International Petroleum Investment Company v Independent Public Business Corporation of Papua New Guinea

What occurred in the present case

1. On 13 February 2014, within the time stipulated by condition 7.5.2, IPIC issued a Mandatory Exchange Notice.
2. The Calculation Agent proceeded to make the determination required by condition 7.5.5 and advised the parties by letter dated 28 February 2014 that: 1. the number of Ordinary Shares to be delivered on the Unconditional Delivery Date in exchange for the Bonds was 196,604,177; 2. the Current Market Value on the relevant Valuation Date of the aggregate of all the Ordinary Shares to be delivered was AUD 1,610,188,209.59; and 3. the Cash Settlement Amount was AUD 103,280,420.55.
3. Details of the calculations made by the Calculation Agent in making its determination were enclosed with the 28 February 2014 letter, from which it can be noted that: 1. the Principal Amount of the Bonds being redeemed plus accrued interest on the Maturity Date was calculated at AUD 1,713,468,630.14; 2. the VWAP determination was calculated on the basis of a 20 day VWAP determination period from 20 January 2014 to 17 February 2014; and 3. VWAP was calculated as being AUD 8.19.
4. On 24 February 2014, following a resolution by the IPBC Board to do so, the Managing Director of IPBC issued an Alternative Valuation Notice, certifying that IPBC did not consider the VWAP Value to reflect the market value of the Oil Search shares and advising that its view was based on the occurrence of various events leading up to the Valuation Date and subsequently.
5. The giving of that notice triggered the procedure in condition 7.5.9 of the Bond Deed. Although IPIC contended (ultimately unsuccessfully) that the Alternative Valuation Notice was invalid and ineffective, it proceeded on 3 March 2014, without prejudice to that contention, to appoint KPMG Corporate Finance (KPMG) as an Independent Valuer for the purposes of condition 7.5.9(ii). On the same day IPBC appointed RBC Capital Markets (RBC) as an Independent Valuer for the purposes of that condition.
6. In successive tranches on 5 and 7 March 2014, the requisite aggregate number of Oil Search shares to be exchanged for the Bonds, as determined by the Calculation Agent, were transferred to IPIC.
7. The Independent Valuers then prepared their respective reports.
8. IPBC's appointed Independent Valuer (RBC), in a report of 18 March 2014, concluded that the 20 Day VWAP Value of AUD 8.19 per share "does not reflect the market value of Oil Search ordinary shares" and adopted AUD 8.60 (being the midpoint of the trading range it had derived for those shares as at 17 February 2014) as the Alternative Value for Oil Search Ordinary Shares. In reaching this conclusion, RBC stated its belief that a stock underperformance gap that it had identified in relation to the Oil Search shares was alleviated after the making of certain media announcements on 27 February 2014 and that the divergence in the P/NAV (price to net asset value ratio) averages of Oil Search and Woodside (a comparable company) had narrowed since 27 February 2014, suggesting that investor concerns (as identified earlier in the report) had been addressed.
9. IPIC's appointed Independent Valuer (KPMG), in a report of 19 March 2014, concluded on the other hand that the market value of a single share in Oil Search as at the Valuation Date was AUD 8.19, this being the VWAP corresponding to a 15 trading day period "prior up to [sic] the Valuation Date". The 15 trading day period from 28 January 2014 to the Valuation Date was considered by KPMG to be appropriate having regard to the following matters: that the market was well informed in relation to the activities of Oil Search; the release (and dates of release) of certain information to the market; and the trend in the share price observed up to the Valuation Date. In essence, what KPMG did was to exclude from consideration the first 5 days of the 20 day VWAP period due to the fact that there had at that time been an announcement of financial results by the company and it formed the view that the 15 day period better represented the market consensus view on the Valuation Date.
10. Although KPMG reached its conclusion by reference to a 15 day VWAP period rather than a 20 day VWAP period, it noted in its report that the 15 day VWAP was broadly consistent with the VWAP over 20, 30 and 60 days. The table at p 31 of its report identified VWAP over the 20 day period as AUD 8.19. The KPMG report also noted that its conclusion as to market value "approximates" the VWAP Value.
11. The upshot of both reports was that it was not the case that both Independent Valuers had confirmed that the VWAP Value reflected the market value (which would have enlivened condition 7.5.9(vi)(c)) nor had they both confirmed that it did not reflect market value (the starting point for the operation of condition 7.5.9(vi)(e)).
12. Assuming for the moment, contrary to his Honour's finding, that both valuations were effective for the purposes of condition 7.5.8(i)(b), and assuming the KPMG valuation to have confirmed the VWAP Value (this being a moot point depending on how one reads the statement that its conclusion as to market value "approximates" the VWAP value), what condition 7.5.9(iv)(d) in terms then required was for the Calculation Agent to average the VWAP Value that had been determined by it (AUD 8.19) and the Alternative Value as determined by the one Independent Valuer (here, RBC) who had confirmed that the VWAP Value did not reflect the market value and who had specified an Alternative Value (i.e., AUD 8.60).
13. What the Calculation Agent in fact did (as described in its notification to the parties) was to calculate the Cash Settlement Amount based on "the average of the Alternative Value and the VWAP Value as determined by the two Independent Valuers" (my emphasis), which it noted as being AUD 8.395. That may simply have been an infelicitous description of the task carried out. It is not suggested that anything turns on this.
14. Based on the value so averaged at AUD 8.395, the Calculation Agent concluded that the Cash Settlement Amount was AUD 62,976,564.26. That amount was paid to IPIC on 3 April 2014. A further amount is held in escrow pending the outcome of the present appeal and cross-appeal.

Equity Division Proceedings

1. IPIC commenced proceedings in the Commercial List of the Equity Division seeking, by way of declaratory relief, declarations that IPBC was not entitled to serve its Alternative Valuation Notice; that the Alternative Valuation Notice was not valid and effective for the purposes of condition 7.5.9 of the Bond Deed; and that the determination by RBC purporting to specify an Alternative Value for an Ordinary Share in Oil Search was affected by manifest or proven error and was not binding on the parties.
2. IPBC in turn filed a Commercial List cross-claim contending that the KPMG determination was affected by manifest or proven error. It contended that the KPMG determination was not binding and of no effect and that condition 7.5.9(v) applied, so that the RBC determination was the Current Market Value for the purposes of condition 7.5.8(i)(b) of the Bond Deed. In its amended cross-claim statement it contended, further and in the alternative to the preceding contention, that, on a proper construction of the Bond Deed, condition 7.5.9 required that, in the event that there is a manifest or proven error in the determination of an Independent Valuer: 1. if the effect of that manifest or proven error on the final determination can be identified, then the parties are bound by that determination as adjusted for the manifest or proven error ([7]); or 2. if the effect of that manifest or proven error on the final determination cannot be identified, then the Independent Valuer is required to produce a substitute determination which will, in the absence of manifest or proven error, bind all parties concerned ([8]).

Primary judgment

1. The primary judge rejected IPIC's contention that IPBC's Alternative Valuation Notice was invalid and of no effect, concluding (at [134]) that IPBC had successfully invoked the Alternative Valuation Notice procedure. There is no challenge to that conclusion.
2. In respect of the challenges made by each of the parties to the validity or efficacy of the determination of market value made by the other party's appointed Independent Valuer, his Honour concluded that the KPMG valuation was binding on the parties (as to which there is now no challenge) but that the RBC valuation was not ([208]). The reason for the latter conclusion was that the methodology adopted in the RBC valuation did not yield a determination of market value (or was not directed at market value) as that term was construed by his Honour and therefore did not produce an Alternative Value within the meaning of condition 7.5 ([196]; [197]); and hence the RBC valuation was not binding on the parties, being affected by manifest and/or proven error.
3. On his Honour's findings, the position was thus that while both parties had appointed an Independent Valuer in accordance with the procedure specified in condition 7.5.9(ii) only one of those Independent Valuers had produced a binding determination. Clearly, in those circumstances none of (c), (d) and (e) of condition 7.5.9(vi) could in its terms apply.
4. His Honour did not accept IPBC's contention that the machinery specified in the contract for the determination of Current Market Value had failed. Rather, his Honour considered it was still capable of working. Therefore, his Honour did not consider that the Court could impose an alternative machinery upon the parties (referring to Candoora No. 19 Pty Ltd v Freixenet Australasia Pty Ltd (No 2) [2008] VSC 478 at [15]). His Honour characterised the situation in effect as one in which the contractual machinery had not to that point operated as contemplated by the parties, without the fault of either, because the expert chosen by IPBC did not undertake the contractually mandated task ([212]).
5. In circumstances where his Honour did not consider that the time limit imposed by condition 7.5.9(vi)(b) rendered nugatory the "entitlement" of IPBC to have a valid and binding determination by an Independent Valuer appointed by it; where there was nothing at that point to suggest that RBC was unwilling to make a fresh determination in accordance with the Bond Deed; and where IPIC had not identified any reason why RBC could not properly re-do the valuation, his Honour considered (at [215]) that IPBC was entitled to request RBC to make a further determination in accordance with the Bond Deed. Although his Honour did not order IPBC to do so, IPBC then proceeded to make such a request of RBC and the Court has been informed (IPIC submissions [19]) that the outcome of RBC's subsequent valuation was that it concluded that AUD 8.34, based on a one day VWAP at the end of the 20 day VWAP period represented the market value of an Oil Search Ordinary Share on the Valuation Date). There is no suggestion that RBC's second determination was affected by manifest or proven error.
6. His Honour, by way of final orders, made a declaration that the RBC valuation was not binding on the parties and dismissed IPBC's cross-claim. IPBC was ordered to pay to IPIC the amount of AUD 25,558,433 with interest on that amount from 3 April 2014 to the date it was paid (the interest accruing at a daily rate of AUD 4,901.64 as calculated in accordance with condition 6.4.2 of the Bond Deed). His Honour ordered IPBC to pay the costs of its cross-claim and 62.5% of the costs of the IPIC's claim.

