Salomon Smith Barney Australia Corporate Finance Pty Ltd v Allgas Energy Ltd

[2] To that end, the plaintiff (then known as County NatWest Corporate Finance Australia Ltd), an investment banker and corporate financial adviser, was engaged to seek an investor which would take up 40 to 50 percent of Allgas shares. As a secondary task, County NatWest was to put to the Government a proposal to alter existing legislation which imposed a 12½ percent shareholding limit. Subsequently, however, the Allgas board decided to invite proposals for a full takeover of Allgas. Ultimately, the South East Queensland Electricity Corporation Limited (Energex) acquired, in what might be described as an unfriendly takeover, at least 76.8 percent of Allgas' ordinary shares. At issue in this action is the fee, if any, to which County NatWest (Salomon Smith Barney by the end of the events in question) was entitled upon that takeover.

[3] All the witnesses in the case were called by the plaintiff. They included individuals from both the Allgas and County NatWest sides of the events in question, and all were entirely credible. The dispute in this case is not so much as to the events which occurred, as the complexion which is to be placed upon them.

[4] The board of Allgas had set up a committee to deal with the quest for a major shareholder, consisting of the chairman of the board, Mr James Dowrie, the chief executive of Allgas, Mr Graham Drummond, and a board member, Dr Garry Weiss. It was Mr Dowrie and Dr Weiss who conveyed the aims of Allgas to Mr Paul Binsted, a director of County NatWest, in mid-1997. Having accepted their instructions, Mr Binsted pointed out to them that once other parties were in a position to acquire more than 20% of the company's shares, there could be no guarantee of control over the identities of, or acquisitions made by, prospective investors. The situation would be akin to a public auction. Nonetheless, he advised, his company was in a position to seek out suitable investors. The parties went on to discuss a suitable process for doing so, and the terms of County NatWest's engagement.

[5] The meeting was followed by a letter dated 23 June 1997 from County NatWest to Allgas. It has become known as the "mandate letter", and it was executed on behalf of Allgas by Mr Drummond, with the authority of the board. There is no dispute that it sets out the terms of the agreement between County NatWest and Allgas as it initially stood, subject to the plaintiff's argument that a further term was to be implied into it.

[6] County NatWest noted, in the letter, the Allgas board's desire to encourage investment from a major international gas utility, to acquire 40 to 50 percent of shares. Its own tasks were to identify potential new shareholders, to prepare an information memorandum for provision to suitable prospects, and to run a tender process in order to negotiate a proposal. This last was likely to involve the negotiation of a shareholder's agreement. County NatWest also identified as part of its undertaking the submission of a proposal to the Queensland Government to vary the existing shareholding restrictions and to obtain all the required approvals for the share acquisition.

[7] As to remuneration, the letter specified a retainer of $50,000 in respect of the information memorandum and submissions to Government; but no fee was to be charged for obtaining approvals. Out of pocket expenses (not to exceed $5,000 without prior approval) would be charged. As to the fee for the identification and introduction of the new shareholder, the following was prescribed:

"a fee of 1% of the market value of the equity of Allgas acquired by the new shareholder. This fee would apply both to shares purchased from existing shareholders and shares placed by Allgas. This fee would be payable by the new shareholder. While Allgas clearly cannot bind the new shareholder, we would ask Allgas to agree with County NatWest that it would insist this was a term of any transaction entered into between it and the proposed new shareholder".

[8] In accordance with the agreement, information memoranda were duly prepared and dispatched to potential investors. County NatWest kept Allgas informed of its progress throughout the balance of 1997. By early January 1998, two proposals had emerged from American utilities; but both had indicated, for various reasons to do with taxation implications and other industry interests, a preference for a full takeover, and a willingness to pay a higher share price for that outcome. To discuss those bids, a meeting was held on 15 January 1998 between the members of the Allgas committee and representatives of County NatWest. Because of Mr Binsted's absence on holidays, Mr Brian Wilson and Mr Stephen Leong attended the meeting on behalf of County NatWest. Ms Nerolie Withnall from Minter Ellison, the solicitors who represented Allgas, was also present at the meeting.

[9] At the meeting, the proposals from the American utilities were discussed. The outcome was a consensus that the Allgas committee should return to its board, recommending consideration of a full takeover. County NatWest was instructed to return to the utilities to ascertain the terms on which they would be prepared to make a full takeover offer. That approach was to include ascertaining whether either utility was prepared to offer as consideration a redeemable convertible note, which would give Allgas shareholders who took it up, the option to participate in any subsequent float or to redeem at a cash value.

