HEARD : 4-6, 10-11 NOVEMBER 2003 & 17 FEBRUARY 2004

BETWEEN : SDS CORPORATION LTD (ABN 73 007 980 645)

Contract - Agreement to purchase business - Proposed merger of corporations manufacturing and supplying equipment and providing services to mining, oil and gas and construction industries - Specific performance - Whether plaintiff ready, willing and able to perform - Whether discretionary reasons for refusal of specific performance

Contract - Implied terms - Rectification - Whether payment of $1 million by purchaser required to be made by date certain if completion had not then occurred and assets not transferred

Trade Practices - Misleading or deceptive conduct - Failure to disclose - Test of reasonable expectation that relevant facts would be disclosed - Details of purchaser's financial position with its own banks and generally - Published reports and accounts - Whether further disclosure required

Contract - General contractual principles - Repudiation - Termination - Frustration - Whether contract incapable of performance - Obligation to comply with due diligence inquiry - Whether defendants in breach

Australian Securities & Investments Commission Act 2001 (Cth), s 12DA

Acorn Consolidated Pty Ltd v Hawkslade Investments Pty Ltd (1999) 21 WAR 425

Alanbert Pty Ltd v Bulevi Pty Ltd [2000] NSWSC 261

Alghussein Establishment v Eton College [1988] 1 WLR 587

Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99

Australian Mutual Provident Society v 400 St Kilda Road Pty Ltd [1991] VicRp 80; [1991] 2 VR 417

Automatic Fire Sprinklers pty Ltd v Watson [1946] HCA 25; (1946) 72 CLR 435

Bacchus Marsh Concentrated Milk Co Ltd (in liquidation) v Joseph Nathan & Co Ltd [1919] HCA 18; (1919) 26 CLR 410

Bethco Ltd et al v Clareco Canada Ltd (1986) 22 DLR (4th) 481

Bowes v Chaleyer [1923] HCA 15; (1923) 32 CLR 159

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Castlemaine Tooheys Ltd v Carlton & United BReweries Ltd (1987) 10 NSWLR 468

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Darter Pty Ltd v Malloy [1993] 2 Qd R 615

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FA Tamplin Steamship Co Ltd v Ango­Mexican Petroleum Products Co Ltd [1916] 2 AC 397

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GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd [2001] FCA 1761; (2001) 117 FCR 23

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Greydae Pty Ltd v Malilane Pty Ltd [2002] VSC 170

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Hewett v Court (1983) 149 CLR 629

Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2; (1932) 147 LT 503

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Hungry Jacks Pty Ltd v Burger King Corp (1999) 30 ACSR 551

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Kimberley NZI Finance Ltd v Torero Pty Ltd & Ors (1989) ATPR (Digest) 46­054

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Kirk Contractors Pty Ltd v Lasnom Pty Ltd, unreported; SCt of WA (Owen J); Library No950262; 31 May 1995

Lacey v Hayden [2000] NSWCA 182; (2000) 10 BPR 18,199

Lam v Ausintel Investments Pty Ltd (1989) 97 FLR 458

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Mackay v Dick (1881) 6 App Cas 251

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1 ROBERTS-SMITH J: On 18 October 2002 the plaintiff, SDS Corporation Ltd ("SDS"), filed a writ of summons with statement of claim annexed ("SOC") against the first defendant Pasdonnay Pty Ltd ("Pasdonnay") and the second defendant Mr Ian Graeme Rear ("Mr Rear"), claiming breach of a Business Assets Sale Agreement made in July 2002 ("the Agreement") and claiming specific performance and damages.

2 By the time of trial from 4 to 11 November 2003, there had been extensive interlocutory proceedings and the pleadings had been subject to substantial amendment.

3 SDS and Pasdonnay are companies both incorporated in Western Australia. SDS carries on a mining supply and a hammer and bit manufacture business. Pasdonnay carries on a hammer and bit manufacture business. Mr Rear is a director of Pasdonnay and the owner of the patents which are used by Pasdonnay in the conduct of its business.

4 In July 2002 SDS, Pasdonnay and Mr Rear entered into the Agreement whereby SDS agreed to purchase the assets of Pasdonnay and assume certain liabilities of Pasdonnay on the terms and conditions contained in the Agreement and (conditional upon the sale and purchase of those assets) Mr Rear would enter into a licence agreement with SDS under which he would licence or transfer the patents to SDS.

5 SDS pleads that cl 4.1 of the Agreement provides (inter alia) that completion of the Agreement is subject to, and conditional upon the results of the due diligence investigations to be undertaken by or on behalf of SDS in relation to Pasdonnay in its absolute discretion. It further pleads that cl 4.1.4 of the Agreement provides (inter alia) that completion of the Agreement is subject to, and conditional upon, the Commonwealth Bank of Australia ("the CBA"), as financier of SDS, consenting to the sale and purchase of the business assets and the assumption of the assumed liabilities in accordance with the Agreement and, if consent is conditional, the conditions be satisfactory to SDS and to Pasdonnay.

6 SDS pleads cl 4.3.1 of the Agreement which provides that Pasdonnay and Mr Rear must provide all assistance required by SDS to enable SDS to conduct the due diligence investigations in accordance with cl 4.2.1 of the Agreement.

7 At [7] SOC (which description I shall use to refer to the statement of claim as amended to the date of trial) SDS pleads that Pasdonnay and Mr Rear have breached those terms of the Agreement by failing to provide information necessary for SDS to conduct due diligence and by impliedly refusing to perform it, as a consequence of which SDS has been unable to complete its due diligence investigation. It is pleaded that as a result, SDS is unable to take the benefit of the Agreement and has incurred expenses.

8 SDS pleads that it is ready, willing and able to comply with all its obligations under the Agreement but that Pasdonnay has failed and refused to perform any of its obligations.

9 There is a claim for rectification of the Agreement in response to a pleaded contention by Pasdonnay that on its true construction, cl 11.1 of the Agreement obliged SDS to pay $1 million, part of the purchase price, to Pasdonnay on 30 October 2002 notwithstanding that certain conditions precedent to completion contained in cl 4.1 of the Agreement had not been satisfied, Pasdonnay had breached the terms of the Agreement and that completion had not occurred.

10 As to that, SDS pleads that SDS's obligation to pay the $1 million under cl 11.1 of the Agreement was not to arise unless completion first occurred and that the failure to stipulate that in the Agreement was an error and the Agreement should be rectified so as to state that expressly.

11 The defendants deny the breaches alleged, maintain that they have produced the information necessary for the plaintiff to conduct its due diligence investigations in relation to the business, the business assets and the patents as defined in the Agreement and contend the Agreement is subject to implied terms that the defendants need only provide all assistance reasonably required by the plaintiff and all information reasonably necessary for the plaintiff to conduct its due diligence investigations.

12 They further plead that the Agreement came to an end on 22 October 2002 because on that date HSBC Bank Australia Ltd ("HSBC") advised the defendants that it would not consent to the assumption of the assumed liabilities by the plaintiff in accordance with cl 4.1.3 of the Agreement ("the HSBC condition"), that being a condition of completion. Further, or alternatively, the defendants pleaded the Agreement came to an end on 8 November 2002 when they terminated it pursuant to cl 4.10.1 on the basis that a condition requiring CBA's consent to the sale and purchase of the business assets and assumption of the assumed liabilities had not been forthcoming.

13 Amongst other matters it is pleaded that since 30 October 2002 SDS has been in material breach of the Agreement because it has failed to pay $1 million due to be paid to the first defendant on 30 October 2002 under cl 11.1.

14 There are numerous other matters pleaded and it will be necessary to deal with them all in due course.

15 It is convenient to begin with the course of dealings between the parties.

16 SDS is a manufacturer and supplier of equipment and services to the mining, oil and gas and construction industries. It has a number of subsidiaries, primarily one called SDS Digger Tools Pty Ltd ("Digger Tools") which is a manufacturer of down-hole percussion hammers and drill bits and has a world-wide retail sales network.

17 Another company in the group, SDS Ausminco, markets an extensive range of mining and construction equipment through branches located in the major mining centres around Australia.

18 SDS was publicly listed on the Australian Stock Exchange in May 1998, the business having been established some 20 years before at Broken Hill as a dealer in various mining products. The company and the SDS group progressed by taking over agencies and by virtue of its own patents, inventions and the manufacturer of its own products and is said to have gained pre-eminence, particularly in the field of down-hole percussion hammers and drill bits. The major shareholder of SDS is Mr Fred Moir. The company secretary is Mr Kevin Benson.

19 Pasdonnay, trading as International Drill Quip ("IDQ"), is engaged in similar lines of business although perhaps not as extensively as the SDS group.

20 Mr Rear is the major shareholder and the guiding force behind Pasdonnay and he, like Mr Moir, is the person who either invented, or is responsible for, the manufacture, through their various corporate entities, of various pieces of equipment which form part of the core businesses of each of the plaintiff and the first defendant.

21 In 1997 one of the SDS group of companies instituted proceedings against a company called Seismic Supply International and another company, Azuko Pty Ltd, in relation to the infringement of patents. These patents related to improvements and inventions in relation to down-hole drilling. They were the subject of extensive litigation, eventually leading to what was described in the hearing as the Nautronix litigation.

22 The Nautronix litigation is now finalised. I am mentioning it is because that was one of the sources of funds that Mr Moir and Mr Benson from time to time referred to and it features in some of the correspondence that I will go to in due course. There was a lengthy action before a single Judge in the Federal Court, an appeal to the Full Court, and then a special leave application to the High Court. That was dismissed in the latter half of 2002.

23 In 1999 Digger Tools instituted proceedings (which were in part related to the Nautronix litigation) against Pasdonnay in the Federal Court claiming infringement of certain patents. Pasdonnay in response instituted proceedings in this court claiming that the plaintiff in one of its entities had breached the terms of a licence agreement by which it was entitled to use the patents.

24 There was an attempt under the Cross-Vesting Act to remove the proceedings from the Federal Court into this Court. That attempt was resisted, with the result that effectively the Federal Court proceedings against Pasdonnay and Pasdonnay's proceedings in this Court against SDS have been in abeyance because of discussions which commenced in early 2002 which were designed to put an end to the litigation by what was effectively a merger of the two companies.

25 The documents show that there were discussions about that between Mr Rear and Mr Moir in mid-February 2002.

26 On 5 March 2002 Mr Benson sent an email to Ted Rear, advising that he had spoken to Fred Moir and suggesting that to progress the merger discussions, the independent advisory firm of Gresham Partners be engaged to assess the relative values of both SDS and IDQ. Those valuations would not be extensive but would provide a global overview of each company's value. It was envisaged the valuation would take approximately four to six weeks and would exclude, inter alia, the patent litigation in respect of which the application for special leave to appeal to the High Court was then scheduled to be heard on 15 March 2002. He suggested that when relative values had been established, further discussions could be arranged to finalise the issuance of shares and cash in any proposed merger.

27 The structure proposed for the combined SDS/Drill Quip entity was the subject of a further email from Mr Benson to Mr Rear on 12 March 2002. That included a comment that should the special leave application be rejected by the High Court, then the expected recovery of damages and market share would need to be factored into the merger with Drill Quip.

28 Then followed a continuing exchange of correspondence by email. This focused largely on the proposed structure of the merged entities. One of Mr Rear's concerns was to ascertain whether, following the amalgamation, the manufacturing and marketing arms would become an integrated company or whether they would continue to be separate organisations.

29 By letter dated 25 March 2002, Mr Moir made a formal merger offer on behalf of SDS. He said that was based on the figures advised at a recent meeting. They included hammer and bit sales of $10 million for 2001 and profit after tax of $600,000. The letter continued:

1. Withdraw from all litigations between parties.

2. Digger will purchase business from Drill Quip/Air Drill (including all associated technology).

3. Consideration 'Net Asset Value' (approx. $5.5 million) by way of $1 million cash and remainder SDS shares @ $0.50.

4. Cash to be paid from Nautronix settlement or within 6 months. Shares to be held in escrow for 12 months.

5. Payment by way of share placement. Will require shareholders approval.

6. A formal sales agreement to be produced covering this 'Heads of Agreement' plus normal terms and conditions, and warranties.

7. Andrew Gilbert to be offered employment. Contract terms and conditions to be agreed.

8. Ted Rear to be offered part-time employment and SDS board position while he is a significant shareholder.

9. Contract subject to bank approval (to take on debt of approx. $3 million) and reasonable and acceptable due diligence report.

10. Time Table

(1) This offer is open for acceptance till 5 p.m. Thursday, 2nd April 2002.

(ii) Settlement after due diligence but not later than 5 p.m. Monday, 1st July 2002."

30 Andrew Gilbert was the Pasdonnay Operations Manager at the time.

31 Mr Rear was obtaining financial advice from a Mr Lawrie Cook, a financial advisor. On 26 March 2002 Mr Cook emailed Mr Rear a copy of a draft reply from Mr Rear to SDS. Mr Rear emailed the response in the terms suggested, to Mr Moir. It was in the following terms:

"Set out below are my revisions of the proposed heads of agreement. I have excluded reference to AirDrill, as that entity was not included in my original discussions and the original price was based on Drill Quip alone.

1. Withdraw from all litigations between the parties.

2. Digger will purchase business from International Drill Quip (including all associated technology but see 4 below).

3. Consideration minimum of $5.5 million (after SDS assumes all external liabilities) payable by way of $3 million cash and the remainder as SDS shares at 50 cents each or other appropriate price (see 4 below)

This was basically in line with our original discussions, as I was basically contemplating a cash sale and would require a major portion of the consideration to be in cash.

4. $1.5 million cash to be paid on execution of the contract with the second $1.5 million cash to come from Nautronix settlement or within 6 months. Shares to be held in escrow for 12 months.

I anticipate the first $1.5 million can be recouped by the sale of excess plant and equipment very shortly after the agreement is signed. I would also require some form of guarantee that the shares will actually be worth at least 50 cents each in 12 months' time (after the escrow time). I will retain legal ownership of my patents, until the full consideration under the agreement has been satisfied and the guarantee satisfied. Digger will be entitled to exclusive use of the patents in the meantime.

5. I understand it will be necessary to obtain shareholders approval to the proposed share placement.

6. A formal sales agreement to be produced covering this 'Heads of Agreement' plus normal terms and conditions, and warranties.

7. Andrew Gilbert to be offered employment. Contract terms and conditions to be agreed.

8. Myself to be offered an appointment and engaged as a Consultant to the SDS Board and entitled to attend all Board Meetings while I remain a significant shareholder of SDS.

9. Contract subject to bank approval (to take on debt of approx. $3 million) and reasonable and acceptable due diligence report.

10. Timetable

(i) This offer is open for acceptance till 5 p.m. Tuesday, 2nd April 2002.

(ii) Settlement after due diligence but not later than 5 p.m. Monday, 1st July 2002."

32 On 27 March 2002 SDS responded with a counter offer. That was largely a reversion to the first offer made by SDS. One term was that $1 million cash would be paid from the Nautronix settlement or within three months.

33 The document which was executed by both parties was signed on 28 March 2002. It came from Mr Rear on behalf of IDQ and was addressed to Mr Moir. It began:

"Further to our discussions please find below the following proposal. I would like to discuss points 4/5/6 in addition as this or the final agreement is subject to legal and financial advice."

34 Then following the "Heads of Agreement" which relevantly included:

"1. Withdraw from all litigations (sic) between parties.

2. ...

3. Consideration Net Asset Value of Drill Quip Business and additional patents in Ted Rear's name of approx. $5.5 million by way of $1.5 million cash, $1.0 million convertible notes and remainder SDS shares @ $0.50.

4. One million cash to be paid from Nautronix settlement or within 3 months. Five hundred thousand cash to be paid within 6 months. Shares to be held in escrow for 12 months.

Fred Moir to be given first option to purchase any shares that Ted Rear wishes to sell or to act as agent for sales of shares within 14 days of notice that Ted Rear wishes to sell such shares.

Ted Rear to undertake not to sell more than 2 million shares in each of the two financial years following the escrow period without the prior written consent of Fred Moir.

5. Vendor financing of $1.0 million by way of two secured convertible notes at $0.50 and interest rate of 7%, payable monthly.

Timetable for convertible shares or repayment of cash:

6. ...

7. ...

8. A formal sales agreement to be produced covering this 'Heads of Agreement' plus normal terms and conditions and warranties.

9. ...

10. ...

11. ...

12. ...

13. Contract subject to bank approval (to take on debt of approx. $3 million) and reasonable and acceptable due diligence report.

14. Time Table

(i) This offer is open for acceptance till 5 p.m. EST Thursday, 28th March 2002.

(ii) Formal Agreement to be completed at the earliest date preferably no later than EST 5 p.m. Friday, April 12th 2002.

(iii) Settlement after due diligence but not later than 5 p.m. EST Monday, 1st July 2002."

35 On 29 March 2002, Mr Rear sent an email to Mr Cook and Andrew Gilbert, setting out the terms of the Heads of Agreement document of 28 March, together with comments on it.

36 It is apparent from this email that Mr Rear had been obtaining advice and comments from a Mr Brent Bonadeo, Mr Rear's son-in-law, (who held a senior position in Westpac) and from Mr Rear's daughter Catherine. Mr Rear wrote in part that:

"Brent Bonadeo's Notes and Catherines (sic) Notes are worth reading I feel. Also we need to protect IDQ by making sure SDS have absolutely no knowledge of HSBC attitude of late. SDS could cancel agreement - drag everything out for 3 or 4 months and then try and get us for nothing. Peter Heaney must be kept under wraps in this regard and also any contact between SDS accountants and HSBC should be minimised in this respect."

37 The concerns and possibilities discussed in this email do justify the submission of Mr Abbot QC for the plaintiff that Mr Rear was not an uninformed vendor, but one who was considering every possible permutation which might flow from the transaction. He and his advisors knew the SDS shares were tightly held and that Mr Moir was the major shareholder. They were well aware of the fact that because of the thin spread of the shares, they were taking shares in a company effectively owned substantially by Mr Moir whose activities may or may not have had a relevance to the value of the shares Pasdonnay would be accepting as the major portion of the purchase price of Pasdonnay.

38 Mr Rear sent a further email to Andrew Gilbert and Lawrie Cook on 29 March 2002 forwarding another message from his daughter. She raised a number of points about the valuation, the consideration and whether warranties could dilute the amount payable significantly. She made suggestions about how the patents could be dealt with. She warned that the first $1 million payment should not be exclusively tied to the funds from the Nautronix deal. If that were to fail or be delayed or if there were prior claims to the funds, Pasdonnay could be left without recourse. She pointed out in relation to the shares, that as there was no open market trade for them, it was possible they would be unsaleable and hence worthless. She stressed the importance of Moir and/or SDS being obliged to buy Mr Rear out at the market price and for there to be a mechanism to protect him in the event the share price was to fall below a certain value.

39 SDS's lawyers were a firm of Adelaide solicitors, Messrs Thomson Playford ("Thomsons"). The particular solicitor in that firm with the general responsibility for this transaction was Mr Jamie Restas. Working with him was Ms Samantha Reidy. Mr Benson sent a copy of the Heads of Agreement to Thomsons for review by facsimile on 3 April 2002.

40 In an email to Andrew Gilbert and Lawrie Cook on Thursday 4 April 2002, Mr Rear set out in considerable detail numerous points for consideration about the proposal. This was in the context that Mr Moir had indicated to him that he wished to be ready to sign an agreement the following Friday and that Rear was proposing to Moir that a final meeting be held in Adelaide on Wednesday 10 April to iron out the final form of the agreement.

41 On Friday 5 April 2002, Mr Bonadeo sent Mr Rear an email in which he advised him to tell Moir that he was "... not interested in the deal as currently structured". The reasons for that he suggested as being that Rear was being offered $1.5 million in cash (when Nautronix settled) and $1 million in convertible notes subordinated and convertible into equity and/or cash plus $3 million in shares. Bonadeo suggested that the convertible notes and shares would be worthless having regard to the current structure and related party transactions. Presciently, he also suggested that the debt refinancing was another "deal breaker". He wrote that Moir was in trouble with his banks. He suggested Pasdonnay weigh the situation up against the position with HSBC. He opined that a disposal of the company aircraft and revised terms with HSBC would be the better way to go.

42 The aircraft referred to was a Gulfstream Aircraft used by Mr Rear for corporate business. In the end it formed no part of the transaction.

43 Exhibit P 17 is a long email from Ted Rear to Lawrie Cook dated 8 April 2002. The first part of the email is Mr Rear's communication with Mr Cook. He stated that he proposed to contact Blake Dawson Waldron ("Blakes") in relation to SDS after he had spoken to Cook. He would want to discuss how to frame the agreement. It was his feeling that they needed to frame their argument with Moir and the SDS representatives on the basis that they would sell IDQ. Rear then added:

"In a normal sale one would get the money at time of property asset transfer. That is not happening. What we are getting is nothing up front with a timetable of the first $1.5 million being a bit airy."

44 He noted that the sale for $1 million cash and $0.5 million cash should both be paid within a specific time regardless of Nautronix. He said the $3 million share value was questionable and mentioned a possible claim for bank interest plus 1 per cent.

45 The next part of the email appears to be an on-forward of one from Catherine Rear which in turn was an email to her reporting generally on share trading in SDS and related entities. It was noted that trading in SDS seemed to have been relatively quiet since the beginning of the year with only approximately 150,000 shares traded since 1 December 2001. The trades occurred between 36 and 48 cents on 19 separate days. It noted there had not been a recent release pertaining to the top 20 shareholders but an Initial Directors' Notice dated 21 January 2002 listed holdings which included:

46 The email also attached the SDS half-yearly report for the period ended December 2001 and summarised the highlights of it. They included the observation that SDS recorded a net loss after tax of $1,427,000 for the period.

47 Relevantly it was noted that on 15 March 2002, SDS had announced that it had received a favourable decision from the High Court which had refused the special leave application. That had been sought by the infringers of two SDS owned patents which dealt with a reverse circulation drilling innovation. SDS successfully established infringement of those patents before von Doussa J in the Federal Court in May 2000. That decision was upheld by the Full Federal Court in August 2001. The order made by von Doussa J in June 2000 included an injunction restraining the Nautronix Ltd subsidiaries Azuko Pty Ltd and Seismic Supply International Pty Ltd from manufacturing and selling the infringing product. SDS was actively pursuing further orders including for delivery up for destruction of existing stocks of the infringing product, recovery of significant legal costs and the expeditious pursuit of lost profits and damages. It was noted that preliminary estimates by an independent expert for SDS was that SDS's claim for damages was in the range between $5 million and $15 million excluding interest and costs.