Appeal

1. IPIC appeals from that part of his Honour's decision ([210]-[216]) in which his Honour found that IPBC was entitled to request RBC to make a further determination in accordance with the Bond Deed, contending that his Honour: 1. erred in finding that IPBC was entitled in accordance with the Bond Deed to request RBC to make a further determination of the market value of the shares in Oil Search Limited; and 2. should have found that the "Current Market Value" of the shares under the Bond Deed was to be determined based on 20 day VWAP.
2. IPIC seeks an order, in lieu of orders 3, 4, 5 and 6(ii) made on 6 February 2015, that IPBC pay to it the amount of AUD 40,303,856.33 plus interest at the default rate specified in condition 6.4 of the Bond Deed from 3 April 2014; and also seeks an order that IPBC pay the whole of its costs.

Cross-Appeal

1. By notice of cross-appeal, IPBC appeals from that part of his Honour's reasons ([99]-[104], [172]-[197], [208] and [218]), relating to his Honour's finding (at [208]) that the RBC determination of 18 March 2014 was not binding. It seeks to set aside orders 1, 3, 4, 5 and 6 made on 6 February 2015. It contends that his Honour: (1) (a) erred in concluding that the RBC Determination of 18 March 2014 (RBC Determination) was not a determination in accordance with cl 7.5.9 of the Bond Deed and was affected by manifest or proven error; (b) erred in concluding that the RBC Determination did not assess the market value of an Oil Search share; and (c) erred in concluding that "market value" for the purposes of cl 7.5.9 of the Bond Deed was, in the absence of abnormalities in the operation of the market, confined to prices actually obtainable in market sales; (2) (a) ought to have concluded that "market value" for the purposes of cl 7.5.9 of the Bond Deed included a value calculated by any methodology reasonably considered by an investment banker as appropriate to calculate market value; (b) ought to have concluded that the methodology employed in the RBC Determination was such a methodology; (c) further or alternatively, ought to have concluded that the observable market prices were affected by abnormalities in the operation of the market; (d) ought to have concluded that the RBC Determination assessed the market value of an Oil Search share; and (e) ought to have concluded that the RBC Determination was a valid determination of market value within the meaning of cl 7.5.9 of the Bond Deed and therefore binding on the parties.

Notice of Contention

1. IPBC has also filed a notice of contention, which it presses only in the event that IPIC's appeal is successful on the basis that his Honour erred in holding that IPBC was entitled to request RBC to make a second determination. It contends, in the alternative or in addition to its notice of cross-appeal, that his Honour's decision should be affirmed on grounds other than those relied upon by the Court below, namely on the grounds that: 1. Having concluded that the RBC valuation did not produce an Alternative Value within the meaning of condition 7.5 ([196]) and was not binding on the parties ([208]), the trial judge could have concluded but that the determination of the Alternative Value by IPBC's appointed valuer had miscarried; and 1. determined the Alternative Value for the purposes of condition 7.5.9(vi)(d) of the Bond Deed (either himself or by referral to an expert) of an Oil Search Limited share at the market price on 17 February 2014 of $8.34; or alternatively 2. corrected the error identified by the Court in the RBC valuation such that the RBC determination of the value of an Oil Search Limited share was the market price on 17 February 2014 of $8.34. 1. In the event that the trial judge was incorrect to find (at [213]) that the contractual machinery in condition 7.5.9 of the Bond Deed was still capable of working, the trial judge could have concluded that the contractual machinery in condition 7.5.9 of the Bond Deed had failed and: 1. determined the Alternative Value for the purposes of condition 7.5.9(vi)(d) of the Bond Deed (either himself or by referral to an expert) of an Oil Search Limited share at the market price on 17 February 2014 of $8.34; or alternatively 2. corrected the error identified by the Court in the RBC valuation such that the RBC determination of the value of an Oil Search Limited share was the market price on 17 February 2014 of $8.34; or alternatively 3. ordered or permitted IPBC to procure a fresh determination from RBC of the value of an Oil Search Limited share on 17 February 2014.
2. Pausing here, IPBC's cross-appeal and notice of contention refer variously to the RBC determination of 18 March 2014 and the RBC valuation. In IPBC's opening oral submissions on the cross-appeal, Mr Moore SC nevertheless submitted that the essence of the error in IPIC's position was an assumption that condition 7.5.9 deals with the provision of "valuations" rather than the provision of "determinations".
3. To be precise, condition 7.5.9(vi), read with the definition of Alternative Value in condition 7.5.9(v)(b), refers to the conduct by the Independent Valuers of the "valuation" of the relevant security, followed (if the Independent Valuer confirms that the VWAP Value does not reflect the market value of the relevant security) by the specification of the market value of that security "as determined" by that Independent Valuer. Elsewhere (in conditions 7.5.9(vi)(d) and (e)) condition 7.5.9 provides for an averaging process by reference in part to the Alternative Value(s) "as determined" or "determined" by that Independent Valuer or the Independent Valuers as the case may be. In those circumstances, what flows from any distinction between "valuation" and "determination" for the purposes of IPBC's argument is unclear to say the least. In these reasons, where I use the terms "valuation" and "determination [i.e., meaning a determination of market value consequent upon the conduct of a valuation]" by the Independent Valuer(s), I am not intending to draw any distinction between the two.

Outcome of the present proceedings

1. The parties are agreed that the possible outcomes in these proceedings are as follows: 1. If IPIC succeeds on its appeal (and IPBC fails on its cross-appeal), then the Current Market Value of the relevant share was AUD 8.19 and the Cash Settlement Amount was AUD 103,280.420.55 with the result that IPIC is entitled to recover the additional amount of AUD 40,303,856.33 plus interest; 2. If both IPIC and IPBC fail in their appeal and cross-appeal, respectively, then the position is as reflected in the orders made by the primary judge, namely, the Current Market Value of the relevant share is the average of AUD 8.19 and AUD 8.34 (i.e., AUD 8.265) and the Cash Settlement Amount was AUD 88,534,997.23, with the result that IPIC is entitled to recover the additional amount of AUD 25,558,433 plus interest; 3. If IPBC succeeds on its cross-appeal, and the RBC determination was valid, then the Current Market Value of the relevant share is the average of AUD 8.19 and AUD 8.60 (i.e., AUD 8.395) and the Cash Settlement Amount was the amount paid to IPIC on 3 April 2014 (AUD 62,976,564.23) with the result that no further amount is payable by way of the Cash Settlement Amount.

Structure of these reasons

1. If his Honour erred in concluding that the RBC determination of Alternative Value was not binding on the parties, then the issues raised in IPIC's appeal and IPBC's notice of contention do not arise. It is therefore convenient first to address IPBC's cross-appeal, which challenges his Honour's finding that the RBC determination did not assess or direct itself to the "market value" of an Oil Search share and thus was not a determination in accordance with condition 7.5.9 of the Bond Deed.

IPBC's cross-appeal - validity of RBC determination

Market Value

1. The first question that arises in this context is what, properly construed, is meant by the term "market value" in condition 7.5.9. Unlike "Current Market Value", this term is not defined in the Bond Deed.

