McIntosh Hamson Hoare Govett v Pinnacle Properties [1995] QCA 156

The learned trial Judge rejected the claim. His Honour held in effect that a binding lump sum agreement was made initially and that the additional term for payment by two instalments at the designated stages was not binding because of a lack of any further consideration for such a promise. His Honour accordingly held that the appellant had failed to prove the agreement alleged which included the obligation to pay in two stages. That of course would not prove fatal to any claim for quantum meruit if the respondent through breach or wrongful repudiation prevented the appellant from earning the stipulated remuneration. However, before pursuing the questions of entitlement and remedy it is necessary to know the relevant terms of the contract which bound the parties, and in particular whether there was a binding contract payable at specified stages or whether it was a lump sum contract payable on final performance. No plea of want of consideration with respect to the staged payments was ever made, and that issue was not ventilated at the trial. The making of the promise was not contested. The respondent did not seriously support his Honour's finding in this respect, and for the purposes of the appeal the contract should be taken as including the promise that $150,000 be paid on completion of the 12g meeting.

The basis upon which the claim was rejected was in effect that the work done and result achieved by the appellant was so different from that which the respondent engaged it to do that the appellant did not carry out its obligations. His Honour held that the appellant actually did that which it knew the respondent did not want it to do, and that the effect was that the appellant did not fulfil any material part of its obligations to the respondent. In particular the appellant had caused EMR's creditors to be advised that the respondent would pay them 100 cents in the dollar contrary to the express requirement of the respondent.

The appellant in suggesting to the respondent that this particular project would be a suitable one for it to undertake, advised the respondent that it would not be required to discharge EMR's debts in full. In turn, the express instructions of the respondent were that it was essential that it be placed in a position where it was able to negotiate with creditors, and that it wished not to be placed in the position where it would have to pay the creditors in full. The learned trial Judge found to that effect.

The relevant facts may be briefly stated. The parties entered into a "corporate services agreement" on 1 March 1988 which provided a general structure under which the appellant would when requested provide services to the respondent and in turn receive remuneration. In May 1988 the appellant suggested that EMR was a company worth looking at with respect to obtaining a back-door listing. A meeting ensued with the provisional liquidator of EMR and various assets of that company were inspected. The appellant assisted the respondent in arrangements for the purchase of Ariadne's shares in EMR which gave the respondent the necessary minimum holding to become a "substantial shareholder" for the purposes of the acquisition code (Companies (Acquisition of Shares) (Queensland) Code; Companies (Acquisition of Shares) (Application of Laws) Act 1981 (Qld)). Preliminary letters were written to the Stock Exchange. The next step, which was critical, was the making of arrangements by which the provisional liquidator would convene a meeting of EMR's shareholders setting out the conditions upon which agreement to acquire the shares would be made. This included the terms on which creditors were intended to be satisfied.

As mentioned above, the respondent had made clear to the appellant that it was not prepared to pay the creditors in full, and that an essential ingredient of the exercise was the intention to negotiate with creditors with a view to compromising their debts.

On 7 June 1988, letters, prepared by the appellant, were sent to the Australian Stock Exchange and to the provisional liquidator. The letter to the provisional liquidator was prepared by the appellant for the respondent to send. Upon looking at a draft, the respondent's representative Mr Murphy saw a reference to paying creditors in full, and queried this because it was contrary to his instructions. In the result the appellant's representative altered one part of the draft letter so that the reference to payment in full was deleted and replaced with a reference of intention to "satisfy" creditors. However, the appellant did nothing with respect to two other statements in the same letter, one referring to the respondent's intention to advance "money sufficient to pay out all debts .." and another suggesting "naturally, the payment of all creditors in full..". The appellant also sent a letter to the Australian Stock Exchange, on behalf of the defendant, asserting inter alia that the respondent "has placed a proposal to the provisional liquidator that... the proposal will be of greater benefit to creditors who will be paid fully ..".

