managing Director of Gough, Gough & Hamer in 1979. However, following a family dispute, he resigned that position and in 1986 left New Zealand.

123 It was asserted by Mr Nitto in some correspondence to the second respondent's head office in Peoria, Illinois that the reason why Mr Gough was forced to leave New Zealand was because his operational skills were judged a touch too sharp. There was no foundation whatsoever for such an accusation, merely rumour and innuendo. I will deal with this in more detail later in this judgment.

124 The evidence, however, leads one to the inevitable conclusion that Mr Gough's confrontational disposition, his treatment of Caterpillar employees such as the successive district managers, and his dealings with Caterpillar of Australia over a number of years severely strained the dealer-principal relationship and the trust and confidence underpinning it. Nevertheless, the question remains as to whether, in all the circumstances and despite Mr Gough's conduct, the respondents' treatment of the applicants in ultimately terminating the dealership was unfair, harsh or unconscionable within the meaning of ss 105 and 106 of the Act. The Third Applicant

125 Anthony Lansley Gilmour, the third applicant, owns 10 per cent of the issued share capital in the first applicant. Mr Gilmour has an extensive background in Caterpillar dealerships, having worked in one or another all of his professional life. Mr Gilmour is a qualified civil engineer, having graduated from the University of NSW with a Bachelor of Engineering in 1972.

126 Mr Gilmour's current position within the first applicant is marketing director. He is responsible for devising and implementing strategies to develop the first applicant's market share and margin for all its products, namely, new and used machines, parts and service. Also, as a director of the first applicant he is involved in all facets of the business, such as finance and industrial relations.

127 Mr Gilmour worked for Waugh & Josephson for 12 years prior to taking a position in 1984 as products support manager with Gough, Gough & Hamer in New Zealand where he met Mr Gough. In 1986 Mr Gilmour was promoted to the position of general manager, marketing. In 1988 Mr Gilmour joined with Mr Gough in bidding for the Waugh & Josephson dealership.

128 Mr Gilmour presented as a loyal, conscientious, well-regarded and effective representative of the first applicant. There was no suggestion that his personality, attitude or performance figured significantly in the decision by the respondents to terminate the dealership. Indeed, when Caterpillar of Australia initially approached Mr Gough to sell his shares in the dealership no similar approach was made to Mr Gilmour. However, the respondents did not consider as an alternative to requiring Mr Gough to sell his interests that Mr Gilmour could take over the running of the dealership and retain his interest in it. It appears this was mainly because of their concern that Mr Gilmour would be overborne by Mr Gough's dominating personality notwithstanding that Mr Gough might have "stepped back" from the day to day management of the dealership. Ultimately, Mr Gilmour was placed in the same position as Mr Gough in so far as selling his shares was concerned.

129 I consider that Mr Gilmour was heavily influenced by Mr Gough, understandably so because Mr Gough held 90 per cent of the shares compared to Mr Gilmour's 10 per cent, but also because of Mr Gough's dominating personality. Acquisition by the second and third applicants of the Waugh & Josephson dealership

130 In 1925 Waugh & Josephson Pty Limited was appointed a Caterpillar dealer. In 1987 Bell Resources Limited bought all of the shares in Waugh & Josephson. Following the share market crash in October 1987 Bond Corporation bought Bell Resources so that in 1988 Bond Corporation became the beneficial owner of Waugh & Josephson.

131 In June 1988 the second applicant became aware that Waugh & Josephson might be for sale. In about July 1988, the first respondent called for expressions of interest for the acquisition of the dealership. In July 1988, Mr Gough approached Mr Gilmour about forming a partnership to acquire the Waugh & Josephson dealership. Mr Gilmour affirmed his interest. The second and third applicants advised Mr Al Wickert, the first respondent's district manager for New South Wales at the time, of their interest in acquiring the dealership. Both Mr Gough and Mr Gilmour saw the Caterpillar dealership as a long-term investment opportunity. There was evidence that it was Mr Gough's intention to pass his interest in the business to his children. There was also evidence that the second and third applicants sought to purchase the dealership on the basis that Caterpillar dealers had a high level of security, and that notwithstanding the termination provisions of the dealership agreements their expectation was that save in circumstances of low profitability or bankruptcy and/or sustained poor performance or misconduct, that the dealership agreements would not be terminated. This expectation is a central element in the applicants' case and I shall return to it later in this judgment.

132 There were six steps in the process whereby Gough & Gilmour acquired the Waugh & Josephson dealership from Bond Corporation. The first was that Caterpillar issued a prospectus. It was Mr Gough's evidence that some 25 prospectuses were issued but this was in respect of both the Waugh & Josephson dealership and another dealership in Western Australia owned by Bond Corporation known as Wigmore's. Secondly, discussions occurred between Gough & Gilmour, Bond Corporation and Caterpillar regarding the dealership. Such discussions also apparently occurred between Caterpillar, Bond Corporation and other potential purchasers. Thirdly, in October 1988, Mr Gough and Mr Gilmour finalised a formal proposal for the acquisition of the dealership and gave an oral presentation to Caterpillar in support of their written proposal. This was followed by a further presentation in early November. Fourthly, on 17 November 1988 Mr Tong informed Gough & Gilmour that they had been selected as approved Caterpillar dealers for New South Wales and the Australian Capital Territory and on 4 January 1989 signed a heads of agreement for the purchase of Waugh & Josephson. Fifthly, on 20 February 1989, Elemental Pty Limited (the company which later became the first applicant in these proceedings) indirectly purchased all the shares in Waugh & Josephson pursuant to a transaction that involved the commitment of funds totalling approximately $43 million. Sixthly, on 20 February 1989 the applicant entered into the three dealership agreements with Caterpillar of Australia.

133 There were two matters associated with the sale of the Waugh & Josephson dealership that gave rise to controversy in relation to the sale of the applicants' dealership. The first was whether Gough & Gilmour were aware at the time that Caterpillar of Australia had taken the decision to terminate the Waugh & Josephson dealership by the giving of 90 days' notice. It was part of the applicants' case that the sale to WesTrac of their dealership was unfair because WesTrac was aware of the prospect that unless the applicants' sold their interests in the business, Caterpillar would cancel the dealership. This, the applicants' contended, gave WesTrac an unfair bargaining advantage. It was Caterpillar's contention that at the time of the sale of the Waugh & Josephson dealership, Gough & Gilmour were aware that Caterpillar had taken the decision to terminate the dealership by giving 90 days' notice and, accordingly, the applicants could hardly complain about any knowledge that WesTrac may have had about termination intentions. This question is dealt with more fully later in the judgment but at this point it may be noted that the applicants were aware that termination notices had been served on Bond.

134 There was also an issue raised by the following contention by Mr Gough that: …during the sale of W&J in 1988 the potential purchasers on the final short list had to demonstrate that they had reached a commercial understanding with the Bond Corporation prior to Caterpillar considering them as candidates for the dealership in the Territory. By placing this onus on a number of potential purchasers, the bargaining position of Bond Corporation was greatly improved.

135 One of the applicants' complaints in relation to selling their dealership was that they were not able to negotiate with more than one bidder. In other words, when it came to selling their interests in the dealership the applicants were limited to negotiating with WesTrac only. The applicants pointed to what they regarded as an inconsistency in Caterpillar's position in relation to the sale process and the unfairness they were subjected to vis-a-vis the sale by Bond Corporation in 1988/89.

136 It was Mr Gough's evidence that he was told by Mr Tong in October 1988 "You now need to be able to demonstrate that you have reached a commercial understanding with the Bond Corporation for the acquisition of the W & J business." Mr Gough said that negotiations ensued with Wardley Australia Limited, the agent for Bond Corporation, and an agreement in principle was reached as at 11 November as to the purchase of Waugh & Josephson's shares. It was said that this provided a basis upon which to go forward in the selection process for the dealership.

137 Mr Tong denied that he told Mr Gough of the need to reach a commercial understanding with Bond Corporation and it does not appear that there was any "agreement in principle" between Gough & Gilmour and Bond Corporation as to the purchase of the shares in Waugh & Josephson until 23 December 1988, which was well after Gough & Gilmour had been informed by Mr Tong that they had been selected as approved Caterpillar dealers. Mr Gough, nevertheless, maintained that he and Mr Gilmour had reached a "commercial understanding" with Wardley on 11 November 1988 and this understanding enabled he and Mr Gilmour to continue as participants in the selection process being conducted by Caterpillar. Again, this matter is addressed in greater detail later in this judgment.

138 Messrs Gough and Gilmour experienced difficulty in securing finance for the purchase of the shares in Waugh & Josephson. In late January or early February 1989 Caterpillar of Australia indicated a preparedness to provide that funding in exchange for a 50 per cent equity interest and on 31 May 1989 the parties entered into a shareholder agreement. As security for the funding, Mr Gough and Mr Gilmour provided personal guarantees. When the transaction was finalised, Mr Gough held 45 per cent of the shares, Mr Gilmour held 5 per cent and Caterpillar of Australia held the remaining 50 per cent of shares.

139 The Waugh & Josephson dealership was acquired by Gough & Gilmour by share acquisition for the following reasons: (a) to obviate the difficulties that would otherwise arise concerning existing W&J contractual commitments, for example, for the supply of equipment and existing warranty obligations; (b) to obviate the difficulties that would otherwise arise with respect to the contracts of employment between W&J and its staff. That is, the share acquisition approach facilitated continuity of service and preservation of leave and other entitlements; and (c) to ensure that G&G would then have access to W&J records, especially its records with respect to customer and employee histories. THE FIRST AND SECOND ASSURANCES

140 It was contended in the summons for relief that the respondents assured the applicants that they could reasonably expect to be secure in the dealership provided good "PINS" and good profit were maintained. This was referred to in the amended summons for relief as the "First Assurance". "PINS" is an acronym for "Percentage of Industry Net Sales" and is a measure of market share. The applicants further contended in the summons that they were assured by the respondents that the 90 days' notice of termination provision of the dealership agreements would only operate in the event of serious and wilful misconduct or sustained and significant poor performance ("the Second Assurance").

141 It was Mr Gough's evidence that the prospectus issued by Caterpillar of Australia at the time for the Waugh & Josephson dealership confirmed his understanding that a Caterpillar dealership would be a long-term investment opportunity and that he and Mr Gilmour made their bid on that basis. That prospectus only states the very broad goal that "we seek long - lasting relationships - based on integrity - with all whose activities touch upon our own". Such a statement could not be said to represent an assurance in the nature of the alleged first assurance.

142 Further, it was Mr Gough's evidence that in entering into the dealership agreements he relied strongly on his "understanding of Caterpillar dealerships that had operated both in New Zealand, and in other countries, or other parts of Australia, for the belief and expectation that this dealership was of a long-term nature and would only be terminated for cause".

143 In referring to the operation of the dealership agreements, Mr Gough said in his evidence that: I was also aware, from my long involvement with Caterpillar, that the strict terms of those agreements did not reflect how Caterpillar dealerships operated in practice on a day by day basis. Indeed, my clear impression was that the agreements were signed, put in a drawer and forgotten about. That is certainly what occurred with the dealership throughout my time in Gough, Gough & Hamer, and with the dealership agreements that were signed by G&G in 1989 and then again in 1991, as I do not recall any occasion (at least prior to 1997) when I needed to refer to the Sales and Service Agreement itself or when the specific terms thereof were the subject of discussion or debate with officers of CofA. And further that …there is absolutely no doubt that I would not have committed myself to purchase the Caterpillar dealership for the Territory if I had any idea or belief that CofA intended that the 90 day notice of termination provision should operate in accordance with its strict terms, namely, that it could be used to cancel the dealership arrangement regardless of the level of investment and the company's performance in the dealership.

144 In his evidence Mr Gilmour said: By the time that Mr Gough and I were awarded the Caterpillar dealership, I had worked for Caterpillar dealerships continuously for approximately 17 years. Over that period I had formed strong relationships with various Caterpillar personnel which included interacting on a social basis. I had travelled on several occasions to the United States and within Australia attending numerous Caterpillar dealer conferences, and meeting other dealers. It had been strongly ingrained in me that: (a) Caterpillar expects its dealers to perform in the long term; (b) there is a strong culture of co-operation and assistance between Caterpillar and its dealers; (c) Caterpillar dealerships cannot be bought; dealers have to be selected on merit; and (d) a dealer was secure as long as it performed. Both at this stage and up until recently, my understanding and personal knowledge was that Caterpillar dealerships were held by a dealer for the long term and, in many cases, over several generations. I am aware that, in recognition that dealerships are held over several generations, Caterpillar offers programs from its Head Office in Peoria for succession planning for the children of dealer principals. 145 Mr Coonan said in his evidence: During my time with Caterpillar, the company was always interested in ensuring that dealers held a long-term relationship with Caterpillar. This is because the business of Caterpillar is a long term one. The machines are generally expensive and take some time to design, test and manufacture. The customers are few in numbers so dealers need to be associated with the same customers for a long period of time in order to service the machine and provide new products when needed. In my experience, the average dealership tenure with Caterpillar was in excess of thirty years. The principal reasons for changes in dealers were the death or ill-health of a dealer principal, the retirement of a dealer principal or the lack of an acceptable successor to the dealer principal. 146 Reference was also made by the applicants to a letter from Mr Nitto dated 2 April 1996 that had annexed to it the article by Don Fites, entitled "Make Your Dealers Your Partner". The applicants relied upon various statements in the article regarding the long-term nature of the relationship between Caterpillar and its dealers. The article certainly addresses the long-term nature of relationships but it also refers to the nature and importance of the relationship and to the termination provisions: We have good relationships with dealers not just because they like us but because the investment is good for them and for Caterpillar, and because both parties work to strengthen the relationship. Both parties invest heavily in maintaining a relationship built on trust, confidence, and shared interests and rewards. The rules don't change, so everyone knows what to expect of one another. … The kind of trust that exists between Caterpillar and its dealers is something that could be built up only over generations. Our dealership agreements are documents that run just a few pages. They have no expiration date, and either party can terminate without cause on 90 days' notice. But turnover is rare because we recognize that we're in this together. The final decision either to terminate or to appoint any dealer in the world rests with the CEO of this company, no one else at Caterpillar can make that decision. …They also know very well that Caterpillar is much more than just a good account-we are a valuable long-term business associate.

the quality of the relationship between [the] company and its dealers is much more important than the contractual arrangements and agreements or the techniques and tactics that make the relationship work on the surface. What matters is mutual trust, and that is fostered by observing a few simple rules: share gain as well as pain. 147 I consider the respondents were correct in submitting that: A proper reference to the full Fites Article (rather than selected parts of it) does not demonstrate, as the applicants would have it, that a dealership can be expected to be long-term regardless of how poor and unworkable a relationship becomes. 148 I note further that Mr Nitto's letter to which the Fites' article was annexed was not sent until 1996 and it could not possibly be said that the applicants relied on this article in entering into the dealership agreements.

149 There were other instances referred to by the applicants as supporting the contention that the first and second assurances were given or were likely to have been given. These included:

· a letter from John Langmore on behalf of the first respondent to the second and third applicants, dated 18 September 1998; · a conversation between Mr Tong on behalf of the first respondent and the second applicant in late 1988; · a conversation between David Crommelin from Westpac and Mr Tong on behalf of the first respondent at Grosvenor Place, Sydney, in January 1989; · a conversation between Mr Tong on behalf of the first respondent and the second applicant and third applicant at Grosvenor Place, Sydney, in January 1989; · various conversations between Mr Wickert on behalf of the first respondent and the second applicant at the home of Mr Wickert in around 1989 and 1990; · a conversation between Mr Coonan on behalf of the first respondent and the second applicant at a restaurant in Peoria in the early 1980s; · A conversation between Ray Frazer on behalf of the respondents and the third applicant at Alexandria, Sydney, in 1993; · A conversation involving Mr Tong and Mr Ramseyer on behalf of the respondents, and the second applicant, in December 1999; and · An affidavit sworn by Mr Tong on 24 February 1989 in relation to proceedings where Caterpillar was seeking to prevent Wigmore's from circulating a letter to all Caterpillar dealers complaining of arbitrary and capricious dealership termination. 150 I do not propose to deal with all of these matters but I have had regard to each of them. I do not consider that they represent the giving of the alleged assurances or that they support or corroborate the giving of the alleged assurances.

151 Mr Gough was aware of the provision in the dealership agreements that entitled Caterpillar of Australia to terminate the dealership without cause on 90 days' notice. His lawyers, Freehill, Hollingdale and Page, had brought the provision to his notice at the time of the negotiations with Caterpillar of Australia. In this respect the following exchange took place in the cross-examination of Mr Gough: Q. What I am putting to you is this: the lawyers acting on your behalf, Freehills, firstly in dealing with Mr Lavin [representing Caterpillar] and, secondly, in drafting or having a hand in the drafting of these agreements, including the provision of the shareholding provision, clearly wished to have Caterpillar retain the right to terminate and that necessarily carried with it a risk, however small a risk you may have considered it to have been; correct? A. I understand that was the position we were in.

Q. Because you would understand that although it might not then be seen to be likely that that is what Caterpillar would do, or act on its termination rights, it clearly wished to retain that right in case something came up which might prompt it to exercise the right, even if that not be seen to be likely; correct? A. My understanding was, and always was until 8 June 1989, that they would never do it. Not unlikely, not rare, they would never do it.

Q. We have established the basis of that understanding, but all I am simply saying to you is this: in looking at the way the lawyers drafted this agreement, we are looking at page 308, it is clear that insofar as the right was reserved to terminate, that inherently carried a risk with it that it might, not probably will, but it might be exercised. That is all I am saying. A. Yes, I accept what you are saying. 152 Mr Gough gave evidence that Mr Williamson-Noble (of Freehills) expressed the view to Gough that the termination right exercisable without cause did not provide any security of tenure for Gough & Gilmour's prospective investment and that he (Williamson-Noble) wouldn't have signed the agreement. Mr Gough said he conveyed Williamson-Noble's view to Mr Wickert and that Wickert responded: "Well, that is it."

153 The applicants submitted that the fact that Mr Gough proceeded to enter into the dealership agreements, notwithstanding Mr Williamson-Noble's advice, serves to confirm Mr Gough's level of confidence and knowledge as to the way the dealership operated in practice. That may be so, but it is also noteworthy that Mr Gough did not say to Mr Williamson-Noble that he had received assurances from the first respondent in the nature of the alleged first and second assurances and, therefore, there was no need to be concerned about the 90 days' termination provision.

154 Mr Gilmour gave evidence that, "for years prior to June 1999", he knew that the dealership agreements contained the 90 days' clause and that Caterpillar and the dealer contractually had the right to terminate on 90 days' notice without cause. Given Mr Gilmour's close and intimate knowledge of Caterpillar in the years preceding 1988 and his close involvement in purchasing the dealership, it is reasonable to infer that Mr Gilmour knew of the 90 days' provision before entering into the dealership agreements. There was no evidence from Mr Gilmour that this was otherwise. 155 I am satisfied that the position in relation to the alleged first and second assurances was that prior to Mr Gough & Mr Gilmour being informed in November 1988 that they had been selected as approved Caterpillar dealers, that they genuinely believed that they were entering a long-term, secure arrangement and I consider that Caterpillar was of this view also. I note in this regard that Mr Tong agreed in his evidence with the proposition that dealers are entitled to assume that unless Caterpillar has got good cause for termination they would be secure. Further, that whilst they were aware of Caterpillar's right to terminate a dealership without cause by the giving of 90 days' notice, the applicants' expectation was that the respondents would not exercise their right and that, therefore, in entering into the dealership agreements it was not a matter that they needed to dwell on. In my opinion, the expectation of a long-term arrangement and the applicants' belief that there was little risk in the dealership being cancelled without cause, were genuinely held. However, they fall short of being expectations and beliefs based on assurances given by the respondents. I am not satisfied on the evidence that assurances had been given to the second and third applicants to the effect the dealership agreements, save in circumstances of low profitability or bankruptcy and/or sustained poor performance or misconduct, would not be terminated.

156 Following their selection as approved dealers the applicants contended that there were further assurances given by the respondents as to the long-term nature of the dealership and that it would not be cancelled without cause. Both Mr Gough and Mr Gilmour referred to statements by Mr Tong to this effect. Mr Gough recalled a meeting in January 1989 with David Crommelin from Westpac, regarding financing, where Mr Tong said: Caterpillar never appoints dealers unless they expect a long-term relationship. Look at the historical record and the average tenure of our dealerships around the world.

We're in this for the long-term. We don't make short-term decisions. 157 It is difficult to accept Mr Tong's words as being an assurance that " … the applicants could reasonably expect to be secure in the dealership in the Territory provided good PINS and good profit were maintained." Moreover, there is no record in Westpac's documents as to assurances having been given to the effect of the first and second assurances - matters that would obviously have been of some importance to the applicants' bankers if the assurances had, in fact, been given. Gough & Gilmour's credit application states: RISK MANAGEMENT Loss of Dealership Agreement

Dealership agreement may be terminated by 90 days notice in writing. In practice, Caterpillar looks to appoint dealers committed to maintaining the dealership over the long term. e.g. Hastings Deering (Qld) 54 years

Wigmores (WA) 63 years (until recent ownership change)

Caterpillar is not likely to terminate agreement without just cause, especially considering the level of support given to Messrs. Gough & Gilmour. 158 In later explaining Caterpillar's decision to take a 50 per cent interest in the dealership, Mr Tong also said to Mr Gough: We chose you and broke our rule of not investing in dealerships because we think you will do the best long term in the Territory for Caterpillar. If Caterpillar only wanted an investor they would have chosen any number of other people and would not have chosen you.

159 Mr Gough said in his evidence that: The longevity of a Caterpillar dealership, particularly in Australasia, was beyond question from my perspective provided that PINS (market share) and profitability were maintained. Over the years this has been repeatedly confirmed to me by many Caterpillar people including Mr Coonan, Mr Tong and Mr Wickert. For instance, when the performance of a Caterpillar dealership came up as a topic in conversation, both Mr Coonan and Mr Wickert often said: If your PINS and profit are both good then basically you're doing the job Caterpillar wants and there would never be an issue of termination. I can specifically recall this being said by Mr Wickert whilst in his home in Sydney in around 1989 and 1990 and by Mr Coonan whilst at a restaurant in Peoria in the early 1990's.

160 Undoubtedly, the applicants felt assured by these statements from Caterpillar executives about the security of the dealership they had purchased. But I am unable to accept that the statements by Mr Tong and Messrs Coonan and Wickert are to be regarded as assurances directed to the applicants per se that the dealership would not be cancelled other than for cause. This is especially so given that the second and third applicants were aware of the existence of the termination provisions of the dealership agreements and knew that the agreements could be terminated on notice without cause. Indeed, in 1991 when the second and third applicants decided to restructure their business, they specifically requested that the dealership agreements be terminated pursuant to the termination clauses so that the first applicant could become the appointed dealer. Furthermore, the second and third applicants relied on the without cause termination provisions and the absence of goodwill to obtain stamp duty and other tax benefits in connection with the restructure of the business and the associated asset transfer.

161 As the respondents contended, I think it is particularly instructive that Mr Gough did not raise the issue of the first or second assurances when Mr Curfman told him on 8 June 1999 that he should sell his interests in the dealership. Nor did Mr Gough raise the issue when he subsequently spoke with Mr Barton on 14 June nor when he spoke with Mr Ramseyer on seven occasions between 17 June and 28 August 1999. If Mr Gough had been of the view in 1999 that he had received assurances of the nature of the alleged first and second assurances, in my opinion this would have been Mr Gough's first objection to any suggestion that he should divest himself of his interests in the dealership.

162 The fact is that the dealership agreements contain provisions that permit either party to terminate the agreements without cause by the giving of 90 days' notice and the applicants were aware of these provisions before the dealership agreements were entered into by them. Their long experience in Caterpillar dealerships informed the applicants that such dealerships were essentially secure, long-term arrangements and there was little to suggest that the dealership would be cancelled if the dealership performed in terms of profitability and maintenance of market share. However, I consider the evidence falls short of showing that under no circumstances would the dealership be cancelled other than for cause and I do not consider that the applicants received assurances from Caterpillar to the effect that save in circumstances of low profitability or bankruptcy and/or sustained poor performance or misconduct, the dealership agreements would not be terminated. The risk was always there that at some time in the future, Caterpillar would invoke its right to terminate the dealership without cause by the giving of 90 days' notice. In any event, if the applicants did conduct themselves in such a way that there were objectively proper grounds for the respondents to consider they no longer had any trust and confidence in the applicants, then it could be said that the respondents had cause to terminate. 163 Mr Gough said in his evidence that he would not have purchased the dealership if he had been aware that "the 90 day notice of termination provision should operate in accordance with its strict terms, namely, that it could be used to cancel the dealership arrangement regardless of the level of investment and the company's performance in the dealership." On the other hand, the dealership, as Mr Gough and Mr Gilmour knew, was a business with enormous earning potential and with their background and experience they were very confident they could make it work and very keen to do so. I doubt that, in the circumstances, Mr Gough would have declined to purchase the dealership if he had been told in 1988 that, by the way, Caterpillar reserved the right to terminate the dealership by the giving of 90 days' notice if because of the conduct of the dealer principals Caterpillar had lost trust and confidence in them.

164 Moreover, it seems to me that if Mr Gough's understanding was that the 90 days' notice of termination provision could be used to terminate the dealership in circumstances where Caterpillar considered the dealer principals were not sufficiently re-investing in the dealership, what is so different in principle to being able to use the 90 day provision to terminate the dealership in circumstances where Caterpillar considered that because of the conduct of the dealer principals its relationship with the dealership had deteriorated to such an extent it no longer had trust and confidence in that dealership? Surely it cannot be said that notwithstanding a without cause termination provision known and understood by a dealer that Caterpillar was, nevertheless, prevented from terminating the dealer in circumstances where it no longer had confidence in the dealer principals.

165 At this point I should observe that whilst the applicants at no stage resiled from their original allegations regarding the alleged first and second assurances, their submissions in this respect reveal a discernible shift in position. That shift was from what one would have expected to have been a submission focused on demonstrating the alleged assurances were in fact given, expressly or impliedly, to one involving a submission that the second and third applicants had a legitimate and reasonable expectation of security as well as an expectation that the 90 days' notice provision of the dealership agreements would only operate in the event of serious and wilful misconduct or sustained and significant poor performance. Further, that these expectations were also held by the respondents and by their words and actions the respondents reinforced the validity of these expectations. As I understand this submission, it was that given the respondents allowed and encouraged these expectations to develop and subsequently acted contrary to them, the respondents are guilty of unfair conduct within the meaning of ss 105 and 106 of the Industrial Relations Act.

166 As I have said, I consider that both sides shared a belief and an expectation that they were entering a long-term, secure arrangement. Whilst the respondents regarded the 90 days' termination provision as a last resort option I do not consider they had a belief, expectation or intention that the 90 days' notice provision of the dealership agreements would only operate in the event of serious and wilful misconduct or sustained and significant poor performance. Absent this belief and expectation, the respondents did not instil it in the second and third applicants either expressly or impliedly. Indeed, I consider it was unrealistic and unreasonable for the applicants to expect and believe that if they conducted themselves in such a fashion as to cause the respondents to lose trust and confidence in them as dealer principals that they would, nevertheless, remain secure in the dealership and not be subject to termination. Estoppel by Convention 167 The shift in the applicants' position away from an emphasis on establishing that the respondents actually gave the alleged first and second assurances is made even more evident by the applicants' late reliance on the doctrine of estoppel by convention. The applicants submitted that: the Applicants and Respondents entered into the Dealership Agreement on the basis of an assumed fact, namely that, once appointed, dealers could reasonably expect to be secure and retain the dealership for the long term, for their own benefit and the benefit of their children, save in circumstances of sustained poor performance, poor profitability or misconduct. That was the case notwithstanding the existence of the 90 days without notice clause contained in the Agreement. The Court would, adopting the principle that underpins estoppel by convention, approach this case on the basis that the Respondents cannot deny that that assumed fact underpinned the agreement and would, accordingly, vary the Agreement to reflect that assumed fact. 168 In Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 64 ALR 481 at 491 the High Court (Gibbs CJ, Mason, Wilson, Brennan and Dawson JJ) defined estoppel by convention as follows: Estoppel by convention is a form of estoppel founded not on a representation of fact made by a representor and acted on by a representee to his or her detriment, but on the conduct of relations between the parties on the basis of an agreed or assumed state of facts, which both will be estopped from denying. 169 As I understand the applicants' contention it was that once appointed, Gough & Gilmour assumed by virtue of the conduct of the respondents that they could reasonably expect to be secure and retain the dealership for the long term, for their own benefit and the benefit of their children, save in circumstances of sustained poor performance, poor profitability or misconduct. Further, given that expectation, the first respondent would not exercise its right under the dealership agreements to implement the 90 days' without cause termination provision. The applicants contended that this was a state of fact assumed by the applicants and the respondents. Therefore, the respondents were now estopped from denying this assumed fact and by way of remedy under s 106 the applicants seek to have the dealerships varied to incorporate the assumed fact.

170 The party relying on the doctrine of estoppel by convention must clearly demonstrate the acceptance of a particular state of things as the foundation of the dealings between the parties: see Queensland Independent Wholesalers Ltd v Coutts Townsville Pty Ltd [1989] 2 Qd R 40 at 46 per McPherson J. In these proceedings, for the reasons earlier explained, the applicants have not shown that the parties adopted the alleged assumed fact as the foundation of their dealings. There is no persuasive evidence to support the contention that the first respondent, by its conduct or words, accepted that it would not exercise its right to apply the 90 days' without cause termination provision in circumstances that it considered appropriate and that the applicants would not have entered into the dealership agreements if the provisions of clause 29 could be applied in accordance with its terms. Mr Gough agreed in his evidence that the first respondent had retained the right to terminate without cause and that there was a risk that could occur. Consequently, I reject the applicants' contentions regarding estoppel by convention.

171 The applicants further submitted that, as a result of representations made to them in relation to the security and longevity of the respondents' relationship with its dealers, the applicants were also entitled to rely on the principles of promissory estoppel. 172 As the respondents submitted, there was no analysis in the applicants' submissions of the relevant facts or how the principles of promissory estoppel apply to the relevant facts. Similarly, there was no analysis as to the appropriate remedy, if the Court were to apply, by analogy, principles of promissory estoppel.

173 In any event, I have found that there was no assurance or representation - let alone a clear and unambiguous one as required by the doctrine of promissory estoppel - made by the respondents or either one of them that the first respondent would not enforce its right to terminate the dealership agreements without cause on 90 days' notice. The applicants' contentions regarding promissory estoppel are rejected. Conclusion regarding first and second assurances

174 I find that the applicants have not made out their claim that the overall arrangement formed in about February 1989 between the first applicant, the first respondent and the second respondent comprised of assurances by the first and second respondents to the applicants that they could reasonably expect to be secure in their dealership provided good PINS and good profit were maintained (the alleged "First Assurance").

175 I find further that the applicants have not made out their claim that the overall arrangement formed in about February 1989 between the first applicant, the first respondent and the second respondent comprised of assurances by the first and second respondents to the applicants that the 90 days' notice of termination provision of the dealership agreements would only operate in the event of serious and wilful misconduct or sustained and significant poor performance (the alleged "Second Assurance").

176 Mr Gough gave evidence that: After the acquisition of the dealership in 1989, G&G went through a 3 to 4 year period during which a considerable level of effort was invested in improving and growing the business and hence its profitability. Furthermore, from 1993 (whilst CofA still held 50% of the equity in G&G), G&G commenced an investment and reinvestment programme with the knowledge and encouragement of CofA. This programme continued through until very recent times. The total value of assets actively committed in the business as at October 2000 was approximately $150 million, including the following:-

$m Land & Buildings 28.2 Plant & Equipment 8.6 Computers 1.4 Motor Vehicles 4.8 Debtors 38.4 Inventories 62.8 Cash and Prepaid Exp 5.2 Total $149.4 million

177 On about 7 March 1994, Caterpillar of Australia's shareholding in the first respondent was bought back by it for $11 million. A $2 million dividend had also been paid to Caterpillar of Australia in the previous year. Thereafter, Mr Gilmour held 10 per cent of the Gough & Gilmour shares and Mr Gough held 90 per cent of the shares until 1997 when he "rolled" them into a family company.

178 A new head office was constructed at Parramatta in the period between late 1994 and 1996 for a total cost to the first applicant of about $27 million. The head office consists of 7,885 square metres of buildings on approximately 10 acres of land. As at 31 December 2000, it housed in excess of 200 employees and held parts to the value of approximately $6 million and machinery stock to the value of about $28.5 million. It was purpose built to accommodate large and heavy Caterpillar equipment.

179 Mr Gough also gave evidence that: In addition to the above, since 1994 we have also: (a) purchased land and built premises at Grafton for a cost of $2 million and at Albury for a cost of $1.7 million;

(b) set up, equipped and staffed new branches in rented premises at: - Armidale; - Bathurst; - Cobar; - Eden; - Griffith; - Gunnedah; - Muswellbrook; and - Wetherill Park. … G&G has also consistently maintained the biggest apprentice training programme of any Australian dealer at an overall cost of in excess of $20 million over the last 12 years. This programme would never have been initiated if we had not believed we would be in the business for a very long term.

… As at June 1999, G&G was finalising details for:

(a) an expanded parts warehouse in the Hunter Valley at an estimated cost of $1.5 million; (b) a new Sydney truck shop at an estimated cost of $2.5 million (excluding land); and (c) the upgrading and extension of our Dubbo branch at an estimated cost of $2.4 million.

At that time G&G were also actively seeking to acquire land in Newcastle for the purpose of constructing a new branch there. The target budget for this land and building costs was $4 million.

… As at October 2000, G&G and GIPL [a company wholly owned by the second applicant and his children] between them had approximately $24 million invested in approximately 121 rental machines. I understand that we are the largest Caterpillar rental dealer in Australia at this time. To put these figures in context, the commitment to rental inventory amounted to over one and a half times G&G's new machine inventory. 180 Mr Gough gave the following information about re-investment in the dealership: Since 1989, I have received (directly and indirectly) approximately $23.4 million in pre-tax dividends. After the payment of tax, all of these dividends (plus a significant proportion of the subsequent earnings thereon net of expenses) have been reinvested in the business of the dealership. While the structure of the transactions underpinning this reinvestment have been complex, in summary, the position as at January 2001 is as follows: (a) $1.45 million was used to repay my personal loans to fund the initial share acquisition; (b) $10 million has been lent directly to G&G by wholly owned family companies; (c) $7.4 million has been invested in GIPL; (d) $5.4 million has been advanced to ACN 085 992 052 Pty Limited, a company owned by myself and Mr Gilmour, the only function of which is to hold some of the inventory for G&G; (e) approximately $510,000 has been used to pay the costs of the WesTrac sale process (referred to below) to date; and (f) approximately $410,000 is being held by ACN 078 280 029 Pty Limited, this being the company which holds my shares in G&G, for working capital needs in the G&G group. 181 In relation to this re-investment Mr Gough said: I would not have reinvested those dividends and I would not have approved of G&G borrowing money and reinvesting its profits in the manner described above … if I had any doubt about the security and longevity of the G&G Caterpillar dealership. I would certainly not have "put all my eggs in one basket" in the manner outlined above.

At no stage during the 10 years, 1989-1999, did any representative of Caterpillar or CofA ever seek to discourage me or G&G from investing or reinvesting substantial sums in the dealership, either because G&G was under threat of cancellation or for any other reason. 182 The extent of investment in the dealership, especially by Mr Gough, serves to confirm that he and Mr Gilmour regarded the business as a long-term arrangement and that the passive and active encouragement by Caterpillar of the investments also reflected the respondents' belief of a long-term arrangement. I have no doubt that both Mr Gough and Mr Gilmour intended to remain in the dealership for the remainder of their working lives and in so far as Mr Gough was concerned, he contemplated passing on his interest in the business to his children.

183 But the fact there was investment and that it was encouraged and the mutual understanding that the dealership was a long-term arrangement, did not, in my opinion, nullify the first respondent's right to terminate the dealership without cause.

EARLY EXPRESSIONS OF DISSATISFACTION WITH APPLICANTS

184 Throughout 1991 and 1992 there appears to have been a number of concerns or complaints raised within Caterpillar and between Caterpillar and Mr Gough regarding the dealership. These included issues relating to staff turnover, warranty claim practices, Mr Gough's communication style and his intimidatory approach to people. One of the key people in Caterpillar throughout the 1990's was Mr Kevin Barrett, regional manager. In his evidence Mr Barrett said: I first met Harcourt Gough during the 1980's shortly after I became Service Manager. I cannot recall the precise date. As far as I can recall, it was at a meeting in his office at a time that he was Managing Director of Gough Gough and Hamer (" Gough NZ "). The purpose of my visit was really to see the lie of the land and meet with Gough in his role as Managing Director. I recall having an impression of Gough being someone who was authoritative, direct and challenging.

… Although I was not Regional Manager at the time that Gough & Gilmour obtained the dealership, I did become aware that they had been appointed. I was also aware at that time that Caterpillar Australia had had concerns about Gough NZ in the past and the management style and characteristics of Gough himself. I was aware that, prior to Gough being appointed, a conversation had occurred between Gough and Don Coonan (the then Vice President) in the presence of Andrew Mason Jefferies. I was informed by Andrew Mason Jefferies at the time and believe that Don Coonan had had a frank discussion with Gough about the need to change his approach to the way he dealt with people and customers. I was also informed by Mr Mason Jefferies at the time that Don Coonan had wanted Tony Gilmour as part of the ownership - the aim being to dilute the negative aspects of Gough's disposition or approach. Unfortunately, concerns about the relationship developed early in my role as Regional Manager and continued throughout most of the relationship. That is not to say that Gough & Gilmour did not at times do some things well. Indeed, at times they did and they were congratulated for it. The concerns that I had related not so much to questions of measured financial performance but critical relationship, business philosophy and management issues. I cannot now recall all the conversations I had with Harcourt Gough and Tony Gilmour regarding these matters or all of the conversations I had with District Managers and representatives regarding the difficulties with the relationship. However, I had hundreds of conversations over the years with District Managers, representatives, Gough and Gilmour and others regarding the difficulties with the relationship and associated issues.

185 In his evidence Mr Barrett described some of the incidents involving Gough and Gilmour in the early 1990's: On about 11 October 1990 I received a memorandum from Stan Knowles of the Mining Products Division. … It made reference to a veiled threat of "corporate blackmail" by Gough and concluded with the remark that "the dealer principal's general approach to this business opportunity and basic attitude towards a Caterpillar and Dealer partnership is, in my opinion, cause for serious concern".

On 7 October 1991 I sent a letter to Gough regarding the 1991/1992 Business Plan in which I congratulated Gough & Gilmour on their professional job. In that letter I went on to comment upon "a couple of areas that attracted my attention more than others" but noted that it was "not to suggest that they are any more or less important, but perhaps worthy of a few comments at this time". … In response I received a letter dated 9 October 1991… in which Gough expressed "serious concern" that I would "seek to challenge two of the fundamental foundations on which [this] business plan is based". In fact that was not what I was doing.

Ray Fraser was district manager during part of my time as regional manager. In his memorandum of 5 July 1992 … he set out a summary of "the major concerns we currently see confronting [Gough & Gilmour] which may be worth pursuing with Harcourt". The list of concerns included the following: i. perceived low level of private customer satisfaction and lack of confidence in the dealer; ii. serious decline in PINS through March to approximately 25%; iii. continuity and competence of account managers; iv. lack of defined/detailed training and development plan for account managers; v. inability of dealer to produce credible management, accounting and financial reports; vi. instability, insecurity and low morale amongst staff; vii. inability of dealership to institutionalise improvement and permanently hold gains. 186 The letter of 7 October 1991 referred to by Mr Barrett was regarding the dealership's 1991-92 business plan. In the letter Mr Barrett said: The work you have done over the past two years has shown very positive results in your cash flow leaving you in good financial standing. Congratulations on a job well done. This high achievement looks like enabling Gough & Gilmour to pay Caterpillar back before the anticipated time frame, a strong testimony to the great job that has been done. 187 The letter also referred to three issues of some concern to Caterpillar, namely Gough & Gilmour's linking of stock turn and gross margins, the fact that Gough & Gilmour's PINS targets were higher than Caterpillar's targets and Gough & Gilmour's new concept of account managers.

188 Mr Gough responded on 9 October expressing his "serious concern" that Caterpillar "would seek to challenge two of the fundamental foundations" of Gough & Gilmour's business plan, namely PINS targets and financial ratios. Mr Barrett's letter could hardly be regarded as a "serious challenge" but the strength of Mr Gough's reaction, or what might be properly regarded as an over reaction, at the time underscores the tensions that were already building up in the relationship between Caterpillar and Gough & Gilmour. I also note Mr Nitto's handwritten comments of 17 October on Mr Barrett's letter that: As usual, you handled it with firmness and professionalism. I believe he has the message although I suspect he'll try us on again down the road.

189 Such comments are indicative of a less than open, friendly and trusting relationship.

190 Mr Barrett acknowledged in his evidence that his personal relationship with Mr Gough was not a good one: In reality Gough and I did not seem to be able to agree on much and, to my observation, he appeared to approach my involvement in matters in a hostile way. Despite the existence of the business relationship over the last 9 or 10 years Gough and I have been unable to develop a positive working relationship. In my view this will not change and I expect the relationship between us to remain poor. Because of these difficulties I have always been of the view that it was critical that the relationship between Gough & Gilmour and the District Managers appointed from time to time be positive, cooperative and effective. One of the reasons I have always thought that this is necessary is to reduce the impact of the relationship difficulties between Gough and me and his antipathy towards me and the way that I operate. To this end, I consciously limited my personal contact with Gough. 191 Mr Barrett also said that Mr Gough had difficulty with a succession of district managers: It is a reflection of the difficulties that Caterpillar experienced with Gough that the turnover of District Managers in New South Wales was high. Ray Fraser, Rod Beeler and John Langmore were District Managers at different times during the period July 1981 (sic) to November 1999. During the time of their respective appointments they each told me of their dissatisfaction and frustration with the working relationship they had with Gough & Gilmour, and particularly Gough. As part of my strategy of trying to manage the relationship with Gough & Gilmour District Managers were changed in an endeavour to make the relationship work. I had hoped that each time I changed a District Manager the relationship with Gough & Gilmour would improve and develop into an effective working relationship but unfortunately this did not eventuate. 192 There were two incidents in particular, the first involving a meeting between Mr Gough and Mr Beeler on 19 June 1996 in respect of invoicing of truck bodies and the second involving Mr Gough and Mr Langmore on 21 May 1999 regarding the Cadia dispute, which stand out as examples of Mr Gough's poor treatment of these two district managers. I will deal with these two incidents in their proper context in this judgment.

193 It was apparent from the evidence that Mr Barrett was a highly capable manager and well regarded within Caterpillar. However, whilst he had a good opinion of Mr Barrett as a manager, Mr Curfman, the managing director of Caterpillar of Australia from 1999 onwards, made a telling comment that Mr Barrett "treated people like dirt". Whilst the remark may have been more directed to the way Mr Curfman believed that Mr Barrett treated his staff, I consider that it reveals a hard-nosed side to Mr Barrett's character. Further, during the time Caterpillar of Australia was interviewing the short list of candidates to take over the Waugh & Josephson dealership, Mr Wickert said that he had a conversation with Mr Barrett who said to him: Caterpillar would be mad to give Harcourt Gough another dealership, he's an arsehole. 194 Mr Barrett denied he said these words but whether he did or not I am satisfied that the poor relationship between Mr Gough and Mr Barrett was not entirely of Mr Gough's making and that from the outset, Mr Barrett had a negative view of Mr Gough and this influenced the relationship thereafter. It follows that I do not accept the proposition that Mr Barrett was at all times a supporter of Gough & Gilmour up to the latter part of 1998. However, I also do not accept that he had an "invincible bias" against the applicants.

195 I have also had regard to other evidence given by Mr Wickert regarding the negative view Mr Barrett and the managing director of Caterpillar between 1987 and 1991, Mr Thorstenson, had of Gough & Gilmour: From my personal dealings with Kevin Barrett and Terry Thorstenson I formed the view that they were not supporters of Harcourt Gough, nor, to a lesser extent, Tony Gilmour. Many times G&G would be criticised by them in meetings where other CofA staff were present, in ways that I thought were unnecessary or plainly wrong. I noticed that after a while CofA staff, many of whom never travelled to NSW and had no real contact with G&G, began to express similar negative views. Part of the negative opinion expressed by Kevin Barrett and Terry Thorstenson was that "there are great difficulties in working with G&G". In my opinion that became self-fulfilling, as staff imbued with that attitude then approached their dealings with G&G with an unnecessarily negative outlook. I did not share that opinion. 196 Whilst I have approached Mr Wickert's evidence with some caution because of his close relationship with the applicants and because he attributed his failure to obtain further tenure in Australia as being due to Barrett being the Regional Manager at the time, I nevertheless accept his observations about Barrett's negativity towards the applicants. 197 As to the decision of Mr Barrett to remain at arm's length of Mr Gough, I note that Mr Nitto, the managing director of Caterpillar of Australia at the time, endorsed it. This was apparently about 1994-95. If the relationship between Mr Gough and Mr Barrett was so poor that separation was deemed the answer, it seems to me more pro-active steps would have been in order to remedy the problem because Mr Barrett became entirely ineffectual in being able to assist in resolving the increasing relationship problems between Mr Gough and successive district managers and, indeed, between the Gough & Gilmour dealership and Caterpillar of Australia. The first respondent's failure to vigorously and forthrightly address the problems with the applicants early in the period of the dealership made it much more difficult to do so as time went on. 198 What is the more contentious issue, however, is the applicants' submission that Mr Barrett was the cause of much of the animosity that existed between the applicants and the first respondent; that Mr Barrett sought to poison the relationship and that he was instrumental in influencing the decision to end the relationship with Gough & Gilmour.

199 Mr Gough had a personal dislike of Mr Barrett. He said he developed a "distinct dislike" for Mr Barrett and I consider Mr Gough also developed something of an obsession with the idea that from very early on Mr Barrett was conspiring to get rid of the Gough & Gilmour dealership. Mr Gough's dislike of Mr Barrett was reflected in a strong attack by the applicants on Mr Barrett in the proceedings. Indeed, the applicants went so far as to submit that Mr Barrett was the key Caterpillar executive who contrived over the whole period of the 1990's to terminate their dealership because he was "invincibly biased against the applicants." In this respect it was contended that: (a) Barrett engaged in "harsh and unreasonable treatment of the Applicants in the 1991 - 1999 period"

(b) Barrett engaged in "constant bagging" of the applicants.

(c) Barrett deliberately and improperly forced Wickert's departure for the purpose of breaking up or "unpicking" his working relationship with Gough & Gilmour, because Barrett had a dislike of both Gough and Wickert;

(d) Barrett resented the fact that Gough and Gilmour were more experienced than him in running Caterpillar dealerships;

(e) "Barrett was clearly someone with poor people skills, likely to create enmity from those he worked with";

(f) Barrett sought to "micro manage" the applicants' dealership;

(g) The reason for Barrett stepping back from contact with Gough was because he could not "stand" dealing face to face with Gough;

(i) Barrett, in 1992 or 1993, threatened the Gough & Gilmour dealership with cancellation, and was consequently chided by Mr Fites, chairman of Caterpillar at the time;

(j) Because of Barrett's corporate knowledge, successive managing directors and district managers were heavily reliant on him in their dealings with Gough & Gilmour and thus Barrett was in a position to paint a negative picture of the applicants.

200 As I have already observed, my assessment of the evidence relating to Mr Barrett and his attitude towards the Gough & Gilmour dealership is that he did indeed have a negative attitude, brought about by what I consider to have been his antipathy towards Mr Gough and also by what he genuinely regarded as the dealership's operational shortcomings. Despite reservations I have about parts of Mr Barrett's evidence and which I refer to later in this judgment, as far as the portrayal of Mr Barrett as a Machiavellian character, working assiduously behind the scenes to get rid of Gough & Gilmour because of his dislike of Mr Gough, I think not. Mr Barrett was not alone in his experience of relationship difficulties by any means. All of the district managers who had dealings with Mr Gough, with the exception of Mr Wickert, found Mr Gough a difficult person to deal with. Mr Langmore, for example, was the district manager for Caterpillar between 1998 and 1999 and had succeeded in establishing a personal friendship with Mr Gough only to find that this did not save him from being a target of Mr Gough's wrath. The three managing directors of the first respondent (Thorstenson, Nitto and Curfman) also had difficulty dealing with Mr Gough.

201 There is insufficient evidence to prove that Mr Barrett conspired with Mr Nitto and successive district managers to have the Gough & Gilmour dealership terminated because of a dislike of Mr Gough or for any other reason. I do consider, however, that Mr Barrett's antipathy towards Mr Gough and the decision to remain at arm's length from the dealership combined to cloud Mr Barrett's judgment about how best to address the difficult relationship problem between Caterpillar of Australia and the applicants. Indeed, I consider that Mr Barrett's attitude towards Mr Gough and the dealership caused him to err on the side of negativism when it came to making any judgment about the dealership and its future. I must emphasise, however, that I reject the proposition that Mr Barrett conspired to get rid of the Gough & Gilmour dealership.

202 Mr Nitto, who was the managing director of Caterpillar of Australia between 1991 and 1999, had the following view of the relationship between his organisation and the applicants and, in particular, Mr Gough:

Relationship issues were apparent to me from reasonably early on in my position as Managing Director. It appeared to me that the parties seemed to be repeatedly having to second guess each other's position and there was a lack of confidence on either side as to the manner in which the parties were approaching the relationship. To my observation this was primarily due to the approach to business and dealing with Caterpillar Australia taken by the effective controller of Gough & Gilmour, Harcourt Gough. Although in social circumstances I found Gough to be a very personable individual and enjoyable company, in a working environment he was very often combative and difficult to deal with. That is not to say that he is not an intelligent person with skills in many areas, which he is. To my observation however he is and was someone who had difficulty accepting any constructive criticism. He had a challenge, answer or excuse for everything and had difficulty working with Caterpillar on almost any issue. If one did not see events how he saw them or did not wish to deal with an issue in the manner he suggested, this inevitably led to confrontation or protracted disputes, taking up excessive time and causing further relationship difficulties. The Cadia bodies issue is an example of an unnecessarily protracted dispute.

203 Mr Nitto said that on 6 July 1992 he planned to have a meeting with Mr Gough regarding problems with the relationship. Mr Nitto made some handwritten notes at the time and these were as follows: "Can't be trusted" "Stop attacking the people - old trick" "Arrogance with … all Caterpillar" "Arrogance with customers" "Almost an obsession with trying to tell us we don't know what we're doing you are unwittingly creating an attitude of confrontation where there doesn't need to be one." "Can fix selected problems but can't institutionalise the progress gained" "no systems in place" "continuity of people" "no accounting depth" "Harcourt = [?] your people skills are terrible" "Numerous customer complaints".

204 The meeting between Mr Nitto and Mr Gough took place and later Mr Nitto wrote a memo to Mr Petterson dated 20 July 1992 and to other Caterpillar officers on 27 July 1992 recording what had occurred. The covering memo to Mr Petterson stated: The attached recaps a candid three hour discussion with Harcourt Gough. At this stage, unless Harcourt fails to refine his approach, I don't want to make this more of an issue than it already is. Accordingly this is for your information only at this point. Whether you elect to share with DVF is your call, but I'd like to see how well Harcourt responds to the counsel on his own. As I said in my notes, I have a lot of time for Harcourt but he's had himself on a one way ticket that could have serious ramifications unless he alters his approach and style to the people he's trying to influence as a leader and dealer principal. 205 Mr Nitto's record of the discussion with Mr Gough stated in part: The following describes a meeting I convened with Harcourt Gough on Monday, July 6, 1992: The meeting was precipitated by two factors:

1. My commitment to him to have a candid discussion on business/organizational philosophy after I had been here six months; 2. His increasingly confrontational approach to almost all business issues with customers, his own staff, other dealer principals, and C of A staff.

While I was prepared to discuss No.1, I focused heavily on No.2. With increasing frequency, I had received input on or observed a pattern of behaviour which was beginning to become a critical relationship matter principally due to his communication style and approach to people. While Harcourt is extremely enthusiastic and committed to the Caterpillar business, I suspect the previous fast growth and continuing recession are beginning to uncover some significant capability shortfalls in the administration, accounting and sales/marketing sides of their business. My purpose, however, was not to engage in a discussion about the operational sides of the business. That continues to be handled exceedingly well by the Region with back up from other support departments. My purpose was to discuss Harcourt - the dealer principal, team player, leader, the person, etc. I told Harcourt that we recognize his considerable skills in terms of entrepreneurship, strategic planning etc., but that his people skills and methods of confrontational communication in and outside his company had reached the stage of being unacceptable. Examples over the last several months include: · Increasing t/o of people in sales/marketing areas. · Lax Administration/Accounting practices. · Resolution of Hex hardship claims. · Valuation approach for redemption of C of A Ltd. equity level in G & G. · Cooperation with other dealer principles relative to start up of new engine distribution. · Starting a price war with Komatsu and other Japanese competitors he couldn't win. · Customer complaints. · Use of District resources. · Final negotiations for the Howick Coal deal. · 793 Demonstrator Program in Hunter Valley. · Short sighted inventory practices.

Beyond its length, what makes the above list so significant is Harcourt's almost singular visibility in terms of trying to influence outcomes as if he were the only dealer or dealer principal in Australia.

While Harcourt is an intelligent and engaging personality, it was pointed out that his tendency to attempt to intimidate those who disagree with him is a trait not particularly appreciated by his own people, customers, other dealers or our staff. Further, whether he likes it or not, he is part of an overall team; his own for starters, other principals, as well as C of A in conjunction with G & G. Lastly is Harcourt's tendency to over use the threat of going to Peoria if he doesn't get his way. While I conveyed to him that he is free to talk to anyone in Peoria at any time, it's a practice he started with Thorstenson and one which doesn't endear him to the field and staff people he heavily relies on within C of A.

Harcourt's receptivity to the perceptions I shared with him seemed sincere along with the acknowledgment that he too had noticed strained relationship but attributed it to his attempts to change cultures within his organization, ours and with other dealers. While I believe some of that is in fact a natural and healthy occurrence, the approach he increasingly uses is not. It borders on a "win at any cost" mentality regardless of what or who is involved.

I concluded our conversation by reminding him of the "woodshed" conversation he had with Coonan just before he got the dealership. In essence, Coonan had cautioned him on some of these characteristics, which were evidenced in his management style in New Zealand. Further that we continue to have confidence in his long term potential as a dealer provided he can also make some of the same changes in his leadership style that he is asking of others.

I personally have a lot of time for Harcourt and he knows that. However, his current approach to the people he works with (customers, other dealers, his own staff, and ours) has increasingly isolated him from being influential as a change agent and I wanted him to know that.

He was most appreciative of the "management review" and acknowledge he hadn't had that kind of straight feedback since his discussion with Coonan. We agreed to meet on a more regular unofficial basis with the understanding I have no desire to be either his District Management or the Region Manager. 206 In his evidence, Mr Gough:

· denied that Mr Nitto made any reference to a "woodshed conversation" with Mr Coonan nor that Mr Coonan had cautioned him on his approach and his "win-at-any-cost" mentality. Mr Gough also denied that Mr Coonan had ever delivered such a caution to him. Furthermore, Mr Gough said he was not aware of any asserted "woodshed conversation" until he read the affidavits filed by CofA in these proceedings. I note in Mr Coonan's evidence that he denied that he ever had a "woodshed" conversation with Harcourt Gough or that he "ever communicated to any Cat Inc or CofA person that I had a "woodshed" conversation with Harcourt Gough…. I had no need to have a "woodshed" conversation with Harcourt Gough, as I did not hold the view that his attitude need to change to ensure that there would be no adverse affect on his relationship with CofA." · Denied that Mr Nitto had advised him he was "on a one way ticket that could have serious ramifications unless [I] altered [my] approach and style to the people [I was] trying to influence as a leader and dealer principal". · Denied the assertion that he had an increasingly confrontational approach to all business issues with customers, his own staff, other dealer principals and CofA staff. · Whilst recalling there was a discussion about his communication style and Mr Nitto's complaint about it, Mr Gough denied that Mr Nitto advised him that his "methods of confrontational communication in and outside [my] company had reached the stage of being unacceptable". · Denied that the matters referred to on the list in Mr Nitto's memo served to confirm or demonstrate some asserted problem with his communication style. · As to the items on the list, Mr Gough said as follows: (i) I deny that we had an increasing turnover of people in sales/marketing areas. (ii) I agree that there were, at the time, some short comings in our administration/accounting practices but say that this was addressed soon thereafter by the hiring that month of Mr Danckert. (iii) I am unable to discern, at least with any certainty, what Mr Nitto is referring to when he refers to the "resolution of Hex" hardship claims. However, if this is to reflect an allegation that our hardship claims were over-inflated, then I deny any such assertion. (iv) I have no recollection of any issue concerning the valuation approach for redemption of CofA equity level in G&G (other than with respect to the treatment of franking credits). (v) I deny that there was any lack of co-operation with other dealer principals concerning the start up of the new engine distribution company, EPSA. (vi) I deny that G&G started a price war with Komatsu and other Japanese competitors. (vii) I am unable to discern what Mr Nitto was referring to, in particular, when he listed "customer complaints". (viii) I deny the implication that G&G either wrongly utilised or over-utilised "district resources". (ix) I am unable to discern what complaint, if any, there was about my handling of the final negotiations for the Howick Coal deal. (x) I do not recall there being any major issue concerning G&G's desire to acquire a 793, being a 240 tonne capacity, off-highway truck at a cost of more than $2 million to "use as a demonstrator" with a view to attracting orders from customers for that particular truck. (xi) I deny that G&G had "short-sighted" inventory practices. · Denied that his approach to business dealings was to "attempt to intimidate those who disagree with [me]". · Denied that he had a tendency to "over-use the threat of going to Peoria" if he did not get his way. 207 A prominent aspect of both the applicants' and the respondents' cases in these proceedings was the credit of each other's witnesses. I do not think any one of the witnesses escaped unscathed from criticism of his evidence. Those who particularly came under attack were Mr Gough, Mr Nitto, Mr Ramseyer, Mr Barrett, Mr Langmore and Mr Gammell (managing director of Australian Capital Equity Pty Ltd, the holding company of the Stokes' organization of which WesTrac is a division).

208 The respondents contended that the respective attacks on credit (some of it well deserved I must say) served to underline the impossibility of accepting that the applicants' primary relief, that is maintenance of the dealership agreements, ought be granted. I will address this issue later but I do consider that the mutual trust and confidence that is necessary to make the relationship work has been all but destroyed and that these proceedings have contributed to that destruction.