His Honour's reasoning

1. His Honour addressed this question at [99]-[104].
2. His Honour referred (at [100]) to the settled meaning at general law of the concept of, and test for, market value as articulated in Spencer v The Commonwealth [1907] HCA 82; (1907) 5 CLR 418, namely that which a willing and knowledgeable but not anxious purchaser would pay a willing and knowledgeable but not anxious vendor in an arm's length transaction, and to the expression of the test in Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494 at 514 as the value identified according to what price freely contracting, fully informed parties would have offered and accepted.
3. His Honour noted (at [101]) that, at general law, market values are the prices actually attainable in market sales (citing HTW Valuers Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640) and that this is an objective standard (citing MMAL Rentals Pty Ltd v Brunning [2004] NSWCA 451; (2004) 63 NSWLR 167 at 177). His Honour also noted that the test for market value is to be contrasted with tests for value expressed in different terms, though observing that the distinction between them is sometimes difficult to draw.
4. At [104], his Honour concluded that the structure and operation of the Bond Deed in general, and a number of its specific provisions, made clear that, absent abnormalities in the operation of the market, the parties intended that the test for the market value of an Oil Search share would be the prices actually obtainable in market sales. His Honour drew support for that conclusion from two specific aspects of the Bond Deed.
5. First, that IPIC was to receive shares and, if necessary, cash in exchange for the fixed money face value amount of the Bonds plus interest and that the number of shares to be delivered "as part of the effective repayment" was fixed by reference to stock exchange prices. His Honour observed that "the mechanism is intended to give IPIC its money back", it being able to recover its money by selling the shares on the market.
6. Second, his Honour considered that the opening words of condition 7.5.9 ("following the occurrence of an event or a series of events") made it clear that the parties expected that, absent the occurrence of a relevant event or events, VWAP would reflect the market value and hence the Alternative Valuation Notice must specify a reasonable basis for a different view. His Honour noted that Current Market Value, as defined in condition 7.5.8, was objectively ascertained by reference to VWAP and that the definition of VWAP itself excluded from the calculation transactions that were not in the ordinary course. His Honour further noted that each Independent Valuer was required to confirm that VWAP either reflected market value or it did not (and that the Issuer Redemption Procedure in condition 7.2, to which it is not necessary here to refer, incorporated the same objective procedure).

IPBC's submissions

1. IPBC contends that his Honour erred in concluding that "market value" for the purposes of condition 7.5.9 of the Bond Deed was so confined as expressed by his Honour at [104] (see [69] above). It advances three reasons for that contention.
2. First, it is submitted that "market value" must be read in light of the identity of the possible entities selected to conduct the valuation, the limits on their discretion to select a valuation method, and the limits on the circumstances in which their valuation could be set aside.
3. IPBC argues that the requirement that "each" Valuer consider its own methodology to be appropriate for valuing the relevant security recognises that reasonable valuers may differ in the methodologies chosen; that the requirement that this methodology be considered "reasonable", being an objective standard, means reasonable having regard to the range of potential methodologies that could be used within the stipulated profession of the valuer (i.e., investment banker or accountant); and that the stipulation that a valuation will bind the parties unless affected by manifest or proven error must be construed as "manifest or proven error in applying the methodology reasonably considered as appropriate" by that Independent Valuer.
4. It is submitted by IPBC that condition 7.5.9 does not permit the setting aside of an Independent Valuer's valuation in circumstances where that Independent Valuer has adopted a methodology which it reasonably considered as appropriate for the security concerned and where there was no manifest or proven error in applying that methodology.
5. Second, it is submitted that, having regard to the text and context of condition 7.5.9, the condition operates when IPBC "reasonably considers that VWAP (i.e., a measure of market price) does not reflect the market value of the relevant security" (emphasis as per IPBC's submissions). It is submitted that this suggests that "market value" in condition 7.5.9 is a wider notion than "market price" and may well be distinguished from market price. IPBC also notes that the introductory words of condition 7.5.9 ("following the occurrence of an event or series of events") are framed in general terms and submits that there is nothing in the text of condition 7.5, or in the Bond Deed as a whole, to suggest that the alternative valuation process was to be available only in some "extremely rare" circumstance.
6. IPBC relies on those two factors considered together as indicating that, while 20 day VWAP is the "default measure" of market value, market value could well differ from a market price measure such as 20 day VWAP and may be assessed using any methodology, not limited to price, reasonably considered appropriate by persons from one of two different disciplines. In those circumstances, it is said that his Honour's conclusion at [104] is not supported by the structure of the Bond Deed. (Interestingly, given that this is in effect the role IPIC contends it plays in the present scenario, IPBC here appears to accept that VWAP is a default measure of market value.)
7. The third reason put forward for the submission that his Honour's conclusion as to the meaning of market value was wrong amounts to criticism of the two observations made by his Honour at [104] in support of that conclusion (summarised at [70] and [71] above).
8. As to the first of those (namely that condition 7.5.9 was intended to provide a mechanism to "give IPIC its money back") IPBC argues that this notion is misplaced because the number of shares to be delivered is fixed not by the alternative valuation procedure but by 20 day VWAP (see condition 7.5.5(i)). It is submitted that since the Alternative Value, if any, was not used to calculate the number of shares which could later be sold on the market by IPIC to recover its money, this notion is irrelevant to the meaning of market value in condition 7.5.9.
9. It is further submitted that the sale of shares on the market is not a means for IPIC to recover its money since on any view its stake in Oil Search was a very large stake. At the time of entry into the Bond Deed, its stake represented 17.6% of the issued share capital of the company (see RBC valuation report dated 18 March 2014). IPBC notes that therefore the sale of a large block of shares, whether on the market or at a private sale, would almost inevitably be at a discount to current market prices (reference being made to Ms Royle's evidence in that regard, an investment banking expert called by IPBC).
10. As to the second of his Honour's observations at [104] (namely that the opening words of condition 7.5.9 made clear that the parties expected that, absent the occurrence of a relevant event(s), VWAP would reflect market value), it is submitted by IPBC that the structure of condition 7.5 and the existence of an alternative valuation procedure in 7.5.9 contradicts a construction of "market value" in condition 7.5.9 which ties it to market price.
11. IPBC submits that this Court should construe "market value" as encompassing market value as understood by investment bankers or accountants and should find that, absent any specific identified error, the RBC determination binds the parties "as long as it uses a notion of market value commonly adopted by investment bankers, and as long as the methodology applied is one that a reasonable investment banker would use".
12. IPBC notes in this regard that Mr Corey Fraiberg, the managing director of a related company to RBC (RBC Dominion Securities Inc), was not cross-examined as to his explanation of the process by which the RBC determination came into existence. IPBC says that there was no suggestion that RBC did not reasonably consider its methodology appropriate to valuing shares in Oil Search. It further notes the expert evidence of Ms Royle to the effect that the methodology was one that a reasonable investment banker would use and submits that her evidence supports the proposition that the notion of market value adopted by RBC is one commonly used by investment bankers.