48 A progress report from Nautronix Ltd (apparently downloaded from the ASX) reflected the Nautronix view that the estimates were very high and well above the quantum of any damages which might be awarded and foreshadowed further litigation relating to the extent of the products to which the patent applied.

49 Further emails between Rear and Cook reflect their continuing concerns about the ability of SDS to make a cash offer for IDQ and the patents, the "thin" market for SDS shares and the means by which Mr Rear could be guaranteed a return of not less than 50 cents on the sale of the shares in due course.

50 In the meantime Mr Restas had been doing some preliminary work on a draft agreement. On 8 April 2002 he sent an email to Mr Benson attaching a first draft of the agreement. He made a number of general comments including that the draft was necessarily general and broad, given that he was unaware of the subject matter other than what was contained in the Heads of Agreement letter. He reiterated earlier advice that it was common practice to commence due diligence in relation to a proposed target business prior to finalising an agreement, and in some cases, before even commencing the drafting of an agreement. That was for two reasons - the first was that due diligence enquiries might uncover information which would "kill" the deal, and secondly, due diligence enquiries generally uncover issues which need to be specifically dealt with in the agreement. Mr Restas pointed out that given the due diligence enquiries had not been conducted, the draft was therefore subject to any matters that might be identified once it had been. His email concluded with him expressing his strong preference that the agreement not be distributed to Pasdonnay until he and Benson had had a chance to discuss its contents "... and some of the usual clauses that I have deliberately left out".

51 At the hearing, some attempt was made to suggest that there was something untoward about Mr Restas leaving out "some of the usual clauses", but in my view, and in light of the circumstances at the time, it seems to me he meant no more than that he had concentrated in his draft at that stage on the matters which were particular to the transaction and that the more usual or routine clauses could be added later.

52 Clause 4.5 of the draft of 8 April 2002 dealt with termination in the following terms:

4.5.1 In the event that all of the Conditions have not been satisfied or waived by [insert date eg 30 June 2002] or such other date as the parties may agree in writing, then this agreement automatically terminates."

53 That provision was changed significantly by the time it appeared in the final agreement.

54 There was a meeting between Fred Moir, Ted Rear and Andrew Gilbert at Lawrie Cook's office on Friday 5 April 2002. Notes of that meeting were forwarded by Lawrie Cook to Kevin Benson by email on 9 April. According to those notes the intended timetable was for the draft of the agreement to be completed and signed off by 1 May, on which date due diligence would start, and that settlement would be on 1 July 2002.

55 The notes recorded that Mr Rear accepted SDS had been through difficult times and was not in a position to make a cash offer for IDQ and the patents. On that basis he was prepared to make concessions in considering the SDS offer. He also accepted the consolidated business had considerably greater likelihood of success than both entities as they presently stood. He was prepared to sell the business for $5.5 million. That price was originally based on a cash sale, but the proposal being considered at that stage involved no cash payment immediately, extended settlement dates, a temporary loan taking the form of secured convertible notes, plus what was another further deferred payment in the form of the issue of vendor shares to be held in escrow for one year.

56 Mr Abbott QC submits that the observation in the notes that the present proposal involved no cash payment immediately, is of particular significance in relation to the question whether or not the $1 million was payable before the completion date.

57 On 9 April 2002 Catherine Rear sent a further email to her father setting out a number of specific considerations which she suggested would require careful attention in the course of the negotiations. They included ways in which the value of Mr Rear's holdings could be protected subsequent to the transaction and included the suggestion that Mr Moir should be required personally to guarantee to buy back Rear's shares at a certain value, indexed.

58 In the meantime Mr Moir was also giving instructions to and taking advice from Thomsons. On 9 April 2002 he spoke to Ms Reidy whose file note reflects a number of matters were discussed including the need to insert in the draft agreement that the conduct of due diligence was to be a condition precedent so that the completion date of 1 July was acceptable but only provided due diligence had then occurred.

59 Other matters noted as conditions precedent were to be the consent of SDS's own bank (CBA) and Pasdonnay's bank's consent (of which details were needed). There is a note in relation to cl 11 and what was described as "deferred purchase price". It was that the solicitors needed to know "who would get the dollars - $1 million to the company, $500,000 to Mr Rear."

60 It is apparent from the notes that the solicitors were under considerable pressure. Mr Moir wanted the agreement finalised the following day and signed then or the day after that.

61 The second draft agreement was dated 9 April 2002. Exhibit P 24 is a copy of that draft with hand-written notations by Mr Cook.

62 Clause 4 of this draft specified a number of conditions precedent to which completion was subject. They were that the results of the due diligence investigations to be undertaken by or on behalf of the purchaser be satisfactory to the purchaser, the necessary resolution being passed at an extraordinary general meeting of the purchaser shareholder, the vendor's third party financier consenting to the sale and purchase of the business assets in accordance with the agreement and the third party financier of the purchaser consenting likewise. Mr Cook's notes indicate that the vendor's third party financier was HSBC and the purchaser's third party financier was CBA.

63 Clause 11 was headed "DEFERRED PURCHASE PRICE". In this draft that clause read as follows:

"The Purchaser shall pay the $1,500,000 balance of the Purchase Price by cash as follows:

11.1.1 the date that is 3 months after the Completion Date; or

11.1.2 the date that the Nautronix Litigation is settled to the complete satisfaction of the Purchaser; or

11.1.3 the date that the Federal Court of Australia awards damages in relation to the Nautronix Litigation,

11.2 $500,000 will be paid to Rear on the date that is 6 months after the Completion Date."

64 A file note by Mr Restas of a telephone conversation between him and Mr Benson on 10 April 2002 makes the comment that Mr Rear was "quite okay" about most of the agreement but would like a guarantee buy-back by Mr Moir at 56 cents in two years time. That price would take into account an interest component for the fact that Mr Rear would have to hold on to the shares for two years.

65 Further documentation was in the course of preparation. On 10 April 2002, Samantha Reidy forwarded to Kevin Benson a draft Deed of Release between Digger Tools and Pasdonnay concerning the proceedings by Digger Tools against Pasdonnay in this Court and the Federal Court.

66 An email from Kevin Benson to Ms Wenderoth, a solicitor employed by Blakes, with copies to Lawrie Cook and Ted Rear on 11 April 2002 indicated that Mr Moir wished to sign the agreement the following day. On Friday 12 April he forwarded an amended Put Option Deed between Pasdonnay and Fred Moir.

67 An email from Lawrie Cook to Mr Benson on the morning of 12 April was circulated to Ted Rear and others with Benson's comments. There is nothing of note in that except the observation that the prospect of signing the document by midday looked highly optimistic.

68 Later that day Mr Benson emailed Blakes (with a copy to Mr Rear) enclosing the amended draft agreement dated 12 April 2002.

69 There is a file note by Mr Restas bearing a date (not in his writing) of 14 April 2002 which appears to be a list of matters requiring attention in the final agreement. A number of those matters go to the issue of due diligence. Against the word "timetable" there is a note:

"Advise not to enter any agreement until DD has been completed - report could result in either (1) SDS pulling out in entirety or (2) SDS negotiating a lower price."

70 At the top of the second page of those notes there is a heading "Completion Items" under which is listed a number of items including the litigation between the parties, the issue of shares and convertible notes and the consultancy agreement for Ted Rear.

71 Below that there is a further heading "Post Completion Items" under which the first point noted is "payment of cash".

72 This note is part of the basis upon which the plaintiff contends the payment of cash was always intended to be something which occurred following completion.

73 On 13 April 2002 the parties signed a set of documents including the Agreement. One document was headed "Appendix to Business Assets Sale Agreement dated 13 April 2002", the short substance of which was:

"It is agreed that the intent of the Heads of Agreement previously executed by the parties is contained in the Business Asset Sale Agreement and that Agreement constitutes a legally binding agreement.

It is further agreed that any technical or legal points will be resolved by the lawyers for each of the parties within the next seven days.

Failing agreement to any amendments to the Business Asset Sale Agreement, the matter will be decided by an agreed arbitrator, or failing agreement an arbitrator appointed by the Legal (sic) Society of WA."

74 It might reasonably be thought that the reference to "... any technical or legal points" was intended to allow for amendment or further agreement of a quite limited nature; however, the continuing communications between the parties and their solicitors dealt with matters of considerable substance.

75 On the strength of the documents signed on 13 April 2002, the parties gave public notification of the merger. A standard letter on IDQ letterhead and dated 15 April 2002 signed by Mr Rear on behalf of IDQ and Mr Moir on behalf of SDS, announced that the SDS Group had made an offer to purchase IDQ and that both companies had signed a sale agreement conditional upon, and subject to, due diligence. On the same date Mr Benson sent an announcement to the ASX to similar effect and concluding that the sale agreement was conditional upon "outstanding issues" which it was hoped would be finalised prior to 30 June 2002.

76 Also on Monday 15 April 2002, Lawrie Cook sent an email to Mr Benson attaching draft documents showing changes proposed on Mr Rear's behalf by his solicitors, Blakes. He expressed concern that some of the changes seemed fairly major but he expected there were valid legal reasons for them.

77 Mr Neil Cowie was the Manager, Group Risk Management, of the CBA. Responsibility for SDS accounts with CBA had been passed to his section because the bank was concerned at the level of risk to which it was exposed with SDS. On 17 April 2002 Mr Cowie sent an email to Mr Benson referring to the ASX announcement of the merger and making certain specific requests for further financial information. A copy of the ASX announcement had been sent to him by Mr Benson the previous day.

78 Mr Cowie's interest in the proposed transaction logically enough was to ascertain what, if any, impact it might have on the bank's position with SDS. He specifically informed Mr Benson that it would be necessary for SDS to obtain CBA approval for the transaction.

79 On 17 April 2002 Mr Benson, on behalf of SDS, made a further announcement to the ASX. That was:

"Further to the company's announcement dated April 15, 2002 concerning the merger with International Drill Quip, set out below are further details of the transaction:

1. The purchase price will be dependent upon the outcome of the due diligence process. It is expected that the price will be approximately $5.5 million however, adjustments may be made based upon the Net Tangible Asset position of International Drill Quip after the Due Diligence process has been completed.

2. Settlement of the purchase price will be a combination of a share placement from SDS of $3 million, a convertible note issue of $1 million and a cash component of $1.5 million.

3. The purchase agreement allows for conditions to be satisfied such as financier approval, shareholder approval and due diligence.

It is expected that the due diligence and necessary approvals will be completed by May 31, 2002 with a settlement date of July 1, 2002."

80 Blakes wrote to Mr Restas at Thomsons on 17 April 2002. They noted that they had not as yet received his comments on the draft agreement of Saturday 13 April 2002. In light of that, they advised that their client (Rear) intended to extend the period of negotiation referred to in the Appendix by a further seven days. They drew attention to a number of issues which still required amendments to the Agreement and the Put Option.

81 Mr Benson had a meeting with Mr Restas and Ms Reidy at Thomsons on 26 April 2002 to review the requested amendments by Blakes to the agreements signed on 13 April. Shortly thereafter, Mr Benson sent a memo to Mr Moir advising of the meeting and detailing a summary of amendments requested by Blakes. He added:

"It should be noted that the amendments below relate to commercial matters rather than legal matters. The supplementary documents signed on April 13, 2002 whilst validating the agreements, allowed for changes to technical or legal points within the seven days to April 20, 2002. The requested changes below are outside this timeframe and do not constitute legal points."

82 In passing I note that item 20 on Mr Benson's list was that Blakes had made it SDS's obligation to obtain HSBC consent for the sale, whereas in his view that should be Pasdonnay's obligation.

83 On 7 May 2002 there was a meeting between Mr Gilbert (for Pasdonnay), Mr Benson (for SDS) and Mr S Munrowd-Harris (for HSBC), to discuss the proposed transaction in general terms. Mr Munrowd-Harris asked SDS to provide further financial information to HSBC to enable the bank to consider the matter further. I not Munrowd-Harris left the employ of HSBC shortly afterwards.

84 On 16 May Mr Benson had a conference with Mr Restas and Ms Reidy, details of which were recorded on a file note made by Ms Reidy. Some of the changes proposed by Blakes were accepted; in respect of others it was decided to adhere to the Thomsons' draft. In relation to the timetable, Ms Reidy noted that if the new agreement were to be signed late the following week, that would give SDS one month to do due diligence and that Mr Benson thought that would probably be enough time.

85 By this time Mr Rear and those working with him for IDQ were becoming unhappy with Blakes' services. On 15 May 2002, Alexandra Wenderoth sent, attached to an email, a "Due Diligence Checklist" prepared to assist Pasdonnay to prepare for the due diligence to be performed by SDS. This was an extensive and detailed list. In an email dated 26 May 2002 Lawrie Cook took it to be a list of what Blakes thought IDQ should be addressing. His criticism was that on his understanding of due diligence, it would encompass anything SDS might require, not what Blakes nor Pasdonnay might think appropriate. He added that IDQ would no doubt be charged "... for this unsolicited (and probably irrelevant) advice".

86 The need for IDQ to get started on the due diligence exercise as soon as possible was pointed out by Lawrie Cook in an email to Mr Rear on 28 May 2002. In that he said that he did not think it would be necessary to have Ernst & Young prepare accounts, particularly given the legal costs Rear had already incurred. He opined that SDS should have the accounting knowledge and experience to analyse IDQ internal accounts without incurring further accounting costs and suggested Rear should agree that with Benson as soon as possible. This was clearly a reference to Ernst & Young preparing Pasdonnay (IDQ) accounts for the purpose of the due diligence being conducted by or for SDS.

87 A copy of the agreement with amendments to that date was sent by Mr Restas to Mr Benson by email on 29 May. Restas noted that he had added the concept of conducting a stocktake prior to completion (as a condition precedent) to determine the "initial stock value". The purchase price would then be adjusted to reflect any difference between the "initial stock value" and $5,020,980 (the "difference"). He then added:

"I have also provided that the 'Adjustment Amount' take account of the Difference. This impacts on the number of 'Adjusted SDS Shares' that are issued 3 months after completion. When making this change I have assumed that the Difference will not be greater than $1 million (the 'Adjusted SDS Shares' is based on 2 million $0.50 SDS shares being issued). If you think that the Difference could exceed $1 million then you need to consider whether the cash component of the purchase price or the amount of the 'Completion Shares' is to be decreased."

88 Once again, it is Mr Abbott's submission that this was a clear indication that the plaintiff at least regarded the cash component as payable after completion.

89 The same submission was made in respect of file notes made by Mr Benson on 29 May 2002 in relation to the agreement. These included a notation that of the purchase price, $1 million was to be paid three months after completion date or on settlement with Nautronix or on the damages award from the Federal Court, whichever be the earlier.

90 Mr Benson forwarded the amended draft agreement of 29 May 2002 to Lawrie Cook and Mr Rear by email on 31 May, with a request that they review the amendments.

The Purchaser shall pay the balance of the Purchase Price as follows:

11.1.1 the date that is 3 months after the Completion Date; or

11.1.2 the date that the Nautronix Litigation is settled to the complete satisfaction of the Purchaser; or

11.1.3 the date that the Federal Court of Australia awards damages in relation to the Nautronix Litigation,

92 Mr Cook's comments on the amendments were sent to Mr Benson by email on 9 June 2002, a copy of which was also sent to Mr Rear. He drew attention to clauses which he saw as needing adjustment. Clause 11 of the draft of 29 May was not one of them.

93 Mr Benson had another meeting with Mr Restas and Ms Reidy on 17 June 2002. It was at that meeting that Mr Benson gave firm instructions to write the aircraft out of the draft. Other matters discussed included introduction of the concept of "Pre-completion Accounts" and the giving of a loan of $150,000 to Mr Rear. That last was the subject of a draft letter forwarded by Mr Restas to Mr Benson on 18 June. The letter stated that the purpose of the loan was to enable Rear to pay for his costs associated with the Agreement. The loan was to remain available until it expired on the "repayment date" defined as the date that was three months after the completion date, or that on which the Nautronix litigation was settled or that the Federal Court of Australia awarded damages in relation to the Nautronix litigation, whichever be the earlier. The letter also contained a provision that Mr Rear unconditionally and irrevocably authorised and directed SDS to deduct the repayment from all moneys payable to him under the Agreement.

94 On 24 June 2002 Mr Cowie wrote to Mr Martin Jones of the accounting firm Ferrier Hodgson requesting that firm to undertake an investigation of SDS on behalf of the CBA. Mr Cowie detailed the current exposure of the bank to SDS as $10,993,852. With the estimated value of securities at $7,377,000, the "estimated risk" to the bank was $3,616,852.

95 The letter noted that SDS had been under the control of the bank's Credit Management Unit since March 2000 and in that period the bank had cancelled both overdraft and trade facilities, with the company operating its trading account on a "credit only" basis. He noted that SDS had met all interest payments on the outstanding loans "with a small reduction in principal outstanding". He further noted that in the same period SDS had unsuccessfully tried to sell some of its freehold assets, achieve a share placement and refinance its facilities with another bank. He drew attention to a number of events currently being considered or undertaken by SDS which would impact on its future operations. These included the Nautronix litigation, the purchase of IDQ and the company's trading performance. As to the last, he wrote that SDS's financial performance had improved since November 2001 but it had only been able to generate sufficient cash to meet its interest commitments and other operating commitments. It had not generated sufficient cash to meet any capital expenditure for principal reductions.

96 Mr Cowie specifically requested Ferrier Hodgson to review and comment on the SDS Group profit and loss budgets, cash flow forecasts and projected balance sheets for the year ended 30 June 2003, with and without the proposed purchase of IDQ. He also asked for the accountants to review and comment on the proposed IDQ purchase and related agreements.

97 A draft of the Agreement dated 25 June 2002 was forwarded by Mr Restas to Mr Benson by email on 26 June. In a covering email, Mr Restas explained that the purchase price mechanism embodied in that draft was now that the starting purchase price was $5 million, which could be amended by reference to the "net assets" in the Pre-completion Accounts. The first $2 million was to be paid at completion and $1 million cash was to be paid as a deferred amount.

98 The draft of 25 June was sent by email from Kevin Benson to Lawrie Cook on 26 June. No change had been made to cl 11, dealing with the deferred purchase price.

99 On 26 June 2002 Moir and Rear had a dinner meeting at the Witches' Cauldron restaurant in Subiaco ("the Witches' Cauldron meeting"). By that time Mr Rear was becoming concerned about the ability of Moir and SDS to complete the Agreement. His specific concern was that they would not have the funds to do so. According to Rear, he asked Moir and Benson several times during April, May and June, where the funds would come from, but was told by them words "to the effect" that he should not worry as SDS was trading profitably, was about to be awarded significant new contracts and would shortly be awarded significant damages from the Nautronix litigation. Rear had discussed his concerns about SDS's ability to complete the transaction with Cook.

100 Mr Rear testified that at the Witches' Cauldron meeting he told Mr Moir words to the effect that if the sale were to proceed he had to be assured of IDQ receiving the first $1 million of the cash component of the consideration by the end of August 2002. That was because he had made financial commitments on behalf of IDQ based on settlement of the sale by 30 June 2002.

101 In his evidence Mr Rear said Mr Moir told him he was not willing to commit to payment of the $1 million by the end of August, although he thought he would be able to pay it by the end of September 2002. When Rear said he wanted that to be in the contract, Moir said if that were to be written in he would want a further month to make the payment. Rear said he accordingly agreed to accept the end of October 2002 "as the latest date for settlement of the transaction and payment of the $1 million".

102 Shortly after the meeting Mr Rear asked Mr Cook to have this agreement as to payment of the $1 million incorporated in the Agreement.

103 In his evidence Mr Moir generally agreed with Mr Rear's account of their conversation about the $1 million, but said that the reason they pushed the date out to the end of October was to ensure the payment was made after completion. He said he could not recall if they actually expressed that, but that was his understanding. In cross-examination he conceded that was the date that they agreed to put in the contract.

104 In his cross-examination, Mr Rear initially said they were both very clear that the $1 million was to be paid on 30 October 2002 because they were under the impression "completion would be finished", yet a little later he said that he never regarded that payment to be part of the balance of the purchase price but that it had to be made by the date specified in the contract whether or not completion had occurred.

105 Correspondence and documentation continued to be exchanged between the parties over the next few days. These included amendments to the proposed licence agreement for the payment of cash and shares and a patent licence agreement as well as further amendments to the agreement itself.

106 In an email to Mr Benson on 1 July 2002, Mr Cook raised a number of further issues following his further review of the agreement as drafted to that date. Included in those was the comment that there was still a problem as to how the HSBC charges would be satisfied by the completion date and that it had to be borne in mind that Mr Rear had no capacity to satisfy the charges.

107 Another observation he made was the timing of the sale and payment to Mr Rear needed to be made certain and he added:

"Fred indicated it might be possible to make the $1 million cash payment by 30 October."

That appears to be the first written reference to that particular date.

108 By the end of June 2002 Mr Rear and IDQ had terminated their relationship with Blakes and had instructed a new solicitor, Mr Peter Bogue.

109 In an email to Mr Rear of 1 July 2002, Mr Cook suggested a number of matters which required consideration. In the same email he set out how he understood the consideration would be payable and when. That was:

These notes are either to be repaid after 2 years or are to be converted into shares at that time.

If converted, the shares will not be subject to the Put Option arrangements but are subject to pre-emptive rights.

$2M (maximum) in shares (4M shares) subject to adjustment per the sale agreement

$1M cash (reduced by any amounts paid under the loan agreement).

110 What was said to be the final draft of the agreement was a document dated 2 July 2002 forwarded by Samantha Reidy to Kevin Benson by email. It was in this document that the date of 30 October 2002 appeared in cl 11 for the first time. So far as is pertinent, the clause read:

"The Purchaser shall pay the balance of the Purchase Price as follows:

11.1.1 30 October 2002; or

11.1.2 the date that is 3 months after the Completion Date; or

11.1.3 the date that the Nautronix Litigation is settled to the complete satisfaction of the Purchaser; or

11.1.4 the date that the Federal Court of Australia awards damages in relation to the Nautronix Litigation,

whichever is earlier; and ..." (Underlining in the original).

111 Copies of the final Agreement were circulated by Mr Benson on 2 July 2002 for execution the following day.

112 Some minor changes were subsequently suggested and made to some of the documents but there were no changes to any of the clauses relevant to these proceedings.

113 The Agreement was signed by the parties on 5 July 2002.

114 It is apposite at this point to refer to the particular provisions of the Agreement which bear upon these proceedings, before turning to the course of dealings between the parties following its execution and in compliance (or alleged non-compliance) with it.