His Honour found that these letters were drafted by the appellant and that they were sent in reliance upon the appellant's advice that the language in the letters were not such as to commit the respondent to paying the creditors in full, and that the respondent sent its letter relying upon such advice. These findings are not challenged.

The provisional liquidator then sent relevant material, including the content of the letter dated 7 June 1988 to creditors and shareholders. On 30 June the Australian Stock Exchange gave consent to the dealings proposed. On 1 July a meeting of the creditors of EMR was held and not surprisingly the creditors voted to approve the proposals substantially as set out in the letter of 7 June. Some days after this, in consequence of newspaper reports which included the proposal to pay out creditors in full, the respondent realised that the proposal which had gone forward was not that which it intended to go forward and which it believed had gone forward. On 6 July 1988 the respondent's solicitors wrote to the provisional liquidator seeking an adjournment of the proposed 12g meeting of shareholders, alleging that the creditors' meeting of 1 July was invalid and stating that it had never been the respondent's intention to provide funds under a scheme involving a payout of 100 cents in the dollar to creditors.

However on 8 July 1988 the shareholders met and approved the acquisition of shares by the respondent. On the same date the respondent's solicitors wrote to all the shareholders and creditors of EMR withdrawing the proposal presented to the provisional liquidator.

On the same day the respondent's solicitors wrote to the appellant terminating the "corporate services agreement" of 1 March 1988, in reliance upon cl.7 which provides for termination upon the giving of 24 hours notice. The letter concluded "our client reserves its rights in relation to the 'services provided' as outlined in cl.3 of the document". That clause contained the general promise to pay fees for services provided.

Contrary to some of the arguments presented before this court, it does not seem to be the case that, on 8 July 1988, the respondent peremptorily repudiated the agreement at issue in these proceedings, namely the agreement to pay $250,000 for services that would lead to the specified takeover. It is true that on that day the respondent purported to withdraw from the shareholders its earlier offer and that it did not make any further attempt to approach the creditors to negotiate an acceptable reduction in their claims. It is equally true that the appellant did not take any further step to keep the transaction alive or make any suggestion to its client (as its counsel now suggested to this court) that it was still feasible for the respondent to have continued with the project and to have negotiated fresh arrangements with the creditors less favourable to them than what had so far been represented.

This is not on its face a case of immediate election by the respondent to rescind the contract in issue. There was an express reservation of rights. Impliedly the respondent disclosed its intention not to proceed further with the contract and not to engage the appellant again. However the appellant did not then allege that the respondent had breached the contract by refusing to proceed with the venture, and simply rendered monthly accounts for $135,945.62. That sum represented a claim of $150,000 plus outlays less $15,000 already received at an earlier stage. These accounts were in due course answered by a letter from the respondent's solicitors denying responsibility for such claims and further reserving its rights against the appellant.

How then is the situation as at 8 July 1988 to be characterised? The respondent had made a judgment to the effect that the proposed scheme had been undone and that it was not worthwhile to proceed with it. It decided to withdraw from the takeover scheme. In these circumstances the learned trial Judge determined that in so far as the claim is based upon contract the appellant did not fulfil any material part of its obligations; and in so far as there was an alternative claim in quantum meruit the appellant had embarked on a course which, if completed, committed the respondent to a course of action which the appellant well knew the defendant did not want. In his Honour's view the value to the respondent of the services was nil.

Counsel for the appellant submitted that despite the erroneous representations which were made to the shareholders and creditors the respondent remained able to negotiate with creditors, and that there is no evidence that any of the creditors would have declined to negotiate on a basis of less than 100 cents in the dollar. Some reliance was placed upon the respondent's letter of 6 July to the provisional liquidator in which there was an attempt to retreat from the offer of 100 cents in the dollar and an assertion that this was never the proposal. In its context this letter seems to be an attempt to salvage a disastrous situation. It does not assist the argument that it would have been feasible to go ahead notwithstanding the initial misrepresentation.