Proper construction of market value

1. Turning first to the submission that his Honour wrongly took into account that the ascertainment of the Cash Settlement Amount was part of a process by which IPIC was to be repaid the Principal Amount plus interest, it is clear both that the subscription and issue of the Bonds was for the purposes of a financing transaction and that the mandatory exchange procedure (of which payment of any Cash Settlement Amount formed part) was the mechanism by which IPIC was to recoup the funds it had advanced plus interest. This Court was not taken to any other provision by which repayment of the funds that were the subject of the financing transaction was to occur.
2. His Honour's observation as to the "effective repayment" process was not therefore inapt. IPBC does not dispute that the determination of the number of ordinary Oil Search shares to be delivered to IPIC on mandatory exchange was to be made by reference to stock exchange prices (VWAP). The mandatory exchange procedure included provision for any shortfall in the amount notionally so recovered by the delivery of shares to be made by way of the Cash Settlement Amount. In other words, what the parties clearly contemplated was that a combination of the Oil Search shares and cash, to the extent of a shortfall, would be the means by which "repayment" of the funds that had been advanced, plus interest accrued at the Maturity Date, would be effected.
3. Whether IPIC would or might suffer a discount if it chose (or were for some reason forced) immediately to sell a large parcel of the shares obtained as part of the mandatory exchange procedure is not to the point.
4. As to the submission that Alternative Value involved a concept different from the VWAP "market price" or default measure of value, it by no means follows from the fact that the parties had agreed to put in place an alternative valuation procedure to operate if IPBC reasonably considered (following the occurrence of an event or series of events) that VWAP did not reflect "market value", that "market value" for the purposes of that alternative procedure was to bear whatever meaning the valuers chose to ascribe to it as part of choosing an appropriate methodology for their respective valuations.
5. Finally, insofar as IPBC maintains that his Honour ought to have concluded that "market value" included a value calculated by any methodology reasonably considered by an investment banker as appropriate to calculate market value, this conflates, in my opinion, what was to be determined (market value) with the methodology by which it was to be determined.
6. True it is that condition 7.5.9(vi)(a) makes provision, if two Independent Valuers are appointed, for those Independent Valuers to conduct the valuation of the relevant security by reference to the relevant Valuation Date "using a methodology reasonably considered by each of those Independent Valuers as appropriate for that security" (my emphasis). However, that speaks only to the appropriateness of the valuation methodology to be adopted for the purpose of assessing the market value of the relevant security; not what would be considered the appropriate definition of the market value of that security. Whatever methodology was reasonably considered to be appropriate, it was required to be one that was directed at the determination of "market value" as that term was to be understood. Throughout condition 7.5.9 reference is made to the "valuation of the relevant security" for the purposes of confirming whether or not the VWAP Value reflects "the market value" of the security (and, if it does not, specification of the Alternative Value, namely "the market value of the relevant security").
7. The continued reference to "market value of the relevant security" in condition 7.5.9(vi) makes it clear that while the Independent Valuers were permitted to use whatever methodology they reasonably considered appropriate to value the particular security in question (i.e., an Oil Search Ordinary Share) the contractual mandate was ultimately for a valuation of "market value". In other words, simply because a valuation methodology might have been "reasonable" or available in some contexts does not mandate a conclusion that the end result of such methodology was a determination of "market value" as properly construed in condition 7.5.9.
8. There is force to IPIC's submission that the construction advanced by IPBC (at [73] of its submissions - i.e., that the determination binds the parties as long as it uses a notion of market value commonly adopted by investment bankers and as long as the methodology applied is one that a reasonable investment banker would use) amounts to an impermissible modification of the terms of the Bond Deed.
9. Furthermore, whether or not RBC (or Mr Fraiberg) reasonably considered the methodology to be appropriate is ultimately not determinative of the question whether the RBC report was directed at "market value". (In this context, IPIC notes that there is no challenge to his Honour's rejection of the opinion of IPIC's expert (Mr Ross) that the methodology adopted by RBC was recognised or reasonable (judgment [197]).)
10. In addition to the authorities referred to above, IPIC refers to authority for the proposition that the value of shares listed on a stock exchange is "the price at which the shares are being bought and sold on the stock exchange" (Commissioner of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd [1947] HCA 10; (1947) 74 CLR 358 at 361 per Latham CJ, Rich and Williams JJ, at 373 per Dixon J (agreeing) and at 370 per Starke J (agreeing that the price at which shares are selling on the open market will determine their value); Airservices Australia v Canadian Airlines International Ltd [1999] HCA 62; (1999) 202 CLR 133 at [444] per Gummow J; Elkington v Shell Australia Ltd (1993) 32 NSWLR 11 at 22-23 per Sheller JA (Meagher JA agreeing)). Further, it notes that in MMAL Rentals, to which his Honour referred, it was recognised (at [58]), that "market value" (as opposed to the "fair market value") is the price obtained in market transactions even if there exist market distortions at that time.
11. "Market value" has, as his Honour noted, an accepted and well-recognised meaning at common law. It must be assumed that the parties chose that expression having regard to that well-recognised meaning. There is nothing in the Bond Deed to suggest that the parties intended "market value" to have any meaning different from that identified in the authorities to which his Honour referred. In my opinion, his Honour did not err in his construction of "market value" in condition 7.5.9.

Did the RBC valuation assess market value as so understood?

1. The next issue is whether the RBC valuation did in fact assess market value in the sense in which his Honour (correctly, in my opinion) construed that term. IPBC submits that even if "market value" bears the meaning explained in Spencer, his Honour should have found that the RBC valuation was a determination of market value within that meaning.

His Honour's reasons

1. His Honour recorded (at [172]), and there is no challenge as to this proposition, that there was no issue between the parties that if the RBC valuation was not of "market value" it would not be a valuation in accordance with the Bond Deed and would not bind the parties (referring to Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 701; Holt v Cox (1997) 23 ACSR 590). His Honour said that in that event the RBC valuation would undoubtedly also be affected by manifest or proven error and did not consider it necessary to consider where the boundaries lay between those two concepts. Again, there is no complaint as to this proposition.
2. Rather, what IPBC contends in this regard is that his Honour ought to have concluded that the RBC valuation did yield a determination of market value. It argues that the observable market prices were affected by abnormalities in the operation of the market that were identified by RBC.
3. This complaint, as I understand it, goes to his Honour's assessment of the methodology adopted by RBC. It does not appear to be suggested that his Honour's description of the RBC methodology was incorrect.
4. The RBC valuation was described by his Honour (at [173]) as entailing four steps: an assessment of the NAV (Net Asset Value) of an Oil Search share to enable the derivation of a P/NAV (Price to Net Asset Value ratio); a comparative study of the performance of Oil Search shares compared to its peers using P/NAVs; identification of circumstances explaining why, for a period straddling the VWAP period, Oil Search shares underperformed their peers; and adjusting Oil Search's underperformance to eliminate the effect of the circumstances so identified. The investor concerns were identified by RBC by reference to various analysts' reports and included matters such as the possibility of Oil Search acquiring a stake in a particular LNG field in Papua New Guinea and as to what might occur at maturity of the IPIC financing transaction.
5. His Honour summarised the expert evidence adduced on this issue by IPIC (from Mr Samuel) at [148]-[149] and that adduced by IPBC (from Mr Ross and Ms Royle) at [156]-[170]. His Honour also referred (at [174]) to the opinion given by Mr Fraiberg, who had considerable experience as an investment banker, to the effect that the RBC valuation was a determination of market value.
6. His Honour's conclusion that the RBC valuation was not directed to market value was followed by his observation that it was not a determination of what hypothetical willing and knowledgeable but not anxious purchasers would pay and what hypothetical willing and knowledgeable but not anxious vendors would take for an Oil Search share on the Valuation Date.
7. At [175], his Honour said: Market price and true market value are not always the same. Markets can, and often do, operate imperfectly. However, when it comes to shares in a company which are being bought and sold on the stock exchange and there are no abnormalities affecting the market, the price at which the shares are changing hands in the ordinary course of business prima facie represents their value: see Perpetual Trustee Co Ltd v Federal Commissioner of Taxation (1942) 65 CLR 572 at 579, Ronnoc Finance v Spectrum Network Systems Ltd (1997) 45 NSWLR 624 at 626, Commissioner of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd (1947) 74 CLR 358 at 361, Airservices Australia v Canadian Airlines International Ltd (2000) 202 CLR 133 at [444], Elkington v Shell Australia Ltd (1993) 32 NSWLR 11.
8. His Honour considered that insofar as the RBC valuation ascribed the divergence and reconvergence of Oil Search's P/NAV with that of its peers to information the subject of public announcements (a Liquidity Announcement on 22 October 2013, which engendered concerns on the part of the market, and a Potential Acquisition Announcement, which exacerbated those concerns, followed by an announcement on 27 February 2014 which allayed those concerns), this established that the traded prices accurately reflected the market value of an Oil Search share ([177]). In other words, his Honour considered that the fact that information seen by RBC as affecting the share price was known to the market at the relevant time meant that the price at which an Oil Search share was being traded at the relevant time was the value that purchasers and vendors in an informed market were placing on such a share.
9. His Honour concluded that the RBC valuation was directed to some other notion of value, perhaps best described as "intrinsic value" ([178]). His Honour considered that Mr Fraiberg's explanation of RBC's analysis (i.e., that it indicated that there was an impact on the stock price due to the occurrence of extraordinary events unrelated to the value of the assets of the company) revealed the elision of market value and the value which the RBC valuation had addressed ([181]). His Honour commented that the RBC valuation provided an explanation why, at particular points in time before 27 February 2014, willing and knowledgeable but not anxious parties were paying and accepting prices which, when compared to the prices after 27 February 2014, might be considered to be cheap ([180]).
10. His Honour identified two symptoms of the error into which RBC fell as being the use to which it put P/NAV comparables and the use to which it put subsequent information or hindsight ([182]). As to the former, his Honour concluded (at [186]) that the comparative analysis of the performance of Oil Search and its peers carried out by RBC confirmed that the divergence in stock price was market driven. As to the latter, having referred to Kizbeau Pty Ltd v W G & B Pty Ltd [1995] HCA 4; (1995) 184 CLR 281 at 291; National Provincial Bank Ltd v Bradberry [1943] 1 Ch 35 at 42; Willis v The Commonwealth [1946] HCA 22; (1946) 73 CLR 105 at 116; and Gould v Vaggelas [1984] HCA 68; (1984) 157 CLR 215 at 220, his Honour said (at [188]): There would have been nothing exceptional had the RBC valuation relied on subsequent facts which could and should have been, but were not, known to the market as at the Valuation Date. Such facts may have displaced the presumption that the actual prices at which Oil Search shares were changing hands were not an accurate reflection of their true market value. But that is not this case. The market factored into its prices the matters of concern identified by RBC. The allaying of these concerns by subsequent events are not facts which, if accepted, could rationally affect (directly or indirectly) the assessment of the market value of an Oil Search share on 17 February 2014 other than to confirm that the traded price on that day was indeed market value.
11. Referring to the expert evidence given by Ms Royle, who his Honour considered to be an impressive witness, his Honour commented that her approach exposed the potential for a bargain price based on the divergence between market value (represented by market price) and intrinsic value and said (at [195]) that: This approach overlooks the fact that the marked down price of the stock affected by a specific factor known to the market is the market price. [emphasis as per original] … The underperformance gap is a measure of the potential bargain to be had (or not had if things had turned out differently) in due course.
12. His Honour made clear (at [197]) that his conclusion that the RBC valuation did not yield a determination of market value had been reached without the need to rely on any of the expert evidence of Mr Samuel and Mr Ross but noted that his conclusion accorded with the opinion of Mr Samuel whose view he preferred to that of Mr Ross. As noted above, his Honour expressly rejected Mr Ross' opinion that the methodology adopted by RBC was recognised or reasonable as one directed towards ascertaining market value.