115 The Agreement is between Pasdonnay, Rear and SDS.

"A. Pasdonnay conducts a hammer and bit manufacture business in Western Australia (the 'Business').

B. Pasdonnay owns the Business Assets and Rear owns the Patents which are used by Pasdonnay in the conduct of the Business.

C. Pasdonnay has agreed to sell, and the Purchaser has agreed to buy, the Business Assets and Pasdonnay has agreed to be released from, and the Purchaser has agreed to assume, the Assumed Liabilities, on the terms and conditions contained in this agreement.

D. Conditional upon completion of the sale of Business Assets, Rear wishes to enter into a licence agreement with the Purchaser under which Rear will licence the Patents to the Purchaser and, depending on the circumstances, transfer the Patents to the Purchaser (the 'Licence Agreement')."

117 The term "Assumed Liabilities" is defined in cl 1.1.8 as meaning trade creditors' debts, the HSBC debt and employee entitlements.

118 The term "HSBC debt" is further defined in cl 1.1.37 as meaning the total amount owing by Pasdonnay to HSBC as at Completion. "Completion" is defined in cl 1.8.18 as meaning the completion of the sale and the purchase of the business assets and the assumption of the Assumed Liabilities pursuant to the Agreement and "Completion Date" is the date that is 10 business days after the satisfaction of the conditions or such other date agreed by the parties (cl 1.1.19).

Pasdonnay shall sell, and the Purchaser shall buy, the Business Assets free of all Encumbrances subject to the terms and conditions set out in this agreement.

Pasdonnay shall assign and be released from, and the Purchaser shall assume, the Assumed Liabilities subject to the terms and conditions of this agreement."

120 Completion was subject to a number of conditions precedent, as set out in cl 4:

4.1.1 the results of the due diligence investigations to be undertaken by or on behalf of the Purchaser in relation to the Business, the Business Assets and the Patents being satisfactory to the Purchaser in its absolute discretion (for the avoidance of doubt, the due diligence investigations will include a review of the matters (if any) set out in the Disclosure Letter from the Asset Holders);

4.1.2 If required by the listing rules of Australian Stock Exchange Limited, the Resolution being passed at an extraordinary general meeting of the Purchaser's shareholders;

4.1.3 HSBC, as financier of Pasdonnay, consenting to the sale and purchase of the Business Assets and the assumption of the Assumed Liabilities in accordance with this agreement and, if consent is conditional, where such conditions are satisfactory to Pasdonnay and the Purchaser;

4.1.4 Commonwealth Bank of Australia, as financier of the Purchaser, consenting to the sale and purchase of the Business Assets and the assumption of the Assumed Liabilities in accordance with this agreement and, if consent is conditional where such conditions are satisfactory to the Purchaser and Pasdonnay; and

4.1.5 the Pre-Completion Accounts and the Certificate being prepared in accordance with clause 4.4."

121 By cl 4.2.2 SDS was obligated to use its best endeavours to procure the satisfaction of the conditions in cl 4.1.2, cl 4.1.4 and cl 4.1.5.

122 By cl 4.2.3 Pasdonnay was obliged to use its best endeavours to satisfy the conditions in cl 4.1.3 and cl 4.1.5.

123 The purchase price for the business assets were stated to be the total value of the net assets which the parties estimated at $5 million (cl 3).

4.3.1 The Asset Holders must provide all assistance required by the Purchaser to enable it to conduct the due diligence investigations to be conducted by the Purchaser in accordance with clause 4.2.1. Without limiting the generality of this clause 4.3.1, the Asset Holders will give the Purchaser:

(a) access to all information necessary for the Purchaser to conduct due diligence investigations in relation to the Business, the Business Assets and the Patents, such information to be all information necessary for the Purchaser to make an informed decision as to whether or not to purchase the Business Assets and enter into the Licence Agreement;

(b) access to all relevant personnel, officers and advisers and to the Business Assets; and

(c) responses to any queries raised by the Purchaser in relation to the Business and/or the Business Assets and/or the Patents.

4.3.2 The Asset Holders must provide all reasonable assistance to the Purchaser in procuring the satisfaction of the Conditions in clause 4.1.2 and clause 4.1.1.

4.3.3 The Purchaser must provide all reasonable assistance to Pasdonnay in procuring the satisfaction of the Condition in clause 4.1.3."

125 The Agreement contemplated the preparation of Pre-completion Accounts and a certificate. The certificate was to be provided by Pasdonnay's accountant certifying that the Pre-completion Accounts had been prepared in accordance with the approved accounting standards and the Agreement and presented a true and fair view of the assets and liabilities of Pasdonnay as at 5 pm on the date of the Agreement.

126 Clauses 4.4 and 4.5 imposed obligations on Pasdonnay to give full assistance together with complete access to all assets and information as may be requested by Pasdonnay's accountant.

127 On provision of the Pre-completion Accounts and certificate, the purchase price would be reduced or increased (as the case may be) by $1.00 for every $1.00 by which the value of the net assets was greater or less than $5 million (cl 4.8).

128 By cl 4.9 the purchaser is required to promptly notify the asset holders (Pasdonnay and Rear) in writing as soon as the due diligence investigations are completed and whether or not Pasdonnay either wishes to purchase the business assets on the terms of this Agreement or does not wish to purchase them at all. Clause 4.9 also provided that the purchaser may request that the terms of the Agreement be amended in the event that the due diligence investigations reveal a fact that in Pasdonnay's opinion had an adverse effect on the business, the business assets and/or the patents.

129 Clauses 4.10 and 4.11 deal with termination and waiver respectively:

4.10.1 In the event that the Conditions in clause 4.1.2 or clause 4.4.4 have not been satisfied or waived by 30 September 2002 or such other date as the parties may agree in writing, then this agreement may be terminated by either Pasdonnay or Rear giving the other parties notice of such termination.

4.10.2 In the event that the Conditions in clause 4.1.1, clause 4.1.3 or clause 4.1.5 have not been satisfied or waived by 30 September 2002 or such other date as the parties may agree in writing, then this agreement may be terminated by the Purchaser giving the other parties notice of such termination.

4.10.3 If this agreement is terminated under this clause 4.10, then in addition to any other rights provided by law:

(a) each party is released from its obligations to continue performance under this agreement; and

(b) each party retains the rights it has against any other party in respect of any past breach.

4.10.4 Notwithstanding clause 4.10.3, if this agreement is terminated under this clause 4.10, the provisions of clauses 15, 16, 17 and 18 shall survive such termination and remain in full force and effect.

4.11.1 The Conditions in clause 4.1.1, clause 4.1.2 and clause 4.1.4 may only be waived by the Purchaser in writing.

4.11.2 The Condition in clause 4.1.3 may only be waived by Pasdonnay in writing.

4.11.3 The Condition in clause 4.1.5 may only be waived with the agreement of the parting in writing."

130 The Agreement contemplates that certain activities shall be conducted prior to completion, certain activities shall be undertaken at completion and certain activities will be conducted post-completion.

131 Completion is covered by cl 6 of the Agreement. Clause 6.2 provides that at Completion Pasdonnay shall deliver, or cause to be delivered to SDS (inter alia) possession of the Business Assets (cl 6.2.1), a list of the Assumed Liabilities (cl 6.2.4) and evidence of the discharge of all encumbrances over any business asset including, but not limited to, discharge of Australian Securities and Investments Corporation registered charges 578163 and 629914 (cl 6.2.15). Those two numbered charges were the HSBC floating charges over Pasdonnay's assets.

132 The obligations imposed on the purchaser for the completion procedure are set out in cl 6.3.

133 That provides that subject to the asset-holders complying with their obligations under cl 6.2, at Completion the purchaser must (inter alia), pay $2 million of the purchase price by issuing completion shares and SDS convertible notes to Pasdonnay free from all encumbrances (cl 6.3.1).

134 Clause 6.4.1 provides that at Completion the purchaser agrees to issue the completion shares to Pasdonnay at 50 cents per share "... in part satisfaction of the purchase price".

135 The next relevantly important provision is cl 11:

The Purchaser shall pay the balance of the Purchase Price as follows:

11.1.1 30 October 2002; or

11.1.2 the date that is 3 months after the Completion Date; or

11.1.3 the date that the Nautronix Litigation is settled to the complete satisfaction of the Purchaser; or

11.1.4 the date that the Federal Court of Australia awards damages in relation to the Nautronix Litigation.

136 Clause 11.2 provided that the balance was to be paid on the adjustment date by the purchaser issuing further adjusted STS shares to Pasdonnay.

137 The parties' post-completion obligations are set out in cl 13, but as those do not impact on these proceedings I do not trouble with them further.

138 The only other provision it is necessary to note cl 19.1 which stipulates that each party must do or cause to be done all acts and things necessary or desirable to give effect to the Agreement.

Course of events - post execution of the agreement

139 I have already referred to the letter from Mr Cowie of the CBA instructing Ferrier Hodgson to conduct a review of the SDS Group.

140 On 9 July 2002 Mr Jones of Ferrier Hodgson wrote to Mr Benson advising SDS of those instructions and forwarding a copy of the CBA letter of engagement dated 24 June 2002. Mr Jones wrote that Ferrier Hodgson envisaged that they would be able to report to the CBA within one month of receipt of their information requirements and advised that in accordance with their normal practice, a draft of the report would be provided to the directors of SDS for comment prior to submission to the CBA. The proposed fee was to be the lower of the time cost or $50,000. Acceptance of that was requested. Although the review was being conducted for the CBA, the accountant's fees were of course to be paid by SDS. A document setting out the information requirements in respect of each entity of the SDS Group - and IDQ - was annexed.

141 The accountants engaged by SDS to conduct the due diligence investigation of Pasdonnay were Deloitte Touche Tohmatsu ("Deloittes").

142 Deloittes set out the terms on which they were to act in that capacity in a letter to SDS dated 23 July 2002. The principal staff member at Deloittes with responsibility for the conduct of the due diligence investigation was Ms Rochelle Armstrong.

143 In mid-July 2002 Mr Rear telephoned Mr Aaron Natoli, a Credit Analysis at HSBC, who was responsible for the Pasdonnay account. Rear advised Natoli of the proposed sale and arranged an appointment to discuss it with the State Manager for HSBC, Mr Geoffrey Farr.

144 Messrs Rear and Gilbert met with Messrs Farr and Natoli about 22 July 2002. They gave the HSBC representatives a presentation on Pasdonnay's current financial and business performance. In relation to the proposed sale, Mr Rear told them that part of the sale to SDS would involve HSBC needing to extend Pasdonnay's existing facilities (some $3.2 million) to SDS. Mr Natoli says he told them it was a term of the Agreement that SDS would take over Pasdonnay's debt with HSBC.

145 Farr's response was that SDS would first have to put a proposal to HSBC which would then consider it, but he warned that it was unlikely HSBC would extend the existing facilities to SDS.

146 So far as Mr Farr is aware, SDS never did put a written proposal to HSBC although there were some discussions with Mr Natoli.

147 On 29 July 2002 Ms Armstrong sent to Mr Peter Heeney at IDQ a copy of an information request list for his attention.

148 It is apparent at least some information had been provided by Pasdonnay to Deloittes reasonably promptly because there was a draft report in existence dated August 2002. Although obviously incomplete, that flagged a number of areas in which further information was required. Some of those were addressed in a fax from Ms Armstrong to Andrew Gilbert of IDQ on 2 August 2002.

149 In the meantime, probably towards the end of July 2002, Mr Natoli had a telephone conversation with Mr Benson. According to Natoli, Benson confirmed that SDS was looking for an arrangement whereby HSBC would allow Pasdonnay's liabilities to be assigned to SDS as part of the sale agreement.

150 As the figures in its interim financial statement suggested SDS was heading for a substantial loss for the full year to 30 June 2002, Natoli was reinforced in his view that HSBC was unlikely to assist SDS. He told Benson that. They arranged for Benson to attend to discuss the situation further with Natoli.

151 A few days later Mr Benson called on Mr Natoli at the bank. Amongst other things, Benson told Natoli about the Nautronix settlement and said SDS was expecting to receive between $10 million and $15 million by the middle of 2003.

152 In his statement (tendered without objection) Natoli said he asked Benson if SDS would pay out HSBC once the Nautronix settlement had gone through. He states Benson replied that SDS would make it a priority to repay that debt once settlement had been finalised. He said he asked Benson what would happen if the bank was unwilling to agree to the assignment of Pasdonnay's debt to SDS and that Benson replied they would have to look for another lender elsewhere.

153 Arrangements were subsequently made for Farr and Natoli to attend the SDS manufacturing facility at Canning Vale.

154 Prior to that Natoli made further enquiries about SDS. He was not reassured. He ascertained from the most recent SDS annual report (to 30 June 2001) that CBA was treating SDS debt as "current", from which he concluded CBA had concerns about SDS's ability to repay it. He also noted that SDS had significant debt at the time, in the order of $10-13 million.

156 A couple of days later (it seems on 7 August 2002) they both went to the SDS factory at Canning Vale to meet Moir and Benson. Far told them that HSBC would not be able to assist SDS. The bank's preferred option was to rid itself of the Pasdonnay debt and it was not prepared to agree to any assignment of that debt to SDS. Farr asked Moir if he could get CBA to finance the takeout of the HSBC debt. He replied that CBA would not lend SDS any more money. Farr has not spoken to Moir or Benson since that meeting. However, in cross-examination he made it clear what the bank was not prepared to do was rollover the Pasdonnay liability to SDS - it would have no difficulty giving its consent to a proposal that the bank be paid out at Completion. That, of course, is hardly surprising.

157 On 9 August 2002 Mr Benson sent by fax to Mr Gilbert a copy of the financial results for the SDS Group to June 2002. He requested details of IDQ's cash flow so that he could complete the consolidation for the new group for 2002-2003.

158 Despite continuing exchanges of correspondence and information between the parties, problems were developing. They began to be apparent at a meeting between Ted Rear, Andrew Gilbert, Fred Moir, Kevin Benson and Lawrie Cook on 21 August 2002. Mr Cook's notes of that meeting are Exhibit P85.

159 Mr Cook began by suggesting that it would be convenient to discuss the progress and difficulties with the due diligence process.

160 Mr Benson said the process was to determine the net tangible asset position of IDQ and SDS was looking to convert trading stock quickly into cash. There was concern that the prospects of doing so did not appear good.

161 Other issues specifically referred to were a substantial increase in the reported value of work in progress, reported stock-on-hand (in particular, items of stock which were described as "test account" which were either used equipment or had been lost or disposed of) and an issue of obsolescence.

162 Mr Rear spoke of the background to the Agreement. He said that he had chosen to sell the business to SDS although he had at that time been approached by another party willing to invest in IDQ and Air Drill as a group. He said that he had recently again been approached by that person (that was in fact a Mr Thompson, although Mr Rear did not mention his name at the time) with a view to that person putting cash into IDQ. Such an injection of funds would have meant IDQ would not have its current cash flow difficulties.

163 After some other discussion about IDQ's cash situation and the company aircraft, Mr Cook said that led directly to Mr Rear's purpose in calling the meeting. He said that from an early stage in the negotiations for the proposed sale of assets Rear and Gilbert had been concerned about the ability of SDS to meet the cash commitment of $1,000,000 payable by 31 October 2002. He said the recent inability or unwillingness of SDS to provide interim funding to IDQ had again raised their concerns.

164 This was a reference to an earlier request by Mr Rear that SDS make a payment of $300,000 to Pasdonnay to alleviate problems Pasdonnay was having with its creditors. Moir and Benson told Rear that SDS had no obligation under the Agreement to make the payment and did not wish to do so.

165 At the meeting, Mr Benson explained that the problem SDS had with the request for interim funding was that IDQ had no unencumbered security against which it could be provided. SDS was not prepared to advance money at that stage and rank as a secured creditor behind the HSBC.

166 Mr Cook conceded that was a reasonable explanation for SDS not being prepared to advance additional moneys at that time.

167 There was further discussion about stock values and the financial structure of the Agreement. That culminated with Mr Cook saying that IDQ and Mr Rear were "very concerned" about SDS's ability to produce the $1,000,000 and now required evidence of SDS's ability to pay it.

168 Mr Moir said there were several possible sources of funds and repeated what he had said on earlier occasions that if necessary, he would personally provide the funds. Despite that, and notwithstanding mention of a possible sale to Boral of land at Welshpool owned by the SDS group and leased to Boral (the Welshpool property"), Mr Cook reiterated that the question remained whether SDS had the ability to meet its obligations and that IDQ and Mr Rear required evidence the funding was in place for the $1,000,000.

169 Mr Moir repeated that the funds would be available when required. He mentioned a verbal offer from a financier to provide a $1,000,000 advance against the Welshpool property or other sources, such as the Nautronix litigation.

170 It is clear none of this was satisfactory to the IDQ representatives - they wanted to know where the $1,000,000 would be coming from. According to the notes, at that point Mr Moir said he would be able to say where the money was coming from as soon as Mr Gilbert and Mr Rear answered the matters being raised in the due diligence process, which he thought could reasonably be expected in seven to ten days time. Mr Cook repeated the need to know the intended source of funds and requested written confirmation of the arrangements.

171 The notes record that Mr Benson then said SDS had an obligation under the Agreement to fund the money by 30 October and that was SDS's only obligation.

172 Mr Rear said he wanted assurance SDS was able to pay the $1,000,000 as he presently had the third party investor as a "fall back position". He was concerned that SDS could wait until the last minute and then simply advise that it did not wish to proceed. That was why he wanted to see where the money was coming from and why he wanted something in writing. Again, the notes record that Mr Benson said it did not matter where the money was coming from.

173 Finally, the notes record that Mr Cook explained the concern about SDS's ability to make the payment was heightened because the Agreement provided for handing over of the assets prior to the payment of the $1,000,000 on 31 October. He suggested a settlement date on which the assets would be handed over contemporaneously with the payment of the $1,000,000. To that, Mr Benson said he did not have a problem with such an arrangement, bearing in mind the completion date now looked like being within several weeks of 31 October. (It was common ground that the reference to 31 October was a misunderstanding - the contractual date was 30 October 2002.)

174 The plaintiff's contention is that this final reference in the notes reflects "a direct admission", well after the Agreement was executed on 5 July 2002, that Mr Cook and Mr Rear understood its provisions to require Completion first and payment of $1,000,000 subsequent to that. The plaintiff argues this view is emphasised by the content of Mr Cook's letter to Mr Moir dated 26 August 2002 under cover of which he forwarded a copy of the notes of the meeting, and in which he concluded:

"It is necessary to have the Sale Agreement altered to provide for the handover of IDQ assets at the time of payment of the $1,000,000 to IDQ on 31 [sic] October as discussed at the meeting."

175 The question of the payment of the $1,000,000 (or more particularly, the capacity of Mr Moir and SDS to make it) continued to loom large over the following days.

176 On 29 August 2002 Mr Cook sent an email to Mr Rear bringing him up to date on recent discussions the former had been having with Mr Benson. He reported that as at the previous evening Benson's advice was that SDS did not yet have funding in place but that he and Mr Moir were nevertheless confident the $1,000,000 would be available on 31 [sic] October. According to Mr Cook, Mr Benson said Moir was looking at several alternatives but as nothing had crystallised Mr Moir was reluctant to put anything in writing. He said Mr Benson had mentioned there were several possible sources of funding but their fall-back position remained the sale or refinancing of the Welshpool property. They had been told Boral was most likely going to renew its lease but there would be no official confirmation of that until Friday 6 September - which in effect would mean Monday 9 September.

177 Mr Benson sent a copy of SDS's draft consolidated balance sheet as at 30 June 2002, to Mr Rear by email on 30 August 2002.

178 On 2 September 2002 Mr Benson wrote to Mr Cook responding to the suggestion in his earlier letter that the Agreement would need to be changed. He wrote:

"Further to our discussions of last week, SDS Corporation Ltd provides the following information to show it's bona fide intentions to completing it's obligations under the above agreement. This information does not have to be tendered under the terms of the above agreement but is given so as to provide comfort to the principals of Pasdonnay Pty Ltd.

Attached to this letter is a notice of extension by Boral Asphalt for its lease at McDowell Street, Welshpool. A financier has indicated that it will provide an offer to extend additional finance to F Moir Holdings Pty Ltd who will then loan the money to SDS Corporation Ltd to complete the contemplated transaction with Pasdonnay Pty Ltd.

Given the considerable delays associated with the Due Diligence process, it is expected the payment of the $1 million, the issue of the SDS shares and convertible notes will occur toward the end of October 2002. This will coincide with the completion date as contemplated by the Business Asset Sale Agreement. As such, we do not consider it necessary to alter the agreement as executed by both parties."

179 It is the plaintiff's submission that what Mr Benson was saying in the last paragraph was that because of the delays in due diligence, Completion would not occur prior to 30 October and so there would not be a transfer of the assets before payment of the $1,000,000. As the likelihood was that the completion date would be moved out towards 30 October, the payment of the $1,000,000 the payment by shares and Completion (ie the transfer of the assets) could all occur contemporaneously.

180 Deloittes were still working on the due diligence process. There is a file note by Ms Armstrong dated 2 September 2002 about a telephone conversation between her and Andrew Gilbert of IDQ. She was seeking further information but Mr Gilbert said although he had work in progress and stock information ready for her he was holding onto it until he received further information from SDS. He did not specify what information IDQ was waiting on from SDS. Ms Armstrong telephoned Mr Benson about this that day but he told her he was not aware of it.

181 By email dated 4 September 2002 Mr Benson advised Mr Rear that the due diligence process had not progressed much in the past few days and that Deloittes required information on work in progress, stock and plant and equipment. He requested Mr Rear to advise him of the position and forward the required information to Deloittes so that a draft due diligence report could be prepared and discussed.

182 Relations between the parties continued to deteriorate, to the point at which Mr Rear specifically raised the prospect of IDQ repudiating the Agreement. He raised it in a letter to SDS dated 5 September 2002 in which he expressed concern " ... about the way events are unfolding in an unsatisfactory manner".

"To begin with you committed to providing written evidence of the availability of the $1,000,000 to be paid to Pasdonnay Pty Ltd pursuant to the agreement. This is a fundamental plank of the transaction (particularly given the available evidence concerning your company's financial position) and you have failed to provide any proper evidence at all. The latest communication only relates to F Moir Holdings Pty Ltd which has no obligations under the agreement. Moreover the identity of the financier is not disclosed."