209 In relation to the conflict between Mr Gough's evidence and that of Mr Nitto, I cannot say that I accept either as a completely honest, forthright and reliable witness. There are parts of their evidence that I simply do not believe and I refer to these in the course of this judgment. Accordingly, I am not in a position to say as a general proposition that I accept the evidence of one over the other wherever there is a conflict. It has been necessary to consider each piece of evidence of events and conversations as it arises and make a judgment based on all of the relevant material and my impressions of the witness as to his truthfulness.

210 As to the meeting between Gough and Nitto on 6 July 1992, I consider that Mr Nitto was prone to exaggeration and/or embellishment and his memo to Petterson and later written communications including, for example, the covering letter to the March 1999 report on Gough & Gilmour's performance, reflect that. There is no doubt though, that Mr Nitto found it necessary to have the discussion with Mr Gough about the latter's approach and style and that he was conveying a message to Mr Gough that he needed to change because Caterpillar was concerned about it.

211 Such were the extent of Mr Gough's denials as to what occurred at the meeting on 6 July 1992, one is left to wonder momentarily whether the meeting occurred at all. His response to Mr Nitto's letter is indicative, I think, of a general state of denial about the relationship difficulties between the applicants and the first respondent. The message conveyed to him by Mr Nitto in July 1992 was not accepted by Mr Gough either then, it seems, or at any later time. Mr Gough's failure to understand or accept that the first respondent had legitimate concerns about his style and approach and his failure to address those concerns contributed significantly to the decision by the first respondent to recommend to the second respondent in 1999 that there should be a change of dealer in NSW/ACT.

212 Caterpillar of Australia undertook a review of the Gough & Gilmour dealership for the 1992 year. The applicants had no input into the review or the report arising out of it. The business summary contained in the review, which was dated March 1993, recorded the following:

· Dramatic PINS decline (42 to 33) · Excellent motor grader penetration - Local Government · Continuing High Used Inventory · Unacceptable Parts results · Demand down (91.3% of B.P) · DCAL decline (64-62) · Sustained poor service fill · Reduced Gross Margin on Cat Machines (9.4% 6.5%) · High and Rising Expenses · Low Customer Satisfaction Rating 55% (NACD 78%) · Poor Morale/High Staff Turnover (Consistently 17-20%) · Industry Downturn (702-667 units) 213 The March 1993 review was obviously critical of Gough & Gilmour's performance in a number of areas but it was Caterpillar's contention that the review was not for the purpose of denigrating Gough & Gilmour but rather the basis for focusing debate on matters that required attention.

214 Mr Gough was advised of the review. Correspondence at the time indicates Mr Gough's unfavourable view of the reports as to his dealership's performance and his assertion that the reports were in places inaccurate and unbalanced. It appears that Caterpillar, in effect, agreed not to dwell on the March 1993 review and proposed that the relationship move forward. Mr Gough said: Whilst I was unhappy about the very existence of such an inaccurate report, I nevertheless accepted the assurance of Mr Barrett and Mr Fraser that, in effect, the report would have no significance going forward. JANUARY 1994 REVIEW OF GOUGH & GILMOUR 215 A further review was undertaken for the 1993 year and this was published in January 1994. Mr Gough was provided with a copy of the review and on 10 February 1994 wrote to Mr Fraser, the then district manager, expressing his surprise and disappointment. After referring to the 1992 review, Mr Gough said in his letter: You will recall that at the time we stated to you that we considered that "Dealer Review" to be biased, containing a number of errors of fact and ignoring some key achievements within our dealership. You will recall that in the interests of building a better relationship between our two organisations, we agreed to refrain from requesting that this 1993 "Dealer Review of 1992" be amended to correct the errors of fact and to provide a more fair and balanced record of our dealer performance.

… In the context of the above it was a matter of considerable surprise and disappointment to us that you and Kevin presented to us recently a document entitled "Dealer Review - January 1994" that had significant similarities with last year's document. In particular, it included 63% criticisms of various areas of performance (many of which have not been discussed between us) 18% neutral comments and/or begrudging acknowledgments that down-play specific achievements and just 19% acknowledgments of notable progress.

… …we note with some relief that you have assured us of the following: 1. Although entitled "Dealer Review" this is in fact not a Dealer Review and that it will not be seen by anyone other than yourselves and Dick Nitto;

2. That this "Dealer Review" will be amended to correct errors of fact and statements that could be ambiguously interpreted and to include some reference to those areas of dealership focus and effort that had been omitted from the original. The memory of 1992 is still fresh in our minds and we are anxious to avoid any risk, however remote, of a departure from a relationship between our companies based on positive, mutual support and pursuit of agreed objectives. We are conscious that in any but the smallest organisation documents can sometimes be read and misinterpreted by third parties. We therefore ask that until such time as we can reach agreement that your "Dealer Review" represents a fair and balanced record of our 1993 performance, a copy of this letter should be affixed to every copy of your "Dealer Review".

216 Mr Fraser, the district manager at the time, responded in June 1994 to Mr Gough's concerns regarding the 1993 report and stated: As I mentioned during our discussions, this document is not, and never was, intended to be a review of Gough and Gilmour's performance. It was rather an attempt to identify areas of potential improvement in your operations which could lead to higher levels of customer satisfaction, improved efficiencies and profitability for your dealership.

Further, from our viewpoint, it was intended to be a means to build on the more positive relationship which had developed during 1993 and was a vehicle for us to jointly and objectively review areas of possible focus for 1994 and beyond.

We are keen to maintain… 'a relationship based on positive, mutual support and pursuit of agreed objectives'… We will ensure that any report, assessment or comment will be based on actual results, reported data or clear need for improvement identified by users. No doubt over time there will be issues and concerns where we view the cause and possible solution differently, and in these instances we are happy to work in a consultative or advisory capacity, and accept that you at all times determine the method or means of improvement. 217 Mr Gough said in his evidence that …I was, ultimately, reassured about CofA's attitude to that [1993] report when I received Mr Fraser's letter of 6 June 1994. 1994 BUYBACK OF CATERPILLAR'S EQUITY IN GOUGH & GILMOUR 218 Mr Nitto said that in 1992, when Gough & Gilmour were seeking to repurchase Caterpillar Australia's 50 per cent share of the equity in the company, he was of the view that it would be better to retain the equity investment for a further period. This view was reflected in a memo of 25 September 1992 to the executive office in Peoria where Mr Nitto said: "Matt [Tong], Kevin [Barrett], and I have been discussing their [Gough & Gilmour] overall performance for several months and have concluded that we would now be ill advised to conclude this transaction and finalise our equity withdrawal.

… While his financial position at December '91 stabilised enough to persuade the bank to approve the transaction, his commercial performance has continued to deteriorate since then to the point that:

(a) PINS have declined dramatically from 50% to 31%; (b) overall parts service percentage has declined from 89% to 72%; (c) customer satisfaction ratings, particularly with fleet owners, has deteriorated ie 39-49% unfavourable ratings, and salesmen turnover has increased and coverage is unsatisfactory.

Somewhat ironically, Harcourt claims computer problems for not publishing the last three monthly operating statements.

We'd like to approach the issue on a positive basis to the extent we feel our equity should remain in to provide Gough & Gilmour a more flexible operating framework to improve some of the operating areas he'll need to invest in.

Secondarily, if improvements aren't forthcoming and we need to alter representation in 12-14 months, our ownership position will permit us to better control the valuation and change process to assure a smoother transition.

219 As I have already stated, notwithstanding Mr Nitto's reservations, Caterpillar's 50 per cent interest in the dealership was bought back in March 1994 by Gough & Gilmour. I note that the shareholder agreement made on 31 May 1989 relating to Caterpillar's interest in the dealership provided Caterpillar with a minimum 35 per cent per annum compound return on its money until such time as the dealership became independently viable. Up to that time Caterpillar of Australia had two directors on the Gough & Gilmour board who, at the time of the buy back, were Mr Tong and Mr Nitto.

220 It was part of the applicants' contention that any complaint or criticism against the dealership and its principals could properly be ignored up to March 1994 because Caterpillar allowed the buy back to occur. That is, in agreeing to the buy back, Caterpillar must have been of the view that any complaint about the dealership's performance and Mr Gough's personality and attitude, were not sufficiently serious to warrant Caterpillar continuing with any direct intervention in the business through board representation. Further, that Caterpillar must have been satisfied that the dealership was in good hands in going forward and that it was safe to relinquish Caterpillar's direct interest and its representation on the dealership's board of directors. Mr Kimber for the applicants contended: We say, in fact, that the buy-out of the Caterpillar Australia shareholding in early 1994 effectively amounts to a full waiver and, in a de facto sense, stops the respondents from now saying, in the year 2000, that somehow your performance has always been bad, your conduct has always been unacceptable, we never had a proper working relationship. 221 In cross-examination Mr Nitto agreed that despite the difficulties he perceived to exist in the relationship between Caterpillar and Gough & Gilmour in 1991 and 1992, and despite the adverse comments in the 1992 and 1993 reports into the operation of the dealership, Mr Nitto did not have any major objection to the buy back.

222 Mr Barrett also said in his evidence that despite his misgivings, and despite the 1992 and 1993 reviews of Gough & Gilmour's operations, he supported the decision by Caterpillar to proceed to sell its 50 per cent stake in the dealership. Mr Tong, the other Caterpillar director on the Gough & Gilmour board, also supported the sale of Caterpillar's interest.

223 The shareholder agreement provided that: In consideration of the payment by Gough to CofA of the sum of $10.00 (receipt of which CofA hereby acknowledges) CofA hereby grants to Gough an irrevocable absolute option and right to acquire by means of transfer for the Agreed Value such number of "C" class shares as in the same proportion to the total number of the "C" class shares as the number of Shares held by Gough bears to the total number of issues "A" class Shares and "B" class Shares in the capital of the Company at such time such option and right being capable of exercise by Gough only in the event of each of the Stipulated Conditions being met, observed, complied with and satisfied and not otherwise. 224 One of the "Stipulated Conditions" in the shareholder agreement that the first applicant was required to meet was in the following terms: (b) CofA being satisfied that the Company can perform and comply with and can and will have the capacity to continue to perform and comply with the Caterpillar Dealership Agreements and that the Company and the subsidiaries can and will have the capacity to conduct and manage the Permitted Business in a manner consistent with that expected and required by CofA under and pursuant to the Caterpillar Dealership Agreements.

225 Another Stipulated Condition was as follows: (c) in the case of the exercise of the Dealer Principals' [Gough and Gilmour] call option - (i) repayment of all principal outstanding and interest accrued and unpaid on each of the Gough Loan and the Gilmour Loan, and

(ii) each and all of the Minimum Standards being met, complied with and otherwise satisfied. 226 The "Minimum Standards" included: (c) if the Company breaches or otherwise fails to observe and comply with the express obligations on its part to be observed and complied with as set out in any of the Caterpillar Dealership Agreements; (d) if any ground for termination of any of the Caterpillar Dealership Agreements by CofA with cause exists and is not remedied within 14 days of the date of a notice in writing given by CofA to the Company in which such ground is set out and the rights available to CofA under this clause 8 are specified; (e) if notice of termination of any of the Caterpillar Dealership Agreements, whether with or without cause, is given by either CofA or the Company pursuant to rights reserved expressly in clause 29 of each of the Caterpillar Dealership Agreements; (f) if any of the Caterpillar Dealership Agreements is terminated, whether by CofA or the Company and for whatever cause or reason. 227 It is apparent that from early on in the relation between Caterpillar and the Gough & Gilmour dealership that there were disagreements and tension between the two organisations and that this involved concern on the part of senior Caterpillar executives about Mr Gough's approach to running the dealership and his leadership style.

228 The applicants contended that given the circumstances of the buy back any complaints and criticisms prior to 1994 should be ignored in any consideration of the respondents' rationale for terminating the agreement in 2000. Certainly, at the time the buy back occurred the respondents obviously were not so dissatisfied with the dealership's performance or Mr Gough's conduct that they sought to exercise their rights under the dealership to retain their interest in the dealership, although it is clear at the time that Mr Nitto, in particular, had reservations about selling Caterpillar's interest. Since purchasing the Waugh & Josephson dealership Messrs Gough and Gilmour had made good progress in turning it around into a profitable business and had invested heavily in it. For example, Mr Wickert said in his evidence: From the date of the G&G takeover in February 1989, until my departure in July 1991, parts sales doubled, service sales increased by 300%, PINS increased from 28 in 1988 to 50 for the first 6 months of 1991, and customer satisfaction was significantly improved. 229 Moreover, it was not Caterpillar's practice to take equity in a dealership. I consider that it is understandable that in 1994 Caterpillar was prepared to hand over control to Messrs Gough and Gilmour despite its reservations.

230 I do not consider, however, that as the applicants contended, the buy back necessarily wiped the slate clean as at 1994. In participating in the buy back it was not as though Caterpillar was condoning any past conduct that it felt was at odds with the relationship prior to 1994. It is apparent that the first respondent did have reservations about the applicants at the time of the buy back but that the reservations were not at a level that justified maintaining an interest in the dealership.

231 The year 1995 does not appear to have been marked by any serious issues impacting on the relationship between Caterpillar and Gough & Gilmour. The respondents contended, however, that the tension between the first respondent and the applicant continued to be felt.

232 The year 1996 was marred by an incident involving invoicing arrangements in relation to certain truck bodies. Mr Beeler gave the following account of a meeting on 19 June 1996 to discuss a problem about truck bodies. The meeting involved Mr Beeler, Mr Gough, Mr Gilmour and Mr Robert Danckert, the first applicant's finance manager: As with this meeting, at most meetings you attended at Gough & Gilmour you would be out numbered. This was not by accident. We discussed the issue and I put a proposal to the meeting, the details of which I cannot recall. I do recall, however, that it involved offering Gough & Gilmour most of what they wanted in circumstances where the error involved was really the fault of Gough & Gilmour personnel. Gough got extremely upset and shouted and started to say that no one was supporting him and no one was cooperating and that he was effectively having to build his business without any help from Caterpillar Australia at all. He said that the relationship between Caterpillar and Gough & Gilmour was incredibly poor. I interrupted him and told him that Caterpillar Australia had provided a lot of support and that I was doing a lot for him. He then began shouting at me and talking to me like I have never been talked to before by a dealer in my 22 years at Caterpillar. I was physically shaking when I left the office and I returned to my office where I was unable to work and went home.

233 Mr Gough agreed that at the meeting on 19 June there was a heated exchange between he and Mr Beeler but he denied having shouted at or abused Mr Beeler. Mr Gough's recollection of the meeting was otherwise vague.

234 Mr Danckert in his evidence agreed that the meeting on 19 June 1996 was "unpleasant" and that Mr Beeler appeared to be physically upset.

235 Mr Gilmour was cross-examined about the meeting on 19 June 1996 but had virtually no recollection of the meeting. He was, nevertheless, asked to assume that it occurred in the manner described by Mr Beeler. On that basis the following exchange occurred:

Q. I want to suggest to you that if the incident took place, it is an example of the confrontational approach that Mr Gough took in his dealings with Caterpillar of Australia personnel? A. If it took place - if what you have described literally took place and our district manager left shaking and could not go to work because he was so emotionally upset, that would be a position we wouldn't want to get to.

Q. It indicates that Mr Gough at times adopted a confrontational approach to resolution of disputes between the parties, does it not? A. If he had done that to Rod Beeler?

Q. Yes. A. It would indicate that he had been overly tough and confrontational.

Q. And perhaps demonstrating even a "win at all costs" mentality? A. You could imply that, yes. 236 Following the meeting on 19 June 1996 Messrs Gough, Gilmour and Danckert sent a letter to Mr Beeler in which they noted that Mr Beeler's body language had signaled to them that he had a very negative view of the meeting and that in "shooting the messenger", "perhaps" they owed Mr Beeler an apology. Mr Danckert agreed in his evidence that, despite the equivocal language, the letter was intended to convey an apology.

237 Whether or not Mr Beeler was physically shaking when he left the meeting and was unable to work - matters challenged by the applicants - is to some extent beside the point. I accept Mr Beeler's evidence that he was subjected to what, in my opinion, amounted to abuse by Mr Gough. Mr Danckert acknowledged that the meeting was "unpleasant" but both Mr Gough and Mr Beeler engaged in shouting. Messrs Gough and Gilmour had vague recollections of the meeting. Clearly, however, by sending the letter of apology to Mr Beeler, the Gough & Gilmour executives well knew that the bounds of civility had been overstepped.

238 Now, it must be said that the problem relating to the truck bodies was created by Caterpillar in invoicing the dealership for the supply of the trucks sooner than should have been the case and for a very substantial sum of money of the order of $12 to $15 million. Perhaps, in those circumstances, Mr Gough had good cause to be upset but it did not, in my opinion, give him the right to be abusive at the meeting on 19 June. Mr Gough's conduct at the meeting was on any reasonable view unacceptable and warranted a proper apology, not the half-hearted one that was tendered. Mr Gough's conduct in relation to Mr Beeler serves to confirm the credibility of the evidence going to the former's confrontational style of dealing with Caterpillar and its executives. THE 1997 REVIEW

239 In 1997 Mr Beeler prepared a 65-page document entitled "Gough & Gilmour Holdings Ltd Corporate Overview - 1997". The document was circulated to a small group of managers in the Melbourne head office of the first respondent and was also sent to Peoria. The document listed in summary form a number of the key issues that had arisen during Mr Beeler's period as district manager. These were summarised under the heading "Critical Issues" as follows:

· high employment attrition; · unfocussed sales coverage; · no market segmentation; · systems support/processes lacked substance; · deteriorating relationship with Caterpillar Australia; · declining PINS in selected product/market areas; · non-team player with other Caterpillar Australia dealer - no trust; · early warning on customer satisfaction decline in key markets; · repeated non-action to Caterpillar Australia proposals with no better plan alternatives. 240 Mr Beeler wrote a covering memorandum to the report, which came to be known as "the capital letters document". The covering memorandum and the report itself could not be described as a "balanced" view of the dealership's performance - indeed they was quite critical, but Mr Beeler said that was not the purpose, which was rather to inform Mr Nitto and Mr Barrett of Mr Beeler's view about the dealership so that they might be able to address shortcomings with Mr Gough and Mr Gilmour. The memorandum was in the following terms: Harcourt Gough and Tony Gilmour took over the dealership in 1989 with great enthusiasm and plans for improvement. In particular, they committed to improving their performance in the mining market and to continue to build on a strong local government presence. The key to their mining strategy has been the implimentation (sic) of guaranteed cost and availability agreements. They currently enjoy a strong local government presence primarily due to a strong preference for cat motor graders and an extensive branch network.

Summarising the performance of Gough and Gilmour since 1989: · PINS have been static or slightly declining · parts DCAL has been static or slightly declining · employee turnover HAS continually been high · customer satisfaction surveys have indicated static satisfaction levels Based on this performance and the growth strategies we are implimenting (SIC), it is time to evaluate the strategic health of Gough and Gilmour. This should be done to determine if this is a dealership capable of handling and implimenting these growth initiatives. As we expand the markets and/or product lines we participate in, we need strong dealers to properly introduce, market, and most importantly support these markets. Dealers that do not have good strategic health today will struggle in the future due to the changing dynamics of current markets as well as the changing dynamics of the new markets.

Attached to this memo is an update of a dealer review done in 1993. This was presented to Harcourt and Tony, yet little has changed with their company since that review. Used equipment performance has improved dramatically in the last 12 - 18 months, and their financial health has improved dramatically the last 2 - 3 years due to some success in the Hunter Valley. CofA implimented changes shortly after that review. First we put our most experienced rep team in Sydney dedicated to working with Gough and Gilmour. They were to try to improve the operations. Then COFA changed the district manager in an effort to have someone In Sydney full time to support the rep team efforts, to further emphasize the importance to Harcourt and Tony of improving their operations, and to improve the relationship between the two companies. Again, despite this effort, very little has really changed.

Since Gough and Gilmour became the dealer PINS have primarily been in the 31 - 33 range. However, from 1991 to 1997 (ytd) PINS have declined from a high (In the history of G and G) of 41 to a low (In the history of G and G) of 31. In the last 12 - 15 months, their excavator and wheel loader performance has been particularly poor - especially when compared to all other Australian dealers. Various recommendations have been made - both by their own people and ours. But once again, they have been very slow to impliment [ sic ]. Another contributing factor to their low PINS has been the turnover of people. This continual turnover of key customer contact personnel has resulted in dealer personnel not knowing enough of the buyers in today's market. This has been confirmed by internal audits, yet despite verbal commitments, very little has been done. Rather, they have implimented [ sic ] guaranteed cost and availability agreements. This has become their answer to most competitive challenges.

In the near future, there is risk that someone else will be more active in the short term rental business than gough and gilmour. we are seeing evidence of that today. AH plant hire and EMECO are two companies that are more aggressive in short term rentals than Gough and Gilmour. CofA has recently been contacted by an independent financing company wanting to discuss participating in operating leases for local government. They contend they have commitments from a number of shires. If this did happen, it could have a very negative impact on the dealer. Earlier In 1997, three of the other Australian dealers wanted to investigate forming a national rental strategy/approach. Gough and Gilmour refused to participate saying they would develop their own approach. To date, very little has happened other than a few rentals of used equipment they have had trouble selling.

Their parts DCAL has also remained static despite the significant guaranteed cost contracts that assure them 100% DCAL. Competitors are gaining parts sales through superior service according to some customer focus groups surveyed recently. Expressway Spares has been rated by some key Hunter Valley customers as being more responsive and proactive than Gough and Gilmour. NS Komatsu was credited as having the best and most responsive parts department In the Hunter Valley.

From the time Harcourt and Tony have taken over the business, employee turnover has been high. It has been high at all levels. When they first tooK over the dealership, we were assured the turnover was due to the need to "clean house" and start with their own people. The latest rounds of turnover has been 'their" people-recruited, trained, and promoted by Harcourt and Tony. In 1997, they have lost a strong nucleus of talented managers. They have also continually turned over all customer contact personnel. This includes area managers (salesmen), project managers, branch product support managers, and most operating managers. Rare is anyone in a customer contact role for longer than 3 years.

It is felt this is largely due to Harcourt and Tony's policy of hiring young, bright, people and promoting them very quickly. But rarely have the operations been put in place to deliver customer expectations. This then leads to customer and employee dissatisfaction and frustration. It then spills over to affect Caterpillar personnel. Frustration at Caterpillar has reached all levels within the company and in all departments. The high employee turnover started when Harcourt and Tony took over the dealership, is prevalent today, and shows no signs of diminishing In the future. They do not see this as a problem. But their overall performance says otherwise.

Customer satisfaction survey results have basically been static since we began surveying. Recent focus groups in mining, ag, and construction indicate dissatisfaction is growing (the results of these groups is attached). These results were shared with Harcourt and Tony. They were quite interested in which customers attended the focus groups and then discounted the feedback. Very little has been done as a result.

Further, there is great dissatisfaction from truck OEM dealers and manufacturers with Gough and Gilmour (see attached). They are the only dealer in Australia not to have a TEPS program operating. The lack of this program is largely contributing to NSW having the lowest truck engine PINS in Australia according to the OEM dealers. Further, Gough and Gilmour do not have an acceptable support plan for truck engine users in NSW. They expect us to wait until they develop and impliment their plan-despite the ramifications of low truck engine PINS.

One could never describe the relationship between CofA and Harcourt and Tony as strong and positive. We have significant philosophical differences. They do not believe in segmenting markets. They have been a reluctant participant in the work being done on process 2000. They chose not to participate In the important value mapping exercise -a key effort to improve our mining distribution working closely with our dealers. Hastings Deering and WesTrac both are actively participating. At the dealer principal meeting in Hobart, Tony Gilmour volunteered to head a task force formed to address national customer coverage. He did nothing. Finally CofA had to step in, name a leader, and bring this project to fruition. All of this has led to frustration with CofA and in some cases, with other dealers as well. They caution employees not to get too close to Caterpillar people. Thus far, they have not signed the engine product support agreement. This after we made a number of changes at their request. However, because we did not make one change regarding TEPS, they have so far refused to sign. All other CofA dealers have signed. Due primarily to philosophical and strategic differences of opinion, CofA and Gough and Gilmour have always had a strained relationship.

If the key elements of strategic health for a caterpillar dealer are defined as market share performance, employee satisfaction, customer satisfaction, working with caterpillar, working with other dealers, and financial health, then at this point, Gough and Gilmour only have clear strength financially. Therefore, one must question their overall strategic health. Analysing their history, core beliefs, and strategies, one must question whether it will improve. I do not believe we can expect significant change from Gough and Gilmour. Therefore, we must question their capability to grow. They will be very enthusiastic, but either current performance in a market will suffer, the new product/market will not be successful, or both. We must seriously question their readiness for today's business challenges. To be successful in the future, to meet customer needs, they will have to change significantly. I question their willingness, or capability to do so. Without change, the district manager four years from now will review a dealer with high employee turnover, static PINS, DCAL, and customer satisfaction - at best - the same as in 1993 and 1997. 241 On 25 November 1997 Mr Nitto met with Mr Gough over six hours to discuss the 1997 review of the dealership's performance. Mr Gough was provided with a draft copy of the report but he was not shown the "capital letters document". The draft copy provided to Mr Gough only contained one of the six annexures. That annexure dealt with Caterpillar's understanding of employee attrition with the dealership. Mr Gough read the material and asked to have a copy. Mr Nitto, however, declined to leave a copy of the report with Mr Gough.

242 Mr Gough said that a few days later he telephoned Mr Nitto and said: I am increasingly concerned about the serious distortions, misrepresentations and outright untruths in that document and I am calling to ask for a copy so that I can rebut them. 243 Mr Gough received a copy of the draft report early in December 1997 but only one of the annexures was included (annexure 2). Mr Gough pressed for copies of the remaining annexures and following various communications between the two, Mr Nitto wrote to Mr Gough on 3 February 1998 and stated: Thanks for your 30 January letter. 1998 is a brand new year and with it goes my commitment to build a fresh new slate with Gough & Gilmour people and the C of A team.

As far as your request, I really don't prefer to engage in a paper chase of past business disagreements, biases, etc. I don't have the time given the competitive climate, and don't think you do either. While it might be marginally instructive, I sense a more constructive approach is to organise a quarterly discussion of strengths and areas of improvement we both need to focus on

I'll be in the U.S. on business from March 11 until the 24th. After my return, why don't we plan a team meeting between our groups to flesh out a way forward. Participants from C of A would include the District Team, Kevin Barrett, Andrew Mason- Jefferies and myself, together with you and a small team group of your senior managers. 244 As to his response, Mr Gough said in his evidence: Given the content of this letter, I decided not to pursue the matter any further and genuinely believed that CofA was satisfied that there was not a proper basis for the allegations contained in the draft document. I received no further correspondence from Mr Nitto, or anyone else on behalf of CofA, about the allegations that had been raised in the draft report. Nor do I recall any further conversations with either Mr Nitto or anyone else from CofA or Caterpillar about those matters.

245 A significant complaint by the applicants was that despite Mr Nitto's assurance to the contrary ("the third assurance") the 1997 report, together with the 1992 and 1993 reports, was utilised again by Caterpillar of Australia in the preparation of a further overview of the dealership dated March 1999. This was a report that recommended to the executive office in Peoria that "…a change needs to be made in the assigned dealer for NSW." I will deal with this in more detail in relation to the 1999 report.

246 As to the proposed quarterly meetings, Mr Nitto did say in his evidence that he spoke to Mr Gough about further meetings but that Mr Gough had always replied that he was too busy or had not had the time to think about suitable dates. Apart from this, it does not appear that Mr Nitto followed up the idea of regular meetings. Rather, he appears to have relied more on the incoming district manager, Mr Langmore, to repair the relationship.

247 In 1997 a dispute occurred between the applicants and the first respondent, which became known as the TEPS (Truck Engine Product Support) dispute. The respondents contended that:

a. The TEPS dispute contributed to the relationship tensions between the two organisations. b. The TEPS dispute is yet another example of the inability of the parties to work together in a trusting and co-operative manner to reach an effective resolution of their differences. c. The applicants' approach in resisting the first respondent's proposal to replace the 1991 Distribution Agreement for Engines Parts, and Service with the 1997 Product Support Agreement for Engines, Parts and Service was both unreasonable and at odds with Caterpillar's objective of increasing the on-highway truck engine market for the mutual benefit of the first respondent and its Australian dealers. d. The applicants disagreement with the first respondent as to the terms of the proposed 1997 agreement, and a concurrent disagreement as to the terms on which Gough & Gilmour would enter into agreements with its TEPS dealers, was characterised by inordinate delay, resulting in concerns within the first respondent as to the level of coverage and support to truck engine users in NSW and complaints to the first respondent by OEMs and truck engine users about that level of such coverage and support. 248 The background to the TEPS dispute is conveniently summarised in the applicants' submissions as follows:

a. Caterpillar manufacture engines for on-highway trucks. Those engines are used by truck manufacturers, such as Kenworth and Mack Trucks (such manufacturers are referred to commonly as "OEMs"). b. Unlike almost all other Caterpillar products, on-highway engines are sold to the OEMs by Caterpillar directly, rather than via a dealer. c. Truck owners require these engines to be serviced, and because of the nature of their business, they require service outlets across Australia. Dealers can and do provide service for the Caterpillar on-highway truck engines via their branch offices, but such branches alone could not meet the need for service centres across Australia. That led to the creation of second level dealers in each territory called "TEPS dealers". d. These second level dealers are usually companies that sell and service trucks which have Caterpillar engines, for example, the Kenworth dealer in a country town. e. TEPS dealers are appointed by the dealer in the territory (e.g. the First Applicant) on terms agreed between the dealer and the second level dealer (although the First Respondent recommends the standard terms to be used across Australia). f. The terms on which the First Respondent authorises and requests its dealers to appoint second level dealers are set out in a Distribution Agreement for Engine Parts and Service between the dealer and the First Respondent. g. TEPS dealers are entitled to display Caterpillar trade marks and obtain parts at a discount. TEPS dealers are required to meet certain standards to maintain their second level dealer status. 249 On 1 July 1991, Gough & Gilmour and the first respondent entered into a Distribution Agreement For Engines, Parts and Service. Clause 6(c) of the Agreement (which provided for the appointment of TEPS Dealers) stated: (c) In order to increase the availability of parts and mechanical service to those users of engine products who are not adequately served by existing facilities, Dealer agrees to appoint TEPS Dealers throughout his service territory described in Exhibit A. Dealer agrees to appoint as TEPS Dealers only individuals, partnerships or corporations performing designated service functions, and to appoint them in such numbers, at such locations and for such Selected Models as to provide complete and adequate parts availability and mechanical service for such users. Dealer agrees that it is in the interest of both Dealer and Company that all TEPS Dealers be responsible, of good reputation and capable of providing prompt, efficient and high quality service to users. No appointment of a TEPS Dealer shall be made without the prior written approval of Company as to the appropriateness of such appointment. Dealer agrees to inform Company concerning the appointment of any TEPS Dealer and the termination of TEPS Dealers previously appointed, and will from time to time report such information concerning each TEPS Dealer appointed by Dealer as Company may request. 250 Clause 5 of the 1991 Agreement outlined the intent of the TEPS system as follows: (c) Company and Dealer agree that the sale of engines to certain original equipment manufacturers ("OEMs") can usually best be accomplished directly by Company to such OEMs and that such sales of engines are of benefit to Dealer and TEPS Dealers because an expanded population of Caterpillar engines in OEM products creates substantial additional markets for other engine products and service. Company and Dealer also agree that the ability of Company or Dealer to make sales of engines to OEMs is substantially dependent upon supporting selling efforts of Dealer among users and potential users of such OEM products to achieve specification of Caterpillar engine in OEM products purchased by such users and potential users … 251 In about July 1993, a Mercedes Benz/Freightliner dealer in the Dubbo area, Tracserv Pty Ltd, made an application to Gough & Gilmour to become a TEPS dealer. In May 1994 Tracserv complained to the first respondent about the delay in their being advised of the outcome of their application to be appointed as a TEPS dealer. Tracserv was advised that the decision to appoint a TEPS dealer rested with the relevant Caterpillar dealer. Various pieces of correspondence ensued between the first respondent and Tracserv and between the first respondent and the applicants regarding appointment of Tracserv as a TEPS dealer. In September 1994 Mr Nitto expressed to Mr Gilmour his frustration at the time it was taking Gough & Gilmour to make a decision on the matter.

252 In October 1994 it was agreed between Mr Gough and Mr Tom Thomas of Caterpillar that Caterpillar dealers would not appoint competitor Komatsu dealers as TEPS dealers and that Gough & Gilmour were to advise Tracserv accordingly. On 19 October 1994 Mr Gough wrote to Tracserv advising that: …we believe that the appointment of Tracserv as a TEPS Dealer would not be consistent with Gough & Gilmour's coverage plan for truck engines in that part of New South Wales …

Caterpillar of Australia have now advised us of new TEPS guidelines, and we expect to receive written details of these within the next few weeks. Our current understanding of these new guidelines is that they would not lead us to change our view that the appointment of Tracserv Pty Ltd would be inconsistent with our truck engine coverage plan. 253 In May 1995 Tracserv again wrote to the first respondent stating it was still not aware of the status of its application to be appointed as a TEPS dealer. Ultimately, according to Mr Gough's affidavit, Gough & Gilmour did not appoint Tracserv as a TEPS dealer.

254 The applicants contended that there was pressure placed on the applicants by some sections of the first respondent over a number of years to appoint Tracserv as a TEPS dealer, contrary to the first respondent's own guidelines, namely, not to allow the appointment of any TEPS dealer that in the same facility sells or services earthmoving equipment of a competitor of the respondents, such as Komatsu (Tracserv was a Komatsu dealer). Further, that the first applicant had a legitimate basis to be concerned when the first respondent proposed a new Distribution Agreement in 1997 that contained a new provision giving the first respondent the power to require a business to be appointed a TEPS dealer, and a legitimate basis to seek to amend that draft Agreement so it was closer to the original 1991 Agreement.

255 Apart from Mr Gough's assertion that the first respondent sought to apply pressure to have Tracserv appointed as a TEPS dealer, there is no other evidence to support this assertion. Indeed, the documentary evidence would suggest that the first respondent supported the applicants' position that Tracserv should not be so appointed and that the only pressure that was applied to the applicants was that they should finally determine Tracserv's application and advise Tracserv of the decision - something that seems to have taken the applicants about two years to accomplish.

256 The respondents contended that the applicants' resistance to the proposal to replace the 1991 Agreement with a new Agreement in 1997 was both unreasonable and at odds with Caterpillar's objective of increasing the on-highway truck engine market for the mutual benefit of the first respondent and its Australian dealers.

257 In 1995 the first respondent reached an agreement with Mack Trucks Australia Pty Ltd whereby Caterpillar's 3406E engine would be an option in Mack's Titan truck. As part of that agreement, Mack Trucks required that their six main State branches be granted full TEPS dealer status and the three sub-branches, maintenance TEPS dealer status.

258 In 1997, the first respondent sought to introduce a new Agreement with respect to the distribution and product support for engines by its Australian dealers. This Agreement was to supersede the existing Agreement for Engines Parts and Service that had been executed by Gough & Gilmour in 1991. A draft copy of the proposed Engine Product Support Agreement was sent to Gough & Gilmour in June 1996. Clause 6(a) of the draft Engine Product Support Agreement gave the first respondent the express power to require its Australian dealers to appoint TEPS dealers. Clause 6(c) of the proposed new Agreement required the prior approval by the first respondent as to the appropriateness of any proposed appointment of a TEPS dealer by a Caterpillar dealer.

259 The applicants objected to the terms of the proposed new Distribution Agreement primarily, it seems, on the ground that it gave the first respondent the power to compel Caterpillar dealers to appoint TEPS dealers regardless of whether the Caterpillar dealer believed the appointment was appropriate or not.

· The motivation and impetus for the change to the 1991 Distribution Agreement stemmed from the fact that the first respondent, undoubtedly acting in its own self interest (as direct sellers of Caterpillar engines to on-highway truck manufacturers) entered into a formal agreement with the major on-highway truck manufacturers, Mack and Kenworth (OEMs). Under that Agreement, if those companies agreed to use a particular Caterpillar engine in their new trucks, the first respondent would agree to have designated Mack and Kenworth dealers as TEPS dealers. · The effect of reaching those agreements with the OEMs was that even where a dealer had a branch that the first respondent believed could adequately service trucks in a particular area, the first respondent still wanted OEM dealers in that area appointed as TEPS dealers. · The Applicants had, before 1996, more TEPS dealers than any other Caterpillar dealers in Australia. The first applicant had an extensive branch network and did not want a greater proliferation of TEPS dealers in and around the areas in which it had branches. · Given their experience with the TracServ issue, and the perceived need to rationalise and be more selective about appropriate TEPS dealers going forward, the applicants did not see it as appropriate or necessary for the first respondent to assume the power for TEPS dealer appointments in New South Wales. · The applicants expressed concerns about the new Product Support Agreement. These concerns were, on any view, objectively understandable and defensible. However, they were ultimately disregarded or ignored by the first respondent on the basis that: (i) the "power to appoint" clause was non-negotiable; (ii) was standard form in other areas of the world; and (iii) the applicants could "like it or lump it". · The first respondent, on the basis of a clear threat, stated that unless the first applicant signed the new agreement in the form proposed by the first respondent and allowed OEM dealers to enter into the Caterpillar recommended style of TEPS agreement (referred to as a "traditional agreement"), the first respondent would simply proceed to completely by-pass the first applicant and appoint whatever TEPS dealers that it thought was appropriate in New South Wales. · The first applicant's concern regarding the difficulty in properly training and ensuring quality of service by TEPS staff led it to suggest an innovative form of TEPS Agreement with OEM dealers under which it would supply trained labour for TEPS dealers to use from its local branch office. The first respondent asked the first applicant to offer OEMs both styles of Agreement and let them choose whether they prefer the "traditional" TEPS arrangement or the new arrangement suggested by the first applicant. · The applicants did, ultimately, sign the new form of the Distribution Agreement in November 1997 following discussions with and assurances by Mr Tong that the first respondent would not appoint TEPS dealers in New South Wales over the objection of the first applicant. · The Applicants signed the 1997 Distribution Agreement in those terms based on a representation that they were "standard" terms as used "in other areas of the world", and as such, could not be changed. Yet, at the time those representations were being made, the first respondent knew that clause 6 (i.e. the wording being proposed as to the right of the first respondent to insist on the appointment of a particular person as a TEPS dealer) was not the form of agreement being used throughout the world. A "softer" form of words was being used in the North American region. That "softer" form of words was almost identical to the form of words used in clause 6(c) of the original 1991 Distribution Agreement. · The applicants also agreed from late 1997 to offer to the OEM dealers the "traditional" TEPS agreement terms preferred by the first respondent, leading to no outstanding dispute regarding the terms of TEPS Agreements by the middle of 1998. 261 The respondents denied that they were acting in their own self-interest in implementing the revised 1997 Agreement. On the contrary, it was contended that: (a) The impetus for its decision to retain to itself the right to instruct its dealers to appoint TEPS dealers was to ensure that an acceptable and consistent level of broad product support coverage was put in place for supporting OEM users against a background of variable commitment amongst the Australian dealers to developing their truck engine business. (b) Part of the first respondent's intent in developing the on-highway truck engine market generally and, in particular, in implementing the TEPS program, was to provide increased parts and service profit opportunities to Caterpillar's Australian dealers. (c) The first respondent's intention in requiring Gough & Gilmour to execute the revised Product Support Agreement in the same terms as that executed by the other Australian dealers was to ensure consistency within the region. 262 The respondents contended that in contrast to the first respondent's motivations, the applicants' resistance to the revised Agreement and their delay in signing up TEPS dealers under the Agreement was motivated largely by self interested commercial desires - an objective at odds with Caterpillar's objective of developing the truck engine business for the common commercial benefit of the first respondent and its Australian dealers.

263 The respondents also challenged the applicants' contentions that: the first respondent had threatened to by-pass the applicants if they did not sign the revised Agreement; the first respondent misled the first applicant into believing that the amendments to clause 6(a) were standard terms throughout the world and could not be changed to suit the applicants' convenience.

264 The respondents submitted that the applicants' conduct contributed to a significant delay in resolving the TEPS dispute. In this regard it was submitted:

· The draft 1997 Product Support Agreement was circulated amongst the first respondent's Australian dealers in June 1996. · Unlike other Australian dealers who agreed to enter into the 1997 Product Support Agreement in the terms initially proposed by the first respondent shortly after the draft agreement was circulated, Gough & Gilmour did not respond with any comments on the proposed draft agreement until 25 February 1997. · Further discussions between the first respondent and Gough & Gilmour ensued about the terms of the proposed agreement and about the terms upon which Gough & Gilmour proposed to enter into TEPS agreements with TEPS dealers between March and July 1997 The applicants were advised of the first respondent's willingness to incorporate two of Gough & Gilmour's suggested amendments into the 1997 Product Support agreement. · Gough & Gilmour did not respond until 10 October 1997, see letter from Shearman, which (despite the clear message contained in CofA's letter of 29 July 1997 and conveyed in subsequent discussions between the parties that CofA did not agree to the applicants' proposal to amend clause 6(a) to remove the first respondent's ability to require its dealers to appoint TEPS dealers), enclosed executed copies of the 1997 Product Support agreement unilaterally amending clause 6(a). · The First respondent again reviewed Gough & Gilmour's request to amend clause 6(a) and by letter dated 24 October 1997, advised that their proposed amendment was unacceptable. · Gough & Gilmour did not ultimately execute the 1997 Product Support Agreement until 12 November 1997. 265 The respondents contended that the applicants' delay in entering into the 1997 Product Support Agreement, and in implementing the revised TEPS program generally, gave rise to concerns within the first respondent as to the level of coverage and support to truck engine users and complaints to the first respondent from OEMs and truck engine users about the level of such coverage and support. In this regard, the first respondent referred to the following matters:

· Gough's oral evidence that he was aware that one of the consequences of Gough & Gilmour's intransigence on the TEPS issue was that Caterpillar was being put under increasing pressure from OEMs and that this added to the tension between the first respondent and Gough & Gilmour over this issue. · The applicants were aware that in about November 1995, the first respondent had entered into agreements with the major OEMs, Mack and Kenworth, in an effort to improve the coverage and overall service and parts product support to the OEMs customers throughout Australia. Under those agreements, if the OEMs agreed to use Caterpillar engines in their trucks, the first respondent would agree, subject to their compliance with the TEPS guidelines, to the appointment of OEM dealer outlets as TEPS dealers. · Despite their awareness of the above arrangements and the first respondent's request to its dealers, including Gough & Gilmour, in November 1996 that they put in place the necessary tooling and maintenance level parts support, and enter into the necessary TEPS agreements, to enable OEM dealers to obtain TEPS dealer status, OEMs experienced considerable delay and difficulties throughout 1997 in obtaining the necessary training and tooling from Gough & Gilmour to enable them to establish their NSW branches as TEPS dealers. · Gough & Gilmour's delay in 1997 in implementing the revised TEPS program also led to the suspension by some OEMs of the installation of Caterpillar engines into their vehicles.

266 The respondents further contended that the TEPS issue contributed significantly to the relationship tensions between the first respondent and Gough & Gilmour. In this respect, the following exchange took place in the cross examination of Mr Gough: Q. Apart from the reason or the motivation behind Gough & Gilmour's stance on the TEPS issue, you were aware, were you not, that one of the consequences of Gough & Gilmour's intransigence on the issue was that Caterpillar were being put under increasing pressure from OEMs? A. Yes.

Q. And that added to the tension over the issue between Caterpillar and Gough & Gilmour? A. Over this particular issue, yes. 267 The TEPS dispute is another example of the poor communications between the parties on important issues and of the lack of trust and mutual respect. Whether or not Caterpillar was independently entitled to make agreements with OEMs that might affect the businesses of dealers, the fact that it did so without informing the dealers of its intentions beforehand, sits oddly with Mr Fites' notions of "partnership" and "family" in his Harvard Business Review article. Moreover, one can understand the reluctance of a dealer to readily concede to a proposal that removes its rights with respect to the appointment of a TEPS dealer who will compete with the Caterpillar dealer in the latter's territory.

268 The contention that dealers have to fall into line because a proposal involves dealers worldwide and exceptions cannot be made, does suggest something of a one-sided partnership. This is especially so where it involves one party exercising its power unilaterally to alter the terms of an agreement without what I would regard as adequate prior consultation.

269 If it had been the first respondent's concern that there was a "variable commitment amongst the Australian dealers to developing their truck engine business" and it was, therefore, necessary to change the 1991 Agreement to give the first respondent the right to instruct its dealers to appoint TEPS dealers, the preferable course, in my opinion, would have been, at the very least, to advise the dealers that their commitment was lacking and it was necessary to take steps to remedy the problem. Instead, the first respondent proceeded to take steps to unilaterally override the dealer's customary and contractual right in relation to the appointment of TEPS dealers, in circumstances where, as a consequence of the agreements with Mack and Kenworth to sell truck engines to them directly, there was necessarily a strong degree of self-interest involved.

270 For their part, the applicants were less than cooperative in implementing the new TEPS arrangements. They most certainly dragged their feet in acquiring the necessary tooling and training, in appointing new TEPS dealers and in proposing an alternative TEPS program. I consider this was in part a manifestation of the applicants' protest at the first respondent's unilateral action and in part a desire to avoid or delay unwanted competition in their territory in the form of additional TEPS dealers.

271 As the applicants themselves acknowledged, the debate about the new form of agreement on distribution and product support should have taken place in a shorter time frame. In my opinion, and characteristically I must say, the applicants contributed to the delay in resolving the TEPS issue by their studied lack of cooperation and intransigence. To that extent the applicants must assume some level of culpability but this has to be balanced against the first respondent's unilateral decision to alter arrangements without any adequate prior consultation.

272 I consider that the respondents were correct in submitting that the TEPS dispute contributed to the tension between the two organisations and was another example of the inability of the parties to work together in a trusting and cooperative manner to reach an effective resolution of their differences. However, the frustration and embarrassment felt by the first respondent as a result of the delay in implementing its new TEPS program was, to a significant extent, of its own making. The fact that other Caterpillar dealers in Australia may have accepted the inevitable much more quickly than the applicants, by signing off early on the 1997 Agreement, is no basis for concluding that the entire blame for the TEPS dispute lay with the applicants. That was clearly not the case. 1998 - A CRITICAL YEAR

273 1998 was a critical year in the relationship between the applicants and the first respondent. Towards the end of 1998 the managing director of Caterpillar of Australia, Mr Nitto, decided that the relationship was no longer sustainable and he proposed to recommend to the second respondent in Peoria that it should come to an end. He based this conclusion on his experience with Gough & Gilmour since 1991 and, more latterly, on his experience with the TEPS dispute and Gough & Gilmour's approach to the RPI and Cadia disputes, which I shall come to shortly. In arriving at his decision to recommend that the relationship with the applicant should be brought to an end, Mr Nitto also relied on the views of the district manager, Mr John Langmore. Mr Nitto also relied heavily on Mr Barrett's views. I shall deal with each of these issues in turn but, before doing so, it is necessary to deal in more detail with Mr Nitto. Richard Nitto

274 During 1998 Mr Nitto continued as managing director of Caterpillar of Australia. Mr Nitto's view of 1998 was that in the early part of the year progress was made by Mr Langmore to build trust and confidence back into the relationship between Caterpillar and Gough & Gilmour but the progress was not maintained throughout the year. Mr Nitto did not have a great deal of personal contact with Mr Gough or Mr Gilmour in 1998 and so his view about progress in the relationship was largely based on information from people such as Mr Langmore, Mr Barrett and other department heads within Caterpillar.

275 Mr Nitto said that by the latter half of 1998 (September, October, November), he had formed the view that the relationship between Gough & Gilmour was not sustainable and that by Christmas 1998 Mr Nitto told Mr Barrett and several other department heads that he was proposing to recommend a dealership change in New South Wales.

276 Mr Gough had a quite different view about 1998. In his evidence he referred to Gough & Gilmour being the second highest seller of agricultural equipment in the world and the highest outside the USA for the calendar year 1998 and that it had the highest market share in machine sales in mining of all Australian dealers in 1998. Apparently these achievements occurred in what was, financially, a historically poor year for Gough & Gilmour.

277 Mr Gough also said: … Mr Nitto and I reached an accord about the way forward in early 1998, I say that the relationship, continued to operate in a sound and professional basis even though there were two difficult disputes between the parties, namely the RPI dispute and the Cadia dispute. I do not believe that either of those disputes, or G&G's stance and approach to the resolution thereof, in any way supported the conclusion that the relationship had broken down to such an extent that it was no longer sustainable or "commercially viable".

278 Mr Gough contended that the objectives set by Mr Langmore and Gough & Gilmour earlier in the year were being appropriately pursued and that there could be no cause for criticism in that respect.

279 Mr Nitto's evidence reflects an attitude of mistrust of Gough & Gilmour borne of his experience as managing director of Caterpillar throughout most of the 1990's. He took the view that he had spent since 1991 trying to achieve a proper relationship with Gough & Gilmour and that he had now exhausted that effort. In this respect the following exchange took place in cross-examination of Mr Nitto: Q.…In light of the evidence that you gave yesterday about this, would it be right to say that, ultimately, you formed the opinion that you were simply not going to try any more; that you had done more than you thought was fair in dealing with Mr Gough and you weren't going to make any more effort. Was that the position you reached in 1998?

A. Yes. I believe that at the end of 1998 I felt that I had exhausted as many different avenues to try and deal with the issue, the personality, and regrettably came to the decision that the spots on the leopard are not going to change and we might as well make a decision. 280 Mr Nitto's negative attitude towards the relationship between Caterpillar and the applicants commenced to be formed in the early part of his stewardship. I have already referred to the three-hour meeting between Mr Nitto and Mr Gough in July 1992 where Mr Gough's approach and leadership style were discussed. Despite that discussion in 1992, Mr Nitto's view of the applicants did not improve over the succeeding years, as some of the comments from his oral evidence shows:

· Prior to February 1994, Nitto had some serious doubts about the workability of the relationship. At that stage he did not regard the relationship as totally typified by mistrust or totally unworkable. · Gough's personality made the relationship a very difficult one. An assessment of Gough's personality was seen as underlying the problems in the relationship. · Nitto formed a view about Gough that he was a person who would pursue issues beyond what Nitto thought was reasonable. Nitto formed this view gradually over time. · Nitto's impression was that the relationship had problems at all material times, that he had concerns about the relationship early on. He didn't say that the relationship was bad at all times; he said he developed progressive concerns until 1998. · Nitto put his concerns in writing to Peoria in 1992 regarding Mr Gough. He did not always put such serious concerns in writing. He communicated serious concerns orally to Peoria, usually when there were operational reviews when Owens, Ramseyer or Fites were in Australia. He told the executive office that he harboured serious concerns about Gough and Gilmour's suitability as dealer principals. He shared this concern in various ways from 1992, that there were increasing problems with Gough & Gilmour in terms of how they handled problems. · As at March 1995, Nitto had concerns as to what Gough & Gilmour's strategy was for the future. He also had concerns about customer dissatisfaction levels being high. He also had concerns about the level of staffing and attrition at Gough & Gilmour. He also held the view that there was a lack of mutual trust and respect between the first respondent and Gough & Gilmour. · It was evidenced to Nitto in one form or another through the better part of his tenure that the relationship was underpinned by mistrust. Nitto told his superiors this, from time to time, over five or six years. He told Ramseyer, but didn't commit to paper every conversation that he had with Ramseyer. Many things were done about it; many positive, serious things. Nitto's superiors frequently asked the question of what they were going to do, and the selection of district managers was part of that response. · Nitto would not make the assumption that there were no significant disputes that took place between the parties in 1994, 1995 and 1996. There was a continuation of issues during those years. Rather than getting to a point, given the reaction from the two previous reviews, it was decided to let the district team settle in, establish the relationship and see if the process could be moved forward. The customer satisfaction surveys showed that there were still issues during this time. There were still TEPS issues and attrition issues. The emphasis at the time was to give everybody a little room to see if the relationship could be established. · Nitto was of the view that there was not sufficient progress made about the issues that had been around for a long time during 1998. He relied upon district reports and operational reports from the field people to decide whether or not such progress was made during 1998. Langmore was one of the principal contacts. Nitto felt strongly about the sincerity and sustainability of some of Gough & Gilmour's progress: there were lots of discussions and verbal commitments, which were either half followed through or not followed through at all. · Insofar as Nitto indicated that Gough couldn't be trusted, the foundation for that view is that when a businessman indicates that he's going to address a particular issue and then seems to adopt a strategy that not only doesn't address it but also intentionally doesn't address it, one comes away with a lack of trust in a person's ability or word to honour what he said he was going to do. There were a number of programs over the years that Gough had been asked to consider; he would say they would be considered, and then go about a whole range of actions that basically suggested that not only was he not going to consider it, but he wasn't going to be a party to the programs. The rental issue is a good example. Gough & Gilmour had indicated that they were willing to look at the development of a heavy machinery rental business, but then nothing occurred.

281 I will make an assessment of Mr Nitto's decision in 1998, to recommend a change in the dealer, after reviewing the remaining bases upon which he arrived at that decision, namely: Kevin Barrett's and John Langmore's views about the relationship between the applicants and the first respondent; the RPI dispute; and, the Cadia dispute. I have already dealt with the other bases for Mr Nitto's decision, that is, the TEPS dispute and his experience in dealing with Gough & Gilmour over the tenure of his managing directorship of the first respondent. Kevin Barrett

282 I have already addressed the question of Mr Barrett's relationship with the applicants and, in particular, Mr Gough. The relationship was never a good one, principally because of Mr Gough's dislike of Mr Barrett and the decision by the first respondent to minimise Mr Barrett's contact with the applicants. I have also found that Mr Barrett had a negative view of the applicants. Nonetheless, despite the tensions in the relationship, Mr Barrett said that he held the view that up to about early 1999 the applicants' performance was acceptable "in most areas" and there was an "acceptable working relationship." But by early 1999 he considered that he would have preferred to see someone else running the dealership. Mr Barrett appears to have come to this view on the basis of the Cadia and RPI disputes, Mr Langmore's view about the relationship, and an issue over parts inventory levels.

283 I will deal with Mr Langmore's view and the RPI and Cadia disputes separately. John Langmore

284 Mr Langmore was transferred from the position of Asia Pacific legal counsel for CAT Asia based in Singapore to district manager for New South Wales and the Australian Capital Territory in February 1998. It was Mr Barrett's evidence that a key objective for Mr Langmore was to continue to build the relationship between the first respondent and the applicants. Mr Langmore said that he was told by Mr Barrett "Its your responsibility to go in and try to make this thing right."

285 Mr Langmore was successful in striking up a close friendship with Mr Gough, in particular, as well as Mr Gilmour and Ms Shearman. Ms Shearman was a senior executive and legal counsel with the first applicant. As to his relationship with Mr Gough, Mr Langmore said in his evidence: Throughout my time as District Manager I dealt with and observed Gough on many occasions, both social and business. Indeed, Gough became a person who I regarded as one of my closest friends during my time in Sydney. Unfortunately, and despite this friendship and my personal affection for Gough, I ultimately concluded that the relationship between Caterpillar Australia and Gough & Gilmour was dysfunctional and beyond repair. This was a conclusion that I did not wish to reach and worked hard to avoid.

In a business sense my relationship with Gough & Gilmour - and particularly Gough - started off as a very positive relationship. Because I was aware of past relationship difficulties with Caterpillar Australia and Gough's dislike of Barrett, I was looking to create mechanisms which might facilitate the repair of the relationship. One of these was to meet with Gough for breakfast each week. We used to meet at the Cruising Yacht Club of Australia in Rushcutter's Bay where Gough's yacht was moored. These meetings were usually without an agenda and just general discussions. Sometimes they would last for hours and they would cover many issues both business and personal. Gough is an intelligent person who to my observation sometimes finds large social gatherings difficult. In business he was frequently confrontational and I observed that he had difficulty accepting constructive criticism. He often took business criticism personally. Gough is competitive by nature and treats many issues as a zero sum game. I observed that after he takes a position on an issue he tended to approach things on the basis that "you guys are wrong and I am right". It was apparent to me fairly early on in my time as District Manager that he did not like Caterpillar Australia making suggestions and being involved in the dealership business, which was really the opposite of the way Caterpillar Australia seeks to work together in a trusting and cooperative way with its dealers …

To my observation, Gough's usual reaction to suggestions emanating from Caterpillar Australia was one of resistance. Gough was frequently uncooperative or unwilling to embrace suggestions that changes or improvements needed to be made at the dealership. Examples of such suggestions included, territorial stocking, responding to customer surveys and having processes in place that interfaced more effectively with Caterpillar Australia. Over time I came to expect, and approach my dealings with Gough & Gilmour, on the basis that Caterpillar Australia's suggestions would be something of a battle with Gough. 286 Mr Langmore said that he was informed at the outset of the poor relationship between Caterpillar and Gough & Gilmour and that it was his job to make the relationship work. It is clear from Mr Langmore's evidence that he tackled his assignment with enthusiasm and made some early progress in improving the relationship. 287 On 6 April 1998, as contemplated in Mr Nitto's letter of 3 February, a meeting took place between Caterpillar of Australia and Gough & Gilmour. The meeting was, by all accounts, "positive". In a letter of 21 April 1998 to Mr Gough summarising the meeting Mr Langmore referred to agreement being reached "with respect to the following areas":

i. PINS growth in hydraulic excavators and wheel loaders ii. Ag products iii. Rental iv. Process implementation and improvement v. Strategic health. 288 In the penultimate paragraph of the letter Mr Langmore said: Harcourt and Tony, both myself and the entire CofA team will be working with you to achieve these goals in a time frame which should begin achieving the results we both desire before year end. Through this co-operative effort, we should also be able to look forward to a resultant improvement in the overall relationship between CofA and G&G. 289 In a memo to Messrs Fites, Owens and Ramseyer dated 22 June 1998, Mr Langmore referred to the "tumultuous relationship between G&G and Caterpillar in the past" and the "unquestionably critical" need to repair the relationship. Mr Langmore then referred to the fact that "Diligent efforts on the part of both CofA and G&G towards improving this relationship are currently underway." Mr Langmore then referred to elements of a "common vision of success" and summarised his view of Gough & Gilmour's performance under the following headings:

Market Performance (as measured in PINS) 2. Employee satisfaction 3. Customer satisfaction 4. Operational measures 5. Dealer financial health 290 Mr Langmore's memo was generally positive and in respect of Mr Gough he said "Harcourt's commitment to being a successful Caterpillar dealer is beyond reproach. Although this alone does not ensure success, it is certainly a threshold requirement."