[10] According to Mr Wilson, at the stage of the meeting at which it was agreed that the preferable outcome was a full takeover of Allgas, Dr Weiss said words to the effect "you guys have just doubled your fee". Mr Leong also recalled such a statement, but was unable to say with certainty by whom it was made. Dr Weiss did not give evidence of making such a statement. Mr Dowrie said that he could recall the remark being made by Dr Weiss as, he said, "a throw away line". Mr Drummond said that he could recall that there was a light-hearted aside to do with fees, but he could not remember its contents. Neither Mr Drummond nor Mr Leong, both of whom made notes of the meeting, recorded any reference to fees, and it seems clear that there was no formal discussion of a fee to be paid to County NatWest.

[11] After the meeting the Allgas committee reported back to its board, which agreed with its recommendation to invite bids for a 100 percent take over.

[12] Negotiations continued, with County NatWest reporting by letter to the Allgas board on its progress on at least two occasions. One of the two American utilities, Texas Utilities Australia, had become the preferred tenderer. It made an offer for all the ordinary shares of Allgas at between $17.25 and $18.55 (depending on the number actually acquired). That offer was recommended to shareholders. Soon after, representatives of Boral Ltd approached the Allgas board with a view to Boral's making its own bid. A meeting was held in mid- to late February 1998 between Boral representatives, including Mr John Green, one of Boral's financial advisers, Mr Dowrie and Mr Drummond on behalf of the Allgas board, Ms Withnall as their legal adviser, and Mr Leong and Mr Binsted on behalf of County NatWest.

[13] In the course of that meeting, Mr Green outlined the Boral proposal. Having raised some queries about Allgas assets, he asked what County NatWest's fee for advising Allgas was. Mr Green could not recall the precise answer given by Mr Binsted, but was left with the impression that it was of the order of $2,000,000, and would increase if the bidding price increased. According to Mr Binsted, he answered that the fee was one percent of the takeover consideration. Mr Leong gave no evidence about the conversation. Mr Drummond said he had no specific recollection of fees being discussed; he said that the parties were at a long table, and he was at one end. If he had heard a significant statement which was obviously wrong from a party attending a meeting on behalf of Allgas, he would "most likely have said something". Mr Dowrie similarly said that he would correct an inaccurate statement, but could not recall any specific discussion of County NatWest's fee.

The Energex bid and the Allgas board's response on fees

[14] An offer was made by Boral Ltd to acquire all ordinary shares in Allgas. It was overtaken, however, by a higher offer of $23 per share made by Energex in June 1998. Recognising that the Allgas board would be replaced on the Energex takeover, Mr Dowrie instructed Mr Drummond to ask Allgas' advisers, financial and legal, to render their accounts. Mr Binsted responded to that request by letter dated 10 July 1998. In it, he pointed out that a one percent fee based on an acquisition by Energex of Allgas' issued ordinary share capital of 10,883,821 shares at $23 would amount to $2,503,278. Since there was no certainty as to the precise number of shares which would be acquired by Energex, he proposed settlement by payment of a fee to Salomon Smith Barney (as it had by then become) of $2,400,000. No further charge would be made in respect of out of pocket expenses.

[15] A meeting of the board of Allgas was held on 17 July 1998. The discussions held at it were the subject of objection by the defendant which will be canvassed later in this judgment. Four directors, Mr Dowrie, Dr Weiss, a Mr Fry and Mr Dalton were present at the meeting, as was Mr Drummond. Mr Dowrie, Dr Weiss and Mr Drummond gave evidence of what occurred at it.

[16] Mr Dowrie's recollection was that there was agreement of all directors other than Mr Fry that the fee should be paid by Allgas. If he had known that Energex would not agree to pay the fee, he would have taken a vote immediately on the matter, although he was concerned that not everybody would agree. The end result of the discussions, on his evidence, was that the directors agreed to negotiate the fee.

[17] Dr Weiss said also that in his recall the majority attitude was that County NatWest was entitled to be paid its fee. He had agreed with an indication by Mr Dowrie that he would seek to negotiate a lower fee; but would have supported Mr Dowrie had a vote been taken for immediate payment of the plaintiff's fee.

[18] Mr Drummond, who took notes of the meeting, said that the board could not, due to one director's dissent, reach an agreement as to whether the fee should be paid. It was decided that the matter would be left to the new Allgas board. He communicated that result to Mr Binsted. The board's resolution is recorded in Mr Drummond's note as follows:

"Board resolved not to agree with the Salomon fee proposed in their letter of 10/7/98, but agreed a reasonable fee should be paid in accordance with the original letter of 23/6/97."

[19] The formal minutes of the same meeting record the following:

"Directors stated that they were not in agreement with the amount as contained in the letter of 10 July 1998.

Directors acknowledged that there is an obligation to pay a fair fee having regard to the original terms as set out in the mandate letter of 23 June 1997.

