Findings
266 Mr Ranyard said that he "became aware of the increased costs and the inflated profit margin" (emphasis added) associated with the Tindal Subcontract in around April 2019. He said that in June 2019 he was asked by the board of OS Group to investigate what was happening with the Tindal Subcontract. He said that he reviewed materials that included the WIP Forecasts in which the forecast gross profit margin of 31% appeared. He said (and I accept):
On reviewing those materials over a period of months from around mid-2019 to early 2020 and after consultation with Stuart Norton-Baker and Hagen Bahnemann, I was confused as to why the contingency allowances were not loaded in SimPRO with a cost price. I considered that the failure to do so would have negatively impacted the estimated gross profit margin for the Tindal Project. I considered that by excluding the estimated costs for the contingency allowance but including the revenue, the gross profit margin for the whole Tindal Project was artificially increased.
267 The Margin Review Paper was prepared under the instructions of Mr Ranyard. Mr Ranyard received an iteration of it on 27 June 2019 and he read it in detail shortly afterward. It contains a statement to the effect that the predicted gross profit margin "for the whole job" was 20.90%.
268 Mr Strathdee's affidavit evidence was to the effect that in November 2019 he was provided with a final iteration of the Margin Review Paper. He listed the matters that "became apparent" to him as a result of reading it, and the enquiries that he made around that time. The matters that "became apparent" to him are discussed at [107] - [109] of his first affidavit. They include Mr Strathdee's beliefs that the Additional Amount had wrongly been treated as revenue and his belief that Margin Eroding Costs (including costs associated with the termination of the ABR subcontract) had not been disclosed. He said that when "contingency costs" and the Margin Eroding Costs were taken into account, the gross profit margin from the Tindal Subcontract "was much lower, and likely to be below 20%". That is broadly consistent with Mr Ranyard's stated beliefs. On the basis of that evidence and the evidence discussed below I find that as early as November 2019 both Mr Strathdee and Mr Ranyard had formed the view that the earlier forecast gross profit margin had been wrongly "inflated".
269 It is necessary to extract a good portion of the cross-examination on that part of Mr Strathdee's affidavit so as to assess it as a whole. It is as follows:
Counsel: And you set out at 107 and 108 the matters you rely upon, in your opinion, to support what you then say in 109 and 110; is that correct?
Mr Strathdee: ---Yes.
Counsel: And that's, in very short form, the nature of the breach of warranty claim that you brought against the respondent?
Mr Strathdee: ---Yes.
Counsel: And we can see from paragraph 106 - and correct if I'm wrong, but those matters were apparent to you as a result of the margin review paper:
...and the inquiries that I made around this time.
Counsel: And that's a reference to in around November 2019 in paragraph 105; is that correct?
Mr Strathdee: ---Yes.
Counsel: And so you were aware that you had a warranty claim against the respondent in November 2019, certainly no later than December two thousand and - - -?
Mr Strathdee: ---I'm not quite sure I follow your question. Aware that a warranty claim existed or aware that we had a warranty regime in place? Are you asking whether I had an evidentiary basis upon which to view that there was a warranty claim available?
Counsel: You had a basis for complaining of breach of warranty that was clear to you in November - in around November 2019?
Mr Strathdee: ---I don't particularly recall the timing of when I formed the view that we had a basis for a warranty claim. We saw the facts. We then put it to our counsel to look at the documents to see whether the facts met with the warranties, and I think it was later that we formed the view that we had a claim. That would be the way that I would represent that to you.
Counsel: Well, that's not what you've said, though, is it? What you've said there is that you were aware of the following matters as a result of the margin review papers and the inquiries that you made in November 2019. You agreed with me that that gave you a basis for complaining of breach of warranty?
Mr Strathdee: ---Well, that's not quite the words that I used. You asked me a specific question as whether that's when I believed we were aware that we had the basis for the warranty claim. I'm very clear that in November '19, I discovered the facts that I've affirmed I discovered. We then through [sic] went through a process of speaking with our lawyers about it to determine whether we had a warranty claim. I'm just trying to be precise in answering your question.