291 Ultimately, however, Mr Langmore said the year 1998 was not altogether successful in trying to improve the relationship between Caterpillar and Gough & Gilmour. He referred to some "minor victories" but also referred to "constant conflict" and the feeling of his district team when they were asked to implement a new initiative, that in respect of Gough & Gilmour what they could expect was another "shit fight". By the end of 1998 Mr Langmore considered that relations between Caterpillar and the applicants were bad and had been bad on an ongoing basis such that by March 1999 he considered that the relationship problems were "so fundamental and irreconcilable that a change need[ed] to be made to the assigned dealer in NSW". The reference in the overview to the March 1999 report on Gough & Gilmour to the "embattled relationship" between the parties was Mr Langmore's term and reflected his view at the time. In referring to the five dealers he now works with in the US Mr Langmore said, "I haven't had as much conflict with the five dealers in two-and-a-half years than I had with one dealer [Gough & Gilmour] in, you know, 18 or 20 months".

292 Mr Langmore said that despite his enthusiasm and the initial improvements that had been made in 1998, relationships did not change in any marked way. He said there were "unacceptable difficulties" in implementing programs with the applicants, such as implementing changes to the applicants' parts operations; improving the applicants' sales force; improving the applicants' product support interface with the first respondent; resolving issues like Cadia; and, moving forward on the applicants' response to customer satisfaction surveys.

293 Mr Langmore's view about the lack of progress in mending relationships and improving the first applicant's performance in 1998 and early 1999 was quite at odds with the applicants' view of these matters and for this and other matters he came under strong attack by the applicants as to his credibility as a witness of truth and reliability.

294 The applicants submitted that there were a number of successful initiatives introduced by them, together with the first respondent, in 1998. These initiatives were identified as including:

· The strategy to improve excavator PINS within New South Wales. · To increase agricultural sales. · To introduce quieter machinery in the mining sector and the new Lexion harvester in the agricultural market. · To train staff on "selling the premium" for excavators. · Successful customer events. · Improve performance of project managers. · By June 1998, a major initiative was underway to foster an efficient interface between the respondents and the first applicant in relation to processes and systems. · In June 1998, a major effort was underway between the first applicant and the first respondent to improve some operational measures such as parts fill and service policy redo. · Also in June 1998, an agreement had been reached to undertake strategic initiatives for mining and agricultural markets and an initiative to move the first applicant into rental services. · In November 1997 and following, the first applicant participated with the first respondent in the development of software in respect of the management of mining contracts. · In 1998, the Applicants worked with WesTrac, Hastings Deering and the first respondent to adapt mining fixing operating cost agreements (the FOCUS contracts) to a world wide standard. · In 1998, the Applicants focused on reducing the "service redo" and "policy" costs that were incurred. Since that time, the applicants have achieved success in this goal. · In June 1998, the applicants and the first respondent were working to adapt mining fixed operating costs agreements to a worldwide standard. · The applicants engaged Wickert to conduct a review of its operations and report to it on how its operations could be improved. · The applicants progressed introduction of the rental program. · The applicants commissioned Stephen Dakin to prepare a report on staff satisfaction. · The applicants introduced new processes to reduce the number of errors in warranty claims. · New TEPS agreements were finalised with TEPS dealers. · The applicants opened a new branch in Grafton, and were working on a new branch at Albury (opened in 1999), a major addition to the Hunter Valley store and had plans drawn up for an on-highway truck facility at Parramatta. 295 It would be expected that in the normal course of running the dealership new branches would be opened, that there would be customer events, staff would be trained, sales would increase in relation to certain product lines and an effort would be made to improve the performance of project managers. Accordingly, a number of the matters referred to by the applicants as representing progress made in cooperation with the first respondent may be discounted. As to the other indicators of progress, Mr Langmore's evidence about the lack of it was not that matters had come to a standstill. Mr Langmore acknowledged that there was progress in relation to operational issues and it is to be noted that Gough & Gilmour must have acknowledged to some degree Caterpillar's concern about such matters as staff turnover and aspects of its operations because it brought in consultants (Wickert and Dakin) to examine these issues. So it could not be said that during 1998 the applicants were ignoring the need to improve operationally.

296 Mr Langmore, however, referred to a number of areas where none, or very little progress, was being made. This included the applicants' attitude to customer satisfaction surveys, product problem resolution and parts operations - issues that the first respondent regarded as important but which Mr Langmore said the applicants continued to ignore, resist or prevaricate about. In relation to customer satisfaction surveys, Mr Langmore said that as soon as they began to paint a slightly negative picture of customer perception in New South Wales, Mr Gough would complain about the methodology rather than look at how the perceptions could be worked through. Further, that if Mr Gough perceived that an initiative came from Mr Barrett or it had Barrett's imprimatur, it could be expected that Mr Gough would respond only negatively. Mr Langmore expressed frustration, not simply because Gough & Gilmour might not accept a program proposed by Caterpillar, but because he got a negative response whether the program was well founded or not.

297 In relation to the question of performance it should be noted that even Mr Wickert, a strong supporter of the dealership and Mr Gough, stated in a report he prepared for the dealership in 1998 when he was asked by Mr Gough to review the performance of the dealership, that there were a number of "critical, potentially life threatening problems" within the dealership as well as other less critical problems. The critical problems included:

· Low machine PINS. · Rapidly increasing cost of FOCUS Contracts. · Perception of loss of competent managers. · Warranty, problem management, and service administration overall. · Parts inventory suitability. 298 Mr Wickert noted in his report that the continuing conflict with Melbourne [Caterpillar's head office in Australia] "absorbs too much energy."

299 The applicants alleged that Mr Langmore's evidence about his frustration with Gough & Gilmour regarding the lack of progress in achieving improvements in 1998 was in contrast to what he said in his annual performance reviews. These performance reviews involved the filling in of forms by employees on an annual basis in relation to job goals and results. The employee's performance was then evaluated by his or her superior and then signed off by both the employee and the evaluator.

300 In looking at the performance reviews of various senior employees of the first respondent one finds that the language they used in describing their achievements was generally positive and there was generally endorsement of those achievements by the employee's superior. Without being too critical of the performance reviews, they are somewhat self-serving documents that tend to put a positive spin on matters. It is only to be expected that an employee, in completing the performance review, would paint his or her achievement of performance objectives or targets in a favourable light and that is what seems to have occurred in respect of the senior employees of the first respondent. Mr Langmore was no different. Further, the evaluations given to employees by their superiors tended, almost universally, to err on the high side of the scale.

301 It was asserted by the applicants that in giving his evidence Mr Langmore was prepared to "resile" from contemporaneous statements in his performance reviews as to the level of improvement that had been achieved during his period as district manager. Accordingly, his evidence on this issue could not be believed. Whilst Mr Langmore agreed in cross examination that in his performance review he may have overstated the level of improvement in the dealership and that it was not "wholly accurate", it does not seem to me to be much of an overstatement. The 1998 performance review refers to certain improvements but it also says that the dealership's effort to improve its processes "fell short of our ambitions", that "The only notable area of improvement was warranty processing" and that "Less than acceptable progress was made in product problem resolutions and responding to customer surveys."

302 As to relationships, the performance review stated: One of the most significant initiatives for the Sydney District was to improve the relationship between CofA and G&G. Several efforts were made in this respect with mixed results. Several meetings were arranged between senior CofA and G&G management. The District also holds regular meetings with dealer principals and other key dealer personnel. The lines of communication are improving and an acceptable working relationship is slowly developing. Although progress has been made, a significant amount of work remains to be done in 1999 to build trust and confidence back into the relationship. 303 In signing off on the performance evaluation Mr Barrett commented: John inherited a very difficult situation with dealer culture misaligned with Caterpillar. He has made a good start at re-aligning this situation. 304 Having regard to the fact that Mr Langmore is not likely to admit complete defeat in a performance review, I do not regard the performance review to be significantly at odds with Mr Langmore's evidence in the proceedings: Mr Langmore got off to a good start in 1998 in attempting to bring about improvements in the dealership's operations and in relationships and there were improvements in some operational areas of concern to the first respondent but, ultimately, he was not successful in bringing about a material or marked improvement in the relationship. Moreover, I accept what Mr Langmore said that a performance review is not the place to express condemnatory views about a dealership that may have implications for the dealership's future.

305 It was further asserted by the applicants that as Langmore had developed a close personal relationship with the applicants and Ms Shearman it was impossible to reconcile that relationship "with the suggestion that he (Langmore) advised Barrett and others within the First Respondent that Gough was impossible to work with and that the relationship was unsustainable." Further, that Langmore could not recall whether he expressed his views about the unworkability of the relationship until after he had seen the draft March 1999 review document. Therefore, it was submitted, Langmore's views could hardly have been instrumental in Barrett reaching his conclusion that the relationship was "irredeemable" as that conclusion, said to have been reached in February 1999, triggered the drafting of the March 1999 review.

306 As to Langmore's relationship with the second and third applicants and Ms Shearman, the applicants seem to suggest that because of that personal friendship Mr Langmore could not have, in all honesty, suggested the business relationship was unworkable. That he did so, the applicants submitted, was only because he was pressured into it by Mr Barrett or he decided "which side his bread was buttered on" and for the sake of his career with Caterpillar he forsook the truth and his personal friendships and sided with those in Caterpillar, namely Mr Nitto and Mr Barrett, who wanted to be rid of Gough & Gilmour in order to achieve a rationalisation of the number of Australian dealers.

307 As Mr Langmore said in his evidence, he found himself the "meat in the sandwich". It is apparent to me that Mr Barrett had a negative view of Mr Gough and would not have been slow to point out problems or failings in the dealership. Mr Langmore, on the other hand, had established a friendship with the dealer principals and I consider he was keen to use that friendship to improve the operational performance of the dealership and to mend the relationship problems between the first respondent and the applicants. I accept Mr Langmore' evidence, however, that whilst he met with some success in 1998, he found the process of achieving change in the dealership difficult and frustrating and that, ultimately, he felt he had not been successful. The principal obstacle to making headway was the attitude of Mr Gough, in respect of whom Mr Langmore said that, despite the friendship: He often took business criticism personally. Gough is competitive by nature and treats many issues as a zero sum game. I observed that after he takes a position on an issue he tended to approach things on the basis that "you guys are wrong and I am right". It was apparent to me fairly early on in my time as District Manager that he did not like Caterpillar Australia making suggestions and being involved in the dealership business, which was really the opposite of the way Caterpillar Australia seeks to work together in a trusting and cooperative way with its dealers …

To my observation, Gough's usual reaction to suggestions emanating from Caterpillar Australia was one of resistance. Gough was frequently uncooperative or unwilling to embrace suggestions that changes or improvements needed to be made at the dealership.

308 Mr Langmore was in the position where he had to make a choice between his personal friendship and his duty to his employer; he chose the latter. He found himself in the position by March 1999 that he could not disagree with the view that the relationship between the first respondent and the applicants was no longer sustainable. Mr Langmore said there was no single event that caused him to reach this conclusion but that by the time the March 1999 report was written he was of the view that the relationship was beyond repair and there was nothing he could do to repair it.

309 Mr Langmore denied that he did not tell Mr Gough that the relationship was "unworkable or fast approaching unworkable." It is understandable, however, that Mr Langmore would not have told Mr Gough that it was intended to recommend to the second respondent that the relationship be brought to an end. Despite his friendship with Mr Gough, it was clearly not Mr Langmore's role to do so.

310 It is often difficult in the course of business and commerce to separate personal and professional relationships. However, I can find no basis to be critical of Mr Langmore in this regard. I note, of course, that despite the apparent friendship, Mr Gough had no difficulty at all in leveling abuse at Mr Langmore at a meeting on 11 May 1999 concerning the Cadia issue.

311 As I have already recorded, it was contended by the applicants that Mr Langmore could not recall whether he expressed his views about the unworkability of the relationship until after he had seen the draft March 1999 review document. Therefore, it was submitted, Langmore's views could hardly have been instrumental in Barrett reaching his conclusion that the relationship was "irredeemable" as that conclusion, said to have been reached in February 1999, triggered the drafting of the March 1999 review.

312 Putting aside the proposition that Barrett triggered the drafting of the 1999 review - a proposition that I do not consider to be correct - Mr Langmore said in his evidence that he had discussions with Mr Barrett over the "entire tenure" of his time as district manager regarding the relationship issue. Mr Langmore said that up to March 1999 he had indicated to both Mr Barrett and Mr Nitto that the relationship between the first respondent and Gough & Gilmour was "difficult" or getting difficult" but that in about mid-March 1999 he advised them that the relationship was "unworkable." Mr Barrett gave evidence that Mr Langmore expressed "grave concern" about the relationship prior to February 1999 and that Mr Langmore informed him that Mr Gough was "extremely difficult to work with".

313 I accept the evidence that Mr Barrett and Mr Nitto were informed by Mr Langmore of the difficulties he was experiencing in attempting to mend the relationship and that this influenced their thinking about the future of the relationship. RPI dispute

314 As Mr Nitto explained in his evidence: RPI stands for "Request for Pricing Information". Briefly, this is a system where Caterpillar provides a price discount to a dealer based upon a number of dealer costing assumptions. Audits then occur from time to time to make sure that the assumptions were borne out and appropriate allowances have been made. Typically this results in amounts being owed by the dealer to Caterpillar. It is not unusual to have differences between Caterpillar Australia and its dealers in relation to the outcome of the audit process. In the case of Gough the issue of the RPI audit took over a year to resolve. Throughout this time I had many communications with Gough regarding the issue and he was always extremely difficult to deal with. The fact that there was a disagreement about the amount owing was not to the point. The manner in which he went about dealing with the issue was a further illustration to me of difficulties in the relationship. 315 A fuller description of the RPI process was provided by Mr Tong as follows: The RPI was a program which operated to provide dealers with pricing assistance to help them obtain business - typically from large mining customers. Briefly, it operated in the following way: (a) A dealer would be placing a tender or seeking the business for a particular supply contract to a mining company. (b) In arriving at its bid price the dealer would liaise with Caterpillar Australia with a view to putting together a competitive price aimed at securing the business. (c) Because of the competitive nature of the industry and the limited margins available in the mining industry, the program enabled dealers to obtain discounted prices on equipment from Caterpillar in certain circumstances. From Caterpillar's point of view the incentive was to ensure that the business was obtained but also desired to ensure that the discount was passed on to the customer rather than just improving the profit margin of the dealer. (d) To be eligible for this discounted pricing the dealer was not entitled to charge a price to the customer that allowed for a gross margin above a specified percentage. (e) It was not possible at the start of a deal to determine precisely what the gross margin would end up being. This could only be determined after the business had been won and the various expenses had been incurred and a proper calculation of allowable costs could occur. Consequently, an audit process was in place. Caterpillar would audit dealers' books in relation to RPI business. As part of this process, the dealers would put forward what they said were allowable expenses etc in relation to RPI business. A calculation would then occur to work out whether the percentage gross margin had been exceeded or not. If the gross margin had been exceeded (after taking into account allowable expenses etc) Caterpillar Australia would be entitled to a refund. The amount of the refund would be equal to the difference between the gross margin achieved and the maximum percentage gross margin allowed.

The system meant that there was always the potential for differences of opinion regarding the gross margin achieved. This is because the system allowed certain expenses and other amounts to be built into the dealers' cost of sale. As a result, there would be various expenses which a dealer may assert should be taken into account in determining the cost of sale for RPI business whereas Caterpillar may have a different view in relation to one or more of those expenses. The results of these differences of opinion obviously impacted upon the bottom line, ie what gross margin was in fact achieved and therefore what amount was repayable to Caterpillar. To my observation, Gough & Gilmour's approach to this dispute was always markedly more uncooperative, aggressive and non-conciliatory than the approach of other Caterpillar dealers. 316 Caterpillar issued general guidelines relevant to RPI requests to all dealers in August 1989. Initially, the applicants claimed not to have received the guidelines but later agreed that they had. The applicants also indicated that they had received hard copies of slides used by Caterpillar in a presentation on the RPI process sometime before September 1998.

317 The RPI guidelines issued in August 1989 were of a general nature and it appears there was only loose adherence to them by dealers and Caterpillar. It is fair to say that Caterpillar's RPI policies and procedures were deficient, ambiguous and were not policed in an effective manner. In a letter of 11 November 1997 to Mr Nitto, Mr Sheed, managing director of Hastings Deering, referred to the "poorly defined 'ground rules' for RPI's". An internal Caterpillar memo written in December 1995 also commented that:

· There was no written procedure as to how the RPI is prepared. · There was no requirement on district offices to audit RPI's and report the findings. · By not carrying out the audits the significance of them was lost and that this could be traced to a lack of leadership in the product support function and poor communications with districts. 318 It was clear, however, that general guidelines and criteria were in place and dealers were aware of the prospect of an audit being carried out from time to time.

319 The RPI dispute arose out of a letter from Mr Langmore to Mr Gough on 21 September 1998. The letter advised of "the recent audit conducted by CofA on RPI machines sold by Gough & Gilmour for the years 1994 through 1996" and that "Although additional information is required to finalise the audit, the results are substantially complete." The letter indicated that "The preliminary estimate of the amount due CofA is A$4,343,606.00."

320 The letter caused a strong, adverse reaction within the first applicant. On 24 September 1998 Mr Gough replied to Mr Langmore stating "We remained stunned by the amount of your preliminary estimate." Mr Gough went on to say in his letter that:

· Gough & Gilmour did not agree the amount claimed was owed. · The audit had been delayed for so long. · The claim may put Caterpillar and Gough & Gilmour in breach of their bank facilities. · It would take several months to review the claim in order to dispute it. · Caterpillar should provide a copy of the RPI rules. · The audit attempts to claw back concessions that had already been made by a previous district manager. 321 The claim for $4.3 million came as a surprise to Gough & Gilmour and in the circumstances, there can be no criticism of the applicants for taking exception to the RPI claim and in their questioning of the claim given: (i) the vagueness and ambiguities associated with the audit process; (ii) the fact that the audit was conducted in respect of machines delivered three years previously and in circumstances where the negotiation of the sale of those machines had in many cases taken place as early as 1992; (iii) the difficulty and work involved for the applicants in analysing the claims.

322 Having received the claim, Mr Gough and Mr Danckert wrote a joint letter to their bankers on 14 October 1998 informing them of Caterpillar's claim. In the letter it was said: We have since reviewed the detail supporting Caterpillar's claim and find them to be substantially flawed … in our view the amount owing (if any) could easily be as little as $4,320 on a sound and logical basis determined in accordance with their very own guidelines. … In short we believe there is little or no possibility that any material, and commercially valid, claim against us will result from this exercise. Our observation, regarding receipt of such an ambit claim, is that there is no coincidence it follows the lodging of our first, of several expected, "Hardship Claims" which result from continual product problems on certain models of equipment. … As you might have already deduced from the above, we intend to vigorously pursue the elimination of the ambit claim from Caterpillar… 323 Gough & Gilmour justified the letter to the bankers on the basis that it was required to make full disclosure of such matter under Bank Covenants and, indeed, this appears to be so. The letter, however, drew a strong reaction from Mr Nitto who said in a letter to Mr Gough on 21 October 1998: As I read the letter closely, I was shocked. It's an extraordinary document that went way beyond a mere notification of delay and request for extension. It calls into question, to an outside third party no less, some of the fundamental core values of the relationship between Caterpillar and its dealers. Further, it does so in a very offensive tone which I regard as totally unacceptable as well as unprofessional. While I accept there will always be perception differences in conducting these audits and that the ultimate outcome is usually a combination of clarification, flexibility and compromise, I find your posture somewhat perplexing given your long association with Caterpillar. 324 Documents internal to the first applicant reveal the depth of ill feeling against the first respondent for making the RPI claim. One of the documents criticised the first respondent in the following terms: To allow such a significant letter to go out to a dealer principal without proper review or consideration can fairly be construed as indicating that either CofA's internal systems are hopelessly inadequate in this regard, or other senior CofA personnel have reckless disregard for dealers, or both. The enormity, and also stupidity, of the dispute and situation we now find ourselves in can be attributed solely to the way CofA chose to communicate their preliminary findings to us. 325 There was also mistrust on the applicants' part of the respondents evidenced by Mr Danckert's recommendation that "we cannot afford to have this happen again and must now commence the laborious process of ensuring that all commitments made to us by the Cat organisation are formerly (sic) documented in writing at the time they are made."

326 Mr Danckert had the principal responsibility for managing the RPI dispute. It was contended for the applicants that one of the reasons why Mr Danckert reacted adversely to the claim (Mr Danckert drafted the letter to the bankers) was that despite what was written in the letter of 21 September 1998, it was represented to the applicants as a firm and formal demand rather than a mere "preliminary estimate" that the first respondent wanted to discuss before formalising any specific claim. Mr Gough claimed that Mr Langmore had told him that while the claim was expressed as a preliminary estimate Mr Langmore did not expect it to change and Caterpillar would be pursuing Gough & Gilmour for that amount. I do not accept Mr Gough's evidence in this respect. It was vague and equivocal. It is clear from the terms of the letter that there were a number of outstanding issues to be resolved in relation to the claim before the audit could be finalised and a final figure arrived at. In the letter Mr Langmore expressed a desire to "begin working with your team as soon as possible to resolve the outstanding issues such that we can finalise the audit, arrange for payment and move forward with other initiatives that we are pursuing."

327 The applicants contended that the first respondent's refusal to withdraw the claim to allow discussions to proceed amounted to a formal demand. It is not clear whether Caterpillar did in fact refuse a request to withdraw but, in any event, given the claim was expressed as a preliminary estimate and that Caterpillar may have been concerned at the implications for claims against other dealers if it did withdraw, it is understandable that Caterpillar would not have agreed to withdrawal of the claim.

328 Mr Gough responded to Mr Nitto in a letter dated 26 October 1998 and in doing so unreservedly apologised for any offence that may have been caused by the letter to Gough & Gilmour's bankers. Nevertheless, as far as the RPI claim was concerned, Mr Gough made no concessions in his position, which up to that point was that very little, if any, money was owing to Caterpillar.

329 Analyses of the claim and negotiations between the parties then continued for a number of months. Caterpillar was obviously willing to compromise its original claim to a limited degree but settlement remained elusive.

330 In March 1999, at a dealer principal meeting, the RPI dispute was the subject of discussion between Messrs Gough and Gilmour, Mr Owens, Mr Nitto and Mr Barrett. Mr Gough indicated that he said to Mr Owens: I have asked for an independent review of the decision regarding the RPI audit. I believe we have been unfairly treated.

331 Mr Gough's overture to Mr Owens was unsuccessful and the message from Mr Owens was in effect that the money was owed and that the applicants should "pay up".

332 Further negotiations ensued, with Caterpillar making more concessions. Ultimately, agreement was reached on a settlement figure of $2,550,198, made up of $2,503,878 in cash and $46,320 to be paid into "fighting funds". The final settlement figure represented a significant difference from the $4.9 million originally claimed by Caterpillar. Mr Gough indicated his agreement to finally settle in a letter dated 4 June 1999. However, the letter was not faxed until 17 June 1999. The reason for this, according to Mr Gough, was that he had intended handing the letter to Mr Curfman at the meeting on 8 June but given the nature of that meeting, had forgotten to do so.

333 The respondents' complaint was not about who was right or wrong in relation to the amount claimed but rather the applicants' conduct in reacting to the claim and their conduct in resolving the differences between the parties over the issue. The respondents contended that although there was room for differences of opinion regarding what was and what was not allowable in respect of the claim, the applicants' approach to the dispute was adversarial, uncooperative and aggressive; that consequently it took an inordinate amount of time to resolve; that it had a significant adverse impact on an already strained relationship; that it was reflective of a breakdown in trust and confidence between the parties, and; that it supported the conclusion that the relationship going forward was unworkable.

334 The question for the Court is how should it regard the RPI dispute in the context of the relationship between the applicants and the respondents. Neither side, in my opinion, could be said to be free of blame. Clearly, the first respondent's policies and procedures relating to RPI claims were deficient and contributed significantly to the dispute that arose between the parties and to the time it took to settle. In this regard, the evidence revealed that the applicants were not the only dealer to complain about the vagueness and unfairness of the RPI process.

335 The first respondent did make a number of concessions that brought its original claim down from $4.3 million to $2.5 million. The applicants remained dissatisfied even with that reduced amount but it was clear the first respondent was not prepared to make further concessions, regardless of whether they were justified and, in my opinion, used its dominance in the relationship to close down any further negotiations. The very fact that the first respondent was prepared to reduce its original claim by some 42 per cent points to either a generosity on the part of the first respondent that is not wholly borne out by the nature of the concessions, an inadequate audit process that produced an excessive claim in the first place, or an absence of clear guidelines as to what costs were and were not allowable.

336 On the other hand, the applicants' reaction to the claim was out of proportion to what was reasonable or appropriate. In my opinion, the applicants' characterization of the claim as a formal demand, as opposed to a preliminary estimate, lacked foundation. But this view seems to have driven the applicants to write the letter they did to their bankers.

337 The applicants accused the first respondent of heavy-handed tactics that paid no regard to the consequences of its actions for the applicants or to the need to first discuss the issue. However, by the letter to their bankers, the applicants opened themselves up to similar criticism. Whilst it does appear that it was necessary for the applicants to inform their bankers of the RPI claims it was quite unnecessary, in the course of doing so, to gratuitously impugn the first respondent's bona fides. The letter is indicative of a lack of respect on the applicant's part for its business partner and undoubtedly had the effect of placing further strain on an already strained relationship.

338 The applicants' attitude to the RPI claim and their handling of the issue reflected quite a strong degree of hostility on their part towards Caterpillar as well as a level of mistrust. And whilst it may be true that Caterpillar encountered difficulties with other dealers in relation to RPI claims, these did not involve the level of acrimony generated by the applicants.

339 A more appropriate reaction to the claim on the applicants' part would have been to recognize the difficulties encountered in the relationship in the past and to respond to the claim in a more restrained manner.

340 On the other hand, knowing the strained nature of the relationship it could reasonably be expected of Caterpillar that it would have given more thought to how it might best go about lodging a claim of $4.3 million on the applicants. A moment's consideration would have made it apparent to Caterpillar that such a claim would come as an unpleasant surprise. To that extent the respondents caused the dispute to be more serious than perhaps it otherwise would have been.

341 Coming back to the question of how the Court should regard the RPI dispute, the respondents contended that the issue was not about who was right and who was wrong but rather the applicants' objectionable conduct in responding to the first respondent's claim. However, the applicants' conduct was to a significant extent the product of the first respondent's deficient RPI policies and practices.

342 Accordingly, the strength of any contention that the RPI dispute was an exemplar of the applicants' aggressive, win-at-all-costs behaviour experienced by the respondents throughout much of the life of the dealership, and constituted a basis for terminating the dealership, is substantially diminished.

343 Nonetheless, as I have already explained, it could hardly be said that the applicants were blameless in the RPI dispute. Consistent with a past pattern of behaviour, the applicants approached the issue in a precipitative and antagonistic way that, against the background of an already strained relationship with the respondents, had the understandable effect of reinforcing in Mr Nitto's mind the futility of persisting with efforts to maintain the relationship. The Cadia dispute

344 The Cadia dispute arose in the middle of 1998. The dispute grew out of the provision of certain mining equipment and maintenance services by Gough & Gilmour to Newcrest Mining Limited at Newcrest's open cut gold mine and adjacent underground mining operation at Cadia near Orange in central western New South Wales. It appears that Newcrest set up a company, Cadia Holdings Pty Ltd ("Cadia"), to operate and manage the mine. Part of the equipment supplied by the applicants included a fleet of ten Caterpillar trucks able to carry a payload of hard rock. The dispute essentially concerned the sharing of costs between Gough & Gilmour and the first respondent in relation to damage that had occurred to the trucks in the course of operations at the mine.

345 The respondents contended that the significance of the Cadia dispute in the context of the relationship between the applicants and the respondents could be seen in: (a) the applicants' unreasonable and intransigent approach to the merits of the dispute; (b) regardless of ultimately who was right and who was wrong in connection with the merits of the dispute, the applicants' approach to the Cadia dispute was adversarial, uncooperative and aggressive with Gough & Gilmour often seeking to advance its own interests at the expense of the mutual best interests of the applicants and respondents and potentially the customer; and (c) the Cadia dispute is reflective of the breakdown in trust and confidence and supportive of a conclusion that the relationship going forward was unworkable. 346 The applicants contended that their approach to the Cadia dispute was both understandable and reasonable and "it certainly does not support the Respondents' general contention that the Applicants' behaviour in the Cadia dispute provided clear evidence that the relationship was irredeemable." It was further contended that there were similarities between the Cadia dispute and the RPI dispute, namely: (a) In both cases the First Respondent lodged unjustifiable claims on the Applicants. (b) The Applicants were then criticised for resisting those claims and converting the issues involved into protracted disputes in circumstances where any review of the objective contemporaneous material (and, in the case of RPI, Langmore's own opinion) it could not be said that the Applicants behaved unreasonably in either case. (c) The Applicants rational and reasonable resistance to the claims is then portrayed by the First Respondent as an indication of a lack of mutual trust and confidence in the relationship and supportive of the conclusion that the relationship had become irredeemable because of the Applicants' behaviour. (d) Both disputes appear to have been used by the Respondents, on an ex post facto basis, to try to justify the decision to move against the Applicants in March 1999. Their irrelevance to the decision making process that occurred at that time is abundantly clear from the fact that neither dispute was even referred to in the March 1999 review documents. 347 The history of the dispute commences with the fact that in June 1995 Newcrest initiated a tender for the provision of the mining equipment described above. Both the first applicant and the first respondent were understandably anxious to secure both the contract to supply and the repair and maintenance contract. The total value of the equipment the subject of the supply contract was approximately $36 million. The total value of the maintenance service contract was $60 million. Both parties perceived strong competition from a rival firm, Komatsu, which had released a truck onto the Australian market with a substantially increased payload capacity. The role of the first applicant in relation to the tender was that it would be the party responding to the tender and the contracting party with Cadia in relation to both contracts. The role of the first respondent would be to provide the trucks and other machinery and equipment to the first applicant based on the specifications in equipment orders filed by the first applicant with the first respondent. In theory at least, and according to a letter from Mr Nitto to Mr Gerard Danckert, the mining manager for Cadia, Caterpillar was to provide close support for Gough & Gilmour in relation to the performance of the contracts.

348 In its tender, Newcrest specified that the trucks to be supplied were to possess a payload capacity of 240 tonnes and operate for a minimum of 56,250 hours (approximately 8 years). At the time Newcrest initiated the tender Caterpillar did not manufacture a truck with the capacity to carry such a payload. However, in an initial "Cadia Hill Submission" dated 27 September 1996 by the first applicant it was said that with certain modifications, including a lightweight body, "a payload of 230 metric tonne is achievable within the reality window of the 793C's GVW". The 793C was the truck model manufactured by Caterpillar that it was proposed to modify in order to meet Newcrest's specifications.

349 On 27 February 1997 Mr Keith Williams of Caterpillar sent an email message to Ms Angela Petousis of Gough & Gilmour asking for certain information set out in the email to be passed on to Mr Tony Sambell, who had the principal responsibility within the first applicant for managing the Cadia mine bid. The email was in the following terms: Angela, could you please pass info to Tony Sambell.

Tony, the Body we are proposing for Cadia will be 129 cu m. capacity (SAE 2:1) with ducktail. Floorplate of 16mm 500 brinell material. Side walls and front walls 10 mm and 12 mm respectively and T1 material.

Will need either partial liner in Duaplate or some riffle structure. There is possibility that we can reduce the thickness of the material in the channels to achieve a target weight of 27 tonnes assuming non gullwing design.

We spoke to Roche at Superpit about their body costs for 789. Material is Dolerite which I think is similar to the Monsonite at Cadia but cannot confirm this because it is difficult to find info (not on Internet and a geologist I spoke with did not know if it). Roche pull the bodies out of service at 15 - 20,000 hrs depending on how much damage the shovels have done. They reline at approx half this interval.

Cost to overhaul at 20,000 hours say is $75,000 Cost of liners at 10,000 hours is $23,400 (18,400 + 100 hrs lab) Total cost for 20,000 hours is $98,000 which equals $4.90/hr

(Liner material cost is current for 793. $75,000 should be ok for 793).

We should probably consider this to be best case as it is possible that the second major repair at 40,000 hrs should be a replace with new.

If Monsonite is harder than Dolerite, then the situation could be similar to an Argyll ie worst case where steel bodies wore out in 3000 hrs.

It is likely that Cadia is not as abrasive as Argyll.

Cost to overhaul at 20,000 hours say is $75,000 Cost for liners at 15,000 hours is $23,000 Cost for liners at 10,000 hours $23,000 Cost for liners at 5,000 hours $23,000 Total cost for 20,000 hours is $144,000 which is $7.20 per hour

Believe if this scenario is used, it is possible that a new body should be included at 45,000 hrs.

Tony, hope this helps. Please send the rock data when you receive. By the way can we expect contact damage to the body will be less with PH 4100 than with smaller hydraulic shovels? I think so. 350 The email shows that prior to Gough & Gilmour submitting its tender, the first respondent was having substantial input into the design of the truck bodies (indeed, it was "proposing" a design) and was making some preliminary observations about repair and maintenance scenarios and the cost per hour of those scenarios. It should be noted that one of the scenarios developed by Mr Williams involved the liners being replaced every 5,000 hours with an overhaul at 20,000 hours. The cost per hour is calculated to be $7.20. Mr Williams recommended a replacement body after 45,000 hours. It should further be noted that Mr Williams was uncertain about the impact on the truck body of the rock type to be loaded and the impact of the loading tool to be used to load the rock material into the trucks.

351 It appears that on 10 March 1997 the first applicant lodged its response with Newcrest to the maintenance tender. In relation to the truck bodies the first applicant stated: Truck Body * The new style body that we are proposing for the 793C, has been designed with a lighter tare weight maintaining structural integrity and wear resistance through the use of 500 Brinell steel for the surface plates. This design along with the 12 hour capacity fuel tank will allow the Company to operate with a 240 metric tonne payload optimising the GVW of the truck.

• The body design and subsequent maintenance costs have been set around the material information supplied by the Company, particularly with references to target material sizes.

• The body maintenance program has been structured around programmed repairs leading to eventual replacement at 44,000 hours. Therefore we would propose that the Company and Contractor have the ability to discuss and agree upon fair wear and tear in relation to abuse/accident damage. At such time that agreement on fair wear and tear breaks down, then a third party engineering evaluation will be carried out to determine the outcome. Failure by the Company to observe these Application and Operation Conditions will result in a reduced Availability being guaranteed by the Contractor. 352 Contrary to what was said in the tender response, the design of the truck bodies had not been finalised when the response was submitted. On 7 April 1997 Mr Robert Obliubek of Caterpillar sent a facsimile message to Mr Sambell of Gough & Gilmour providing information about the proposed body concept for the Cadia trucks. The proposal involved a lightweight body design (27 tonnes compared to the standard body weight of 31.2 tonnes) with a payload capacity of 230 metric tonnes.

353 On 14 April 1997 the first applicant provided its tender for the supply of equipment to the Cadia mine. The tender proposed to reduce the payload capacity of the trucks from 240 tonnes to 235 tonnes. The tender also noted the loading tool was to be a "P&H 4100". The loading tool was later changed by Cadia (after the contracts were signed) from the P & H 4100 cable shovel to a "Demag 655" hydraulic shovel and this had implications for the nature and extent of damage caused to the truck bodies. A Caterpillar 994 loader was also used and this was regarded as having added to the extent of damage caused to the bodies.

354 On 22 April 1997 Mr Obliubek sent an internal email to Mr Beeler setting out two alternative configurations for the 793C truck to be used at Cadia. Relevantly the email stated that: Rod The following is an estimation of calculated tare weight of 793C for Newcrest Cadia project. I have listed two tare weights, one with the bare minimum weight that has been the driver to achieve 240 tonne payload within published GVW, the other a more practical tare weight that will provide the customer with the lowest cost per tonne. …. Rod, as you can see with a bare minimum truck using the projected new tyres from Michelin and running a super light weight body, the absolute minimum tare weight is 238 tonne (with 785 fuel tank). …. We would have concern running a truck with this type of configuration. For one, the Michelin tyres are yet to be released and proven and it may well be that overall effect is to increase cost per tonne using this tyre option. …. The 27,000 kgs body is a throw away body and needs to be presented to the customer in that light. This body is estimated to provide only 10,000 hours service compared to the 20,000 hours as originally figured in the R&M costs submitted to Newcrest. Again the payload vs repair costs economics needs to be presented to the customer to determine lowest cost per tonne option. Additionally, we should ask ourselves whether it is practical to run trucks on smaller fuel tanks, conventional fan and non fire proof hoods and standard stairs/walkways. Does the elimination of these items actually reduce cost per tonne. Based on the above, it is our recommendation that 230 tonne payload be presented to the customer. On this basis we would allow a maximum/maximum payload of 253 tonne ie 10% of loads above nominal 230 tonne not to exceed tonne payload based on tare weight of 147 tonne. Additionally, the rated payload of the P&H 4100 is 77 tonnes per pass, which equates to 231 tonnes for 3 pass loading. Please discuss this with Tony Sambell with overall objective of lowest cost per tonne with realistic and practical truck specifications.

355 It was Mr Beeler's uncontested evidence that he handed Mr Obliubek's email to Mr Sambell and in doing so asked Mr Sambell to determine how the information in the email was going to affect the tender. It may be noted that the applicants did not call Mr Sambell to give evidence in the proceedings.

356 The significance of Mr Obliubek's email to Mr Beeler was that up to this point the first applicant had tendered on the basis of a truck with a payload capacity of 235 tonnes as opposed to Mr Obliubek's recommendation of 230 tonnes, and a 20,000 hours service life for the body compared to Mr Obliubek's recommendation of 10,000 hours.

357 On 18 July 1997 Mr Beeler wrote to Mr Danckert of Cadia giving certain undertakings "in order to persuade Cadia Holdings Pty Limited to place an order for Caterpillar equipment with Caterpillar's dealer in New South Wales, Gough & Gilmour Holdings Pty Limited." The letter stated: …

As you would also know, we have been intimately involved in working with Gough & Gilmour in response to this tender as well as the previous one. We have worked with them to find ways to modify our product to meet your specific needs. Yes, the machines being quoted in the tender will indeed meet the performance specifications set out in the purchase order. As we have always done, we will support them to ensure the machines meet all criteria set out in the tender submission. A key part of our relationship and agreement is that the dealer (Gough & Gilmour) is responsible for applying, managing and enforcing our warranty statements.

… 358 The first applicant was successful in both its tenders for the supply of machinery and equipment and for the repair and maintenance. The supply contract was executed in late July 1997 and the repair and maintenance contract in September 1997. In relation to the repair and maintenance contract it provided for a truck body life of 44,000 hours (with a rebuild at 22,000 hours and liner replacement every 5,500 hours) on a costing of $7.03 per hour. The contract also provided that: Truck, body and payload

9…. The Company shall use reasonable endeavours to manage the payload of the trucks such that the normal load is 235 metric tonnes with a distribution within 10% about the nominal load. And further, that: The body design and subsequent maintenance costs have been set around the material information supplied by the Company as set out in the Geotechnical data and Primary Crusher data in Schedule P, particularly with reference to target material sizes. 359 At the time the contracts for supply and repair and maintenance were entered into the body design had not been finalised. On 17 September 1997 the first applicant placed equipment orders with Caterpillar for the supply of ten 793C trucks. In relation to the truck bodies the orders specified: a flat floor and lightweight body; size to target 235 tonne payload; target design weight 27,000 kg. Thus at some point, which is not apparent from the evidence, the first applicant opted for a flat floor body rather than the standard dual slope body. Whether this decision was the first applicant's alone or the first respondent recommended the flat floor is not clear. The significance of this issue is that it was later decided to revert to a dual slope body when it became apparent that a flat floor was not suitable for the hard rock application encountered at the Cadia mine.

360 On 1 December 1997 a meeting took place in Melbourne, involving Mr Sambell and Mr Mark Sweeney from the first applicant and representatives from Caterpillar, to finalise the body requirements for the Cadia trucks.

361 On 19 December 1997 Michael Worth from Caterpillar sent a facsimile message to Mr Sambell setting out a summary of body options for the Cadia trucks. In the message Mr Worth stated:

362 The standard 793C body with liners lasts approximately 20,000 hrs in hard rock application before major maintenance is required. The experience at KCGM super pit is that liners are changed at 10,000 hrs; and the floor and front wall are rebuilt at 20,000 hrs. The lightweight bodies outlined in this document (31,919 kg and 29,244 kg) WILL NOT achieve these hours. The best estimate for the life of the lightweight body is 10,000 to 15,000 hours. The large range in hour estimate is due to the variation in material fragmentation, material abrasion, loading technique and number of loading cycles. The reduction in body life and the increase in maintenance frequency must be considered when reducing the weight of the truck body.

363 Mr Worth's observation that a lightweight body would only last 10,000 to 15,000 hours before a major repair became necessary is similar to the earlier advice of Mr Obliubek on 22 April 1997 that: The 27,000 kgs body is a throw away body and needs to be presented to the customer in that light. This body is estimated to provide only 10,000 hours service compared to the 20,000 hours as originally figured in the R&M costs submitted to Newcrest. 364 On 5 March 1998 the first respondent sought Cadia's agreement to reduce the nominal payload figure in Schedule N of the contract from 235 tonnes to 231 tonnes on the understanding that if "the Michelin 80 series tyres aren't installed on the truck then the nominal payload will be 231 metric tonnes."

365 In May 1998 the first four trucks were delivered and commenced operation. Various problems soon emerged including difficulties caused by overloading, payload spillage, and damage to the headboard, body side rail and floor of the body. Mr Lethlean of Caterpillar described the damage as "significant structural damage".

366 On 2 July 1998 Cadia indicated to the first applicant that it would only conditionally accept the further six trucks that it had ordered on the basis that in its view the trays were not acceptable, rendering the trucks not fit for purpose.

367 On 10 July 1998 the first applicant acknowledged Cadia's claim about "not fit for purpose" but went on to say in a facsimile message of that date: Cadia also has caused damage to the Trucks as a result of operator inexperience. These problems arise in several areas, for example hits to the body with the loading tool and load location problems. Without making a decision on the extent to which costs will be borne by the parties at this stage, we state as a matter of principle that we will bear the cost of damage to the bodies to the extent that this is caused by defects in design for which we are responsible. We cannot accept responsibility for damage caused by operators to the extent that they would have occurred in any event on a "light" body.

368 Between May 1998 and March 2000 the first applicant performed repair work on the trucks to the value of $1,130,079. The repair work did not render the trucks compliant with the tender specifications.

369 Further, between July 1998 and March 1999 there was extensive investigation into the problems associated with the Cadia trucks and a great deal of discussion amongst the parties. Nevertheless, the parties were unable to reach any agreement on respective responsibility for the problems.

370 On 24 August 1998 the first respondent proposed an allocation of costs for repairing the truck bodies "based on the source of the damage and our perception of responsibility for the source of that damage." The first respondent's proposal was based on the following assumptions: 1 It is acknowledged that winning this deal was incumbent upon providing a truck with a carrying capacity of at least 230 metric tons. This fact drove the development of the lightweight body. G&G is viewed as sharing in the risk of this body design both because of its share in the rewards of this transaction, its participation in negotiating the features of the body, and due to its signing the contract with knowledge that the body was still being developed. 2 Caterpillar designed the body based on specific input regarding the application at Cadia. This input was provided to CofA via G&G. Critical in this respect were the loading tool, loading method and the characteristics of the material being loaded. 3 Important aspects of the input criteria mentioned in 2 above have not been met. These include the change in loading tool from a P&H 4100 to a Demag 655; much more frequent loading with the 994; larger and more coarse material. CofA views these as costs to be allocated between G&G and Cadia as appropriate per the contract terms between those parties".

371 The specific proposed allocations of costs prepared by the first respondent were as follows: 1 Repairs to the headboard and the addition of a ducktail - CofA is prepared to bear the costs of these repairs. Our early estimate, dependent upon whether the repairs can be carried out at site, are $4,000 for the headboard and $12,000 for the ducktail. 2 Sideplates - CofA views the necessity of this repair as one largely due to operating practices. Accordingly, without assessing responsibility between G&G and Cadia, CofA is not prepared to bear the cost of this repair. The preliminary estimate of the cost is $5,000. 3 Top rail - CofA views these changes as being necessitated by operating practices. Again, this would place responsibility for these costs between G&G and Cadia. The preliminary estimate of the repair cost is $1,000. 4 Floor board and ribs - CofA is prepared to accept 50% of the costs associated with this repair. In accepting 50%, CofA acknowledges its role in designing the lightweight body. The 50% which CofA is unprepared to cover allocates a portion of the risk of lightweight bodies to G&G as being risk associated with the benefit of winning this deal and an acknowledgement of G&G's role in proposing and accepting lightweight bodies. It also acknowledges that the target material is different than that originally presented to CofA when designing the bodies. Problematic loading methods and use of a different loading tool than originally presented are also contributing factors to defamation of the floor board and ribs. The preliminary estimate of the repair cost is $6,000. 5 Lowering of sidewall - At this point, CofA is uncertain whether this should be done. We will defer a decision until after the production study. We can discuss allocation of those costs should it prove a necessary repair.

As indicated by CofA's proposed allocation of costs, it is evident we feel mine operating practices are contributing significantly to the deterioration of the bodies. Because of its lack of contractual privity with Cadia, CofA is not in a position to influence the operating practices of Cadia. This responsibility rests exclusively with G&G. It is important at this point that CofA express its firm conviction that G&G should address with Cadia at a senior level the specific concerns we have and the responsibility we assign to Cadia's loading practices for damage to the bodies. CofA's participation in the production study is intended to support your efforts in this respect. CofA is also participating in acknowledgment that it is in all parties' best interests to have the mine improve its operating practices whether through blasting, loading or otherwise.

372 Gough & Gilmour did not accept the proposal by the first respondent.

373 On 24 March 1999 the first respondent wrote to the first applicant and made the following "commercial offer" to Gough & Gilmour:

· Five (5) 136m³ SAE2:1 dual slope design bodies at a cost of A$124,000 ex Taree, and in addition a contribution of A$150,000 to repair/upgrade five (5) existing flat floor bodies in accordance with option 2 OR · Ten (10) 136m³ SAE 2:1 dual slope design bodies at a cost of A$124,000 ex Taree to replace existing flat floor bodies.

… 374 Gough & Gilmour rejected the offer as not being commercially realistic. In a response dated 21 April 1999 the first applicant said: We do not believe that the proposed offer is commercially realistic, given the nature of the problem and the extent of the repairs which we have already had to undertake to keep the bodies safe and operational. Nor does it reflect the respective responsibilities of the parties in respect of the problems which are occurring. …. "Experimental" Nature of the Bodies and Sharing of Risk

During the February 1999 meeting between Caterpillar and Gough and Gilmour, Caterpillar indicated to us that it believed Gough and Gilmour should accept the design/manufacture liabilities and costs on a 50/50 basis. It was argued that this was fair given that Gough and Gilmour had been aware of the fact that any body would be "experimental" and that Caterpillar did not at that time have a body which would meet the payload needs for the Cadia mine. We entirely reject that claim. At no time was Gough and Gilmour aware of this. We refer to the email dated 1/6/98 from Robert Obliubek assuring us that the body was not a prototype. The email is attached at "G". At all times it was our belief that you had a design and that similar bodies were operating elsewhere in the world. Further, if it was the case that Gough and Gilmour was expected to assume half the risk for a body that Caterpillar was designing and manufacturing, then the directors should have been made aware of it in writing. The directors were not made aware that this was proposed either verbally or in writing. If that had been the condition on which the bodies were supplied to us by Caterpillar, then the directors would not have committed the company to such a risk. That would have been commercially irresponsible. At the time we committed to the tender and later to the contract, we understood that you could and would design and manufacture a "fit for purpose body", and we think that it was and remains your responsibility to do so. If there had been some understanding regarding the sharing of the design and manufacturing risk, this would have represented a major change in the normal position between us. If we had been going to assume a share of your risk, there would also have been included in the document recording such a change, an understanding about the other elements of risk associated with that deal and usually accepted entirely by the Dealer, eg the exchange risk.

375 On 11 May 1999 at a meeting between the first applicant and first respondent, agreement was reached that the first respondent would replace the bodies of the trucks with dual slope trays, although that meant a reduction in the payload to 228 tonnes. The first respondent offered to sell the replacement bodies at $60,000 (as opposed to $124,000). The first applicant felt that it should not have to contribute more than 20 per cent of the replacement cost per body ($24,000 per body).

376 By letter dated 4 August 1999 the first applicant made a counter offer as follows:

· Caterpillar to contribute $900,000 approximately in respect of Gough and Gilmour additional maintenance costs; and · Sell the 11 dual slope bodies to G&G for $50,000 each.

377 In putting forward its counter proposal the first applicant said:

· Our case should be considered on the basis of what information we had prior to submitting our tender. We were not aware that there were major design issues until well after the tender had been submitted. Design issues came up after the contract had been signed. · At the time we were all working together for the first Cadia contract, it was a crucial time in Caterpillar's 793C worldwide marketing efforts, when we were all feeling the effects of the competitive pressures of the introduction of the Komatsu 930. We submitted our bid with the full understanding and support from CofA District Office, whose Manager had taken personal responsibility, on behalf of Caterpillar, to ensure that the deal was done. · It had been suggested that, after the body redesign issue came up, we should have gone back to the customer to seek changes to the tender. We didn't do that because we didn't get the information which made your concerns about design apparent prior to the signing of the contract. In fact, we didn't get any information of that nature until some 4 months prior to the delivery of the first truck, and over 4 months after we had signed the contract. We were already contractually bound by the time your team appears to have begun the design process started to voice its concerns about its capacity to fulfil the contractual obligation. The Caterpillar team was aware that we had signed the contract, committing the delivery of the bodies you had told us could be delivered.

378 On 13 August 1999 the first respondent agreed to supply the replacement bodies for a token sum of $1,000 per body with no contribution to the first applicant's claimed additional maintenance costs. The first applicant accepted this offer on 19 August 1999.

379 The evidence suggests that the relationship between the first applicant and the first respondent was strained during the Cadia dispute. Mr Gough, Mr Gilmour and Ms Shearman acknowledged this. The meeting on 11 May 1999 referred to earlier was also indicative of a poor relationship. In his evidence regarding the meeting Mr Langmore said in cross-examination: I mean, the whole meeting was - I mean, I wish I could play you a videotape. It was, you know, just horrible. Harcourt particularly performed very, very badly. I mean, for a dealer principal, you know, to have gone off the way he did and take these outrageous positions that we have owed them back $5 million, it was just so incredibly unproductive, and just - I mean, anyone that would have been a fly on the wall would have been like, "Good God, these people are meant to work together going forward? No way". I mean, it was so nasty and vitriolic that it was - and that is why I left there, I just, God, you know, this is - you know, it was one of those things. It was, like, you just sort of topped off everything. I mean, I have never had a meeting like that in my 11 years with Caterpillar, other than that one of course.

380 It was put to Mr Langmore in cross-examination that there was no serious disagreement between the parties over Cadia until the meeting on 11 May 1999. Mr Langmore said: A. That is absolutely wholly inaccurate. We - there'd been a number of very, you know, contentious heated meetings far in advance of May 1999. That was an ongoing thing that, you know, I was pulling my hair out over Cadia over a fairly protracted period of time irrespective of what correspondence I may or may not have written. That was, it was a source of fairly intense friction over a fairly protracted period of time. 381 The applicants submitted that Mr Langmore's evidence to the effect that there was friction between the parties throughout the period of the Cadia dispute should not be accepted because he was unable to point to any instances, other than 11 May 1999, where there was serious disagreement. 382 In the re-examination of Mr Barrett the following exchange occurred: Q. Well, we know of course that that year produced some confrontation and difficulties between the parties over Cadia and the RPI issue, among other things. In terms of your experienced dealings with dealerships, if you have arrived at a position five years after, in this case the buy out, and there is still a perception that the relationship lacks trust and confidence, notwithstanding whatever efforts have been made on both sides, what do you say as a regional manager about the prospect of such a relationship against that background? A. It's certainly extremely difficult to manage key issues of size or that have been long-standing without trust and confidence, to be able to go in and analyse those situations. I think I mentioned earlier if both parties are not working in sync to try to respond to a challenge the size of Cadia, then it is very difficult to get a resolution of such a size - such a problem, that is going to be seen by the customer in particular of value, and certainly that all parties involved are going to be seen to work through the issue and been happy with the outcome. A similar situation with the RPI in terms of having issues that are open for interpretation without having a close working relationship is certainly going to give rise to frequent differences of opinion. To me I think it made both of those subjects very difficult.

383 What is striking about the Cadia dispute, especially given the value of the contracts involved, not to mention the reputations of both Caterpillar and Gough & Gilmour being at stake, is the apparent lack of coordination and understanding between the two organisations in tendering for the contracts.

384 As far as it can be ascertained from the evidence, the first applicant's successful tender contained the following relevant elements:

· A flat floor (as opposed to dual slope), lightweight (27,000 kg) body design. · A payload of 235 tonnes. · The loading tool to be a P & H 4100. · A body life of 44,000 hours with major repair at 22,000 hours and liner replacement every 5,500 hours. · A repair and maintenance costing of $7.03 per hour. · The body design and subsequent maintenance costs set around information supplied by Cadia as set out in geotechnical data and primary crusher data.

385 It appears, at least in part, that the foregoing elements of the tender were based on the information supplied to the first applicant by Mr Keith Williams in his email of 27 February 1997. So much is evident from the letter from Mr Gilmour to Mr Langmore dated 4 August 1999 where it is apparent that in determining its costings the first applicant paid substantial regard to those figures of Mr Williams that were based on the assumption that the material to be loaded at Cadia was not as abrasive as that encountered at the Argyll mine, which Mr Williams described as "worst case".

386 What appears to have occurred is that the first applicant proceeded to submit a tender for a ten year contract guaranteeing a cost per hour on the basis of a bare assumption by Mr Williams that because it was "likely" that the rock at Cadia was not as abrasive as that at Argyll the body would last 20,000 before major repair was required.

387 The first applicant continued to rely on Mr Williams' assumptions, notwithstanding advice it received in April 1997, that the lightweight body was estimated to provide 10,000 hours service before a major repair was required rather than the 20,000 hours quoted to Cadia in the tender. In other words, the first applicant took no steps to adjust its response to Newcrest's tender in the light of the new information from the first respondent. The applicants submitted that it was inconceivable that they would have proceeded with their original quote for maintenance work if they had received the advice that Mr Beeler said was provided to them. However, I have no basis for disbelieving Mr Beeler's evidence on this point. Mr Beeler was adamant that when he received the email from Mr Obliubek on 22 April 1997 he remembered "printing this out in my office and taking it over to Gough & Gilmour and handing it to Tony (Sambell) immediately." Further, I note that the applicants did not call Mr Sambell to give evidence.

388 After the contracts with Cadia were executed but before the design of the bodies was completed, the first applicant was again advised by the first respondent that the best estimate for the life of the lightweight body was 10,000 to 15,000 hours. But again, the first applicant took no steps to remedy the inadequacy of their maintenance costings. If it had been "inconceivable" that the applicants would have proceeded with their original quote for maintenance work if they had been told in April 1997 about the limitations of the body design, it is strange that having found out in December 1997 the applicants did absolutely nothing about it. No attempt was made to seek an amendment to the contract and there is no record of any complaint to the first respondent by the applicants about the matter.

389 In so far as the first respondent's role in relation to the maintenance tender was concerned, it appears that the first applicant did not consult Caterpillar in relation to its final proposals before submitting its response to the tender in March 1997. However, Mr Beeler, by April 1997, was well aware that the new information regarding the expected life of the lightweight bodies (10,000 hours as opposed to 20,000 hours) had implications for the first applicant's maintenance costings and for the performance of the bodies (including the fact that it had been recommended that a 230 tonnes payload be represented to the customer instead of 235 tonnes). Mr Beeler, however, seems to have taken no steps to assure himself that the first applicant gave proper consideration to the new information. Yet, he wrote to Cadia in July indicating that Caterpillar had been intimately involved in working with Gough & Gilmour in response to the tender and that the machines in the tender would indeed meet all criteria set out in the tender submissions and the performance specifications set out in the purchase order.

390 The maintenance and supply contracts were thus executed in circumstances where both the first applicant and first respondent knew of recommendations from Caterpillar's engineering department that the lightweight bodies would at best last for 10,000 to 15,000 hours before major repairs were required and should have been - but were not - presented to the customer in that light. It was wrong, therefore, for Mr Gilmour to assert in his letter to the first respondent on 4 August 1999 that: It has been suggested that, after the body redesign issue came up, we should have gone back to the customer to seek changes to the tender. We didn't do that because we didn't get the information which made your concerns about design apparent prior to the signing of the contract. In fact, we didn't get any information of that nature until some 4 months prior to delivery of the first truck and over 4 months after we signed the contract. We were already contractually bound by the time your team appears to have begun the design process started to voice its concerns about its capacity to fulfil the contractual obligation.

391 In relation to the supply contract, there is no doubt that the major responsibility for the design and manufacture of the bodies lay with Caterpillar. As Mr Williams said in his email of 27 February 1997 "The Body we are proposing for Cadia …". The first applicant did have input into the design, and properly so, but Caterpillar held the proprietary interest in the body design. Design and manufacture were, as senior counsel for the applicants put it, in the respondents' "heartland". Caterpillar also had every opportunity to consider the conditions under which the body would operate. The first respondent was provided with the relevant geotechnical data, including rock size (which did not change) prior to designing the bodies; it carried out an on-site inspection prior to designing the bodies; it had access to information about the use of flat floor bodies at other sites. It is true that the loading tool did change but the first respondent was aware of this before the bodies were manufactured. In any event, the loading method and other factors such as the size of rock being loaded were not the chief causes of the damage; it was rather that the design of the bodies - lightweight and flat floor - was not up to the task. In my opinion, in response to the first respondent's proposal that the first applicant bear half the cost of replacing the bodies, the first applicant was entitled to take the position it did in its letter of 21 April 1999 that: … if it was the case that Gough and Gilmour was expected to assume half the risk for a body that Caterpillar was designing and manufacturing, then the directors should have been made aware of it in writing. The directors were not made aware that this was proposed either verbally or in writing. If that had been the condition on which the bodies were supplied to us by Caterpillar, then the directors would not have committed the company to such a risk. That would have been commercially irresponsible. At the time we committed to the tender and later to the contract, we understood that you could and would design and manufacture a "fit for purpose body", and we think that it was and remains your responsibility to do so. If there had been some understanding regarding the sharing of the design and manufacturing risk, this would have represented a major change in the normal position between us. If we had been going to assume a share of your risk, there would also have been included in the document recording such a change, an understanding about the other elements of risk associated with that deal and usually accepted entirely by the Dealer, eg the exchange risk.

392 The respondent's submitted that in addressing the Cadia dispute, it was not a question of who was right or wrong but rather how the applicant's conducted themselves when it came to rectifying the problem. I do not entirely agree. Whilst it is most relevant to consider the applicants' conduct during the rectification negotiations - and I propose to do so shortly - it is also relevant to consider the causes of the dispute. If one party makes a claim, involving as it did a large sum of money, it is relevant, when considering the other party's reaction to the claim, to consider whether the claim was reasonable.