184 He mentioned two other matters of particular concern. One involved a three year contract in Mt Isa in respect of which both IDQ and SDS were quoting. He claimed that one of SDS's employees had contacted one of IDQ's employees based in Mt Isa and sought both to poach his services and also seek confidential information directly related to aspects of the Mt Isa contract. The other was alleged interference by SDS in Pasdonnay's contractual relationships in Hong Kong. Mr Rear suggested both of these matters could only be viewed as interference and evidence of bad faith on the part of SDS rather than a position in keeping with the actions of a company full committed to the Agreement. Given the importance of what Mr Rear then wrote about the Agreement, I set that part of his letter out in full as follows:

"Fourthly, the written Business Asset Sale Agreement is unsatisfactorily drawn generally and in particular is rendered meaningless by reason of the fact that certain corporations and persons who are parties to the unexecuted but necessary complementary agreements (which are contained in the Schedules to the main agreement) are not parties to the Business Asset Sale Agreement and therefore have no current obligation to perform the promises expressed in those complementary agreements.

Advice from our legal counsel is that the above four matters (either taken separately or as a whole) entitle Pasdonnay Pty Ltd to repudiate the Business Asset Sale Agreement in its entirety.

And I have to say that in the light of events and your company's apparent attitude I am inclined to adopt this option and will do so if necessary.

But taking a purely commercial perspective, a lot of time, effort and expense has gone into trying to consummate a deal which ultimately would be of advantage to us both.

To attempt to salvage such a deal from the present wreck I propose that a fresh agreement be negotiated (adopting the present 'in principle' understanding as a model) and a proper contract be entered into, one that contains certainty and both legal and commercial efficacy.

Key points which I would regard as essential to a new contract are (and I might add that I am here just putting forward the points in principle, not attempting to definitively draft their content).

(a) SDS Corporation Ltd commits to providing incontrovertible evidence of its ability to pay all monies due under the contract to Pasdonnay Pty Ltd and its creditors in a timely manner.

(b) The transfer of the business assets is to be contemporaneous with settlement, (sic: and?) the payment of the $1,000,000, rather than on the present artificial completion date.

(c) Any moneys borrowed by Pasdonnay Pty Ltd to pay creditors pending the new completion/settlement date be repaid to any such lender in cash by SDS Corporation Ltd at the same time as completion/settlement.

(d) The current dates for finalisation be put back four months.

The above items are fundamentally non negotiable; other matters can be the subject of further discussion. There also needs to be an express commitment by each side of good faith toward each other both in direct dealing and in any peripheral activities involving third parties which might have a bearing on either of the parties.

Would you please respond directly to the above by 5.00 PM (WST), Friday, 6 September 2002."

185 Mr Moir replied to this by letter dated 9 September 2002. He proffered explanations suggesting Mr Rear's concerns about the Mt Isa and Hong Kong matters were based on misunderstandings and then turned his attention to Mr Rear's concerns about the Agreement.

186 He pointed out that the legal advice given to IDQ was inaccurate because the only parties to the Agreement were Pasdonnay, Rear and SDS. Each of those parties had legal capacity and access to advice prior to signing the Agreement, which would only come into force when the preconditions had been fulfilled. He said that until then none of the attached agreements, or the parties to them, were involved in the Agreement. He emphasised that it was SDS's position that the Agreement was valid and enforceable and that SDS wished to progress the current due diligence process as quickly as possible so that the transaction could be finalised and the parties' original intentions advanced.

187 That expressed desire to progress the due diligence was reiterated in an email from Kevin Benson to Mr Rear on 12 September 2002 in which he also asked when the outstanding information could be reviewed by Deloittes.

188 Andrew Gilbert responded to that email on 13 September, advising Mr Benson that Rear was away from the office but IDQ was "working on due diligence with Ernst & Young working on accounts" and he would get back to Mr Benson later that day.

189 Although Mr Benson expressed the view to Mr Moir that that appeared to be a change of approach on behalf of Pasdonnay (an understandable impression, since the message was sent to him in response to - and on - his own email about due diligence) it was Mr Rear's evidence that this was a reference to Pasdonnay wanting Ernst & Young to do due diligence on SDS - that is, Ernst & Young were not assisting with the SDS due diligence process on IDQ at all.

190 On 17 September Mr Benson again emailed Mr Rear noting that despite the earlier advice that IDQ would respond to Deloitte's outstanding queries on 13 September, Deloittes had still not received the outstanding information to allow them to complete the due diligence process. He again asked when that information would be available.

191 Benson emailed Rear again on 19 September asking whether he had a response to the due diligence enquiry and advising that he would call later that day to discuss it.

192 However what SDS did receive was a letter dated 19 September from IDQ sent by facsimile that day. From that, it is apparent that Rear was maintaining IDQ's earlier stated position. He pointed out that Moir had agreed to provide written evidence of his ability to pay the $1,000,000 and any other financial obligations when due, but had simply not done that. He rejected SDS's explanation of the Mt Isa issue and stood by his assertions on the Hong Kong issue.

193 As to the Agreement itself, he wrote that the complimentary agreements contained in the schedules to the Agreement are essential to the completion of the transaction. Some of those agreements were between parties other than the parties to the Agreement. Those were currently unexecuted and therefore could not be the subject of enforcement. He instanced the Put Option Deed between Pasdonnay and Mr Moir in his personal capacity: the Put Option was central and essential to the transaction, but as matters stood Mr Moir could simply refuse to execute it. He was not, in his own capacity, bound to do so under the Agreement.

194 Mr Rear asserted that the Agreement was therefore rendered meaningless and as such was unenforceable.

195 Deloittes in the meantime were still seeking information from IDQ to enable them to complete their due diligence process. On 24 September 2002 Mr Peter Messer of Deloittes wrote to Mr Geoff Brennan of Thomsons referring to a conversation between Mr Brennan and Ms Armstrong the previous day and to Deloittes' information request facsimiles dated 8, 13 and 16 August 2002 addressed to Mr Gilbert at IDQ. He then detailed those items of information which had been requested earlier but which were still outstanding. They related to the forecast cash flow for the 2003 financial year, queries in relation to the stock report and work in progress, details of possibly obsolete products in stock, copies of maintenance schedules for machinery, copies of property and vehicle rental agreements, a reconciliation of some asset revaluations to the asset register and other particular details.

196 Mr Messer concluded with the comment that Mr Gilbert had advised on 2 September 2002 that the remaining outstanding information would not be provided by IDQ and that questions arising from information provided to that date should not be raised until further notice. He wrote that accordingly, to complete the due diligence, there may be other information or clarification required in regard to information provided by IDQ in August and questions might arise from any subsequent information received in accordance to the current request.

197 On 25 September 2002 Thomsons wrote to Mr Rear. They referred to the Agreement and to the extensive correspondence sent by, or on behalf of, SDS to Pasdonnay in relation to the due diligence investigations being undertaken on behalf of SDS by Deloittes. They drew attention to cls 4.1.1 ("the due diligence condition"), 4.2.1 and 4.3.1 of the Agreement and said that they had been instructed by SDS that Pasdonnay had failed to comply with its obligations to provide assistance to SDS or its agents in relation to the performance of its due diligence investigations. They then adumbrated particular matters relied upon, they being essentially those previously set out in Deloitte's letter of 24 September. They asserted that in light of those outstanding requests for information and the position taken by Mr Rear and Pasdonnay in respect of the Agreement to that point, it was clear that Pasdonnay had breached cl 4.3.1 of the Agreement in that it had failed to provide "all assistance required by the purchaser to enable it to conduct its due diligence investigations".

198 Thomsons gave notice that if the information were not provided by Pasdonnay to Deloittes by close of business on Thursday 26 September 2002, SDS would seek a mandatory interlocutory injunction requiring compliance with the Agreement by Pasdonnay.

199 Thomsons then responded specifically to each of the assertions previously advanced on behalf of Pasdonnay as entitling it to repudiate the Agreement.

200 On 26 September 2002 in response to a telephone call from Mr Rear, Mr Farr wrote to Pasdonnay advising that HSBC would not be prepared to provide finance to a third party to allow the sale of IDQ to SDS to proceed as HSBC's preference was to be repaid at settlement of any sale. Mr Farr advised that HSBC had not completed a due diligence on SDS but its preference was to exit the industry and therefore the bank would not consider either the SDS proposal or any other proposal which required it to continue finance.

201 By this time Pasdonnay and Mr Rear had a new solicitor, Mr Peter Bogue. On 26 September 2002 he wrote to Thomsons replying to their letter of the previous day. Put shortly, he denied that Pasdonnay had failed to comply with its obligations in relation to the due diligence process, asserting that the necessary details had been provided. He said that Pasdonnay stood by the assertions made in its letter to SDS of 19 September, adding that although the agreement itself did not oblige SDS to provide the information referred to (as to the capacity of it or Mr Moir to pay the $1 million) SDS had agreed to do so and he said, "... as such I would have thought that this fell into the category of a collateral contract".

202 As Mr Abbott submitted, that proposition is nowhere reflected in the pleadings.

203 Mr Bogue said that Pasdonnay considered it was legally entitled to repudiate the Agreement, but went on to add that a new element had entered the picture. He asserted that quite apart from any availability of the due diligence report, HSBC had "unequivocally stated that it will not consent to the sale and purchase of the business assets and the assumption of assumed liabilities in accordance with the Agreement as written". In short, he said that HSBC was not prepared to take SDS on as a client and would only consent to the sale in return for full repayment of its facility in the amount of approximately $3,200,000 at the time of settlement. He concluded that that for all practical purposes put an end to matters because although by cl 4.10.2 only SDS could elect to terminate, the sale was frustrated.

204 The position expressed there by Mr Bogue in relation to HSBC is the position still taken by the defendants, namely that the advice by HSBC that it would only consent to the sale in return for full repayment of the facility at the time of settlement constituted a failure to consent within the terms of the HSBC condition.

205 The plaintiff on the other hand, argues that was a misunderstanding of HSBC's position, which was that consent would be forthcoming if the facility were to be repaid in full before or on Completion - which was what SDS intended.

206 Thomsons responded to that letter on 30 September 2002. They disputed that the particular items of information requested by Deloittes had been provided by IDQ and reiterated the request for them. They pointed out that Pasdonnay was obliged to provide SDS with the information requested but had not done so and was thereby in default.

207 As to the issue of HSBC's consent to the transaction, Thomsons rejected Mr Bogue's assertions. They advised that the current status of the negotiations between SDS and HSBC was that there had been preliminary discussions between them in relation to the proposed transaction but SDS had not put forward a specific proposal to HSBC as it had not yet completed its due diligence investigations because of the failure of Pasdonnay to provide the necessary information. They said that HSBC had not informed SDS that it would not consent to the sale and purchase of the business assets and the assumed liabilities in accordance with the Agreement; nor had it informed SDS of the conditions upon which it would provide such consent. They said it was SDS's intention to complete the due diligence investigations once the information sought from IDQ was provided and SDS would then enter into further negotiations with HSBC. On the basis of that, Thomsons said SDS rejected the assertion that the transaction was frustrated. Finally, they drew attention to cl 4.2.3 of the Agreement which provides that Pasdonnay must use its best endeavours to obtain the consent of HSBC to the transaction.

208 Moir had also been in negotiations with St George Bank Ltd ("St George") to obtain an alternative source of funding.

209 On 4 October 2002, St George wrote to the directors of F Moir Holdings Pty Ltd offering a borrowing facility of $1,950,000. The purpose was stated as being to refinance a CBA facility of approximately $1 million originally provided to assist with the purchase of the Welshpool property and to provide an equity release of approximately $950,000 for investment purposes.

210 The plaintiff puts this forward as evidence confirming the capacity of Moir and SDS to pay the $1 million on 30 October.

211 On 7 October 2002 Mr Bogue replied to Thomsons' letter of 30 September. He indicated that Pasdonnay stood by the position it had previously taken in relation to the issue of HSBC consent and stated that given that, the issues about the due diligence process were irrelevant and need not be debated.

212 On 18 October 2002, the plaintiff issued a chamber summons for an interlocutory injunction requiring the defendants to do all things necessary to comply with their obligations under cls 4.3.1, 4.3.2, 4.5.1 and 19 of the Agreement. In particular, an order was sought that the defendants provide all assistance required by the plaintiff to conduct the due diligence investigations.

213 On 6 November 2002 Mr Gilbert wrote on behalf of IDQ to SDS referring to cl 4.1.4, the condition precedent requiring the CBA consent ("the CBA condition"). He noted that Pasdonnay had received no confirmation that such consent had been forthcoming and requested written confirmation of it by 4 pm the following day.

214 Notwithstanding that, Mr Gilbert wrote again to SDS on 8 November 2002 giving formal notice of termination of the Agreement pursuant to cl 4.10.1, on the basis the CBA condition had not been satisfied nor waived by 30 September 2002.

215 Thomsons replied to that by letter later the same day. According to that letter, the CBA had been unable to complete its assessment of the purchase because the defendants had failed to comply with their obligations under cl 4.3.1 of the Agreement and, absent the completion of due diligence, SDS was not able to satisfy CBA it should give its consent.

216 Thomsons maintained the defendants were not entitled to terminate the Agreement and their purported termination was rejected. They said SDS required Pasdonnay to provide a written undertaking that until the trial of the action or further order, it would operate only in the ordinary course of business and, effectively, it would not enter into any major arrangements or undertakings without prior written consent of SDS.

217 The plaintiff's application for a mandatory injunction was heard by Barker J on 31 October 2002. Judgment was reserved.

218 On 15 November 2002 the plaintiff filed a further chamber summons seeking a prohibitory interlocutory injunction to prevent the defendants from adversely affecting the business or disposing of the assets of the business the subject of the Agreement. That application was heard by Barker J on 19 November 2002.

219 Judgment on both applications was delivered by Barker J on 22 November 2002 (SDS Corporation Ltd v Pasdonnay Pty Ltd & Anor [2002] WASC 276). His Honour granted both the mandatory interlocutory injunction and the prohibitory interlocutory injunction. The orders made were:

Upon the usual undertaking as to damages being provided by the plaintiff:

(1) The defendants are ordered and an injunction is hereby granted requiring them to perform the following acts under and for the purposes of the Business Asset Sales Agreement made between them in July 2002:

(a) The defendants provide the job sheets and general explanation of the increase in WIP for the year ended 30 June 2002, referred to in par 7 of attachment RAA5 to the affidavit of Rochelle Argo Armstrong sworn 31 October 2002 (Ms Armstrong's affidavit).

(b) The defendants provide the information necessary to assist with the reconciliation of the movement in stock in the period 15 June 2002 to 12 August 2002 and referred to in par 13.2.1 of Ms Armstrong's affidavit and par 6 of attachment RAA5 to Ms Armstrong's affidavit.

(c) The defendants provide the information necessary to assist in the reconciliation of fixed assets as referred to in par 13.3 of Ms Armstrong's affidavit.

(d) The defendants provide the information concerning stock obsolescence referred to in par 13.5(a) of Ms Armstrong's affidavit."

220 There is in evidence a letter from Andrew Gilbert to Deloittes dated 26 November 2002 advising that he was attaching the information requested in response to the four points ordered by the Court. In so doing, he explained:

"Our contention is that Mr Rear was advised by way of a verbal agreement between SDS and Pasdonnay that market sensitive information provided by us would be reciprocated by the same information from SDS. This did not happen. In addition on 9 September Kevin Benson informed us there would be a written response to a query we had on SDS's dealings in Hong Kong, this information was never forthcoming."

221 He then provided explanations in respect of the particular issues raised by Deloittes.

222 It seems that letter was in fact not sent. It should be noted that it was not signed and there is another letter of the same date addressed to Deloittes which is signed by Gilbert and which contains only the explanation of the four items. The preliminary observations have been omitted. Nonetheless, they do I think, give an indication of Gilbert's thinking at the time and, most probably, that of Mr Rear.

223 On 26 November 2002 Deloittes wrote to Mr Gilbert at IDQ confirming that Barker J had granted an injunction requiring Pasdonnay and Mr Rear to provide certain information. The four items nominated concerned work in progress, reconciliation of stock, information necessary to assist in the reconciliation of fixed assets and clarification of a report of product which had not moved for 12 months.

224 Deloittes subsequently sought further clarification and information by two facsimiles, dated 5 and 6 December 2002 respectively.

225 On 12 December 2002 Thomsons wrote to Mr Bogue seeking an independent valuation of Pasdonnay's fixed assets by Mr John Gregson of Gregson's Valuers and Auctioneers. That prompted a response from Mr Bogue by letter the following day, in which he pointed out that it was still his client's position that the Agreement was at an end. He noted that SDS had a different view about that but it was a question yet to be determined by the Court and as matters presently stood, his clients saw themselves as bound only by any orders made by the Court.

226 Against that background, Mr Bogue pointed out that the mandatory injunction had been confined to four specific categories and that nowhere in the orders was there, "even by extrapolation", a requirement for an independent valuation of the fixed assets of Pasdonnay. He expressed the view that SDS's request for an independent valuation was outside the scope of the mandatory injunction.

227 Finally, Deloittes forwarded their due diligence report on IDQ to Mr Benson under cover of a letter dated 8 January 2003.

228 Key issues identified in the report as requiring further consideration by SDS were the acquisition of IDQ to be progressed included:

• Action to seek assurance regarding the existence and value of plant and equipment.

• The negotiation of consultancy fees payable to Pasdonnay for services to be performed by Mr Rear and a consultancy services package for Mr Gilbert. In this regard it was noted that consultancy expenses for Mr Rear would be deducted from future earnings of the business, whereas payment schedules for salaries and wages did not presently include wages for him.

• The patent licence agreement under which SDS would pay Mr Rear $500,000 and issue licence shares for the patents should be considered and the value of patents reviewed.

• The valuation of stock and work in progress should be further examined. The investigation had revealed that work in progress was overstated as at 30 June 2002 by an amount in excess of $567,000. There were other concerns about the accuracy of the work in progress figures as a result of which the value of work in progress as at 30 June 2002 remained questionable.

• The position with HSBC since 30 September 2002 needed to be further examined. It was noted that IDQ had an overdraft and loans from HSBC totally approximately $3.1 million, which had been tentatively extended to 30 September 2002 pending resolution of the sale of the business to SDS.

229 Other observations made included the point that sales had remained relatively flat for the past two years, the business had no liquidity and current assets consisted primarily of receivables and inventory and that considering the magnitude of debt and lack of earnings, the business currently appeared to be in significant financial difficulty.

230 The issue of valuation of Pasdonnay's assets was the subject of continuing discussion between the parties' solicitors. There being no resolution of this, the plaintiff filed a chamber summons on 30 January 2003 seeking an interlocutory injunction for inspection of the Business Assets by an SDS-nominated valuer.

231 On 18 February 2003 Mr Bogue wrote to the plaintiff's new solicitors Messrs Williams & Hughes advising that to avoid the costs of further court appearances, the defendants would be prepared to allow a valuation on the conditions that the valuer was selected from a list of three names provided and that the valuation should be conducted on the basis the assets were to be given a market value.

232 Thomsons wrote to Ferrier Hodgson on 20 February 2003 confirming that Ferrier Hodgson would review the due diligence report prepared by Deloittes and advise what additional information was required from Pasdonnay in order to satisfy the terms of their engagement with the CBA. Ferrier Hodgson provided a list of their additional information requirements by letter dated 21 February 2003 to Thomsons. They confirmed that they believed those records were required for them to adequately comply with their instructions from the CBA to comment on IDQ's underlying profitability, viability and ability to service and repay debts.

233 Mr Bogue's offer to resolve the valuation issue was rejected by Williams & Hughes in a facsimile dated 25 February 2003. They countered with an offer that Pasdonnay provide access to the fixed assets of Pasdonnay to Mr John Gregson or such other valuer as may be nominated by SDS within 48 hours and that Pasdonnay pay the costs incurred by SDS in relation to the then outstanding interlocutory injunction application.

234 That counter offer was rejected by Mr Bogue in a letter dated 26 February 2003. He proposed that Mr Gregson have limited access to certain fixed assets only for the purposes of the valuation.

235 This drew a response from Williams & Hughes by facsimile on 27 February 2003. The solicitors said SDS could see no reason why Pasdonnay should dictate to SDS who the latter's valuer should be and asked that Pasdonnay reconsider its position, failing which affidavits should be served and "the matter determined judicially".

236 On 12 March 2003 SDS made a formal request by letter of that date to Pasdonnay for information and documents to enable Ferrier Hodgson to provide their report to the CBA.

237 Mr Moir had been holding discussions with representatives of Ausdrill Ltd in relation to the provision of funding by Ausdrill to SDS to enable SDS to complete the acquisition of the assets and the assumption of the liabilities of Pasdonnay pursuant to the Agreement.

238 By letter dated 9 April 2003 Ausdrill agreed to provide SDS with an advance of up to $2 million to enable SDS to repay the debt owing to HSBC, on condition that SDS granted Ausdrill a first ranking fixed and floating charge over the assets which SDS was purchasing from Pasdonnay. Mr Moir signed a copy of that letter indicating acceptance on behalf of SDS.

239 On 10 April 2003 SDS filed a chamber summons for a further interlocutory injunction. An order was sought requiring the defendants to do all things necessary to comply with their obligations under cl 4.3.2 and cl 10.1 of the Agreement and in particular, to provide the documents listed in an annexure to an affidavit of Mr Benson sworn 9 April 2003.

240 On 14 April Mr Bogue wrote to Williams & Hughes confirming instructions that SDS may nominate its valuer (presumably Mr Gregson) to value the Pasdonnay plant and equipment. He then referred to the Ferrier Hodgson additional information requirements individually, in substance agreeing to provide the information sought.

241 That offer was accepted by Williams & Hughes by letter dated 22 April 2003 on condition that the defendants pay SDS's costs of the injunctions sought by chamber summons dated 30 January and 10 April 2003. However, recognising the prospect that the question of costs might create an impediment, Williams & Hughes wrote again the following day advising that on condition the information would be provided as indicated, SDS would consent to the costs of the interlocutory applications being reserved to the trial Judge. That proposition was accepted by Mr Bogue by letter dated 23 April 2003.

242 On 30 April 2003 Mr Benson wrote to Mr Farr of HSBC seeking the consent of HSBC to the sale and purchase of the business assets and the assumption of the assumed liabilities, including the debt owed by Pasdonnay to HSBC, in accordance with the Agreement. The basis upon which the consent was sought was expressly stated to be that SDS would assume the HSBC debt as at completion of the transaction and immediately thereafter (ie at settlement) SDS would repay the total amount owing by HSBC. Mr Benson indicated SDS would provide a more detailed submission if necessary but sought HSBC agreement "in principle" and an indication what HSBC would require to carry such agreement forward.

