Optic Security Australia 2 Pty Limited v YC Investments

YC INVESTMENTS' SUBMISSIONS 4 The time to apply for leave to appeal from the order of 25 July 2023 has been extended so as to commence to run from the date of publication of these reasons. This matter has been on foot since 2020 and some expedition and finality is required. Accordingly, it is convenient to substantially reproduce YC Investments' written submissions here in full without substantive alteration (omitting footnotes), rather than expend time paraphrasing them. The oral submissions of YC Investments did not significantly enlarge upon them, other than to add a contention that the case as originally formulated and later abandoned by Optic 2 was so convoluted that it involved more than a thousand causes of action. 5 The written submissions summarise the issues that arose in the proceedings, the claims that were abandoned and the outcome. That part of the submissions is not disputed by Optic 2. With minor exceptions, what follows from [6] to [24] below is YC Investments' language, not mine.

Reasons why Optic 2's claims failed 6 The ACL claim failed because Optic 2 failed to establish a breach of s 18 of the ACL in each of the following respects: (1) Optic 2 failed to establish that the 31% Gross Margin (GM) figure in the WIP Forecasts for the Tindal Subcontract prepared in July 2018 was "taken from SimPRO", that is, it had been calculated in the same way and using the same figures as the 31.42% which was produced from the amounts entered into SimPRO in June 2017 (Reasons [88] - [90], [94] - [123], [130] - [165]). As the Court noted at [165], that failure was "dispositive of the whole of Optic 2's action against YC Investments, given the confined manner in which it pleaded its case founded on contraventions of the ACL". (2) For the same reasons, Optic 2 failed to establish that the 31% GM figure in the WIP Forecasts for the Tindal Subcontract in July 2018 was misleading or deceptive by reference to the claimed errors in the entries in SimPRO in June 2017 (Reasons at [180] - [182]). (3) It failed to establish that there were errors in the entries in SimPRO in June 2017 in respect of the allowance for "the Additional Amount" (Reasons at [40] - [ 49]). (4) Its reliance on the analysis of GM% for the Tindal Contract in the Margin Review Paper to establish the falsity of the 31% estimate in 2018 was misconceived as that analysis was based on the position in May 2019 (Reasons at [124] - [129], [166] - [178]). (5) YC Investments had adduced evidence sufficient to show that it had a reasonable basis for 31% GM representation when it was made and for that reason that representation could not be taken to be misleading because of the operation of s 4(1) of the ACL. The same applied for the Management Accounts and EBITDA forecasts (Reasons at [201] - [229]). 7 Optic 2's ACL claim also failed because Optic 2 failed to establish any loss from the claimed breach and if so what the loss might have been. Particularly: (1) Optic 2 abandoned in final submissions the "no transaction" case pleaded in the Further Amended Statement of Claim dated 25 February 2022 (FASOC) [82(b)] and [93A] (Reasons at [86]); (2) Optic 2 failed to adduce evidence: (a) explaining the accounting methodology employed using the figures in the subject spreadsheets to forecast the end of year financial positions of STS-NT and the STS Group based on the 31% GM figure for the Tindal Subcontract (Reasons at [87]); (b) from critical witnesses including the person(s) who made the decisions on behalf of Optic 2 in relation to its entry into the Final SPA supposedly based on the 31% GM figure (Reasons at [234] third dot point, [243] - [248]); (c) from an independent expert to assess the quantum of the loss claimed in FASOC [93], contrary to what that paragraph itself foreshadowed (Reasons at [85]). (3) as a result, there was no proper evidence explaining, amongst other matters: (a) the connection between the 31% GM figure and the calculation of predicted EBITDA for FY19, including the calculation of revenue (Reasons at [234] first dot point); (b) the impact of the entitlement in the Final SPA for adjustment of the purchase price in the event that forecast FY19 EBITA was not reached (Reasons at [234] second dot point, [236] - [242]); (c) the alternative transaction which would have occurred had the FY19 forecast EBITDA been lower, its terms and the resultant difference in value (Reasons at [234] third dot point); (4) in terms of the damages claim based on the difference between the purchase price and the true value of the STS Business, no evidence as to that true value was adduced nor was it explained how that might be determined by the Court (Reasons at [252]). (5) even the alternative, unpleaded case based on Mr Strathdee's claim that he would have insisted on a different ratio of cash and scrip was undeveloped in all respects, lacking any analysis of the terms and viability of the alternative SPA and the quantification of the difference (Reasons at [249] - [251]). 8 Being based on the same claims, the contractual claims failed for the same reasons (Reasons at [297] - [299]). In addition, as Mr Strathdee had formed a view about these matters and hence was aware of the basis of the warranty claim made in these proceedings "well before" November 2019, by delaying until May 2020 in providing notice of the claim, notice was not given by Optic 2 "as soon as practicable" contrary to cl 13.5(a) (Reasons at [253] - [296]).