The matter was deferred for determination by the new Board of Directors."

[20] Mr Dowrie later contacted Mr Binsted and advised him that while he was satisfied that County NatWest was entitled to a 1 percent fee the Board had been undecided as to what figure the 1 percent should be taken on. He recounted part of Mr Dowrie's comments to him: "the 1 percent of the Energex bid was more money than they had anticipated, it was a higher share price, and they wanted to think about what was fair."

[21] Subsequently, Salomon Smith Barney demanded full payment of a 1 percent fee based on the Energex bid, a demand which was refused by Allgas. The result was the present action, in which Salomon Smith Barney seeks damages for breach of the agreement of June 1997 or payment of its fee pursuant to the varied agreement of January 1998.

[22] The first of those claims, as raised in the Statement of Claim, alleges as the relevant breach the failure to insist on the inclusion of a term in the transaction with Energex that the latter would pay the plaintiff's fee. However, the plaintiff's Reply pleads in addition an implied condition of the June 1997 agreement: that if the new shareholder refused Allgas' requirement that it pay the County NatWest fee, Allgas itself would pay the fee. The condition was to be implied, according to the plaintiff's particulars, as necessary to give business efficacy to the agreement. The plaintiff's case as argued largely proceeded on the footing that it was that implied condition which had been breached.

[23] The second claim, for County NatWest's fee, relies on the allegation that the agreement was varied in 1998 to entail County NatWest's acting on Allgas' behalf in seeking a total takeover. It is said that the changed nature of the transaction required the implication of a term that Allgas itself would pay County NatWest's fee. That fee was, the plaintiff contends, still to be calculated in the same way as contemplated in the original agreement; that is, including one percent of the market value of the shareholding acquired.

[24] The defendant, on the other hand, says that the June 1997 agreement contemplated the identification of an international investor to take up between 40 and 50 percent of shares, and that the successful Energex bid, involving a full takeover by a local investor, was not within it. In any event, no transaction was entered into between Allgas and any proposed new shareholder so as to enliven its obligation to insist on a term that a fee be paid by the new shareholder. Even if there were a transaction with Energex, it says, it had no capacity to require Energex's agreement to such a term. The onus was on the plaintiff to show that Energex would have paid the fee, and the preponderance of evidence was that Energex would not have agreed to it, so that there was no loss or damage suffered. No term as to Allgas' paying the fee in the event of a refusal by the new shareholder should be implied because such a term would be inconsistent with the express provision in the agreement for payment by the newcomer; it was not "so obvious as to go without saying"; and it was not necessary to give business efficacy to the contract.

[25] The defendant denies the existence of any varied agreement and says that any services provided after January 1998 were provided in the absence of any agreement for remuneration in respect of them. Finally, it argues that it was up to County NatWest as the Allgas adviser to advise Allgas that it should insist on such a term in any takeover. So, it is said, if any loss or damage were caused, it was by reason of County NatWest's own breach of contract or duty as an adviser.

[26] One must begin by identifying the relevant essential terms of the June 1997 agreement insofar as it is constituted by the letter of 23 June 1997. In my view, it is clear that County NatWest undertook the task of identifying prospective shareholders with international interests; or, conversely, shareholders which were not locally based. That identification of prospective shareholders was to be undertaken with the aim of inducing an acquisition by such a shareholder of 40 to 50 percent of the Allgas shares. It may be argued, as Mr Dunning for the plaintiff did, that the agreement had an element of fluidity, because the parties recognized that their aims of a 40-50 percent share acquisition by an international investor might not be met; but that is not to say that those goals were any the less the aims which County NatWest was required to endeavour to meet; the boundaries of its task, and essential terms of the agreement.

[27] Other than a $50,000 retainer and out-of-pocket expenses, Allgas agreed by its execution of the mandate letter that "it would insist [payment of a one percent fee] was a term of any transaction entered into between it and the proposed new shareholder". The mandate letter offers no clarification of what constitutes a "transaction". In its context it cannot sensibly be restricted to a situation in which the provision of financial consideration was involved. Clearly enough, the letter contemplates a transaction involving terms. The expression must, I think, be regarded as having a broad ambit, encompassing any arrangement between the board and the new investor by which one accepted an obligation or obligations which would benefit the other. It was, for example, contemplated by the letter of mandate that Allgas might place new shares in order to raise additional capital in the course of the endeavour to make shares available for acquisition.

[28] The agreement also recognised, in the use of the clause "while Allgas clearly cannot bind the new shareholder", that any insistence by Allgas on the terms of a transaction as including payment of the fee would not necessarily be fruitful.

Did the Energex takeover fall within the ambit of the June 1997 agreement?