IPBC submissions

1. IPBC notes that the Spencer test assesses market value by reference to a hypothetical transaction and that, while actual transactions may provide good evidence of market value on the Spencer test, they will not do so if the market is affected by abnormalities (there referring to Elkington v Shell Australia Ltd). It emphasises that actual transactions are not to be equated with market value in and of themselves and submits that if, in the "real world", sellers are anxious or there is a dearth of buyers, then the resulting price will not reflect market value within the Spencer test. (That is axiomatic in the sense that the Spencer test is predicated on what non-anxious buyers and sellers would do.)
2. IPBC points out that all of the experts at trial agreed that market value was not the same as market price (Ms Royle in her report dated 29 July 2014; Mr Ross in his report dated 30 July 2014; and Mr Samuel in his report dated 20 August 2014).
3. IPBC also points to the reasons identified by its expert, Mr Ross, for a departure of market price from market value. Those included insufficient trading; volatility in trading; a substantial level of shorting (which Mr Ross said was reflective not of the market value but of the trading activity itself), insider trading or short-term sentiment that may not be fully informed. IPBC notes Mr Ross' evidence that all experts were agreed that liquidity effects could cause differences between market price and market value, such as a large block of shares coming into the market or the expectation that it might come into the market; and that both Mr Samuel and Mr Ross accepted that an attempted sale of a large stake in a company could cause temporary illiquidity because there would be insufficient buyers to purchase the shares at what would otherwise be the equilibrium price for the sale of a single share (referring to Mr Samuel's evidence and Mr Ross' evidence).
4. IPBC submits that, in identifying the likely sale of a large stake and the potential for a capital raising as two matters affecting market price, RBC was applying the test in Spencer. It further notes that Ms Royle referred to the phenomenon described as portfolio strategy and trading tactics which would prevent a current share price from reflecting the price at which a hypothetical willing and knowledgeable but not anxious buyer and seller would transact, namely that the larger funds who would set the price would hang back from the market to cause the price to sag because they intended to participate in the capital raising and wish to do so at as low a price as possible. It is submitted by IPBC that deliberate holding back by investors is relevantly an abnormality in the operation of a market which causes market price to depart from market value in the general law sense.
5. IPBC contends that his Honour failed to engage with the manner in which those two matters impacted on market price in a manner that caused that price to differ from the price that would be produced by a transaction between willing and knowledgeable but not anxious buyers and sellers. It is submitted that both of the identified matters impacted on the existence of willing buyers (in the first case because of temporary illiquidity that would be produced by the sale of a large stake with insufficient buyers to support an equilibrium price that would be produced between a single buyer and seller; and in the second case because the price-setting buyers were engaged in strategic behaviour by refraining from buying so as to reduce the price ahead of a capital raising). Thus, it is said that his Honour ought to have found that those matters did impact on market price so as to reduce it below market value in the relevant sense.
6. In oral submissions, Mr Lockhart SC submitted for IPIC that in an informed market the only way to interpret the market value of shares is by looking at the traded price and adjusting it subject to any unknown information, because such unknown information distorts the price compared to the value. He argues that in this case, as the market was fully informed, there being no 'unknown information', the trading price of shares would therefore be indicative of market value, or as his Honour put it (at [188]), there was nothing to 'displace the presumption that the actual prices at which Oil Search shares were changing hands were not an accurate reflection of their true market value'.
7. IPIC cavils with the submission by IPBC (at [87]) that RBC's valuation "identified relevant market abnormalities". It points to the RBC report which expressly noted, by reference to short positions, share trading volumes, volatility and changes in institutional ownership, that Oil Search shares were trading normally at the relevant time; and notes that his Honour's finding that there was no suggestion of abnormalities affecting the market in the RBC valuation (at [177]) is unchallenged. IPIC also points to the joint expert report which recorded agreement that: (i) there was no substantial shorting of Oil Search stock; (ii) Oil Search stock had been liquid; and (iii) the trading volatility of Oil Search had been comparable to its peers.

Determination

1. His Honour addressed (at [193]-[194]) Ms Royle's evidence as to the common practice of analysts in detecting under and over valuations of stocks in order to identify investment opportunities and as to the factors by reference to which the market "marked down" the price of Oil Search shares (referring to the typical holding off by buyers to allow prices to sag following the respective announcements and the perceived stock with respect to the possibility that IPIC could gradually sell down). In essence, his Honour concluded that "the marked down price of the stock affected by a specific factor known to the market is the market price" (at [195]). Although IPBC maintains that this is not the relevant question, what his Honour was clearly there addressing was the proposition that the effect on the market price of factors that are known to the market is indicative of traded prices reflecting the value placed by willing and knowledgeable but not anxious buyers and hence market value in the Spencer sense. Uncertainties recognised by the market at the time, and that might therefore have an impact on the price at which shares were trading, were not in that sense abnormalities distorting the share price of which the market had no knowledge. As IPIC submits, the "marked down" price was therefore an illustration of the efficient functioning of the market.
2. In my opinion, his Honour did not err in concluding that the RBC valuation did not yield a determination of "market value" in the Spencer sense. There was no suggestion that the investor concerns identified by RBC, or factors of the kind that RBC considered had "softened" or depressed, or were capable of softening or depressing, the price at which the shares were trading at the relevant time (such as uncertainty as to the liquidity of the stock), were unknown to the market at that time. That those factors later ceased to operate simply points to the different pressures on the market price at different times. The fact that at the relevant date (i.e., the Valuation Date) willing and knowledgeable but not anxious buyers purchasing the shares on market may well have bought them at what they then thought or what later may have transpired to be a bargain price (the potential bargain to which his Honour referred at [195]) is an illustration of the fact that the value placed by the market on a share may fluctuate from time to time based on the information then known to the market. That does not mean that as at that date the market value of the shares (as opposed to, say, their intrinsic worth or the price at which they might have been expected to trade if market opinion had not been affected by matters such as the uncertainty following the earlier media announcements) was higher than the traded price.

Conclusion

1. IPBC's cross-appeal should be dismissed with costs.

IPIC's appeal - consequences of non-binding nature of RBC determination of Alternative Value

1. Turning then to IPIC's appeal, this turns on what is the consequence under the Bond Deed of the RBC valuation not being binding on the parties due to manifest or proven error. In closing submissions at first instance IPIC's position, in essence, was that the Current Market Value was then left as the VWAP Value. IPIC pointed to condition 7.5.8(i)(b) as the basis for that contention. His Honour instead held that the non-binding nature of the RBC valuation meant that the contractual mechanism for determining market value had not operated to that point and that IPBC was entitled to request a further determination from its Independent Valuer.