The failure of all of Optic 2's claims was inevitable and ought to have been obvious 9 YC Investments contends that a reasonable party in the position of Optic 2 would have known that its case as presented at trial was hopeless in the above respects and would not have commenced proceedings let alone taken the matter to trial in the way it did. Specifically: (1) Optic 2's errors concerning the source of the 31% GM figure was there for it to discover. A proper proof from its own witness, Mr Norton-Baker, would have made the error obvious. Further, the unlikelihood of the 34% figure being transposed from SimPRO in its condition over a year earlier without further thought was apparent from the KPMG reports, something which it can be inferred the authors of that report would have confirmed. In addition, having retained possession and control of SimPRO and Xero, Optic 2 could have interrogated SimPRO and Xero and found out the answer itself about the allegedly undisclosed costs. Finally, this error was made particularly obvious from the detail in YC Investment's affidavits which were served by 10 January 2022. No coherent case to explain how information from SimPRO in June 2017 was used to supply figures for the due diligence process in July 2018 was put in cross-examination. The case put in cross-examination appeared to be a different case based on errors made in the ongoing assessment of %GM for the Tindal Contract, a case which is inconsistent with the 31% being taken from SimPRO as at June 2017. Yet, Optic 2 continued to press that mistaken case to judgment. (2) Further, these claims that additional costs had been incurred on the Tindal Subcontract prior to September 2018 which were not included in SimPRO in June 2017 and which were not disclosed to KPMG/Optic 2 subsequently, also faced the problem - as was ultimately accepted by Optic 2 - that these costs as a matter of course would have been entered into Xero and processed through STS-NT's accounts at least up to 30 June 2018 for the obvious purposes of ensuring that a tax deduction was claimed for them as expenses and of recovering the GST which STS-NT had paid on the relevant accounts. Hence, these expenses must have been disclosed to KPMG and Optic 2 in September 2018. The proposition that all or some of the costs reflecting the Additional Sum and Margin Eroding Costs had been incurred by STS-NT in FY18 and not disclosed to KPMG/Optic 2 during due diligence in September 2018 could not withstand scrutiny. As was said by Counsel for YC Investments when Optic 2 was struggling to articulate in opening a case based on the evidence, "... [is Optic 2] seriously asserting that this company simply didn't include in its accounts $1.3 million of the money it spent. It's a nonsense, in our submission and they need to be clear how they can put it". It was never clearly explained how Optic 2 could maintain these claims based upon nondisclosure if they accepted that these costs were fully disclosed to and then investigated by KPMG as paragraph [35(d)] from Optic 2's final submissions illustrates: By November 2019, these Margin Eroding Costs amounted to at least $1.307M. It is not in issue that most of the Margin Eroding Costs were brought to account and inputted into Xero by FY18 for the purposes of STS NT'S financial accounts. Nor is it in issue that those costs were entered into SimPRO at the appropriate time. However, what is in issue is the impact of those Margin Eroding Costs on the forecast gross profit margin of the Tindal Subcontract. Importantly, the gross profit margin of 31% (as it appears in the First and Second WIP & Forecast Model) was derived from SimPRO at a point in time prior to those costs actually being incurred. (3) No attempt at all was made to explain to the Court by reference to the KPMG Financial Models how the 31% figure for the GM of the Tindal Subcontract impacted on the FY19 predictions, and through that, the sale price, the terms of the Final SPA and the Side Letter. The Court was left to embark upon a "death by spreadsheet" (that is, to attempt to