[29] I do not consider that the events which occurred in 1998 by which Energex acquired a majority of the Allgas ordinary shares came within the compass of the June 1997 agreement. Energex, as a locally based utility seeking a full takeover, did not fall within the parameters of the search task which County NatWest accepted; and, indeed, it is only on the most generous view that it can be said that its emergence was related to County NatWest's endeavours.

[30] Most tellingly, there was nothing in the oral evidence or the documentary evidence to suggest any dealing between Energex and the Allgas board in the course of that takeover which could be described as a "transaction". Energex made its bid at $23, which the Allgas board recommended to shareholders at the stage when it became apparent that Energex had outflanked its competition, having already acquired 65.8 percent of the company's ordinary shares, and there was no other feasible option. No element of mutual assistance or agreement existed.

[31] The conclusion I reach, therefore, is that the Energex transaction did not fall within the purview of the agreement of June 1997 so as to create any obligation on Allgas to insist that Energex pay a fee of one percent of the market value of the Allgas equity acquired by Energex.

If there had been a transaction within the agreement, was there any loss?

[32] In any event, had Allgas had such an obligation, there is no evidence to suggest that Energex would have complied with its request. Indeed, in the circumstances of the hostile takeover it seems patent that Energex would not have paid. There was no imperative, moral, legal or otherwise requiring it to do so; for it to have parted with some millions of dollars at Allgas' behest when it had received nothing from County NatWest, would have constituted, one would imagine, an irresponsible breach by its management of its responsibility to its own shareholders.

Was there any obligation on County NatWest to advise Allgas in relation to inclusion of a term for payment of fees?

[33] An argument was put for the defence, and resisted by the plaintiff, that if the to the Energex takeover did fall within the June 1997 agreement, and did entail a "transaction", the plaintiff had caused its own loss by, in breach of a duty or an implied term of the agreement between the parties, failing to advise Allgas to include a term for payment of fees in the takeover. Because of the views I have reached, it is not strictly necessary for me to deal with this issue. It suffices to say that I do not consider that such advice can reasonably be regarded as within the functions assigned to County NatWest. It was not suggested that it had undertaken some general role as financial adviser. The particularity of the tasks ascribed to it in the mandate letter militates strongly against the implication of any more general obligation to advise.

Was there an implied term that if a new shareholder refused Allgas' request to pay County NatWest's fee, Allgas itself would pay the fee?

[34] As I have found, there was no obligation on Allgas to seek payment of the County NatWest fee from Energex pursuant to the June 1997 agreement, nor was there any likelihood that Energex would have complied had it done so. For completeness, however, I turn to the question of the term for payment by Allgas which the plaintiff, by its reply, asserts should be implied into the June 1997 agreement. The plaintiff particularised as the basis for implication of such a term the need for it to give business efficacy to the contract. It was not pleaded that there was a breach of the term contended for; but the case was argued by the plaintiff on the basis of such a breach, and it was clear that if the term did exist, it had not been met by Allgas. I propose, therefore, to deal with the point.

[35] Mr Dunning, for the plaintiff, submitted that the mandate letter was not the product of careful legal drafting and was not to be regard as a formal and complete contract. Mr Morrison QC, for the defendant, argued that the letter did constitute a formal contract, so that the requirements for an implied term described in BP Refinery (Westernport) v Shire of Hastings[1] should be applied, viz:

"for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

[36] It has, of course, been recognised that the approach to be taken where there is not a formal contract is somewhat more flexible:

"in a case where it is apparent that the parties have not attempted to spell out the full terms of their contract, a court should imply a term by reference to the imputed intention of the parties if, but only if, it can be seen the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case. That general statement of principle is subject to the qualification that a term may be implied in a contract by established mercantile usage or professional practice or by a past course of dealing between the parties."

That statement by Deane J in Hawkins v Clayton[2] was approved by the majority in Byrne v Australian Airlines Ltd [3].

[37] Taking the more generous view, and regarding the contract as an informal one, although it appears in writing, it is nonetheless impossible to say that the term contended for by the plaintiff is a necessary one to give the agreement business efficacy. The agreement was of a commission nature; it was clearly not an arrangement requiring that County NatWest in every event receive its fee. Mr Binsted had explained to the board the risk of an unsought and undesired outcome. The risk to County NatWest of a result occurring which was outside what was sought, and what would result in its remuneration, was thus acknowledged. County NatWest could expect to realise its fee if it achieved the desired end; but it was implicit in the arrangement that that might not occur. Indeed, the mandate letter indicates that it was contemplated that even if a desired outcome were achieved, County NatWest might nonetheless go away empty handed so far as its fee was concerned, because of the inability of Allgas to bind any incoming shareholder.