393 The underlying cause of the dispute, it seems to me, was that both the first applicant and first respondent were so anxious to secure the Cadia contracts that for all the talk about working closely together for that purpose, they neglected to take a truly cooperative approach. Perhaps this was symptomatic of the past relationship. The first applicant seems to have focused on the maintenance contract and did not even bother to tell the first respondent what the nature of its final quote was until after it had been tendered. If the first respondent had truly regarded the truck bodies as experimental it certainly did not tell the first applicant of that and of its expectation that the first applicant would have to assume half of the cost if the bodies failed.

394 The initial claim by the first respondent for a 50 per cent contribution by the first applicant to the cost of the replacement bodies was ill considered in the circumstances and could only be described as an inappropriate ambit claim. The making of such a claim contributed significantly to the prolongation of the settlement of the issue.

395 As to the parties' respective conduct in the rectification negotiations, a review of the evidence shows that the parties did put considerable resources, individually and collectively, into resolving the truck bodies' problem. However, it took them from August 1998 to August 1999 to resolve the issue of how to share the costs of rectifying the problem. For the first respondent's part, the evidence showed a marked and unreasonable reluctance to take responsibility for the poor design of the truck bodies. For the first applicant's part the evidence showed a refusal to accept that it had erred in respect of its quote relating to maintenance costs. To this extent both parties contributed to the Cadia dispute and its fallout.

396 In the result, however, the Cadia dispute did not provide grounds for the respondents to conclude that the relationship with the applicants had irretrievably broken down. An objective analysis of the dispute leads inevitably to the conclusion that the first respondent did not have clean hands. Furthermore, Mr Nitto said that by the end of 1998, having regard to Cadia and other issues, he had come to the conclusion that, in effect the relationship had no future and he intended to recommend termination. Mr Nitto does not appear to have had much involvement in the Cadia dispute and his conclusion about Cadia appears to rely on the advice of Mr Mason-Jefferies who told Mr Nitto in September or October 1998 that the problem with Gough & Gilmour and the Cadia trucks looked like it was "going to be a long, drawn out process." Mr Mason-Jefferies made these observations not long after Caterpillar made its initial claim for a 50/50 split on the cost of rectification and whilst Gough & Gilmour was still in the process of working out what its share of the costs might be. Mr Nitto, therefore, came to the decision to recommend termination, based on consideration of issues including Cadia, before Mr Gough's conduct at the meeting on 11 May 1999 came to Mr Nitto's attention and whilst negotiations regarding cost sharing was still in a relatively early stage. The fact that Caterpillar had made a claim on the first applicant in August 1998 regarding the sharing of costs and that the applicants had not agreed with that claim by September or October 1998, does not justify a conclusion on the respondents' part that the applicants were being so uncooperative, aggressive and adversarial as to justify the taking of steps to end the relationship.

397 It must be said, however, that none of this excuses the conduct of Mr Gough during the meeting of 11 May 1999. I do not regard Mr Langmore as a person overly sensitive to criticism, and taking into account Mr Langmore's penchant for hyperbole, I accept that he found the meeting on 11 May 1999 to be quite offensive to his sense of what is reasonable and proper behaviour. It is understandable that Mr Langmore would have taken the view that after working hard to improve the relationship between Gough & Gilmour and Caterpillar, then being affronted in the manner he described on 11 May by a person he thought to be a good friend, that Mr Langmore might consider that "the relationship had broken down irretrievably."

398 Whilst I consider that the Cadia dispute was used to an extent as ex post facto justification for the decision to terminate the relationship, especially given that the dispute did not rate a mention in the March 1999 report, Mr Gough's conduct at the 11 May meeting only served to confirm in the minds of the respondents' executives that Mr Gough continued to be a very difficult individual to deal with and that their decision to terminate the relationship was correct.

399 As I have already indicated, the first respondent's conduct contributed significantly to the seriousness of the Cadia dispute and to some degree justified an angry response from Mr Gough. If his behaviour at the meeting on 11 May had been an isolated incident it would have been understandable. But his conduct was indicative of a more deep-seated malaise affecting the relationship which, in my opinion, had as one of its primary causes a lack of respect by the applicants for the first respondent and its officers. Consideration of Nitto's decision in 1998 to recommend change of dealer

400 It may be seen from the foregoing lengthy analysis that Mr Nitto's decision, taken towards the end of 1998, to recommend to the second respondent that there needed to be a change in the dealer for New South Wales and the Australian Capital Territory, was said to have been influenced by six main considerations:

1. His experience as managing director of the first respondent in dealing with the applicants since 1991. 2) The TEPS dispute. 3) The RPI dispute. 4) The Cadia dispute. 5) Mr Langmore's views regarding the difficult working relationship between the applicants and the first respondent. 6) Mr Barrett's views about the relationship.

401 As to the three disputes that figured prominently in Mr Nitto's decision to recommend a change of dealer, a distinct pattern emerges. That is, in each case the first respondent contributed in a significant way to the dispute occurring in the first place. In each case, the response of the applicants was characteristically combative and indicative of a lack of trust and respect for the first respondent.

402 Despite the applicants' adversarial stance in each of the disputes, an objective consideration of all of the circumstances does not support a conclusion that the applicants' conduct was capable of supporting a recommendation to change the dealer. This is because of the first respondent's own culpability in each of the disputes.

403 The question remains, however, whether on the basis of Mr Nitto's whole-of-relationship experience he had a proper and justifiable basis for recommending a change of dealer. The answer to this question is not one that leaps out from Mr Nitto's evidence alone but it is very apparent to me on the evidence as a whole that there was a history of relationship problems throughout much of the time the second and third respondents had been dealer principals and there was a lack of trust, respect, cooperation and open communications between the parties.

404 These problems were recognised from time to time by the second and third applicants themselves. For example, Mr Gough acknowledged that in respect of some important issues he "took an adversarial approach and dealt with Caterpillar as though it was a business adversary"; Mr Gough agreed in his evidence that there was a struggle for power underpinning the relationship; Mr Gough had been involved in a number of major battles with the first respondent; As at 6 November 1997 Mr Gough was concerned about the relationship; Mr Gough acknowledged Gough & Gilmour's relationship with Mr Beeler had been particularly strained during the TEPS dispute in 1997; Mr Gough understood why Mr Nitto considered him to be "extremely difficult to deal with" regarding the RPI issue; Mr Gilmour agreed that in early 1995 the relationship was not good and it needed a new district manager at least, to improve it; Mr Gilmour had heard Mr Gough say from time to time that the relationship was incredibly poor; Mr Gilmour agreed there was a basis to the comment in the 1997 report that there was a lack of respect in the Caterpillar/Gough & Gilmour relationship and that there was also some basis to Mr Nitto's statement that there was a lack of mutual trust and confidence between the parties; Mr Gilmour agreed that Mr Wickert's 1998 report focused attention on some very serious relationship problems that Gough & Gilmour were having with Caterpillar and that these problems were not new but had been around for some time.

405 Whilst it was accepted by the applicants that they did express views about the poor state of relationships, these were episodic and not meant to be taken as an acknowledgement of a continuing or recurring relationship problem. I disagree with this submission. The applicants could not have failed to know and understand that their relationship with the first respondent was one characterised throughout much of its term by tension and a lack of trust, respect and cooperation. The applicants' persistent denial of this flies in the face of reality and is not to be believed.

406 I have not canvassed all of the evidence going to the relationship between the respondents and the applicants but I am satisfied that notwithstanding the first respondent's culpability in the TEPS, RPI and Cadia disputes, the major contributors to the poor state of the relationship were the applicants. I consider that, ultimately, Mr Nitto was fairly entitled to take the decision to recommend a change in the dealer for New South Wales and the ACT. I have come to this conclusion on the following bases:

1. The second applicant was the dominant personality with whom the first respondent was required to deal with in the principal/dealer relationship. 2) The second applicant's influence and authority over the first applicant was pervasive; any dealings by the first respondent with the first applicant were invariably subject to the dominating influence and authority of the second applicant. 3) The influence and authority of the second applicant also dominated the third applicant. 4) Mutual cooperation, trust, confidence and respect were fundamentally important elements in the relationship between the first respondent and the applicants. 5) The second applicant conducted himself in such a manner that it demonstrated a sustained lack of cooperation with, and trust and respect for, the first respondent. 6) The second applicant's conduct and adversarial attitude towards the first respondent placed a continuing strain on the relationship between the applicants and the first respondent. 7) The strained relationship between the first respondent and the applicants was not occasional as one might expect in a normal business relationship but was a constantly recurring theme throughout much of the period of the relationship. 8) Whilst the first respondent contributed to the poor state of the relationship by its conduct and flawed policies and procedures in the TEPS, RPI and Cadia disputes, it did not display by its conduct an ongoing and wilful disregard for the importance of cooperation, trust, confidence and respect in the relationship, such disregard being characteristic of the applicants' conduct. 9) The first respondent had proper grounds for coming to the view that its relationship with the applicants lacked mutual trust and confidence. 10) There were no assurances given by the respondents to the applicants that were inconsistent with the first respondent's right to terminate the dealership agreements without cause.

407 It is appropriate at this point to deal with the applicants' contentions that the true reason for moving against them was the first respondent's desire to rationalise the number of dealers in Australia with "the proper inference being that the reliance by Barrett and Nitto on the RPI dispute and the Cadia dispute (and Langmore's apparent views about the relationship at the time) was an ex post facto reconstruction of events." It was further submitted that given the first respondent's desire to rationalise, there was only a small window of opportunity that presented itself in about March 1999. In this respect, the applicants submitted: As to the timing of the move on the Applicants, the Court will note two things, namely: (i) Fites retired as Chairman of the Second Respondent in February 1999, so any concern that he might not support a move on the Applicants was removed; and, even more significantly;

(ii) Nitto, who was both a supporter of dealer rationalisation and of the Stokes organisation (but not of the Applicants) was resigning as Managing Director of the First Respondent as and from 31 March 1999. Accordingly, the "window of opportunity" to move on the Applicants all of a sudden became a small one (as it is obvious that neither Barrett nor the Stokes organisation could count on Nitto's successor, Curfman, being prepared to support any move on the Applicants). 408 As to the timing issue, if Fites may not have supported a move on the applicants how were the alleged conspirators to know that his successor, Mr Barton, would support such a move? The applicants did not explain that. As to the timing of Mr Nitto's move to Northern Ireland, there was a discussion involving Mr Nitto, Mr Barrett and Mr Owens in February 1999 regarding the difficult relationship with the applicants. Mr Owens directed Mr Nitto to put his views in writing. Mr Owens said in his evidence: During the course of my Caterpillar Australia on-site review in early 1999 before the dealer meeting in Queenstown, New Zealand, I discussed the Gough & Gilmour relationship with Dick Nitto and Kevin Barrett. During the course of those discussions each of them expressed concern about the absence of trust, co-operation and integrity in the relationship. Dick Nitto said to me that he thought the relationship was at such a point that it could not continue.

At that stage it had been announced that Dick Nitto was to take up a position as President of FG Wilson in Northern Ireland commencing at the start of April 1999 and that his successor in Australia was to be Chris Curfman. I said to Dick Nitto that if he felt that strongly about Gough & Gilmour then before he left he should put it in writing and say why he felt that the relationship should be brought to an end. He said that he would. One of the reasons I wanted this to occur was because I did not want the new Managing Director to have to devote enormous resources to deal with the issue all over again. It was a problem that had been experienced for many years and needed to be acted upon. 409 I consider Mr Owens' evidence explains the question of timing rather that the conspiracy theory posed by the applicants.

410 As to the dealer rationalisation plan, the applicants' submission may be summarised as follows: (a) The rationalisation "plan" was embarked upon in conjunction with and/or as a consequence of the encouragement and lobbying efforts made by the Stokes organisation on a regular basis between 1995 and the time at which the first respondent ultimately made the rationalisation decision; (b) There was no reason, apart from rationalisation, to ask the applicants to exit the dealership; the relationship was satisfactory and the first applicant was a performing dealer with acceptable investment levels and high profitability; (c) The applicants' departure was the first stage of a "broader dealer rationalisation plan"; (d) The respondents painted the "blackest possible picture" of the applicants via the March 1999 review in order to obtain approval from Peoria for a dealership change, because the second respondent would not have accepted a dealership change based solely upon rationalisation, inter alia, because of its policy against rationalising performing dealers; (e) Caterpillar Australia defied Caterpillar Inc by persisting in its consideration of rationalisation options; (f) In their evidence to the Court Barrett, Langmore, Nitto, Curfman and Tong all denied the existence of a rationalisation plan in spite of an abundance of clear evidence to the contrary; (g) There is evidence of the "dealer rationalisation plan" and moves to implement it in 1999; (h) Caterpillar Australia deceived Peoria by developing a rationalisation plan without its knowledge or approval, and concealed the "dealer rationalisation documents" from Peoria, so as to obtain Peoria's approval for the otherwise unfounded dealership change; (i) The rationalisation plan is evidenced by the respondents' failure to cancel only as a "last resort", including their failure to contemplate a Gough & Gilmour "improvement plan" or Gough "stepping back" from involvement in the dealership; (j) The respondents failed to provide the applicants with one or more warnings that they faced cancellation; (k) The Dealer Agreements operated unfairly because of their failure to ensure that the applicants were heard prior to the making of the cancellation decision, and because the respondents did not take other alternatives to cancellation (such as improvement plan, step back, etc).

411 The reduction of the number of Australian Caterpillar dealers was an issue that had been raised by Mr Wickert, and which Gough & Gilmour in 1992 had embraced. Wickert gave evidence that he considered dealer rationalisation to make good economic sense and he presented the idea of rationalisation in about 1993, but it was not accepted as a good idea. It was subsequently thrown up from time to time, but not accepted during Wickert's time with Caterpillar. Dealer rationalisation was a matter that had been the subject of discussion or comment on numerous other occasions.

412 The applicants asserted that the reason for the ultimate termination of their dealership was not poor performance or a poor relationship. It was submitted these were motives that were fabricated by Nitto and Barrett in particular. The real reason for termination, it was submitted, was the first respondent's desire to reduce the number of dealerships within Australia and, in this particular case, to award the New South Wales dealership to WesTrac, thereby amalgamating the Western Australian and New South Wales dealer territories.

413 Given my finding that the first respondent had proper grounds for coming to the view its relationship with the applicants lacked mutual trust and confidence and that, therefore, it was open to the first respondent to seek to change the dealer, the applicants' dealer rationalisation contentions are, I consider, seriously weakened. Even if I were to accept that the respondents had put a plan in place to reduce the number of dealers in Australia and decided that Gough & Gilmour was to be the one to go, the fact that the respondents had good grounds for selecting Gough & Gilmour gives them every right to do so. The respondents went so far as to submit that even if the Court were to find that the applicants were asked to exit the NSW dealership as a result of rationalisation for commercial or strategic reasons, there is nothing illegitimate or unfair about that and, indeed, that may well be so. In this respect, the respondents pointed to the statement in par [17] of Windeyer J's judgment in Apple Communications Limited v Optus Mobile Pty Limited [2001] NSWSC 635 as being apposite: … if a contract allows for termination for any reason then it does not seem to me to be unreasonable to terminate it for a reason unconnected with the conduct of a contracting party. If a system of operation is decided to be inappropriate, that would be a proper reason for changing that system. 414 Of course, if the respondents had engaged in some subterfuge in changing the dealership, despite the fact they may have a legitimate commercial objective in doing so, it may still amount to unfairness under s 106 of the Industrial Relations Act.

415 In any event, my view of the evidence is that whilst dealer rationalisation may have been a topical issue from time to time, it was not the motivating factor for seeking a change in the dealer for NSW and the ACT. I say that for a number of reasons. Firstly, all of the respondents' witnesses either denied, or were unaware of, the existence of a dealer rationalisation plan being the motivation to end the relationship with Gough & Gilmour: (a) Owens denied that the decision to end the relationship with Gough & Gilmour was motivated by a desire to reduce the number of dealers. He said that dealer consolidation played no part in his decision to approve the ending of the relationship with Gough & Gilmour. He also stated: "If the relationship had been a good one it would be continuing. However, if in any case a relationship is to end, then dealer numbers and distribution costs etc are considerations relevant to the appointment of the replacement dealer as was the case here"; (b) Owens said in his oral evidence that he never supported the idea of consolidating dealers with whom Caterpillar had no performance; or relationship-related problems. Caterpillar has never terminated a dealer in order to effect a rationalisation. In the April/May 1999 timeframe, Owens was aware that the first respondent was strategising on consolidation alternatives in light of the anticipated ownership transition. He did not consider Curfman and Barrett to be "jumping the gun" by strategising in April/May 1999 about what the options might be should Caterpillar move forward with an ownership change;

(c) Ramseyer stated that, in response to questions from Gough during a telephone call on 9 September 1999 as to whether it was part of Caterpillar's objective to reduce the number of dealers: "I told him that it was not the case and that we do not ask our dealers to exit because a consolidation is desirable. I did say, as is my belief, that when there is a change of dealer (either driven by an owner or a Caterpillar decision) we do always look at scenarios of consolidation and that that was something that was happening in Australia"; (d) Ramseyer stated in his affidavit that the issue of rationalisation played no part in the thinking that led to his decision to approve the recommendation that the relationship with Gough & Gilmour be brought to an end, and that his recommendation only occurred because of the relationship difficulties. He said that, in the absence of those difficulties, there would have been no issue;

(e) Ramseyer said in his oral evidence that he had no recollection of discussing consolidation with Nitto at or about the time Nitto was leaving Australia, or in late 1998 to early 1999. He believed that a decision was made to put together options for dealer consolidation in April 1999, shortly after the March 1999 report. Ramseyer told Curfman that he should review some of the options of what would happen if an exit strategy for Gough & Gilmour were to be embraced;

(f) Ramseyer in his oral evidence denied that there was a consolidation project on foot and that the removal of Gough & Gilmour was part of it. When Caterpillar decided to talk with Gough & Gilmour about their exiting the business, it started to strategise about various consolidation options. All of the consolidation options prior to 8 June 1999 involved Gough & Gilmour disappearing because it had already been decided to ask them to exit the business;

(g) Barrett gave evidence that the implementation of a rationalisation of dealers would be a huge task, requiring major study and analysis, the allocation of a number of people, and resulting in the generation of a considerable amount of documentation. Barrett has seen no such documentation;

(h) Barrett was unaware of any Caterpillar policy or practice to advance dealer consolidation proactively. However, if an opportunity arises where a dealer chooses to exit the business, Caterpillar has looked to take advantage of that to assign the dealership to an adjacent territory, or to trade off territories;

(i) Barrett denied that he and Nitto decided in early 1999, as a result of Barrett's longstanding personal opposition to Gough, that Gough & Gilmour should be the target of a dealer rationalisation project. Nor was the first respondent's rejection of the proposal of Gough stepping back related to rationalisation;

(j) Langmore said he was never aware of a consolidation project, and he was not a party to any detailed discussions after March 1999 about dealer consolidation options. Consolidation was not a " project " above and beyond the notion that, if Gough & Gilmour was going to change hands, the first respondent would offer the dealership to another Australian dealer. The first respondent was ending an unworkable relationship and then, given that it was doing so, starting to talk about a consolidation opportunity. Gough & Gilmour were not being moved out simply as a means of achieving consolidation;

(k) Mason-Jefferies said he was not aware, prior to February 1999, of any proposal to rationalise the number of Australian dealers. He was not aware of any consolidation project;

(l) Curfman said what he meant by dealer rationalisation was when a dealership is going to be exiting, a scenario has to be put together on how to handle the remaining part of the territory; the effect of a dealer leaving creates a rationalisation or distribution project. If there were no decision to change the dealership, there would be no rationalisation project;

(m) Curfman said that when he arrived in Melbourne, the decision had already been made that Gough & Gilmour had no future. As a result, it was his job to determine future distribution in the Australian territory;

(n) Tong said in his oral evidence that he did not, in the first two months of 1999, or prior thereto, have any discussions with Barrett about the need to rationalise the number of dealers in Australia. After the March 1999 report had been sent to Peoria, Tong had discussions with Barrett and Curfman about the desirability or otherwise of rationalising the number of dealers in Australia. During 1999 or 2000, Tong was aware of the existence of a dealer consolidation project, though he was not shown the details. He understood that the project was using the dealership change in New South Wales as an opportunity to reduce the number of dealers in Australia. The project did not extend further than Gough & Gilmour to the possible consolidation of other dealers within Australia. Tong said he was not aware at any stage in 1999 of a plan or project to reduce the number of dealers to two or a maximum of three.

416 For the Court to accept that the respondents set about getting rid of Gough & Gilmour in order to achieve a rationalisation of the number of Australian dealers would mean the Court would have to find that each one of the respondents' witnesses gave false evidence. The Court does not accept this was the case.

417 Secondly, the applicants asserted that in order to achieve the dealer rationalisation plan the first respondent and Mr Ramseyer had to conceal the plan from the second respondent, whose policy was not to terminate a performing dealer. As the respondents submitted on this point: The applicants' rationalisation theory is wholly inconsistent with the fact that, although the Caterpillar Inc Executive Office was aware that CofA had been looking at consolidation options, it had not authorised any consolidation "plan" or "project". That authorisation would have been necessary before any such plan or project could have been pursued. It is also inconsistent with the fact that, prior to the implementation of any such "plan" or "project", it would have been necessary for extensive research and analysis to have been carried out, resulting in the production of voluminous associated documentation. There was no approval, no analysis, and no voluminous documentation. Yet the applicants seek to assert that some unapproved, unanalysed, and undocumented program was what drove Caterpillar's desire to bring an end to their tenure.

The furthest that consideration of consolidation progressed was the formulation by Curfman in April 1999, with Barrett's assistance, of several high-level "what if" scenarios that might arise consequent upon a change in ownership of the New South Wales dealership. Curfman undertook this task because he saw it as a responsible managerial exercise arising from the decision, which had already been made prior to his arrival in Australia, to recommend a dealership change in NSW. Curfman's scenarios were not part of some wider dealer rationalisation plan, program or project. Ramseyer's email of 1 April 1999 to Owens makes this plain.

418 The evidence is simply not there to allow the Court to draw the inference that senior executives of the first respondent secretly conspired with Mr Ramseyer to achieve a dealer rationalisation without the second respondent being made aware of such a move.

419 Thirdly, the applicants' contentions amounted to something like this: the first respondent was keen on dealer rationalisation for a number of commercial reasons including cost savings. Moreover, Gough & Gilmour was a dealer that was too difficult to deal with and given the esteem in which the first respondent held WesTrac as a Caterpillar dealer, the NSW/ACT dealership should go to WesTrac. This would achieve two objectives, namely, the commercially sound objective of dealer consolidation/rationalisation involving cost savings and at the same time ridding the first respondent of its problem dealer. All this was to be done without the second respondent being aware of such moves. As Mr Gough said in his affidavit evidence: Any substantial reductions in distribution costs would only be achieved in Australia by the merging of contiguous dealerships. The distance between Western Australia and New South Wales is such as to minimise any such asserted reduction in distribution costs by granting the New South Wales dealership to WesTrac. 420 If what Mr Gough said was correct, the merger of the New South Wales and Western Australian dealerships would not result in any substantial saving of distribution costs. In this respect, I agree with the respondents' submission that "This detracts heavily from the applicants' assertion that the reason for their termination was CofA's objective to save costs by rationalisation." 421 I am satisfied that there was no conspiracy involving the first respondent aimed at getting rid of the applicants as the dealers in NSW/ACT in order to achieve a dealer rationalisation plan and to install WesTrac as the new dealer. Whilst dealer rationalisation was topical from time to time throughout the 1980's and 1990's it only came to the fore as an issue for serious consideration following the decision in 1999 to change dealer in NSW/ACT. The respondents' decision to change the dealer is explicable by the fact they had proper grounds for deciding that by virtue of the applicants' conduct and attitude to their relationship with the first respondent, the relationship lacked the necessary degree of mutual trust and confidence.

422 In March 1999 the first respondent submitted a report to the second respondent's executive office in Peoria. The report addressed the troubled relationship between the first respondent and the applicants but, overwhelmingly, the report focused on the performance of the first applicant in a number of operational and strategic health areas.

423 The March 1999 report was submitted in the context of a meeting of senior Caterpillar executives that had been held in February 1999 when Mr Nitto expressed his concern with the ongoing relationship difficulties between the first respondent and the applicants and was advised to put his concerns down on paper. By this time Mr Nitto had formed the opinion that the relationship had no future and should be brought to an end. 424 Mr Owens' evidence about the meeting of senior Caterpillar executives in February 1999 was as follows: During the course of my Caterpillar Australia on-site review in early 1999 before the dealer meeting in Queenstown, New Zealand, I discussed the Gough & Gilmour relationship with Dick Nitto and Kevin Barrett. During the course of those discussions each of them expressed concern about the absence of trust, co-operation and integrity in the relationship. Dick Nitto said to me that he thought the relationship was at such a point that it could not continue.

At that stage it had been announced that Dick Nitto was to take up a position as President of FG Wilson in Northern Ireland commencing at the start of April 1999 and that his successor in Australia was to be Chris Curfman. I said to Dick Nitto that if he felt that strongly about Gough & Gilmour then before he left he should put it in writing and say why he felt that the relationship should be brought to an end. He said that he would. One of the reasons I wanted this to occur was because I did not want the new Managing Director to have to devote enormous resources to deal with the issue all over again. It was a problem that had been experienced for many years and needed to be acted upon. 425 It was on the basis of this discussion that Mr Nitto proceeded to arrange for the March 1999 report to be compiled.

426 In respect of the March 1999 report, the applicants contended that:

(a) As with the 1997 Review, the 1999 Review was knowingly biased and misleading in that: (i) it was given the appearance of a balanced review, when in fact there was no attempt to give a balanced picture of performance; (ii) it failed to note the many positive achievements of the First Applicant; and (iii) many of its negative conclusions were wrong or misleading. (b) The 1999 Review continued many of the errors that existed in the 1997 Review, and took no account of the fact that Gough had, in his long meeting with Nitto in November 1997, pointed out that the 1997 Review was replete with errors. (c) The 1999 Review unconscionably relied on material contained in the 1997 Review, notwithstanding the fact that Nitto had stated in 1997 that the 1997 Review contained inaccuracies, that the slate would be wiped clean and contrary to an assurance given by Nitto that the 1997 Review would not be used to judge the First Applicant's performance. (d) The 1999 Review was deliberately prepared in that way to lay the groundwork for a decision by the Second Respondent to cancel the First Applicant. (e) While the principal authors of the 1999 Review knew at the time the 1999 Review was written that the First Applicant's performance did not form a proper basis to seek to end the relationship with the Applicants or terminate their dealership, they deliberately wrote a document that was designed to give the impression that the Applicants' performance was such to warrant termination. (f) There is no precedent for Caterpillar terminating a dealership because of the "personality" of the dealer principal. (g) The First Respondent recognised that it could not simply tell Peoria that it did not like working with Gough any more as he was too difficult and expect to gain Peoria's approval for his removal, especially if such an approach was accompanied by a fair appraisal of the First Applicant's performance throughout the years. (h) By overwhelming inference they wrote a negative performance review because they knew that the Second Respondent would not cancel a dealership on grounds other than performance grounds. (i) The First Respondent did not give the Applicants any opportunity to review and comment on the 1999 Review before it was sent to Peoria, denying them natural justice and the opportunity to point out its myriad faults. By inference, that was because the First Respondent knew it was not a fair reflection of the First Applicant's performance, and did not want to give the First Applicant an opportunity to point out its many faults. (j) The First Respondent took those unconscionable steps to encourage a decision by the Second Respondent to cancel the First Applicant, and it did that because by that date it had determined to rationalise the number of dealers in Australia so as to "achieve cost reduction and improve effectiveness of the distribution system" by "eliminating the weakest dealer".

427 On the other hand, the respondents contended that in considering the March 1999 report the central issues are: (i) Whether there were relationship difficulties, as a matter of fact, and if so, whether they were of an order which could support the conclusion expressed in the March 1999 report; and

(ii) Whether the corporate view reached by the respondents (i.e., that having lost trust and confidence in the applicants, their relationship with them could no longer continue) was formulated on a reasonable and proper basis or whether it was tainted by prejudicial and misleading information by one or more employees of the first respondent. 428 The respondents submitted that:

· The executive office in Peoria was not misled into making a decision based upon the performance and financial measures referred to in the March 1999 report; · There was a serious relationship issue that did provide a bona fide basis for ending the relationship and this was addressed in the March 1999 report; · The executive office decision to proceed with a strategy to end the relationship was not based on the operational or financial performance of the first applicant but rather on the relationship difficulties; · Whilst the March 1999 report contained some inaccuracies, it was overwhelmingly accurate; · The March 1999 report was not deliberately drafted to create a misleading impression of the first applicant's performance; · The first respondent was entitled to rely on material from the 1997 report and no assurances were given to the applicants in the form of the alleged third assurances, namely, an assurance by the first respondent to the applicants in late 1997/early 1998 that the first respondent's view was that there was no proper basis for the allegations contained in the draft 1997 report and that accordingly, the applicants did not need to respond to them, and that the matter was "closed". 429 There was a large amount of material tendered in relation to the March 1999 report and it is not my intention to canvass all of it or all of the report in this judgment. The starting point, however, in considering the March 1999 report is to acknowledge that it was written against the background of a long history of relationship difficulties between the first respondent and the applicants such that the managing director had formed the view that the relationship should come to an end.

430 The applicants submitted that contrary to the view expressed in the March 1999 report, the relationship between the applicants and the first respondent was not so bad and, indeed, it was improving into early 1999. Further, that there were significant periods where the relationship did not experience any difficulties. The applicants made reference to the performance reviews of Mr Langmore, Mr Beeler and Mr Fraser where comments were made to various effects that the relationship had improved or that it was more positive. In this respect, however, I think the respondents were correct in submitting that the continued references in the performance reviews to the importance of, and need for, "building" or "rebuilding" and "improving" the relationship going back to 1993 were indicative of the need to "apply continuous and considerable efforts in an endeavour to improve it."

431 Messrs Nitto, Barrett, Tong, Mason-Jefferies, Salmon and Kreuser, who constituted the senior management team within the first respondent, signed the March 1999 report. The relationship difficulties with the applicants were referred to in the March 1999 report: After numerous attempts to improve the relationship between Gough & Gilmour and CofA with no marked signs of change, it is now time to make difficult decisions with respect to Caterpillar's dealer for New South Wales (NSW).

The outward manifestation of this embattled relationship is an unacceptable difficulty in implementing programs or change in NSW. ………

The attached report details the specifics which underscore the difficult decision CofA now feels is necessary. It is the opinion of CofA's management that the differences between CofA and Gough & Gilmour are so fundamental and irreconcilable that a change needs to be made in the assigned dealer for NSW…

432 In a covering letter to the report dated 26 March 1999, Mr Nitto also referred to the relationship problems as follows: The enclosed report has been developed from input from several areas within CofA. As you recall our discussions during the operational on-site review you and Jim had at CofA in late February, I thought it appropriate and necessary to summarise our views in writing.

Aside from all the operational and strategic measures outlined in this report, I truly believe this dealer and its principals represent a growing cancerous approach to our distribution and key partnership values in Australia.

In the 30+ years I've been working with dealers in the U.S. and overseas, I've never seen a relationship underpinned by as much mistrust as this one. While we don't have all the answers, nor are we perfect, we have tried on countless occasions to re-balance the relationship dynamics since it goes to the core of our partnership.

The only real interest this dealer and in particular Harcourt Gough have is self financial interest at the expense of customer value, customer satisfaction, employee satisfaction and subsidiary relations. Having looked back in history when Harcourt was the Managing Director of Gough Gough & Hamer in New Zealand, I'm frankly surprised and disturbed we rewarded his value system and business tactics by letting him have anything to do with another Caterpillar dealership.

We have reached a point in my judgment, shared by the CofA management team, whereby we are seeking Executive Office approval to proceed to gain Harcourt's voluntary resignation to terminate his business relationship with Caterpillar.

During one of our last discussions with Harcourt, he made the comment that if we felt the relationship wouldn't work anymore, just let him know and he'd get out. That time has come and further we are prepared to seek his termination, should he, as usual, not mean what he said.

We have irreconcilable differences as to Harcourt's strategy, methodology, measurement and values. While I have always held out the hope that we could influence our partnership in a more positive way, as we have with other CofA dealers, his destructive methods make this possible.

Your endorsement to proceed and that of the Executive Office would be appreciated. 433 I mentioned earlier in this judgment that there was no foundation for Mr Nitto's remarks regarding Mr Gough's position in New Zealand and it was obviously designed to portray him in the poorest light. The general language used by Mr Nitto in his letter was also designed to incite a less than flattering view about the applicants and Mr Gough in particular.

434 What is missing from Mr Nitto's letter, and from the report generally, is a chronicle of the relationship problems. One would have expected that if the report were for the purpose of recommending termination based on relationship grounds, details of the relationship problems would have been incorporated in the report. For example, the first respondent's alleged poor experiences with the recent TEPS and RPI dispute and the ongoing Cadia dispute. The report does contain a short section on "Relationships" but this only describes the relationship as "marginal" - not one demanding termination.

435 The absence of any respectable chronicle of relationship problems - problems that in fact existed - supports my opinion that the March 1999 report was designed to bolster the first respondent's case for getting rid of the applicants as Caterpillar dealers by portraying a picture of a poor performing dealer. Thus, not only was it said there were relationship problems but that the first applicant was not performing well either, operationally or financially. If I am wrong about that, and performance had nothing to do with the reasons for wanting to terminate the dealership, what was the point of referring to a broad selection of aspects of the first applicant's performance at all?

436 It is difficult to understand why the first respondent found it necessary to denigrate Gough & Gilmour's performance when there existed sufficient relationship grounds to recommend a change of dealer. Perhaps it was felt there was not sufficient precedent to change a dealer on the basis of a relationship problem and some additional reason was necessary. Whilst I do not accept the applicants' submission about a dealer rationalisation plan as being the motivation for painting a black picture of the applicants in the March 1999 report, the report was unnecessary and ultimately backfired on the respondents, as I will explain.

437 The aspects of the first applicant's performance that were addressed in the report may be summarised by quoting from the report:

· New and used machine margins - Gough & Gilmour's new and used machine margins, 7% and 2% respectively, are the lowest of CofA's dealers, which average 10.3% and 6.03% respectively. · Employee satisfaction/turnover - Although Gough & Gilmour have implemented a selective employee satisfaction focus group, employee satisfaction continues to be a potential concern, given the staff turnover", and that there "had been a 50% turnover of Area Managers in the 12 months prior to March 1999. · Customer satisfaction and feedback - The latest survey of customer satisfaction in NSW revealed both an alarming trend towards dissatisfied customers, and absolute measures which are unacceptable by Caterpillar standards. · Parts performance and inventory stocking practices - Gough & Gilmour parts operation is driven by avoiding costs, irrespective of the consequences to customer satisfaction. Customers have been asked to wait two days for part, allowing the dealer to avoid emergency freight charges (refer Appendix C, Jim Callaghan's memo). CofA has modified the emergency freight program to avoid misuse by Gough & Gilmour. Despite this dramatic action, the dealer continues to manipulate the revised system to a point where CofA is now considering removing G&G from the program entirely. Unfortunately, such action will also penalise Caterpillar customers in NSW. The dealer very much envisages their operations feeding from Caterpillar stock, rather than carrying appropriate parts inventories to facilitate their customers requirements. Emergency stock, including x orders is 34.27%. Only five of Gough & Gilmour's branches meet CofA's targeted service fill, their main facility in Parramatta fails to meet the benchmark (86%) with a level of 77.3% stock on hand. · Product problem management - Gough & Gilmour do not take a proactive stance on the application of PSP's to represent value to users in NSW. PSP's are typically applied after failure, in a manner to share cost, rather than a candid approach based on application to restore intended value. · Warranty claims processing - Warranty processing training was initiated at Gough & Gilmour in September 1998 to rectify a high error rate. Despite initial improvements, performance is steadily declining to historically low levels; characterised by high adjustment rates and slow document presentation. · OEM Support Update - The three east coast dealers cover 80% of the truck engine market with Gough & Gilmour the largest with 36%. G&G continue to have the lowest PINS of these three dealers at 15% versus average of 19%. Kenworth is market leader and our main dealer (60% of sales), of the main dealers G&G's territory represents the lowest PINS at Kenworth @ 41% versus and average of 45%. With the largest resident opportunity (approx 33%) of Cat truck engines and the largest transport opportunity (approx 55%), Gough & Gilmour remain the only dealer to not have a truck dyno. … Gough & Gilmour have completed rebuilding the TEPS network (the last dealer to do so). It is becoming apparent now that insufficient training and administration of these TEPS dealers will clearly lead to a repeat of the 1995 breakdown of the TEPS system. · Financial Status - Gough & Gilmour is currently ranked the lowest in profitability among the five Australian dealers (see chart below). · Financial Strength - Gough & Gilmour's excess borrowing capacity of A$20 million to A$30 million will "be consumed by the potential new working capital requirement. This will lead Gough & Gilmour with no capacity to fund business growth… 438 On any objective view of the March 1999 report it paints a negative picture of Gough & Gilmour's performance. Nevertheless, despite some equivocation on the matter, Mr Nitto denied that the March 1999 report was created to convey the view that Gough & Gilmour was a poor performing dealer. His evidence was that the report was designed, to the extent possible, to create a fair and balanced view of the dealership, in terms of all the facts as the first respondent's management team perceived them. Mr Barrett's evidence was that the areas of performance which were highlighted in the report were to indicate where incompatibility [between the two organisations] was manifesting itself in Gough & Gilmour's business "from the end point and the customers' point of view".

439 It could not be said that the March 1999 report was designed to "create a fair and balanced view" of the applicants' dealership. The point of the report was to state a case for terminating the dealership and was written with that objective in mind. If a report on a dealership is meant to be fair and balanced it is hardly likely to refer to the dealer principals as representing "a growing cancerous approach".

440 In so far as Mr Barrett's evidence is concerned, that the performance areas referred to in the report reflected the impact on the business of relationship difficulties, is it said, for example, that because the first respondent found Mr Gough impossible to deal with this resulted in a high labour turnover within the first applicant? I think such a connection is tenuous at best. If one were to accept Mr Barrett's evidence on this point then what it amounts to is that the relationship difficulties were having a deleterious effect on the dealership and that it was performing poorly in the areas referred to in the report. That is, in all of the areas referred to (new and used machine gross margins; customer satisfaction; employee turnover; PINS; parts performance and inventory practices; product problem management; warranty claims processing; OEM support; and, profitability and financial strength), Gough & Gilmour was a poor performing dealer because of relationship difficulties. I do not find that to be a convincing proposition.

441 I do not consider there is any real doubt that in submitting the March 1999 report to the executive office in Peoria, the first respondent was seeking to portray Gough & Gilmour as a poor performing dealer as well as a dealer that was very difficult, if not impossible, to deal with. That being so, it does raise the question of the credibility of Mr Nitto and Mr Barrett, both who denied that the purpose of the report was to convey the impression of poor performance. I do not believe their evidence on this point. Furthermore, the March 1999 report reveals a basic inconsistency in the respondents' position: on the one hand it is submitted that Gough & Gilmour was not a poor performing dealer and that the dealership was not sought to be terminated on that ground. On the other hand, the first respondent compiled a report obviously designed to give the impression of a poor performing dealer thereby warranting a change in the dealer.

442 Given the deliberately negative focus of the March 1999 report, it could not be regarded as a fair and balanced analysis of Gough & Gilmour's performance. In this respect the applicants referred to evidence of positive performance that, despite the fact that 1998 was a poor year for the dealership, could have been included in a balanced report. This included:

· The First Applicant had good PINS in specific key areas. · The First Applicant had very high agricultural sales. The First Applicant was the second highest seller of agricultural equipment in the world and the highest outside of the United States of America. · The First Applicant used equipment volume of sales and profitability had doubled over historical levels and that performance should continue. · The First Applicant overall had good levels of investment. · The First Applicant had established an excellent branch network. · The First Applicant was continuing to invest in new facilities throughout the territory, having opened in 1998 and 1999 two substantially improved branches at Grafton and Albury and were then planning a major addition to its Hunter Valley store. · The First Applicant had a strong commitment to an apprenticeship program. · The First Applicant consistently won Caterpillar Financial Australia Limited awards, namely the "Finance Leader PODD Achievement" for highest percentage of deals done through Caterpillar Financial and the "Finance Leader Volume Achievement" awards for most dollar volume put through Caterpillar Financial and had a very good relationship with Caterpillar Financial. 443 Additionally, the applicants submitted that the 1999 report failed to note a number of matters concerning the performance in the 1996 and 1997 years, which would have been relevant in assessing the overall performance of the first applicant as a dealer at that time, namely:

· The financial strength of the first applicant had improved in 1997 and the immediately preceding period. · The first applicant had enjoyed record total sales in 1996 and 1997, and in the 12 months to 30 June 1997. · Sales gross profit and parts gross profits were at or above the first respondent averages in 1996 and 1997. · Profitability in used equipment and service had increased in the second half of 1996 and both were well ahead of budget. · The first applicant's customer satisfaction surveys in 1995/6 indicated customers were happier with the first applicant. · The first applicant's truck engine customers were more satisfied than the national average as recorded in a survey conducted in 1997. · The first applicant was one of the top ten dealers worldwide for the sale of oil.

444 Given that the report was not balanced, it could not be described as fair even if, in material respects, it was largely accurate - a matter strongly contested by the applicants. The respondents submitted, however, "the CofA management did not intend it (the report) to be a total evaluation of Gough & Gilmour's overall performance as a dealership". The report, however, does not carry any qualification to this effect and any reasonable person reading the report could only gain a negative impression as to the dealership's performance.

445 It was further submitted by the respondents that even if every word of the report was inaccurate it would be of no consequence because it played no part in the executive office's thinking or decision making regarding the termination of the dealership and that "it had been made plain to the Executive Office that CofA's recommendation that the relationship be brought to an end was not based upon financial acumen, level of investment or performance issues." If that were the case, one can only ask again, why so much effort was put into a report regarding the performance of the dealership?

446 As to the submission that the executive office paid no regard to the performance of the applicants in coming to a decision to end the relationship, such a submission, in my opinion, is untenable. The March 1999 report was compiled following a request by Mr Owens and Mr Ramseyer in February 1999 for Mr Nitto to put his views in writing. One would expect that Mr Nitto would have done what he was asked to do and not go off on a frolic of his own. Given the report is about performance it is reasonable to infer that Mr Nitto was asked to express his view about the whole of the dealership including its performance.

447 Mr Owens gave evidence that he read the report and in doing so trusted those who prepared it and believed the contents of the report to be correct. Indeed, Mr Owens accepted that the March 1999 report was "substantially true." It beggars belief that Mr Owens would not have been influenced by the report or that he would not have taken it into consideration in deciding to authorise Mr Curfman to approach Mr Gough in June 1999 with a view to getting him to sell the dealership business and, in September 2000, in deciding to cancel the dealership. Given the entirely negative focus of the report, Mr Owens could not fail to have gained the impression that Gough & Gilmour was a poor performing dealer. Moreover, Mr Owens would also have been influenced by the separate negative reports he received from the first respondent regarding the RPI and Cadia disputes. For example, he said the RPI dispute took too long to resolve. But it was the first respondent's flawed policies and procedures that contributed to the RPI dispute. As for the Cadia dispute, it too was attributable in part to the first respondent's conduct.

448 Could it be said that the impression of Gough & Gilmour as a poor performing dealer was correct? The 1998-year, in terms of Gough & Gilmour's profit performance, was a poor one. Further, there were legitimate criticisms to be made of the dealership in terms of such matters as margins, labour turnover, employee satisfaction, customer satisfaction and PINS. The problem with the March 1999 report, however, is that it failed to tell the whole story by not referring to the applicant's positive achievements and by neglecting relevant performance issues in 1996 and 1997. To that extent the report was misleading, factually incorrect in a number of respects and incomplete. It was not a fair assessment of the dealership's performance.

449 Another issue of considerable importance in relation to the March 1999 report is the submission by the applicants that contrary to assurances given by Mr Nitto to Mr Gough in December 1997, Mr Nitto allowed material from the 1997 review of the Gough & Gilmour dealership to be used in compiling the 1999 report. These assurances constitute the alleged third assurance in the third further amended summons for relief.

450 In 1997 the first respondent carried out a review of the first applicant's performance. Mr Nitto sought a meeting with Mr Gough in November 1997 to discuss a draft report on the review. Mr Gough complained that: the draft report contained a large number of factual inaccuracies; failed to recognise any of the dealership's achievements; and, gave a seriously biased view of the dealership. In a letter responding to Mr Gough's criticisms dated 12 December 1997, Mr Nitto accepted Mr Gough's view that the report contained some inaccuracies. Mr Nitto went on to say in the letter "I have no intention of looking backward to the past and have accordingly, following my return from Sydney, eliminated the report as a basis of measurement."

451 The 1999 report drew on material from the 1997 report. Indeed, it could be said that parts of the 1999 report (comparative tables in particular) were an updated version of the 1997 report. When cross-examined about the apparent about-face, Mr Nitto said he had changed his mind about using the 1997 report. The following exchange took place: Q. It would be a fair characterisation that what you are giving to Mr Gough at this time was an assurance that this report would not be used for dealership measurement purposes; that is true, isn't it? A. Yes. Q. And you reneged on that assurance, didn't you? A. No, I changed my mind in December; November, December. … Q. When you say November, December, you changed your mind a year later, in terms of using the 1997 Report as a measurement tool for the dealership; correct? A. Because the issues were still current, correct. Q. And you didn't think it was appropriate, given the assurance you had given, to go back to Mr Gough to enable him an opportunity to comment upon that report in a more fulsome way; correct? A. That's correct. 452 I consider that it was open to Mr Gough to assume that, in the face of his objections, the first respondent would no longer use the 1997 Report as a basis for measuring the dealership's performance. The use of the 1997 material in the 1999 report was undeniably for the purpose of making a statement about the first applicant's performance. It is clear to me that in allowing the 1997 material to be used in compiling the 1999 report, Mr Nitto disregarded his undertaking to Mr Gough and did so without informing Mr Gough that he did not intend to observe his undertaking. The consequence of this action on the part of Mr Nitto is that it may be assumed that he did not agree with Mr Gough that the 1997 Report was flawed or inaccurate but that in 1997 he was not prepared to thrash the matter out with Mr Gough. Nevertheless, Mr Nitto allowed Mr Gough to believe the slate had been wiped clean and there would be a new beginning. The alternative scenario is that Mr Nitto accepted the report was inaccurate and on that basis eliminated the report for measurement purposes. In 1999, however, he resurrected the 1997 Report and used it to compile the 1999 Report knowing it was at least in part inaccurate and knowing he had undertaken not to use it for performance measurement purposes. Whichever scenario is correct Mr Nitto misled Mr Gough.

453 I have already found that Mr Nitto found Mr Gough a difficult person to deal with. Probably this was the reason that Mr Nitto decided that the process of going through the 1997 report line by line with Mr Gough would be a wasted exercise because Mr Nitto believed it was unlikely, on Mr Gough's form, that he would accept the validity of the report. Mr Nitto consequently took the easy way out, which is characteristic to some extent of the history of the first respondent's dealing with Gough & Gilmour. In this respect it could be said Mr Gough had the first respondent bluffed. The problem with taking the easy way out over such a long period is that when it came to the point where the senior executives of the first respondent felt compelled to move to end the relationship with Gough & Gilmour, they again took the easy way out by avoiding any confrontation with Mr Gough. Without any indication or notice to him, and without any advice as to the reasons, the first respondent secretly put in train the machinery to end the relationship. In providing the second respondent with material supporting its desire to end the relationship, the first respondent did so knowing the material contained matters that Mr Gough regarded as inaccurate, incomplete and biased and in respect of which Mr Gough had been given an undertaking it would not be used.

454 In my opinion, this amounted to unfair conduct on the part of the first respondent. Notwithstanding its right to terminate the dealership agreements without cause, the first respondent decided, in effect, that it did have cause and proceeded to recommend to the second respondent that on the basis of relationship problems and a report highlighting the first applicant's poor performance, there should be a change of dealer. The report was not a fair assessment of the first applicant's performance and the first respondent was aware of Mr Gough's view that the report was inaccurate, incomplete and biased and contained material that the first respondent had assured the second applicant would not be used for performance measurement purposes. The report was, nevertheless, taken into account by the second respondent in the making of the decision to change the dealer. No attempt was made by the second respondent to check the accuracy or veracity of the report. Consequently, the second respondent made its decision to proceed with a change of dealer based at least in part on a report that was unfair and in respect of which the applicants had been denied the opportunity of commenting. IMPROVEMENT PLAN; STEP BACK OPTION

455 This raises the question of the alternatives open to the respondents, other than the course they did take, of moving against the applicants without the applicants' knowledge. In this respect, the applicants' submitted that the respondents failed to adhere to their policy of "termination only as a last resort" in that they failed to seek to implement an "improvement plan" or a "step back option" rather than resort to terminating the relationship and this amounted to unfairness.

456 As to an "improvement plan" to address the relationship problem the respondents submitted What type of "improvement plan" could address Gough's "pathological suspicion" of virtually every officer of CofA and his self-confessed "distinct dislike" of Barrett? What type of improvement plan could succeed where the best efforts of successive talented district managers failed? What type of improvement plan could succeed where every attempt made by CofA to discuss the problems in the relationship was met by vehement denial, attacks upon personalities, and the creation of documents (such as the disturbing "Struggle for Power" document) which could only serve to further destroy the relationship? In particular, what sort of improvement plan could be effective in light of Gough & Gilmour's incorrigible and defiant stance to their relationship with Caterpillar … 457 Whilst I acknowledge the difficulties confronting the respondents given the history of the relationship, I adhere to my view that the respondents took the easy way out. If the respondents had put together a dossier on the relationship and other problems they had encountered over the history of their relationship with the applicants and which was capable of withstanding independent scrutiny, together with a realistic plan as to how relationships might be improved, the respondents would have established a proper foundation for moving against the applicants if the need arose.

458 The dossier and plan could have been provided to the applicants with an ultimatum that unless the relationship improved in line with the plan, a recommendation would be made to Peoria to terminate the relationship. Having heard all of the evidence I can imagine that the second applicant, in particular, would have challenged, to the point of exasperation, both the dossier and the improvement plan. Nevertheless, with sufficient resolve and in the context of a real threat to end the relationship, the relevant issues causing concern for the first respondent could have been addressed and the applicants left in no doubt as to their tenuous position.

459 It might be argued that in the light of their right to terminate without cause it was quite unnecessary for the respondents to go to the trouble of preparing a relationship dossier and proposing an improvement plan. I note that notwithstanding the right to terminate without cause the first respondent, nevertheless, went to the trouble of preparing a report on the first applicant's performance in order to justify the termination. In any event, I consider it is clear from the evidence that Caterpillar's policy relating to termination, notwithstanding its right to terminate without cause on 90 days' notice, is that it is a "last resort" measure and that dealers are given every reasonable opportunity of remaining as a Caterpillar dealer. Before putting in train the machinery to end the relationship it was incumbent on the first respondent to at least give notice of its intention to do so, especially, as the applicants submitted, "given the often life-long commitment of dealer principals to their dealership businesses and the significant number of employees and external contractors/suppliers whose livelihoods depend upon the continuation of the dealership relationships/contracts". Moreover, in hindsight it would have been a less disruptive, less distracting and no doubt a less distressing option to the course that matters ultimately took.

460 It might be contended that the second and third applicants were given their warning by Mr Owens at the dealer principal meeting in Queenstown in February 1999 and to some extent that is correct. But I do not consider that the evidence of what was said at Queenstown amounted to a final warning or ultimatum to the applicants of the nature discussed in the previous paragraph.

461 The applicants also submitted that rather than moving to terminate the dealership it would have been open to the respondents to allow Mr Gough to "step back" from his day to day management role in the dealership and allow someone else to manage the business, either Mr Gilmour, for example, or a general manager regarded by Caterpillar as suitable for the role. As the respondents submitted, given the strength and dominance of Gough's personality, and his overwhelming majority shareholding in the dealership, it is difficult to accept the practicability of such a proposal.

462 The respondents referred to the evidence of Langmore who, it was submitted, as Gough's once close personal friend, may be presumed to have a degree of insight into Gough's likely approach: Q. You were asked some questions this morning about the position of Mr Gough stepping back. You said you didn't view it as possible and you were asked why; you said based on your knowledge of Harcourt Gough and his personality. What was it about that that made you believe that he wouldn't in fact step back even if he said he would? A. Just, you know, he wouldn't turn over control of a business that he owned 90 per cent of to someone else and then just simply have nothing to do with it when all of his wealth was tied up in the business and let Tony run the thing. He wouldn't do that irrespective of what he might have said in response to a suggestion along those lines. Q. You made reference to part of it being based upon his personality. What do you say your view was based on so far as personality was concerned? A. Just that, you know, he had a very deep desire to control things, particularly control his business.

463 I agree with the respondents that it is difficult to see how Mr Gough, in light of his exhortations to others to "stay out of my business", would be able himself to "stay out of his own business" in the event that a step back plan were to be attempted.

464 I accept the respondents' contentions that the "step back" option was not reasonably practicable in the circumstances.

465 On 8 June 1999 the managing director of the first respondent, who by this time was Chris Curfman, met with Mr Gough at the Ritz Carlton Hotel in Sydney and on Mr Curfman's affidavit evidence the following occurred: The meeting lasted about two hours. At the outset we exchanged pleasantries and I said that I had a serious issue I needed to discuss with Gough and I thanked him for his time and thanked him for coming at short notice. The conversation was to the following effect. I said that I had just returned from Peoria and Hong Kong where I met with Ramseyer and Owens. I said I wanted to discuss the situation, which the Executive Office was supporting, about the breakdown in the relationship. I said that it was a difficult discussion but it was long overdue and that it was about Caterpillar and Gough & Gilmour's relationship. I said that there was no basis upon which Caterpillar could go forward and that we were 180 degrees apart and that there was no basis for a future relationship between the two companies.

466 An appropriate starting point for examining the events that led up to the meeting on 8 June 1999 is the on-site review that occurred in February 1999 between Owens, Nitto and Barrett where Mr Nitto said to Owens that he thought the relationship was at such a point that it could not continue. Consequently, Mr Owens said to Mr Nitto that if he felt that strongly about Gough & Gilmour he should put it in writing and say why he felt that the relationship should be brought to an end. Mr Nitto did so in the form of the March 1999 review and his covering letter, which is set out at par [432] of this judgment.

467 A day or so after the on-site review, a dealer principals' meeting took place in Queenstown, New Zealand at which Mr Owens, Mr Nitto and Messrs Gough and Gilmour were present. At that meeting, Owens discussed the RPI dispute with Gough and Gilmour. He also met privately with them and told them that they needed to understand the gravity of the situation and that:

· he was extremely concerned about the relationship; · the relationship with Caterpillar had reached the point where it had ruptured to such a degree that it could not continue; · if they could not restore the trust in the dealer partnership the dealership could not go on; · they needed to take drastic and immediate steps to restore a viable relationship; and · he wanted to make it clear that the Executive Office was prepared to support Caterpillar Australia. 468 Both Mr Gilmour and Mr Gough denied the substance of what Mr Owens claimed he said to them in Queenstown and it was contended in submissions for the applicants that there was an inconsistency between Owens' asserted "ruptured" remark and what he had earlier said to them in the context of the RPI dispute that "we should conclude this issue and move on." 469 I do not see any significant inconsistency in Mr Owens' remarks. I have no doubt that Mr Owens did seek to convey to Messrs Gough & Gilmour that the relationship was in serious trouble. At that point he had not made any determination as to whether the relationship should end and, in my opinion, was hopeful that the relationship would continue. It was in the latter context that the RPI remark was made.

470 Mr Owens then received the March 1999 report and covering memo from Mr Nitto in which Mr Nitto sought "Executive Office approval to proceed to gain Harcourt's voluntary resignation to terminate the business relationship with Caterpillar". Mr Owens did not act on it immediately, saying that he hoped the relationship would improve. In his affidavit evidence Mr Owens said that eventually, however, he came to the view that: …it was appropriate to implement Caterpillar Australia's recommendation that attempts be made to negotiate the end of the relationship with Gough & Gilmour. I understood this would be done on the basis that Gough & Gilmour would be told that the relationship could not continue and an attempt would be made to get their agreement regarding the sale of their assets and the appointment of a new dealer. I discussed this approach with Glen Barton and he told me he was also of the view that it would be in the best interests of all the parties concerned if it proceeded in this way. I also discussed this plan with Chris Curfman and Sig Ramseyer. I told Sig Ramseyer and Chris Curfman that they could tell Gough that there was no future and seek to reach agreement concerning the sale of their assets. I thought it was in Gough & Gilmour's interests to have a managed transition rather than a termination if that could be achieved reasonably quickly - which I believed it could. 471 It would appear from the evidence that it was on 29 May 1999 that Mr Owens approved an approach by Mr Curfman to Mr Gough to obtain an agreement for the sale of the applicants' assets. In giving Mr Curfman the go-ahead it seems that Mr Owens was concerned about such an approach and that Caterpillar "needed to be very careful with how we handled Harcourt Gough". Apparently, Mr Barton had reminded Mr Owens that only the Chairman could finalise the termination of a dealer and that Mr Barton did not "want any legal issue in Sydney."

472 In his oral evidence Owens explained that although he wanted to avoid a termination if it was possible, there was an absolute need for an ownership transition and that Curfman spoke with the authority of Barton and Owens when this was explained to Gough. Mr Owens said he did not prohibit Curfman from mentioning the word "termination", but just reinforced that he was not authorised to actually terminate. Similarly, he did not forbid Curfman from saying "if you don't sell you'll be cancelled". Owens had approved Curfman pressing for the transition and telling the applicants that there was no going back. He rejected the notion that Curfman was acting without authorisation.

473 At this point the alleged fourth assurances arise for consideration. The applicants alleged that the fourth assurances were made by the respondent to the second and third applicants to the effect that, if the second and third applicants agreed to sell their shares in the first applicant: (a) the process would be conducted on an amicable and reasonable basis without duress; (b) the process would provide an opportunity for the second and third applicants to receive a fair value for the shares; (c) the respondent would assist the applicants to receive a fair value for the shares; and (d) by implication, that if no agreement for a sale at a fair value could be reached, the applicants would retain the dealership.

474 The applicants also allege that the first respondent led them to believe that unless they entered negotiations with WesTrac to sell the business, they would face cancellation of the dealership. The applicants, therefore, allege that they felt compelled to enter into negotiations to sell their shares in the first applicant.