work this out for itself) which the Court would not and could not do. This meant that, if Optic 2 failed to address this issue with evidence and submissions, the claim was bound to fail for that reason alone. That point was made to Optic 2 in opening yet, Optic 2 pressed its claim to judgment without attending to the Court's concern. (4) More generally, there was no basis recognised by the law upon which a court could have awarded damages or any other remedy to Optic 2 based upon its case as presented at trial even if it had proved a breach of the Final SPA or s 18 of the ACL. Optic 2 recognised this by the assurances it gave in its pleadings that the applicant's loss and damage "will be the subject of expert evidence", and by the fact that it filed and served a report from Mr Jaski of PwC of 14 October 2021. Further, in this respect and in respect of proof of reliance as alleged in FASOC [81] and [82] (which is critical for causation), Optic 2 needed to adduce supporting evidence from Optic 2's decision makers at the time. None were called. The causation and quantum evidence from Mr Strathdee was received under s 136 of the Evidence Act 1995 (Cth) as being evidence of his opinion only. That was all it could be. It was not capable of having probative value for any aspect of the proof of Optic 2's loss. (5) Even the question of whether YC Investments had reasonable grounds for making the 31% GM estimate in July 2018 was there for Optic 2 to see from: (a) the discussion of margin forecasting generally and in respect of FY19 and WIP calculations in the KPMG September Report at pages 5, 9, 11, 17 and 21 - 27 and from speaking to those involved in its preparation; and (b) the calculation of WIP in the Tindal Subcontract for the purposes preparing the FY18 accounts in XERO which was undertaken at about the same time (Reasons at [143] - [150]).

How did Optic 2 come to prosecute a hopeless case? 10 The continued prosecution of the warranty claim was the inevitable consequence of Mr Strathdee's approach. The warranty claim was arrived at and made as described by Mr Strathdee at [104] - [118] of his first affidavit and then prosecuted without Mr Strathdee properly reviewing "the accounts on which he relied to satisfy himself that there was a proper factual foundation for the serious allegations he advanced" as set out in those paragraphs (Reasons at [163]). The Court said further (at [164]): ... it remains a feature of Mr Strathdee's evidence that he made serious allegations that were factually unsubstantiated. I consider him (at least) to be a careless witness. He ought not to have made bald assertions as to what was or was not recorded in SimPRO or Xero without being able to point to the evidence that could support it. 11 In pursuit of this warranty claim, Mr Strathdee approved the pleadings filed in this matter (alongside others), fully understanding the nature of the allegations they made. That unfounded and unsupported case was then prosecuted to judgment.

What was the advantage to Optic 2 of prosecuting a hopeless case? 12 Post-acquisition, the STS Group did not achieve the levels of trading forecast by the model used to justify the purchase. In these circumstances, it may reasonably be inferred that the warranty claim and its prosecution gave Optic 2 including Mr Strathdee and his fellow directors one or more of the following benefits: (1) an explanation as to why the poor trading of the business post-acquisition was not the fault of the post-acquisition management; (2) evidence that they were doing something to remedy the problem; (3) an excuse for not paying the $1.35m which was due under the Side Letter on 30 June 2019; and/or (4) from the non-payment to Mr Ireland (amongst others) of the $1.35m and the conduct instead of this litigation, a means for Mr Strathdee to deliver on his threat "to make Mr Ireland's life hell and destroy his future". 13 It would seem no coincidence therefore that the manner in which Optic 2 conducted this litigation was oppressive in several other respects in addition to being without merit.