243 By facsimile dated 7 May 2003 Mr John Dawson, Senior Manager of HSBC, advised that the bank would not provide any information in relation to Pasdonnay.

244 That prompted a letter dated 8 May 2003 from SDS to Mr Rear explaining that pursuant to cl 4.1.3 of the Agreement, SDS had sought the consent of HSBC on the basis described and advising that the bank had refused to provide any information to SDS in relation to Pasdonnay. Mr Benson referred to cl 4.2.3 of the Agreement which required Pasdonnay to use its best endeavours to satisfy the condition and accordingly requested Pasdonnay authorise HSBC to consider and respond to the request made by SDS's letter of 30 April and to provide information to SDS incidental to the request, including but not limited to, the amount of the HSBC debt. He also drew attention to cl 19.1 of the Agreement which provided both SDS and Pasdonnay must do or cause to be done all acts and things necessary or desirable to give effect to it.

245 On 13 May 2003 Solomon Brothers notified Williams & Hughes that they were now acting for the defendants.

246 Solomon Brothers wrote to Williams & Hughes on 14 May 2003 with their client's preliminary response to the letter from SDS of 8 May. In part that letter read:

"1. The letter dated 8 May 2003 annexes a copy of a letter dated 30 April 2003 to the State Manager of HSBC Bank Australia Ltd ('HSBC'). Those two letters (in slightly different form - the 30 April letter refers to repayment 'at settlement', but the 8 May letter does not) suggest to me that:-

1.1 SDS will assume liability for the HSBC debt as at completion of the sale transaction between our clients and SDS; and

1.2 after completion of that sale transaction (but at the same settlement), SDS will replay the total amount of that assumed debt owing to HSBC.

2. Before responding to the request in the letter of 8 May 2003 in detail, we need clarification of the concepts and information detailed below.

3. In an ordinary and usual conveyancing transaction, where a vendor pays out its financier at settlement, the purchase money paid by the purchaser or its financier is paid over at the direction of the vendor to the vendor's financier, and the vendor's financier releases its securities in exchange for that payment. The conveyance by the vendor (freed of the previous encumbrance(s) in favour of the vendor's financier) to the purchaser is handed over at settlement in exchange for the payment of the price made by the purchaser (including part of the payment made at the direction of the vendor to the vendor's financier). In that way, the purchaser does not, at settlement, assume any liability to the vendor's financier for one moment because the vendor's financier's securities are discharged in the course of the settlement process.

4. What is spoken of in the letter written by SDS to our client of 8 May 2003 and in the earlier letter to HSBC of 30 April 2003 appears different from the ordinary and usual transaction I have described in paragraph 3. Those letters appear to contemplate that, for some period of time after completion of the sale conveyance, SDS will have assumed liability to HSBC for the debt owing by the vendors at the time of settlement, but SDS will immediately thereafter satisfy those obligations. Hence, it appears that what is contemplated is that there will be a conveyance by our clients to SDS subject to the securities securing the HSBC debt (and without the HSBC debt being satisfied), to be followed thereafter by a separate transaction between SDS and HSBC by which SDS made repayment directly to HSBC of the assumed debt in exchange for a discharge of the HSBC securities securing that assumed debt."

247 Solomon Brothers asked Williams & Hughes whether or not that understanding of the proposed transactions was correct or alternatively what was proposed, what was the reason for the transactions being structured in that way and what information SDS required the defendants to authorise HSBC to provide.

248 Williams & Hughes replied to this by facsimile dated 15 May 2003. In that, they explained that "Putting matters in a practical level" what would occur at settlement would be that SDS would:

2.1 settle with its vendor in accordance with the terms of the Business Asset Sale Agreement; and

2.2 deliver a bank cheque for the amount of the Pasdonnay/HSBC debt to HSBC in return for a discharge (of the debt) and the usual documents discharging HSBC's securities over Pasdonnay's assets.

This has the same effect as 'ordinary and usual conveyancing transaction' (as you describe it) ie Pasdonnay's obligation to HSBC is discharged.

3. If Pasdonnay wishes to proceed in the manner you regard as conventional, the sale price can be increased to include the HSBC debt - on the basis that SDS will bring two bank cheques to settlement and discharge HSBC's debt with one of them. This would require Pasdonnay to make the arrangements for the discharge of securities with HSBC, and to ascertain the amount of the HSBC debt as at settlement and inform SDS of it."

249 The letter went on to say that it appeared inconceivable that if told that its debt would be discharged at settlement, HSBC would not do all those things necessary to enable that to happen - including consenting in the terms of cl 4.1.3 of the Agreement.

250 They enquired in the circumstances how Pasdonnay wished to proceed.

251 That response apparently went no way to allaying Solomon Brothers' enquiry. On 16 May they wrote again to Williams & Hughes saying that the questions asked had not been answered by Williams & Hughes asking how the defendants wished to proceed. They pointed out that it was SDS that had requested action by the defendants in the letter of 8 May and the defendants were entitled to know precisely what transactions SDS was proposing. SDS was claiming specific performance and was obliged to articulate precisely the transactions it was proposing would take place at settlement. Solomon Brothers again asked for a response to the questions asked in their letter of 14 May.

252 By facsimile dated 20 May 2003 Williams & Hughes responded explicitly in relation to the three questions posed by Solomon Brothers. They confirmed that the transaction proposed was that as set out in [4] of Solomon Brothers' letter of 14 May and added that:

"For the avoidance of doubt, what is proposed is as follows:-

At a settlement at which HSBC attends SDS will:-

(a) settle with its vendor in accordance with the terms of the Business Asset Sale Agreement; and

(b) deliver a bank cheque for the amount of the Pasdonnay/HSBC debt to HSBC in return for a discharge (of the debt) and the usual documents discharging HSBC's securities over Pasdonnay's assets.

The effect of these transaction (sic) is to discharge, contemporaneously with the transfer of the business assets (and assumption by SDS of Pasdonnay's liabilities), Pasdonnay's HSBC debt and the securities for it."

253 As to the reasons for the proposed transaction being structured in that way, the solicitors advised that SDS was willing to structure the transaction either in that way or on the basis of the "ordinary and usual type of conveyancing transaction" as described by Solomon Brothers. They said that SDS had no particular preference and would willingly do either.

254 As to the information required from HSBC, they said that was the amount which would be required to discharge the HSBC debt at settlement and HSBC's requirements at settlement and the documents which HSBC would provide so that its securities over Pasdonnay's assets may be discharged. SDS would of course, require Pasdonnay's written consent to HSBC to deal direct with SDS.

255 That response was met bluntly with a letter from Solomon Brothers dated 20 May 2003 confirming that they acted for the defendants and enclosing notice of termination.

256 I set out the operative part of the notice of termination in full:

A. By an agreement styled 'Business Asset Sale Agreement' made in 2002 ('the Agreement') between you as purchaser and Pasdonnay Pty Ltd ('Pasdonnay') and Ian Graeme Rear ('Rear') as Asset Holders:-

(i) you agreed to purchase the Business Assets from Pasdonnay; and

(ii) Rear agreed to enter into an agreement to license the Patents to you and, depending on the circumstances, transfer the Patents to you, pursuant to recital D and clause 6.2.19 of the Agreement,

subject to conditions, including a condition in clause 4.1.3 of the Agreement ('the 4.1.3 Condition') that completion is subject to and conditional on HSBC, as financier of Pasdonnay, consenting to the sale and purchase of the Business Assets and the assumption of the Assumed Liabilities in accordance with the Agreement and, if consent is conditional, where such conditions are satisfactory to you and Pasdonnay.

B. Clause 13.1.2 of the Agreement provided that you are liable for, and must indemnify the Asset Holders, for all acts and omissions in respect of the Assumed Liabilities after the Completion Date.

C. Clause 11 of the Agreement provides for deferred payment to Pasdonnay of the balance of the Purchase Price after Completion.

D. Clause 4.11.2 of the Agreement provides that the 4.1.3 Condition may only be waived by Pasdonnay in writing.

E. Clause 4.10.2 of the Agreement provides that, in the event that the 4.1.3 Condition was not satisfied or waived (by Pasdonnay under clause 4.11.2 of the Agreement) by 30 September 2002 or such other date as tl1e parties may agree in writing, then you may terminate the Agreement by giving written notice of termination to the Asset Holders.

F. The 4.1.3 Condition was not satisfied by 30 September 2002 and the parties to the Agreement did not agree in writing any other date for the purposes of clause 4.10.2 of the Agreement.

G. Apart from specifying in clause 4.11.2 that only Pasdonnay may waive the 4.1.3 Condition, the Agreement does not provide for the eventuality that you do not exercise the right of termination conferred by clause 4.1 0.2, despite the 4.1.3 Condition not having been satisfied.

H. By reason of:-

(i) the sole right of waiver of the 4.1.3 Condition being granted to Pasdonnay by clause 4.11.2 of the Agreement; and

(ii) the detrimental effect on Pasdonnay as a creditor of you for the balance of the Purchase Price under clause 11 of the Agreement, if the 4.1.3 Condition is not satisfied but you make financing arrangements to payout the HSBC Debt at Completion,

the Agreement includes a term implied by law, alternatively implied in fact, ('the Termination Condition') that, in the event that:

(a) the 4.1.3 Condition was not satisfied by the time specified in clause 4.1 0.2 of the Agreement ('the Condition Satisfaction Date'); and

(b) you did not exercise the right to terminate the Agreement under clause 4,10,2 for non-satisfaction of the 4.1.3 Condition within a reasonable time after the Condition Satisfaction Date,

Pasdonnay and Rear can terminate the Agreement by giving written notice to you for non- satisfaction of the 4.1.3 Condition.

I. Pasdonnay and Rear are now entitled to terminate the Agreement pursuant to the Termination Condition by reason of:

(i) the 4.1.3 Condition was not satisfied by the Condition Satisfaction Date; and

(ii) you did not terminate the Agreement for non-satisfaction of the 4.1.3 Condition within a reasonable time after the Condition Satisfaction Date;

(iii) the 4.1.3 Condition remains unsatisfied, HSBC having categorically rejected a request to consent to you assuming liability for the HSBC Debt;

(iv) you have now proposed in a letter dated 8 May 2003 to implement an arrangement at Completion ('the Completion Proposal') whereby you will assume liability' for the HSBC Debt at Completion for a short time, followed by you repaying the HSBC Debt, and

(v) by the Completion Proposal, as stated in your solicitors' facsimile letter dated 15 May 2003, you seek in substance to waive the 4.1.3 Condition, despite Pasdonnay having the sole right of waiver of the 4.1.3 Condition,

J. Pasdonnay and Rear have resolved to terminate the Agreement pursuant to the Termination Condition in the event that the Agreement remains on foot (which Pasdonnay and Rear deny).

K. Expressions used in this notice which are defined in the Agreement have the same meaning in this notice as in the Agreement.

NOW THEREFORE Pasdonnay and Rear HEREBY GIVE YOU NOTICE that they and each of them HEREBY TERMINATE AND TERMINATES the Agreement pursuant to the Termination Condition, subject and without prejudice to the contention of them and each of them that the Agreement did not remain on foot prior to the giving of this notice of termination."

257 On 21 May 2003 the defendants sought to further amend their defence by a plea that the plaintiff was in breach of cl 11.1 of the Agreement by failing to pay $1 million to Pasdonnay on 30 October 2002. In a letter to Williams & Hughes dated the same day, Solomon Brothers argued that as the plaintiff was thereby in material breach, it could not obtain specific performance, no interlocutory injunction should have been granted, and having been granted, should not continue except subject to immediate payment of the $1 million to Pasdonnay.

258 On 23 May 2003 Williams & Hughes sent a facsimile to Solomon Brothers responding to the notice of termination. They contended that the notice had been served on the basis of a construction of the Agreement which was unsustainable. They noted that HSBC had no wish to either continue to fund Pasdonnay nor to fund SDS but rather to be paid out at Completion of the Agreement. That was precisely what SDS proposed to do and was seeking Pasdonnay's cooperation (to which it is entitled under the terms of the Agreement) to achieve that objective.

259 A more considered response by Williams & Hughes was contained in a letter from them on 28 May in which they noted, inter alia, that SDS's obligation to pay the purchase price and Pasdonnay's obligation to transfer the business assets were mutually dependent obligations and it could not seriously be contended that SDS was under any obligation to pay the purchase price if Pasdonnay refused to transfer the assets - or vice versa. They advanced reasons for their view that SDS had not breached the Agreement and accordingly there was no obstacle to a decree of specific performance.

260 On the same date Solomon Brothers responded by facsimile letter in which they wrote:

"By refusing to pay the $1,000,000.00 required by Clause 11.1 of the Agreement, except upon completion, your client has, by your facsimile dated 28 May 2003, evinced an intention to perform its obligations in a manner which is substantially different from that required by the Agreement, and has thereby repudiated the agreement. Unless your client withdraws its repudiation by 10am on Monday 2 June 2003, our clients may accept the repudiation and terminate the Agreement."

261 In a letter dated 30 May Williams & Hughes rejected the proposition that their letter of 28 May was a repudiation of the Agreement, confirmed SDS was ready, willing and able to pay the $1 million pursuant to the Agreement upon the satisfaction of the conditions precedent to performance as provided in it and argued that even if SDS had repudiated the Agreement Pasdonnay would not be entitled to accept such repudiation given that Pasdonnay was itself in breach and had purported to terminate the Agreement.

262 Further correspondence followed from which it is apparent the parties were maintaining their respective positions culminating in a letter from Solomon Brothers to SDS dated 4 June 2003 advising the defendants thereby terminated the Agreement on the grounds of SDS's repudiation of it. They expressly asserted that the termination so effected was subject and without prejudice to the contention that the Agreement, properly construed, did not remain on foot prior to the giving of that notice of termination.

263 As at 16 June 2003, Solomon Brothers were still maintaining the position that SDS could not obtain specific performance whilst refusing to comply with material obligations in the Agreement. They argued that Pasdonnay was entitled to payment of the $1 million on the basis that if SDS should fail in its claim (for specific performance) Pasdonnay would anticipate a claim in restitution for repayment.

264 A great deal of evidence given in this case concerned the conduct of the negotiations between the parties and their individual understandings and expectations. That was in the context of a dispute about the meaning and effect of certain of the contractual provisions in the Agreement, claims that certain terms should be implied as a matter of law and a claim for rectification. Different considerations apply to the reception and use of evidence of this kind depending upon the nature of the issue being considered. Likewise, different legal principles apply to the implication of a contractual term and rectification.

265 As Mason J said in Codelfa Constructions Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 346:

"The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by a deficiency in the expression of the consensual agreement. A term which should have been included has been omitted. The difference is that with rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which is presumed that the parties would have agreed upon had they turned their minds to it - it is not a term that they have actually agreed upon. Thus, in the case of the implied term the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it. Rectification ensures that the contract gives effect to the parties' actual intention; the implication of a term is designed to give effect to the parties' presumed intention."

266 His Honour went on (at 346) to emphasise that it is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract.

267 Turning to the question whether it is legitimate to take into account the common beliefs of the parties as developed and manifested during their antecedent negotiations, his Honour observed that the broad purpose of the parol evidence rule is to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument.

"The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.

It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification."

269 Finally, at 353, his Honour returned to the essential point that the law is concerned with the presumed intention of the parties rather than their actual intentions:

"The importance of this evolution of the law as it affects the construction of contracts is that it centres upon the presumed, rather than the actual, intention of the parties. Once it is accepted that in the construction of the contract account is taken of the presumed intention of the parties it naturally follows that account should also be taken of their presumed intention when the court is called upon to decide whether a term is to be implied. The existence of the remedy 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.

However, it is equally obvious that in making the inquiry whether a term is to be implied the court is no more confined than it is when it construes the contract. For the implication of a term is an illustration of the process of construction, though differing from the more orthodox ascertainment of the meaning of a contractual provision."

"The question of an implied term was raised by Codelfa in the arbitration. It has not sought rectification of the contract. The implication of a term thus falls to be considered upon the terms of the written contract. The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used. 'The time has long passed', Lord Wilberforce said in Prenn v Simmonds [1971] 1 WLR 1381, at pp 1383-1384; [1971] 3 All ER 237, at pp 239-240, 'when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations'. Both the internal and extrinsic context in which a word or phrase is used may throw light upon the meaning with which the parties must be taken to have used it, though an extrinsic fact known to only one of the contracting parties can shed no light upon the meaning with which that word or phrase was used by the other or others."

"The necessary foundation for the creation of contractual rights and obligations is the agreement of the parties, and their agreement is equally necessary to vary those rights and obligations prior to discharge. A term implied in a contract is stamped with a contractual character because it is a part of the contract. It cannot derive that character from extrinsic circumstances which do not evidence a contract. It would be inconsistent with the foundation of contractual obligations to find an implied term in facts extrinsic to a written contract unless the contract stands in need of rectification. Of course, where a collateral contract is propounded, or where a written contract is said to require rectification, the circumstances in which the principal contract is made frequently furnish the evidence of a collateral contract or of a term to be included in the rectified contract. But where the term propounded is said to be implied in a contract, that term must inhere in its express terms, and reference to extrinsic circumstances is permissible only to construe the contract and to understand its operation."

272 Clause 4.1.1 makes Completion conditional upon the results of the purchaser's due diligence investigations being satisfactory to the purchaser in its absolute discretion. The clause states that the due diligence investigations will include a review of the matters (if any) set out in the disclosure letter from the asset holders, but there is no evidence before me of any such letter.

273 Clause 4.1.1 is to be read in the context of the agreement as a whole, including cl 4.3.1, which requires the asset holders to provide all assistance required by the purchaser to enable it to conduct its due diligence investigations.

274 The effect of these provisions was considered by Barker J in his judgment on the applications for interlocutory injunctions. His Honour concluded (supra) at [32] - [34]:

"32 In these circumstances, it is my view that any request for assistance made by SDS to either of the defendants pursuant to cl 4.3.1 must satisfy the following criteria:

(1) It must be a request that will enable SDS to conduct the due diligence investigations in relation to the Business, the Business Assets and the Patents.

(2) If the request for assistance constitutes a request for 'access to information', 'access to personnel, officers and advisers' or 'responses to queries', then the obligation to provide such access or responses is governed respectively by subcls (a), (b) and (c).

(3) In the case of all requests for assistance, the request for access for information, access to persons, responses or other assistance must be to enable SDS to make an informed decision as to whether or not to purchase the Business Assets and enter into the Licence Agreement.

33 On this view, if a request for assistance objectively appears to relate to the Business, the Business Assets and the Patents, there will be a prima facie obligation on the defendants to assist. Depending on the nature of the request for assistance, the second criterion may come into play. However, there may be forms of assistance that do not fit under subcls (a), (b) or (c) of cl 4.3.1. They will not be affected by that criterion. All requests for assistance, however, must satisfy the third criterion.

34 If must also follow, in my view, on the proper interpretation of the rights and obligations created by cl 4.3.1, that SDS is only entitled to require assistance, whether it be by way of access to 'information' or information held by personnel, officers and advisers to whom access is obtained, and information the subject of responses to queries, or otherwise, in respect of information that is within the control or possession of the defendants. In some cases, such information may be in a documentary, including electronic, form. In other cases, it may be knowledge possessed by a person. Where the request for 'information', however, goes beyond information that is currently controlled or possessed by the defendants, but on a true analysis is a request for information not currently controlled or possessed by the defendants, then it will not be a request for assistance falling within cl 4.3.1. "

275 I respectfully agree with his Honour's conclusions for the reasons expressed by him. In my view cls 4.1.1 and 4.3.1 could have no other effect.

276 This conclusion does not involve implication of a term that Pasdonnay provide "reasonable assistance" or response to "reasonable queries", as submitted by the plaintiff. It involves no more than determining the meaning of the terms of the relevant clauses as set out in the Agreement and whether or not requests for particular information or material fall within them.

277 It is apparent that by mid-August 2002, Rear and Cook were having misgivings. The precise genesis of those is unclear. Lawrie Cook appears to have had a view that some of Deloitte's requests for information were unreasonable or unnecessary. There was a concern that some of what was being requested was commercially sensitive (given that SDS was a business competitor) and not properly within the scope of the due diligence exercise. Rear had never really been happy with the terms of the Agreement and felt he had been pressured into signing it - which was the case. But he need not have signed it. I am satisfied he did so, originally in April 2002, in the somewhat naïve and quite misconceived expectation that the appendix document gave the parties a continuing opportunity to negotiate matters of substance. That is indicated by some of the matters the defendants unsuccessfully sought to raise subsequently for incorporation in the final Agreement. There was further haste with the finalisation and execution of the Agreement itself on 5 July 2002. thereafter, Mr Rear continued to be generally unhappy with the situation as it was developing.

278 Sometime prior to the meeting on 21 August 2002, Mr Rear was again approached by Mr Thompson, who repeated his earlier offer to invest in IDQ. Mr Rear was concerned that Mr Moir and SDS would not have the necessary funds to complete. Apart from information he was getting from the market place, this concern was generated because SDS had failed to pay an ordinary business debt of $17,000 to Pasdonnay and had refused a request to advance interim funding to Pasdonnay. Whether these concerns were well-founded is not to the point. They were influencing Rear's (and hence Pasdonnay's) dealings with Moir and SDS. They were, in fact, why Rear called the meeting on 21 August. Moir's responses to the defendant's repeated requests for evidence of SDS's ability to pay the $1 million cash left Rear even more unhappy, and that unhappiness was exacerbated rather than eased by subsequent communications from Mr Benson.

279 Pasdonnay effectively ceased responding to requests for information to enable due diligence to proceed, in mid-August 2002.

280 Mr Rear was becoming increasingly diverted from the parties' actual contractual obligations under the Agreement, by his general concerns and apprehensions about Moir and SDS, and in particular by the prospect that they might not be able to find the $1 million cash. This is reflected in his letter of 5 September 2002. That letter also expresses the culmination of his increasing dissatisfaction with the Agreement itself.

281 He raised first the failure of SDS to provide written evidence of its ability to pay the $1 million and also his complaints about incidents in Mt Isa and Hong Kong. None of those matters bore upon performance by the plaintiff of its contractual obligations under the Agreement. Neither Moir nor SDS was under any obligation to provide written evidence of the capacity of SDS to pay the $1 million. There was nothing in the Agreement about that. Rear's comments about the Agreement being "unsatisfactorily drawn" and "meaningless" such as to entitle Pasdonnay to repudiate it, were simply incorrect. They do, however, reveal a desire on his part (and that of Pasdonnay) to renegotiate the transaction. Moir's response of 9 September 2002, to the effect that the Agreement was valid and enforceable, was a correct statement of the position.