475 In their submissions the applicants drew a distinction between the consequences that they feared if they simply refused to agree to negotiate a sale of their assets at all, and their belief as to what would occur if they agreed to participate in the sale process but, through no fault of their own, a sale did not eventuate. The applicants contended that, in the latter circumstances, they had cause to believe (by implication) that provided they negotiated in good faith and behaved reasonably in the sale process, if a sale nevertheless did not result, then they would not face cancellation of the dealership agreements.

476 The evidence upon which the applicants appear to rely in this respect are conversations between:

(a) Curfman and Gough on: · 8 June 1999; · 11 June 1999; and · 25 July 2000.

(b) Ramseyer and Gough and Gilmour on: · 17 June 1999; · 22 June 1999; · 6 July 1999; and · 28 August 1999. (c) Langmore and Gilmour on 13 August 1999; and

(d) Tong and Gough on: · four occasions in September 1999; and · 7 December 1999. 477 The respondents submitted that: …leaving aside the characterisation of the alleged statements as "assurances", it is not in dispute that: (a) the respondent wanted to see an amicable transition occur in relation to the New South Wales dealership;

(b) the respondent indicated to the applicants that it would like to see the applicants obtain fair value and would seek to assist in providing an opportunity for that to be achieved.

478 The respondents strongly disputed the suggestion that it was said or implied that if no agreement for a sale at fair value could be reached the applicants would retain the dealership.

479 I turn to consider the evidence relating to the alleged fourth assurances.

480 As I have already recounted, Mr Curfman met with Mr Gough in Sydney on 8 June 1999 and told him "there was no basis for a future relationship between the two companies". Mr Curfman said in his evidence that Mr Gough did not accept that the relationship had broken down and insisted that Gough & Gilmour was a good performing dealer. Gough said that he had heard rumours of termination. Mr Curfman said that he had no authority to terminate and that the meeting was not about termination but about agreeing to work towards a respectable sale. Mr Gough said to Curfman he may elect not to sell and asked what I was going to do if he did not sell. Curfman told him that not selling was not an option. Curfman further told Gough that Caterpillar wanted him to get a fair market value and to bring him a buyer that had financial capacity and the structure to absorb his people and business.

481 Mr Curfman stated in his affidavit evidence that: Gough said he did not believe that I had the necessary authority and I told him that I did and that we wanted to work with him. I said I would find him a buyer. He asked who that would be and I said our process for selection of the preferred dealer candidate had not started and I anticipated that it would take three to four months. Again I reinforced to Gough that this was a decision with Executive Office approval and that he needed to respect that and we needed to transition the deal out on a confidential basis. He asked me how long it would take and I told him that to find a buyer that had the capital and the resources I thought would take three to four months. I said it was my objective that the deal be put to bed by December 1999. 482 Mr Gough's recollection of the meeting with Mr Curfman ("CC") was set out in his affidavit evidence as follows: That afternoon (on 8 June 1999), I had the planned meeting with Mr Langmore and Mr Curfman. During the course of that meeting I made a note of what I regarded to be important exchanges to the extent that I was able to do so. Annexed hereto … is a true copy of the handwritten notes that I took at that time. Having used these notes to refresh my memory, my recollection of the conversation is as follows:

CC said: This is the worst job I've ever been asked to do. I don't know why it was left to me to have this discussion and why my predecessor didn't talk to you himself. I have just returned from Peoria. Peoria have made a decision, Owens, Barton and the lot, that in our opinion, based on the relationships, our future together is not a good one. We don't know where things went off course. There appears to have been a number of philosophical differences over the last five years. Our philosophies appear to be at 180 degree opposite ends of the spectrum. Relationships need to be based on trust, respect and communication. Respect has broken down both ways. We don't see a future together. There couldn't be, for you personally, a more advantageous time to get out of this business. I sense a level of frustration throughout our organisations, which I haven't seen in all the years I have been in dealer administration. John is here because you don't have a stronger advocate. But he wouldn't be here if he didn't support this position. We recognise everything you have done. You have been very successful. The level of respect we have for you and your business is unmatched.

There is no reason why this should not be a very rewarding process for you financially. The alternative is not good for any of us. The decision has been made and the Executive Office is firm and is irreversible. The decision has been made that the relationship is over. It is our objective to make you the winner." I said: How long has this decision been made?" CC said: "Formally the decision was made two weeks ago, but I believe that a decision was really made some years ago." I said: "Can you say what aspect is unsatisfactory?" CC said: "I don't think there is a relationship. If we cannot get along now, in the future there is no future. If John wasn't in agreement, we wouldn't be here. The decision in Peoria is to part as amicably as we can. I need to see if I can find you a buyer. I want this to be a very positive opportunity for you." I said: "What do you believe the next move is?"

CC said: "I am proposing that I find an amicable, financially well heeled buyer of the business. It would be our intention to agree that it is time to separate, and to go our own way."

I said: "I will discuss this with Tony and our decision and response will be unanimous. Actually, I am surprised he wasn't invited today."

CC said: "I understand he is a 10% shareholder. Maybe he wishes to stay and work with the new owner?"

I said: "Does Cat have a view about potential buyers?" CC said: "No, but my preference would be to see it remain within Australia."

CC said: "It ought to be able to be done by 90 days. There (sic) ought to be possible to find a buyer who doesn't nickel and dime you to death. It ought to be all wrapped up by Christmas. What is your thought about the timeframe?"

I said: "I need to reflect on your comments before I give any response at all." 483 I consider that Mr Curfman adhered carefully to his instructions from Mr Owens; that he (Curfman) was not authorised to terminate the dealership agreements but that he made it clear that the "relationship is over" and there was no going back. It could not be said by any stretch of the imagination there was any implication in what Mr Curfman said on 8 June 1999 that, provided the applicants negotiated in good faith and behaved reasonably in the sale process, if a sale nevertheless did not result, then they would not ultimately face cancellation of the dealership agreements. 484 On 11 June 1999, Mr Gough had a telephone conversation with Mr Curfman concerning his reaction to what he had been told on 8 June 1999. Mr Gough made notes of the conversation and relied on those notes in giving his affidavit evidence. The telephone conversation consisted largely of Mr Gough disputing the allegation of lack of trust and confidence and asking for the reasons why he was being asked to sell. The conversation eventually turned to the options for Mr Gough. Mr Gough's account of the relevant parts of the conversation with Mr Curfman ("CC") were as follows: CC said: "Well, that's where we are. It's about the lack of trust, lack of respect". I said: "I don't believe there is a lack of trust". CC said: "Well, there we are. We think there is lack of trust, and you don't agree. So you see, we cannot even agree on that". I said: "My preference is to remain as a Cat dealer. It is my life. I have worked towards this for 25 years". CC said: "Well, we feel there is no way to do business long term. You have to have a relationship, and it's our opinion that one does not exist". I said: "My question, do I have an option?" CC said: "Well, you can have all the options you want, but we want to assist you to sell your shares". I said: "What are the alternatives?" CC said: "We think your best option is to ask us to find a buyer for your shares". I said: "But you can't tell me why or what has caused this". CC said: "On Tuesday I said we didn't want to get into details, or we will just end up finger-pointing. I think that finding you a buyer is really the best option. I want you to understand that the decision is firm". I said: What about Tony?" CC said: If there is a role for Tony with an incoming owner, then maybe something can be sorted out. I would just defer to you and Tony as to how he wants to . . ." He then paused and said: "Have you talked to Tony?" I said: "I have talked at length with Tony". CC said: "I don't know Tony at all. He seems nice enough. Until I understand what you want to do I cannot talk with Tony. But I must have your firm answer. I have to report to a meeting in Peoria on Monday, and I have to tell them your decision". I said: "But my preference would have been to continue as a Caterpillar Dealer". CC said: "Is that what you want me to tell them?" I said: "Yes". CC said: "Then I will. But I have to tell you that is not an option. Their decision is firm". 485 Once again, Mr Curfman made it clear to Mr Gough that "the "decision is firm" and nothing in the conversation indicated that there was the prospect that the applicants would be allowed to retain the dealership. At this stage there had been no discussion or consideration at all of what might occur if, despite reasonable behaviour by the applicants, any sale fell through. Mr Gough could have had no impression other than that the relationship was over and there was no turning back. The only implication one could draw from that is, notwithstanding that any sale might fall through, the respondents were not interested in continuing the relationship and that the respondents would continue to search for another buyer.

486 On 14 June 1999 Mr Gough phoned Mr Barton and said in his affidavit evidence that: At the conclusion of this conversation I was optimistic. I had gained the clear impression that Mr Barton had been misinformed about my desire to sell the business. However, he did not get back to me about the prospect of having a meeting or about any other matter.

487 It is not clear from the evidence but it is a reasonable inference to draw from Mr Barton's surprise about Mr Gough's unwillingness to sell that following his discussion with Mr Gough, Mr Barton subsequently had further discussions with Mr Owens. This is because on 25 July 1999 Mr Owens had a telephone discussion with Mr Ramseyer and canvassed options short of termination. These included an "improvement plan" option and the "step back option". Mr Ramseyer convinced Mr Owens that the options were not viable and Owens proceeded with the sale plan.

488 The applicants contended that the fact this discussion took place between Mr Owens and Mr Ramseyer on 25 July was evidence of the fact that Peoria had not made an irreversible decision to bring the relationship to an end and that Curfman had misled Gough on 8 and 11 June. I do not agree. In my opinion, in April or May 1999 Mr Owens had made a firm decision that the relationship had to come to an end and issued instructions to Mr Curfman accordingly. The decision, however, was not made without reservations. Understandably, Mr Owens may have wanted to reconsider his position, especially at Mr Barton's urging, and the discussion with Mr Ramseyer on 25 July confirms that was the case. The fact that Mr Owens did reconsider his decision to end the relationship is not evidence that Mr Curfman misled Mr Gough. 489 In June 1999 Mr Owens had asked Mr Ramseyer to meet with Mr Gough and discuss the sale issue. This meeting occurred on 17 June 1999 in Sydney. Gough told Ramseyer he did not want to sell his shares and that he had discussed with Barton the prospect of having a meeting. Ramseyer's response was: I don't think there would be much point in having a meeting. It is a good opportunity for you. You will do very well financially.

490 There was no assurance given in the discussion on 17 June about the applicants' ability to retain the dealership.

491 On 22 June 1999 there was a telephone conversation between Ramseyer and Gough. Mr Gough recalled the conversation in his affidavit evidence, a relevant extract of which is as follows: He said: "We feel we have not got this relationship. I think it is deeper. I have always encouraged Dick Nitto to consider where it is heading. In his last review he said he saw no improvement. It may be the best outcome. This is an opportunity to get out at a very good price. The problem is always to say what the issue is." "If I ask many people, we all have a feeling this is going to be a very rocky relationship for a long time, and in five years we will wish we had done something today. I do appreciate this means you will be separate from Caterpillar, but at least you can do very well for yourself financially."

I said: "Is there no way we can rebuild a relationship? This has been my life for 25 years. Are you really saying you see no alternative?"

He said: "I'm afraid that is what I am saying. I mean it sincerely, to help as much as I can to see you get a good price."

I said: "Glen Barton told me that no decision had been made."

He said: "That would be technically correct in that it would not be in writing yet, but it has been decided to ask you to sell." 492 There is no implication in the foregoing exchange that if no agreement for a sale at fair value could be reached, the applicants would retain the dealership. On the contrary, the implication is that the relationship was over and Caterpillar had made up its mind that the applicants were to sell the dealership.

493 The telephone conversation between Ramseyer and Gough on 6 July 1999 and the further telephone conversation between Ramseyer and Gough on 28 August 1999 also contain no references to support the implication contended for by the applicants.

494 What the applicants appear to have particularly relied upon for their contention that if no agreement for a sale at a fair value could be reached the applicants would retain the dealership, was a collection of statements by various representatives of the respondents as follows:

· "Ultimately we do hope we can achieve a change of ownership. Certainly if we do not agree with the figure you will not get a cancellation. Don't get nervous when you open the morning mail." - Ramseyer in a telephone conversation between Gough and Ramseyer undated, estimate mid-July 1999; · "Matt said that "Caterpillar executive office in Peoria stressed that this is NOT a cancellation." - Tong, being an email regarding telephone conversation between Gough and Tong dated 7 December 1999; · "More than once during the conversation Matt stressed that it was anticipated that the transaction should be amicable." - Tong, being an email regarding telephone conversation between Gough and Tong dated 7 December 1999; · "It is not like a normal situation, like trying to get a good price for the incoming dealer. In this situation we have to see you satisfied." - Tong being a file note regarding telephone conversation between Gough and Tong dated 9 December 1999; · "Not talking about termination talking about transferring a going concern." - Tong, being note of meeting between Gough and Tong dated 14 September 1999. 495 The applicants submitted that given the constant reassurances that it was not about cancellation and not about termination but that the transition was to proceed by way of "transferring a going concern", they were entitled to imply that if a transfer was not possible there would be no cancellation.

496 The applicants submitted that given the repeated reference to the contention that the transaction should be "amicable" especially when considered in conjunction with the remark "it is not like a normal situation, like trying to get a good price for the incoming dealer. In this situation we have to see you satisfied", it obviously carried with it the intention and belief that the respondents would support the applicants in achieving the price they were seeking, especially if the respondents agreed that the price was reasonable.

497 It was further submitted that: Such an agreement as to price and protection for the Applicants in the sale process to follow was designed to ensure that the Applicants would be "satisfied" . In such circumstances, the Applicants submit that they were entitled to imply from such an agreed approach that (save in circumstances where they behaved unreasonably) they would not be forced out/cancelled if the price agreed between the Applicants and the Respondents ("the price is the price") could not, ultimately, be delivered. Gough confirmed that he believed that deferring the sale was an option if the price offered was inadequate, especially considering that Gough & Gilmour was a performing dealer…

498 In my opinion none of the evidence, taken in its proper context, supports the applicants' contention that, by implication, they had been assured that if no agreement for a sale at a fair value could be reached the applicants would retain the dealership. Indeed, the contention goes against the evidence: The applicants were told on numerous occasions the relationship was over; as early as 8 June 1999 the applicants were seeking legal advice as to their options relating to termination of the dealership agreements; the applicants' solicitors were asked to give advice on the basis that Caterpillar was contemplating termination of the dealership; legal advice to the applicants was that they should cooperate in the sale price because the 90 days' clause in the dealership agreements "was either difficult or impossible to challenge"; Gilmour was told by Langmore on 13 August 1999 that if Gough & Gilmour were unable to agree on a price with the purchaser then Caterpillar would have to exercise its right to cancel the dealership agreements; the applicants' receipt of the letter from Caterpillar on 6 October 1999 seeking Gough & Gilmour's acknowledgement of Caterpillar's reservation of all of its rights pursuant to the dealership agreement and the applicants' subsequent acknowledgement; following the telephone conversation with Owens on 7 February 2000 when Gough said Owens said to him "I want to avoid a cancellation. We have to remind dealers that they don't own the distribution rights", Gough did not raise with Owens or subsequently with anyone from Caterpillar, the existence of any express or implied assurance that if a sale for fair value could not be reached, the applicants could retain the dealership; at no time during period up to and including February 2000 when the applicants said they realised cancellation was on the cards did the applicants say to the respondents they had been assured that if no agreement for a sale at a fair value could be reached the applicants would retain the dealership; and, at no time did the applicants instruct their legal advisers to write to the respondents to say that the respondents were acting contrary to assurances. Conclusion regarding the fourth assurances 499 The applicants' contention, which constitutes part of the alleged fourth assurance, namely, "by implication, that if no agreement for a sale at a fair value could be reached the applicants would retain the dealership", is not made out on the evidence.

500 As to the other elements of the alleged fourth assurance, putting aside the characterisation of "assurance", the respondents did not dispute that: (a) the respondents wanted to see an amicable transition occur in relation to the New South Wales dealership;

(b) the respondents indicated to the applicants that it would like to see the applicants obtain fair value and would seek to assist in providing an opportunity for that to be achieved.

501 I shall deal with these issues later under the heading "Sale/Exit Process".

502 It was submitted for the respondents that: (a) The applicants concealed the fact that they had sought and obtained legal advice, including advice about section 106, as early as June 1999;

(b) The applicants sought to mislead the Court, and the respondents, by actively asserting that they were not aware of that advice until October 2000, and that that lack of awareness significantly impacted upon their behaviour;

(c) But for what the applicants deride as the respondents' "pursuit of perfect discovery" (which was strongly resisted by the applicants), these matters would never have come to light;

(d) The applicants' concealment of their extensive legal advice was consistent with their long held commercial strategy to sell the dealership for an enhanced goodwill value. The applicants sought to realise that strategy by choosing to embark upon the sale process, keeping the litigation card up their sleeve as a fallback option.

(e) The litigation fallback option involved using the Courts as a commercial tool, whereby: (i) the applicants would "buy time" by instituting proceedings;

(ii) Caterpillar would be "kept busy" for years, while the applicants continued to receive profits from the dealership;

(iii) pressure would be exerted on Caterpillar (and the prospective purchaser) to increase the price paid for the dealership. 503 It was further submitted that as to the consequences of the applicants' non-disclosure, apart from the obvious adverse effect upon their credit, it was to be observed that their obtaining significant legal advice at an early stage militates strongly against the unfairness which they have asserted to have arisen out of the sale process.

504 The legal advice issue was the subject of an interlocutory judgment in these proceedings (Gough & Gilmour v Caterpillar of Australia (No. 7) [2001] NSWIRComm 147). The judgment concerned the issue of whether the respondents were entitled to access certain legal advice that the applicants might have received as to their options in the face of the respondents' requirement that the second and third applicants sell their interests in the dealership. Interlocutory Judgment No.7 provides the background to the issue I am now required to address: 35. As I understand Mr Gough's evidence it was that following the conversation with Mr Curfman on 8 June 1999, he was left with the clear impression that unless he entered into negotiations to sell the business, the first respondent would cancel the dealership agreements. At par 272 of Mr Gough's affidavit of 31 January 2001 he deposed that: It was my understanding, based on the conversations referred to above, that unless G&G entered negotiations to sell its business to a purchaser nominated by C of A, we would face the cancellation of the dealership agreement. As such, we felt we had no alternative but to enter negotiations with the potential purchaser or purchasers selected by C of A. 36. At par 383A of his affidavit, Mr Gough deposed that: During this same period [October 2000] G&G became aware, for the first time, of s 106. 37. At par 333 of his affidavit, Mr Gough deposed that he had a conversation with Mr Owens, the Chairman of the second respondent in February 2000: At the end of the conversation with Mr Owens, I was left with no doubt whatsoever that CofA expected G&G to do a deal with ACE, even if the terms offered by ACE were unreasonable, and that G&G would face cancellation unless this occurred. In other words, it was then clear to me that CofA had no intention of honouring its repeated assurances to me that G&G would only be required to sell on fair and reasonable terms and that CofA would assist G&G to achieve such an outcome. 38. At pars 128 and 129 of his affidavit of 31 January 2001 Mr Gilmour stated: On 26 October 2000, G&G was served with notices from C of A dated 25 October 2000, purporting to terminate our Sales and Service Agreement, Distribution Agreement for Engines, Parts and Service and Product Support Agreement for Engines, Parts and Service, on 90 days notice. On our instructions, our solicitors commenced these proceedings on 27 October 2000. I first learnt of s 106 of the Industrial Relations Act in mid October 2000. 39. The state of mind of the second and third applicants as to their position regarding negotiations to sell the business, is summed up at par 31 of the proposed third further amended summons, which states: The second and third applicants were led to believe by the first respondent that unless they entered negotiations with WesTrac to sell the business, they would face the cancellation of the dealership. In the circumstances, they felt they had no alternative but to enter negotiations to sell their shares in the first applicant. 40. This state of mind changed on 7 February 2000, following the conversation with Mr Owens. From then on Mr Gough believed that not only did he have no choice other than to enter negotiations to sell his shares but now he had no choice other than to sell, regardless of whether he achieved fair value, or the dealership would be cancelled.

41. Mr Jamie Robinson, a partner with Harmers Workplace Lawyers, gave evidence that on 11 June 1999 his firm raised with Mr Gilmour and other executives employed by the first applicant "the possibility pursuant to section 106 of the Industrial Relations Act (NSW) 1996 of challenging Caterpillar's stated objective of having the Second Applicant leave the dealership." There was also evidence from the second applicant that on or about 8 June 1999 Beerworth & Associates were engaged to provide advice to the applicants regarding possible remedies under trade practices legislation and Gilbert & Tobin had also been engaged to provide legal advice on termination of the dealership.

42. The respondents submitted that they are entitled to know whether the applicants were advised that they did in fact have a legal alternative to entering negotiations and what the nature of that advice was. That is, whether they had legal advice that they could (or could not) challenge what was allegedly an initial ultimatum given in June 1999 by the first respondent (whether expressed or implied) that if the applicants did not enter negotiations to sell their interests in the dealership it would be cancelled and, after February 2000, a further ultimatum that regardless of what price they received, if the applicants did not sell their interests, the dealership would be cancelled. The respondents contended that this was a critical issue, because if the applicants were aware of a legal option prior to October 2000 but chose not to exercise it, this may have implications for any findings relating to unfairness as well as to questions of compensation if this were to ultimately arise.

505 In Interlocutory Judgment No. 7 I decided that the question of the applicants' knowledge and belief as to their legal rights that they had no alternative but to sell the business was directly relevant to what the Court was required to determine. The respondents were granted access to the legal advice they sought on the basis of implied waiver of privilege.

506 The respondents now contend that the evidence in the proceedings shows that: (a) the applicants had obtained legal advice from three sets of law firms as early as June 1999;

(b) Mr Gilmour, Ms Shearman, and Ms Mitchell (Gough & Gilmour's second-in-charge legal counsel) had been advised of section 106 as early as June 1999;

(c) by 11 June 1999, Harmers (the applicants' legal advisors in the s 106 proceedings) had performed research relevant to Gough & Gilmour instituting section 106 proceedings, including cross-vesting section 106 proceedings in the Federal Court and the question of jurisdiction where the governing law of the agreement was stated to be Victorian;

(d) the applicants had "bullish" advice about their prospects of mounting a Trade Practices Act proceeding against Caterpillar as early as 16 June 1999;

(e) the applicants continued to be extensively advised throughout the period June 1999 to October 2000;

(f) the applicants had determined to institute proceedings against Caterpillar as early as August/September 2000;

(g) Mr Gough held a strategy, since at least September 1999, of endeavouring to get the best price possible, with a fallback position of instituting legal proceedings to buy him time and "keep Cat busy" for two years; and

(h) Mr Gough wanted legal advice for the purpose of using it as a negotiating tool. 507 In light of this material, the respondents submitted: (a) Shearman clearly was aware, as early as mid June 1999, of Gough & Gilmour's right, pursuant to section 106, to challenge Caterpillar's actions; (b) Gilmour also was clearly aware, as early as 11 June 1999, of that right; (c) Ms Mitchell, Shearman's second-in-charge, was clearly aware as of 11 June 1999, of that right. (Despite the fact that Mitchell was a solicitor, the applicants have discovered no notes of hers of the 11 June meeting; nor have they called her as a witness in this proceeding); (d) As a result of the preceding three sub-paragraphs, Gough & Gilmour clearly had corporate knowledge of the existence of section 106 as early as June 1999: its two in-house solicitors (one of whom was a key member of the core management team) were aware of the provision, as was one of its co-directors; (e) Harmers provided advice to a greater extent than Robinson, in his contradictory, and at times evasive evidence, was prepared to concede. In particular, why would Robinson have been "surprised" on 18 June that Shearman told him that Gough & Gilmour were not going to pursue section 106? If Harmer's advice had been minimal, and/or suggested weak prospects, there would have been no cause for surprise at Shearman's response; the response would have been expected. There could only have been surprise if Shearman, in the face of favourable and/or reasonably bullish advice, was electing to take a contrary course; (f) Despite their denials, Shearman informed Gough and Gilmour of their section 106 rights. It is inconceivable that Shearman would not have done so (in the absence of a deliberate plot by Shearman to deceive and harm her employers), particularly in circumstances where: (i) Gough & Gilmour were spending significant amounts of money in engaging three firms of lawyers, yet the applicants would have the Court believe that Shearman, their own in-house legal counsel and a core member of their management team, was aware of a further potential remedy but had not disclosed it to anybody; (ii) Gough gave evidence that he would do anything to retain the dealership, and that he wanted legal advice as quickly as he could after 8 June; and (iii) Gough, Gilmour and Shearman had discussions about what to do on many occasions from 8 June 1999 onwards. (g) The applicants' sworn evidence to the Commission in these proceedings, concerning their knowledge of section 106, is incorrect and misleading. Unfortunately for them, as a result of the respondents' "pursuit of perfect discovery", they were found out; and (h) Contrary to their assertions, the applicants did not have "no choice" but to follow the sale process; they were well aware of the possible legal remedy available to them under section 106 (and pursuant to other laws), but chose for commercial and strategic reasons to go down the path of the sale process, reserving to themselves the opportunity to institute the section 106 proceedings at a later date if they chose to. Indeed, according to Robinson's affidavit, Shearman informed him on a number of occasions that, rather than giving more thought to section 106, Gough & Gilmour were following the sale "option". The very description of that course of action as an "option", in the context of it being a reason for their asserted failure to give further consideration to section 106, completely belies the applicants' attempt to characterise it as something which was forced upon them as the only course available. The retention of this "option" was consistent with Gough's strategy of keeping Caterpillar busy for years with litigation. 508 What the respondents are asking the Court to accept is that the applicants, and Mr Gough in particular, sought and gained legal advice to the effect that s 106 of the Industrial Relations Act was an effective remedy in the face of the respondents' attempts to force them to sell their dealership. Further, that the applicants knew this advice as early as June 1999 but they chose not to immediately exercise any rights under s 106. Rather, the strategy to be pursued was one of delay and obstruction in the sale process in order to maximise their profits, with the institution of legal proceedings being the applicants' fall back position if required. The respondents contended this strategy reflected badly on the applicants' credit and militates strongly against any finding of unfairness that they assert may have arisen out of the sale process.

509 Without going to the whole of the applicants' response it does, I believe, identify a number of flaws in the respondents' argument on this issue of legal advice. The first concerns the respondents' contention that the applicants' assertion that they would have instituted proceedings in June 1999, had they known of section 106 at that stage, was inconsistent with their election in June 1999 to refrain from instituting proceedings notwithstanding that they had received "bullish" advice from Dr Beerworth on 16 June 1999 concerning Trade Practices, contractual and tortious remedies. It was also inconsistent with Gough's view, as at the time of his phone call to Barton (14 June 1999), that "current Australian law gives me strong grounds to [remain a Cat dealer]". It was submitted by the respondents that given Gough & Gilmour chose not to exercise their Trade Practices, contractual and tortious remedies immediately upon being advised of them, it was untenable for them to assert that they would have exercised their section 106 remedies immediately upon being advised of them.

510 This submission ignores the fact that Mr Williamson-Noble, Mr Gough's principal lawyer, did not agree with the "bullish" advice of Beerworth. Mr Williamson-Noble advised that: (a) there was no alternative but to enter into the sale process;

(b) there were no legal proceedings that could prevent cancellation of the dealership in the event that Caterpillar decided to exercise its rights under clause 29 of the Sales and Service Agreement and terminate the contract on 90 days' notice;

(c) the respondents were unlikely to force the applicants out on 90 days' notice provided they negotiated in good faith and so they should negotiate in good faith;

(d) the respondents could not be stopped from issuing a notice of cancellation and that such a notice would be effective to bring the relationship to an end; (e) the best approach in the circumstances was to enter into the sale process, obtain what could be obtained from that process and, to the extent to which they could show further damage, sue for the balance.

511 Given the reliance Mr Gough placed on Mr Williamson-Noble, it may be inferred that he preferred his advice to that of Dr Beerworth and it explains why the applicants did not institute legal proceedings as early as June 1999. Given this, it was not untenable, as the respondents contend, for the applicants to assert that they would have exercised their section 106 remedies immediately upon being advised of them.

512 Secondly, the respondents submitted that: …given (the Applicants) had legal advice about other possible remedies 16 months prior to October 2000 … their affidavit evidence about having 'no choice' or 'no alternative' but to enter into the sale process is entirely untruthful, even putting aside the question of section 106, given that they believed that they had other legal remedies available to them as early as June 1999.

513 As I stated above, this submission ignores the evidence in respect of the advice of Williamson-Noble. The evidence was that the legal advice given to the applicants by their principal legal advisor prior to October 2000 was that they had no real or effective choice but to enter into the sale process and they had no ability to prevent a cancellation if a cancellation notice were issued.

514 Thirdly, the respondents contended that Gough and Gilmour were not telling the truth when they said that it was in October 2000 that they first became aware that section 106 provided them with a potential remedy to avoid cancellation. Dealing with Mr Gilmour firstly, he did attend the meeting at Harmers on 11 June 1999. The purpose of the meeting was to discuss the position of executive employees of the dealership if they were terminated as a consequence of the sale of the dealership. The use of s 106 by one corporation against another was raised at the beginning of the meeting on 11 June between Michael Harmer (partner with Harmers), Jamie Robinson (partner with Harmers), Gilmour and Mitchell. Mr Gilmour gave evidence that he was distracted due to serious family issues (he had just picked up his wife from hospital and had left her at home to attend the meeting at Harmers) and the preliminary advice went "straight over his head" such that he never understood and/or remembered that Harmers was suggesting section 106 as a potential remedy for the company in the face of cancellation.

515 The respondents submitted that even if Gilmour did not fully understand section 106 it was still untruthful for him to assert in his affidavit that he first learnt of section 106 in mid-October 2000. In relation to this submission the applicants submitted: If the Respondents mean that the affidavit was wrong as a matter of fact as to when the existence of section 106 was first discussed in the presence of Gilmour, their submission is correct. However, the submission is quite wrong to suggest that Gilmour was saying something other than the truth on his oath when he stated that he first learnt of section 106 in October 2000. The Court would accept that Gilmour was not knowingly or intentionally being untruthful when he said he had no recollection of section 106 being mentioned at the meeting of 11 June 1999, a meeting that he recalled was about executive employee contracts. Gilmour was tested on this evidence in cross-examination and, on that subject as other subjects, he was a credible and honest witness. Failure to recollect some years later what was said at a meeting, particularly in the circumstances of that day (where Gilmour had gone to the meeting having just taken his wife home from hospital after having a major operation and being called upon by Shearman at the last minute to attend in her place) is no proper foundation to suggest that he was being untruthful.

516 I agree with and accept the applicants' submission on this point.

517 As to Mr Gough, he did not attend the meeting on 11 June. However, as I understand the respondents' contentions, Ms Shearman was alleged to have advised Mr Gough as early as June 1999 that s106 provided a remedy to prevent cancellation. Ms Shearman was not at the meeting either on 11 June but she would have received a report from Ms Mitchell and she did have conversations with Mr Robinson of Harmers in the days following 11 June. Those conversations did involve the potential use of s 106. That Ms Shearman knew of s 106 is evident from the fact that Mr Robinson said he had a conversation with Ms Shearman on 18 June in which he expressed surprise that the applicants were not going to pursue s 106. Further, in conversations between Mr Robinson and Ms Shearman, Ms Shearman said that Gough & Gilmour had not given any further consideration to s 106 but were "reluctantly following the sale option". Ms Shearman also advised Dr Beerworth of the s106 option.

518 Mr Gough said in his evidence that he first became aware of s 106 as a potential remedy in about October 2000 but he conceded in cross-examination that it might have been as early as July 2000 that Ms Shearman mentioned s 106. Mr Gough said, however, the reference by Ms Shearman to s 106 was "fairly vague" and he did not understand its significance.

519 Ms Shearman was not called by the applicants to give evidence in the proceedings, other than in respect of an interlocutory matter. She gave no evidence about the legal advice issue. In respect of Ms Shearman's failure to give evidence, the respondents submitted: (a) she was responsible, at a very early stage, for obtaining legal advice from a number of sources;

(b) she had expressed to Gough & Gilmour's legal advisers, on more than one occasion, that there were serious problems in the relationship;

(c) she clearly had been advised of section 106 (insofar as it enabled Gough & Gilmour to challenge Caterpillar's action) and had discussed it with Robinson on one or more occasions. On each of these occasions she informed Robinson that Gough & Gilmour had given no further thought to section 106, but had decided to "reluctantly follow the sale option". Notwithstanding Gough's evidence, she almost certainly passed that knowledge onto Gough. The only alternative is that, notwithstanding how anxious Gough was to retain his dealership by whatever legal means possible, and notwithstanding Gilmour's evidence that Shearman had turned her mind to cancellation after 8 June 1999, she (in concert with Gilmour and Mitchell) deliberately concealed from Gough her knowledge of the possible application of section 106, for a period of approximately 14 months; and (d) she had deliberately and carefully re-drafted letters of advice and letters of engagement from Harmers so as to remove reference to Caterpillar having threatened to terminate Gough & Gilmour's dealership.

It is submitted that the matters in the previous paragraph, coupled with her unexplained failure to give evidence and her obstructive and unresponsive answers on the interlocutory application, lead inexorably to an adverse Jones v Dunkel [(1959) 101 CLR 298] inference of the strongest kind, namely, that any evidence which she could have given would not have assisted the applicants' case. They also lead to serious questions about the trustworthiness of another key member of Gough & Gilmour's senior management team, with whom Caterpillar would be required to work in the event that the Court ordered a continuation of the relationship. 520 I do not consider there is much doubt that Ms Shearman understood from about June 1999 that s 106 was potentially a significant legal option and it most certainly troubles me that neither she nor Ms Mitchell were called to give evidence. If she had not understood the potential significance of s 106 then in answer to Mr Robinson's question on a number of occasions, "Have you given any further thought to s 106 proceedings?" her answer would have been something like, "What is s 106?" or "How can it help us?" not, "No, at this time we are reluctantly following the sale option." However, as Moore J pointed out in Moshirian v University of New South Wales [2002] FCA 179 at par [50]: At most, the rule in Jones v Dunkel permits an inference that such a witness' evidence would not have assisted the applicant, and that other evidence which might have been contradicted by that witness may more readily be accepted. It does not allow an inference that the witness' evidence would have been detrimental to the applicant's case … 521 Accordingly, in the absence of any direct evidence to suggest that Gough had been told by Shearman about s 106 well before October 2000, the applicants' failure to call Ms Shearman does not allow me to draw the adverse inference that the applicants did not call her because her evidence would have damaged the applicants' case by contradicting Mr Gough's testimony that he was not aware of s 106 until some time about October 2000.

522 Perhaps, as the applicants submitted, the most potent reason for accepting that Gough was not told by Shearman or anybody else prior to the latter part of 2000 about the availability of s 106 as an option for keeping the dealership, is that if he had been told of such an option he would have engaged in discussions with lawyers "so that he might personally understand the potentiality of s 106" or at the very least required a detailed advice about it. If Mr Gough had any inkling that s 106 might well have been a powerful legal remedy, in my opinion he would have been in personal contact with Harmers very early after being told by the first respondent to sell; Mr Gough was a person who had to know and understand the details of any strategy, including any legal strategy. He was not the type of person to accept advice about the complexities of a provision such as s 106 on a second hand basis, especially given its importance to retaining the dealership. Yet there is no evidence that Mr Gough met with Harmers or received detail legal advice on s 106 until October 2000. Furthermore, as the applicants submitted: …given that Gough had advice from Gilbert & Tobin that his legal options were confined to actions for compensation/damages, it is also inevitable that Gough would not have raised Harmers' view about the availability of section 106 in his discussions at that time with Williamson-Noble. Gough would then have been in the position of having received conflicting advice which he would need to resolve and there is a strong possibility that Gough would have sought to hold a meeting with both Harmers and Williamson-Noble to discuss the matter (again there are no records to suggest that any such meetings ever took place and the Gilbert & Tobin file notes make no reference to section 106 ever being discussed in any of the meetings that they held with Gough). Given his propensity for sending emails to his colleagues, friends and family members and his capacity/preparedness to express his innermost thoughts in such emails and personal letters … there is every basis to have expected that he would have told somebody in the period between June/July 1999 and September/October 2000 that he was aware of section 106 and was keeping his ability to use that section "up his sleeve" (or in his back pocket) to be used at the most appropriate point. (Again, however, there is no suggestion that he had such information in any of his emails/letters that are now before the Court and this is the case in spite of a very extensive discovery process). 523 The respondents submitted that Gough's evidence - that as at 4 August 2000 he considered he was in effect in a position where he had to accept Stokes' offer because he was unaware of section 106 - was "untruthful". The basis of this allegation was the evidence that Gough gave in cross-examination that Shearman "may have told him" about section 106 as early as July 2000. In respect of this submission I note: (a) Mr Robinson's evidence that Harmers were not called upon to provide any advice in relation to the possibility of challenging Caterpillar under s 106 until early October 2000;

(b) Harmers' fee sheets for 2000, which reveal that Harmers were doing no work in 2000 in respect of the possible cancellation of the dealership until 4 October 2000. On 4, 5, 6, 9, 10, 11 and 12 October 2000 the fee note records work being done in preparation for a meeting on 13 October 2000 at which Gough, Shearman, Potts and Danckert were present. Thereafter the fee note reveals the work done to prepare to commence proceedings, which was done on 27 October 2000.

524 If Mr Gough had heard about and understood the significance of s 106 in July 2000, at a time when the Stokes' organisation was asking for a significant reduction in the price they had earlier offered, at the very least Gough would have sought detailed advice on his options under s106. Yet there was no evidence of him or any of his associates seeking any such advice. Conclusion regarding legal advice issue

525 Whilst the failure of the applicants to call such a key figure as Ms Shearman to give evidence about the legal advice issue is a cause of considerable disquiet, on the balance of probabilities I find that the second and third applicants did not become aware of the significance of s 106 of the Industrial Relations Act until about September or October 2000.

526 The process of the sale of the second and third applicants' interests in the dealership and the manner in which the respondents sought to terminate the dealership agreements give rise to what are, possibly, the most complex factual issues in the case. These issues may be grouped under four main headings:

1. Whether the sale process was a sham because it had been pre-determined by the respondents that WesTrac would take over the dealership; 2) Whether the sale process was unfair because it limited the potential for the applicants to maximise the price for the dealership and placed the applicants in a weak bargaining position vis-a-vis WesTrac; 3) What conclusions can be drawn from the conduct of the applicants, the respondents and WesTrac during the sale negotiations; 4) Whether the respondents acted unconscionably in deciding to terminate the dealership agreements. Whether the sale process was a sham

527 The overall approach to be adopted to the sale process was that the applicants would obtain a draft or indicative valuation of the dealership; there would be discussions between the applicants and Mr Tong with a view to reaching an agreement as to value/price or at least as to an appropriate range as to value/price; and, once such agreement was reached the first respondent would find a suitable buyer with whom the applicants could negotiate.

528 Following the discussion with Mr Curfman on 8 June 1999, Mr Gough agreed to obtain a valuation of the dealership, which he did through PriceWaterhouseCoopers' (PWC) Sydney Office. Ramseyer and Langmore had dinner with Gough and Gilmour on 17 June 1999 to further discuss the issue. During the dinner, Ramseyer said that the relationship was beyond repair, notwithstanding past attempts to salvage it. He emphasised that it was Caterpillar's desire that the sale work favourably for Gough and Gilmour and requested that they value the business and provide the details to Ramseyer. Gough said he would value the business and revert to Ramseyer.

529 On 22 June 1999 Gough indicated that, at the right price, he was prepared to consider an offer for his shares. On 6 July 1999 Gough advised Ramseyer that valuation work had been done and that it would take two or three weeks. On 20 August 1999 PWC Sydney provided an indicative valuation report to the applicants that gave an indicative equity valuation range of $106.5 million to $118.4 million with an enterprise entity valuation (i.e. including debt) of $147-$159 million. PWC's report concluded that "The ultimate price which may be achievable is likely to be dependent on how the sale process is conducted and the level of confidence potential purchasers have in the longevity of the dealership rights". At about the same time Danckert sent to PWC Sydney his company valuation issues paper and set out his company total valuation ranges - being enterprise values between $94.2 million and $103.6 million.

530 On 14 September 1999 Tong met with Gough to discuss the valuation prepared by PWC. As recorded in Tong's memorandum of 14 September 1999, the valuation was based on an EBIT (Earnings Before Interest and Tax) multiple of 7 and was about $70 million higher than the best-case scenario Tong had put together. Tong and Gough agreed to meet again on 24 September to further evaluate the position. Despite PWC Sydney's valuation, Gough told Tong that "The valuation is not final but PriceWaterhouse has indicated a figure of around $157 million for net assets and goodwill. This assumes $60 million net assets and $97 million goodwill." The valuation conveyed to Mr Tong was about $40 million more than PWC's indicative valuation. It was also contrary to PWC's advice to Mr Gough that he should not make ambit claims.

531 While the applicants were proceeding with the valuation issue the first respondent was seeking to identify a candidate to take over the dealership. The applicants contended, however, that there never was any real or proper consideration of any candidate other than the Stokes' organisation and what has been suggested by the first respondent to have been "a contest" between William Adams, the other candidate to whom a prospectus was issued, and WesTrac was really a "boat race", as the outcome of that contest was well known even before it commenced.

532 The question of whether or not there was a proper contest is an important one. The applicants contended, in effect, that there was some sort of secret arrangement between the respondents and WesTrac or sham sale process whereby, as part of a dealer rationalisation process, WesTrac would take over the Gough & Gilmour dealership in return for taking on the North Eastern China dealership. This was a dealership in respect of which it was alleged the respondents had found it difficult to find someone to operate. The issue goes further than that, however, because as I understand the applicants' case it was contended that the relationship between the respondents and WesTrac was so close that they colluded in the sale process to the extent that the respondents, with WesTrac's knowledge, put pressure on the applicants to sell at the price offered by WesTrac by issuing termination notices in October 2000.

533 If it were found that the selection of WesTrac to take over the Gough & Gilmour dealership was a 'boat race', it adds credence to the applicants' contentions about collusion or secret arrangements being made between the respondents and WesTrac in the sale process.

534 The applicants submitted that the evidence supporting the 'boat race' contention was as follows:

· The Stokes' organisation had been extolling the virtues of dealer rationalisation in Australia since as early as 1995 and it is inconceivable that it would champion such a cause unless it believed that it would be the beneficiary of any such rationalisation process. · Barrett had developed a close personal (and presumably working) relationship with Jim Walker of WesTrac and agreed that he had discussions involving WesTrac at or after the February 1998 Dealer Principal Meeting in Perth. The closeness of the relationship between the First Respondent and WesTrac is also demonstrated by the fact that WesTrac was the dealer chosen for the development of "cell certification" and it was the First Respondent's joint venture partner (and only partner) for the development of the Caterpillar Institute idea. Upon being shown his Performance Review dated 1997, Beeler agreed that WesTrac was the only dealer ultimately to accept the training institute program and the most vocal advocate and supporter of dealer rationalisation was the First Respondent's Western Australian District Manager, Glen Morrison. · Barrett's Dealer Consolidation Options document dated April 1999 was put together whilst Barrett was in Perth, as is clear from his email of 14 April 1999, wherein he told Curfman that he had "today returned from a couple of successful days in Perth". · Curfman and Ramseyer talked in terms of an "Australian solution" from as early as June 1999 and indicated a firm desire and intention to move quickly so as to minimise the prospect that interested dealers and others from overseas would surface as interested potential dealer candidates. · An "Australian solution" did not, however, suggest that the first respondent would countenance any other existing Australian dealer or any other interested Australian company, as Hastings Deering (whilst interested in New South Wales) was ruled out as unsuitable from the outset for reasons that do not stand up to scrutiny and (unlike the situation in 1988) prospectuses were not circulated to potentially interested and suitable Australian companies. · Barrett's Dealer Consolidation Options document and his 8 October, 1999 "most likely" scenarios document both disclosed WesTrac as the undoubted beneficiary of the dealer rationalisation process, with the only residual issue being whether one or two of the other Australian dealer principals (Cavill and Elphinstone) would be offered a minority shareholding in a new New South Wales dealership entity owned by the Stokes organisation. · Contrary to the approach adopted in 1988 when approximately 30 prospectuses were circulated, only two prospectuses were sent out in October 1999. · Unlike the situation that prevailed in 1988, the applicants were not even permitted to negotiate with a number of different potential candidates (or even two) on a "what if"/conditional basis, i.e., what the candidate would be prepared to pay if they were appointed as the dealer. · Curfman, as Managing Director of the first respondent, made clear his unequivocal preference and support for WesTrac known even before the prospectuses were issued to WesTrac and William Adams and then again before receipt of the written submissions from the dealers. · Whilst Gammell denied it, the Stokes' organisation was advised by mid November 1999 that it was likely to succeed. 535 The applicants further submitted that:

· The reality is that apart from the denial that this was not a true contest and the assertion that it was a relatively "close contest", there is no suggestion in the contemporaneous documentary material that the outcome of the alleged contest was ever in doubt. That is, WesTrac was always going to be selected as the preferred dealer candidate and this is what happened as a matter of fact. Curfman had decided on 26 October 1999 that WesTrac would succeed. · The selection of WesTrac as the preferred dealer candidate for New South Wales was also linked to the deal done between the Stokes' organisation and Ramseyer and the first respondent for Stokes to take a dealership in the North East of China. · The analysis of the respective submissions by the candidates for the dealership does not support the conclusion in favour of WesTrac. Note, for instance, the apparent downplaying of the fact that Victoria and New South Wales were "contiguous" territories in spite of the fact that such a situation would maximise the "synergies" and cost efficiencies that were apparently driving the decision making process. Also, the WesTrac proposal was much more highly geared than the William Adams proposal. Sime Darby like WesTrac was also in the process of acquiring a China dealership and the New Caledonia acquisitions, yet Hastings' Deering China acquisition was a fact that Ramseyer allegedly relied on to rule out Hastings Deering because he felt that Sime Darby "would have to digest" the new China acquisition and New Caledonia acquisition). Furthermore, the Court will note that Dale Elphinstone apparently presented in a presumptuous manner and this was regarded as sufficiently important for Ramseyer to advise Owens in his summary of presentations by dealer candidates. · In spite of the first respondent's commitment to an "Australian solution" and its evidence that there was a relatively close and bona fide contest between WesTrac and William Adams for the New South Wales dealership, with the implication being that William Adams could have easily have won the contest given the merits of its application, the first respondent still refused to allow the applicants to negotiate even with William Adams once the negotiations with the Stokes organisation broke down.

536 The respondents submitted: … the applicants appear to proceed on an assumption or misapprehension that Caterpillar was somehow obliged or bound to open up its dealer selection process so as to give more than one party an opportunity to pitch for the dealership. It is then said that its selection process was effectively a sham because the result had been predetermined. Not only is this contention manifestly incorrect as a matter of fact, it appears to be based upon the premise that Caterpillar was in fact obliged to open the process to more than one party. This is misconceived.

537 It was further submitted by the respondents that: … if Caterpillar Australia had been of the view that, for its own commercial reasons, it wished to select one dealer for the territory without allowing others to express an interest, it would have been open for it do so. This is precisely what it did in 1988 when it decided to allow Holmes a Court the opportunity to acquire the dealerships before allowing any other person to express interest. It of course follows that had there been a plan and predetermined strategy to select WesTrac as the preferred dealer candidate, it would simply have done so. There would not have been a need to create an artificial process involving an additional candidate. It could have selected WesTrac as the preferred dealer candidate without further ado.

538 The respondents submitted that they did not simply select WesTrac as the preferred dealer: … because it made a business decision that it wanted an Australian solution and that there were two potential candidates whom it wished to offer the opportunity to express an interest in obtaining the right to represent Caterpillar in New South Wales. The choice between WesTrac and William Adams was not an easy one and it was not a charade.

539 I consider that as a candidate for the NSW/ACT dealership, WesTrac was regarded, with some reservations, in a most favourable light by the respondents but I am not prepared to find that WesTrac's appointment was a pre-determined outcome. However, even if the respondents had foregone any competitive bidding process for the dealership, and simply appointed WesTrac, I agree with the respondents that it would have been open for them to do so.

540 The applicants appear to contend, however, that the respondents went through a sham selection process in order to hide the fact that a deal had been done with WesTrac to give it the NSW/ACT dealership as part of a dealer rationalisation program and as the quid pro quo for taking on the North Eastern China dealership.

541 I have already considered the applicants' contentions regarding a secret arrangement or conspiracy between the respondents and WesTrac regarding dealer rationalisation and rejected it. Accordingly, there is no foundation for the proposition that the appointment of WesTrac to take over New South Wales and the ACT territory was pre-determined as part of an agreement to rationalise/reduce the number of Australian dealers.

542 As for the proposition that WesTrac was secretly promised the NSW/ACT dealership if it was prepared to also take up the dealership in North-Eastern China, I do not consider the evidence is sufficiently strong for me to be able to draw that inference. Australian Capital Equity Pty Ltd ("ACE") had first made it known to Caterpillar that they were interested in China at about the time they lost the Vietnamese dealership, in 1995/1996. Ramseyer first had discussions with WesTrac about the opportunities to take a dealership into China probably in 1998. WesTrac was chosen because Stokes and WesTrac management had always asked Caterpillar whether they could have more territory, particularly outside of Australia, and had made presentations for some countries before but had never been successful in their bids. In 1996 or 1997 Ramseyer had visited Stokes and asked him if he was interested in a Russian dealership. Stokes told Ramseyer he was not interested in Russia, but that Caterpillar should get back to him if anything should develop in China.

543 Barrett had no knowledge of any arrangement or deal being reached between Stokes and Caterpillar that involved Stokes taking on a China dealership on the condition that he would get NSW. Similarly, Gammell gave evidence that, to his knowledge, there was no link between the China proposal and WesTrac's interest in Gough & Gilmour; the two proposals were entirely discrete and had no linkage whatsoever. Ramseyer gave evidence that there was no connection at all between WesTrac's interest in China and its interest in Gough & Gilmour, or that there was an understanding that WesTrac would receive the NSW dealership as compensation for taking on the China dealership. Owens confirmed that China and New South Wales were entirely separate and not linked in any way and that Barrett had no role. Similarly, the first respondent had little or no involvement.

544 To accept the applicants' contentions regarding the China quid pro quo I would have to accept that Owens, Ramseyer, Curfman, Gammell and Barrett all conspired to lie under oath in relation to this issue. With some reservations arising out of my findings in relation to the "cruise ship" meeting that occurred in September 2000 and discussed later in this judgment, I do not accept that in relation to this issue there is sufficient material for me to arrive at such a damaging finding. Moreover, given the extent of discovery in this case, if there had been an agreement between the respondents and WesTrac involving China and NSW/ACT it would almost certainly have been recorded somewhere and, therefore, would have found its way into the evidence in these proceedings.

545 As for the selection process itself and the applicants' contention that it was a 'boat race', I accept the respondents' submission that the evidence shows that: (a) the selection of WesTrac as the preferred dealer candidate for NSW followed a fair, routine and transparent process involving the presentation and consideration of written and oral proposals by the two contenders; (b) the proposals were properly, fairly and carefully assessed by the Caterpillar selection team, both separately and in concert; (c) the recommendation to select WesTrac was based on legitimate considerations, which were expressed in written documents setting out the reasons for the recommendation. Whether the sale process was unfair because it limited the potential for the applicants to maximise the price for the dealership and placed the applicants in a weak bargaining position vis-a-vis WesTrac

546 Dale Elphinstone (William Adams) and Kerry Stokes (WesTrac) were identified as the potential dealer candidates to be short listed. By letter dated 6 October 1999, Caterpillar sought authority to formally approach potential dealer candidates for the purpose of informing them that the applicants were interested in negotiating a sale and introducing that person to the applicants if they were interested in pursuing such discussions. Gough & Gilmour responded on 15 October with a signed authority noting that, although their preference was still to remain a Caterpillar dealer, they were aware of their position and were prepared to conform with the requirement that they explore the possibility of a sale to see if an acceptable outcome could be achieved. They indicated that this was not reflective of any commitment to sell. However, on the right terms, they were reluctant sellers but the terms had to be acceptable.

547 A prospectus was prepared and sent to William Adams and WesTrac. A selection process then occurred resulting in the selection of WesTrac as preferred dealer candidate.

548 The applicants contended that the contract/arrangement with the respondents operated unfairly in that: … the respondents did not authorise, permit or even "encourage" "potential" dealer candidates or "serious" candidates to enter into either discussions or preliminary negotiations with the Applicants in advance of the Respondents' decision as to the selected and approved dealer candidate. That is, the Respondents refused to permit such discussions or preliminary negotiations on a "what if" basis.

549 In this respect the applicants contended that the unfairness in this approach could be summarised as follows: (a) It was in stark contrast to the approach that the respondents adopted when the Bond Corporation (as the outgoing dealer in 1988) was seeking to sell its Caterpillar dealerships in both Western Australia and New South Wales, the latter being the one ultimately acquired by the applicants, in circumstances where there was no good reason why the applicants should be treated less favourably than the Bond Corporation. Indeed, there were good reasons for the respondents to treat the applicants more favourably than the Bond Corporation, given that the applicants were established and successful dealers that were being forced out without cause; (b) The respondents: (i) by expressly indicating to other "interested" Caterpillar dealers, such as Hastings Deering, that there was, in effect, no point in their entering into negotiations with the applicants because they would not be selected as the New South Wales dealer, and; (ii) by expressly refusing the applicants' request that they be permitted to negotiate with more than one potential candidate so as to derive the benefit of a "competitive bidding" situation,

denied the applicants the opportunity to gain, from the relevant marketplace, a proper assessment as to true or fair market value for the New South Wales dealership business. (c) Furthermore, by permitting the applicants to negotiate only with the Stokes' organisation, in circumstances where the Stokes' organisation was aware from the outset that the applicants would face cancellation if they did not reach a sale agreement with the Stokes' organisation meant that the Stokes' organisation could: (i) insist on the "most extensive due diligence" that Tong had ever seen; (ii) ultimately insist upon a "bargain basement" view as to goodwill (namely $50 million), comfortable in the knowledge that the applicants would be forced to take it if they wanted to avoid cancellation. That is, "fair market value" was determined by what the Stokes organisation deemed it to be; (iii) put enormous pressure on the applicants to compromise with respect to long-established net asset values (as reflected in the audited accounts) on the same basis, i.e. compromise or face the prospect of cancellation; and (iv) hold out for terms and conditions in the proposed contract for sale that reflected the position that the Stokes organisation was assuming "no risk" (whether quantifiable or otherwise) with respect to the deal. (d) The Stokes' organisation was, in effect, put in a position where it "held all the cards" which provided it with an enormous but unfair advantage in the bargaining process. (e) The obvious advantages deliberately bestowed upon the Stokes' organisation, with the corresponding disadvantages then faced by the applicants in the sale process, necessarily resulted in the respondents reneging on clear assurances provided to the applicants during the second half of 1999, not only with respect to the question of price, but also with respect to fair terms and conditions and Caterpillar assistance in the event that the Stokes' organisation sought to drive too hard a bargain or otherwise "chisel" the price.

550 I deal firstly with the question of whether there was any unfairness arising out of the allegation that the applicants were not accorded the same opportunities in selling their interests in the dealership as was the case with Bond Corporation in 1988.

551 The respondents' general response to this allegation, apart from denying that there was any difference of treatment or opportunity, was that the first respondent had the right to determine who should be a dealer and that the applicants were well aware of Caterpillar's insistence on its right to appoint a dealer in a given territory; the applicants purchased the dealership knowing this was the case and knowing that the dealership would not necessarily go to the highest bidder. This may well be so, but it does not answer the proposition that notwithstanding the first respondent's absolute right to appoint a dealer of its choice, the first respondent provided Bond Corporation with the opportunity in 1988 of entering into discussions/preliminary negotiations with potential candidates so that a preliminary evaluation could be made as to the likelihood that a deal could be done between a particular candidate and the outgoing dealer, but a similar opportunity was not provided to the applicants in 1999.

552 It only stands to reason that if the outgoing dealer is able to have such preliminary negotiations with a number of potential candidates, the outgoing dealer is likely to gain a better price for the assets and goodwill of the dealership. It is acknowledged that Caterpillar has the ultimate right to say who will be the dealer, regardless of any preliminary negotiations between the outgoing dealer and potential candidates. However, if Caterpillar (as it did in 1988) operated on the basis of assisting the outgoing dealer to obtain a fair price and indicated that it would make the final selection of the new dealer from amongst those who were prepared to negotiate at a price at which the outgoing dealer would sell, the question must be asked whether Caterpillar adopted the same approach in 1999 and, if not, was it unfair to the applicants?

553 It is evident that in 1988 the respondents acted cooperatively with the Bond Corporation in assisting it to obtain a fair price for the dealership, such fair price to include "compensation for the extra value of an ongoing business versus starting from scratch". At the time the respondents indicated to Bond that "We'll be happy to work with you to assure you receive fair value for what your assets (some or all) are worth to the new dealer by sending the serious candidates to talk with your designee …"

554 In his evidence Mr Tong agreed with the following view of Bond Corporation as to the negotiating process and the basis for making a final selection in 1988: The agreement … that was finally reached, reflected that [the Bond Corporation] would take part in the negotiating process with all the people who had been approached by Caterpillar, as well as those who had approached [the Bond Corporation] directly, that [the Bond Corporation] would negotiate with all of the interested parties a price at which [the Bond Corporation] would sell, either the two franchises together or separately and that Caterpillar would make their final selection from amongst those [the Bond Corporation] had negotiated such an arrangement.

555 The respondents clearly did not approach the selection of a new dealer in 1999 on the basis referred to in the foregoing quote.

556 The applicants contended that they were not allowed to negotiate with various third parties on a "what if" basis because that would have been inconsistent with the respondents' dealer rationalisation objectives. I have rejected the dealer rationalisation theory. However, this does not destroy the assertion that it may have been both unfair and unconscionable for the respondents "to bestow such an obviously valuable opportunity on the Bond Corporation and yet deny the same right to the applicants", especially in circumstances where it is not in dispute that the respondents indicated to the applicants that they would like to see them obtain fair value and would seek to assist in providing an opportunity for that to be achieved.

557 It seems to me that, on the basis of their undertaking to the applicants to assist them in gaining fair value, it would have been open to the respondents to follow a similar course to that adopted with Bond in 1988 rather than, for all practical purposes, limit the applicants' dealings to just one candidate, namely, WesTrac. Bond was given a greater opportunity to explore the prospects of maximising his price than the applicants. Indeed, Bond was given the opportunity to express opinions for and against particular prospective candidates and the final recommendations as to the most suitable candidates at the time included input from the Bond Corporation.

558 The respondents submitted that: There is not and never has been an obligation upon Caterpillar to offer the right to conduct a dealership to the world at large (or any subset thereof). Similarly, there is not and never has been any obligation upon Caterpillar to expressly or implicitly suggest to the world at large (or any subset thereof) that they should negotiate with an outgoing dealer in case they are presented with an opportunity to become the new dealer in a territory undergoing change.