IPIC's submissions

1. IPIC maintains that, on the proper construction of the Bond Deed, there is no entitlement on the part of IPBC to a further determination by RBC. Rather, it says that the consequence of the RBC determination being non-binding, and the KPMG determination confirming that VWAP did reflect the market value of an ordinary Oil Search share at the Valuation Date, is that none of paragraphs (c), (d) or (e) of condition 7.5.9(vi) was engaged and so no Alternative Value was determined in accordance with condition 7.5.9(vi), leaving market value for the purposes of calculation of the Cash Settlement Amount as being the Current Market Value under condition 7.5.8(i)(a) (i.e., the VWAP Value determined by the Calculation Agent).
2. IPIC points to five features of the language used by the parties in the Bond Deed as supportive of this construction and argues that it is consistent with the commercial purposes or objects to the Bond Deed.
3. As to the textual matters, IPIC notes, first, that the starting point in the Bond Deed for the determination of Current Market Value was VWAP as determined by the Calculation Agent and that the Alternative Value process set out in condition 7.5.9(v) and (vi) was one of "confirming" whether or not the VWAP Value reflected the market value. If the VWAP Value was confirmed, then this was the Current Market Value for the purposes of condition 7.5 (as per conditions 7.5.9(v)(c) and (vi)(c)).
4. Second, IPIC points to the requirement in condition 7.5.9(vi)(b) that each Independent Valuer issue its written confirmation no later than the last day of the Alternative Valuation Period. It argues that there is nothing in the language of that condition "to support a relaxation of that timing requirement which had important consequences for the bringing into existence and timing of the obligation to pay the Cash Settlement Amount under condition 7.5.7 and IPIC's entitlement to interest".
5. Third, it submits that the Bond Deed did not provide for "an entitlement of IPBC to have a valid and binding determination by an Independent Valuer appointed by it" (as stated by his Honour at [213]); rather the parties' entitlement in condition 7.5.9(ii) was to appoint an entity falling within the class there specified to conduct the valuation. It is submitted that the requirements of independence and good repute are important indications that what the parties contemplated was that, once appointed, the Independent Valuers would conduct their task without being influenced by their appointor. IPIC further notes that the parties expressly provided that if the Independent Valuer made a manifest or proven error its determination was not binding but did not make provision for a further determination to be made in that event. It is submitted that the mechanism provided for by the parties instead contemplated that the Current Market Value would be arrived at using any Alternative Value that was binding (condition 7.5.9(vi)(d)) or, if no Alternative Value was arrived at, reverting to the VWAP Value as determined by the Calculation Agent (condition 7.5.8(i)).
6. Fourth, it is submitted that the use of the words "if any" after "Alternative Value of the relevant security" in condition 7.5.8(i)(b) is a clear indication that the parties contemplated that there may not be an Alternative Value yielded by the alternative valuation procedure.
7. Finally, IPIC notes that under condition 7.5.7(ii), IPBC was under an obligation to pay the Cash Settlement Amount on the Business Day which is 8 Business Days after a determination was "delivered" by each Independent Valuer. It is submitted that condition 7.5.7 does not condition the obligation to pay on the delivery of a "binding determination" by each Independent Valuer but refers to the delivery of "a determination" pursuant to condition 7.5.9(vi)(b) (which specified the time period within which the written confirmation is to be issued). IPIC points to the fact that the possibility of a non-binding determination was contemplated by the parties, yet the language used in condition 7.5.9 did not condition payment on a "binding determination".
8. As to the commercial purpose or objects of the Bond Deed, IPIC places emphasis on the magnitude of the sums at stake (on its construction of the relevant provisions the Cash Settlement Amount being over AUD 100,000,000). It is submitted that it would be expected that the parties would pay close attention to the timing of payments of principal and interest, particularly the timing of the repayment of the principal, in those circumstances.
9. IPIC submits that a clear purpose of the Bond Deed was to provide a mechanism for prompt repayment of principal and interest upon the maturity of the Bonds, referring to the short timeframes incorporated in the mandatory exchange process. It is submitted that this was to ensure that, even in the circumstance of doubt as to whether the VWAP Value was the appropriate methodology, the valuation process would be brought to finality within a matter of days after the Maturity Date. IPIC accepts that condition 7.5.3 conferred a discretion on it to defer the issue of the Mandatory Exchange Notice but notes that if it did so, it would not be entitled to interest in the period commencing on the Maturity Date and ending on the delivery of the Mandatory Exchange Notice.
10. It is submitted that the construction adopted by his Honour frustrates the parties' clearly expressed preference for certainty and promptness as to the resolution of any valuation issues, noting that the effect of his Honour's judgment was that IPBC was permitted to request a further determination by RBC without any fixed deadlines.
11. IPIC submits that the construction adopted by his Honour has the following material consequences under the Bond Deed which the parties cannot have intended: 1. IPBC's obligation to pay the Cash Settlement Amount is delayed for an indefinite period to an indeterminate time; 2. IPIC's right to receive interest on the Cash Settlement Amount (potentially a substantial amount) is compromised because, under condition 6.4, interest only accrues from the time any sum "becomes due and payable"; 3. there is nothing to confine the number of times that a further determination might be requested by IPBC if subsequent determinations are also affected by manifest or proven error; 4. if the party who sought the impugned valuation (i.e., IPBC) does not request a further valuation or the Independent Valuer is unable or unwilling to carry out the task, on his Honour's reasoning no Alternative Value will be determined by condition 7.5.9 and thus no Cash Settlement Amount will be calculated; therefore it is said there is no commercial incentive for IPBC to expedite the process and the potential result is that it would have no obligation to pay the Cash Settlement Amount under condition 7.5.7 or to pay interest on that amount.
12. IPIC argues that there are two fundamental timing requirements that stand in the way of IPBC's construction: the requirement under condition 7.5.9(vi)(b) that each valuation be issued no later than the last day of the Alternative Valuation Period (which was ten business days after the appointment of each valuer), with which requirement a second or later attempt to provide a valuation could not comply; and condition 7.5.7(ii) which requires payment of the Cash Settlement Amount within eight business days after each valuer delivered its determination.