Counsel: Mr Strathdee, you're more experienced than your lawyers are in this industry, aren't you?
Mr Strathdee: ---In which industry are you talking?
Counsel: Well, the one in which we're operating at the moment and you are operating at the moment and we're having a case about?
Mr Strathdee: ---The security - the ..... security sector?
Counsel: No, I mean private equity financing of business transactions like the sale and purchase of businesses?
Mr Strathdee: ---Well, I guess that's my business, and I guess my lawyer's business is my lawyer's business, but it's a legal matter to make a warranty claim, so that's why we sought the advices we typically would of our lawyers.
Counsel: It went to your lawyers because you believed you had a warranty claim?
Mr Strathdee: ---I believed I had a warranty claim well before November 2019.
Counsel: Thank you. If you could turn up page 1405 of the bundle?
Mr Strathdee: ---I'm looking at that.
…
Counsel: Now, when did you first attempt to satisfy clause 13.5(a)?
Mr Strathdee: ---Well, I think after we had the margin review paper presented to us and we made the other inquiries I referred to around that time, we then provided the information to our lawyers Simpson Grierson to determine whether, on the basis of the documents, there is a warranty claim. We thought there was a breach. Because it wasn't a question of whether we knew the facts at that time. We had to work out whether the documents afforded us an entitlement to act ..... warranties as provided.
Counsel: So you believed you had a claim of breach of warranty, but you just wanted to make sure that you could prove it, there wasn't some technical problem?
Mr Strathdee: ---Well, when I say 'believe', I mean there's enough here for me to make an inquiry. Then we have fact, upon which we make the claim, and then we determine whether the facts fit the document. Because if the facts didn't fit the terminology of the warranty, we had no claim. So to me, it's a process of suspecting something is up, reviewing the facts as to whether something is up, and then having our lawyers tell us whether, in fact, that fact pattern complies with the structure of the warranties given.
Counsel: Mr Strathdee, you're avoiding telling the truth so that you don't give her Honour - - -?
Mr Strathdee: ---I'm not - I'm sorry, I - - -
Counsel: ..... that will show that you've breached this clause, aren't you?
Mr Strathdee: ---I - - -
Counsel: You know full-well - - -?
Mr Strathdee: ---I - - -
Counsel: - - - Mr Strathdee, that this - that you knew this was a breach of warranty claim, if it was any claim at all, in November/December 2019?
Mr Strathdee: ---I refute your allegation that I am being untruthful. I repeat what I said. It was my view that we needed to properly assess the situation with our lawyers, which we did, after we discovered the facts. I don't believe, in my view, that we did anything other than comply with the documents that were signed in which the warranties were contained.
Counsel: Are you - - -?
Mr Strathdee: ---I made a proper inquiry to determine whether, in fact, we had a breach of ..... situation on the ..... to us.
Counsel: How long did those inquiries take?
Mr Strathdee: ---I don't immediately recall. It was near the end of the year, and so I am presuming - I would have to go back and look at the specifics as to when we made inquiry of Simpson Grierson and when they provided us with advice.
Counsel: You don't remember now how long it took you to work out whether it was - - -?
Mr Strathdee: ---I remember it taking some time because Simpson Grierson did a review. They then had to refer it to Australian counsel. That took time. I recall that fact pattern. But I don't remember the specific dates, I'm sorry.
(emphasis added)
270 The cross-examination continued:
Counsel: And you've said that you were aware that you had a breach of warranty claim from before November 2019, and we can see that - - -?
Mr Strathdee: ---No, I did not. No, I did not. I won't have my words taken by you and twisted to match the argument. I said I believed, I had the hunch, I had the sense that earnings were not - and costs were not disclosed to us. We made inquiry to be sure that, as good corporate citizens, we were doing the right thing before laying a warranty claim out. We took advice from our lawyers. I'm not persuaded in any way by the fact that we submitted this two days before the 18 month period is up; we submitted it within the 18 month period to what we were entitled. We did our homework. We made sure that we were getting to the bottom of this because it was a serious matter.