Oppression - pleading numerous claims or allegations which were without merit and withdrawn or abandoned just before or during trial 14 Optic 2 said at [1] of its closing submissions, "This is a case involving a relatively straightforward proposition ... [T]here is really only one calculation that is in issue, being that which ought to have been the gross margin forecast for a particular contract for [FY19]". That observation is clearly correct. 15 Yet, the original SOC was 65 pages (17 pages of schedules) and with 126 paragraphs (93 plus 34 in the schedule) and what appears to be over 1,000 subparagraphs of text (including particulars) in total. By the end of the trial: (1) The disclosure material relied upon as pleaded in FASOC [12] had reduced from 19 items to 3 (12, (I) and (m)). (2) The alleged misrepresented figures as pleaded in FASOC [31] had reduced from 37 items to 5 (31, (i)(i), (i)(ii), (i)(iii), (i)(iv), noting that (b) is in substance the same as (a)). (3) The contingency allowance claim (FASOC [33] - [58]) had been withdrawn. (4) All claims based on the overstated financial statements had been withdrawn (FASOC [58L] - [58Q]); (5) The breach of warranty claims for 6(b)(i), 6(c)(i), 6(c)(ii), and 6(d) (FASOC [60] - [67]) had been withdrawn; and (6) The "no transaction" damages case had been withdrawn. 16 In the end, about 150 paragraphs of pleaded allegations (not counting paragraphs which were particulars of another paragraph) were formally deleted by amendment from the FASOC. To this should be added a large number of paragraphs which were otiose by the end of the trial and which were still not deleted by amendment from the FASOC, e.g., all but (e), (l) and (m) from [12] and all allegations in the schedules save those related to FY19 forecasts. 17 The case which was argued in Optic 2's final submissions could and should have been pleaded in a document a fraction of the size of any of the versions of Optic 2's Statement of Claim. Instead, the narrow case which Optic 2 ran was hidden within a "forest of forensic contingencies", an approach which was criticised by the High Court in Forest v Australian Securities and Investments Commission (2012) 247 CLR 486 (at [27]). Criticism of Optic 2 should be made in stronger terms as none of the claims which comprised this forest - whether those that were withdrawn or the one which was maintained - had any merit.

Oppression - promised particulars which were never provided 18 As already noted in respect of damages, many of the pleaded paragraphs which were either abandoned or left unsupported said that particulars "will be provided": see FASOC [58D(D)], [58E(E)], [58F(C),(D)], [58J(a)(C)], [58J(b)(C)], [58M(C)], [58P(a)(B)],[58P(b)(B)], [91], [93]; see also Optic 2's FBPs [A6(b)], [A40(b)]. None were.

Oppression - making unfounded allegations of dishonesty 19 As O'Sullivan J noted in Hillier v Martin (No 14) [2022] FCA 984 (at [63]), although it does not reflect the law in Australia in respect of the second limb in Barnes v Addy (1874) LR 9 Ch App 244, there is no reason to consider that Lord Nicholls' well known description of dishonesty in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (at 389) is not authoritative in Australian law for that purpose. As that passage makes clear, there is no grey area between honesty and dishonesty. Dishonesty is the "counterpart" of honesty. 20 The allegations in FASOC [70] that YC Investments "was aware that the Disclosure Material (which it represented was true: warranty 7.1 (a)) was not true..." and in [72(a)] that it "did not honestly hold" the opinions, expectations and beliefs it represented it held were allegations of dishonesty. When read with the particulars in [59], they necessarily were allegations of a dishonest state of mind on the part of each of Mr Ireland, Mr Rakkas and Mr Hurley. They should never have been made: see further at [21(8)] below. Like the other elements of the oppression conduct of this litigation as referred to above, they necessarily increased significantly the risks to Mr Ireland, Mr Rakkas and Mr Hurley of the litigation, noting that Mr Ireland has been at all times in this litigation the CEO of the Chamber of Commerce Northern Territory. If the pleaded allegation that Mr Ireland did not honestly believe representations he knew a company of which he was a director was making in the course of a large sale transaction had been published widely in the media in the Territory, it may well have made Mr Ireland's "life hell and destroy[ed] his future" as Mr Strathdee had threatened.