[38] Such contracts, in which a commission agent bears the risk of intervening events rendering his endeavours fruitless or unremunerated, are part and parcel of normal commercial dealing. It cannot reasonably be concluded that the contract could not be effective in a business sense without a fall-back position to ensure payment of County NatWest's fee in all contingencies involving a new shareholder. It need hardly be said that there was no evidence of established mercantile usage or professional practice or any past course of dealing between the parties which would support the implication of such a term.

[39] One can approach the matter in a slightly different way by asking, as Deane J advocates in Hospital Products[4], even in the case of an informal contract, whether a requirement that Allgas would pay the fee in the event of refusal by a new shareholder was so obvious that it went without saying, in that if it had been raised both parties would testily have replied "of course". In a context in which the mandate letter expressly recognises that it is the new shareholder who is to pay the fee, while prescribing Allgas' obligation, which is to ask for the fee and no more, the answer must, I conclude, be in the negative.

[40] Although one might regard the mandate letter as informal in nature, it does, nonetheless, constitute an agreement in written form. One cannot, therefore, avoid the questions as to whether the term to be implied is consistent with the terms of the agreement as expressed in writing, and whether the contingency received the attention of the parties:

"No term can be implied if it is inconsistent with express terms of the contract: Gemmell Power Farming Co Ltd v Nies[5] ; nor can a term be implied if it appears on the face of the contract that the parties adverted to the point and deliberately abstained from dealing with it: Chandler Bros. Ltd v Boswell [6]; Maritime National Fish Ltd v Ocean Trawlers Ltd [7]." [8]

[41] The term sought is, in my view, inconsistent with those parts of the mandate letter which state:

and restrict the obligation of Allgas to insisting that a payment term be included in any transaction. The expression used,

"While Allgas clearly cannot bind the new shareholder"

moreover, makes it clear that the parties adverted to the possibility that payment from the new shareholder would not be forthcoming, without apprehending a need for further provision in that event.

[42] There is, finally, this deficiency in the term contended for, whether one regards the matter as a question of obviousness, business efficacy, or inconsistency with the written contract. What is sought is the implication of a term that Allgas would pay "if the new shareholder refused [Allgas'] requirement that it pay the fee". The mandate letter did not impose on Allgas any responsibility to require that the new shareholder pay the fee; its obligation, at the highest, was to insist on inclusion of a term for payment in any transaction. The putative implied term in my view confuses the two concepts in a way that further militates against its implication.

[43] It was not argued for the plaintiff that any subsequent conduct by Allgas should be considered as having any bearing on implication of such a term into the June 1997 agreement. I observe, in any event, that I do not consider that such an argument would have been maintainable, for reasons which will be dealt with in my examination of the January 1998 dealings.

Was there a variation of the agreement in January 1998?

[44] The competing arguments as to the effect of the instructions given in the meeting of 15 January 1998 are, on the one hand, that they constituted no more than a variation of the existing agreement; and, on the other, that they constituted an entirely new agreement, one for which no remuneration was agreed. In addition, of course, the plaintiff says that an additional term, that Allgas would assume responsibility for the fee, must be implied into the varied agreement for which it contends.

[45] It is necessary to deal briefly with the effect of the instructions given by Mr Dowrie. If, as suggested, by the defendant, it was the case that he, although a member of the committee, could not effectively give such instructions without the authority of the board, I am satisfied that any instructions given were subsequently ratified by the board. Such ratification would, of course, take effect from 15th January, the day on which the instructions were actually provided.

[46] It clear that the instructions given to County NatWest in January 1998 constituted a substantial change from those given in June 1998. Nonetheless, in the context of the activities which County NatWest had undertaken in the last half of 1997, and its reporting back to Allgas on those activities, it is unrealistic to regard those changed instructions as anything other than a variation of the existing agreement as to County NatWest's tasks. I have no difficulty in concluding that the agreement continued, with the variations that County NatWest was now to negotiate with interested parties an acquisition of shares which might extend to a full takeover, and with those negotiations to include the possibility of issue of a redeemable convertible note.

[47] That conclusion does not of itself assist the plaintiff greatly. Unless there was a variation of the arrangement as to who was to pay County NatWest's fee, the finding I have made, that there was no relevant transaction with Energex so as to enliven any obligation on Allgas to seek a fee for County NatWest, would continue to apply. It is necessary therefore to turn to the question of whether the changed nature of the transaction with County NatWest (that is to canvass a full takeover) gives rise to an implication that its fee was payable by Allgas.

Was there an implied term of the varied agreement that Allgas would pay the fee?