282 Mr Gilbert's email to Mr Benson on 13 September 2002 advising that IDQ was working on due diligence with Ernst & Young was misleading. In the circumstances it could only have been intended to convey the impression that Ernst & Young was assisting IDQ to prepare accounts for the purpose of progressing Deloitte's due diligence investigation of IDQ. In fact, Rear and Pasdonnay had engaged Ernst & Young to undertake a due diligence investigation of SDS. That was never explained to Benson and Moir.

283 Deloitte's requests for information in relation to work in progress, stock and plant and equipment made from about August 2002 were well within the proper ambit of their due diligence inquiry. Mr Gilbert's (and hence Pasdonnay's) refusal to provide that information between 2 September 2002 until after the interlocutory injunction was granted on 22 November 2002, was a failure to comply with the defendant's obligations in respect of the due diligence condition and cl 4.3.1.

284 Further, refusal of the defendants between 12 December 2002 and 23 April 2003 to comply with the plaintiff's repeated requests for Mr Gregson to be given access to the fixed business assets for the purpose of conducting a valuation of them, constituted a failure to provide all assistance required by the plaintiff to enable it to conduct due diligence and was a breach of cl 4.3.1.

285 The matters pleaded at [7] SOC have been made out.

286 Paragraph [8] SOC pleads that SDS has been unable to complete its due diligence investigation as a result of the defendants' breaches referred to in [7], and so is unable to take the benefit of the Agreement and has incurred expenses. No evidence was adduced to show what, if any, additional expense was incurred by the plaintiff as a consequence of the defendants' breaches referred to in [7]. Nor does the evidence establish that SDS has been unable to complete its due diligence investigations. True it is that it was prevented from doing so because of the refusal of the defendants to provide the information required between August and November 2002, but the final due diligence report was provided by Deloittes on 8 January 2003.

287 The plaintiff pleads (at [9] - [14] SOC) that the defendants have breached cl 5.2A, 5.3 and 6 of the Agreement in that they have failed to provide Ferrier Hodgson with documents required to enable Ferrier Hodgson to perform an assessment of the effect of the purchase of the business assets and assumption of the assumed liabilities of Pasdonnay under the Agreement and to report thereon to CBA so that it could decide whether or not to give its consent.

288 It is pleaded that the defendants have thereby failed to do all things necessary for SDS to satisfy the condition precedent in cl 4.1.4 and for SDS to have the benefit of the Agreement.

289 The documents referred to are those set out in the schedule to the Ferrier Hodgson letter dated 21 February 2003 to SDS and in the faxed letter from SDS to the defendants dated 12 March 2003.

290 A central feature of this plea is that in [10] SOC, that the engagement of Ferrier Hodgson was made by CBA so that it could assess (inter alia) whether or not to give its consent to the sale and purchase of the Business Assets and Assumed Liabilities under the Agreement.

291 The first notification to CBA of the intention to SDS to acquire IDQ was the email from Mr Benson forwarding a copy of the announcement to the ASX on 16 April 2002. There was no reference to any contractual requirement for the consent of CBA to the transaction, although the position was that it was a condition of the loan facility that SDS had with the bank that CBA consent was required for each transaction, arrangement or activity which might impact upon the bank's financial security. Mr Cowie reminded Benson of that by email on 17 April 2002, in which he sought further information. Mr Cowie's concern, naturally, was to safeguard the position of the bank. That was his purpose in the meeting he and Mr Butcher (his immediate superior) had with Mr Moir, Mr Benson and Mr Rizzo on 12 June 2002 in which he indicated that CBA was likely to support the proposed transaction subject to being satisfied by SDS that it was viable.

292 While it is true a purpose of the review of SDS Mr Cowie instructed Ferrier Hodgson to undertake by his letter of 24 June 2002 was to assess SDS's financial position and forecasts to determine whether the CBA would consent to the acquisition of IDQ by SDS, that was not the only purpose. Nor was that seen as a consent required as a contractual condition precedent to the transaction - Mr Cowie was quite unaware of the existence of that condition. In fact, he did not become aware of it until the trial.

293 Mr Benson had told Mr Cowie that Deloittes were conducting a due diligence investigation of IDQ for SDS. The bank's interest was in SDS which was where it had its exposure. Cowie expected Ferrier Hodgson to liaise with Deloittes to use their information in respect of IDQ and merge it with that relating to SDS to combine the cash flows of the two companies.

294 When Ferrier Hodgson reported to CBA in October 2002, they did so only on the operations of SDS itself. That was because Deloittes had been unable to complete the due diligence report on IDQ.

295 The information subsequently became available from Deloittes and Ferrier Hodgson were able to incorporate it in their final report to CBA in October 2003, following which CBA gave consent to the transaction.

296 It was Mr Cowie's evidence that had Ferrier Hodgson provided a report in October 2002 which showed the proposed merger would not have had an adverse impact on SDS's financial position and that the worst possible scenario would have been to "break even" for future cash flows, there would have been no reason for the bank not to give its consent. I accept that.

297 In cross-examination, Mr Cowie opined that from what CBA knew of the SDS account in November 2002, the company would not then have been able to raise $3.2 million in cash to pay out IDQ's debt to HSBC.

298 Mr Benson's letter to Mr Cowie dated 29 May 2002 advised in respect of the IDQ purchase, that final contracts had been negotiated and prepared and a copy would be forwarded to him shortly. In fact, Mr Cowie has never seen a copy of the Agreement.

299 Mr Solomon suggests Mr Benson was being duplicitous by his reference to the contract documents at that time, but I accept that was a reference to the documents which had been negotiated, prepared and signed in April 2002.

300 An attempt was made, principally through the cross-examination of Mr Cowie, to show that from July 2002 he and Mr Benson had agreed that Ferrier Hodgson would not proceed further with the review insofar as it related to IDQ, but that they would first complete their review of SDA and only then review the due diligence report prepared by Deloittes in respect of IDQ.

301 In my view, a proper understanding of the evidence about this shows that it was the bank's intention throughout that Ferrier Hodgson review SDS and the due diligence information in respect of IDQ concurrently, with the purpose of reporting upon them together, and that it was only in light of advice that Deloittes had not been able to obtain the information they required for the due diligence investigation of IDQ, that Mr Cowie agreed that the Ferrier Hodgson review of SDS should proceed notwithstanding. The clear intention was that the IDQ information would then be incorporated when it became available. The Ferrier Hodgson instruction to cover both SDS and IDQ in their report was never otherwise changed. As Mr Cowie explained (t 510), the original letter of appointment to Ferrier Hodgson specifically required a report showing whether or not there would be any adverse impact on SDS's cash flow from the purchase of IDQ and that requirement never altered.

302 One of the difficulties explained by Mr Cowie was that a bank would always want to make decisions upon the most recent information available, so that when a review extends over a period of months or accounting periods, the review can be delayed by the need to update information previously supplied.

303 The Deloitte's information not being available, Ferrier Hodgson provided a report dated 3 October to CBA on 7 October 2002, dealing only with the SDS aspect.

304 Mr Cowie received the Deloitte's due diligence report on 31 January 2003. However, he did not ask Ferrier Hodgson to immediately review that and complete their report, because he understood the IDQ transaction had by then been deferred indefinitely, pending the outcome of this litigation and it did not alter the bank's position so far as SDS was concerned at that stage, which was what he was concerned with.

305 Mr Cowie never did instruct Ferrier Hodgson to complete their report. That was because the bank's instruction to them had never changed. In fact, that was done by SDS in mid-2003.

306 Given Ms Armstrong's evidence that had she been provided with the necessary information, she could have completed her due diligence report in four weeks or less, I am satisfied that had the defendants provided the information properly required by Deloittes, Ferrier Hodgson could have completed their report in sufficient time for CBA to consent to the transaction prior to 30 September 2002. Whether the CBA would have done so at that time must, to some extent, be speculative, but I am satisfied that the breaches by the defendants of cl 4.3.1 and cl 4.3.2 at least materially contributed to the failure by the CBA to give its consent before 30 September 2002 - and hence to SDS's failure to satisfy the CBA condition.

307 That brings me to the defendants' submission that the consent of the CBA under cl 4.1.4 was never sought by the plaintiff (at least prior to 30 September 2002). As a matter of fact, that is strictly correct. It was never put to the bank that its consent was a condition precedent to the Agreement; Mr Cowie was proceeding on the basis it was the bank's requirement that the transaction could not take place without its consent - although he seemed to think that without that consent the contract would be null and void.

308 The practical reality was that the plaintiff had to obtain the consent of CBA. When finally obtained that consent was, in form, to the sale and purchase of the Business Assets and the Assumption of the Assumed Liabilities in accordance with the Agreement. Under the circumstances, I do not ultimately think anything turns on the fact the consent of the CBA was not sought expressly as a condition precedent to the Agreement. It was being sought to the transaction, which amounted to the same thing.

309 It was next submitted on behalf of the defendants, that their notice of termination given on 8 November 2002 was effective under cl 4.10.1 because at that date the CBA consent had not been obtained nor waived in accordance with cl 4.1.4.

310 They accept that under cl 4.11.1 the CBA condition could be waived by the purchaser, but that had not been done and nor had any other date for compliance been agreed by the parties in writing.

311 The plaintiff argues that because the defendants materially contributed to the non-satisfaction of the condition precedent, that condition is to be taken as having been satisfied, or put differently, the defendants are to be taken to have waived it. The plaintiff relies on G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 and Foran v Wight [1989] HCA 51; (1989) 168 CLR 385.

312 G R Securities does not go that far. That case concerned a contract for the sale and purchase of land, buildings and equipment which constituted a 62 bed hospital. The contract was evidenced by an exchange of three letters which were held to constitute an agreement to be immediately bound by main terms but subject to a further contract which, by consent, might contain additional terms. The vendor repudiated, making it impossible for the purchaser to comply with outstanding conditions. An argument by the vendor that the contract fell because of the failure of the purchaser to comply with those conditions did not succeed. The principle there applied was that where one party to a contract makes it impossible for a condition of the contract to be fulfilled, the condition is to be taken as satisfied.

313 Nonetheless, the principle is wider than there expressed. It was stated by Lord Atkinson in New Zealand Shipping Co Ltd v Societe des Ateliers et Chantiers [1919] AC 1 at 9 in a passage quoted with approval in the joint judgment of Latham CJ, Williams and Fullagar JJ in Suttor v Gundowda Pty Ltd [1950] HCA 35; (1950) 81 CLR 418 at 441:

"... But if the stipulation be that the contract shall be void on the happening of an event which one or either of them can by his own act or omission bring about, then the party, who by his own act or omission brings that event about, cannot be permitted either to insist upon the stipulation himself or to compel the other party, who is blameless, to insist upon it, because to permit the blameable party to do either would be to permit him to take advantage of his own wrong, in the one case directly, and in the other case indirectly in a roundabout way, but in either way putting an end to the contract."

314 In Foran, a contract for the sale of land was due to be completed upon a specified date. Time was of the essence. There was a condition requiring the vendors to obtain registration of a right of way before Completion. Prior to the settlement date the vendors' solicitor told the purchasers' solicitor that the vendors would not be able to settle on the stipulated date because the right of way had not been registered. Neither party attempted to settle on the due date. Thereafter the purchasers gave the vendors a notice of recision. The purchasers claimed a declaration that they had rescinded the contract. The vendors contended the notice of recision was invalid on the ground the purchasers were not ready and willing to complete on the due date for want of funds. The High Court held that the purchasers' notice of recision was not invalid and that they were entitled to the return of their deposit. Although the purchasers were required to show they were ready and willing to perform, the fact the vendors had intimated they were unable to settle relieved the purchasers of the need to show more than that they were not incapacitated from raising the necessary funds and had not resiled against doing so.

315 Mason CJ was in dissent on the outcome because he considered that the contract went off due to fault on the part of both parties. However, in his discussion of the legal principles and of the authorities, his Honour noted that a repudiation by one party of that party's concurrent obligation may constitute a waiver or dispensation of performance on the part of the other party and in that event the party excused or absolved from performance may terminate the contract and sue for damages. Whether that is the appropriate remedy in a particular case will depend upon the circumstances, including the nature of the condition. Furthermore, his Honour was of the view that the authorities established it is still necessary for the other party to show it was ready and willing to perform at the time of repudiation.

316 In my opinion the plaintiff has established that it was (and is) ready and willing to perform at all relevant times. That is still so - indeed, the plaintiff seeks an order for specific performance. Pasdonnay's breach of the due diligence requirement contributed to the failure of the CBA to give consent by 30 September 2002. That being so, Pasdonnay could not take the benefit of its own failure to comply, such as to afford a proper basis for it to terminate under cl 4.10.1. I further accept the plaintiff's submission that the defendants' refusal to provide the due diligence information, in breach of cl 4.3.1 and 4.3.2, waived the essentiality of the time stipulation that consent had to be obtained by 30 September 2002 (Foran v Wight, supra, per Gaudron J at 457 - 458).

317 The plaintiff submitted that Pasdonnay could not make time of the essence again because it was in breach. I accept the proposition it could not do so while it remained in breach, but I think the position must be that once the breach was rectified by the provision of the information necessary for Deloittes to complete the due diligence inquiry, it was then open to Pasdonnay to give notice of a time by which the CBA consent must be obtained. However, a party in such circumstances must give reasonable notice (Carr v J A Berriman Pty Ltd [1953] HCA 31; (1953) 89 CLR 327 at 348 - 349). By the notice it gave on 6 November 2002, Pasdonnay purported to again make time of the essence but the time given for the plaintiff to obtain the CBA consent was only 24 hours. That notice was patently inadequate; it was not reasonable notice in the circumstances. That being so, the termination based upon it was ineffective. In any event, at that stage, the defendants had still not provided the required due diligence information. The consent of the CBA having since been obtained, the condition precedent has been satisfied.

318 The defendants also plead that if the Agreement was still on foot on that date (which they deny) they gave legally effective notice of termination on 20 May 2003. The argument is put in the following way.

319 It is common ground that Pasdonnay has not obtained HSBC consent to the transaction.

320 By cl 4.10.2, only SDS can terminate the Agreement if HSBC, as financier of Pasdonnay, does not give its consent to the sale and purchase of the Business Assets and the Assumption of the Assumed Liabilities in accordance with the Agreement, by 30 September 2002, or such other date as the parties may agree in writing. No such other date has been agreed.

321 Under cl 4.11.2 the HSBC condition can be waived only by Pasdonnay.

322 Mr Solomon submits that the Agreement does not contemplate what is to happen if the HSBC condition is not satisfied nor waived by Pasdonnay, and SDS does not exercise its right to terminate under cl 4.10.2.

323 The defendants plead (Defence [19]) that there must necessarily be an implied term that where the HSBC condition has not been satisfied nor waived and SDS has not terminated within a reasonable time thereafter, Pasdonnay must have the right to do so.

324 Mr Solomon relies upon Byrne & Frew v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410 at 450 - 451 (per McHugh and Gummow JJ), applied in Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 176 ALR 693 at 700 ([23] per Gleeson CJ, Gaudron and Gummow JJ) for his proposition that this term is to be implied by law for the first time, as being necessary to prevent the right conferred on Pasdonnay by cl 4.11.2 to be the only party entitled to waive the HSBC condition being rendered nugatory, worthless, or seriously undermined (see Nullagine Investments Pty Ltd v Western Australian Club Inc [1993] HCA 45; (1993) 177 CLR 635 at 647 - 648, 659), or alternatively necessarily to be implied in fact so as to give business efficacy to the Agreement as a whole.

325 This is not a case in which the Agreement falls within a class or category of contract in respect of which terms will be implied by law, irrespective of the intentions of the parties. The submission is rather, that the term contended for, is to be implied as a matter of law or fact so as to give effect to the presumed intention of the parties. The distinction was discussed at 448 - 449 of the judgment of McHugh and Gummow JJ in Byrne.

326 I do not accept the submission that the term pleaded is to be implied by law. Pasdonnay's exclusive right under cl 4.11.2 to waive the HSBC condition is not rendered nugatory, worthless or seriously undermined for lack of it. HSBC is Pasdonnay's financier. The HSBC condition is for Pasdonnay's benefit. Given the securities held by HSBC over the business assets, Pasdonnay could not transfer them without HSBC consent - unless alternative finance could be found and HSBC were paid out. It is logical and appropriate that Pasdonnay have the exclusive right to waive that condition. It is also logical and appropriate that SDS as purchaser, have the exclusive right to terminate the Agreement in the absence of the HSBC condition being satisfied or waived.

327 But the defendants' argument turns on what is to happen if the HSBC condition is not satisfied nor waived, yet SDS does not terminate.

328 The first problem confronted by the submission is that the implication of the term contended for is inconsistent with the express provisions of the Agreement. The parties have directed their minds to Pasdonnay's relationship with HSBC and have specifically addressed it.

329 It may be that in particular cases, or even generally (as submitted by the defendants), the test of construing a contract to ascertain whether a party can terminate for non-satisfaction of a condition precedent to Completion, and the test of whether the condition is solely for the benefit of the other party entitled to terminate, give the same result in a particular case (Sandra Investments Pty Ltd v Booth [1983] HCA 46; (1983) 153 CLR 153 at 159).

330 Sandra Investments was quite a different case. A contractual condition requiring Council approval of a subdivision was solely for the benefit of the purchaser and it was entitled to waive performance of it. The purchaser was not able to obtain the necessary approval and at the expiration of the time for obtaining it, waived the condition and sued for specific performance. The High Court held that if the purchaser did not choose to cancel the contract when it was unable to obtain Council approval, there was the plain implication of the condition that the vendor had no right to treat it as being at an end. But the distinguishing feature of that case is that there was no express provision for termination in those circumstances.

331 In the eventuality postulated here, the defendants' submission is that the practical consequence would be that if SDS did not terminate, it could nonetheless not insist on Completion because HSBC consent is a condition precedent. It is submitted there would be an impasse.

332 It is difficult to imagine why SDS would not exercise its right to terminate were HSBC not to give consent and Pasdonnay not waive that condition, such that Completion could not in fact occur.

333 On the evidence, it is SDS's position that HSBC will give its consent if specific performance were to be ordered. That is apparently predicated on the proposition that HSBC would consent to be paid out.

334 I am prepared to accept the evidence does show that HSBC would consent to have Pasdonnay's liability to it paid out upon Completion - and HSBC would then have to discharge its securities over Pasdonnay's assets. What HSBC is not prepared to do, is to allow the assets to be transferred to SDS or anyone else subject to the purchaser's security. Nor is HSBC prepared to refinance those loans in some other way.

335 The first real contact with HSBC about this transaction was from Mr Rear in early 2002. In his telephone conversation with Mr Munrowd-Harris in February or March 2002 and at his meeting with Messrs Farr and Natoli on 22 July 2002, Mr Rear told HSBC that part of the sale involved SDS paying Pasdonnay out and SDS taking over the SDS debt - ie assuming Pasdonnay's liabilities with HSBC.

336 That was Mr Rear's understanding of what was to occur. That was the proposal to which HSBC was not prepared to consent.

337 Mr Rear's understanding of the arrangement envisaged in respect of HSBC was shared by Messrs Moir and Benson, at least at the time of their meeting with Messrs Farr and Natoli in September or October 2002. The discussion proceeded entirely upon the basis that on Completion SDS would be assuming a further liability of $3.2 million by way of the Pasdonnay debt to HSBC. The HSBC representatives were concerned to find out what the attitude of SDS's financier, CBA, was to that. Mr Moir's response was to say he had not spoken to CBA about it at that stage. Mr Farr specifically asked if Mr Moir could get the CBA to finance the take out of the HSBC debt. Mr Moir told him that the CBA would not lend SDS any more money. Mr Farr had already decided not to entertain extending the existing HSBC facilities in favour of Pasdonnay, to SDS. That conversation cemented him in that view. That was why Mr Farr confirmed his decision by telephone and letter on 26 September 2002, that HSBC was not interested in providing assistance.

338 The terms of the HSBC letter to Pasdonnay dated 26 September 2002 (ex P102) are quite clear. HSBC was not prepared to provide finance to a third party to allow the sale to proceed. It would not consider any proposal which required HSBC to continue finance. The bank's preference was (and is) to be repaid at settlement of any sale.

339 The clear and common-sense implication is that HSBC would consent to the transaction if it were to be paid out on Completion (ie at settlement). The correctness of that implication is confirmed by Mr Farr's evidence at trial.

340 Mr Solomon argues, however, that payment out of the Pasdonnay liabilities to HSBC on Completion is not contemplated by the Agreement and that was not what was agreed by the parties. Performance in that way would be something quite different to the intention of the parties as evidenced by the Agreement.

341 I think the first answer to this is that the HSBC condition expressly envisages that HSBC consent might be conditional. The condition which HSBC would impose for its consent is that Pasdonnay's liabilities to it be discharged at settlement.

342 The clause requires any condition imposed by HSBC to be satisfactory to Pasdonnay and the purchaser. There is no reason why the discharge of Pasdonnay's liability to HSBC by SDS should not be satisfactory to Pasdonnay. "Satisfaction" in that respect could not be unreasonably withheld. If SDS were not able or willing to meet such condition then it would not be satisfactory to SDS. But it is that course which SDS says it wishes to take and says it is able to effect.

343 The second, and more substantial, answer to the defendants' contention is that the Agreement itself requires the payment of the HSBC loan at Completion.

344 By cl 2.1 Pasdonnay shall sell and SDS shall buy, the Business Assets free of all encumbrances subject to the Agreement.

345 By cl 2.2 Pasdonnay is to assign and be released from, and SDS is to assume, the Assumed Liabilities, subject to the terms and conditions of the Agreement.

346 "Assumed Liabilities" mean trade debts, creditors' debts, the HSBC debt and employee entitlements.

347 By cl 6.2, at Completion Pasdonnay is to deliver (inter alia) evidence of the discharge of encumbrances including the HSBC securities, over any business asset. Pasdonnay would not be able to do that unless HSBC is paid out. The Agreement does not talk about the assignment of those liabilities to SDS.

348 The Assumed Liabilities being taken by SDS on Completion will be the trade debts, creditors' debts and employee entitlements.

349 The consent required from HSBC accordingly, is consent to the transaction on the basis HSBC willl be paid out at Completion.

350 The end result, it seems to me, is that on the evidence HSBC has not refused its consent to the transaction in the manner proposed by the plaintiff. As the matter presently stands, SDS has sought that consent by its letter of 30 April 2003 on the basis HSBC would be paid out at settlement, but HSBC requires the authority of Pasdonnay to respond. That authority has not been given. The giving of it to enable HSBC to respond to SDS is clearly something which Pasdonnay is obliged to do under cl 19.1, quite apart from its obligation under cl 4.2.3 to use its best endeavours to satisfy the HSBC condition.