Oppression - ignoring YC Investment's well-founded criticisms in relation to these matters 21 Reinforcing that Optic 2's oppressive conduct was strategic, Optic 2 repeatedly ignored YC Investments' complaints and requests for the clear articulation of Optic 2's case: (1) On 21 January 2021, the same day as YC Investments filed its first defence, its solicitors wrote a detailed letter complaining about the incoherence of the claims that STS's financial accounts and predictions were misleading, the impermissible multiplicity of claims, the impermissible deferral of essential particulars and the unsupported allegation of fraud/dishonesty. Optic 2's solicitors' letter of 18 February 2021 rejected all criticisms and suggested in effect that any difficulties YC Investments had understanding the case should be dealt with by a request for further particulars. Importantly, and contrary to the position it took on the strike out application and at trial, it did not dispute that it had made allegations of dishonesty against Mr Ireland, Mr Rakkas and Mr Ireland, asserting instead that "the pleas of dishonesty are distinctly pleaded": see [22]; (2) On 8 March 2021, YC Investments sought further and better particulars of the Statement of Claim. They were provided in respect of the first Amended Statement of Claim on 16 April 2021 (FBP). The Court will note that the request replicated many of the inquiries which the Court made of Optic 2 when its Counsel was opening its case at trial, particularly the precise figures in the accounts and projections which were said to be wrong and what the correct figure was: see R7-R13, R1 6-R18, R20-R22, R25-R30 of the FBP. A review of the FBP shows that it does nothing more than restate the general matters set out in the Amended Statement of Claim. It should also be noted that, by way of example, any genuine attempt to answer R26 which related to the allegations in ASOC [63(a)] of "inaccuracies and omissions" in the management accounts listed in ASOC [62] would have revealed what became clear at trial - there were none. (3) On 12 January 2022, after serving YC Investments' affidavits, its solicitors wrote to Optic 2's solicitors stating: One of the reasons for the delay was the difficulty we had in identifying precisely what, following the provision of your affidavits, your client's case now is. It seems that large amounts of the Amended Statement of Claim are no longer pressed and that your client's case is confined to the claims which are referred to in the evidence concerning the projections of 31% and 41% gross margins for the Tindal contract and the variation to work element 15 respectively. Particularly it seems to us that the following paragraphs in your client's Amended Statement of Case are not supported by any evidence and should be withdrawn or struck out - 31 (all save (a) and (j)), 32 (all save (a) and (e)), 58J(b), 58L to 58Q, 60 to 67, 68(a), 68(b), 68(c)(part), 69 (aa), 69(b), 69(c), 71 (part), 72 (part), 84 (part), 85 (part) and 91 (part). We also invite your client to reflect on the large number of separate causes of action which it has pleaded in relation to its two complaints concerning the 31% and 41% projected gross margins and narrow its case accordingly to avoid further unnecessary cost and delay and embarrassment to the respondent in the conduct of its defence. As we have explained in earlier correspondence, this will follow inevitably if your client continues to press a multiplicity of separate legal claims for the one, narrow set of facts. Can you please therefore confirm by return that your client will file an amended Statement of Claim which attends to these defects in its pleading? If your client is not prepared to do so, please explain why. (4) On 13 January 2022, YC Investments solicitors wrote to Optic 2's solicitors stating: ... we note your client's evidence (particularly when read in the light of our client's evidence) does not disclose any reasonable basis for arguing that the respondent acted dishonestly in making the projections it made about gross margin on the Tindal contract in 2017. Accordingly, there is no proper basis for the pleas in paragraphs 70 and 72(a) to remain in the Amended Statement of Claim. Mr Ireland, Mr Rakkas and Mr Hurley are well known members of the Darwin community. Mr Ireland is at present the Chief Executive Officer, Chamber of Commerce Northern Territory. If maintained, these unjustified allegations are likely to be highly damaging. We ask you again to withdraw them. If you refuse, our client will also apply to strike out these two paragraphs at the next directions hearing. (5) On 18 January 