[48] The immediate difficulty I encounter with the plaintiff's proposition is that it requires not only the implication of the term sought, but the deletion, from the existing agreement, of the requirement that there be a "transaction" before a fee became payable. In any event, applying again the approach of Deane J, it was not necessary for the reasonable or effective operation of the agreement with County NatWest that there be an undertaking by Allgas to pay its fee. Although the quest for a new investor had broadened its compass to contemplate an entity which would take over Allgas, it did not follow that the fee structure must change. It was still possible that there would be a transaction between that entity and Allgas, in the sense of the negotiation of terms acceptable to both parties.

[49] This is exemplified in the Texas Utilities bid. Negotiations were set in train with regard to the use of a convertible security as an alternative form of consideration, and Texas Utilities indicated its enthusiasm for consulting arrangements with the members of the existing Allgas board. Exhibit 20 on the trial, a letter from Texas Utilities Australia to Mr Brian Wilson of 20 January 1998, sets out the utility's willingness to accommodate Allgas. A subsequent release to the stock exchange by Allgas describes Texas Utilities' proposal as "an offer to merge".

[50] Clearly enough, a friendly arrangement such as that could give rise to a transaction involving terms accepted by the new shareholder, and could extend to the acceptance of an obligation to pay fees. That being so, it seems to me that the situation remained in this respect much the same as it had been under the unvaried agreement; that is, that County NatWest could achieve its fee in the desired event of a friendly takeover but ran the risk of being left unpaid in the event of an undesired outcome. Accordingly, I would see no more basis for implication of the term in the light of the varied agreement than existed in respect of the June 1997 agreement.

[51] However, Mr Dunning takes his argument in relation to the January 1998 agreement further. He relies on what he says was a common understanding arising from the January 1998 meeting, evinced by various acts and statements both at and after it. In his written submissions, he pointed to the following examples as constituting admissions or manifestations of the common understanding:

"(a) the giving of instructions on 15 January 1998 to have TU and GPU revise their bids and seek bids from any other person;

(b) the "you guys have just doubled your fees" remark at the meeting;

(c) the exchange between Mr Green and Mr Binsted at the Boral meeting. This admission is important. The varied agreement alleged in the statement of claim was set out in terms. It was not suggested to either of those witnesses that their recollection was faulty. Presumably Ms Withnall could offer not [sic] evidence to assist Allgas in that regard;

(d) Mr Dowrie's request of Mr Drummond for SSB to deliver its fees note in July 1998;

(e) Mr Drummond's request of SSB to deliver its fee note accordingly;

(f) the discussion at a special board meeting including Mr Dowrie, Dr Weiss, Mr Wilson, Mr Binsted, Mr Dawson, Mr Fry, Mr Drummond and Ms Withnall where it was resolved to have advisers [sic] fees in for the following meeting;

(h) the resolution of the board on 17 July 1998 that "...a reasonable fee should be paid in accordance with the original letter of 23/6/97." Notably, this resolution was not quite faithfully transcribed into the recently discovered board minute;

(I) the telephone conversation between Mr Binsted and Mr Drummond and also between Mr Binsted and Mr Dowrie where it was admitted that a fee of 1% was payable but the issue was on which price."

To these may be added the following, raised in oral submissions:

(j) the absence of any indication by Allgas that the agreement with County NatWest was terminated;

(k) letters from County NatWest to Allgas (dated 10th February 1998 and 27th February 1998) which referred to County NatWest's instructions in relation to seeking an investor, and its progress in respect particularly of Texas Utilities;

(l) an announcement to shareholders dated 13th February 1998 and a letter from Allgas' solicitors to the Minister for Mines and Energy, both of which referred to the engagement of County NatWest to conduct a search for an investor and the identification of Texas Utilities in that regard.

The use which can be made of the defendant's post-contractual conduct

[52] A number of authorities were cited both for and against the proposition that evidence of subsequent acts and statements by the defendant in this case was admissible. In considering those authorities, it is as well to remember that it is not at issue here whether there was an intention to contract at all, so as to raise questions of actual intention of the kind canvassed in Howard Smith & Company Ltd v Varia[9] and Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd[10]. Nor can those cases which deal with the admissibility of such evidence on questions of construction lend assistance - as for example, FAI Traders Insurance Company Ltd v Savoy Plaza Pty Ltd[11], Spunwill Pty Ltd v BAB Pty Ltd[12], and Sportsvision Australia v Tallglen Pty Ltd[13]). The question for present purposes is whether the variation of the contract which I have found occurred, extended to include an implied term, one which Mr Dunning contends was a matter of common understanding.

[53] It is clear that the approach to implication of the term must be objective, or that of the reasonable bystander. Deane J, for example in Hawkins & Clayton[14] refers to implication of a term "by reference to the imputed intention of the parties". Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales[15] explains that "the existence of the remedy and of rectification and the purpose which it serves makes it obvious that the actual intention of the parties cannot constitute the basis of an implied term". Notwithstanding, he considered that discussions between the parties in that case, prior to their entry into contract, were relevant as revealing "a matter which was in the common contemplation of the parties yet was not a contractual provision actually agreed upon for the simple reason that it was a matter of common assumption".