IPBC's submissions

1. IPBC, in response, advances nine reasons why the construction advanced by IPIC should not be accepted.
2. First, it emphasises that the occasion for the alternative valuation process is that there has been an event or series of events following which IPBC reasonably considers that 20 day VWAP does not reflect market value. It submits that it would be an odd result if the parties' agreement that there be an independent valuation of market value in those circumstances were to be defeated as a result of some error in a determination which is capable of being corrected.
3. Second, it argues that the emphasis placed by IPIC on the timing considerations is misconceived, noting that where time is not specified for the performance of an obligation or the occurrence of an event it will be implied that it be performed within a reasonable time and that where parties have not expressly provided for the essentiality of a procedural time stipulation in a commercial contract it will generally not be held to be a condition of the contract (referring to Mango Boulevard Pty Ltd v Mio Art Pty Ltd [2013] QCA 271; Gollin & Co Ltd v Karenlee Nominees Pty Ltd [1983] HCA 38; (1983) 153 CLR 455 and Kudeweh v T&J Kelleher Builders Pty Ltd [1990] VR 701) (IPIC argues that the fact that it is not specified to be of essence does not mean that the express timing requirements in the Bond Deed for the taking of various steps can be ignored, and that this is said a powerful indicator that the parties did not intend that a valuer would have subsequent attempts at a valuation where the inevitable consequence would be a breach of the timing deadline (referring here to GR Mailman & Associates Pty Ltd v Wormald (Aust) Pty Ltd (1991) 24 NSWLR 80).)
4. IPBC notes that the timing of the alternative valuation process is uncertain from the outset since there is no strict time limit for the giving of an Alternative Valuation Notice and that the Bond Deed expressly contemplates that the valuation process may take longer than expected, since condition 7.5.7, dealing with payment of the Cash Settlement Amount, fixes the time for payment on a date that depends upon delivery of the determination(s) where an Alternative Valuation Notice has been issued. It also notes that there are other provisions of the Bond Deed that provide for extension of dates so as to accommodate potential delays in the process.
5. Third, IPBC argues that IPIC's construction is commercially unreasonable and has a significant potential to cause absurd results. A number of examples are put forward as illustrating the potential for absurdity.
6. The first example postulated is that: a valid Alternative Valuation Notice is issued; each party appoints an Independent Valuer; each Independent Valuer issues a confirmation in writing that VWAP does not reflect market value; IPIC's valuer concludes that market value is 5% greater than 20 day VWAP; IPBC's valuer concludes market value is 15% greater than 20 day VWAP but makes a mathematical error in so doing; and it appears that in the absence of IPBC's valuer's error, it would have concluded that the market value would be somewhere between 10% and 14% greater than 20 day VWAP. It is said that on IPIC's construction on that scenario there will be no Alternative Value because IPBC's valuation is affected by error and not binding, such that the Current Market Value is to be assessed as the 20 day VWAP Value.
7. The second example given is of a situation where the manifest or proven error is in the conclusion by IPIC's valuer that the market value did not differ from the 20 day VWAP Value. It is said that on IPIC's construction IPBC would be "stuck with" the 20 day VWAP.
8. Third, it is postulated that if both Independent Valuers certified that market value differed from 20 day VWAP but both determinations were tainted by manifest or proven error, on IPIC's construction the VWAP Value would stand, even though both Independent Valuers correctly considered that VWAP Value was not market value.
9. IPBC submits that each of the above results would be absurd. It is submitted that IPIC's construction does not give proper effect to the recognised principles of construction and application of machinery provisions and is inconsistent with the apparent intention of the parties to provide for an alternative determination of the market value of the relevant security in the event that IPBC reasonably considers that the default value of 20 day VWAP is not the market value.
10. Fourth, IPBC argues that the consequence of IPIC's construction is that a party bears the risk of the valuation process miscarrying through no fault of its own. It is submitted that what the parties here contemplated was the delivery of determinations that were without manifest or proven error and argues that where a determination miscarries without fault of a party it is appropriate for the Court to uphold the bargain and give effect to the contractual machinery which envisaged two independent determinations and an averaging process.
11. Fifth, it is submitted by IPBC that, while the language of condition 7.5.7 does not refer to a "binding" determination, if a determination is not binding because it was tainted with manifest or proven error then it does not amount to a "determination" in the relevant sense and the language ought to be construed in that way to make commercial sense. IPIC does not contend that it needs to construe 7.5.7 to incorporate the word "binding" in order to make commercial sense because the provision makes commercial sense without it. Pausing there, as I read condition 7.5.7(ii), what is contemplated is the delivery of a determination. Whether it is binding or not is a different issue.
12. Sixth, it is submitted that IPIC's argument based on the presence of the words "if any" in condition 7.5.8(i)(b) ignores the structure of conditions 7.5.8 and 7.5.9 and the alternative valuation process and provides no relevant indication as to what is to occur in the event of an error. IPBC refers to other possible reasons for there being no Alternative Value (such as if no Alternative Valuation Notice is issued or if the appointed valuer confirms that the VWAP Value reflects the market value of the relevant security).
13. Seventh, IPBC says that it is incorrect for IPIC to say that it has no right to receive interest in the interim because the primary obligation as to the payment of interest is condition 6.1 (which provides that interest is payable on the aggregate Principal Amount at the rate of 5% per annum). IPBC acknowledges that this primary obligation is impacted "in part" by condition 6.2.2 which provides that each Bond will cease to bear interest from the Maturity Date. However, it is said that that provision is modified or replaced by the final paragraph of condition 7.5.4 which commences with the words "[n]otwithstanding anything to the contrary in these Terms and Conditions".
14. It is submitted that the practical effect of those provisions is that interest ceases to accrue from the Maturity Date in respect of that part of the Principal Amount that is equal to the market value of the shares that are to be transferred, whereas interest continues to run pursuant to condition 6.1 on any balance of the Principal Amount which exceeds the value of the shares transferred. IPBC thus maintains that interest continues to run on any unpaid Principal Amount that is later paid in the Cash Settlement Amount.
15. Eighth, in response to the submission by IPIC that the construction adopted by his Honour would permit a potentially unlimited number of further determinations it is said that this is a potential theoretical issue in all such cases and that the issue does not arise in the present case (where there was a second determination by RBC that was conducted promptly and was not the subject of any challenge).
16. Finally, it is submitted that if an error does vitiate the alternative appropriate valuation procedure then the appropriate consequence would not be that the 20 day VWAP applies but, rather, that the Court should set the value itself or direct some third party to do so. Reference is made in this context to Sudbrook Trading Ltd v Eggleton [1983] 1 AC 444 and Barescape Pty Limited as trustee for The V's Family Trust v Bacchus Holdings Pty Limited as trustee for The Bacchus Holdings Trust (No 9) [2012] NSWSC 984. This raises the issue the subject of IPBC's notice of contention and is dealt with later in these reasons.