2022, Optic 2's solicitors responded to both letters stating: 19 For the avoidance of doubt, the whole of the ASOC is pressed by our client. Our client's case is not just confined to evidence concerning the p rojections of 31% and 41% gross margins for the Tindal contract and the variation to work element 15 respectively. … 21 As we have explained to you on numerous occasions, our ASOC does not present a multiplicity of separate legal claims for one set of facts. It contains two causes of action in relation to: (a) misleading and deceptive conduct; and (b) breach of warranty under the Share Purchase Agreement. There are numerous instances of breaches by your client pleaded as there are numerous instances of incorrect information appearing in the Disclosure Materials (as defined in the ASOC). There is no need or use for our client to further amend our statement of claim on this basis at this stage. 22 Our client does not propose to amend as requested by your client. … 27 Your letter of 13 January 2022 raises certain pleadings of concern to your client. On the basis of the evidence your client has provided, our client is not prepared to withdraw its allegations of awareness by your client (or, in your words, "dishonesty") as contained in paragraphs 70 and 72(a) of the ASOC. On the contrary, the inference to be drawn from your evidence is that your client did know that the materials provided in the course of the due diligence (including statements and forecasts placed in the Dataroom) was not true, incomplete, misleading and/or deceptive. (emphasis added) (6) In relation to YC Investments' foreshadowed application to strike out the allegations of dishonesty, Optic 2's solicitors said (at [33]): The fact that Mr Rakkas, Mr Ireland and Mr Hurley "are well known members of the Darwin community" is of no relevance and we hereby put you on notice that we intend to seek costs assessed on an indemnity basis in relation to the Interlocutory Application (7) Given Optic 2's position, YC Investments filed a strike out application on 19 January 2022 in respect of the unsupported allegations and the dishonesty pleas in ASOC [70] and [72(a)]. The application was opposed by Optic 2 in all respects. In respect of the unsupported allegations, the application was adjourned to the trial. It is informative to compare YC Investments' application with the paragraphs which Optic 2 had deleted of its own initiative from the FASOC by the end of the trial: Sub-paragraph of 4 of the application of 19/1/2022 Paragraph of ASOC sought to be struck out Deletions made by Optic2 to the FASOC (a) 31(b) to 31(i) 31(b) to (H) (b) 32(c) to 32(d) 32(b) to 32(c) (c) 58J(b) - (d) 58L to 58Q 58L to 58Q (e) 60 to 67 60 to 67 (f) 68(a) and 68(b) Deletion of references to "Undisclosed Financial Statement Matters" (g) 68(c), reference to "Undisclosed Financial Statement Matters" 68(c), reference to "undisclosed Financial Statement Matters" (h) 69(aa) to (c) 69 consequential amendments following deletions in (d) above (j), (l) to (p) 71, 84 to 86, 91, 92 (consequential deletions) 81, 84 to 86 (consequential deletions)

As this table demonstrates, YC Investments' contention in its solicitors' letter of 12 January 2022 that these allegations were unsupported by any evidence and should be withdrawn was substantially correct and eventually acceded to by Optic 2, but not until over six weeks later, towards the end of the trial, after being actively resisted in the meantime and with considerable further wasted time and costs. (8) In respect of the dishonesty pleas in ASOC [70] and [72(a)], the Court dismissed that part of the strike out application. This was based in part on the submission by Optic 2 that "... one does not have to be dishonest in order not to hold an honest belief" and the express disownment of any allegation of dishonesty or other conduct tantamount to fraud on the part of YC Investments and Mr Rakkas, Mr Ireland and Mr Hurley. As noted at [19] above, the distinction which Optic 2 (belatedly) sought to draw between an absence of honesty and dishonesty does not exist. Further, no case was developed at trial that Mr Rakkas, Mr Ireland and Mr Hurley and through them Optic 2 approved the document with the 31% GM representation without an honest belief in its truth as alleged in FASOC [70] and [72(a)]. Nothing to this effect was put to any of them in cross-examination. Like many of the allegations in the SOC and ASOC, these allegations should never have been made, but more particularly so because of their seriousness and the reputational damage which can unfairly result from their inclusion in a document filed in court.