(emphasis added)
271 YC Investments seizes upon Mr Strathdee's statement that he "believed that he had a warranty claim well before November 2019". As can be seen (particularly in the emphasised passages), Mr Strathdee later qualified that response by saying that his belief did not amount to an awareness, but was rather in the nature of a hunch, or a state of concern that had put him on inquiry. He claimed that he did not have an awareness of the existence of a warranty claim in the requisite sense until he received legal advice as to whether the underlying facts (as he understood them to be) constituted a breach.
272 It is necessary to consider that evidence against the requirements of clause 13.5(a), properly construed.
273 The word "Claim" appears in the clause, and is defined to include an allegation. The clause should accordingly be understood to refer to facts and circumstances that support an allegation that a warranty has been breached. In my view, the obligation to notify of a "Claim" does not arise when the Buyer forms the view that it would succeed in a suit for breach. Rather, the obligation to notify arises when the Buyer comes to believe (rightly or wrongly) in the existence of facts and circumstances that, if true, could properly found an allegation of breach. That construction is supported by the apparent purpose of the clause, namely to enable the affected Seller to have notice of the allegation at the earliest opportunity with a view to considering and resolving it before litigation commences. That is the more commercial construction, given that the clause appears in the context of an agreement which provides for the Sellers or their associates to take shares in OS Group and so have a continuing stake and continuing relationships in the enterprise.
274 There must also be an appreciation of the nature of the breach alleged, because that too must be articulated in the notice.
275 The clause anticipates that the Buyer is aware of the content of the warranties and is in a position to articulate an allegation that a particular warranty has been breached in a particular way. On the basis of the evidence as a whole I am satisfied that Mr Strathdee was aware that Warranty 7.1(a) and Warranty 7.1(b) were contained in the Final SPA.
276 Against that context, my first observation of Mr Strathdee's testimony is that he expressed himself in language that refers to a belief in the existence of a warranty claim. He did not express his evidence in terms of a belief in the existence of facts that caused him to wonder whether there existed a basis to make an allegation of breach. His reference to a "warranty claim" may be understood as a reference to a belief that the facts he believed (rightly or wrongly) to exist gave rise to a basis to allege a breach of warranties. The nature of the breach forming the subject of his belief may readily be inferred from the facts and circumstances asserted in his affidavit, all of them going obviously to the question of whether the forecast 31% gross profit margin was inaccurate, false or misleading because of the various omissions he specified at [107] - [109] of his affidavit. Mr Strathdee was a member of the board that instructed Mr Ranyard to gather information several months beforehand.
277 It is relevant that Mr Strathdee is legally qualified and a highly experienced businessman. I do not accept his evidence that he could not personally form a view that there existed a proper basis to allege a breach of the warranty claim without first seeking legal advice from Optic2's lawyers. The principal warranty sued upon is Warranty 7.1(a). It is cast in plain terms. The facts and circumstances believed to exist were highly specific and clearly indicated a breach related to the earlier forecasts. I find that as early as November 2019 Mr Strathdee believed the forecasts were misleading because of the specific reasons now sued upon including the treatment of the Additional Amount as 100% revenue and the failure to disclose expenses such as those associated with the replacement of ABR with a new subcontractor.
278 In light of those circumstances I consider Mr Strathdee's reference to the existence of a belief that "there was a warranty claim well before November 2019" should be taken at face value: he had formed a belief that the facts and circumstances supported a claim that there was a breach of warranties. That was sufficient to enable Optic2 to give notice of the claimed breach and its nature, together with the facts and circumstances said to give rise to it.