351 In these circumstances the express terms of the Agreement deal with the matter and so exclude the implication of a term as contended and nor is such term required to give business efficacy to the Agreement.

352 The defendants relied in the alternative on a submission that the contract has been frustrated.

353 Frustration may apply where the parties have not dealt with the matter, or not dealt with it sufficiently (National Carriers Ltd v Panalpina (Northern) Ltd [1980] UKHL 8; [1981] AC 675 at 700, per Lord Simon of Glaisdale, approved by Aikin J in Codelfa, supra, at 375 - 383, and see also Brisbane City Council v Group Projects Pty Ltd [1979] HCA 54; (1979) 145 CLR 143 per Stephen J at 159 - 163).

354 However, this is not a case of frustration because the parties have expressly directed attention to the issue of the HSBC consent and what is to occur if it is given on condition or not given at all. For the reasons I have already indicated, the circumstances do not demonstrate there is a contractual obligation which is incapable of being performed by reason of circumstances arising which were outside the contemplation of the parties.

Payment of $1 million by 30 October 2002 - Rectification

355 The plaintiff's first submission here is that properly construed, cl 11.1.1 ("the $1 million payment clause") requires payment of the $1 million after Completion, not before. Its alternative submission is that if the terms of the clause require payment before Completion - ie before transfer of the business assets - then it does not reflect the agreement actually made by the parties and this Court should amend it by way of rectification.

356 The defendants argue the clause requires payment of the $1 million by a date certain whether or not Completion has occurred, and that was what was agreed by the parties and the remedy of rectification is not available.

357 The heading to cl 11 is "Deferred Purchase Price", but that cannot aid construction of the clause because cl 1.2.8 stipulates that any heading is for convenience only and does not affect the interpretation of the agreement. What is significant though, is that cl 11 begins with the words "the purchaser shall pay the balance of the purchase price as follows ..." (my emphasis). "Purchase price" is defined in cl 1.1.57 as meaning the purchase price for the business assets set out in cl 3.1, as adjusted in accordance with the Agreement. Clause 3.1 provides that the purchase price for the business assets shall be the total value of the net assets, estimated by the parties as $5 million. The purchase price is to be apportioned between the business assets by the purchaser after the Pre-completion Accounts have been prepared. By cl 3.3 the parties agree that the purchase price may be adjusted prior to Completion in accordance with cl 4.8 and as at the Adjustment Date in accordance with cl 8. The adjustment contemplated by cl 4.8 is the reduction or increase of the purchase price by $1.00 for every $1.00 which the value of the net assets is greater or less than (sic) $5 million.

358 At Completion, subject to the Asset Holders delivering the business assets in compliance with their associated obligations, cl 6.3 requires the purchaser to pay $200,000 of the purchase price, in the form of shares and convertible notes. That is the first payment the Agreement requires the purchaser to make ("the first tranche"). There is no requirement for payment of any deposit.

359 Clause 6.4.1 provides that the Completion Shares are to be issued to Pasdonnay at 50 cents per share "... in part satisfaction of the purchase price".

360 Title to and risk in the business assets passes to the purchaser on Completion (cl 7).

361 The Agreement requires the parties to agree within not more than 20 days after Completion, on various amounts which are then to be taken into account by way of adjustment to the purchase price (cl 8.1). If the parties fail to agree, the amounts are to be referred within five days for determination by an independent accountant (cl 8.2 and cl 8.3). If the determination results in a net amount being due to either party, then the purchase price is to be adjusted accordingly, by adjusting the number of SDS shares issued to Pasdonnay (cl 8.4).

362 The next reference in the Agreement to payment of the purchase price is cl 11. That clause deals with two further discrete payments to Pasdonnay by the purchaser. It is clear from the structure and terms of the Agreement that it assumes the first tranche of $200,000 (in the form of shares and convertible notes) has already been paid on Completion.

363 The first payment to be made by the purchaser under cl 11 ("the second tranche") is the $1 million, by the earliest of the events adumbrated in cl 11.1.1 to cl 11.1.4 respectively.

364 The second payment to be made under cl 11 ("the third tranche") is the remaining balance of the purchase price. This payment is to be paid on the Adjustment Date, which is the date five business days after the adjusted amount is finalised and determined under cl 8.1 (cl 1.1.4).

365 Although if the $1 million payment clause were read in isolation it would appear in its terms to have the meaning contended for by the defendants, read in the context of the Agreement as a whole, it plainly contemplates that the $1 million is to be paid after Completion.

366 This construction also accords with commercial reality and the circumstances as they were known to the parties as at 5 July 2002.

367 Given that the Agreement does not require payment of a deposit (with consequential provisions relating to it in the circumstances of non-completion or default by a party) it would be commercially unusual for payment of the $1 million to be required prior to delivery of the business assets on Completion and in circumstances in which Completion might not occur. Even so, if the terms of the Agreement showed that to be the presumed intention of the parties, then full effect would have to be given to that intention.

368 More significantly, the course of dealings between the parties shows clearly enough that when the $1 million payment clause was inserted into the Agreement on 2 July 2002 and at the time of its execution on 5 July 2002, the parties acted on the common assumption and expectation Completion would occur prior to 30 October 2002.

369 Evidence of the parties' actual intention is not admissible in aid of construction of the Agreement, but evidence of their common knowledge of the circumstances is. That supports the construction which in my view is to be derived from the structure and terms of the Agreement itself.

370 Given this conclusion, rectification may not be strictly necessary, but if sought, I would grant it.

371 The defendants relied on Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd [2001] VSCA 2; (2001) 3 VR 526, but that case is distinguishable. It involved an appeal against an order of Beach J granting rectification. The subject agreement provided certain matters of dispute were to be referred to the Victorian Administrative Appeals Tribunal. That was done by one of the parties, but the Tribunal held it had no jurisdiction. The applicant party sought rectification to enable the application to be made to the Victorian Civil and Administrative Tribunal (which by then had succeeded the AAT) under the Town Planning legislation, for consent to changes in the Agreement, by way of increases in certain charges. The VCAT held that having found the relevant contractual clause did express the parties' common intention, but that could not be given effect to because the Tribunal lacked jurisdiction, his Honour erred in ordering rectification. The distinguishing feature between that case and this is that there the order for rectification provided for the Tribunal to do something which was within its jurisdiction but was not what the parties had agreed to, whereas here the amendment to be added by way of rectification would give effect to the presumed intention of the parties as evidenced by the terms of the Agreement in the circumstances as they were known to, or assumed by the parties at the time.

372 I do not propose to re-state in detail the principles governing rectification. They are set out in a judgment of Kennedy J in Anfrank Nominees Pty Ltd v Connell (1989) 1 ACSR 365, 386 - 388. For present purposes I do note the party seeking rectification must persuade the court either that there was a concluded antecedent agreement which by mistake was not carried into effect in the Agreement as written, or that there is disconformity between the terms of the Agreement and what was the common intention of the parties at the time it was executed. As Anderson J pointed out in Frontier Petroleum NL v Anzoil NL, unreported; SCt of WA; Library No 970286; 4 June 1997, this will require proof of what the antecedent agreement or common intention was and the court will not generally be satisfied with such proof unless it is clear and precise and unless there has been some outward expression of the alleged agreement or common intention.

373 I accept the plaintiff's submission that the parties' subjective intention was that SDS's obligation to pay all or any part of the purchase price was dependent upon Completion first occurring. The first payment to be made by the purchaser is the $200,000 referred to in cl 6.3 and that is payable at Completion.

374 The dealings and communications between the parties before and after execution of the Agreement make it quite clear their intention was that the payments required under cl 11 were to be made after Completion.

375 Mr Restas' notes, Mr Cook's advice to Mr Rear as to the terms of the Agreement in his email written after the Witches' Cauldron dinner, the statements made by Mr Cook in Mr Rear's presence at the meeting on 21 August 2002 and in his letter, written on behalf of Pasdonnay, to Mr Moir dated 26 August 2002, all envisage that payment would only be made if completion had occurred. The parties consistently described the $1 million cash payment as a payment of the "deferred purchase price".

376 Mr Moir's agreement that the purchase price would be paid by, or on, 30 October 2002 and the amendment to the Agreement to express that, was quite clearly made on the common assumption that Completion would occur well before that date. This view is supported by Mr Cook's evidence, which made it clear this was the parties' common assumption. He said that all his discussions and communications with Mr Benson, Mr Moir and Mr Rear were on the basis that Completion would occur before 30 October 2002. As late as August 2002 the discussions between the parties were premised on the basis that Completion would occur prior to October 2002 and Mr Cook was seeking to have the Agreement altered so as to provide that Completion and payment would be simultaneous - so that payment would not occur after completion (which it was assumed otherwise would).

377 Notwithstanding the date of 30 October 2002 passed, there was no demand by Pasdonnay for payment of the $1 million, notwithstanding that completion had not occurred, until 21 May 2003.

Contravention of s 606(1) Corporations Act

378 In further answer to the whole of the plaintiff's claim the defendants plead at par 24 of the amended defence, that if completion occurs as defined in the Agreement, Mr Moir would acquire an interest in the plaintiff such as would contravene s 606(1) of the Corporations Act.

379 By s 606(1) of the Corporations Act, a person must not acquire a relevant interest in issued voting shares in a company if because of the transaction, that person or someone else's voting power in the company increases from 20 per cent or below to more than 20 per cent, or from a starting point that is above 20 per cent and below 90 per cent.

380 By s 606(1A) that prohibition is expressly made subject to exceptions. The exceptions are set out in a schedule in s 611.

381 The defendant's plea is that Mr Moir has at all material times had a relevant interest in more than 20 per cent and less than 90 per cent of the issued voting shares of SDS.

382 It is pleaded that by the Put Option Deed, which pursuant to cl 6.3.2(f) of the Agreement must be delivered to Pasdonnay at Completion, Mr Moir would grant Pasdonnay the option to sell to him all sale shares (as defined in the Put Option Deed at a price of 53 cents per share or 56 cents per share depending on whether Pasdonnay exercised the option in the first put exercise window or the second put exercise window).

383 It is pleaded further that at completion SDS will issue Pasdonnay with 2,000,000 voting shares in SDS, and that in these circumstances Mr Moir would acquire a relevant interest in the completion shares at Completion which would contravene s 606(1) of the Corporations Act.

384 The plaintiff accepts that as grantor of the Put Option, Mr Moir will acquire a relevant interest in 2,000,000 shares in SDS as a consequence of the operation of s 608(8) of the Corporations Act. He, together with related entities, is a substantial shareholder in SDS with at least 19 per cent of the voting shares and will thereby increase his shareholding.

385 However, the plaintiff relies upon the exemption contained in par 9 of the schedule in s 611, arguing that neither Mr Moir, nor any other relevant person, will have voting power in SDS more than 3 percentage points higher than they had, and will have, in the 6 months before the date the put option is executed.

386 Paragraph 9 of the schedule in s 611 provides that certain acquisitions are exempt from the prohibition in s 606(1). They include:

"3% creep in 6 months

An acquisition by a person if:

(a) throughout the 6 months before the acquisition that person, or any other person, has had voting power in the company of at least 19%; and

(b) as a result of the acquisition, none of the persons referred to in paragraph (a) would have voting power in the company more than 3 percentage points higher than they had 6 months before the acquisition."

387 The defendants submit that the exception does not apply because, before Mr Moir grants the Put Option, 2,000,000 shares are issued to Pasdonnay. At that point (my emphasis), Mr Moir's relevant interest would drop to 78.5 per cent. The grant of the Put Option would take the relevant interest above 85 per cent. So it is said the "3% creep" rule does not apply.

388 Mr Moir has a current voting power of 84.76 per cent in SDS. There are 57,287,515 total issued shares of which Moir's existing shareholding is 48,556,898 shares.

389 Section 610 of the Corporations Act provides that a person's voting power in a company is equal to that person's and his or her associates' votes divided by the total votes in the company multiplied by 100.

390 Immediately after the put option is granted, SDS will have 59,287,515 shares on issue and Moir will have a relevant interest in 50,556,898 shares. His voting power (when aggregated with his associates) in SDS will be 85.27 per cent (50,556,898 ÷ by 59,287,515 x by 100). His voting power will have increased by only 0.51 per cent.

391 The defendants' proposition depends upon doing the relevant calculation at the point of issue of the 2,000,000 shares to Pasdonnay. That is not the relevant time. The situation turns entirely on the statutory provisions, which make it clear the relevant point in time is 6 months before the acquisition, not immediately before it. This is a complete answer to the defendants' plea, which accordingly cannot be sustained.

392 Furthermore, were it to otherwise bear on the point, I note s 607 of the Corporations Act provides that a transaction is not invalid merely because it involves a contravention of s 606 - although I accept that were a transaction to involve a contravention of the law that would certainly bear upon the exercise of discretion in a claim for specific performance.

393 This is put by the defendants in two ways, at [25] and [26] of the amended defence respectively.

394 In [25] it is pleaded that throughout the period of negotiation of the Agreement between February and early July 2002, the plaintiff repeatedly failed to disclose to the ASX, in breach of ASX Listing Rules, that Dalydine Pty Ltd, a company controlled by Mr Moir, engaged in a series of separate purchase transactions of shares in SDS. It is further pleaded that throughout that time, neither Moir nor anyone else on behalf of the plaintiff informed the defendants of those purchases, notwithstanding that Moir represented to Rear that taking part of the sale price by way of shares in SDS at a value of 50 cents per share was appropriate because the plaintiff's shares were holding their own in a depressed market.

395 It is accordingly pleaded that Pasdonnay agreed to accept shares at 50 cents per share as part of the consideration in reliance on that representation and that but for it, Pasdonnay would not have entered into the Agreement.

396 Finally it is pleaded that the conduct of the plaintiff was misleading or deceptive, or likely to mislead or deceive and was in breach of s 12DA(1) of the Australian Securities and Investments Commission Act 1989.

397 That Act was superseded by the Australian Securities and Investments Commission Act 2001 ("the ASIC Act") which came into effect on 15 July 2001. the ASIC Act contains provisions corresponding to most of the provisions of the Act it superseded and the express legislative intent (s 253 of the ASIC Act) was to provide for a smooth transition from one to the other and so far as possible, ensure that individuals, bodies corporate and other bodies are to the greatest extent possible, put in the same position immediately after the commencement of the ASIC Act as they would have been under the former legislation. Section 12DA is in the same terms as its predecessor.

398 No issue is taken by the plaintiff as to the proposition that s 12DA of the ASIC Act applies with respect to the issuing of shares by a corporation. I accordingly accept that to be so (GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd [2001] FCA 1761; (2001) 117 FCR 23 and Reiffel v ACN 075 839 266 Ltd [2003] FCA 194).

399 Counsel for the defendants puts it on the basis that the matters he identifies meet the "reasonable expectation test" formulated by Gummow J in Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31, 32, to the effect that silence would be unlikely to be misleading or deceptive "unless the circumstances ... give rise to the reasonable expectation that if some relevant fact exists it would be disclosed" (a formulation adopted in Warner v Elders Rural Finance Ltd [1993] FCA 117; (1993) 41 FCR 399 at 401-2); Franich v Swannell (1993) 10 WAR 459, 474-5 and Fraser v NRMA Holdings Ltd (1995) 55 FCR 452, 465).

400 Although concerned with s 52 of the Trade Practices Act 1974, the principles set out by the Full Court of the Federal Court in Sutton v A J Thompson Pty Ltd (in liq) (1987) 73 ALR 233 at 240-241 afford useful guidance here:

"... where the allegedly misleading conduct consists in representations directed specifically towards a particular person or group of people, with a view to making a single specific sale, it is more helpful to recall the principles of law restated by Wilson J in Gould v Vaggelas (1984) 56 ALR 31 at 46. Although these related to the common law action of deceit, they are, in our view, equally applicable breaches of s 52 of the Act. The principles are:

'(i) Notwithstanding that a representation is both false and fraudulent, if the representee does not rely upon it he has no case.

'(ii) If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation.

'(iii) The inference may be rebutted, for example, by showing that the representee, before he entered into the contract, either was possessed of actual knowledge of the true facts and knew them to be true or alternatively made it plain that whether he knew the true facts or not he did not rely on the representation.

'(iv) The representation need not be the sole inducement. It is sufficient so long as it plays some part, even if only a minor part, in contributing to the formation of the contract.'

In this formulation, the possibility that a foolish person might be misled by some representation which no normal person would take seriously, is covered by the exclusion of representations which are not 'calculated to induce' entry into the contract - the test is objective, but must take into account the respective positions of the parties, including such matters as their knowledge of each other through previous dealings and their respective familiarity with the subject-matter of the contact.

Similarly, if a person is so determined to enter into a contract that he is not in truth influenced by some false representation made to him, he clearly has no case. But there is nothing in the principles cited, or in any other authority which has been bought to our attention, to suggest that a person who has been misled into entering a contract, by false representations of a type which were likely to produce that result, and in fact did so, can be deprived of his remedy because of his failure to check the accuracy of those representations: see, to the contrary, Neilsen v Hempston (1986) 65 ALR 302 at 309, and Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) 72 ALR 601."

401 There can be no doubt that Mr Rear would have much preferred the purchase price to have been paid in cash. He was retiring from business and the sale of Pasdonnay was in effect his superannuation as he saw it. SDS did not have sufficient funds in cash reserves to pay for the assets of Pasdonnay outright. Consequently, Mr Rear had to accept part of the purchase price in SDS shares if the transaction were to proceed. He was concerned that accepting SDS shares as part of the consideration would expose him to the successes and failures of the vagaries in the market for SDS shares, which was a risk he did not wish to accept. At the meeting on 5 April 2002, Mr Rear sought to increase the cash component but Moir would not agree to that. Mr Moir reassured him that the shares were a good investment and could reach $1.50 to $2.00 in the next two years.

402 During the course of the negotiations Mr Rear monitored the price of SDS shares and noted they were trading in the range from 40 cents to 45 cents per share.

403 ASX Listing Rule 3.19A requires a director of a listed company to notify the ASX if they, or any entity related to them, purchase or sell any shares in the company of which they are a director. That rule was introduced on 30 September 2001.

404 On 17 January 2002, a notice in compliance with the rule was filed on behalf of Mr Moir. That notice disclosed, inter alia, that Dalydine, a company controlled by Mr Moir, held 753,375 shares in SDS.

405 A further notice in compliance with ASX Listing Rule 3.19A was filed on 29 August 2002. That disclosed that Mr Moir, through Dalydine, had purchased a further 10,000 SDS shares on 20 August 2002, increasing Dalydine's holding from 989,042 shares to 999,042.

406 The discrepancy was noted by the ASX, which as a consequence wrote to Mr Benson on 9 September 2002 asking for an explanation. By letter dated 9 September 2002, Mr Benson explained that Mr Moir had made 27 undisclosed purchases through Dalydine, "due to an oversight".

407 Evidence was led as to the trading in SDS shares between 31 December 2001 and 30 December 2002. Mr Solomon drew particular attention to a number of them.

408 On 8 February 2002, 14,700 shares were traded, of which Dalydine purchased 3,675. The opening price was 32.5 cents; Dalydine paid 39 cents.

409 From 12 February to 26 March 2002, Dalydine was absent from the market for SDS shares. In that period 62,268 SDS shares were traded, all for less than 50 cents per share and most for less than 40 cents per share. Mr Moir bought none of those shares.

410 Dalydine re-entered the market for SDS shares on 26 March 2002, the day after SDS made its first written offer to the defendants, and then continued to buy SDS shares every day they were traded (more often than not the entire amount traded on any day) until 12 April 2002. That was the day before the April Agreement was signed.

411 During that period, Moir and Rear were in negotiations which included discussions about the SDS shares being of concern to Rear and which Moir assured him were a good investment. In his evidence, Moir conceded that he told rear on 5 April 2002 that he believed SDS shares were good value and could go to $1.50 or $2.00 per share within the next two years.

412 Mr Solomon argues that Dalydine's purchases drove the share price up in 1 cent increments from 46 cents per share to 49 cents per share.

413 Dalydine was the sole purchaser of SDS shares on each of 26 March, 4 April, 5 April and 8 April 2002. On 11 and 12 April 2002, Dalydine purchased at 49 cents.

414 On 13 June 2002, the opening price for SDS shares was 35 cents, down 10 cents on the close from the last trade on 6 June 2002. On that day, Dalydine bought 15,000 of the 17,500 SDS shares on offer at 44 cents per share. That was 9 cents (or 25 per cent) above the opening and lowest price paid that day.

415 On 26 June 2002, the day of the Witches' Cauldron dinner, Dalydine again purchased SDS shares at 43 cents per share, which was 8 cents above the opening (and lowest) price of 35 cents.

416 After the notice to the ASX was given on 9 September 2002, Mr Moir did not trade in SDS shares for 6 months. During that period the price fell considerably, to 36 cents.

417 Mr Solomon argues that the irresistible conclusion to be drawn from the evidence is that Moir was manipulating the price for SDS shares by purchasing them through Dalydine and failing to disclose those purchases to the ASX and market in breach of ASX Listing Rule 3.19A. He submits that had Rear known of this, neither he nor Pasdonnay would have entered into the Agreement.

418 Mr Moir's explanation for making the purchases was that he had some spare cash and thought SDS shares were good value at less than 50 cents and so would generally buy them below that price. His explanation for failing to disclose those purchases to the ASX was that he believed no disclosure was required unless he bought more than 5 per cent of the shares and that he did not become aware of the Listing Rule which required him to disclose all purchases until sometime between 1 and 13 August 2002.

419 On the face of it, that appears to be inconsistent with the fact that a notice in compliance with the rule was filed on 17 January 2002. On the other hand, the notice was filed by Mr Benson on behalf of SDS.

420 So far as the allegation that Mr Moir was manipulating the share price is concerned, I note that allegation does not appear in the pleadings. It is not pleaded that Mr Moir was "ramping" the share price for SDS shares - what is pleaded is that neither he nor the plaintiff disclosed the purchases to Mr Rear or the first defendant.

421 I do not accept Mr Solomon's submission that I should find Mr Moir's failure to disclose to the ASX the share purchases by Dalydine from 8 February 2002 to 13 August 2002 was to deliberately conceal the fact that he was involved in making those purchases. The submission is based on the proposition there is no credible explanation for why the notice dated 29 August 2002 (of the purchase of 10,000 shares on 20 August 2002) was given before the ASX letter of 9 September 2002. One impression I formed of Mr Moir, is that he appears to be a person who concentrates on what he sees as major issues and would not be unduly concerned about what he would regard as matters of mere detail. His evidence was that he was not aware of the ASX rule requiring disclosure until the letter of 9 September 2002 came to his attention. Given that the earlier notification was given by Mr Benson, I am not satisfied on the balance of probabilities to the contrary.