[54] It would seem to follow that evidence of matters occurring after the entry of the contract might similarly be capable of demonstrating matters of common assumption not included in the contract. Greig & Davis in The Law of Contract[16] cite two decisions of the English Court of Appeal Ferguson v John Dawson & Partners (Contractors) Ltd[17] and Wilson v Maynard Shipping Consultants A.B[18] as instances in which that court was prepared to look at what the parties had actually done in order to determine the existence and scope of an implied term.

[55] Closer to home, two decisions of the former Full Court of this Court contain statements supporting the use of subsequent conduct in such a way. In Winks v W H Heck & Sons Pty Ltd[19], Thomas J referred to cases in which an agreement or a term of an agreement might be inferred from the actions and conduct of the parties. He expanded on and applied that situation in Australian Energy Limited v Lennard Oil N.L.[20], in a judgment in which Andrew CJ concurred. The relevant passage is worth quoting at length:

"Unless it affords direct evidence of the formation of a contract, conduct of the parties is relevant only when it leads to the necessary inference that somewhere, somehow, the parties must have made a particular agreement. It would be preferable to say that the admissions of parties (including admissions by a course of conduct) may be sufficiently clear to persuade a court to infer that there has been a variation of a contract even though no evidence can be produced to show when, where, by whom or in what particular words such agreement was made. The principle is not limited to variations. The formation of a contract, (Brogden v Metropolitan Railway Co. (1877) 2 App Cas 666) the existence of a contract and its basic terms, (Lahey v Canavan [1970] Qd R 224, 230; Goodwin v Temple [1957] St R Qd 376, 384 (H.C.)) or an additional or varied term (Bruner v Moore [1904] 1 Ch 305, 314_; Morrell v Studd and Millington_ [1913] 2 Ch 648; Ferguson v Dawson [1976] EWCA Civ 7; [1976] 3 All ER 817; [1976] 1 WLR 1213; Whitworth Street Estates Ltd v Miller [1970] AC 583, 603, 605, 611, 613, 615) may be inferred from the conduct of the parties, notwithstanding the absence of the usual evidence of formation and content (Ferguson v Dawson (supra at 823-4 and 831 (All ER); 1221 and 1229 (WLR); Winks v WH Heck and Sons Pty Ltd [1986] 1 Qd R 226; cf Bowman v Durham Holdings Pty Ltd [1973] HCA 55; (1973) 131 CLR 8, 18-20). Of course, it is only in cases where the evidence is clear that such inferences will be drawn; but there is nothing in principle which prevents proof of a contract by admissions (Cf. Lustre Hosiery Ltd v York [1935] HCA 71; (1935) 54 CLR 134, 143-4; Grey v Australian Motorists & General Insurance Co [1976] 1 NSWLR 699). The latter case exemplifies a difficulty if the admission is of a mixed statement of fact and law, but I fail to see why a party may not be held to such an admission if he makes it with sufficient clarity and deliberation."

[56] Of some significance in the present case is the difficulty which Thomas J identified, of determining whether particular conduct constitutes a credible admission of the terms of the contract, or merely the relevant party's belief as to what it meant. He noted that evidence to establish, for example, a variation, might simultaneously be evidence of what a party thought he had agreed. In Lennard, his Honour proceeded to consider the various matters relied on as admissions to determine whether they could establish the terms of the final contract. In the event he concluded that they did no more than to prove one party's belief.

[57] Also of some significance to the present question, is a decision of the New South Wales Court of Appeal in Sasson v Fahevu[21]. In that case, the issue was whether certain fees earned on sales of businesses fell within an agreement made on the termination of the parties' business arrangement. Reliance was placed on admissions made by letter from one of the parties that it was liable to share fees in respect of a particular transaction, together with a concession in cross-examination that the transaction fell within the termination agreement's terms. The court held that those concessions were properly admitted. Beazley JA (with whom Sheller JA agreed) accepted what she referred to as the "force" of the appellant's admission that the documents in cross-examination constituted relevant admissions "of the contractual rights and obligations under the termination agreement".

[58] In light of the above authorities, I consider that evidence of the statements and conduct of Allgas in this case is potentially capable of both evidencing, and constituting an admission of, a common assumption that Allgas would pay County NatWest's fee on a full takeover. It remains, however, to consider whether the evidence relied on does in fact have that effect.