279 That conclusion aligns with other evidence.
280 In a letter to shareholders dated 31 October 2019, Mr Strathdee, then the Chairman of OS Group, wrote to shareholders concerning financial performance for the end of the June quarter. The letter called on shareholders to subscribe for a rights issue through the issuance of new ordinary shares to reduce OS Group's debt and address a breach of its finance facilities. The letter contained statements to the effect that:
forecasts for EBITDA for the financial year to 31 March 2020 represented 50% of the EBITDA performance forecast at the time of the Transaction; and
the level of gross profit margin that the business was able to generate was well below what was forecast at the time of entering into the business.
281 The letter indicates that Mr Strathdee had compared EBITDA and gross profit margin figures with those earlier represented prior to the Transaction.
282 Mr Ireland gave evidence that in late 2019 or early 2020, Mr Cherrington arranged a telephone meeting at which he, Mr Cherrington and Mr Strathdee attended. He said that after some opening words, Mr Cherrington handed the meeting to Mr Strathdee. Mr Ireland told the Court that Mr Strathdee said words to the effect that if Mr Ireland was not prepared to put $1,000,000.00 of capital back into the company he would personally make Mr Ireland's life "hell" and that he would take whatever means were necessary to "destroy" Mr Ireland's future. According to Mr Ireland, Mr Strathdee said words to the effect that "STS had not generally traded at the forecast level" and his tone was aggressive. Mr Ireland said that he refused to continue the conversation and hung up. He said that Mr Strathdee later called Mr Ireland again and told him to pass the same threat to Mr Rakkas.
283 In his second affidavit, Mr Strathdee disputed the content of the telephone conversation in part. He acknowledged that he said words to the effect that STS Group had not traded at its forecast level. He said that he made specific reference to STS-NT and its poor performance with respect to the Tindal Subcontract. He also recalled saying that the financial information disclosed was not accurate "and that [Optic2] was considering whether it pursue the STS Sellers for breach of the warranties contained in the [Final SPA], unless Mr Ireland and Mr Rakkas were each prepared to inject further capital of about $1m into the business as part of a capital raising that would be put to all shareholders". Mr Strathdee denied saying that he would make Mr Ireland's life hell or destroy his future. He said that the telephone conversation took place on 20 February 2020.
284 Mr Strathdee's acknowledgement about the content of the call relating specifically to the earlier forecasts, the Tindal Subcontract, the threatened litigation and the demand for injection of capital may be accepted as broadly consistent with Mr Ireland's recollection. His evidence that the telephone call took place on 20 February 2020 may also be accepted as it roughly accords with Mr Ireland's less precise recollection that it occurred in late 2019 or early 2020.
285 However, I do not accept Mr Strathdee's denial with respect to the threat to make Mr Ireland's life hell and destroy his future, given the adverse credit findings set out elsewhere in these reasons. I prefer Mr Ireland's evidence in that respect.
286 Mr Strathdee went so far as to assert that the telephone call itself amounted to notice of the warranty claim for the purpose of clause 13.5(a) of the Final SPA. I do not accept that assertion. The telephone call cannot constitute notice "in writing" within the meaning of clause 13.5(a), nor was the telephone call pleaded by Optic2 as constituting notice for the purposes of the sub-clause, nor did Counsel for Optic2 embrace Mr Strathdee's assertion in closing submissions. To the contrary, the submission (consistent with Optic2's plea in reply) was that the Notice Letter of 17 May 2020 was the requisite written notice and that it was given as soon as practicable having regard to the need to undertake inquiries, obtain legal advice, wait for that advice and comply with governance requirements within OS Group with respect to contemplated litigation.
287 The content and tenor of the conversation confirms Mr Strathdee's awareness of the facts now sued upon, the connection between those facts and the warranties, and the strength of Mr Strathdee's convictions at the point in time that the warranties had been breached. It gives context to his evidence that he knew that there was a warranty claim well before November 2019. It was not suggested by Mr Strathdee that he came to learn of any critical fact, or that he received legal advice between November 2019 and February 2020. I infer that his state of mind as at the two dates was substantively same. Mr Cherrington was present and said nothing to alter or qualify the meaning of Mr Strathdee's words.