Oppression - resistance to summary disposal 22 Asche CJ in Civil & Civic Pty Ltd v Pioneer Concrete (NT) Pty Ltd (1991) 103 FLR 196 said (at 215 - 216): … Again with great respect to Parker LJ, his remarks may well serve to encourage ingenious counsel to adopt what one would have to call a 'cuttlefish' defence. That sagacious mollusc endeavours to confuse and defeat its enemies by pouring forth clouds of inky blackness when attacked. So, resort to a welter of authorities and referral to esoteric points of law might be employed to persuade an overworked judge that the answer is too hard to find on summary proceedings; and the defence thereby gain a much desired breathing space; at the expense of the plaintiff.

Optic 2's submissions 23 As I have mentioned, for the most part Optic 2 did not take issue with the accuracy of the submissions insofar as they summarise the background to the proceedings, the conduct of the trial and the ultimate outcome. It submitted that the failure of the case was a consequence of its witnesses not coming up to proof. It submitted that the failure to call expert evidence for the purpose of assisting the Court to quantify its claimed loss and damage was explained by the circumstance that an expert who had prepared a report (not adduced at trial) had been the subject of criticism in a judgment of the Supreme Court of Victoria so affecting his credibility that a forensic decision was made not to call him. It was submitted that the failure of the claims and the reasons for the failure were not to be evaluated with the benefit of hindsight. It took issue with the description of its pleaded case as involving more than a thousand causes of action. 24 Optic 2 submitted that there was no proper evidentiary basis to find that it commenced the proceedings with the ulterior and improper motives asserted by YC Investments. It submitted that orders for indemnity costs are ordinarily made in circumstances where an unsuccessful party has unreasonably rejected an offer of compromise, and yet in this case no such offer had been made.

Resolution 25 At a forensic level, I accept (and it was not disputed) that the action failed for the reasons set out in YC Investments' submissions reproduced above. 26 Two significant aspects of YC Investments' submissions should be rejected. 27 First, I am not satisfied that there is sufficient evidence to support a conclusion that the proceedings were commenced and continued for the ulterior motives set out at [12] above. Those submissions amount to conjecture and an order for indemnity costs should not be based on them. On the material before me, I am not satisfied that Optic 2 deliberately erected a thicket of confused pleadings so as to defeat any summary judgment or strikeout application by rendering questions on such applications too difficult or frustrating for the Court to decide. 28 Second, I do not accept that the allegations in the proceedings equated to allegations of dishonesty. The claims founded in breach of the contractual warranties depended on the terms of the warranties themselves and so turned on whether there was an absence of an honest belief as to certain matters. A finding that there was an absence of an honest belief would not amount to a finding of a positive dishonesty. Nor did the allegation of contravention of the ACL depend on any finding of dishonesty. 29 With those exceptions, I largely accept YC Investments' submissions concerning the conduct of Optic 2's case prior to and at the trial. 30 I do not consider it necessary to identify how many separate causes of action were originally pleaded and how many of those were ultimately pressed to judgment. It is sufficient to find that the abandoned portion of the case was very significant indeed. The table extracted at [21(7)] above gives an accurate measure of the abandonment and the extent to which it aligns with those aspects of the claim that YC Investments had complained of in its correspondence well in advance of the trial. I place significant weight on the circumstance that Optic 2 had been put on notice of alleged deficiencies in its claims and yet the abandonment of the claims did not occur until the eleventh hour. The persistence with those claims has caused YC Investments to incur significantly greater costs than it should otherwise have incurred. 31 I accept Optic 2's submission that on an application for indemnity costs the reasons for the failure of a case should not be viewed with the benefit of hindsight. There may be many reasons for the dismissal of a claim. Witnesses may not come up to proof. The issues in contention may turn on the resolution of competing oral testimony. Documents may emerge that shed a more nuanced or perhaps catastrophic light on things. There may be genuine issues of construction upon which the success of the whole of a case turns. 32 However, I do not consider the failure of Optic 2's case to be one that could only have been predicted with the benefit of hindsight. The failure is not explained by witnesses "not coming up to proof". Very few issues turned on the resolution of testimony from witnesses asserting contradictory versions of events. Rather, the case was characterised by Optic 2's persistence with a speculative claim that the 31% figure was "taken from SimPRO" in the particular sense described in the Reasons. 