559 However, in 1988 the first respondent issued approximately 25 prospectuses, obviously for the purpose of maximising the prospect of getting the most suitable dealer candidate. Of course, the more candidates there are negotiating for the dealership, the more likely the outgoing dealer will maximise the price for the dealership. In 1999 the respondents issued only two prospectuses. 560 The respondents further submitted that the applicants had discussions and explored sale options with numerous other parties including Sime Darby (the owner of Hastings Deering), William Adams and Barlows. However, Sime Darby were told that they were not considered to be a suitable successor to Gough & Gilmour. Further, there is no evidence that any negotiations were held with William Adams because before that could have been realistically possible, Gough was advised on 6 December 1999 that WesTrac had been chosen as the successor. As for Barlows (a South African firm), given the respondents' desire that the successor to Gough & Gilmour should be an Australian company, there was little point in any serious negotiations taking place.

561 The fact that the applicants were limited to negotiating with just one approved candidate does not automatically mean that there was any unfairness vis-a-vis what occurred in relation to the Bond Corporation in 1988. And in this respect the respondents, for example, referred to: the advice of Millen (PWC) to the applicants that he did not think any more could be obtained from a competitive tender or any other form of sale; and, the stark contrast between the sale price offered to the applicants and the price paid by the applicants to Bond.

562 I do not consider these arguments have a great deal of merit for the reasons submitted by the applicants. Nevertheless, I think it can be said that because the applicants were, for all practical purposes, limited to negotiating with just one candidate, they did suffer a disadvantage compared to Bond. However, this disadvantage cannot be viewed in isolation. One has to consider the whole of the sale/exit process before arriving at any conclusion as to unfairness. This includes the fact that the applicants found themselves having to negotiate with only one approved candidate, namely, WesTrac (although it was Australian Capital Equity (or "ACE"), which is the Stokes' organisation's holding company that was involved in the sale negotiations with Gough & Gilmour, in order to avoid confusion I propose to refer to WesTrac or the Stokes' organisation unless it is necessary to refer to ACE specifically).

563 In this regard, the applicants submitted: (a) By permitting the applicants to negotiate only with the Stokes' organisation, in circumstances where the Stokes' organisation was aware from the outset that the applicants would face cancellation if they did not reach a sale agreement with the Stokes' organisation meant that the Stokes' organisation could: (i) insist on the "most extensive due diligence" that Tong had ever seen; (ii) ultimately insist upon a "bargain basement" view as to goodwill (namely $50 million), comfortable in the knowledge that the applicants would be forced to take it if they wanted to avoid cancellation. That is, "fair market value" was determined by what the Stokes' organisation deemed it to be; (iii) put enormous pressure on the applicants to compromise with respect to long-established net asset values (as reflected in the audited accounts) on the same basis, i.e. compromise or face the prospect of cancellation; and (iv) hold out for terms and conditions in the proposed contract for sale that reflected the position that the Stokes' organisation was assuming "no risk" (whether quantifiable or otherwise) with respect to the deal. (b) The Stokes' organisation was, in effect, put in a position where it "held all the cards" which provided it with an enormous but unfair advantage in the bargaining process. (c) The obvious advantages deliberately bestowed upon the Stokes' organisation, with the corresponding disadvantages then faced by the applicants in the sale process, necessarily resulted in the respondents reneging on clear assurances provided to the applicants during the second half of 1999, not only with respect to the question of price, but also with respect to fair terms and conditions and Caterpillar assistance in the event that the Stokes' organisation sought to drive too hard a bargain or otherwise "chisel" the price. 564 The first thing to record about the applicants' complaint that the Stokes' organisation was in a strong bargaining position because of its knowledge that the applicants faced cancellation if the sale did not go through, is that in 1988 the applicants were aware that the Bond Corporation was subject to cancellation and that the negotiations took place in that light. So much is clear from the evidence of Coonan and Wickert. The other preliminary point to be made about comparative negotiating strengths is that notwithstanding the applicants' submissions they were negotiating with a large corporation that had extensive experience in acquisitions, the applicants themselves were at all material times able to call on a platoon of top-flight financial, accounting and legal advisers. Additionally, Mr Gough is a shrewd, tough-minded businessman.

565 The position at the end of 1999/early 2000 was that the applicants had been told in no uncertain terms that the relationship was over and that Caterpillar wanted the second and third applicants to sell their interests in the dealership. The applicants could have been under no illusion, in my opinion, that if they did not conduct themselves reasonably in the sale process that in all likelihood the respondents would take steps to terminate the dealership agreements. So much is clear from the conversation Mr Gough had with Mr Ramseyer on 9 September 1999. I also consider that even before the discussion between Mr Gough and Mr Owens on 7 February 2000 the second and third applicants were alert to the prospect of termination even if they did behave reasonably in the sale process but the sale did not eventuate.

566 As for the respondents' state of mind as at the end of 1999/early 2000, I consider they were still optimistic that a change in dealer could be achieved through a successful sale to WesTrac (despite Gammell calling off negotiations on 24 December 1999) and that there would be no need to resort to termination in order to achieve the changeover. I have no doubt, however, that the respondents had every intention of achieving a change in the dealership and that if the sale fell through because of the applicants' unreasonable conduct they would move to cancel the dealership agreements with Gough & Gilmour.

567 I make these observations as part of the background to the question of whether and, if so when, the Stokes' organisation was aware that if agreement on the sale of the dealership was not reached then the applicants' dealership would be terminated and WesTrac would be permitted to proceed to take it over. The applicants contended in this respect that the Stokes' organisation was informed of the prospect of termination as early as January 2000. The applicants had no direct evidence going to the state of the Stokes' organisation's knowledge about termination and consequently sought to particularly rely on three documents in order to draw inferences. These documents were: the "Beaver Creek" facsimile message from Mr Stokes to Mr Gammell in January 2000; the letter from Mr Gammell of 24 December 1999 calling off negotiations; and, a memorandum from the law firm Freehills dated 10 May 2000.

568 For the reasons put forward by the respondents, the three documents referred to in the previous paragraph do not enable the Court to draw an inference that the Stokes' organisation knew that if agreement on the sale of the dealership was not reached then the applicants' dealership would be terminated. Moreover, there was evidence that on 20 January 2000 the Stokes' organisation was informed by Tong, inter alia, that Caterpillar was not contemplating termination and that agreement needed to be reached on a fair value. However, I find it very difficult to accept that the Stokes' organisation would engage in negotiations not knowing and not wanting to know what Caterpillar's intentions were if the negotiations were unsuccessful, particularly if the reason for the lack of success was the applicants' unreasonable conduct during the sale process. Such knowledge would make the difference between the Stokes' organisation being in a strong bargaining position or a weak bargaining position. It is inconceivable that the Stokes' organisation would not at least have asked the question, "What will be the situation if Gough and Gilmour behave unreasonably and the sale falls through"? What is not known is whether Caterpillar answered the question or, if it did, what the answer was.

569 In any event, I have no doubt that WesTrac engaged in the negotiations with Gough & Gilmour on the basis of a very confident assumption that if negotiations were not successful, termination would follow and provided it did not act unreasonably in the sale process, it would remain open for WesTrac to bid for the dealership. WesTrac was the sole preferred dealer candidate and had been provided with a letter of comfort about being appointed as the NSW/ACT dealer if it could negotiate an agreement with the applicants. Moreover, it must have been quite apparent to WesTrac that Caterpillar would not have gone to the trouble of asking Gough and Gilmour to give up the dealership only to change its mind because the sale process was unsuccessful (any suggestion that WesTrac was not aware that Gough & Gilmour had been asked by Caterpillar to vacate the dealership is highly implausible). It is possible, of course, that in the event that negotiations between WesTrac and Gough & Gilmour were unsuccessful, Caterpillar could have approached another dealer to take over the dealership. But this would only have occurred, in my opinion, if WesTrac had been unreasonable in the sale process. At no time in the sale process did Caterpillar consider that WesTrac had conducted itself unreasonably.

570 The conclusion I am able to draw from all this is that despite the fact there is not sufficient evidence to support the proposition that WesTrac knew that if there was no sale the Gough & Gilmour dealership would be cancelled, WesTrac was, nonetheless, in a strong bargaining position. Indeed, Mr Gammell conceded this was so. That WesTrac was in a strong bargaining position does not necessarily amount to unfairness, however, unless it can be shown that it abused its position. I will deal with this issue under the next heading. What conclusions can be drawn from the conduct of the applicants, the respondents and WesTrac during the sale negotiations?

571 The first meeting between Gammell, Stokes, the applicants and PWC, Sydney (consultants to the applicants on the sale) took place on 14 December 1999. It was accepted that the price to be paid for the shares would reflect an amount for net assets plus a fair premium. An estimate of the premium was to be arrived at by multiplying an appropriate EBIT figure by a multiple of 7 and subtracting that from the net asset value.

572 During the meeting Mr Gough suggested that there would be no adjustment to price based on due diligence. Mr Gammell said that due diligence would result in price adjustments if material matters were uncovered. Mr Gough also said that he wanted the acquisition to take the form of a share purchase and Mr Gammell pointed out that this would require greater due diligence than an asset sale.

573 Correspondence then passed between Mr Gammell and Rick Millen (PWC Sydney), with Gammell being anxious for Gough and Stokes to get together. Millen advised that there would need to be more common ground before it was worth Stokes and Gough meeting. In a facsimile message to Millen dated 16 December 1999 and after analysing a number of issues discussed earlier between the parties, Gammell said: In light of this analysis and after consideration of the circumstances and future prospects for the business we have decided that we would be prepared to offer a significant goodwill amount of A$50m, to be added to the tangible assets of the business. This is, in effect, equivalent to approximately two years additional EBIT for Gough & Gilmour.

In our discussions held at your offices on Tuesday, we referred to the "Equity" of the company being shareholders' funds and external debt, being approximately $100m…

For this "Equity" position, and subject to acceptable due diligence and an acceptable sale agreement, we would be prepared to offer $150m. We would thus record total assets of approximately $190m, being a $50m premium to current book value.

574 On 20 December 1999 Millen made the applicants' position clear by stating it to be incumbent upon WesTrac to commence the negotiation process with a meaningful offer. Gammell responded on 22 December 1999 pointing out that the indicative offer of $50 million for goodwill plus net assets was a reasonable offer.

575 On 24 December 1999, Millen responded to Gammell with a counter offer based on an enterprise value of $243 million being an equity value of $203 million and including a goodwill value of $143 million.

576 Gammell responded on 24 December 1999 indicating that, whilst WesTrac was always prepared to negotiate, the parties were so far away from each others' expectations there appeared to be little point in continuing "at this time".

577 Not too much can be read into the conduct of the parties at this stage of the negotiations but I do not consider that the applicants acted unreasonably in the sale process during the period July to December 1999. Curfman had an expectation that negotiations would be wrapped up by December 1999 and was obviously disappointed this did not occur. He blamed the applicants for this, mainly because of the ambit position they had taken in opening negotiations with WesTrac by proposing a sale price of $243 million, which Curfman considered could not be supported "by any numbers". Having discussed the negotiations with Westrac, but not Gough & Gilmour, Curfman expressed his discontent to Peoria in a communication dated 17 December 1999. The correspondence does reveal a somewhat prejudiced view of Mr Gough. Curfman said: Spoke with Peter Gammell and Kerry Stokes today. Stokes has offered Harcourt a seven times earning multiple and a very generous blue sky amount to get up to what was anticipated to be a more than fair price. The seven times earning multiple was consistent with our review and that of Harcourt's initial calculation. I learned today that Harcourt is now seeking a 15 times earnings ratio. This came from nowhere and cannot be supported by any numbers. The Stokes offer at roughly $190 million is based on a $140 million in assets and $50 million blue sky. Harcourt is looking for $100 million in blue sky which takes numbers to $240 to $250 million approximately. Business cannot cashflow that amount … Harcourt's stated position is simply that Cat will not terminate and that he will be in business as long as he wishes. Take it or leave it … Negotiations (which is really not an accurate description for what has taken place) are to continue in some format next week. The potential buyer is very frustrated as seller is not negotiating in a realistic manner all with concrete data … wish news was better, but this position has been predictable. We will have a good feeling by the end of next week as to where we stand ...

578 Gough, however, was entitled to commence negotiations from an ambit position, notwithstanding advice from Millen not to do so. It is, perhaps, a matter of opinion whether $243 million ($203 million equity including $143 million for goodwill, plus $40 million for debt) is a reasonable ambit figure given that PWC's preliminary valuation was $147-$159 million but, as Curfman observed, given Caterpillar's experience in dealing with Mr Gough, his decision to opt for an inflated ambit figure was "predictable". 579 On 14 January 2000, Gough and Gilmour met Tong at Mascot airport. Tong informed Gough and Gilmour that Gammell had sent Tong a copy of his letter of 24 December 1999 to Barrett wherein WesTrac withdrew from negotiations. Tong advised Gough and Gilmour that the purpose of the meeting was to get negotiations restarted. Tong also tabled an alternative method of computing goodwill, and stated that he believed a fair premium would be two per cent of turnover for the next 10 years. On the basis of the first applicant's estimated sales of approximately $400 million for the year 2000, this approach resulted in a goodwill figure of around $80 million Between 14 and 28 January, Gough had a telephone call from Tong wherein Tong advised Gough that he would soon be hearing from Ken Parker of ACE to reopen negotiations. During this meeting Tong said words to the effect of "you can expect a goodwill figure of between $80 million and $100 million."

580 WesTrac submitted a revised offer on 3 February 2000 giving an enterprise value of $184.8 million (representing "goodwill" of $84.528 million and approximately $100 million for equity (including $40 million for debt)) and noting that WesTrac was ready to proceed to due diligence and was looking for a quick resolution. The offer was to expire on Monday 7 February 2000 at 5.00 pm Sydney time.

581 On 7 February the applicants advised that they were prepared to accept an offer which implied an enterprise value of $197 million. The letter also contained a first indication of a significant shortfall between the actual and projected EBIT for the 2000 year. Also on that day, at the request of the first respondent, Owens telephoned Gough and Gilmour to advise them that in regard to the $184.8 million offer "the price is about right at which the transaction can happen"; that Gough and Gilmour did not "own the dealership rights"; and that Owens wanted to "avoid a cancellation". 582 On 9 February 2000, PWC received a letter from WesTrac reiterating its earlier offer and indicating that it expired at 5.00pm that day. On the same day Gough meet with Tong for lunch at his request during which Tong encouraged Gough to accept the WesTrac offer. Gough indicated that he would do so because he felt he had no alternative. On the same day Millen informed Gammell that the offer of 3 February 2000 was accepted subject to an agreement regarding the removal of profits from the company prior to sale. Discussions took place on 11 February 2000 wherein it was established that the parties were working on a different basis with respect to the franking credits.

583 On 11 February 2000 PWC Sydney put a revised offer of either: (a) $185 million enterprise value with no franking credits left in; or (b) $199 million with franking credits left in Gough & Gilmour.

584 Stokes responded by letter of 11 February 2000 indicating that their offer for goodwill would be $79.5 million on the basis that all retained earnings were distributed prior to completion as franked dividends but that if franking credits were not distributed then the offer for goodwill would remain at $84.5 million.

585 Further communications occurred regarding franking credits and ultimately a non-binding memorandum of understanding ("MOU") was executed on 25 February 2000. The memorandum recorded the goodwill at $82.028 million and also stated "A structured program of due diligence will be undertaken, the details of which the parties will agree shortly. The sellers will use every reasonable endeavour to supply the buyer with the buyer's reasonable requirements pursuant to the due diligence".

586 In relation to the MOU, the applicants submitted that they went forward in the sale process negotiations on the basis that $182.5 million was the agreed and correct price that would not be departed from save in circumstances where substantial and objectively provable reasons could be advanced as to why the MOU price was too high. Further, that Mr Gough believed that the respondents would not permit the Stokes' organisation to readily depart from the MOU price; would not allow the due diligence process to be used as an instrument of oppression, or as a means by which to "chisel the price"; and would intervene in the event of an impasse or breakdown in the negotiations.

587 An issue then arose at the end of March 2000 where the applicants denied access to audit working papers. On 10 May 2000, PWC Perth advised ACE that its report could not be finalised until access had been given to the audit working papers and that it was a major outstanding item.

588 It would appear that Gough's main reason for withholding the audit working papers was that he believed the Stokes' organisation was conducting the due diligence process inappropriately, either for purposes of preparation for a greenfields operation in NSW/ACT and/or to support the "chiselling" of the MOU price. Gough was concerned that the Stokes' organisation would or might seek to use the contents of the audit working papers inappropriately "i.e., use them to concoct spurious arguments with a view to further "chiselling" the price". Gough was also concerned about the prospect of giving complete indemnities to the auditors with respect to the audit working papers which was an essential pre-condition to those auditors authorising third party access to their papers (ACE later agreed to provide these indemnities).

589 The respondents contended that the refusal by the applicants to allow access to the audit working papers was part of the applicants' strategy of delay; that they would, on Millen's advice, "basically sail on like the QE2 - prepared to listen but gloriously unconcerned as [they] are happy to continue the business..." and that "time is our friend". It was further contended that having agreed on the MOU price, Gough was not prepared to move from that amount, persistently stating "the price is the price", regardless of what due diligence revealed.

590 It is difficult to be sure what Mr Gough's real motives were in refusing access to the audit working papers. It probably was, as Mr Gough said in his evidence, mistrust of the Stokes' organisation and a fear that there would be an attempt on the part of the Stokes' organisation to seek to "chisel the price". I do not consider, however, that it was part of Gough's strategy to deliberately delay the sale process in order to increase the price, because by this time he was under no misapprehension that if the applicants conducted themselves unreasonably, there was every probability the respondents would move to cancel the dealership and he would be in an even weaker bargaining position. To achieve delay by refusing access to working papers would have been too obvious a tactic.

591 The next obvious question is whether Mr Gough had a legitimate basis for his fear that WesTrac was, or would be, attempting to chisel the price. Up to the time when PWC Perth were refused access to the audit working papers (late March 2000), WesTrac was, in my opinion, following a normal due diligence process. There was no reasonable basis to suspect that WesTrac's agenda was to "chisel the price" and I consider that Mr Gough had no rational basis for refusing access to the audit working papers.

592 Gough's mistrust of the Stokes' organisation, reflected in his refusal to make the audit working papers available, produced a view within the first respondent that the applicants were not negotiating in good faith. Further, on 8 May 2000 Ramseyer emailed a message to Owens bringing him up to date on a compromise proposal to overcome the impasse regarding the audit working papers. Ramseyer went on to say in his email: ... the odds for the deal to go through as planned are estimated to be no more than 50:50. Talking with Matt Tong, he indicates that once the due diligence has been completed it probably will show that profits are overstated and that the agreed EBITDA multiple should be applied to a lower figure which could possibly reduce the price to about A$160M.

I believe the incoming dealer should pay a fair price for the acquisition and the seller should accept a lower price if the records show that earnings have been overstated.

· We await confirmation that the proper due diligence process is back on track - week of May 8. · We expect the final offer to be made possibly within 2-3 weeks of this week. · Should G&G not accept either the initial offer if all is according to expectations or a revised offer based on fair value established through the due diligence process we present the 90 day cancellation notice as outlined in the S&S [sales and service] agreement.

We will facilitate the process and encourage both parties to professional flexibility. However, should we arrive at an impasse I seek your authority to proceed with cancellation without cause as outlined in the S&S agreement.

593 The compromise to overcome the audit working papers impasse involved the production of a list compiled by PWC Perth that identified a number of preliminary financial issues. The idea was that the parties would discuss this preliminary list with a view to reaching agreement and, if agreement was reached, the applicants would provide the audit working papers to WesTrac.

594 The preliminary list referred to ten items that if they were agreed would have resulted in a reduction of $41.6 million in asset value. For example, it was said that the environmental remediation costs of the applicants' Parramatta site was estimated to be $10.6 million (later reduced to $5 million).

595 The preliminary list was sent to the applicants on 11 May 2000. On 12 May PWC Sydney acknowledged receipt of the list and requested supporting material be provided in relation to the issues identified in the list. On 7 June 2000 Gammell (ACE), Walker (WesTrac), Waters (ACE), Gough, Gilmour, Millen (PWC, Sydney) and Williams (PWC, Sydney) attended a meeting to discuss the preliminary list of issues.

596 It is evident that Mr Gough believed that the preliminary list constituted an attempt by WesTrac to renege on previous undertakings not to use the due diligence process to seek to "chisel" the purchase price. Notes of the meeting taken by Walker included the following: G&G advises that the due diligence gives us the opportunity to see if we like the assets - this is what PG [Peter Gammell] allegedly agreed. We allegedly agreed not to haggle the purchase price -we can merely ask questions. We can not try and change the value after the deal. They will not reopen discussion on price. We can either walk away or take the business at $182.5 [million]. "I will not talk about or consider adjusting the price - if you don't like it you can walk away. We will accept cheque for $182.5 or we will remain the Cat dealer." It was quite clear that Harcourt did/does not care about the due diligence at all - it is only the price that counts. Harcourt added that from now on he "would ration his responses to us". Harcourt said that he had had discussions with Cat who were fully aware that $195m was his minimum price and that he had dropped $12.5m to $182.5m and Cat were fully aware that he would drop no further."

Mr Gough did not contest the accuracy of this part of Mr Walker's notes.

597 At this stage of the negotiations it could not be said that WesTrac was asserting that the price for the assets had to be reduced by $41.6 million. WesTrac was merely flagging issues identified by PWC, Perth as matters that, in the context of a due diligence investigation, needed to be discussed and resolved.

598 Exchanges then occurred between WesTrac and the applicants regarding the basis upon which the offer by WesTrac of $184.8 million was made. The exchanges centred on the appropriate average EBIT to be used in determining price. The offer made by WesTrac was said to be based on a multiple of seven times of an estimate of maintainable EBIT on the 1996, 1997 and 1999 average, excluding the 1998 result (i.e., an average of $26.4 million). The 1998 EBIT was excluded on the basis that it was an aberrantly low year.

599 In a letter dated 22 June 2000, WesTrac advised Gough & Gilmour that it was told in January 2000 the EBIT forecast for 2000 was $34.7million and that this was a "key factor" that led to WesTrac agreeing to exclude 1998 from the original estimate. However, the forecast for 2000 had subsequently been revised significantly downwards to $20 million and in those circumstances WesTrac asserted that the 1998 EBIT may not have been an aberration and perhaps should have been included in determining an appropriate average EBIT. The letter stated: The 2000 EBIT forecast was taken into account in setting the $182.5n offer level. As advised at the meeting held on 28 January 2000, the 2000 EBIT forecast of $34.7m was the key factor which led us to base an estimate of maintainable EBIT on the 1996, 1997 and 1999 average, excluding the 1998 result. If not for that forecast, we would not have accepted PwC's 24 December 1999 advice (repeated in the meeting) that 1998 was "abnormally low", and we would not have had a starting point "enterprise value" of $184.8m (7 times $26.4m). The discrepancy between forecast 2000 EBIT and likely 2000 EBIT becomes more significant in light of the many other discrepancies we have discovered. The apparent overstatement of prior year EBIT, prior year "margin-earning" sales and balance sheet values are also significant issues. For the first time, on 7 June 2000, we were advised that 2000 EBIT will be less than the prior year. This confirms the need for us to accurately determine the true level of maintainable EBIT, so that the appropriate price can be determined. As we have done to date, this needs to be verified by a true measure of the sales revenue on which an EBIT margin is earned. A review of correspondence and meetings between the parties (e.g. our 16 December 1999 fax, and the calculation tabled at the 28 January 2000 meeting) clearly shows that our purchase price calculations are based on a "multiple of EBIT" formula. Your advisers, PwC, accepted the formula-based approach as "a reasonable approach in principle" by fax dated 1 February 2000. PwC's 24 December 1999 letter argues for a multiple higher than 6.5, and EBIT higher than $23m. This is not indicative of rejection of a formula-based approach. Also, no PwC or Gough & Gilmour correspondence argues for a multiple higher than 7.0. There has been no argument for a higher multiple than 7.0 at all, let alone any "consistent" argument. The represented sales levels was the key factor in the assumed maintainable "margin-earning" sales level of $330 million. This was used to check the legitimacy of the three-year average EBIT. Had we had the statutory accounts prior to the 28 January meeting, we would not have presented $26.4m as the "base EBIT", and therefore not generated the "enterprise value" on which the $182.5m price was based. Our due diligence to date indicates that using an 8% EBIT margin (based on "Caterpillar comparables") is not appropriate. Your response does not address the true Gough & Gilmour EBIT and EBIT margin, which remains an issue. For the abundance of clarity there are three possible results of our due diligence on EBIT. AVERAGE VALUE 1997,98,99 and forecast 2000 adjusted per due diligence 18.8m 131.6m 1997,98,99 and forecast 2000 (per G & G) UNADJUSTED 22.0m 154.0m 1996,1997,99, (EXCLUDING 1998 as ABNORMAL) 26.2m 183.4m We await further justification as to why the "valuation" should be based on $182.5m.

600 The 8-page letter also canvassed a range of other matters including the preliminary list of financial issues. The letter was provided to Messrs Gough & Gilmour at a meeting held on the same day i.e., 22 June 2000, and they were asked to consider its contents. They apparently did so but there was no change in their position, relying as they did on the assertion that a price had been agreed to in the MOU and nothing had been put to them that justified acceptance of a lower price.

601 On 22 June 2000 Kerry Stokes visited Owens in Peoria. Stokes informed Owens of the frustration he was experiencing as a result of WesTrac's inability to complete the deal with Gough and Gilmour, including the denial of access to the audit working papers. Owens told Stokes that Caterpillar wanted the negotiations to continue "as discussions between two Australian businessmen".

602 By letter dated 30 June 2000, WesTrac made a revised offer. In introducing the revised offer the letter (signed by Gammell) stated: "At our recent meeting on 22 June 2000 it became quite obvious to me that your attitude towards our negotiations was quite intransigent and it seems to me that we have clearly reached an impasse. Whilst we have attempted to open a dialogue with you on many aspects of the asset valuations, most particularly in regard to the current operating performance of the business, you have shown little interest in our comments, save to state that we have not "convinced you" why the asset or business values should be reflected in an adjusted price. All you reiterate is "the price is the price".

Our due diligence has been going on for some four months now, during which we have employed both PwC and Freehills, experts in their relevant fields, and we seem to be no closer to finality let alone to being given access to Deloittes' working papers and other outstanding information necessary to complete our due diligence.

You have continuously and repeatedly been made aware of our view that the price of $182.5 million is not supportable, in light of the material differences in both the actual EBIT performance and the outlook for the Company, compared to the original representations and the significant differences in a number of your asset values. In order to progress the negotiations to a conclusion, we have asked you to confirm that a price adjustment would be entertained. In the meeting you repeatedly stated that "the price is the price" and that you no longer respected the basis used to calculate and justify the value of the business. We maintain that a value for the business of 7x the average EBIT of the company is both reasonable and was accepted as such, during our negotiations. The fact that the due diligence process revealed that the actual EBIT achieved is not close to the level that you represented, does not provide a reason to now challenge the originally accepted method of valuation, but it does change the resultant price using the same method. We continue to believe that this is the only reasonable basis that a third party purchaser or valuer would use, especially as it still provides a significant value for goodwill, a $50 million premium over the net asset value of the company. All of our inquiries with independent advisers confirm that this is a reasonable method and multiple.

You stated in our meeting that if we did not like the price we should walk away. In a last attempt to complete this transaction we now submit to you a revised offer which reflects our view of the value of the business. It may not achieve your initial expectation but we believe it does represent a fair and reasonable offer for the business, providing a significant goodwill premium to net asset value.

603 The revised offer canvassed various alternatives based upon, and in accordance with, WesTrac's earlier comments regarding EBIT. The share sale alternative proposed a goodwill price of $50 million and explained how that had been arrived at. Among other things, the letter pointed out that the enterprise value arrived at by WesTrac as a result of due diligence was $131.6 million but it was picking the mid-point referred to in the 22 June 2000 letter. That is, that the offer represented "$20 million over the value we believe is actually the appropriate price for the business". The letter stated: As you will see below, we are willing to complete the transaction based essentially on disclosed book value plus "goodwill" of $50 million, the median shown in our letter of 22 June.

This implies a purchase price approximately $20 million greater than our due diligence to date would support, based on assessed maintainable EBIT. We are willing to make this very significant concession on the basis that our concerns regarding land and building values, receivables, executive contracts, GIPL contracts, inventory values, prepayments and DML Resources are resolved through these new proposals.

We stress, however, that we have not changed our assessment of maintainable EBIT and hence our assessment of value. Our new offers represent $20 million over the value we believe is actually the appropriate price for the business.

604 The applicants submitted that the Stokes' organisation, opportunistically and deceptively, took advantage of the lower than forecast 2000 EBIT figure to "talk down" the MOU price. It was submitted that the Stokes' organisation agreed to the MOU price not by reference to the applicants' actual EBIT results in the preceding years but rather on the hypothetical basis of assumed maintained sales of $330 million a year and an assumed EBIT of 8 per cent of sales and by using a multiple of seven. On that basis the Stokes' organisation's initial assessment was that a price of up to $200 million could be justified. Moreover, it was submitted that the Stokes' organisation had flatly rejected the use of any forecast EBIT numbers for the year 2000 when the negotiations started in December 1999 on the basis they were subjective and unreliable.

605 I do not accept that the applicants' assertion that WesTrac opportunistically took advantage of the low 2000 EBIT. The basis of the agreed MOU price of $182.5 million was seven times the average EBIT for the years 1996 to1999, excluding 1998. The applicants argued that 1998 was an uncommon year and should not be taken into account. WesTrac accepted this argument. In December 1999 WesTrac did reject the inclusion of the projected 2000 EBIT as being "unrealistic". The due diligence process and the lower than expected EBIT for 2000, however, caused WesTrac to re-assess its original offer. In a letter to Gough and Gilmour dated 12 July 2000, Gammell set out his position in considerable detail. The letter stated, inter alia: We believe that the earnings performance of the Company, using either your own represented figures or the results of our due diligence, is ample reasonable demonstration by us of such a reason to adjust the price. On 22 May 2000 we presented the earnings shortfall calculations to you. Since then we have received no response at all, let alone an adequate response as claimed.

For the avoidance of doubt I again confirm: 1. your own represented figures for 1997 to 2000, with no adjustments to the audited accounts, show average EBIT to be $22.1 million; and

the results of our due diligence show average EBIT for 1997 to 2000 to be $18.8 million. On either basis, a purchase price based on EBIT of $26.4 million cannot be supported.

Furthermore, our due diligence on EBIT is not preliminary, as claimed, but has drawn to a close due to the lack of further information. There has been nothing presented to our team to change our view of the earnings history. While unfettered access to the auditors and their audit workpapers would provide an opportunity to fine-tune our view on the due diligence calculation of EBIT, you have consistently denied us this opportunity.

Even if we were to accept all of your represented 1997 to 2000 earnings figures at face value (which we do not), the formula for calculation would still point to a value of $154 million, as stated in my letter of 22 June 2000.

Our 30 June letter is therefore undeniably correct in stating that actual EBIT is not close to the level represented. You have admitted that 2000 EBIT will be considerably less than $34.7 million and have not disagreed that the EBIT will be approximately $20.9 million. The table below demonstrates the EBIT position in clear and simple terms. I reiterate that our view is not preliminary. Your own figures show that $36 million is not a reasonable estimate of average EBIT. EBIT Calculations (supporting table in 22 June 2000 letter) Year 1996 1997 1998 1999 2000 Average

Represented 24.8 26.6 Excluded 26.8 overstated 26.1

Per WesTrac due diligence Not reviewed 25.5 9.6 18.9 19.2 18.8

Reported per G&G Not reviewed 20.0 14.2 26.8 20.9 22.1

(note: 2000 figure based on representations during due diligence)

The unadjusted 4 year average of $22.1 million, as demonstrated above, is not "close" to the represented $26 million. This is a fact.

606 The letter also stated: At the 28 January meeting, you used the bullish 2000 forecast (EBIT of $34.7 million) to persuade us to exclude the poor 1998 result ($14 million) from the historical calculation. This followed a previous claim that the 1998 result was "abnormally low", in PwC's letter of 24 December. You continued to push for its exclusion to compensate for us not averaging in the 2000 forecast. If we had not been given that $34.7 million forecast, but had rather been given the updated current forecast of $20.9 million, we would not have agreed to your request to omit the actual 1998 EBIT. As a result, our estimate of maintainable EBIT for 1996 to 1999 (even before starting due diligence) would have been only $23 million.

By 28 January, you should also have known that (as you disclosed a few days later) 2000 earnings would fall well short of that which had been represented. This was not mentioned at the 28 January meeting.

607 On the basis of the lower than forecast 2000 EBIT figure and the due diligence findings, WesTrac was entitled, I believe, to review and revise its earlier offer recorded in the MOU as $182.5 million. The MOU was, at the applicants' insistence, non-binding and subject to due diligence. This is not to say that the formula applied by WesTrac was the only correct approach. In a letter to Gammell on 18 July 2000 Gough and Gilmour demonstrated the validity of an average EBIT of $26.064 million for the four years 1996 to 1999 inclusive and questioned the basis for WesTrac excluding the 1996 EBIT in calculating an average.

608 It may be that both the applicants' approach and that of WesTrac are equally valid but that is not the point. The issue is whether WesTrac, up to this point in the negotiations, conducted itself in an unreasonable manner, or unreasonably took advantage of its stronger bargaining position in its dealings with the applicants, such that it could be said the requirement of the respondents to limit any sale negotiations with only one approved purchaser was unfair.

609 Nothing that has been put to me by the applicants leads me to the view that WesTrac acted unconscionably or opportunistically in reviewing and revising its original offer of $182.5 million; it had legitimate grounds for doing so based on the due diligence findings produced by an experienced and reputable firm, namely, PWC, Perth and on the 2000 EBIT figure, which was significantly lower than forecast.

610 The applicants submitted that when Stokes visited Owens in Peoria on 2 June 2000, an inference could be drawn that Owens gave his imprimatur to lower the goodwill offer from approximately $82 million to $50 million. Owens denied this was the case. I do not consider that such an inference can be drawn. The issue of price, including the goodwill component, surfaced as early as May 2000. Further, the meeting in Peoria took place after the 22 June letter revising the goodwill offer down to $50 million had been prepared and after the meeting with the applicants on 22 June 2000 (Eastern Standard Time) had occurred.

611 A meeting took place between Millen (PWC, Sydney), Williams (PWC Sydney), Gough, Gilmour, Sloan (Deloittes) and Lisa Gough on 18 July 2000. Mr Gough's handwritten notes of the meeting indicate that Mr Millen advised that the best that could be hoped for was "mid 160's" and that "Don't say no to Westrac on basis you might get more from competitive tender".

612 On 19 July Gough had a one-to-one meeting with Stokes. During the course of that meeting, Stokes indicated that he was not prepared to countenance paying more than $50 million for goodwill.

613 On 24 July the applicants wrote to the chairman of the second respondent, Mr Barton. In the letter the applicants:

· explained why they were justified in insisting on the MOU price;

· referred to Owens' implicit support for the MOU price in the conversation he had with Gough on 7 February;

· asked if Caterpillar had sanctioned WesTrac reducing the goodwill price from $82.5 million to $50 million (in the meeting between Stokes and Owens on 22 June);

· expressed concern that Caterpillar may have reached an understanding or arrangement with WesTrac of which the applicants were not aware and if that were the case inquired as to what that understanding or arrangement was. 614 Before receiving a reply to the letter to Barton the applicants wrote to Stokes on 27 July with a compromise proposal both with respect to price ($69.4 million for goodwill) and property retention. However, this was rejected and WesTrac said that "the only goodwill figure to which we will agree is $50 million." WesTrac indicated that the offer remained open until close of business on Friday, 4 August 2000.

615 On 28 July Curfman replied to the letter written by the applicants to Barton on 24 July. Mr Curfman's letter is notable only for its blandness - it said virtually nothing of any significance. I do note, however, that it was written at the same time draft notices of termination were being drafted by the first respondent's legal advisers. The applicants were not advised of this.

616 On 2 August the applicants wrote to Curfman in effect asking for the first respondent's approval to open negotiations with other potential dealer candidates given the significant differences between the applicants and WesTrac. Curfman responded the following day saying that the applicants could sell their assets to whom so ever they chose but that "CofA will not select a person as a Caterpillar dealer by reason of that person being a buyer of, or the highest bidder for, another Caterpillar dealer's assets." This effectively meant that the applicants were locked into dealing with Caterpillar's approved purchaser, namely, WesTrac.

617 On 4 August 2000 the applicants agreed by letter to accept WesTrac's offer of $50 million for goodwill. The letter stated: We are prepared to proceed on the basis of a transaction priced at $50 million goodwill plus the book value of net assets as audited by Deloitte Touche Tohmatsu.

618 On 7 August Gammell wrote to Gough and Gilmour stating: As discussed on the telephone with Harcourt last Friday and subject to a satisfactory sale agreement, we confirm that we are agreeable to proceeding on the basis of a transaction priced at $50M goodwill.

We will resolve all of the outstanding issues on a line by line basis at the meeting to be held at ACE's office in Sydney on Tuesday, 15 August at 10.00am.

619 On 15 August 2000 the foreshadowed "line by line" meeting took place between the applicants, Stokes and Gammell. Gough described Stokes' approach in the meeting as "aggressive" and that Stokes had said he was not prepared to take "any risk at all" in buying the applicants' business. The parties adopted the approach of addressing each item "line by line" to resolve them. Gammell informed Gough and Gilmour that it would be necessary for the transaction to be substantially finalised by 15 September 2000, from which date the commitments of Gammell and Stokes to the Olympics would limit their ability to devote time to the transaction for approximately a month. According to Gammell, Gough and Gilmour said that they believed that this should be achievable.

620 Gough's handwritten notes of the 15 August 2000 meeting list the "Issues" as being "properties", "plant & equipment", "maintenance contracts", "buybacks", "prepayments/Cadia bodies", "receivables", "inventories", "DML" and "executive contracts". The notes conclude with the follow "summary of adjustments": Properties - no adjustment (Need to agree retention or mechanism to cover exposure)

Mtce contracts - to be handled by auditors (0 to $3.8m to agree)

Buybacks - no adjustment, warranty & call option, with security for ?

Receivables - PCE/Allens taken out (0.6 + 0.5) - HG/ALG get any recovery - Other 0.2 to be covered by audit.

Cadia prepayments - $1.7 wanted paid out - "don't want to pop up elsewhere in ?

Inventories - (a) Audit values agreed by auditors (b) Review after 12 mths (c) Further 10% writedown on items or call option

DML - Warranty, with HG/ALG able to run the case Exec contracts - HG/ALG pay any termination inside 12 mths.

621 According to Gammell, all of the outstanding issues were resolved at the meeting by way of a "commercial agreement" between the parties as follows: (a) "Properties": It was agreed that there would be no adjustment of the asset value of the properties as originally proposed by ACE, but there would be a retention amount or a mechanism to cover exposure and rectification costs in the event of any environmental problems arising. The amount to be retained was agreed at $5 million. It was agreed that ACE would release the retention amount to Gough and Gilmour as soon as ACE was provided with appropriate certification that there were no environmental problems; (b) "Plant and equipment": It was agreed that there would be no further adjustment for plant and equipment. Previously, there had been disagreement over whether ACE would accept plant and equipment at book value; (c) "Maintenance contracts": Gammell said that ACE would be content with the provision (for losses on maintenance contracts) to be an amount that the auditors would sign off on as properly reflecting the loss, and Gough and Gilmour said that they were happy with this; (d) "Buy-backs": It was agreed that there would be no adjustment in the purchase price for buy-backs, but that if ACE could not get the buy-back price for equipment that it sold, Gough and Gilmour would have a call option to purchase it at that price. If ACE's sale price was below the buy-back price, Gough and Gilmour would indemnify ACE in respect of the difference; (e) "Receivables": It was agreed that disputed receivables would be to the benefit of Gough and Gilmour, that is, they would get any amounts recovered. It was also agreed that certain agreed amounts would be taken out of "receivables" in the preparation of the accounts; (f) "Cadia pre-payments": It was agreed that the asset shown with a value of $1.7 million (relating to Cadia truck body repairs) would not be recorded as an asset or reflected anywhere else in Gough & Gilmour's accounts; (g) "Inventories": It was agreed that inventories would be assigned values by the auditors. It was also agreed that if the inventory had not been sold after twelve months then there would be an adjustment of the 10% in favour of ACE, or, alternatively, Gough and Gilmour could purchase the inventory from ACE at book value; (h) "DML": It was agreed in respect of this retention of title claim by DML that Gough and Gilmour would give ACE an indemnity be able to run the case if proceedings were instituted; (i) "Executive contracts": It was agreed that if any executive employees were terminated by ACE within 12 months, Gough and Gilmour would make any termination payments under the contracts.

622 The question of whether the parties reached a "commercial agreement" on 15 August in relation to all of the outstanding issues, is an important one. In September 2000 the Stokes' organisation informed the respondents that the applicants had reneged on a commercial agreement reached on 15 August. In September, the respondents took the decision to cancel the applicants' dealership. The applicants contended that in taking that decision the respondents were influenced by the Stokes' organisation's claim that the applicants had reneged on a commercial agreement. 623 I accept the applicants' submissions that there was no "commercial agreement" reached between the parties on 15 August 2000 covering all outstanding issues. Those submissions may be summarised as follows: (a) the only contemporaneous notes of the meeting in question were kept by the applicants and those notes do not record that any level of agreement was achieved. (b) given the Stokes' organisation's alleged frustration and exasperation in dealing with the applicants over many months (and in particular their allegation that the applicants did not keep their word), if a total or even a partial commercial agreement had been reached on 15 August 2000, it is inconceivable that Stokes and Gammell would not have insisted either that the agreements reached be recorded in writing (whether in a Heads of Agreement document or otherwise) before the applicants left the meeting or, at the very least, be confirmed in a letter either that day or in the days that immediately followed the meeting. (c) it is even more inconceivable that, if such an agreement had been reached, the Stokes' organisation would not have written a letter to the respondents advising them of such good news. (d) the Court has not been assisted by any evidence from Stokes himself with the inference between that he would have been unable to corroborate Gammell's view of the meeting. (e) as is revealed from Gammell's own evidence, the correspondence (by letter dated 22 August 2000) that passed between the parties immediately after the 15 August meeting only suggested that Gammell was "disappointed that you are revisiting matters individually we thought we had agreed as a package at our meeting on 15 August 2000. However, I provide comments on each of these issues you have raised . . ." Given the style of Gammell's earlier (and later) correspondence, if he truly believed that the applicants were reneging on a commercial agreement, considerably stronger and clearer language would have been anticipated in his letter of 22 August 2000. (f) the correspondence from the Stokes' organisation thereafter tended to corroborate the applicants' view as to what had occurred at the meeting on 15 August, in that its own letters referred to "position proposed" (although it is noted the letter goes on to refer to the meeting as "reflecting our final position"); and, "tentative agreements". (g) it is also inconceivable that the applicants would have, on the spot, agreed to allow the Stokes' organisation to retain $5 million of the agreed value with respect to the Parramatta property pending some unspecified EPA "clearance" process. This is not only because the applicants were firm in the view that no retention sum was fair or reasonable (as the site was not contaminated) but also because there was no (necessary) allied agreement as to the particular EPA process in contemplation (assuming that one existed); as to the timeframe for the conducting of such a process; or as to whether the necessary "clearance" to facilitate the Stokes organisation's release of the $5 million retention sum was a total or 100% clearance, or some other level of confidence about the safety or non-contamination of the site. (h) it is also inconceivable that the applicants would have, on the spot, agreed to spend up to $1.4 million on termination payments to executives in the event that the Stokes' organisation simply decided (as a matter of its own discretion) to terminate the applicants' executives, who are on written contracts, during the first twelve months that the Stokes' organisation operated the New South Wales dealership business. (i) whilst Stokes and Gammell were clearly pressing for full warranties, indemnities and personal guarantees the proposed form of those terms had not been the subject of discussion between the lawyers even in draft form (although Stokes obviously believed that they were in such a standard form that they could be obtained by the push of a button of the applicants' solicitor's computer). (j) Gammell says separate agreements were reached with respect to each line item, yet he kept no notes of those alleged agreements, and did not record in his affidavit what he believes was actually said that evidenced a series of oral agreements. (k) Gammell admitted, after reference to being bound by oral agreements as a Scot, that he did not believe that he had entered a legally binding agreement under Australian law. (l) Gilmour's conversation with Curfman on 22 September 2000 about the difficulties they were experiencing with the Stokes' organisation was entirely inconsistent with the applicants believing that there had been an agreement reached on 15 August.

624 I consider that the proper interpretation of the outcome of the meeting on 15 August 2000 is as described by Mr Gilmour in his conversation with Mr Curfman on 22 September, namely: I am calling to outline the recent negotiations and the outcome of our 15 August meeting with Kerry Stokes and Peter Gammell where they put forward a series of proposals for Harcourt and I to consider. Harcourt and I concluded that meeting on the basis that we thanked them for their input and creative ideas and acknowledged that they had some innovative approaches and that we would give consideration to them and respond formally within a few days (my emphasis).

625 Stokes and Gammell were, I believe, entitled to feel optimistic about the outcome of the meeting on 15 August and that matters would move forward quickly because they believed Gough and Gilmour now understand clearly what the position of the Stokes' organisation was in relation to all of the issues discussed at the meeting. However, this falls well short of any "commercial agreement" and I consider, falls short of a "handshake agreement" (as it was described by Owens) as to how each of the issues would be represented in any draft contract.

626 At the conclusion of the meeting it was agreed that Gough and Gilmour would instruct their solicitors to prepare a draft contract and provide it to the Stokes' organisation. It was also agreed, in light of Stokes' and Gammell's Olympic commitments, that the parties would try to get the deal done by 13 September 2000, with completion accounts as at 30 September 2000 and handover on 1 October 2000.

627 The Stokes' organisation clearly expected that the applicants would prepare a contract that reflected what the Stokes' organisation characterised as its "final position" as expressed on 15 August, i.e., no further negotiation would be countenanced. The applicants, on the other hand, were prepared to draft a contract that reflected in part some of the Stokes' organisation proposals and otherwise contained what they regarded to be acceptable counter-proposals on matters still in issue between the parties.

628 By letter dated 21 August 2000 the applicants raised matters that had been discussed at the meeting on 15 August. Gammell responded by letter dated 22 August 2000 indicating that he was disappointed that the applicants were revisiting matters individually which he thought had been agreed as a package at the meeting on 15 August 2000. Gammell requested a sale contract as a matter of urgency and emphasised the importance of meeting the agreed timetable. By letter to the applicants dated 8 September 2000, Gammell complained about the frustrations and the delay with respect to the draft contract and set out a history of the same. Among other things, he pointed out that on repeated occasions the contract was promised "tomorrow" but was not delivered.

629 On 23 August 2000, there was a further telephone discussion between Gammell and Gough concerning the Stokes' organisation's letter of 22 August 2000. The terms of that conversation, whilst put in issue by Gammell at least to some extent, again demonstrate that no final agreement was reached on 15 August and also that the parties were still discussing ways to resolve some complicated issues (eg Warkworth FOCUS contracts and truck sales).

630 By letter dated 28 August 2000 Gough said, inter alia, "[h]aving received your letter of 22nd August, I was pleased that, during our telephone conversation [on 23 August], you allayed my concerns on a number of points you made in that letter. Naturally the issues will continue to be discussed as we discuss the contract preparation". Gough also advised in that letter that the first draft of the contract had been produced with the expectation being that, subject to the clarification of some issues, the applicants would provide it to the Stokes' organisation by 29 August 2000. However, the prospect of some delay was also countenanced in the letter in view of the death of Gough's mother.

631 The draft contract was sent to the Stokes' organisation on 12 September and received by it on 14 September 2000. Whilst the Stokes' organisation complained of delay in providing the draft contract, it does not seem to me, in the circumstances, that the provision of the draft contract involved any excessive or unreasonable delay on the part of the applicants. The Stokes' organisation was being driven, it seems, by what it perceived to be the need to finalise matters before the commencement of the 2000 Olympics and applied pressure to the applicants to that end; the Stokes' organisation's urgency was seen by it as the applicants' delay. I do note that the applicants were provided with a draft contract by Gilbert & Tobin on 17 August but given the complexities of some of the issues that concerned the applicants, and the intervening death and funeral in New Zealand of Mr Gough's mother, I do not consider four weeks constituted an inordinate delay on the part of the applicants. However, when one considers the terms of the draft contract, it does raise the question of whether the applicants used the period between 15 August to 12 September to be constructive or obstructive.

632 Gammell formed the view that the draft agreement did not accord with the matters agreed at the meeting on 15 August 2000. Following a preliminary review of the contract, Gammell wrote to Gough & Gilmour by facsimile dated 15 September 2000, stating that it was clear that the draft "does not address a number of the matters we agreed at our meeting on 15 August 2000". The facsimile concluded: In conclusion, I must say that I am absolutely stunned that such a contract with so many omissions, should emanate after a four week delay. We will revert with a marked-up contract that could lead to a conclusion of this transaction as soon as we are able, but we did previously highlight the strain on our resources that would occur after 13 September, the previously agreed target for signing of this document.

633 Mr Gammell's facsimile referred to 12 discrete issues not addressed by the draft contract but which he said had been agreed at the meeting on 15 August. He also referred to a condition precedent in the draft contract that had not been previously discussed. The condition precedent was to the effect that if Caterpillar, a third party to the contract, had not paid all claims (not quantified) by 31 December 2000, the applicants had the right to terminate the sale.

634 Despite the fact that no agreement had been reached on 15 August, the applicants, in my opinion, took a less than principled approach to drawing up the draft contract and failed to fully and genuinely address the issues raised on 15 August. Furthermore, whilst it is understandable that the applicants would wish to preserve their rights in relation to outstanding claims (apparently worth about $1.5 million) against Caterpillar, it seems to me that it was quite unnecessary and, indeed mischievous, to provide in the draft contract the right for the applicants to terminate the sale agreement if any outstanding claims were not met. Such a provision, inserted without any prior discussion, could only have had the effect of obstructing or delaying settlement.

635 The terms of the draft contract are indicative of Gough's unwillingness to sell and is a good example of the fact that whilst there was no blatant attempt to delay the sale process the applicants never approached the sale in a cooperative and constructive manner. By this stage I consider that the Stokes' organisation had good grounds to feel frustrated with the applicants.

636 The Stokes' organisation sent a further letter to the applicants on 18 September 2000, pointing out that a complete review of the draft contract had occurred and it did not reflect the "commercial agreement" of 15 August and was, therefore, rejected. A request was made for a proper contract reflecting the agreement by 22 September 2000 failing which the Stokes' organisation would have no alternative but to withdraw from negotiations.

637 It may be seen that whereas Gammell indicated in his facsimile of 15 September that he would "revert with a marked-up contract", there was a change of heart by 18 September because he requested the applicants to provide a "proper contract" reflecting the agreement struck on 15 August. The change of heart was said to have been brought about because the Stokes' organisation had looked at the contract more closely over the weekend (16, 17 September).

638 The applicants submitted that the reason given by the Stokes' organisation for changing its position on providing a marked-up version of a contract was unconvincing because the analysis that led to the identification of the 12 discrete issues would have already led to the conclusion that the applicants' draft was "totally unacceptable".

639 It was submitted by the applicants that "the perceived serious shortcomings in the contract would have provided a clear motivation for [Stokes and Gammell] seeking to meet with Owens and others over the course of the upcoming weekend." The reference to the meeting with Owens is derived from the fact that Owens, Ramseyer, Curfman, Barrett and Nitto had been invited to spend some time on a 300-350 berth cruise ship hired by the Stokes' organisation during the Olympic Games and moored in Sydney harbour. All of these persons attended as guests of the Stokes' organisation. Stokes and Gammell were also present.

640 In relation to this matter the applicants submitted: Until the cross-examination of Curfman , there was no basis whatsoever either from the affidavits of Owens, Ramseyer, Curfman, Nitto or Gammell or from any of the documents that came into existence (on or after 15 September 2000) for the Applicants or the Court to know that there was a meeting between Stokes, Gammell, Owens, Ramseyer and Curfman that occurred in Sydney on the Channel 7 cruise ship over that weekend [16 and 17 September]. The Applicants contend that what occurred at that meeting provides a much more likely foundation for the Stokes organisation's change of heart with respect to the "marked-up" contract proposal (and thereafter for its decision on 28 September 2000 to withdraw completely from the negotiations) and submit that such a conclusion is not only open to the Court on the evidence by way of overwhelming inference, but also compelling given the complete absence of any tenable explanation as to why four of the five people who attended the meeting did not refer to it at all in their affidavits.

641 The applicants further submitted: Given the absence of any tenable evidence to explain such serious omissions from so many witnesses, the only available inference is that a conscious decision was made by all those involved in the meeting to avoid any mention of it; to make no notes whatsoever of the meeting; to avoid reference to the meeting in any later documentation; and to leave out any reference to the meeting in the affidavits filed in these proceedings, and that such extraordinary steps were taken because those representatives of the Respondents and the Stokes organisation that were involved in that meeting were well aware that the agreements/arrangements or understandings entered into during the course of that meeting were at least unconscionable and/or in breach of, inter alia, section 46 of the Trade Practices Act 1974 (Cth). As to drawing of such inferences, see: Canizales v Microsoft Corporation & Ors (2000) 99 IR 426 at page 476.

642 The applicants contended that what occurred on the cruise ship on the weekend of 16 and 17 September 2000 was that a meeting took place on 17 September between Stokes, Gammell, Owens, Ramseyer and Curfman and at that meeting (the most likely scenario) or at a later meeting involving Owens, Ramseyer and Curfman, it was resolved that the dealership agreements with the applicants should be cancelled due to the total "frustration" on everybody's part with respect to the sale process and with a view to bringing the 14-months' process to a close. Further, it was submitted that the fact the Court had been given no explanation or untenable explanations as to why the meetings on the cruise ship were not referred to in any of the respondents' affidavits that this: can only support the inference that the decision [to cancel] was taken for inappropriate reasons and/or on insufficient grounds and/or as a consequence of representations/pressure from the Stokes organisation for an improper purpose (i.e., the use of cancellation notices to induce the Applicants to capitulate and take the price and terms for the New South Wales dealership as offered on a "final" basis by the Stokes organisation on 15 August 2000).

643 In summary then what the applicants contended was: (a) The Court should infer that Caterpillar and the Stokes' organisation improperly and for inappropriate reasons made a joint decision that termination would make the applicants "capitulate" and accept Stokes' price and terms; (b) The alleged joint decision and the termination that followed severely weakened the applicants' bargaining position; (c) The decision to terminate was in fact made on 17 September 2000 on the cruise ship and not, as the respondents contended, on 29 September 2000.

644 The respondents contended that there was no proper foundation to support any of the applicants' contentions. The respondents rejected the applicants' assertions as "ill founded and offensive." The respondents submitted that the direct oral evidence of the respondents' witnesses disproved the applicants' contentions. Further, even if, for arguments sake, the oral evidence was to be ignored, the fact that certain matters were not expressly referred to in the affidavits does not provide an evidentiary, factual or legal basis for inferences of the kind contended for. Even if, again for the purpose of argument, this was assumed not to be so, given the direct oral evidence on the point and the absence of any direct evidence to the contrary, it is manifestly clear that no such inferences of the kind contended for can be drawn. This was so because: (a) the "only available" inferences which the Court is asked to draw involve five separate collusive conspiracies each between five people in different organisations and located in different cities and parts of the world - such conspiracies are said to extend to the collusive conduct throughout the period September 2000 to date; (b) the applicants assert that the inferences to be drawn include inferences that "agreements/arrangements or understandings" (of an unspecified nature) were entered into and that the reason it was all being kept secret was because each of Owens, Ramseyer, Curfman, Stokes and Gammell were "well aware" that the meeting was unconscionable and in breach of various (unspecified) sections of the Trade Practices Act and section 46 of that Act; (c) not only were such matters not put to these witnesses but the proposition that such a cascade of conspiracies was motivated by express knowledge of particular provisions of the Trade Practices Act is nothing short of incredible; (d) the applicants' contentions require a conclusion that the senior Caterpillar executives and Gammell lied under oath calmly and consistently in relation to these matters; (e) they ignore the direct oral evidence of the witnesses; (f) they fail to recognise, adequately or at all, the fact that there is no direct evidentiary basis for any such allegation; (g) they overlook the fact that, far from seeking to cover up the fact that discussions occurred between Ramseyer, Owens and Curfman, each of them referred to discussions between them in their respective affidavits. Although it is true that the affidavits did not refer to the fact that some of this discussion occurred on a cruise ship and that, with the benefit of hindsight, it may have been desirable to do so, the express reference to the fact that discussions occurred between the individuals is completely inconsistent with the notion of a "cover up"; (h) the applicants' submissions seek to create a colour or flavour so as to suggest that some how it was inappropriate or improper for Caterpillar executives to be guests (along with 300 or so others) on the cruise ship at the time of the Olympics. There is simply no basis for any such conclusion;

(i) there is no evidence of any communications between the parties regarding any of the alleged five collective conspiracies the subject of the inferences contended for - and despite the fact that, on the applicants' case, such conspiracies must have involved communication between organisations, cities and countries over nearly a two year period; (j) the applicants contend that these conspiracies were motivated by, inter alia, knowledge and awareness of the terms of section 46 of the Trade Practices Act and the fact that the alleged conduct constituted an abuse of market power. The far fetched nature of this allegation is apparent on its face. For the sake of completeness, it perhaps ought be noted that there is no evidence that these individuals (at least two of whom are not resident in Australia) had any knowledge of the various provisions, and that the issue does not form part of this case. Furthermore, there is no foundation in fact or law for any such allegation in relation to section 46; (k) the witnesses' conduct in the witness box is entirely inconsistent with the existence of such conspiracies. If the desire was to keep these various matters secret, having carefully and collectively having done so over many months (on the applicants' case), the witnesses would have lied on oath about the cruise ship rather than freely give evidence about what transpired; (l) the public nature of the event, the number of guests involved, and the nature of the Caterpillar organisations and dealerships make it inherently unlikely that the applicants or others were not aware of the fact that Caterpillar representatives were guests of Stokes in relation to the Olympics. In any event, such matters objectively militate against the existence of any secret conspiracy; (m) contrary to the implicit assertion of the applicants, Canizales v Microsoft & Ors (2000) 99 IR 426 provides no authority or support for the contention that inferences of the kind referred to above ought be drawn in this case. Whether it is appropriate to draw an inference in a given case is determined by the nature of the inference sought to be drawn and the facts of the particular case (including the consequences which would or might flow from it). The suggestion that the drawing of an inference in one case (albeit of a different kind, involving different facts etc) warrants the drawing of serious inferences of the kind contended for in this case is without merit; (n) as the Courts have been careful to point out, "… inference must be carefully distinguished from conjecture or speculation …" Even if this was a case where the conjecture were plausible (which it is not) it would not assist the applicants. "A conjecture may be plausible, but it is of no legal value, for its essence is that it is a mere guess …" ( Scott v Perry 1995 (SR) NSW 375 at 377), 383 (Full Court). "In contradistinction to such a conjectural opinion, an inference is a reasonable conclusion drawn as a matter of strict logical deduction …" from the established facts. It must be something which follows from given premises as certainly or probably true, and the mere possibility of truth is not sufficient to justify an inference to that effect. Gurnett v Macquarie Stevedoring Co Pty Ltd (1955) (SR) NSW 243 at 248 (Full Court).