288 It is apparent that Mr Strathdee did not believe he required legal advice before aggressively making the demands in late 2019 or early 2020 accompanied by threats of legal action specifically related to the warranties and the earlier forecasts. I do not accept his evidence that from November 2019 he was awaiting legal advice before he could form a view as to whether Optic2 had a warranty claim against YC Investments. I do not accept that demands of the kind made to Mr Ireland and Mr Rakkas would have been made on the basis of a mere hunch.
289 My rejection of Mr Strathdee's attempts to qualify his "belief" statement is also informed by the poor impression he made in the course of his evidence on other topics. The impression was that his testimony was tailored to suit a case theory. An example is given earlier in these reasons at [162] - [164]. In that aspect of his evidence Mr Strathdee personally made allegations purportedly based on his own knowledge, the accuracy of which he had not checked against company records. When pressed to identify what documentary evidence there was to support his claims he could do little more than simply reassert them. I do not accept his assertion that the allegation that information had been withheld from STS-NT's records (including its management accounts) could not be checked and demonstrated against the records themselves. An allegation that expenses incurred at a particular time were not recorded at that particular time may readily be established by a review of the records themselves. I have mentioned that Optic2 abandoned all allegations based on a failure to record expenses as and when they occurred. But it remains that Mr Strathdee's attempts to give content to the claim in his evidence has contributed to my conclusion that he was an unimpressive witness.
290 I also consider Mr Strathdee to have been evasive in his responses to questions concerning the terms of his remuneration and whether he stood personally to gain from Optic2's financial success and its success in this action more generally. The questioning proceeded as follows:
Counsel: So Arena itself provided the 25 million. It wasn't from investors going through Arena?
Mr Strathdee: ---Arena represents its limited partner investors. Its funds made the investment.
Counsel: But Arena invests itself and it also invests on behalf of others, doesn't it? ---
Mr Strathdee: Arena has funds. Investments are made from the funds. There are multiple investors in the funds.
Counsel: And I take it, Mr Strathdee, that you were paid a salary by Arena?
Mr Strathdee: ---I'm paid a consultancy fee by Arena.
Counsel: And is the fee a - does the fee have a success element to it?
Mr Strathdee: ---No.
Counsel: So is it an hourly rate?
Mr Strathdee: ---No.
Counsel: So what is it?
Mr Strathdee: ---A monthly stipend.
Counsel: And it's a fixed fee, is it?
Mr Strathdee: ---Yes.
Counsel: And so you had no, to the use expression, I think, from your industry, skin in the game in relation to this transaction?
Mr Strathdee: ---No, I would not say that.
Counsel: Well, what would you say? What - I will put it directly to you. Did you stand to make any money out of the success of this transaction?
Mr Strathdee: ---At what point?
Counsel: At any point?
Mr Strathdee: ---If it is successful, yes.
Counsel: And how much would that have been? Or would that be if it's - if it is successful?
Mr Strathdee: ---I have no idea. What - what - explain to me what success is and I can calculate for you an approximate number.
Counsel: It's not my agreement. It's your agreement with Arena. Will you please - - -?
Mr Strathdee: ---No, you're interrogating me about my personal position in relation to this investment, so if you have that question for me, I would be grateful if you could tell me what success is, and then I can answer your question. If you can't tell me what success is, I can't answer your question because I can't compute it.
Counsel: I'm asking you tell me what the nature of the agreement is between you and Arena as to your remuneration, which is based on success?
Mr Strathdee: ---May I speak with counsel, your Honour?
Her Honour: No, there's no objection made on the basis of relevance or any other basis. You're required to answer the question?
Mr Strathdee: ---Okay. So the performance of every single investment that we make as a firm - not just Optic but every single investment - forms a basis of incentives for Arena executives. But I can't tell - I can't tell you what quantifiable element might be, because it depends on the entire performance of the funds, not just - - -
Counsel: I'm asking you - Mr - stop it, Mr Strathdee. I would like you to answer the question, please. What are the relevant terms of the agreement between you and Arena that will be engaged by this investment, or by the Optic investment, being in any respect successful? What are the terms of that agreement?