33 As the Reasons explain, Mr Strathdee made allegations based on mere assertions about a failure to enter certain expenses within the SimPRO and Xero software systems. Mr Strathdee did not personally interrogate those systems to ascertain whether his stated beliefs were true. The failure of the case is not explained by Mr Strathdee not coming up to proof. A proper proofing of Mr Strathdee would have revealed that he had not personally interrogated the systems to satisfy himself that there was a proper evidentiary basis for his beliefs. It is reasonable to infer that Mr Strathdee's bare assertion had not been tested against the data contained in the systems in Optic 2's own possession by any person responsible for the formulation or preparation of Optic 2's case. Those systems were able to be examined for evidence to prove the serious allegation (ultimately abandoned in closing submissions) that expenses referrable to the performance of a contract had not been entered as and when they were incurred. 34 Nor can it be said that Mr Norton-Baker did not come up to proof on topics within his knowledge. I described Mr Norton-Baker as an honest witness. He frankly acknowledged that it was the practice of the relevant entity to record expenses as and when they were incurred in SimPRO. That might explain why Optic 2 ultimately persisted only with the allegation alleged that the 31% had been "taken from SimPRO" based on figures in the system at an earlier time. As the Reasons explain, it was not demonstrated how that was done or could feasibly have been done, and Mr Norton-Baker could give no direct factual explanation for it. The allegation appears to have been based on little more than the resemblance of that number to the number 31.42%, as discussed in the Reasons. 35 I accept YC Investments' submission that the Margin Review Paper did not provide a proper basis to assert that the representations made in the due diligence materials were false or misleading at the time of the closure of the due diligence process. To the extent that Optic 2's case rested on the Margin Review Paper and the allegations of Mr Strathdee it was fundamentally flawed for reasons that could and should have been identified by Optic 2 at the time that its case was formulated. 36 To the extent that there was a forensic decision not to call the expert witness Mr Jaski, the forensic reason for that decision is a question of fact. Optic 2's explanation for not calling an expert witness to quantify its claimed losses is not supported by evidence and I therefore make no finding about it. The decision was made before Optic 2 opened its case. Whatever be the reasons for the decision, it remains that Optic 2 persisted with the trial and pressed the Court to judgment in the absence of expert evidence sufficient to make good critical aspects of its claims for relief. 37 No explanation was suggested or proven for the failure to call those persons responsible for causing Optic 2 to enter into the impugned transaction. 38 I place significant weight on the circumstance that YC Investments repeatedly put Optic 2 on notice of the defects it perceived in the claims. Those defects manifested themselves in the late abandonment of much of the case and the wholesale rejection of the remainder. 39 These are not matters of hindsight. They are failures on the part of Optic 2 to conduct is case in a manner consistent with its obligations under s 37M and s 37N of the Act. In the present circumstances, s 37 obliged Optic 2 to give careful consideration to criticisms of which it had been put on notice, and to narrow its case so as to press only those claims for which there was a proper evidentiary foundation. On the material before me, the inference fairly arises that that did not occur. 40 By the time of closing submissions, Optic 2 had also abandoned nearly all aspects of the defence to the counterclaim, other than to submit that it was entitled to have judgment on the counterclaim set off against judgment on its originating application. The set-off "answer" to the counterclaim was as hopeless as its primary claim. YC Investments was otherwise put to the expense of answering those aspects of the defence to the counterclaim that were abandoned, including those abandoned at the eleventh hour. 41 It should be stressed that the purpose of an indemnity costs order is not to punish an unsuccessful party. The award has a compensatory purpose. In all of the circumstances I am satisfied that YC Investments should be indemnified for the costs of defending an action that Optic 2 should not have prosecuted. 42 There was ultimately no dispute that costs should otherwise be calculated on a lump sum basis, and to be assessed by a Registrar of the Court. That lump sum will be fixed on the basis that costs are payable on an indemnity basis. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Charlesworth.