645 As to the applicants' assertion that one or both of the decisions to either terminate or the service of termination notices, severely weakened the bargaining position of the applicants, the respondents submitted this was unsound for four reasons: (a) there was a meeting of the minds on 15 August 2000 - or, on the applicants' evidence, at least by 29 September 2000 in relation to the terms of sale; (b) the opportunity to proceed with the deal on the basis contemplated before termination, remained open thereafter - a fact confirmed not only by Gammell's affidavit but by the applicants' communications with their banks; (c) the only reason that the deal has not proceeded is because of the conscious and strategic choice made by the applicants; (d) on the applicants' case none of these events made any difference, because they now say that once they had become aware of potential litigation avenues (and, in particular, section 106) their position changed - and that it would have changed earlier had they been so aware.

646 As to the timing of the termination decision, the respondents submitted that no termination decision was in fact made until the approval of the Chairman (Barton) had been obtained. According to Owens, that occurred on 29 September 2000. It was submitted there is no factual or evidentiary basis for concluding otherwise. With respect to Curfman's evidence, it is consistent with Owens when all of the evidence is read and fairly considered. For example, Curfman indicated that "[17 September] was the date upon which to begin the process of termination". This, it was submitted, was consistent with Owens' evidence that he asked Curfman to work with the legal team to prepare steps for termination, which by that stage Caterpillar was concluding was likely to be necessary.

647 The applicants contended that on 17 September 2000 it was only the ceremonial signing in relation to the China dealership that took place on the cruise ship and that the New South Wales position was not discussed at that meeting. It was submitted there was a subsequent meeting held with Stokes and Gammell where Stokes expressed his frustration with the applicants and Caterpillar merely encouraged further negotiations.

648 It is simply impossible to believe that a meeting did not take place on the cruise ship regarding the sale of the New South Wales dealership. Curfman asserted that there were two meetings held on the same day on that ship, the first between Stokes, Gammell, Owens, Ramseyer and himself and the second between Owens, Ramseyer and himself. Whilst Curfman expressed some uncertainty as to the date upon which those meetings occurred, initially saying it was 18 September but thereafter was not quite so sure, Gammell was clear that the meeting that he and Stokes attended with the Respondents' representatives took place on Sunday, 17 September 2000.

649 It is also impossible to believe, despite the denials, that Messrs Owens, Curfman, Ramseyer, and Gammell either forgot about the meetings on the cruise ship in September 2000 or considered the meetings were so unimportant or not relevant that it was not necessary to refer to them in their respective affidavits. Whether there was one meeting involving all of these gentlemen and Mr Stokes or two separate meetings, the meeting or meetings formed part of the essential fabric of this case. Whilst they may not have been involved in the meetings, I also note that Messrs Barrett and Nitto were present on the cruise ship and neither of these two witnesses mentioned the fact in their affidavits or in their oral evidence. The cruise ship episode only came to light during the cross-examination of Mr Curfman and by that time Messrs Barrett and Nitto had completed their evidence.

650 I can only conclude that there was an understanding or agreement amongst Gammell, Owens, Ramseyer, Nitto, Curfman and Barrett that there should be no reference to the cruise ship in their affidavits. That is a serious matter and it is a conclusion I have not come to lightly. However, it is beyond coincidence and belief that six men in the positions they held could forget, or consider it irrelevant, to mention the episode of the cruise ship in their affidavits given the prominence for both Caterpillar and the Stokes' organisation of the issue of the applicants' dealership and the fact that a meeting about the issue took place.

651 There are three possible inferences that may be drawn from the failure of the relevant witnesses to mention the cruise ship and the meeting or meetings conducted thereon: (a) That despite it being entirely innocent, they were concerned at how the meeting would be perceived by the applicants and by a court in any potential legal proceedings i.e., the Stokes' organisation funding an all expenses paid meeting about the New South Wales dealership on the cruise ship at a time when there was mounting frustration both within Caterpillar and the Stokes' organisation and one of the options being considered by Caterpillar was cancellation; (b) That there was concern with the implications of the Trade Practices Act for such a meeting. The fact that a number of the persons present were foreign nationals and may not have had personal knowledge of that statute does not mean the implications were not conveyed to them by some other person; (c) That the participants in the meeting were concerned to cover up the fact that a meeting or meetings took place on the cruise ship and at that meeting or meetings a decision was taken to cancel the NSW dealership in order to place pressure on the applicants to sell at the price being offered by the Stokes' organisation.

652 The applicants submitted that I should draw inference (c) above and there is a strong case for so doing. However, I am not certain that the Stokes' organisation actually colluded with the first and second respondents to cancel the dealership in order to bring pressure to bear on the applicants to sell. That is, the executives of both the Stokes' organisation and Caterpillar actually sat down around the same table and worked out a joint plan to cancel in order to pressure the applicants to sell. However, I have no doubt that following the meetings on 17 September both the Stokes' organisation and Caterpillar understood that the way forward was cancellation of the applicants' dealership and that the consequence of this would be to seriously weaken the applicants' bargaining position.

653 The evidence supporting such an inference is as follows: (a) Owens, Ramseyer, Curfman and Gammell failed to reveal in their affidavits that a meeting had taken place on a cruise ship on 17 September involving themselves and Mr Stokes to discuss the sale process. The explanations provided by the respondents' witnesses for not mentioning the significant meetings on the cruise ship were entirely untenable. (b) Owens Ramseyer and Curfman failed to disclose in their affidavits that soon after the meeting with the Stokes organisation Owens authorised Curfman to initiate the termination process immediately. (c) On 15 September Gammell indicated to the applicants that the Stokes' organisation would "revert with a marked-up contract that could lead to a conclusion of this transaction as soon as we are able". (d) On 17 September there were two meetings held on the cruise ship, the first between Stokes, Gammell, Owens, Ramseyer and Curfman and the second between Owens, Ramseyer and Curfman. Whilst Curfman expressed some uncertainty as to the date upon which those meetings occurred, initially saying it was 18 September but thereafter was not quite so sure, Gammell was clear that the meeting that he and Stokes attended with the respondents' representatives took place on Sunday, 17 September 2000. The likely conclusion is, therefore, that both meetings occurred on that day. (e) Stokes and Gammell expressed the view that "they had never dealt with more difficult people in their lives"; they vented their frustration; and, said they thought they were wasting their time and that a deal would not be made. Stokes had claimed, in effect, that the applicants had reneged on a "commercial agreement" made on 15 August. (f) On that same day (17 September) Owens, Ramseyer and Curfman met and resolved that the first applicant should be cancelled due to the total "frustration" on everybody's part with respect to the sale process and with a view to bringing the 14 months' process to a close. (g) Curfman was authorised by Owens to either "pursue with our legal counsel the steps required to terminate" (Owens' evidence) or to "initiate a termination process immediately" (Curfman's evidence). (h) On Monday, 18 September 2000 the Stokes' organisation announced to the applicants that it had changed its mind. It no longer intended to provide a marked-up contract and instead demanded the applicants supply a contract that reflected the "final" offer that it presented on 15 August 2000, with the added threat being that unless such a contract was supplied by 22 September 2000 the Stokes' organisation "will have no alternative but to withdraw from negotiations for the purchase of the company". (i) The Stokes' demand was repeated in its letter of 20 September 2000. In that letter, the Stokes' organisation also confirmed that the terms proposed by it on 15 August "for handling the various contentious issues . . . reflected our final position"; that the contract should reflect "our previous final terms by close of business on Friday, 22 September"; and that "we are not going to address and negotiate these issues on a piece meal basis." (j) The Stokes' organisation commissioned a report from PWC Perth on the value of the Dealership on 5 September 2000. Rather than advise PWC Perth on 28 September 2000 that it was withdrawing from the negotiations to buy the Dealership, it received the PWC Report on 29 September and by 9 October 2000 was advising the National Australia Bank that it was forwarding a typographically correct copy of the valuation that week. This behaviour was consistent with the later admission in the Stokes' organisation letter to Ramseyer dated 12 December 2000 that its withdrawal from negotiations on 28 September was only "temporary". (k) Whilst Curfman asserted that in the week of the 17 September 2000 decision he was instructed to initiate the termination process immediately, he also asserted that he endeavoured to get the Stokes' organisation "back to the negotiation table." However, his evidence as to what he did and when was both vague and confusing, and was inconsistent with his treatment of the applicants after 17 September. The applicants approached Curfman (both orally and in writing) on and from 22 September 2000 to report on the difficulties they were having with the Stokes' organisation and the deadline that it had imposed of 22 September 2000 and to seek his advice and assistance. Despite the requests for assistance Curfman did not seek to call a meeting between Gough and/or Gilmour and the Stokes' organisation during that week (even though he knew the applicants were willing); did not advise the applicants that Owens and Ramseyer were in town and had already met with Stokes and Gammell; and, provided Gough and Gilmour with no constructive advice or assistance whatsoever at any time prior to the Stokes' organisation's decision to withdraw from negotiations on 28 September 2000. Curfman did not suggest a meeting with Owens and Ramseyer so that the applicants could give their side of the story with respect to the sale process and to answer the Stokes' organisation's allegation that the applicants had reneged on the commercial agreement reached on 15 August 2000. (l) If it had truly been the respondents' strategy following the meeting on the cruise ship to get the parties back to the negotiating table, it would have been expected that Curfman would have intervened in a positive and helpful way in response to the applicants' request for assistance and would have also approached the Stokes' organisation. That was not the case. (m) The failure by the respondents to provide any constructive assistance to the applicants was in spite of the assurances of assistance that had been made to the applicants from the outset of the sale process. For example, the following statements were made to the applicants:

· "This is a very good opportunity for you. You will do very well financially." - Ramseyer. · ". . . it will be tremendous for you financially. You will be rewarded" . . . and "you will have my full support in achieving a fair price . . ." - Ramseyer. · "Matt further added if we find the negotiations bog down, or that Kerry tries to drive too hard a bargain, we should approach Cat to intervene." - Tong. · "Sig is genuinely wanting to protect your interests to maximise the value." - Tong. · "It is not like a normal situation, like trying to get a good price for the incoming dealer. In this situation we have to see you satisfied." - Tong. · "My role is primarily to help Harcourt to get a good value prior to commencing discussions with a nominated incoming dealer." - Tong. (n) Gammell wrote a letter to Gough & Gilmour dated 28 September 2000, which stated: We have neither received the requested acceptable contract reflecting the commercial terms of the agreement nor any other communication from you. Under the circumstances, we have no alternative but to confirm that we consider the negotiations for the purchase of your company are at an end. (o) Gough phoned Curfman on 29 September 2000 to discuss Gough & Gilmour's position following the withdrawal of the Stokes' organisation from negotiations. Following the phone conversation, Gough & Gilmour wrote to the first respondent by letter dated 29 September 2000, referring to the termination of the sale negotiations and enclosing "a table which lists our understanding of [the issues discussed at the 15 August meeting] and the position adopted in the first draft of the contract". The letter went on: We are confident that we have been negotiating in good faith and that our position is reasonable. Over the course of negotiations we would have developed a better understanding of WesTrac's issues and may well have been prepared to move further. Unfortunately this opportunity has not been afforded to us.

We still believe that were WesTrac to negotiate in good faith and reasonably with us, completion of the sale of the business could occur by 31 October 2000.

Our preference continues to be to remain as Caterpillar dealer. Should this not be possible, we would also be prepared to negotiate in good faith a sale on reasonable terms to an alternative dealer nominated by Caterpillar. We do feel that such negotiations would stand a better chance of achieving a successful and fair outcome if more than one potential purchaser was nominated.

We would be grateful if you would let us know what action you would like us to take. (p) The first respondent responded to Gough & Gilmour's letter of 29 September on 6 October stating that the negotiating process was one between the Stokes' organisation and Gough & Gilmour alone and concluded: It is not for CofA to be now suggesting to Gough & Gilmour 'initiatives' or any 'action' in relation to those negotiations or otherwise how Gough & Gilmour should or may consider dealing with its own assets. It has always been, and continues to be, a matter for Gough & Gilmour alone as to how or to whom Gough & Gilmour may sell or negotiate the sale of its own assets. (q) Gough & Gilmour responded by letter dated 11 October 2000, stating that they would "now like to revert to business as usual and put the sale process behind us", and seeking confirmation on whether such a course would be acceptable to the first respondent. Curfman responded by letter of 19 October 2000, stating that the first respondent's correspondence and discussions had conveyed a "clear and consistent message" as to its position. (r) Curfman, Ramseyer and Owens spoke with one another and determined that it was appropriate to end the dealership. Owens also discussed the matter with Barton. It would appear that this occurred on or about 29 September. Consequently, without prior notice or warning, on 25 October 2000 termination notices were sent to Gough & Gilmour pursuant to the dealership agreements. Those notices specified that the agreements would terminate 90 days from the date on which the notices were posted. Whether the respondents acted unconscionably in deciding to terminate the dealership agreements.

654 Even if I were to put aside the inference that Caterpillar and the Stokes' organisation had an understanding about the cancellation of the dealership and its consequences, there remains the question of whether the respondents acted unfairly or unconscionably in moving to cancel the dealership. In my opinion they did so act. The applicants displayed a distinct partiality towards the Stokes' organisation. There was no genuine attempt by the respondents to ascertain the applicants' side of the story regarding the sale negotiations prior to deciding on 17 September to initiate termination; there was no opportunity given to the applicants to comment on the view taken by the respondents that the applicants were delaying the sale process and that the applicants were not negotiating in good faith. The respondents appear to have simply accepted the Stokes' organisation's version of events, namely, that the applicants reneged on a commercial agreement, which was not the case. There was no constructive effort on the part of the respondents to assist to bring about a settlement after 17 September despite the applicants' desire for them to intervene and assist in bringing about such a settlement. There was no effort to meet with the applicants prior to deciding to initiate termination despite the fact that all of the relevant senior executives of Caterpillar were in the right place at the right time to do so.

655 There was no investigation/evaluation as to whether or not the applicants had behaved reasonably or unreasonably in the sale process but rather an acceptance of the Stokes' organisation's view as to the cause of the problem. The evidence that supports this is as follows:

· Ramseyer indicated that the position was that if there was an impasse then he would seek authority to cancel the dealership agreements; · Ramseyer admitted that he did not seek to investigate as to why the negotiations failed but just spoke to Stokes and relied on information provided by him; · Ramseyer admitted that whilst the Stokes' point of view as to why the sale process had failed may have been a little biased, he made no allowance for that bias and did nothing to overcome it, for example, by seeking to check whether the Stokes' assertions were true or not; · Ramseyer and Curfman came to the conclusion that Gough was stalling the issue and would not proceed to a sale; · Ramseyer believed that the failure of the sale process must have been Gough's fault; · There was no report prepared on the failed negotiations; · Curfman believed that the applicants had reneged on the details of the commercial agreement; he accepted the Stokes organisation's explanation at face value; and did not seek to verify the accuracy of the Stokes' organisation's account of the agreement; · Curfman was aware that there was an issue as to asset values but this was a matter "between buyer and seller" and therefore he did not get involved; · Curfman indicated that the respondents' position was that it did not care who was to blame for the state of the negotiations; · By around 28 September 2000, Curfman accepted the Stokes' organisation's view that a deal would not be done and that this could all be blamed on the applicants. This was his view although he was not in a position to evaluate who was reasonable and who was unreasonable in the process; · Curfman claimed that he had no way of knowing whether the applicants had been negotiating in good faith or if their position was reasonable; · Curfman did not attempt to verify the Stokes' organisation's claims regarding the negotiations as he did not trust the applicants; · Curfman agreed that nobody conducted an evaluation to determine whether the applicants behaved unreasonably during the negotiations; · Curfman admitted that it was the first respondent's role "to assist" the applicants if any difficulties arose in the negotiations but refused to do so (when the applicants requested assistance on 22 September 2000) because the cancellation decision had already been made by around 18 September 2000; · Curfman was aware of the parties' disagreement over EBIT and the Stokes' organisation's view that the goodwill should be $50 million instead of $82 million, but did not ask anyone to check the EBIT figures; · Curfman admitted that it would have been a good idea to get an independent party or an agreed party to come in and value the assets to see if the parties could reach an agreement; · In August 2000 Curfman was aware that there were fourteen issues in contention between the parties but did not attempt to resolve any of them; · Curfman at no stage suggested that there should be a third party intervention to try and resolve the dispute despite the fact he felt it was a good idea.

656 The respondents' conduct in relation to the sale process was completely at odds with the assurances given to the applicants that the respondents would assist the applicants in the sale process and that the process would be amicable.

657 Given the respondents' evidence that cancellation is a measure of last resort - that is, all other reasonable alternatives are explored before a decision to cancel is taken - and that such a policy is treated seriously by Caterpillar, it seems to me to have been incumbent upon the respondents to satisfy themselves that, indeed, there were no options open other than cancellation and that proper grounds existed to support cancellation. This they failed to do. THE TERMINATION CLAUSE

658 Clause 29 of the Sales and Service Agreement provides, inter alia, that: either party may terminate this agreement, with or without cause, by mailing notice of termination to the other party. In the event either party so mails notice of termination, this agreement shall terminate, subject … to any written agreement to the parties to a different date, on the 90th day following the day on which such notice is mailed. Such termination shall be deemed a termination by the party which mailed the notice of termination.

659 The applicants contended that the 90 days' clause in the dealership agreements is unfair and seek its deletion. The applicants contended:

a) the present 90 day clause is entirely inconsistent with the true arrangement between the parties as to longevity/security in the dealership;

b) the clause is entirely inconsistent with the period of fair or reasonable notice that would be arrived at by application of the principles enunciated by the Court of Appeal in Crawford Fitting Co v Sydney Valve and Fitting Pty Ltd (1988) 14 NSWLR 438, especially given the applicants' "extraordinary investment" in the dealership;

c) the level of investment that the applicants have made in the acquisition of premises and the upgrading and development of infrastructure was based upon the expectation that they had a long term arrangement with Caterpillar;

d) the first applicant's contracts and arrangements with third parties contemplate long-term business relationships;

e) Parramatta was specifically designed and built to cope with all present and likely future Caterpillar equipment. In line with the first applicant's expectations regarding the long term nature of the business, the facility was built in a manner which would allow for future expansion.

f) other factors that suggest that a 90 days' clause is both unfair and unreasonable include the following: i) The first applicant has contracts of employment with approximately 800 staff (as at 15/1/2001); ii) The first applicant has invested heavily in a range of in-house training programmes to develop the skills of its workforce; iii) The first applicant has consistently maintained the biggest apprentice training programme of any Australian dealer at an overall cost in excess of $20 million over the past 12 years; iv) The first applicant invests heavily in employee training and its apprentice program in order to maintain a highly skilled workforce; v) It has always been Danckert's view that the decision to open a branch is a long term decision. If Danckert had been aware that there was a real likelihood of the dealership being terminated, he would not have supported significant expenditure towards new or existing branches and would certainly have opposed the purchase and development of the Parramatta site; vi) Over the years Danckert has supported the first applicant being placed in a position of significant exposure for liability under leases, believing there was no prospect of the 90 day term being invoked. g) the 90 days' clause is also unfair and unreasonably short by reference to the principles enunciated in a significant number of decisions of this Court (and its predecessors), with respect to both employment contracts and independent contractual arrangements see: for instance, Avis v AMP [1995] NSWIRC 238 as affirmed on appeal in AMP v Avis (1997) 111 IR 1 (5 years notice); see: also Mitchell v Interstate Pipelines Pty Limited (1998) 87 IR 324 (6 months' notice); h) in the context of this particular contract/arrangement, the 90 day clause is also inconsistent with the principles enunciated in Day v Lumley Life Limited (1999) 90 IR 70 at 71 as cited with approval in Reich v Client Server Professionals of Australia Pty Limited . That is, just as employers cannot conduct themselves by reference only to their own best/self-interest, this principle applies with equal force in the context of longstanding business relationships between independent contractors. It is also contrary to established and recognised notions of "business morality": see the Commonwealth v Verwayen (1990) 170 CLR 394 at page 441.2 to 441.6; see also Northside Development Pty Limited v Registrar General (1990) 170 CLR 146 at page 165.1; i) the first applicant entered into many other contracts and arrangements on the basis of its expectation and belief of a long term arrangement that could not be terminated on 90 days' notice.

660 The only issue here is whether the period of notice is unfair. Given my findings regarding the first and second assurances, the applicants are unable to sustain their contentions regarding security and tenure and, therefore, there is nothing inherently unfair about the without cause provision in the dealership agreements except where the first respondent's right to terminate without cause conflicted with its obligation to take all reasonable steps to avoid cancellation of a dealership.

661 In relation to the 90 days' period I accept the respondents' contentions that:

a) Even if it could be said that the applicants had made extraordinary investments then consistent with the principles in Crawford Fitting, the applicants have had ample time to recover that expenditure. In any event if the sale had proceeded or does proceed it seems to me the expenditure will be recovered; b) If the sale to WesTrac had proceeded or proceeds on the basis agreed then, as a matter of law, all employment contracts, commercial contracts and leases etc., between the first applicant (or any of its subsidiaries) and third parties will remain on foot and be unaffected. Further, the documentary evidence establishes that, in any event, WesTrac expects to employ additional labour and the affidavit and oral evidence confirms security of employment.

662 It seems to me, however, that 90 days is an inordinately brief period to wind up the affairs of the business the size and complexity of the applicants' dealership. If 90 days' notice had been given to the applicants in June 1999 rather than the making of a request to sell their interests in the dealership, that period of notice would have been patently inadequate - even on the basis of Curfman's expectation, which was that the sale would be completed by December 1999.

663 Of course, in circumstances where Caterpillar has asked a dealer to sell its interests in a dealership and the sale successfully takes place, then 90 days' notice given at about the time the transfer is to occur may well be adequate.

664 The particular circumstances in this case are that in deciding to end the relationship Caterpillar afforded the applicants the opportunity to sell their interests in the dealership. That sale was unsuccessful and the respondents moved, albeit unfairly, to cancel the dealership agreements on 90 days' notice. The termination notices have not yet taken effect by virtue of these proceedings.

665 I do not consider that I am in a position to make a judgment about whether or not 90 days' notice would be fair in the circumstances referred to in the preceding paragraph. If, however, the Court finds unfairness within the meaning of ss 105 and 106 of the Industrial Relations Act but refuses the primary relief sought by the applicants the question becomes whether the Court should grant the alternative relief claimed, that is compensation, and/or some other form of relief such as a longer period of notice than 90 days.

666 If the Court were to opt for a longer period of notice it would be appropriate to allow the parties to address this question in the context of the alternative forms of relief that might be available to the applicants. I will address this question later in the judgment. DISPUTE RESOLUTION

667 It was alleged, in par 36(d) of the Summons, that one of the respects in which the dealership agreements were unfair was that they failed to provide any "grievance handling/dispute resolution provisions". Paragraphs 2 and 2A of the Summons seek orders that the dealership agreements be varied in accordance with Schedule A to the Summons. Paragraph 13 of Schedule A of the Summons seeks the insertion into the dealer agreements of a provision entitled "Dispute Resolution", the substance of which is to require the parties to enter into a specified dispute resolution procedure in circumstances of dispute between them.

668 The idea of a dispute resolution provision in the dealership agreements is immediately attractive. The question is, however, in the absence of such a provision did the agreements operate unfairly?

669 There is an arguable case that the agreements did operate unfairly in the absence of a formal dispute resolution mechanism. For example, in the RPI dispute it is clear that, ultimately, the respondents used their dominant position in the relationship to insist on the terms of the resolution of the dispute whereas independent mediation or arbitration might have produced a different result.

670 What I am not convinced about, however, considering the overall poor state of the relationship and the absence of effective cooperation and trust and confidence, is whether a dispute resolution clause would have made any material difference given the adversarial disposition of the applicants.

671 Gough himself gave evidence that he was aware that Caterpillar's philosophy was that issues between the parties should be "discussed as partners and resolved, not as combatants and aggressors, but as parties working together seeking to reach compromise where there was a dispute or an issue between them" and that, when used, this approach works. Further, Gough agreed that the parties have to try to work things out for themselves through trust, confidence, and give and take and that, given the nature of the relationship, the parties could not afford to be going to dispute resolution over operational matters. Operational matters included of course the TEPS, RPI and Cadia disputes.

672 I note that the clause proposed by the applicants was widely drawn so that it would capture virtually any dispute between the parties, no matter how large or small, (the clause operates "if a dispute arises out of or in relation to this Agreement, or its operation"). I think there is some substance in the respondents' contention that such a clause: ... would not be a solution for the fundamental relationship difficulties between the parties. As the evidence in this case has revealed, a myriad of issues have been the subject of dispute, disagreement, or hostility on the part of Gough & Gilmour toward Caterpillar. Those issues go far beyond the Cadia, RPI and TEPS disputes. If every one of these issues were to be referred to a dispute resolution process, the Caterpillar business in New South Wales would grind to a halt.

673 As Mr Nitto said in his evidence: Q. Based on your experience with the Gough and Gilmour dealership over the years that you've had, you have had some formal process, what is your expectation as to how [the dispute resolution mechanism] that might operate in the context of Gough and Gilmour? A. I guess my perception was that if there was such a mechanism such as that, we would wind up utilising probably it every three or four weeks. Have you ever tried to run that kind of business that large that way?

Q. Does that make for a workable relationship in your view? A. I don't believe so. 674 The other difficulty with the dispute resolution clause proposed by the applicants was the effect that such a procedure, and the delays inherent in it, would have upon Caterpillar's customers. As Barrett explained in his evidence: Caterpillar, in working with its dealers, traditionally prefer to work on the customer issues, for they are the people we want to make sure are not hung out to dry or certainly disadvantaged by an internal process within Caterpillar, and if they had to wait on a position between Caterpillar and the dealer to go through some form of dispute resolution mechanism, we would certainly be criticised greatly, the pair of us, in terms of the market's perception of how we ran our business.

675 The remaining point to be made is that for the Court to impose a dispute resolution procedure on the parties might well create its own unfairness. This is especially so when the relationship is in the nature of a relational contract and is meant to operate on the basis of mutual trust and confidence and where the parties are required to work out, in good faith, their own solutions in circumstances where the issue is not dealt with expressly in the contract.

676 On balance, I have come to the view that the absence of a formal dispute resolution provision in the dealership agreements has not caused unfairness.

677 The applicants contended that the contract/arrangement was unfair and operated unfairly insofar as it permitted (or did not prevent) the respondents proceeding to cancel the applicants' dealership agreements in circumstances where it was said: (a) It had had a longstanding, qualified and suitable dealer principal in Gilmour about whom the Respondents had not lost "trust and confidence" and about whom no complaint whatsoever was made. (b) There was not even any discussion between the Respondents and Gilmour either in June 1999 or in September 2000 with a view to seeing how his undoubted rights and interest could have been accommodated, even if it was accepted that Gough could not or should not be accommodated (whether by way of improvement plan, step back option or whatever). (c) There is no evidence whatsoever that the Respondents, recognising Gilmour's legitimate position vis-à-vis continuity, ever approached the Stokes organisation with a view to demanding or even proposing that Gilmour's ownership interest in the NSW dealership (whether as dealer principal or otherwise) be preserved.

678 It is readily apparent from the evidence in these proceedings that the wellspring of the respondents' discontent was Mr Gough. Mr Gilmour was regarded by the respondents as a capable manager but one loyal to the first and second applicants and subject to the dominance of the majority shareholding and influence of the second applicant.

679 It would appear that in the few days following 8 June 1999 Caterpillar was contemplating a situation whereby Gilmour would be free to stay on at his own choice and perhaps retain his shareholding but the majority shareholding would be sold to a new owner. However, Gilmour's request through Mr Langmore to put "some proposal together with Caterpillar to keep his management team and group together" (but in the absence of Gough) and to "get on with life", was rejected by Curfman. Thereafter what was, in my opinion, a half-hearted effort on the part of Mr Gilmour to bid for the dealership, it is clear that Mr Gilmour saw his position as indistinguishable from Mr Gough in terms of the sale/exit process. 680 In my opinion, in the absence of any assurances as to tenure and security and in light of the without cause termination clause in the dealership agreement, the first respondent was entitled to take the view that there should be a clean break with the applicants. In other words, at the time it recommended an end to the relationship with the second and third applicants there was no obligation on the first respondent to require Mr Gough to sell his shares but allow Mr Gilmour to remain and operate the dealership in his own right.

681 To put it another way, regardless of Mr Gilmour's credentials to run the dealership or whether he personally contributed to the poor relationship, there was no unfairness in the first respondent's decision not to differentiate between the second and third applicants in recommending an end to the relationship.

682 Moreover, I agree with the respondents' submission that as the joint dealer principal, Gilmour cannot escape a share of responsibility for the position that the dealership found itself in as at June 1999. Caterpillar's decision to seek to bring the relationship to an end had at its core the fact that there did not exist the necessary relationship of trust, confidence and co-operation. Gilmour was well aware of Caterpillar's concerns about the relationship but he chose to do nothing of any substance to repair the damage. Mr Gilmour cannot, in those circumstances, seek to have his position considered independently from that of Mr Gough in these proceedings.

683 Following the issue of notices of cancellation on 25 October 2000, the applicants filed a Summons for Relief under sections 106 and 107 of the Industrial Relations Act 1996 on 27 October 2000. The applicants were granted limited interlocutory relief on the same day "to the effect that the First Respondent was to refrain from informing, advising or otherwise communicating to any person that the Respondent had given or intended to give notice to terminate the dealership agreements." On 10 November 2000, the Court endorsed an agreed position that included an undertaking by the first respondent to extend until 25 October 2001 the effective termination date for the dealership agreements.

684 By notice of motion filed 27 September 2001, the applicants sought to postpone the termination date of the dealership agreements until their main application had been heard and determined, and to "prevent the respondents taking any steps inconsistent with or prejudicial to the ongoing operation of the dealership" in the intervening period. The Court acceded to the applicants' request on 23 October 2001.

685 In the context of the interlocutory relief having been granted to the applicants on 27 October 2000 and following a later agreement to extend that relief until 25 October 2001, in late November 2000 Curfman telephoned Stokes and asked him whether he was still interested in acquiring Gough & Gilmour's assets. On 27 November 2000, Gammell telephoned Curfman and said that the Stokes' organisation was still interested in acquiring Gough & Gilmour's assets, but that it was concerned that Gough & Gilmour would not sell.

686 By letter dated 8 December 2000, the Stokes' organisation wrote to Gough & Gilmour, stating: It's been several weeks since the conclusion of the Olympic activities and our last discussion relating to the sale of the Caterpillar business in NSW…

I continue to believe the principles for potential agreement as discussed by us on several occasions are still valid and I believe that we should attempt a resumption of discussions.

I have just arrived back from overseas today and I will be away again from the end of next week until to mid January. However, I would like to meet with you before I depart, if possible on Monday, to discuss this further.

687 Gough & Gilmour responded by letter dated 8 December 2000 stating: Thank you for your letter of 8 December 2000, suggesting a further meeting between us.

While we intend to continue our ongoing discussions with Caterpillar of Australia Limited regarding the Dealership relationship, we are happy to meet with you at a convenient time.

However, we are not available to meet next week. A meeting after Christmas would be more appropriate from our point of view.

688 In January 2001, the Stokes' organisation again sought a meeting with the applicants and the applicants indicated that they would contact Stokes when in a position to hold a further meeting. Following a meeting between Curfman and the applicants, Stokes again requested a meeting by letter dated 9 February 2001.

689 Further attempts were made by Stokes to recommence negotiations. By letter dated 26 March 2001 the Stokes' organisation set out a detailed proposal with a view to facilitating the acquisition and indicated they would be happy for that to be conveyed to the applicant. This reflected the deal reached in principle in August 2000.

690 Without prejudice discussions took place between the applicants and Owens on 16 March 2001 and Owens sent a fax to the applicants dated 28 March 2001 encouraging them to recommence negotiations.

691 By letter of 11 April 2001 the applicants made clear that they did not propose to continue with negotiations. In this regard, the respondents submitted: As has been revealed, this was simply the formal articulation of the election made by its conduct in connection with the draft contract in August and September 2000. Its action between 15 August and 28 September 2000 had been intentionally provocative and inflammatory by reason of the decision to avoid any constructive attempts to finalise the contract. Further, the election thereafter not to consummate the deal on the previously agreed basis was a conscious strategic election - raising the question of whether the applicants' conduct in relation to the contract demonstrates that this decision had been made some time earlier.

692 The respondents referred to various bank and other documents that they submitted revealed the various undisclosed options considered by the applicants and the fact that they were pursuing a deliberate strategy on the basis of perceived fall back positions. The essence of this strategy, it was submitted, was tying Caterpillar up in the courts for years knowing there was always the option of selling to WesTrac or pursuing some other profitable alternative. The respondents referred to a number of examples of the alternatives, including: (a) Danckert's 14 June 2001 letter to Colin O'Connor of Westpac attached updated financial information in respect of the borrowing facilities in place between Gough & Gilmour and Westpac. The letter stated, in part: "I also confirm my previous advice to you that we do actually have 'on the table' a refreshed offer from Australian Capital Equity indicating their willingness to resume negotiations to purchase the company for an amount equal to net assets, plus goodwill of $50 million. Whilst their proposal is not currently being pursued, it continues to represent a fall-back position for our shareholders". (b) Westpac's "credit approval summary" for Gough & Gilmour dated 25 August 2001 recorded, under the heading "principal credit risks and justification", the following: "The outcome of the litigation against Caterpillar of Australia is expected to take many more months to decide (likely early 2002). Win or lose, Gough & Gilmour have some reasonable commercial alternatives available to it, including the option to sell the business to WesTrac for an amount approaching the current offer of net assets plus $50 million goodwill. WIB's position is adequately documented and secured and in the unlikely event that we would have to exercise our security, our facilities would largely be repaid by the net amount that would be owed by CAT for the return of Caterpillar inventory plus cash on hand." (c) Westpac's August 2001 "Credit Risk Analysis" stated, amongst other things: "There are many possible outcomes for Gough & Gilmour depending on the result of the litigation including: · the business continues 'as is' with a 'fairer' distribution agreement; · the business is sold through a competitive process i.e. involving more potential buyers than just WesTrac; · WesTrac and Gough & Gilmour recommence negotiations for the sale of the business and an agreement is reached. According to Gough & Gilmour the offer from WesTrac of 'net assets plus $50 million in goodwill' is still 'on the table' but is not being actively pursued at present; · Gough & Gilmour continue to trade as dealers in used Caterpillar equipment and provide maintenance services for Caterpillar and other equipment. They may also use their extensive branch network to distribute other related products to the same customer base. In addition they could acquire or merge with other businesses (such as Emeco or Expressway Spares) that currently operate in this market 'space'."

693 The applicants submitted that the Court should not draw any adverse inferences from the fact that they have declined to negotiate with WesTrac since December 2000 when WesTrac sought to re-open the sale negotiations and instead have pursued the litigation alternative. This was so, it was submitted, for the following reasons: (a) The applicants have desired to retain the dealership and they only ever negotiated with the Stokes' organisation because they were unaware of any legal process that could have enabled them to keep the dealership. Once they became aware of section 106 and immediately took proceedings pursuant to that section with a view to keeping the dealership, what had formerly been an imperative to negotiate with the Stokes' organisation, was no longer operative. (b) The Stokes' organisation had played "hardball" at all stages of the negotiations; had refused to accept any of the applicants' responses/defences to the various allegations/criticisms made by the Stokes' organisation of the applicants' stance on the question of asset/goodwill value and/or appropriate contractual terms; and had in fact adopted a belligerent and aggressive approach in those negotiations. The applicants had no basis for believing that the Stokes' organisation would behave any differently on the resumption of the negotiations. (c) The respondents, whilst initially providing assurances to the applicants as to the assistance they were prepared to give if Stokes sought to "drive too hard a bargain" or otherwise "chisel the price", reneged on those assurances and categorically refused to provide any support or assistance to the applicants even when that support, assistance and advice was sought at the most critical stages in the negotiations, that is late July / early August and again in mid-September 2000. Accordingly, the applicants were concerned about the respondents' impartiality and their capacity and preparedness to provide genuine assistance to the applicants in the face of any unreasonable stance/behaviour on the part of the Stokes' organisation. (d) The applicants were aware that their bargaining power was decidedly weaker post cancellation and so were reasonably entitled to believe that there was even less chance of a fair deal in that new context. (e) The nature and extent of the contact between the respondents and the Stokes' organisation during the sale process, being contact that had occurred to a very large extent without the applicants' knowledge, has only served to confirm the reasonableness of the applicants' stance with respect to the issue of resuming negotiations with the Stokes' organisation.

694 As to the other options available to the applicants, for example becoming used equipment dealers, I imagine that the applicants' position is that it wishes to retain the dealership and is hopeful that litigation will achieve that objective, thereby obviating the need to take up an alternative business option.

695 In my opinion, the weight of the evidence is against any finding that the applicants' strategy was to "tie Caterpillar up in the Courts for years knowing there was always the option of selling to WesTrac or pursuing some other profitable alternative". Having decided on the litigation option the applicants were entitled to pursue that course rather than opt for renewed negotiations with WesTrac, especially in light of a claim that involves a continuation of the dealership.

696 As the respondents contended, the expert evidence in the proceedings principally concerned two issues: (a) return on investment; and

697 As to return on investment the respondents contended that this was an issue to be taken into account in assessing the overall question of unfairness. That is, the Court should take into account the following: (a) the effect of the contracts upon each of the applicants Mr Gough, Mr Gilmour and the corporate entity Gough & Gilmour Holdings Pty Ltd, has been to return to each multi-million dollar profits in respect of the work performed by them and derived from the Caterpillar support and infrastructure systems; and

(b) the financial returns received to date by each of the applicants together with those that are potentially receivable (in particular on the basis of the offer recorded as being "on the table" from WesTrac) in combination exceed any alternative and available investment returns (treasury bills, all ordinaries index, all industrials index and small ordinaries index) or the remuneration to be derived from any comparable "employment" or commercial activity.

698 As to fair value in the sale process, the respondents contended that: ... if the outcome of a sale process alleged to be unfair is the opportunity to achieve a sale price that is shown by the expert evidence not only to be fair but an excellent outcome, then it is difficult (if not impossible) to see how the other aspects of alleged unfairness can be said to have any particular material relevance or impact.

699 In relation to the return on investment issue the respondents called as an expert witness Mr Andrew Ross, a chartered accountant and, at the time (May 2001), a partner of Arthur Andersen. The applicants called as their expert witness, John Henry Banks, a consultant at KPMG. Both experts provided written reports. For the reasons contended by the respondents I did not find Mr Banks' capital budgeting approach to be of any particular assistance.

700 Mr Ross was not challenged by the applicants and he was not required to be called to be cross-examined on his report.

701 Mr Ross' approach to the question of return on investment was: (a) in respect of the first applicant, Gough and Gilmour Holdings Pty Limited ("GGH") to: (i) adopt as a definition of the return on investment of a Company, the profits of the Company after deducting interest and taxation. By adopting this approach, Ross did not include in the return achieved by the Company any (as yet) unrealised gain in the value of its business which might for example arise on the sale of its business or assets; and (ii) calculate the rate of return achieved by the Company by comparing the return calculated in this way to the Net Assets (or Shareholders' Funds) of the Company at the beginning of the period for which a return is being calculated; and (iii) compare the rate of return so identified to the rate of returns from a range of other alternative investments for the same period. (b) in respect of the individual applicants, Messrs Gough and Gilmour: (i) calculate the total of the amounts derived by each from: · salaries and other benefits; · dividends; · capital growth on funds invested as equity; and · interest on debt funds; (ii) derive the rate of return achieved by each by comparing this total with the total of the funds invested by each individual in the enterprise [GGH], after taking into account the period of time during which those investments were in place; and (iii) compare the rate of return so identified to the rate of returns from a range of other alternative returns over the same period.

702 In respect of the return on investment achieved by GGH, Ross' conclusions were that:

· GGH acquired the Caterpillar dealership business with an investment of $7 million; · based on the information provided to us, GGH has achieved returns on its investment in the dealership business in the period from 1989 to 2000 totalling $97.4 million. The pre-tax return for this period totals $142.2 million; · based on this analysis, the after-tax returns achieved by GGH, on its investment in the dealership business over this period have averaged 34% per year. The pre-tax return for the same period has averaged 45%. However, none of these returns captures the increase in capital value of GGH's business that may be achieved on a sale of that business. Including that increase would produce higher rates of return; · … the returns achieved by GGH have been significantly higher than the returns achieved from these alternative investments in most years ...

703 In respect of the return on investment achieved by Gough, Ross' conclusions were that:

· the total return received by Gough from 20 February 1989 to 30 June 2000 was $130.59 million, assuming a value of his shareholding at 90% of the value of the offer by WesTrac of 26 March 2001 (assessed at $116.35 million); · Ross' calculations do not include the fact that since 30 June 2000, Gough has received dividends totalling a further $1.89 million from GGH. 704 Ross goes on to state in his opinion that:

· Gough suggests that he has reinvested the great majority of the dividends he has received. However, based on the information provided to us, it does not appear that, at 30 June 2000, these dividends, if initially reinvested, remained reinvested in the GGH group of companies; · if WesTrac's offer is accepted, Gough's total return (including his salary) is equivalent to an annual compound return of 47%. This means that, on average, Gough doubled his money every 22 months during the 11 years to June 2000; · if his salary and other related benefits are excluded from this analysis, his annual compound return is still 47%; · even if GGH is only sold for the book value of its net assets at 30 June 2000, and if Gough's salary and other related benefits are excluded from this analysis, Gough will still have achieved a return of $79.2 million on his $3.15 million in shares. That return represents an annual compound return of 41%; · these rates of return reflect the high returns that Gough has received relative to the low cost that he paid to acquire his shares in GGH; · Gough's annual returns between 1989 and 1996 have exceeded those of alternative investments and, in the years since 1996, have been broadly in line with those alternative returns; · we conclude that, irrespective of whether Gough sells his shares now to WesTrac or only for the value suggested by the underlying net assets of GGH, Gough has already received, and will receive a very significant return for his relatively small investment in GGH …".

705 In respect of the return on investment achieved by Gilmour, Ross' conclusions were that:

· the total return received over the period from 20 February 1989 to 30 June 2000 was $16.74 million which sum includes a calculation of the value of his shares on the sale to WesTrac calculated as 10% of the $116.35 million figure; · Ross' calculations do not include the fact that since 30 June 2000, Gilmour has received dividends totalling a further $210,000 from GGH. 706 Ross goes on to state in his opinion that:

· based on the information provided to us, it does not appear that at 30 June 2000, these dividends, if initially reinvested, remained reinvested in the GGH group of companies; · if WesTrac's offer is accepted, Gilmour's total return (including his salary) is equivalent to an annual compound return of 61%. This means that, on average, Gilmour doubled his money every 18 months during the 12 years to June 2000; · if Gilmour's salary and other related benefits are excluded from this analysis, his annual compound return reduces to 58%; · even if GGH is only sold for the book value of its net assets at 30 June 2000, and if his salary and other related benefits are excluded from this analysis, Gilmour will still have achieved a return of $9.1 million on his $350,000 in shares. That return represents an annual compound return of 52%; · Gilmour's annual returns between 1989 and 1996 have exceeded those of alternative investments and, in the years since 1996, have broadly in line with those alternative returns; · we conclude that, irrespective of whether Gilmour sells his shares now to WesTrac or only for the value suggested by the underlying net assets of GGH, he has already received and will receive a very significant return for his relatively small investment in GGH ….

707 I will address the issue of return on investment when I come to consider the overall question of unfairness.

708 Mr Mark Bryant, also a partner with Arthur Andersen (as at September 2001) gave expert evidence for the respondents regarding valuation and due diligence issues. For the reasons contended by the respondents I also prefer Mr Bryant's approach over that of Mr Banks to the question of fair value in the sale process. Mr Bryant approached the question of valuation on a "what is" basis; Mr Banks approached it on what I consider to be a hypothetical basis, namely:

· GGH and its shareholders have the rights to convey to any acquirer of GGH or its business the right to be the Caterpillar dealer, that is Caterpillar of Australia Limited ("CofA") will not unreasonably withhold its consent to the appointment of any potential purchaser of GGH's business as a Caterpillar dealer in New South Wales and the ACT; · the relationship with Caterpillar cannot be terminated at 90 days' notice. Whilst the dealership agreements between GGH and CofA contain clauses to the effect that they may be terminated on 90 days' notice without cause, in practice the termination provisions only operate where the dealer (GGH) is guilty of significant and sustained poor performance or has otherwise been guilty of serious and wilful misconduct; · the business can be sold as a going concern on an open market; and · the business is independent and can stand-alone …. 709 Mr Bryant approached the issue of an appropriate valuation methodology by first considering the terms of the Sales and Service Agreement between Caterpillar and the applicants. In light of those provisions he concluded:

· Because of the COA [Caterpillar of Australia] Retained Rights, neither GGH nor its shareholders has the right to continue as a Caterpillar dealer in the event of the sale of shares or GGH's business; · in those circumstances, the NRA [notional realisation of assets] method referred to at paragraph 26 above is, in our opinion, appropriate to derive GGH's Market Value. That method is used for a company with no expectation of substantial future profits (substantial enough to make continued operations more rational than selling off assets and closing down). A calculation of Market Value, by definition, assumes a transaction resulting in a new owner. GGH could not cause to be transferred to that new owner the right which was essential for substantial future profits: the right to be the Caterpillar dealer in NSW and the ACT. Therefore, if sold on the open market - which, by definition, is assumed in an expression of Market Value - GGH could expect no future profits from Caterpillar related activity …

710 Bryant's assessment of the net asset value of the dealership was in the range of $61 to $67 million. Banks' assessment was $59 million. The assessment of Bryant as to the value of the dealership to a successor dealer was in the range of $85 to $95 million. Banks assessed the successor value to be in the range of $68 to $89 million. The Bryant range of values attributable to the Stokes' organisation's offer (both the August 2000 and March 2001 offers) was $113 to $116 million (exclusive of debt). Banks' assessment was $85 to $112 million (March 2001 offer exclusive of debt).

711 Bryant then assessed the value of GGH on the basis of a "Hypothetical Independent Company" ("HIC"). That is "a hypothetical company which, in addition to having all of the features of GGH, also owns the COA [Caterpillar of Australia] Retained Rights, and hence has an independent, stand alone business." "Retained Rights" means the rights retained by Caterpillar to choose which individuals are involved in Caterpillar dealerships and when changes in such involvement should occur. Bryant's HIC valuation as at September 2000 was in the range of $107 to $141 million. Banks' assessment was in the range of $134 to $161 million.

712 It may be seen from the experts' analysis that: (a) On Bryant's assessment, using his highest net asset value figure ($67 million), the Stokes' organisation's assessed offer ( $113 to $116 million) represented a premium of between $46 and $49 million; (b) On Banks' assessment ($59 million net asset value), the Stokes' organisation's assessed offer ($85 to $112 million) represented a premium of between $26 and $53 million; (c) On the basis of Bryant's HIC assessment the Stokes' organisation's offers were at a level within the range of what GGH could have been worth even if it had been a stand alone business and had owned the Retained Rights, which it did not in fact own. Conclusion on expert evidence

713 Accepting as I do Mr Bryant's methodology and his calculations, it would not be open to me to come to the conclusion that the Stokes' organisation, or the respondents in approving WesTrac as the applicants' successor, conducted themselves unfairly in so far as the offer for the dealership is concerned. In other words, I do not consider that the premium above net asset value offered by WesTrac could be said to be so removed from what was reasonable as to support a finding that it represented an improper and unfair exercise of WesTrac's bargaining power. That should not be taken as a comment on whether or not the price offered by WesTrac was what the Court considers to be the right price and that it should have been accepted by the applicants. It is simply a finding that the premium offered was not so unreasonable as to constitute unconscionable conduct either on the part of WesTrac or on the part of Caterpillar in nominating WesTrac as the single approved purchaser.

PARTICULAR LEGAL ISSUES Implied term of good faith and reasonableness

714 The applicants referred to the judgment of Barrett J in Overlook v Foxtel [2002] NSWSC 17 where his Honour concluded that the implication of a term by law into commercial contracts requiring the exercise of good faith in the performance of the contract is "now in this State [New South Wales] a legal incident of every such contract" (at par [62]). His Honour was relying particularly on the Court of Appeal judgment in Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187 especially at pars [146] to [168].

715 In Overlook v Foxtel, Barrett J said at pars [65] and [67]: 65 If adherence to such standards of conduct is the predominant component of a separate obligation of good faith in performance of a contract, it becomes necessary to enquire about the extent to which selflessness is required. It must be accepted that the party subject to the obligation is not required to subordinate the party's own interests, so long as pursuit of those interests does not entail unreasonable interference with the enjoyment of a benefit conferred by the express contractual terms so that the enjoyment becomes (or could become), in words used by McHugh and Gummow JJ in Byrne v Australian Airlines Ltd (1995-1996) 185 CLR 410, "nugatory, worthless or, perhaps, seriously undermined". This seems to me to be the principle emerging from paras 172 to 177 of the joint judgment in Burger King where the various authorities are collected and discussed. ... ... the implied obligation of good faith underwrites the spirit of the contract and supports the integrity of its character. A party is precluded from cynical resort to the black letter. But no party is fixed with the duty to subordinate self-interest entirely which is the lot of the fiduciary: Burger King at par 187. The duty is not a duty to prefer the interests of the other contracting party. It is, rather, a duty to recognise and to have due regard to the legitimate interests of both the parties in the enjoyment of the fruits of the contract as delineated by its terms.

716 The applicants further submitted there is judicial support for the implication of such a term as a legal incident of all contracts of a franchise or dealership class (see: Far Horizons Pty Limited v McDonald's Australia Limited [2000] VSC 310; Bamco Villa Pty Limited v Montedeen Pty Limited [2001] VSC 192; Garry Rogers Motors (Australia) Pty Limited v Subaru (Aust) Pty Limited [1999] FCA 903).

717 The applicants submitted that a term of reasonableness and good faith should be implied into the standard form contracts that are the subject of these proceedings. Reference was made to the judgment of Sheller JA in Alcatel Australia Limited v Scarcella & Ors (1998) 44 NSWLR 349 where his Honour referred to the statement of Sir Anthony Mason in his 1993 Cambridge Lecture, (see now (2000) 116 LQR 66 at 69) that it was probable that the concept of good faith "embraced no less than three related notions": (1) an obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself); (2) compliance with honest standards of conduct; and (3) compliance with standards of contract which are reasonable having regard to the interests of the parties.

718 Reference was also made to Byrne v Australian Airlines Limited (1995-1996) 185 CLR 410; Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234; Hughes Aircraft Systems International v Air Services Australia (1997) 76 FCR 151.

719 It was submitted for the applicants that: The term of good faith and reasonableness requires a contracting party not to act in a manner which would unreasonably deprive the other contracting party of the benefit of the bargain (see Burger King Corporation v Hungry Jacks Pty Ltd ). The primary aspect of the bargain of which the Applicants would be deprived is security, were the Respondents able to act in breach of this implied term. ... A contracting party must not exercise its powers in reliance on inaccurate information or wrong facts (see: Renard Constructions (ME) Pty Limited v Minister for Public Works ). This is relevant to the fact that the Second Respondent, and Owens in particular, exercised its powers based on inaccurate information (eg that the Applicants had reneged on a commercial agreement; and that the March 1999 Report was accurate, and a lack of relevant information, ignorant as to the true relevant strength of the First Applicant as a dealer and as to the First Respondent's true motivation to remove Gough and Gilmour, namely rationalisation of the Australian dealerships. ... The term [good faith and reasonableness] will prevent a party from exercising a contractual power for an extraneous purpose, that is, a purpose foreign to that for which the contractual power was granted (see: Burger King Corporation v Hungry Jacks Pty Limited and Far Horizons Pty Limited v McDonald's Australia Limited ). This would prevent, for example, termination of the Dealership for the purpose of forcing the dealer to capitulate as to the terms of a sale of the dealership and/or to ensure the implementation of a dealer rationalisation plan. The term requires a contracting party to refrain from acting capriciously (see: Garry Rogers Motors (Aust) Pty Limited v Subaru (Aust) Pty Limited [1999] FCA 903). Accordingly, the Respondents should not have made the capricious decision to cancel the dealership in September 2000 particularly without affording procedural fairness. ... a party must not engage in subterfuge [ Burger King ]. The First Respondent sought to create a false impression of the First Applicant (namely that the First Applicant was a poor performing dealer and would get worse, and that the f irst Applicant had reneged on a commercial agreement with the Stokes organisation) so that the Second Respondent would support termination of the Applicants' dealership. ... A party must not exercise its rights (for example, to terminate a contract) or engage in acts outside the contract (for example, communications with prospective new dealers), in a manner which would destroy the position of the other party, which unreasonably interferes with the enjoyment of a benefit conferred by express contractual terms and which does not give recognition or due regard to the legitimate interests of both contracting parties (see: Overlook v Foxtel; Far Horizons Pty Ltd v McDonald's Australia Limited ). For example, in this case, the First Respondent should not have told the Stokes organisation that the First Applicant was facing cancellation, which was inappropriate and gave the Stokes organisation an enormous bargaining advantage over the First Applicant.

720 The applicants referred to McIntosh v Dylcote Pty Ltd [1999] NSWSC 230 in support of a submission that to allow the respondents to enforce the 90 days' "without cause" termination provision would be "to allow the respondents to prevent the Applicants enjoying the significant future benefit of all their hard work and investment in a manner contrary to the true intent of the Agreement (that there be security). That outcome of termination would be disproportionate given the nature of the alleged "underlying problem" of lack of trust and confidence." Dylcote was a case where Bryson J implied a term of good faith and reasonableness into a lease arrangement that had been terminated by the lessor. The applicants appear to contend that Dylcote stands for the proposition that an implied term of good faith and reasonableness requires there to be proportionality between the outcome of termination and the relevant events that give rise to the decision to terminate.

721 In summary then, it may be seen that the applicants' submissions regarding the implied term of good faith and reasonableness are that: (a) the term should be implied in the dealership agreements; (b) the respondents breached the term by: (i) terminating the dealership agreements in reliance on inaccurate information or wrong facts (i.e., that the applicants had reneged on a commercial agreement and that the March 1999 report as to the first applicant's poor performance was accurate); (ii) unreasonably depriving the applicants of the benefit of a bargain they had entered into with the respondents, namely, security in the dealership that would have allowed the second and third applicants to enjoy the "significant future benefit of their hard work and investment"; (iii) acting capriciously in terminating the dealership agreements without affording the applicants procedural fairness; (iv) exercising their contractual power to terminate the agreements for purposes foreign to that which the contractual power was granted, namely, dealer rationalisation and forcing the applicants to capitulate as to the terms of sale of the dealership.

722 The respondents were somewhat equivocal about whether an implied term of good faith and reasonableness was part of the general law and referred to Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436, 445, 463 where the High Court indicated that it remained to be determined whether or not the concept was part of the general law. Nevertheless, the respondents did say it was "appropriate for the Commission to take into account principles that have been applied in connection with commercial contracts into which a term of good faith and fair dealing has been applied" and referred to Burger King, Overlook, Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd and Apple Communications Ltd v Optus Mobile Pty Ltd [2001] NSWSC 635.

723 The respondents' submissions regarding good faith and reasonableness may be summarised as follows:

· the concept of good faith is only applicable to questions of performance, and is inapplicable to issues of enforcement; · an express power that specifies conditions (including the period of notice) cannot, by definition or in accordance with fundamental precepts of contract law, be subject to an implied term or duty; · the purported use by the applicants of the Burger King decision in the way in which it is invoked in their submissions is wrong and is apt to mislead; · Dylcote is not relevant; · the loss of trust and confidence on the part of the first and second respondents in this case represented, for similar reasons to those identified by Finkelstein J in Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd a good reason to terminate the agreements and that the period of the notices of termination (being an agreed period of 12 months) together with the period from 8 June 1999 to 25 October 2000 was more than reasonable notice, taking into account the chief purpose of a reasonable notice of termination as discussed in Crawford Fitting Co v Sydney Valve and Fittings Pty Ltd (1988) 14 NSWLR 438. Also, it represented an action designed to promote the legitimate interests of the first respondent; · The applicants seek to disregard accepted principles that apply to express powers of termination in commercial cases: see in this regard Thiess Contractors Pty Ltd v Placer (Granny Smith) Pty Limited [2000] WASCA 102, Central Exchange Ltd v Anaconda Nickel Ltd [2002] WASCA 94 and Apple Communications Ltd v Optus Mobile Pty Ltd [2001] NSWSC 635.

724 I question the need to determine whether there is an implied term of good faith and reasonableness in a contract that is the subject of consideration under s 106 of the Industrial Relations Act. The applicants suggest that if such a term is implied it illustrates the standards of commercial behaviour expected even in purely commercial jurisdictions but they also say that in assessing what is fair under s 106 the Court should not be constrained or limited by reference to the implied term.

725 In Peter Rochester Gow v Cronulla Sutherland Leagues Club Ltd [2002] NSWIRComm 247, Walton J, Vice President was discussing the notion of unfairness in the context of s 106 and in doing so (at pars [350] to [352]) referred to equivalent notions in the context of contract law: 350 In Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992 ) 26 NSWLR 234, which concerned a building and engineering contract , Priestley JA found "There is nothing in the slightest novel in the implication of terms requiring reasonableness by parties to a contract in implementing terms of the contract" (at 260). The implication was supported by common law principles of implication at law, statutory analogy (where the legislature implies terms into classes of contract to make the contracts work more fairly between the parties) and a growing openness in Australia to United States contractual doctrines of good faith and fair dealing. His Honour stated (at 265): Similarly, there is a close association of ideas between the terms unreasonableness, lack of good faith, and unconscionability. Although they may not be always co-extensive in their connotations, partly as a result of the varying senses in which each expression is used in different contexts, there can be no doubt that in many of their uses there is a great deal of overlap in their content, particularly in the kind of situation being discussed in the present case. 351 (This judgment has been applied by Finn J of the Federal Court in Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 and referred to by the High Court in Royal Botanic Gardens and Domain Trust v South Sydney City Council. 352 An application of the discussion in Renard as to the interplay between notions of "reasonableness", "conscionability" and "good faith bargaining" leads readily to the conclusion that unfair dealings by a party to an arrangement during its operation or a failure to bargain in good faith, either in the course of reaching an arrangement or subsequent to the making of an arrangement (where the arrangement, for example, requires further negotiation), may result in the arrangement being an unfair contract for the purposes of s106 of the Act. This is so, as the concept of reasonableness is inherent in the notion of fairness (see, Outboard World Pty Limited T/as Budget Waste Control (Sydney) v Muir (1993) 51 IR 167 at 183, although the Commission was careful to ensure cautious attention to the actual tests applicable in s246 of the Industrial Relations Act 1991 rather than the general notion of "unfairness") and conscionability is expressly referred to in the definition in s105. Further, it is unavoidable that the denial of an arrangement, once entered into, would constitute an act of unfairness both in terms of "fair dealing" and having regard to the legitimate expectations of the party subjected to such conduct.