Mr Strathdee: ---It would be a share - - -
291 At that point there was an unmeritorious objection by Optic2's Counsel. The Court then received a frank answer:
Counsel: … Mr Strathdee, I will put the question again. Will you please tell her Honour what are the relevant terms of the agreement between you and Arena which will be engaged from any element of success in relation to their investment in Optic?
Mr Strathdee: ---There is no particular arrangement that specifies an incentive that relates to Optic and only to Optic. The incentive that I have with Arena relates to the entire performance of its funds. We have hundreds of millions of dollars invested in other investments for which I am responsible, and my performance is measured against those, of which Optic forms a part. So I cannot answer you what happens if it's successful, even we define success. Because whatever I am paid is paid as a function of every single investment we make.
292 Mr Strathdee's earlier questioning of Counsel's use of the word "success" was peculiar, given that he had willingly embraced that word in an earlier response. Plainly he did not wish to disclose the personal terms of his remuneration. Whilst that is understandable, his failure to initially respond frankly in order to assist the Court to understand those terms conveyed the impression that his evidence was being given with an eye to the consequences for Optic2's case, rather than with a view to providing a forthright response to the questions as posed. Whilst the subject matter of this questioning is peripheral, it did contribute to an impression that Mr Strathdee was at times evasive and carefully rehearsed.
293 Considering his testimony as a whole I am reinforced in my view that Mr Strathdee's statement that he believed there was a warranty claim well before November 2019 should be understood as unguarded evidence that should be accepted for its truth in its ordinary meaning. I do not accept his attempt to convert the stated belief to a mere hunch. I consider the words "warranty claim" in his response to encompass a belief that the facts gave rise to a claim the nature of which was well understood by him. It was the difference between the earlier forecasts and the actual trading results that precipitated his aggressive threat of legal action made to Mr Ireland and Mr Rakkas late in 2019 or early 2020. He had sufficient legal knowledge and experience to make such threats and I find they were based on his genuine belief at that time that there was a basis to sue. There was enough awareness at that time to justify a demand of $1,000,000.00 from each of Mr Ireland and Mr Rakkas and enough to trigger clause 13.5(a).
294 Accordingly, I conclude that as early as November 2019 and for some time before, Mr Strathdee, was "aware" within the meaning of clause 13.5(a) of the Final SPA of the existence of facts and circumstances supporting a claim that there had been a breach of warranty involving the provision of inaccurate forecasts in the due diligence process, including facts and circumstances supporting his belief as to why the forecasts were inaccurate. As OS Group's Chairman, his state of mind may be attributed to the relevant corporate entities and it was not suggested otherwise by Optic2. In my view, that is sufficient to consider that the time to fulfil the obligation under clause 13.5(a) commenced to run "well before" (and no later than) November 2019. I do not consider the provision of notice in May 2020 to fulfil the requirement that the notice of the claim be given as soon as practicable after the requisite awareness arose.
295 I have not overlooked Optic2's submission that the timing of the notice under clause 13.5(a) was affected by limitations within the corporate structure relating to the need to obtain authorisation to sue. The submission should be rejected. The phrase "as soon as reasonably practicable" does not permit delays referable to Optic2 obtaining authorisation to sue or gathering sufficient evidence to form a view about prospects of success on such a suit or any other matter affecting the willingness or ability to commence legal action. In my view, clause 13.5(a) is not premised on the Buyer being presently willing and able to commence proceedings. The timing of any suit founded on allegations made under clause 13.5(a) is the subject of clause 13.5(b) and clause 13.5(c).
296 The consequence is that for the purposes of clause 13.5(c), notice was not given "in accordance with" clause 13.5(a) and the contractual claims brought in this proceeding cannot be enforced.