Determination of this issue

1. The principles applicable to the construction of a commercial contract were considered by the High Court in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 at [35] and were not in dispute between the parties. An objective approach is to be adopted. The meaning of the terms of the contract is to be determined by what a reasonable business person would have understood them to mean. This requires "consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract" (at [35]). The High Court confirmed that a commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience" (at [35]).
2. That said, as noted by Basten JA in Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297; (2011) 15 BPR 29,545 at [18] and reiterated by Bathurst CJ in Current Images Pty Ltd v Dupack Pty Ltd [2012] NSWCA 99 at [47], the test of absurdity is not easily satisfied. The Court has no mandate to rewrite agreements merely to give them a more commercial operation.
3. In the present case, the proper construction of conditions 7.5.8 and 7.5.9, in the circumstances which eventuated, namely where: each party appointed an Independent Valuer but only one of those Independent Valuers produced a determination binding on the parties and that determination was to the effect that the market value "approximated" VWAP, is in my opinion that for which IPIC has contended, namely that the Current Market Value is the VWAP Value (here, AUD 8.19). That is because, where none of conditions (c), (d) and (e) of condition 7.5.9(vi) applies, the "highest" of the values in 7.5.8(i)(a) and (b) must be that in 7.5.8(i)(a) (VWAP) there being, on this hypothesis no Alternative Value produced by reference to the alternative valuation procedure.
4. IPBC's argument against this construction is, in substance, that once the Alternative Valuation Notice has been issued a "gateway" has been crossed such that the market value must be determined in accordance with the condition 7.5.9 procedure. I accept that that argument gains support from the words "shall be determined in accordance with the procedure below", in the opening words of condition 7.5.9. However, it is by no means clear that the procedure in condition 7.5.9 is intended wholly to supplant condition 7.5.8 in circumstances where an Alternative Value Notice has been issued. Otherwise there would be no need for condition to 7.5.8 to provide a formula requiring a comparison between VWAP and, relevantly, the Alternative Value "if any" described in condition 7.5.8(i)(b).
5. Of the textual matters to which IPIC has pointed, the most significant in my opinion is that condition 7.5.8 contemplates that there may not be an Alternative Value of the security or average value of the security determined in accordance with conditions 7.5.9(v)(d) or (vi)(d) and (e) respectively. Why that is so is not relevant. The relevant fact is that condition 7.5.8(i) provides for the Current Market Value to be the highest of three amounts (those in (a), (b) and (c)), where it is expressly contemplated (by the use of the words "if any") that there may be no value that satisfies (b) and where (c) only applies in the particular circumstances there specified.
6. The parenthetical words "(if any)" qualify the words "Alternative Value of the security" and "average value of the security", respectively. The words "as determined in accordance with …" direct attention to the process by which any such value is to be determined rather than mandating that there be such a value. If, following the relevant process, there is no such value ultimately determined so as to fall within (b), then the value in (a) is left as being the "highest".
7. In those circumstances, and particularly where there is no express provision for the making of further determinations in the event that a valuation is affected by manifest or proven error (rather, the consequence of such an error simply being that it is not a determination binding on the parties) and where the obligation to pay the Cash Settlement Amount is timed by reference to delivery of a determination by the Independent Valuers (their valuations being required within a short time frame) and carries significant interest consequences, the fact that there is a 'reversion' in effect to the VWAP Value is not in my opinion an uncommercial outcome. The tension between that reading of condition 7.5.8 and the words "shall be determined in accordance with the procedure below" in condition 7.5.9 can best be reconciled by recognising that the procedure in 7.5.9 is directed at identifying that which is to be the value for the purposes of condition 7.5.8(i)(b).
8. IPBC's complaint that this would be an odd result where IPBC has passed through the gateway leading to the independent valuation procedure (and hence has reasonably considered that VWAP does not reflect market value) does not take into account that, however reasonable its consideration may be, the parties' agreement also contemplates that the end result of the independent valuation procedure may be that VWAP is confirmed and that this may be so in circumstances where there may be a difference of opinion between valuers in that regard. Triggering the independent valuation procedure, in other words, does not foreclose the possibility that the end result may still be VWAP.
9. The fact that (as raised by the submission summarised at [140] above) on IPIC's construction the parties may bear the risk of the valuation process "miscarrying" through no fault of their own rather begs the question because it assumes that the process has "miscarried" if the "default" measure of VWAP is then the outcome. However, even if it is the case that, due to a failure on the part of the Independent Valuer to deliver an error-free determination, the result of the process leads to the determination of a Cash Settlement Amount that is different from the one which an hypothetically error-free determination would have done, that does not mean that the construction for which IPIC contends is commercially absurd. It simply reflects the fact that the parties bound themselves to a particular process, involving the input of third parties, and that those third parties might for whatever reason not deliver an error-free determination or indeed any determination within the stipulated period. (In some circumstances one can foresee that that might give rise to a complaint against the third parties, but that is beside the point.)
10. As to the submission by IPBC that the emphasis placed on the timing considerations is misconceived, IPIC points out that, although 7.5.3 provides for a later issue by IPIC of the Mandatory Exchange Notice, IPIC is not entitled to interest for the period commencing on the Maturity Date and ending on the date of delivery of the Mandatory Exchange Notice in those circumstances and the extension is in any event not open ended, it being limited to a 90 day period. As to the other timing conditions referred to by IPBC, IPIC argues that any delays in the delivery of shares under 7.5.4(ii)(b) would be brought about by failure, on the part of IPIC, and that condition 7.5.4(ii)(c) only applies to "Other Property", and therefore these provisions do not support a relaxation of timing requirements designed to ensure the prompt repayment of principal and interest.
11. The fact that time is not expressed to be of the essence in relation to the delivery of the valuations does not detract from the fact that the parties have agreed a short time frame for the determination of the Cash Settlement Amount which is consistent with the construction for which IPIC contends. IPIC argues that the delivery of a valuation, which is binding, within the stipulated time period is the condition which must be satisfied in order for the valuation to be taken into account and in that sense it does not matter that the time period is not stated to be of the essence but that in any event, pointing to the imperative language used ("no later than") and the significance of that which flows from the valuation process, this should be characterised as an essential term.
12. As to the suggestion that potentially uncommercial results would flow from its construction, IPIC argues that IPBC's examples are based on a misunderstanding of its construction. As noted earlier, IPIC maintains that if an Alternative Value is not determined under condition 7.5.9, then under condition 7.5.8(i) the Current Market Value is 20 day VWAP. It submits that had one Valuer (say KPMG) reached an Alternative Value and the other valuation was not binding due to error, then an Alternative Value for the proposes of condition 7.5.8(i) would have been reached, namely the average of the valid valuation and VWAP (by reference to condition 7.5.9(vi)(d)). IPIC does not submit that in that circumstance the valid determination would be given 100% weight. As to the second example given by IPBC (see [137] above), it is said that in those circumstances, condition 7.5.9(vi)(d) is engaged which would yield an Alternative Value (not VWAP) for the purpose of condition 7.5.8(i).
13. As to the third example (see [138] above), IPIC contends that the result postulated is not uncommercial; the parties' agreement was that, if a valuation was subject to error, then it was not binding on the parties and, since the parties did not agree that in those circumstances there would be a further attempt to obtain a valuation, there is nothing odd about the default provision (VWAP) applying in the event that both valuations are flawed or subject to error. IPIC points out that in the present case the only valid valuation was one that reached the same result as VWAP.
14. As to the proposition put by IPBC that IPIC would still be entitled to interest for the interim period, and hence its reliance on the timing provisions in that regard is misconceived, IPIC points to condition 6.2.2 which clearly provides that the Bonds will cease to bear interest on the day before the Maturity Date. Condition 6.4 deals with interest on amounts "due and payable", including the Cash Settlement Amount, for any payment delays arising after the maturity of the Bonds.
15. IPIC submits, and I agree, that the concluding paragraph in condition 7.5.4 does not create an entitlement to interest on the Principal Amount of the Bonds in excess of the value of the shares transferred. IPIC submits that all that condition 7.5.4 does is to make it clear that, in the event that shares are not delivered to IPIC on the Maturity Date but on a later date under condition 7.5.4(ii) (which delay would be due to IPIC's actions), IPIC does not receive interest for the period following the Maturity Date. Condition 7.5.4 deals with the delivery of the shares and the timing of the delivery of the shares. It does not provide for interest on the Principal Amount of the Bonds beyond the Maturity Date; nor is there any provision that would determine when any such interest would be payable. Instead, condition 6.1, which provides for interest to be payable semi-annually only makes sense during the currency of the Bonds.
16. It is further noted by IPIC that condition 7.5.5 makes no provision for the Calculation Agent to make an additional determination as to the daily amount of interest on the unpaid portion of the principal of the Bonds and does not provide for the amount of accrued interest from the Maturity Date on such amount to be payable at the same time as the Cash Settlement Amount was payable under condition 7.5.7.
17. The commercial consequences of an indeterminate delay in the calculation and payment of the Cash Settlement Amount in my opinion support the construction of conditions 7.5.8 and 7.5.9 for which IPIC contends. The potential loss of interest would be exacerbated if, as IPBC contends, there is no obligation to pay the Cash Settlement Amount until after the delivery by both Valuers of an error-free determination; particularly if there is no defined time period within which that must occur due to the "entitlement" of a party to request further determinations in the event of an error rendering the first or earlier determination(s) not binding.
18. In my opinion, for the above reasons, the operation of the relevant conditions in the circumstances which eventuated, is that for which IPIC contends and its appeal should be allowed.

IPBC's notice of contention - was it open to his Honour to reach the same result by some other means of determining market value?

1. IPBC submits that, in the event that his Honour was incorrect in construing the Bond Deed as permitting a further determination, his Honour could nevertheless have reached the same result by determining the value himself (as the market price on the Valuation Date); by correcting the error in the RBC valuation; or by referring the matter to an expert for a valuation.
2. On this issue, while IPIC accepts that an obvious arithmetical error would be capable of correction, it submits that the Court cannot amend or re-write the parties' agreement even when dealing with provisions concerning the machinery for resolving disputes (referring to Tawfik v Bill [2010] NSWSC 1034 at [24]). IPIC submits that reliance upon Sudbrook is misplaced on the basis that, here, there was not a failure of the contractual machinery and hence no need to supply a missing ingredient or mechanism to assist the parties in circumstances where the end point of the contractual machinery was identifiable (as was the case in Sudbrook). Rather, IPIC points to the fact that (albeit, it would seem, only on its construction of the relevant clauses) there was a default value provided for under the Bond Deed, that being VWAP.
3. IPIC argues that any suggestion that the primary judge should have undertaken an exercise of determining market value of the shares in Oil Search or himself correcting the error in the RBC valuation is inconsistent with the requirements specified in the Bond Deed. It points to the fact that condition 7.5.9(ii) requires that the Independent Valuer be within a specified class (into which the primary judge self-evidently does not fall).
4. I agree with his Honour's view that it was not appropriate for the Court to undertake the valuation process in place of RBC and it is not apparent that the error made by RBC was of an obvious mechanical kind so as to be capable of simple rectification (in such a fashion as a typographical error or arithmetical error may have been).
5. As to the suggestion that a referee could have been appointed or that there could have been enquiry into the market value by a referee, IPIC submits, and I agree, that this would involve a substantial departure from the valuation exercise agreed to by the parties.
6. IPIC further submits that if there has been a breakdown in the contractual machinery and IPBC is correct in contending that the Court should have supplied the result, the only possible outcome would have been that market value was VWAP in circumstances where the Calculation Agent provided a binding determination of VWAP (AUD 8.19) and the only Independent Valuer who provided a binding determination (KPMG) also provided a determination of AUD 8.19.
7. I am not persuaded that his Honour erred in not adopting the courses propounded in the notice of contention. I would therefore dismiss the notice of contention.

Orders

1. For the reasons above, I would allow the appeal and dismiss the cross-appeal and notice of contention. Costs should follow the event. The orders should therefore reflect the outcome set out at 63 above. The orders I propose are: 1. Allow the appeal. 2. Set aside orders 3, 4, 5 and 6(ii) of the orders made by Hammerschlag J on 6 February 2015 and in lieu thereof order as follows: 1. The defendant pay to the plaintiff the sum of AUD 40,303,856.33 plus interest from 3 April 2014 at the Default Rate specified in Condition 6.4 of the Bond Deed on that amount; 2. The defendant pay the plaintiff's costs of the proceedings. 1. The cross-appeal and notice of contention be dismissed. 2. The respondent pay the appellant's costs of the proceedings in this Court.

Amendments 04 December 2015 - Typographical errors pars 47, 108, 111 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 04 December 2015