The effect of Allgas' post-contractual statements and conduct

[59] It seems to me that items (a), (b), (j), (k) and (l) of Mr Dunning's list (that is, the giving of instructions on 15 January 1998, the remark attributed to Dr Weiss, the absence of any indication of termination of the agreement, the letters advising of County NatWest's progress and referring to its mandate, the Allgas announcement, and the letter to the Minister) cannot advance the plaintiff's argument for an implied term that Allgas would pay its fee. Each of those matters is consistent with a continuation of the 1997 agreement as varied to encompass the prospect of a full takeover, without any change to the existing arrangement for payment of County NatWest's fee. That is, they are consistent with the proposition that Allgas would still insist on a term for payment of the fee in any transaction entered with a new shareholder. None of them points to an agreement by Allgas itself to assume responsibility for the fee.

[60] In respect of the statement attributed to Dr Weiss, it is also worth noting that its effect is doubtful. It was described by Mr Drummond as "an aside type of remark" according to Mr Wilson, it was said "with a smile on his face". In the circumstances it may be questioned whether such a remark could reasonably be taken as going beyond jocularity so as to amount to a binding agreement.[22]

[61] The statement said to have been made by Mr Binsted at the Boral meeting, to the effect that the fee payable to County NatWest was one percent of the takeover consideration, falls into a different category from the items already mentioned, because it was made in a context where an unfriendly takeover was specifically being mooted. However, I do not consider that it can be relied on as an admission by Allgas. There was no evidence that either Mr Drummond or Mr Dowrie was in a position to hear, or did in fact hear, the statement.

[62] The remaining examples evince, I think it is fair to say, a perception that a fee was payable to the plaintiff. They consist of moves to have the plaintiff to deliver its fee note; the resolution of the board that "a reasonable fee should be paid in accordance with the original letter of 23/6/97"; and a conversation sworn to by Mr Binsted (but not Mr Dowrie) in which Mr Dowrie was said to have made the statement that it was clear that plaintiff's fee "was one percent but what they were thinking about was one percent of what".

[63] The difficulty for the plaintiff in respect of these matters is, I think, threefold. Firstly, in no instance is there a statement by Allgas as an entity (as opposed to individuals speaking without the apparent authority of the board) that a one percent fee is payable; the highest matters reached is the board's resolution that "a reasonable fee should be paid". Secondly, in all the circumstances it seems probable that these instances amount to no more than the view of some members of the board as to the legal effect of the June 1997 letter. Thirdly, in none of the instances cited is there evidenced an understanding that the fee would be one percent of the equity acquired on a takeover, hostile or friendly, so as to include a takeover such as that by Energex. I do not consider that they manifest or acknowledge a common assumption, operative at the time of the January 1998 variation, that Allgas would pay a fee quantified in terms of the June 1997 agreement.

[64] Upon the most generous of constructions of the instances relied on, one might infer a common understanding that Allgas would pay a fee. The evidence of what the board was prepared to offer contradicts, however, any suggestion that Allgas was operating on a mutual assumption that it would pay "one percent of the market value of the equity of Allgas acquired by the new shareholder". To imply into the contract a term based on the slender basis of a common understanding that Allgas would pay a (non-specified) fee, would not lend business efficacy to the agreement; it would rather rob it of it.

[65] I do not therefore consider that the term contended for by the plaintiff can be implied, and I conclude that there was, accordingly, no obligation on Allgas to meet the plaintiff's fee.

[66] I give judgment for the defendant against the plaintiff. I will hear the parties as to costs.

[2] (1988) 164 CLR 539 at 573. See also the similar warning articulated by Deane J in Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at 121.

[4] [1984] HCA 64; (1984) 156 CLR 41 at 121

[5] 35 S.R. 460; 52 W.N. 162

[6] [1936] 3 All ER 179 at 186-7

[7] [1935] UKPC 1; [1935] A.C. 524 at 529

[8] Heimann v Commonwealth of Australia [1938] NSWStRp 47; (1938) 38 SR (NSW) 691 at 695

[9] [1907] HCA 38; (1907) 5 CLR 68

[10] 1985 2 NSWLR 309

[11] [1993] VicRp 76; [1993] 2 VR 343

[12] (1994) 36 NSWLR 290

[13] (1998) 44 NSWLR 103

[15] (1982) 149 CLR 337 at 353

[16] Law Book Company 1987 at pages 436-437

[17] [1976] EWCA Civ 7; [1976] 1 WLR 1213 at 1221

[18] [1978] QB 665

[19] [1986] 1 Qd R 226 at 238

[20] [1986] 2 Qd R 216 at 237

[21] [1999] NSW CA 400

[22] See, for example Nyulasy v Rowan [1891] 17 VLR 663; Licenses Insurance Corporation v Lawson (1896) 12 TLR 501.