It is not necessarily persuasive when the party which has placed its client in a quandary suggests that it would have been easy for its client to have got out of it. Here the suggestion is that the client should have retracted publicly a promise already made in its name. It is even less persuasive when the party that created the problem made no such suggestion at the time. A client put in that position might quite reasonably decide not to risk its commercial reputation and deem it preferable to withdraw entirely rather than repudiate a promise and then negotiate with creditors one by one to pay less.

Counsel for the appellant at one stage submitted that unless the respondent could show that it was in fact put in the position where it could not negotiate with the creditors, the services rendered by his client were valuable, and the value was $150,000. A number of overstatements are inherent in those propositions. It seems more appropriate to ask whether the situation was such that it was reasonable on the respondent's part to decide that it could not successfully negotiate with creditors with the consequence that the only reasonable course was to withdraw. Perhaps the most appropriate way to pose the question is to consider whether the respondent's withdrawal from the scheme was then in breach of its obligations under their contract with the appellant. That must take into account that the respondent owed a duty to the appellant to do all things reasonably necessary to enable the appellant to have the benefit of the contract. This is not intended as an exhaustive statement of implied duties of cooperation in contract. (cf Secured Income Real Estate v. St. Martins Investments [1979] HCA 51; (1979) 144 C.L.R. 596, 607-608), but we think it compendiously expresses the respondent's duty to the appellant in this particular contractual situation. Was the respondent's action in breach of that duty? Whichever way the question is approached, the end question involves the reasonableness or otherwise of the respondent's decision to withdraw from the scheme at that time.

Whilst evidence relevant to such a decision is scanty, the decision seems to us to have been proper and reasonable. The amount that could be saved in relation to creditors was always a critical part of the venture. The creditors of the company totalled $1.253 million, and the assets on a liquidation basis might be as little as $.75 million, leaving a substantial deficit if creditors were to be paid in full plus the cost of the shares and the costs charged by the appellant. It would be impossible entirely to unravel the harm that had been done. It was reasonable for the respondent to conclude that a potentially viable project had become commercially non-viable and irrevocably compromised.

The appellant pleaded that the respondent wrongfully repudiated the agreement and that such repudiation prevented the appellant from completing it. In this respect the onus would clearly be upon the appellant to show that the respondent's withdrawal from the scheme was wrongful in the sense that it was a breach of the contract. It is not necessary to decide the present case upon any question of onus, because the evidence on balance suggests that no breach of contractual duty to the appellant was involved in the respondent's withdrawal from the scheme.

In summary, the respondent was put into a position from which it was reasonable for it to decide that it could not safely retreat. The services performed were in fact worthless to the respondent. It was entitled to withdraw the unauthorised offer to pay creditors in full, and this involved no breach of duty under its contract with the appellant.

In those circumstances the appellant's action was rightly dismissed.

It is unnecessary to consider further questions involving the quantum of the claim in the event that it succeeded. It should be noted however that in the event of breach being established against the respondent it by no means follows that the damages for breach of contract, or the assessment in respect of quantum meruit would be the amount claimed. At best for the appellant it would seem that in any assessment of damages the amount stated in the contract should be reduced by the additional costs of withdrawing the initial proposal, negotiating (presumably at some length) with creditors, the calling of further meetings with fresh accurate notices, and an allowance for any additional payments to creditors that would not have had to be made but for the defective notice. It is not necessary to pursue this point, but it must be noted that the appellant did not call evidence that would permit reasonable quantification of these costs. There would be considerable difficulty in quantifying the judgment to which the appellant would be entitled in these circumstances.

So far as quantum meruit is concerned, the basis of the assessment is the benefit or enrichment actually or constructively accepted. (Pavey Matthews Pty Ltd v Paul [1987] HCA 5; (1986-1987) 162 C.L.R. 221, 227, 263.) Similar difficulties would attend an assessment of the extent of the respondent's constructive benefit.