726 Given the degree of overlap referred to in Renard between the terms unreasonableness, lack of good faith, and unconscionability, it seems to me that it is unnecessary for me to imply the covenant of good faith and reasonableness in the dealership agreements. If I were to do so against the background of the statutory requirement in s 106 of determining whether the contracts are unfair, harsh or unconscionable I would be concerned at the prospect of creating unnecessary duplication or, worse, confusion as to the tests being applied. Moreover, the statutory obligation on the Court is to determine whether the relevant contracts and/or arrangements are unfair, not whether an express or implied term of good faith and reasonableness has been breached. Given that the Court's power in determining unfairness is not confined to the terms of any contract and that its powers for that purpose are very broad, it is unnecessary, for the purpose of deciding whether the contract is unfair, to determine whether the dealership agreements contain an implied term of good faith and reasonableness.

727 At best, I consider that some of the cases under the general law relating to the covenant of good faith and reasonableness may be helpful in reaching a conclusion as to unfairness but I do not intend to imply a term of good faith and reasonableness in the dealership agreements. Thiess Contractors Pty Limited v Placer (Granny Smith) Pty Limited

728 In Thiess Contractors Pty Limited v Placer (Granny Smith) Pty Limited [2000] WASCA 102 the Supreme Court of Western Australia (Full Court) (Ipp, Steytler and Wheeler JJ) examined rights under the termination clause that existed in the contract in that case. The contract was a schedule-of-rates mining contract under which Thiess undertook to carry out open-cut mining at Placer's Granny Smith gold mine at Laverton, Western Australia. The contract was entered into in 1989 and the rights and obligations of the parties subsequently re-negotiated and incorporated into a new contract effective from 1 August 1992. Placer terminated the contract in March 1995 in reliance on the termination clause which entitled it, at its option and at any time and for any reason that it might deem advisable, to cancel and terminate the contract. Thiess commenced proceedings against Placer alleging, amongst other things, that Placer's termination of the contract was unlawful.

729 Thiess contended that, prior to entering into the new contract, Placer represented that it would only rely on the termination clause to terminate the contract if the mine were closed or if the mine were uneconomic to work. It was submitted that the exercise of the rights under the termination clause was inconsistent with the alleged representation that the contract was to be for the life of the mine. Thiess also relied upon fair dealing principles against the exercise of those rights.

730 The Full Court held that there was no such inconsistency and that the intention of the parties in entering into the contract was always subject to the termination clause as evidenced by the terms of the contract itself. At the time the contract was entered into, Placer had stressed the importance of the termination clause to it and the Court found, as a matter of inference, that it would not have entered into the contract without it.

731 In relation to an argument that the parties had an "understanding" that the termination clause would only be used in very limited circumstances, the Court stated at [19]: Mr Morris' statement that he could not see any situation in which Placer would need to invoke the termination clause falls into the same category. The mere fact that at the time in question Mr Morris could not conceive of a situation in which Placer would exercise its rights under the termination clause does not mean that he represented that such a situation would never arise. After all, Placer insisted on the termination clause being inserted in the contract, even though Thiess wished it to be removed. Thiess was well aware of the risks of agreeing to the contract with the termination clause in it and accepted those risks. 732 The respondents contended the following propositions flow from the decision in that case: (a) The insistence and express agreement of all well advised parties to accept that their contractual relations is subject to the right to terminate, other than for cause, is fundamental to the decision by the party with the right of termination to enter into the contract; (b) Whether the risk or contingency of the exercise of the power of termination was a high risk or a low risk/contingency does not override or detract from the express right which the parties agreed as between them shall exist; (c) Although the parties at the time of entering into the contract, could not envisage a circumstance in which the right would be exercised does not lead to the conclusion there was a common intention that it would not be implemented; (d) The very fact that attention was drawn to the right to termination during the contract formation stage, that the contract was 'offered' on that basis and was understood and accepted as fundamental to it, constituted, in the respondents' submission, the basis for a legitimate expectation in the party (in this case Caterpillar) offering the contract that the other will abide by its terms; (e) Given the disclosure by Caterpillar of the existence, nature and effect of the termination provision (even though no duty of disclosure existed in it) in the contract formation stage, the applicants' attempt to disown the agreement based on it, evidence conduct that is repudiatory in nature.

733 Thiess represents what might be described as an orthodox approach to contractual construction. But as Sheldon J said of s 88F in Davies v General Transport "It ... plays havoc with the classic principles relating to contracts ..." and an orthodox approach to the construction of contracts, which does not have as its primary focus questions of fairness, has a limited precedent value in relation to matters to be determined under s 106.

734 True it is that from the outset the applicants were well aware of the first respondent's right to terminate the dealership agreements on 90 days' notice "without cause". But it was also part of the overall arrangement between the parties, clearly acknowledged by the respondents, that termination of dealership agreements was an act of last resort. This meant that the respondents would not simply stand by and watch a dealership decline to such a level that there was no option but to terminate. This imposed an obligation on the first respondent to take whatever reasonable steps were available to keep the dealership on foot. Further, in circumstances where the respondents had taken a decision to change dealers and had given the applicants assurances that they would help them in the sale process in achieving a fair price for the dealership the respondents, by their "last resort" policy, were under an obligation not to terminate the dealership unless and until they had provided the necessary help in achieving that fair price.

735 At its heart, section 106 of the Industrial Relations Act is concerned with fairness. The Court's obligation is to determine whether the relevant contract or arrangement operated unfairly according to its terms or by virtue of the conduct of the parties or because of any variation of the contract or for any other reason. If so, the Court has the power to make remedial orders. In carrying out its obligation, the Commission in Court Session is not constrained by the rules of orthodox contractual construction in the same way as other courts. The Court is entitled to look beyond the words of the contract in order to discern whether there is unfairness. If the terms of the written contract provide for termination without cause on 90 days' notice, the Court will take that fact into account. But in weighing up whether there is unfairness the Court will also take into account that the exercise of the right to terminate without cause is conditioned by an unwritten policy that termination will only occur as a last resort. Central Exchange Ltd v Anaconda Nickel Ltd

736 In Central Exchange Ltd v Anaconda Nickel Ltd [2002] WASCA 94 the appellant and the respondent were parties to a deed of settlement dated 17 September 1996. The appellant sought declarations that terms should be implied into the settlement deed having the effect of requiring the respondent to provide it with various documents and information.

737 The judge at first instance, Parker J, proceeded on the assumption that there should be implied into the settlement deed a term that the respondent would deal with the appellant in good faith. However, his Honour was not persuaded that, if a term of that kind was to be implied into the settlement deed, it would be an incident of that term that the respondent should provide the appellant with the information and documents sought by it.

738 The Court of Appeal (Malcolm CJ, Wallwork and Steytler JJ) upheld the judgment at first instance. The leading judgment was delivered by Steytler J who, after reviewing the case law relating to the implied obligation of good faith and reasonableness and on the basis of assuming that such a term was to be implied in the settlement deed, his Honour said at par [64]: One thing that is clear, however, is that principles of good faith "do not block use of terms that actually appear in the contract" ( Kham & Nate's Shoes No 2 Inc v First Bank of Whiting (1990) 908 F 2d 1351, at 1357, referred to in Burger King , above, para 173). In Burger King , the Court (ibid) also referred with apparent approval to the following extract from the judgement of the Court in Metropolitan Life Insurance Co v RJR Nabisco Inc (1989) 716 F Supp 1504 at 1507: "In other words, the implied covenant will only aid and further the explicit terms of the agreement and will never impose an obligation 'which would be inconsistent with other terms of the contractual relationship'. ... Viewed another way, the implied covenant of good faith is breached only when one party seeks to prevent the contract's performance or to withhold benefits ... As a result, it thus ensures that parties to a contract perform the substantive, bargained for terms of their agreement."

739 Relying on Thiess, Apple Communications Ltd v Optus Mobile Pty Ltd and Central Exchange v Anaconda Nickel the respondents apparently contend that any term of good faith and reasonableness that might be implied into the dealership agreements "do not block use of terms that actually appear in the contract". In other words, even if it were implied in the dealership agreements that the first respondent was obliged to act reasonably and in good faith, this term did not operate to block the first respondent's right to terminate without cause on 90 days' notice.

740 I have already stated that it is not my intention to imply a term in the agreements of good faith and reasonableness because in effect, by virtue of the agreements coming under scrutiny pursuant to s 106, they contain an implied term of fairness and there is nothing to be gained by implying further terms (good faith and reasonableness) that may have the effect of narrowing the term of fairness.

741 Given this, the Court is then required to consider, having regard to the particular circumstances of the dealership agreement and to ordinary standards of fairness, whether the first respondent is entitled to terminate the agreements on 90 days' notice. In doing so the Court will consider the terms of the dealership agreements themselves, the surrounding circumstances and/or the manner of performance or operation of the dealership agreements: Port Macquarie Golf Club v Stead (1996) 64 IR 53 at 59. In this particular case, the Court is also entitled to take into account that part of the overall arrangement between the parties was that dealership agreements would only be terminated as a last resort.

742 The Court is entitled to come to the view on the evidence in this case, and does so, that whilst the first respondent may terminate the dealership agreements without cause on 90 days' notice, fairness requires its exercise of that right is to be conditional on observance of the respondents' last resort policy. Notice of termination of commercial agreements

743 The applicants sought to rely on Avis v Australian Mutual Provident Society (unreported, Schmidt J, CT 1310 of 1995, 21 December 1995) in order to draw a parallel with the circumstances in that case relating to termination which Schmidt J found to be unfair. Other than in a general way, I do not regard Avis v AMP as providing any assistance in determining the matter before me. As the respondents submitted, the essential facts in Avis v AMP were entirely different to the present case. In relation to the findings of Schmidt J regarding notice of termination, there were very particular circumstances relating to the provision of interest free loans ('agency development loans' or 'ADLs'), which were granted in order to assist in the establishment of AMP agency businesses and which were required to be repaid. Crawford Fitting Co v Sydney Valve & Fitting Pty Ltd

744 The applicants also sought to rely on Crawford Fitting Co v Sydney Valve & Fitting Pty Ltd (1988) 14 NSWLR 438. The appellants in that case were manufacturers of high quality specialised fittings, valves and associated products. In 1969 Sydney Valve and Fitting was appointed exclusive distributor of Crawford products for New South Wales. In March 1984, Crawford gave 6 months' notice of termination of the agreements.

745 The distributorship agreement did not contain any provision for termination upon the giving of notice for a specified or an agreed period. It was a commercial agreement for an indefinite period. Additionally, the agreement in the case did not contain a "without cause" termination provision. The question that arose in these circumstances was the 'reasonableness' of a period of notice under an implied term.

746 McHugh JA made the following observations at 444 as to the relevant principles to apply in order to determine a reasonable notice of period: When a contract is terminable on reasonable notice, the period of notice must be sufficiently long to enable the recipient to deploy his labour and equipment in alternative employment, to carry out his commitments, to bring current negotiations to fruition and to wind up the association in a businesslike manner.

747 Further, at 448 his Honour said: If, during the contract, a party, acting within the scope of the agreement, engages in extraordinary expenditure or effort, that factor must be taken into account in determining the reasonableness of any notice given. The weight to be given to the factor will vary from case to case and the particular circumstances. … On the other hand, recurrent expenditure or effort not being of an extraordinary nature would not seem relevant to the reasonableness of the notice period. The expenditure of money or effort is simply part of the ordinary cost of doing business. Once the business has existed for a reasonable period, the inability to profit from such work or expenditure is part of the business risk that the agent or distributor takes in entering into an agreement which is terminable at any time. Further, the prospect of obtaining profits in the future is not a relevant factor to be taken into account except so far as it is consequential upon the incurring of extraordinary expenditure or effort within the scope of the agreement." 748 McHugh JA (with whom Priestley JA agreed) also made the following observations at 448 as to the purpose of a notice for a reasonable period: The chief purpose of a notice for a reasonable period, therefore, is to enable the parties to bring to an end in an orderly way a relationship which, ex hypothesi, has existed for a reasonable period so that they will have a reasonable opportunity to enter into alternative arrangements and to wind up matters which arise out of their relationship. Matters to be wound up will include carrying out existing commitments, bringing current negotiations to fruition, and, where appropriate, obtaining the fruits of any extraordinary expenditure or effort carried out within the scope of the agreement. The line between ordinary recurrent expenditure and effort and extraordinary expenditure and effort will not always be easy to draw. But in general it will be determined by what the parties would reasonably have contemplated was extraordinary effort or expenditure.

749 McHugh JA held that even though considerable effort was expended by the dealer, this did not amount to extraordinary effort sufficient to extend the notice period because Sydney Valve had been a distributor for 15 years before termination and reaped considerable rewards from the agreement. In short, Sydney Valve did not show that it had provided extraordinary effort or expenditure to its dealership so as to warrant an extensive notice period.

750 Whilst the factual position in Crawford Fitting v Sydney Valve concerned an implied term of reasonable notice rather than a specified or agreed period of notice, I agree with the applicants that the decision, nevertheless, is relevant in outlining the considerations that are pertinent to determining whether (a) a period of 90 days' notice in the dealership agreements is unfair; and (b) (if a conclusion of unfairness is reached) whether the periods outlined in the Third Further Amended Summons should be inserted into the dealership agreements. Those considerations include the period to deploy labour and equipment in alternative employment, to carry out commitments, to complete negotiations to wind up the association in a business like manner, as well as the period to recoup any extraordinary expenditure or effort made at the commencement of, or during, the relationship.

751 What must also be considered, however, is the submission by the respondents that: (a) By agreement with the applicants, the notice of termination was extended to be for a period of 12 months from 25 October 2000, and that, therefore, the "chief purpose of a notice for a reasonable period" as set out in Crawford Fitting was more than amply satisfied; (b) The applicants have had and still have the opportunity of achieving a complete recoupment of extraordinary expenditure (if they have not already completely recouped it from the vast profits to date) through a sale of assets to ACE on the terms offered and refreshed by way of further offer in more recent times. A & M Thompson Pty Ltd & Ors v Total Australia Ltd

752 The applicants sought to draw a parallel with the circumstances in A & M Thompson Pty Ltd and Others v Total Australia Limited [1980] 2 NSWLR 1 in relation to the opportunities available to the applicants to negotiate changes to the standard form contracts that were offered to them in 1989. In discussing the fairness of the period of notice between the parties, the Industrial Commission (Perrignon and Dey JJ) said in Thompson at 15: We accept that the question of fairness between the contracting parties must be approached with care. It is realised that the Thompsons did not have to enter into the new contract in the form offered to them. They did, as Counsel put, "have their eyes open". On the other hand, it is obvious, and it is not suggested otherwise, that no other contract was available to them. It was a 'take-it-or-leave-it' situation for the Thompsons: whereas for Total, it was a 'take-it-on-our-terms-or-go' situation.

753 In this respect the applicants submitted: So too in the Agreements presently before the Court, the Applicants had no real opportunity to negotiate changes to the "standard form" contract. To the extent they had concerns about the terms of the 90 day notice provision, they were encouraged to seek no changes to it as a consequence of the Respondents' longstanding course of conduct, and the representations made as to how the 90 day notice provision operated in practice.

754 The factual position in Thompson was quite different to the present circumstances. In the present case it was not a question of the applicants abandoning the "fruits of years of work" (Thompson at 6) if they did not sign the first respondent's standard form contracts. The applicants did not have anything at stake when they entered into the dealership agreements and if they had declined to enter into the agreements, would have merely foregone a future business opportunity. Further, the second and third applicants were experienced businessmen who were very familiar with how Caterpillar operated on a world wide basis. No one was forcing the applicants to enter into the agreements upon the terms Caterpillar offered. They could have chosen not to had they wished. The applicants were well aware of the nature of the arrangements they were entering and the benefits that would bring to them.

755 Moreover, the evidence is that the second and third applicants did not see any need to re-negotiate the dealership agreements in relation to notice because, as Mr Gough said in his evidence in relation to the prospect of the respondents exercising their right under the dealership agreement, "they would never do it." This expectation was said to have been based, at least in part, on the first and second assurances that I have found have not been made out.

756 On the question of obtaining legal advice, the applicants also referred to Avis v AMP where Schmidt J considered an argument that both parties were large corporations who could obtain advice, and held as follows: It was submitted by AMP that the parties here are large corporations, who entered into the agreement on a commercial basis, after each having had the benefit of legal advice. Reliance was placed upon Mr Avis' evidence that when Chancellor entered into its former agency agreement in 1989, the termination provision was one which he understood and accepted as being appropriate. I accept that such matters must be considered in coming to a conclusion on whether the challenged provisions of the agreement offend against the section. They cannot however be conclusive of the question. The fact that an agreement was reached by two corporations with the benefit of independent advice, does not preclude the result that a particular term will be found to be unfair, harsh and unconscionable. All of the circumstances revealed must be considered. They include matters of the kind adverted to by the Full Court in Baker , such as the bargaining positions of the parties, the conduct of the parties in the negotiations, their capability to appreciate the bargain being made and the ultimate operation of the contract. Considerations of this kind are all relevant to the circumstances in which the multi-agency agreements were executed by Chancellor in May 1995.

757 Her Honour's findings are unexceptional and, with respect, I agree with them. Trust and confidence

758 Trust and confidence was a central theme in the proceedings and I have referred at length to the emphasis that the respondents placed on trust and confidence in the relationship with the applicants. The respondents submitted that "The true reason for proposing separation in March 1999 was the lack of respect and trust and confidence that had festered and grown over several years."

759 The applicants submitted that whilst trust and confidence was an implied term in an employment relationship to protect the personal relationship between employer and employee (see: Malik v Bank of Credit and Commerce International SA (in compulsory liquidation) [1998] AC 20 at 23; and Johnson v Unisys Ltd (2001) All ER 801 at 818), it is not necessary in a commercial contract, which has at its core an economic bargain. The applicants further submitted: In any event, even if the particular arrangement between the Applicants and the Respondents in this case did require the maintenance of "trust and confidence" it was not an obligation of the type that exists between parties in an employment relationship, where the "personal" nature of the relationship requires "personal" trust and confidence. Rather it is "trust and confidence" between parties who have a common purpose, yet who each necessarily promote and protect their own legitimate business interests which are (unlike in an employment relationship) competitive in many respects.

760 The applicants contended that in unfair dismissal cases reinstatement will often be an appropriate remedy despite the fact that the employer is claiming a lack of trust and confidence in the employee. Further, that if it can be considered appropriate in an employment context, then it is a fortiori that with respect to a commercial relationship, which requires a different and lesser degree of trust and confidence between the parties, the Court will be prepared to countenance making variation orders that would keep the contracts alive.

761 The applicants submitted that the Court would be in error if it refused the primary relief sought on the basis that it is impracticable for a "personal" relationship between the first respondent and the applicants to continue. This was because employment style 'trust and confidence' is not the type of trust and confidence that is required for a viable commercial arrangement to exist.

762 The respondents did not contend that it was necessary to imply trust and confidence as a term of the dealership agreements but rather the concept of trust and confidence should be regarded as "a matter which is fundamental to the very nature of a dealership relationship".

763 The respondents submitted that the applicants' downgrading of the importance of trust and confidence in the relationship between the applicants and the respondents and the applicants' submission that it overlooks the fact that the parties may have their own legitimate interests, does not gainsay the fact that a Caterpillar dealership is the quintessential model of co-operative contracting which is built on trust and confidence. Further, that the applicants belittling of the concept of trust and confidence is evidence of the fact that the relationship is irredeemable. Garry Rogers Motors (Aust) Pty Limited v Subaru (Australia) Pty Limited

764 The respondents referred to Garry Rogers Motors (Aust) Pty Limited v Subaru (Australia) Pty Limited [1999] FCA 903 as providing support for the proposition that the loss of trust and confidence on the part of the first and second respondents provided a good reason to terminate the dealership agreements.

765 Garry Rogers Motors v Subaru involved a claim of unconscionable conduct under s 51AC of the Trade Practices Act 1974 (Cth). Finkelstein J agreed that a term of good faith and fair dealing was to be implied into the franchise agreement that existed between the parties and observed (at par [37]) as follows: In my view, a term of a contract that requires a party to act in good faith and fairly, imposes an obligation upon that party not to act capriciously. It would not operate so as to restrict actions designed to promote legitimate interests of that party. That is to say, provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied. 766 Finkelstein J concluded that Subaru had the right to terminate the agreement because it did have a good reason and had given reasonable notice of termination being "a sufficient period of notice to enable the applicant to reorganise its affairs to accommodate the loss of the dealership, to the extent that it was able to do so" (at par [38]).

767 The reason for the termination, and for the refusal to withdraw the notice of termination, related to the failure of the applicant to adopt a program known as the "Six-Star Program." Finkelstein J concluded (at par [46]): I take as the measure of unconscionability, conduct that might be described as unfair. In the present circumstances I do not believe that the first respondent has acted unfairly in not wishing to reinstate the applicant as a dealer. The applicant had been a dealer for seven or eight years. Whilst it was not obliged to adopt the Six-Star Program, that is, it was not contractually obliged to do so, its failure to adopt the program and its criticism of certain aspects of the program, could reasonably be regarded by the first respondent as an indication that the applicant was not willing to act in the best interests of the first respondent and of the dealership group as a whole . No doubt this led to a loss of confidence in the applicant. That loss of confidence would not necessarily be overcome by a change in attitude on the part of the applicant. Many relationships can only operate satisfactorily if there is mutual confidence and trust. Once that confidence and trust has broken down the position is not easily restored. It is not unconscionable to terminate a relationship where that trust and confidence has been undermined.

768 It was submitted by the respondents that: ... the loss of trust and confidence on the part of the first and second respondents in this case represented, for similar reasons to those identified by Finkelstein J, a good reason to terminate the agreements and that the period of the notices of termination (being an agreed period of 12 months) together with the period from 8 June 1999 to 25 October 2000 was more than reasonable notice, taking into account the chief purpose of a reasonable notice of termination as discussed in Crawford . Also, it represented an action designed to promote the legitimate interests of the first respondent. 769 On the other hand, the applicants said in respect of the approach taken by Finkelstein J: This decision does not ... stand for the proposition that a subjective, unreasonably based loss of confidence can legitimately be a reason for a termination of a dealership arrangement. To the contrary ... it can be taken from the reasoning of Finkelstein J that a termination based on an unreasonable loss of confidence would constitute a breach of the obligation to act fairly and in good faith. The Respondents note in respect of the Garry Rogers Motors v Subaru decision that the failure to implement a single proposal was sufficient to lead the Court to conclude that Subaru was justified in terminating the relationship. However else the Garry Rogers Motors v Subaru decision might be distinguished (eg an interlocutory decision), it is clear that even on the Respondents' case a single incident would not have been a sufficient basis for termination given the nature of the relationship that the Respondents say should and did exist. Indeed, the Respondents' witnesses went out of their way to accept that it was entirely appropriate for dealers to reject Respondent initiatives. In any event, it is difficult to countenance the same outcome in Garry Rogers Motors v Subaru had it been heard as a section 106 case. The Applicants contend that the result in Garry Rogers Motors v Subaru was not correct nor fair applying section 106 principles.

770 Garry Rogers Motors v Subaru is useful to the extent it indicates that the loss of or absence of trust and confidence in a commercial relationship may be a factor to be taken into account in any consideration involving termination of the relationship. However, the case has only limited precedent value because of: the different statutory context; the interlocutory nature of the proceedings; and, the distinctly different factual circumstances. Relational contracts

771 This issue of trust and confidence raises the question of the nature of the relationship between the applicants and the respondents. I found some difficulty in finding the right description for the true nature of the relationship because it does not fit neatly into the category of either an arms' length commercial agreement or a truly personal relationship represented by the employment relationship. However, I consider that the dealership agreements were classic relational contracts and the description of this class of contract by Thomas J in Bobux Marketing Limited v Raynor Marketing Limited [2001] NZCA 348 comes close to being an apt description of the relationship between the respondents and the applicants.

772 Bobux was an appeal about the interpretation of a distribution agreement for babies' leather booties. It centred on four clauses of the agreement that dealt with rights of termination. The clause upon which attention was focused, however, was a clause that provided the agreement could only be terminated "on four calendar months written notice by either party to the other, provided that such notice may only be given after the first year of operation of this Agreement and such notice may only be given by the Supplier if the Distributor will have failed to order at least the Minimum Quantity (as defined) ..." The respondent contended that the clauses exclusively govern the right to terminate and that the appellant could not bring the agreement to an end by giving a reasonable period of notice in circumstances where the respondent was not in breach of any of its obligations and had ordered the minimum quantities specified in the agreement.

773 The majority (Keith and Blanchard JJ) held that the express terms of the agreement addressed the question of termination and that there was no scope to imply a term giving the appellant the right to terminate the agreement on reasonable notice. Thomas J, however, took a different view. His Honour said at par [5]: I would be prepared to import a term giving Bobux the right to terminate the contract on reasonable notice simply to avoid giving effect to a contract which is otherwise commercially unrealistic. The contract purports to be for an "indefinite period". But that phrase can be construed in the sense that the period of the contract has not been defined; not that it is intended to last in perpetuity. Bobux cannot give four months notice to terminate the contract, but this prohibition does not necessarily exclude an intention on the part of the parties that the agreement could be terminated by a longer, and possibly significantly longer, period of notice.

774 Thomas J then discussed whether the law of contract should recognise a general duty of good faith in the performance of contractual obligations. His Honour then stated: [42] We have already noted that a duty to exercise good faith in the performance of a contractual obligation is most often asserted in the context of relational contracts, such as agency relationships, distributorships, partnerships, franchise arrangements and joint ventures. Readiness to import such a term is founded on the fact that the parties have a mutual interest in the successful performance of their agreement. [43] There is again no need for a dissertation on the characteristics of relational contracts as the present agreement undoubtedly falls within that category. Relational contracts are often long-term contracts, but not necessarily so, but long-term contracts by their nature are likely to be relational. In essence, relational contracts recognise the existence of a business relationship between the parties and the need to maintain that relationship; the difficulty of reducing important terms to well defined obligations; the impossibility of foretelling all the events which may impinge upon the contract; the need to adjust the relationship over time to provide for unforeseen factors or contingencies which cannot readily be provided for in advance; the commitment, likely to be extensive, which one party must make to the other, including significant investment; and that they are in an economic sense likely to be incomplete in failing to allocate, or allocate optimally, the risk between the parties in the event of certain future contingencies. See Taylor, supra, at 459 and 479 [Veronica L Taylor, "Contracts with the Lot: Franchises, Good Faith and Contract Regulation" [1997] NZLRev 459]; Hunter, supra, at 19 [H O Hunter, "The Duty of Good Faith and Security of Performance", Jnl of Contract Law (1993) 19]; Goetz and Scott, supra, at 1090 and 1091[Charles J Goetz and Robert E Scott, "Principles of Relational Contracts" (1981) 67 Virginia L R 1089]; Goddard, supra, 436, 430-431, 436, and 457 (424 and 426) [David Goddard, "Long-Term Contracts: A Law and Economics Perspective" [1997] NZLRev 423]; and Eisenberg, supra, at 294-295 and 296 [Melvin A Eisenberg in "Good Faith and Fault in Contract Law"]. [44] Consequently, a relational contract is one which involves not merely an exchange but a relationship between the contractual parties. The parties are not "strangers" in the accepted sense and much of their interaction takes place "off the contract" requiring a deliberate measure of communication, co-operation, and predictable performance based on mutual trust and confidence. Expectations of loyalty and interdependence mark the formation of the contract and become the basis for the rational economic planning of the parties. (Taylor, supra, 479).The norms of the ongoing relationship, of necessity, tend to supplement the express contractual obligations. Good faith is required to ensure that the requisite communication, co-operation and predictable performance occurs for the advantage of both parties. In short, the obligation seeks to hold the parties to the promise implicit in a continuing, relational commercial transaction.(Ibid). [45] Such considerations as these led Elias CJ to say in Stanley v Fuji Xerox (NZ) Ltd (Unreported, HC Auckland, CP 479/96, 5 November 1997, at 58 that the implication of good faith "necessarily arises whenever a contract is predicated upon mutual confidence". Other cases in New Zealand which recognise this obligation are referred to in Cheyne, supra [Judith Cheyne "Commercial Good Faith" [2001] NZLJ 245]. The cases in Australia which recognise the obligation in relational contracts are dealt with in Webb, supra [Eileen Webb, "The Scope of the Implied Duty of Good Faith - Lessons from Commercial and Retail Leasing Cases" (2001) 9 Australian Property Law Journal]. Those cases need not be repeated here. [46] There can be little doubt that the contract between Bobux and Raynor is predicated upon mutual trust and confidence and gave rise to a reasonable expectation of communication, co-operation and predictable performance. These features become all the more important when the contract is for an indefinite period. With the passing of time there could be no other effective basis on which the parties could pursue their mutual interest in the supply and distribution of Bobux products in the United Kingdom. Thomas J would have been prepared to imply a term of good faith in the contract.

775 The contracts and arrangements that existed between the applicants and the respondents in the present proceedings reflected the features of a relational contract described by Thomas J in Bobux. That is, the relationship was predicated upon "mutual trust and confidence and gave rise to a reasonable expectation of communication, co-operation and predictable performance." Moreover, there were "Expectations of loyalty and interdependence" that marked "the formation of the contract and become the basis for the rational economic planning of the parties".

776 I will return to the nature of the relationship later in the judgment. Procedural fairness

777 The applicants submitted the respondents failed to afford them procedural fairness either in relation to certain issues arising during the course of the relationship, or preceding their decision to ask Gough to sell his shares, or preceding their decision to terminate the relationship.

778 The concept of procedural fairness is, of course, well known and understood in employment and administrative law. I question the utility of introducing the concept of procedural fairness in this case. Having found that there was unfairness in the manner in which it was decided by the first respondent to recommend that the relationship with the applicants be brought to an end, and unfairness in the process leading up to and including the cancellation of the dealership, there seems nothing much to be gained in labelling those transgressions as procedurally unfair.

779 As to the applicants' contentions regarding the lack of procedural fairness in relation to the alleged dealer rationalisation plan by the respondents and the selection of the applicants as the "weakest dealer", I have already found that there was no dealer rationalisation plan. Consequently, the issue of procedural fairness does not arise in that context.

780 Prior to addressing the question of whether the relevant dealership agreements and/or overall arrangement are unfair within the meaning of ss 105 and 106 of the Industrial Relations Act, it is appropriate that I summarise the relevant findings in these proceedings: 1. The dealership agreements between the applicants and the first respondent constituted contracts for the purpose of s 105 of the Industrial Relations Act. The dealership agreements constituted part of an overall arrangement between the applicants and the respondents as pleaded by the applicants except in relation to the first and second assurances and part of the fourth assurance, which did not constitute part of any arrangement. That part of the fourth assurance that did constitute part of the overall arrangement was the assurance that the sale process would be conducted on an amicable and reasonable basis without duress and the respondents would assist the applicants to receive a fair value for the shares.

2. The contracts or arrangements between the applicants and respondents meet the necessary jurisdictional requirements of the Act as elucidated by the High Court in Stevenson v Barham and the New South Wales Court of Appeal in Production Spray Painting . Accordingly, there is jurisdiction to hear and determine the applicants' claims for relief under s 106 of the Act.

The Court has power to grant the primary relief sought by the applicants.

The exercise of power under s 106 is not subject to the same limitations as those that apply to s 87 of the Trade Practices Act or s 7 of the Contracts Review Act . Whilst there is no prohibition against having regard to the principles applying to the granting of remedial relief under s 87 of the Trade Practices Act in the exercise of a judge's discretion under s 106, the judge is not bound by those principles. Section 106 is a unique provision standing on its own two feet.

The applicants have not made out their claim that the overall arrangement formed in about February 1989 between the first applicant, the first respondent and the second respondent comprised of assurances by the first and second respondents to the applicants that they could reasonably expect to be secure in their dealership provided good PINS and good profit were maintained (the alleged "First Assurance").

The applicants have not made out their claim that the overall arrangement formed in about February 1989 between the first applicant, the first respondent and the second respondent comprised of assurances by the first and second respondents to the applicants that the 90 days' notice of termination provision of the dealership agreements would only operate in the event of serious and wilful misconduct or sustained and significant poor performance (the alleged "Second Assurance").

As to the TEPS, RPI and Cadia disputes, the first respondent contributed in a significant way to the disputes occurring in the first place. In each case, the response of the applicants was characteristically combative and indicative of a lack of trust and respect for the first respondent. However, despite the applicants' adversarial stance in each of the disputes, an objective consideration of all of the circumstances does not support a conclusion that the applicants' conduct in each of these disputes was capable of supporting a recommendation to change the dealer. This is because of the first respondent's own culpability in each of the disputes. 8. Mutual cooperation, trust, confidence and respect were fundamentally important elements in the relationship between the first respondent and the applicants.

There was a history of relationship problems throughout much of the time the second and third respondents had been dealer principals and there was a lack of mutual trust, confidence, cooperation, respect and open communications between the parties.

The applicants could not have failed to know and understand that their relationship with the first respondent was one characterised throughout much of its term by tension and a lack of trust, confidence, respect and cooperation. The applicants' persistent denial of this flies in the face of reality and is not to be believed.

Mr Nitto was entitled to take the decision in 1998/1999 to recommend a change in the dealer for New South Wales and the ACT. This was so for the following reasons: (a) The second applicant was the dominant personality with whom the first respondent was required to deal with in the principal/dealer relationship; (b) The second applicant's influence and authority over the first applicant was pervasive; any dealings by the first respondent with the first applicant were invariably subject to the dominating influence and authority of the second applicant; (c) The influence and authority of the second applicant also dominated the third applicant; (d) Whilst the first respondent contributed to the poor state of the relationship by its conduct and flawed policies and procedures in the TEPS, RPI and Cadia disputes, it did not display by its conduct an ongoing and wilful disregard for the importance of cooperation, trust, confidence and respect in the relationship, such disregard being characteristic of the applicants' conduct; (e) The first respondent had proper grounds for coming to the view that its relationship with the applicants lacked mutual trust and confidence; (f) There were no assurances (of the nature of the alleged first and second assurances) given by the respondents to the applicants that were inconsistent with the first respondent's right to terminate the dealership agreements without cause; (g) The second applicant conducted himself in such a manner that it demonstrated a sustained lack of cooperation with, and trust and respect for, the first respondent; (h) The applicants' conduct and adversarial attitude towards the first respondent placed a continuing strain on the relationship between the applicants and the first respondent; (i) The strained relationship between the first respondent and the applicants was not occasional as one might expect in a normal business relationship but was a constantly recurring theme throughout much of the period of the relationship.

The March 1999 Report by the first respondent in respect of the Gough & Gilmour dealership was created for the purpose of portraying the dealership as a poor performing dealership both operationally and financially. The report was misleading, factually incorrect in a number of respects and incomplete. It was not a fair or balanced assessment of the dealership's performance. The Report was unfairly designed to bolster the first respondent's case for ending the relationship with Gough & Gilmour.

Without any indication or notice to the second applicant, and without any advice as to the reasons, the first respondent secretly put in train the machinery to end the relationship. In providing the second respondent with material supporting its desire to end the relationship, the first respondent did so knowing the material contained matters that Mr Gough regarded as inaccurate, incomplete and biased and in respect of which Mr Gough had been given an undertaking it would not be used. The applicants have made out their case that the first respondent gave assurances ("the Third Assurance") with respect to the use of the 1997 Report of the operation of the applicants' dealership and breached those assurances.

Before putting in train the machinery to end the relationship it was incumbent on the first respondent to at least give notice of its intention to do so. In failing to advise the applicants of its intention to recommend that the relationship be brought to an end and in failing to properly consider an improvement plan to allow the applicants the opportunity to rehabilitate themselves the first respondent acted unfairly and inconsistently with its "last resort" policy, which involves dealers being given every reasonable opportunity of remaining as a Caterpillar dealer.

The option of Mr Gough stepping back from the day to day management of the dealership was not a practical option. 16. The second respondent was influenced by the March 1999 Report and by unfair and negative reports regarding the applicants' conduct in the RPI and Cadia disputes. The second respondent took these reports into consideration in deciding to authorise Mr Curfman to approach Mr Gough in June 1999 with a view to getting him to sell the dealership business and, in September 2000, in deciding to cancel the dealership.

The applicants' allegation, which constitutes part of the alleged fourth assurance, namely, "by implication, that if no agreement for a sale at a fair value could be reached the applicants would retain the dealership", is not made out on the evidence.

Whilst the failure of the applicants to call such a key figure as Ms Shearman to give evidence about the legal advice issue is a cause of considerable disquiet, on the balance of probabilities the second and third applicants did not become aware of the significance of s 106 of the Industrial Relations Act until about September or October 2000.

The evidence relating to the selection of WesTrac as the preferred dealer candidate for NSW/ACT shows that: (a) it followed a fair, routine and transparent process involving the presentation and consideration of written and oral proposals by the two contenders; (b) the proposals were properly, fairly and carefully assessed by the Caterpillar selection team, both separately and in concert; (c) the recommendation to select WesTrac was based on legitimate considerations, which were expressed in written documents setting out the reasons for the recommendation.

There was no "commercial agreement" reached between the Stokes' organisation and the applicants on 15 August 2000 covering all outstanding issues associated with the sale of the dealership.

Despite the fact that no agreement had been reached on 15 August 2000, the applicants, took a less than principled approach to drawing up the draft contract and failed to fully and genuinely address the issues raised on 15 August. Furthermore, whilst it is understandable that the applicants would wish to preserve their rights in relation to outstanding claims (apparently worth about $1.5 million) against Caterpillar, it was quite unnecessary and, indeed mischievous, to provide in the draft contract the right for the applicants to terminate the sale agreement if any outstanding claims were not met. Such a provision, inserted without any prior discussion, could only have had, and did have, the effect of obstructing or delaying settlement.

The terms of the draft contract sent by the applicants to the Stokes' organisation on 12 September 2000 were indicative of the second applicant's unwillingness to sell and was a good example of the fact that whilst there was no blatant attempt to delay the sale process, the applicants never approached the sale in a cooperative and constructive manner. By this stage the Stokes' organisation had good grounds to feel frustrated with the applicants.

There was a meeting between senior executives of the first and second respondents and the Stokes' organisation on a cruise ship moored in Sydney Harbour on the weekend of 16, 17 September 2000. The meeting discussed the sale of the applicants' dealership.

There was an understanding or agreement amongst Gammell, Owens, Ramseyer, Nitto, Curfman and Barrett that there should be no reference to the cruise ship in their affidavits tendered in these proceedings.

Following meetings on 17 September, both the Stokes' organisation and Caterpillar understood that the way forward was cancellation of the applicants' dealership and that the consequence of this would be to seriously weaken the applicants' bargaining position.

The respondents' conduct in relation to the sale process was completely at odds with the assurances given to the applicants that the respondents would assist the applicants in the sale process and that the process would be amicable.

Given the respondents' evidence that cancellation is a measure of last resort - that is, all other reasonable alternatives are explored before a decision to cancel is taken - and that such a policy is treated seriously by Caterpillar, it was incumbent upon the respondents to satisfy themselves that there were no options open other than cancellation and that proper grounds existed to support cancellation. This they failed to do.

The respondents acted unfairly or unconscionably in acting to cancel the applicants' dealership.

The weight of the evidence is against any finding that the applicants' strategy was to "tie Caterpillar up in the Courts for years knowing there was always the option of selling to WesTrac or pursuing some other profitable alternative". Having decided on the litigation option the applicants were subsequently entitled to pursue that course rather than opt for renewed negotiations with WesTrac, especially in light of a claim that involves a continuation of the dealership. 30. On balance, the absence of a formal dispute resolution provision in the dealership agreements has not caused unfairness. 31. There is no basis for concluding that the treatment of Mr Gilmour by the respondents constituted a separate and additional incident of unfairness. 32. The premium offered by WesTrac above the enterprise value (assets and debt) of the dealership was not so unreasonable as to constitute unconscionable conduct, either on the part of WesTrac or on the part of Caterpillar in nominating WesTrac as the single approved purchaser.

33. Some of the cases under the general law relating to the covenant of good faith and reasonableness may be helpful in reaching a conclusion as to unfairness but it would be unnecessary and inconsistent with the statutory scheme governing the operation of s 106 of the Industrial Relations Act to imply a term of good faith and reasonableness in the dealership agreements.

34. The relationship between the applicants and the first respondent exhibited the features of a relational contract.

35. Cases such as Thiess Contractors Pty Ltd v Placer (Granny Smith) Pty Limited [2000] WASCA 102, Central Exchange Ltd v Anaconda Nickel Ltd [2002] WASCA 94 and Apple Communications Ltd v Optus Mobile Pty Ltd [2001] NSWSC 635 which did not have as their primary focus questions of fairness, have limited precedent value in determining matters under s 106 of the Industrial Relations Act . 36. It is unnecessary to label any unfairness as procedural unfairness.

781 I have found that the first respondent acted unfairly in recommending in March 1999 that the relationship with the applicants be brought to an end and that both the first and second respondents acted unfairly in relation to the sale process and their decision to cancel the dealership. However, it is another question entirely as to whether it may be said that the dealership agreements and/or overall arrangement that existed between the applicants and the respondents were unfair within the meaning of ss 105 and 106 of the Industrial Relations Act.

782 It is important, in my opinion, to have regard the whole of the relationship between the applicants and the respondents before any judgment can be made about questions of unfairness and whether the contracts and/or arrangements constituting that relationship should be declared wholly or partly void, or varied, and whether money orders should be made in connection with the contract and/or arrangements varied or voided. In Cavacuitti v XTMCA Ltd (Toyota Motor Corporation Australia Pty Ltd) [2002] NSWIRComm 117 (5 June 2002), Marks J adopted the test of unfairness as applied by Sheldon J in Davies v General Transport Development Pty Limited and stated (at par [61]): In determining whether there is an unfair arrangement for the purpose of proceedings brought under section 106 and especially taking into account subs (2), the Court is required to exercise a value judgment reflecting contemporary community values derived from the commonsense approach characteristic of the ordinary, reasonable, hypothetical "standard" member of the community. The value judgment must obviously take into account the totality of the circumstances of the relationship between the parties and the totality of the interests of each of the parties. (my emphasis). 783 Section 106 of the Industrial Relations Act provides: 106. Power of the Commission to declare contracts void or varied (1) The Commission may make an order declaring wholly or partly void, or varying, any contract whereby a person performs work in any industry if the Commission finds that the contract is an unfair contract. (2) The Commission may find that it was an unfair contract at the time it was entered into or that it subsequently became an unfair contract because of any conduct of the parties, any variation of the contract or any other reason. (3) A contract may be declared wholly or partly void, or varied, either from the commencement of the contract or from some other time. (4) In considering whether a contract is unfair because it is against the public interest, the matters to which the Commission is to have regard must include the effect that the contract, or a series of such contracts, has had, or may have, on any system of apprenticeship and other methods of providing a sufficient and trained labour force. (5) In making an order under this section, the Commission may make such order as to the payment of money in connection with any contract declared wholly or partly void, or varied, as the Commission considers just in the circumstances of the case. (6) In making an order under this section, the Commission must take into account whether or not the applicant (or person on behalf of whom the application is made) took any action to mitigate loss.

784 The approach to be taken to determining whether there is unfairness that would attract the relief provided by s 106 has been addressed in a number of earlier judgments of the Commission in Court Session and its predecessors. In Port Macquarie Golf Club Limited v Stead (1995) 64 IR 53, the Full Bench of the Commission (at 59) set forth a number of propositions in the nature of guidelines in the making of findings of unfairness including the following:

5. The nature and degree of the unfairness within the purview of s275, as a matter of law, relates to ordinary standards of fairness by directing attention to the particular circumstances of the individual contract or arrangement concerned. Whether or not a contract or arrangement is unfair is a matter to be decided upon examination of the facts of each particular case : Incitec Limited v Barry (1992) 45 IR 148 at 154; and Baker v National Distribution Services Limited (1993) 50 IR 254 at 270. ... 7. The test of unfairness involves the commonsense approach characteristic of the ordinary juryman by applying standards providing a proper balance or division of advantage or disadvantage between the parties who have made the contract or arrangement, bearing in mind the conduct of the parties, their capability to appreciate the bargain they have made and their comparative bargaining positions when entering into the contract or arrangement; Davies v General Transport Development Pty Limited (1967) 67 AR (NSW) 371 at 374; A & M Thompson Pty Limited and Others v Total Australia Limited [1980] 2 NSWLR 1 at 13 and Baker at 271. 785 In A & M Thompson Pty Ltd and Others v Total Australia Limited [1980] 2 NSWLR 1 at 13, the majority of the Industrial Commission in Court Session considered the nature of the unfairness attracted by section 88F of the Industrial Arbitration Act 1940 as follows: It has been said that fairness is determined by the commonsense of a juryman and that it is a moral and not a legal issue ( Davies' case). Whether this be so or not, it does seem that in distinguishing between what is fair and what is not fair the Judge must apply standards which appear to him to provide a proper balance or division of advantage and disadvantage between the parties who have made the contract or arrangement. In doing so, he would also have to bear in mind the conduct of the parties, their capability to appreciate the bargain they had made and their comparative bargaining positions when entering into the contract or arrangement.

786 In considering whether the contracts and/or arrangements between the applicants and respondents in these proceedings were unfair within the meaning of s 106, there are a number of relevant matters that I have had regard to, including the following:

1. The second and third applicants were experienced businessmen and possessed a close working knowledge of Caterpillar and its system of dealerships. Messrs Gough and Gilmour were aware of the lucrative nature of Caterpillar dealerships and were very keen to purchase the Waugh & Josephson dealership. 2. The second and third applicants entered into the dealerships with their eyes open and with the assistance of legal, accounting, financial and corporate advisors. They were aware that they were required to sign standard form contracts. They were aware of the without cause termination provisions in the dealership agreements. Nevertheless, their expectation upon entering into the dealership agreements was that the agreements constituted long term, secure arrangements. 3. At the time of entering into the dealership agreements the second and third applicants were aware that Caterpillar reserved the right to select its dealers and that dealerships could not be bought and sold. Further, that because of the without cause termination provisions Gough and Gilmour were aware that there was no goodwill attached to the dealership. 4. The second and third applicants were very successful in building up the dealership into a profitable business. They invested substantially in the business on an ongoing basis. 5. The first applicant acquired the Caterpillar dealership business with an investment of $7 million. It has achieved returns on its investment in the dealership business in the period from 1989 to 2000 totalling $97.4 million. The pre-tax return for this period totals $142.2 million. The after-tax returns achieved by the first applicant on its investment in the dealership business over this period have averaged 34 per cent per year. The pre-tax return for the same period has averaged 45 per cent. 6. The total return received by Gough from 20 February 1989 to 30 June 2000 was $130.59 million, assuming a value of his shareholding at 90 per cent of the value of the offer by WesTrac of 26 March 2001 (assessed at $116.35 million). 7. The total return received by Gilmour over the period from 20 February 1989 to 30 June 2000 was $16.74 million which sum includes a calculation of the value of his shares on a sale to WesTrac calculated as 10 per cent of the $116.35 million figure. 8. Characteristic of relational contracts, essential elements of the relationship between the applicants and the respondents were mutual trust, confidence, respect, cooperation and open communications. 9. There was a history of relationship problems throughout much of the time the second and third applicants had been dealer principals and there was a lack of mutual trust, confidence, respect, cooperation and open communications between the parties. 10. There was an inability to cooperatively and expeditiously work through business issues and differences. 11. The applicants' conduct and adversarial attitude towards the first respondent placed a continuing strain on the relationship between the applicants and the first respondent and undermined the maintenance of trust, confidence, respect and cooperation between the applicants and the respondents. 12. The first respondent contributed to the breakdown in the relationship between the applicants and the respondents, especially through its failure to properly address relational issues early in the relationship and through its culpability in the TEPS, RPI and Cadia disputes. However, it did not display by its conduct a sustained and wilful disregard for the importance of cooperation, trust and confidence in the relationship, such disregard being characteristic of the applicants' conduct. 13. The first respondent had proper grounds to recommend in March 1999 to the second respondent that the relationship with the applicants be brought to an end. However, in failing to give the applicants notice of its recommendation and in light of its conduct in using material to support its recommendation that it had assured the applicants would not be used, and its conduct in misleading the second respondent in respect of the basis for the recommendation (i.e., poor performance as well as loss of trust and confidence), the first respondent acted unfairly and inconsistently with its "last resort" policy, which involves dealers being given every reasonable opportunity of remaining as a Caterpillar dealer.

14. The applicants obstructed and delayed the sale process. 15. The respondents acted unfairly in acting to cancel the applicants' dealership by failing to adhere to their policy that dealerships would only be cancelled as a last resort. 16. There is no basis for concluding that the treatment of Mr Gilmour by the respondents constituted a separate and additional incident of unfairness. 17. On balance, the absence of a formal dispute resolution provision in the dealership agreements has not caused unfairness. 787 It may be seen from the foregoing matters that the first respondent did have grounds to recommend to the second respondent that the relationship with the applicants should be brought to an end. Given the nature of the relationship the respondents were entitled to expect that the applicants would work cooperatively with the respondents in an environment of mutual trust and confidence. The applicants resisted the notions of cooperation, trust and confidence in the name of independence. There was some evidence that the first applicant should be regarded as an independent business. But the true nature of the relationship was one based on interdependence and it was not an arm's length commercial arrangement.

788 There was no basis for the applicants believing that they were secure in the dealership in perpetuity in the face of their sustained disregard for a cooperative working relationship with the first respondent. In my opinion, if the respondents had adhered to their stated policy of taking all reasonable steps to avoid cancellation of the dealership, there would have been no issue of unfairness and no question of relief being available to the applicants upon termination of the dealership.

789 Notwithstanding the first respondent's right, however, to terminate the dealership agreements without cause on 90 days' notice, supplementing this express contractual right was an understanding or arrangement that the respondents would take all reasonable steps to avoid the cancellation of a dealership. This was admitted to be the case and was seen to be important by Caterpillar for the reasons expressed by Fites in his 1996 Harvard Business Review article in relation to the generational tenure of dealerships.

790 In my opinion, it was not open to the respondents to ignore or put to one side their obligations to do what was reasonably necessary to maintain the dealership before arriving at any decision to cancel. I note the respondents' contention that parties to a contract are free to define termination rights by express provision and that such terms, understood and accepted by the other party who could be affected by its exercise, override competing obligations that might otherwise arise: Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41, Thiess Contractors Pty Limited v Placer (Granny Smith) Pty Limited. Central Exchange Ltd v Anaconda Nickel Ltd. But to accept this contention would render s 106 nugatory, especially s 106(2). 791 Mr Nitto's recommendation to end the relationship was made without proper notice being given to the applicants and without the applicants being given any opportunity to salvage the relationship with the first respondent. Moreover, this failure to treat the applicants fairly was compounded by the first respondent's use of the 1997 Report and its misrepresentation of the first applicant as a poor performing dealer.

792 The respondents' conduct in the sale process was also inconsistent with their assurances to the applicants that they would help them in the process of achieving a fair price for the dealership. Whilst some assistance was provided, at crucial stages in the negotiations that assistance was not forthcoming and the respondents' decision to cancel was made without reasonable consultation with the applicants. In my opinion, the respondents conduct in the sale process and in taking the decision to cancel, was biased in favour of the Stokes' organisation and to a significant degree the applicants were left out in the cold.

793 The finding as to the respondents' culpability in the sale process and in relation to the decision to cancel must, however, be tempered by the fact that the applicants' conduct in the sale process on any reasonable analysis of the evidence was uncooperative and caused delay and frustration.

794 In the result, and having regard to the terms and operation of the overall arrangement and the conduct of all of the parties, I find that the overall arrangement referred to in par [780(1)] of this judgment between the applicants and the respondents was unfair within the meaning of ss 105 and 106 of the Industrial Relations Act.

795 As I have already explained, the primary relief sought by the applicants is for the dealership agreements to continue in operation, albeit with substantial amendment, particularly in relation to the termination provisions. Further, the applicants seek variations to the "Overall Arrangement" as pleaded in the Summons. The variations have been summarised earlier in this judgment.

796 I am not prepared to grant the primary relief sought by the applicants in any of the alternatives that have been proposed. My reasons for refusing the primary relief are as follows: 1. The applicants failed to make out the first and second assurances.

2. The decision by the first respondent to recommend an end to the relationship with the applicants was brought about by the conduct of the applicants. Such conduct constituted a reasonable and proper basis for the respondents to believe that essential elements of the relationship, namely, cooperation, respect, trust and confidence were no longer present.

3. To maintain the dealership would involve keeping the parties together in a relationship that requires respect, cooperation, trust and confidence. Those elements did not exist at the time of the respondents' decision to cancel the dealership. These proceedings have involved strong attacks on the credit and character of senior executives of both the applicants and the respondents. It is unrealistic to the extent of being fanciful to expect that a proper working relationship based on cooperation, trust, confidence and respect for one another could be established and maintained between the applicants and the respondents. 4. Hallmarks of the relationship between the applicants and the respondents were the requirements of respect, cooperation, trust and confidence. These hallmarks strongly suggest a relationship closer to a personal or relational contract as opposed to an arm's length commercial contract. The applicants cannot submit, on the one hand, the contract is akin to a franchise agreement with the characteristics of a relational contract in order to attract jurisdiction and, on the other hand, contend that trust and confidence do not assume particular significance in the relationship because the relationship is commercial in nature.

5. To grant the primary relief sought would be unfair against the respondents and would put the applicants in an advantaged position in the relationship. By acquiring a tenure that they never bargained for the applicants' would secure an unfair advantage as the dealership would, for all practical purposes, be terminable only in strictly limited circumstances. 6. It could not be said that in 1989 either the applicants or the respondents would have contemplated the contractual arrangements of the nature now proposed by the applicants; it is neither just nor appropriate to now impose such arrangements on the respondents.

7. The primary relief sought is grossly disproportionate to the unfairness found to exist and is not in any sense remedial: see Beahan v Bush Boake Allen Australia Ltd (1999) 93 IR 1 at 13. The orders sought in these proceedings travel beyond the purpose of the legislation.

8. The orders sought amount to orders for specific performance. Such orders, in the circumstances of this case, are not justifiable. I agree with Macken J's observations in Bennett v B.P. Australia Limited where his Honour stated: ...were I to rewrite the contract I would face all the difficulties which in the past have prompted Courts to refuse orders for specific performance of contracts of personal service. The future conduct of BP would be governed by the terms of a lease rewritten by the Industrial Commission, but the conduct of the applicants in carrying out their obligation under that lease (the area in which personal endeavour and initiative resides) would be altogether outside the control of the Court …(my emphasis).

9. Except for the failures by the respondents giving rise to findings of unfairness in these proceedings, the contracts and arrangements between the applicants and the respondents have operated fairly for over a decade, with the applicants achieving extraordinarily high returns on their original investments. 797 The applicants' primary relief claim is refused.

798 In the Third Further Amended Summons for Relief the applicants seek an order as follows: 4. An order pursuant to s.107 that the Respondents be prohibited from entering into any dealership agreements to operate in whole or in part of New South Wales in the form of the Agreements unless varied in accordance with the provisions of Schedule A hereto.

799 There is nothing so inherently unfair in the dealership agreements that would cause me to vary them pursuant to s 107 of the Industrial Relations Act. There is the issue of the 90 days' notice of termination provision that I earlier described as "inordinately short". In the present proceedings the respondents did not seek to invoke the 90 days' provision until they decided, unfairly, that the sale process had gone on for too long and that it was necessary to cancel. I have yet to consider the question of the 90 days' provision in the context of whether some alternative form of relief should be granted to the applicants.

800 Whether the 90 days' provision is unfair, however, in other circumstances will depend on the facts of the particular case and how Caterpillar seeks to exercise its rights under that provision. If the provision is implemented in circumstances where a sale of a dealership has already been effected (and the sale is not otherwise tainted by unfairness), then it may be the application of the provision is not unfair. If, however, Caterpillar exercises its right to apply the 90 days' provision in such a way that it falls foul of the principles enunciated in Crawford Fitting, for example, then it may be unfair. But there is no warrant for making a blanket order under s 107 banning the use of Caterpillar's standard form contracts in New South Wales.

801 In Gough & Gilmour Holdings Pty Ltd and ors v Caterpillar of Australia Ltd and anor (No. 9) [2001] NSWIRComm 260 orders were made the effect of which was to keep the dealership agreements on foot until further order and in the intervening period to prevent the respondents taking any steps inconsistent with or prejudicial to the ongoing operation of the dealership. The respondents submitted that in the event the Court declines to grant the primary relief sought by them the underlying basis for the grant of the interlocutory relief pursuant to Interlocutory Judgment No. 9 falls away.

802 The effect of lifting the order that has allowed the dealership agreements to remain on foot would, of course, be to allow the agreements to be terminated by the first respondent.

803 It is yet to be determined whether, in light of the findings of unfairness, the applicants should be granted any alternative relief and, if so, what should be the form of that relief. It would seem that one of the foremost options available to the Court, if a proper case is made out, is to extend the notice period to terminate the dealership agreements. In those circumstances it would be premature to lift the orders allowing the agreements to remain on foot. However, given that the primary relief has been refused, there is a limit to how long the orders preventing termination can continue to apply.

804 Both parties have reserved their respective rights to make further submissions regarding alternative forms of relief. For that purpose, liberty is granted to either party to have these proceedings relisted for directions in relation to the scheduling of further hearings.

805 The Court makes the following orders: 1. The Court declares that the overall arrangement as determined by the Court to have existed between the applicants and the respondents is an unfair contract within the meaning of ss 105 and 106 of the Industrial Relations Act 1996. 2. The relief sought by the applicants in accordance with orders 2, 2A and 4 of the applicants' Further Third Amended Summons For Relief and Schedule A to that Summons is refused. 3. Liberty is granted to the parties to have these proceedings relisted for directions in relation to the scheduling of further hearings on the question of whether the applicants are entitled to any alternative relief and, if so, the form of such relief. 4. Costs are reserved.

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