422 Whilst there can be no doubt the price of SDS shares was important to Mr Rear in the negotiations, and Mr Moir knew that, there can also be no doubt that Mr Rear knew there was no market for SDS shares. Those advising him at the time had pointed that out. He was well aware of it. That was indeed why he insisted on the Put Option being included in the Agreement.

423 So too, although it is true Mr Rear accepted Mr Moir's assurances the price of SDS shares was "going to take off" and he also accepted the value of the shares as return for intellectual property not the subject of the patent licence annexed to the Agreement, it is implicit in that arrangement that Mr Rear regarded the Put Option as adequately covering that situation should the market price of the shares fall below the return he required. By the Agreement and the Put Option, Pasdonnay and Mr Rear would exit from their SDS shareholding with a 7-1/2 per cent return per annum.

424 Although Mr Rear accepted Mr Moir's generalised assertions about the SDS share price, he was very cautious about that and proceeded only when he had satisfied himself that his position was secure even if the share price collapsed. He (and Pasdonnay) entered into the Agreement not because he accepted Mr Moir's statements about the then current future price of SDS shares, but because he was satisfied he had been able to secure his financial interests even if those statements proved to be wrong.

425 Paragraph 25 of the defence has not been made out.

426 By par 26 of the defence, it is further pleaded in answer to the whole of the plaintiff's claim that during the period of negotiation Mr Moir represented to Mr Rear that the plaintiff would be able to pay $1 million by 30 October 2002 and that SDS was trading profitably. It is pleaded that neither Mr Moir nor anyone else on behalf of SDS informed the defendants that the plaintiff was not trading profitably and in fact was depending on substantial on-going loan funding by Mr Moir and his associated entities, that SDS would not be able to pay $1 million to Pasdonnay by 30 October 2002, that CBA had been controlling SDS's operations through its Credit Management Unit since March 2000, it had cancelled overdraft trade facilities and that the bank had exposure in excess of $3.6 million beyond the value of the securities. It is then pleaded that Pasdonnay agreed to accept shares at 50 cents per share as part of the consideration, and that but for the representations as to the capacity of the plaintiff to pay the $1 million and that it was trading profitably, Pasdonnay would not have entered into the Agreement. Finally it is pleaded that by these matters the plaintiff's conduct was misleading or deceptive, or likely to mislead or deceive in breach of s 12DA(1) of the ASIC Act.

427 Mr Solomon submits that whilst the plaintiff has shown that published SDS accounts show trading losses by SDS and that Mr Rear received advice about that from his daughter Catherine and Brett Bonadao, those materials do not show the extent of difficulties in the relationship between SDS and CBA. That, I think, was so - it was conceded by Mr Moir in cross-examination. Mr Solomon further submits that Mr Rear's evidence that, had he known of the extent of those difficulties, neither he nor Pasdonnay would have entered into the Agreement, should be accepted.

428 It was Mr Rear's evidence that not only was he not told the extent of SDS's difficulties with CBA, but he asked Mr Moir about the position because he had heard rumours that SDS's bank had put restrictions on it. Mr Moir's response was that the problems with the bank had been addressed and were in the past. He conceded that he did not tell Mr Rear from what position the improvement was. In cross-examination Mr Moir agreed that he did not tell Mr Rear that a condition had been imposed requiring a $2 million reduction in the CBA debt by 30 June 2002, that SDS had no assurance of any banking facility after that date, nor that the SDS account was being managed through the CBA Credit Management Unit in Melbourne and not through normal arrangements with the bank because the bank was concerned about the information it was receiving from SDS.

429 Mr Solomon submitted that not only did IDQ have the risk of being an unsecured creditor to SDS for $1 million for two years, but it also had the risk that, if SDS collapsed, Mr Moir's wealth (based largely on a huge shareholding in SDS) would diminish or disappear as well so that he either could not, or would not, perform under the Put Option at that time. Thus it is said that the first defendant (by Mr Rear) was induced to enter into the transaction to accept shares and convertible notes in consequence of the misleading and deceptive conduct of SDS (by Mr Moir) with respect to SDS's position with CBA.

430 The issue with respect to the payment of $1 million on 30 October 2002 may be shortly disposed of. The plaintiff accepts that the representation was made, but says it was in fact in a position to pay $1 million to Pasdonnay on 30 October 2002.

432 F Moir Holdings Pty Ltd had arranged a facility with St George Bank from which $1,950,000 was available. Mr Benson's unchallenged evidence about that was the sum could be found from cashflow. Mr Cowie said CBA was prepared to consider the grant of a $1 million facility to F Moir Holdings Pty Ltd.

433 As to the second representation, Mr Moir testified he told Mr Rear the company was making a cash profit and he believed the shares would go up because of the activity and the general upswing in the market.

434 Pasdonnay and Mr Rear are, in my view, to be taken as sophisticated purchasers. They were fully aware of SDS's trading performance from SDS's annual reports, ASX six monthly reports and other public information. Pasdonnay's knowledge of SDS's accounts extended to April 2002 management accounts of SDS's manufacturing subsidiary.

435 The accounts showed a year to date loss of $1,576,564 before tax and of $1,251,585 after tax. Mr Bonadao had told Pasdonnay that SDS was "in trouble" with its banks. That fact was also clear from its annual report - particularly that for 2001 and the note to balance sheet 20.

436 It was apparent from the documents available to Mr Rear that SDS was not trading profitably although, its six monthly report at 31 December 2001, disclosed that it was trading at a "cash surplus". That is the sense in which Mr Moir seemed to use the word "profitable" when speaking to Mr Rear. Mr Cook testified that he told Mr Rear in May 2002 that SDS was not trading profitably, and indeed was making losses.

437 I am satisfied there were quite extensive discussions between Mr Cook and Mr Rear concerning the SDS financial documents and reports available to them, which clearly revealed the SDS position. Indeed, it is quite likely that his appreciation of that significantly fuelled Mr Rear's concerns about whether SDS could perform.

438 On 8 April 2002, Mr Rear forwarded to Mr Cook an email from his daughter Catherine, extracting the SDS figures to 31 December 2001. They showed significant operating losses, a very poor liquidity position, and a very large increase in current borrowings.

439 In cross examination Mr Cook accepted that the published SDS annual report for 2001 "gave a very full disclosure of the fact that SDS has moved certain liabilities from non-current into current". Note 20B to the item "Interest bearing liabilities" read:

"As a result of trading losses, the company's banking arrangements were reviewed and subsequently the bank borrowings were classified as repayable and included as a current liability".

440 Mr Cook agreed that in effect meant that the bank had decided it was going to treat the non-current borrowings as current; and that it had in effect called up SDS's borrowings.

441 The management accounts to the end of 2002 likewise showed that both SDS and SDS Digger Tools had traded at a substantial loss to the end of April 2002. They too were the subject of discussion between Mr Cook and Mr Rear.

442 In the circumstances, and on the evidence as a whole, I am not satisfied that Mr Rear relied on any assertion by Mr Moir that SDS was trading profitably.

443 Nor am I persuaded that in the circumstances there was an obligation on Mr Moir to disclose the defendants those specific matters identified at [26.2] of the defence or at [4.6] of the defendants' amended outline closing submissions, to which I have already referred. SDS's financial position was sufficiently disclosed by material already published by it in the public domain and in fact available to the defendants. The circumstances of their dealings did not give rise to any reasonable expectation that the further precise or particular details identified would be disclosed.

444 So far as the pleading the plaintiff should have disclosed the CBA had exposure in excess of $3.6 million beyond the value of its securities is concerned, it is to be appreciated that was an internal assessment by the bank made for its own purposes. There is no evidence the plaintiff was aware of it. One cannot fail to inform of, or disclose, a matter of which one was not aware (Spedley Securities Ltd (in liq) v Bank of New Zealand (1991) ATPR 41-413 at 53,065).

446 The plaintiff claims specific performance or damages in lieu.

447 The defendants rely on discretionary defences set out at [20] of the defence.

448 The first is that the plaintiff has been, and remains, in material breach by its failure to pay the $1 million by 30 October 2002. I have already dealt with that claim.

449 Alternatively, the defendants claim prejudice to IDQ through the set-off arrangements between Ausdrill and SDS for the borrowing of up to $2 million to enable the plaintiff to repay the HBSC debt on settlement. It is said the defendants will be prejudiced because allowing the advance to be offset against moneys owing by Ausdrill or any of its related entities to the plaintiff or its related entities, could harm the interests of the first defendant as a creditor for the balance of the price and that cl 11 of the Agreement by interfering with the cashflow of the plaintiff.

450 I do not accept this. That outcome was always a possibility on performance of the Agreement. The fact that the Agreement may be performed according to its terms but with consequential financial effects thought by the defendants to be undesirable from the point of view of their interests, when that has always been a possibility, is not something which ought to lead to the discretionary refusal of an order for specific performance. In any event, the contention is essentially speculative, the evidence does not show the apprehended harm to the defendants' interests in that way would be a necessary, or even likely, outcome.

451 The defendants argue that the Agreement is not suitable for specific performance because of the need for Pre-completion Accounts and the certificate under cl 4.4 and the question how HSBC is to be settled consistently with the Agreement "because HSBC will not consent to the assignment of liability performance is impossible". I have already dealt with the last point. HSBC will consent to being paid out at settlement. That is the effect of what is provided for in the Agreement.

452 It may be accepted as a practical matter, that the Pre-completion Accounts would best have been done prior to the commencement of the due diligence inquiry, or at least in conjunction with it, as Mr McPharlin said both in cross-examination and re-examination. But the fact is it was not done that way. That does not mean the process cannot now be completed as contemplated by the Agreement. Furthermore, as Mr McPharlin agreed in re-examination, preparation of the Pre-completion Accounts would require the vendor to provide the purchaser with details of the assets, liabilities, gross turnover, expenses and all other details that one would see in a balance sheet and profit and loss account and in that way the burden would accordingly be substantially on the vendor. The point advanced does not stand in the way of specific performance.

453 The issue whether SDS is ready, willing and able to perform is to be determined in light of all the relevant circumstances. In Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604 at 619, Mason CJ and Dawson J, having acknowledged that in general, the plaintiff in an action for specific performance must establish that he has performed the contractual obligations to be performed on his part before the commencement of the action and that he is ready and willing to perform his future obligations under the contract, noted that:

"But the plaintiff is not required to show that he has complied strictly with all his obligations under the contract (Fullers' Theatres Ltd v Musgrove [1923] HCA 12; (1923) 31 CLR 524, at p 550) or that he is ready and willing to comply strictly with his future obligations. As Barwick CJ pointed out in Mehmet v Benson ((1965) [1965] HCA 18; 113 CLR 295, at p 307):

'The question as to whether or not the plaintiff has been and is ready and willing to perform the contract is one of substance not to be resolved in any technical or narrow sense. It is important to bear in mind what is the substantial thing for which the parties contract and what on the part of the plaintiff ... are his essential obligations.'

See also the comment of Windeyer J that readiness and willingness 'relates only to essential terms' (1965) 113 CLR, at p 314). In that case the purchaser obtained specific performance despite his failure to pay an instalment of the purchase price in time, a failure which would have entitled the vendor, had he chosen, to terminate the contract. Specific performance secured to the vendor the consideration promised to him by the purchaser, namely the purchase price, compensation being awarded for the purchaser's delay in making payment. See as well the remarks of Lord Radcliffe in Australian Hardwoods Pty Ltd v Commissioner for Railways [1961] 1 WLR 425, at p 432; [1961] 1 All ER 737, at p 742), which may state the position too adversely to a plaintiff in so far as they may be taken to suggest that a plaintiff who is in breach of an interdependent obligation cannot obtain specific performance."

454 At 621 their Honours noted that the statement that the plaintiff bears the onus of proof of readiness and willingness may need some qualification insofar as it relates to the plaintiff's ability to perform by paying the purchase price at some indefinite time in the future. Their Honours referred to Mehmet v Benson [1965] HCA 18; (1965) 113 CLR 295 at 315 in which Windeyer J was prepared to participate in ordering specific performance, even though he was not convinced that the plaintiff was then ready and willing to complete the contract. That was because his Honour thought the order should have contained a proviso to meet the situation if the plaintiff had proved unready to complete by payment in full.

455 I am satisfied that SDS has demonstrated it is ready, willing and able to complete as at the date of trial, which I take to be the relevant time (see Spry "Equitable Remedies", 6th Ed, 217-218, J C Williamson Ltd v Lukey [1931] HCA 15; (1931) 45 CLR 282, 298 and Price v Strange [1978] Ch 337).

456 Byrne J expressed the position with clarity in Eskin, Erenli & Balkaya v Trewin, unreported; SCt of Vic; 8307/91; 15 June 1995:

"The requirement that a party who seeks specific performance should be ready and willing to perform is, in a case such as this, another way of saving (sic) that where a plaintiff seeks to obtain specific performance of a contract, the court must be satisfied that the defendant is also obtaining performance of the obligation on which the plaintiff's right depends, a question which must be considered at the time of trial."

457 SDS will be able to pay out HSBC if ordered to complete. It has a facility of $2 million from AusDrill Ltd and Mr Benson's unchallenged evidence was that the balance may be funded out of cashflow. I accept the plaintiff's submission that it is material to bear in mind that because Pasdonnay refused to provide SDS with the necessary due diligence information, the occasion for SDS to make application for other facilities never arose.

458 I turn to the defendants' final submission against an order for specific performance. It is that specific performance should be refused on the grounds that the plaintiff's affidavits in support of the interlocutory injunctions misled the court, and were false.

459 Mr Solomon refers in that regard first to Mr Benson's affidavit sworn 15 November 2002 (ex D1). At [9] Mr Benson deposed that on 12 June 2002, SDS's directors, Fred Moir, Vincent Rizzo and he met with Mr Cowie, SDS's Account Manager, and Gary Butcher, a Senior Manager of CBA, to review SDS's financial position and to discuss the Drill Quip purchase transactions. He deposed that at that meeting Mr Cowie and Mr Butcher said in effect, that CBA was likely to support the Drill Quip purchase subject to SDS satisfying CBA that the transaction was viable. Mr Solomon says that last statement was false.

460 It was Mr Cowie's evidence that at that meeting he said words to the effect that CBA was likely to support the proposed acquisition of Pasdonnay's assets by SDS if SDS satisfied CBA that its cashflows after Completion (that is, the cashflows of the merged businesses) would be satisfactory. Mr Benson's statement correctly reflected that position.

461 At [17] of his affidavit of 15 November 2002, Mr Benson referred to a meeting between Mr Moir, Mr Rizzo and him with Mr Cowie and Mr Butcher on 22 October 2002 for the purpose of providing the CBA representatives with an update of SDS's financial performance and to discuss amongst other things, the Drill Quip purchase. He stated that at that meeting Mr Cowie and Mr Butcher said, in effect, that CBA required Deloittes' due diligence investigations for SDS to be completed and that Ferrier Hodgson would then review Deloittes' due diligence report and then report to CBA, before CBA would provide consent to the Drill Quip purchase as contemplated by cl 4.1 of the Agreement.

462 The notes of that meeting (ex P166) read in relation to the purchase of IDQ:

"The purchase of the competitor, Drill Quip, has been deferred, as the directors of Drill Quip have not been prepared to provide Deloittes with all relevant information to complete the due diligence. Fred Moir stated that he had instructed his solicitors to commence legal action for breach of contract against Drill Quip".

463 Under the heading "MOIR PRIVATE GROUP OF COMPANIES" appears item 3:

"Purchase of Drillquip business - $1m. The existing contract between SDS and Drillquip states that SDS has to pay Drillquip $1m after 90 days of the contract being signed. While the existing contract is in dispute and is now the subject of legal action, Fred Moir wishes to have the availability of the $1m in case the dispute is resolved and he has to prove to the Court that he can complete the conditions of the contract."

464 Mr Solomon submits that apparently the second and third paragraphs of Annexure KVB-12 to Mr Benson's affidavit are false. That annexure is a facsimile message from Thomsons to Mr Peter Bogue dated 8 November 2002. The impugned paragraphs read:

"Commonwealth Bank of Australia ('CBA') has been unable to complete its assessment of the purchase because your clients have failed to comply with their obligations under Clause 4.3.1 of the Business Asset Sale Agreement ('the Agreement') - that is, because SDS is not, absent the completion of due diligence, able to satisfy CBA it should give its consent.

In those circumstances, your clients are not entitled to terminate the Agreement for non satisfaction of condition precedent 4.1.4 and our client rejects your clients' purported termination."

465 It seems to me the first of those paragraphs could not be said to be a false statement of the position at that time. The second of them merely asserts the plaintiff's view of the legal position in light of what is said in the preceding paragraph.

466 Mr Solomon then refers to Mr Benson's affidavit sworn 17 October 2002 (ex D51). He asserts that [19] and [22.3] are false.

On 7 August 2002, Mr Moir and I met Geoff Farr, the Western Australian State Manager of HSBC and Mr Natoli. Because, as appears from the paragraphs above, Pasdonnay has effectively prevented SDS from completing its due diligence investigation, SDS has not been able to make a proposal to HSBC so as to enable it to obtain the Bank's consent to the sale and purchase."

468 Certainly that meeting did occur. What was discussed at that stage was the possibility of HSBC consenting to SDS taking over Pasdonnay's liability to HSBC. Mr Farr made it quite clear HSBC would not be interested in that. The paragraph makes no mention of that. It was true that as at October 2002 SDS had not made a formal proposal to HSBC for the purpose of obtaining its consent to the transaction and at that time Pasdonnay had effectively prevented SDS from completing its due diligence investigation, the two were not necessarily linked in quite the way that paragraph implies. There would have been no real point in SDS making a formal proposal to HSBC before completion of the due diligence inquiry - the outcome might have been that SDS chose not to proceed. What is in the paragraph is not incorrect, but it is artfully drawn and comes close to demonstrating less than the degree of frankness required on an application of that kind. Ultimately, however, I take the view it should not carry me to the point of a discretionary refusal of the relief claimed.

469 In [22.3] Mr Benson deposed that SDS had the capacity to raise funds to re-finance, or to satisfy HSBC it could perform all the obligations under Pasdonnay's HSBC loan and to meet all its other obligations under the Agreement including that under cl 11.1. He deposed that the obligation under cl 11.1 would be satisfied by a facility offered by St George Bank to F Moir Holdings Pty Ltd. In that regard he annexed as "KVB9" a copy of an offer of facility from the bank to F Moir Holdings Pty Ltd dated 4 October 2002. In that letter, St George Bank offered F Moir Holdings Pty Ltd a bill acceptance and discount facility of $1,950,000. Mr Solomon refers to Mr Cowie's notes at p 65 of exhibit P166 of the meeting on 22 October 2002. Those notes show the Moir Group had existing debts of $2.84 million and that Mr Moir was seeking further borrowings from CBA, including to enable payment of the $1 million under the Agreement. Whatever Moir's dealings with CBA at that time may have been, the evidence does show that the St George facility was available. I am not satisfied the assertion of falsity has been made out.

470 Finally, for the defendants, it is said that the statements at p 3 of Thomsons' letter to Mr Bogue dated 30 September 2002 (p 110 of Mr Benson's affidavit of 17 October 2002), concerning the status of dealings with HSBC at that date, particularly at point 4, were false.

471 The matters referred to are a mix of responses by Thomsons to earlier assertions in correspondence on behalf of the defendants, and requests for further information or material. It is not apt to characterise them as false statements.

472 None of the matters advanced on behalf of the defendants in support of their contention that specific performance should be refused as a matter of discretion have been made out. I am satisfied that an order for specific performance should be made.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : SDS CORPORATION LTD -v- PASDONNAY PTY LTD & ANOR [2004] WASC 26 (S)

HEARD : 4-6, 10-11 NOVEMBER 2003 & 17 FEBRUARY 2004

BETWEEN : SDS CORPORATION LTD (ABN 73 007 980 645)

Practice and procedure - Civil trial - Chamber summons for leave to re­open trial - Application to re­open after completion of evidence and addresses but before judgment

1 ROBERTS-SMITH J: The trial of this action was held in November 2003. Judgment was reserved.

2 On 10 February 2004, whilst judgment was still pending, the plaintiff filed a chamber summons by which it sought orders that the trial be re-opened and the plaintiff have leave to adduce further evidence.

3 The chamber summons was supported by the affidavit of Mr Ken Vincent Benson sworn and filed on 9 February 2004 and that of Laura Anne Del Fuoco sworn and filed on 10 February 2004. the defendants filed an affidavit of Ian Kenneth Bellamy sworn and filed 11 February 2004 in opposition.

4 The chamber summons came on for hearing on 17 February 2004. Judgment was for the plaintiff.

5 Having heard the submissions of counsel, I refused the plaintiff's application, with costs.

6 Judgment in the action proper was delivered on 27 February 2004.

7 When dismissing the plaintiff's application to re-open on 17 February 2004, I did not give reasons and indicated I would not do so unless requested by the parties.

8 Counsel for the plaintiff at that time requested that I publish reasons.

10 I shall not set out the details of the action nor the evidence. They are set out in my judgment delivered 27 February 2004 (SDS Corporation Ltd v Pasdonnay Pty Ltd & Anor [2004] WASC 26). These reasons should be read with that.

11 In his affidavit Mr Benson deposes that SDS sought to lead evidence of capital raising it had undertaken. He considers that the capital which SDS had raised is relevant to the question of SDS's ability to perform its obligations pursuant to the Business Assets Sale Agreement ("the Agreement") which it entered into with the defendants.

12 He deposes that the prospect of capital raising and placement was first raised in a meeting on 19 November 2003 with the representatives of Bell Potter Securities in Adelaide. In December 2003 SDS secured commitments from investors to contribute the sum of $16.5 million by way of the issue of 30,000,000 fully paid ordinary shares in SDS at an issue price of 55 cents. The commitments from the investors were expressed to be subject to SDS obtaining shareholder approval for the capital raising at an extra-ordinary general meeting of SDS which was scheduled for 23 January 2004. The resolution for placement of the new shares to the investors was passed at that meeting. An announcement to that effect was subsequently made to the ASX on 27 January 2004.

13 According to Benson, on 28 January 2004 SDS received $16,046,250 representing the proceeds of the issue of 13,000,000 fully paid ordinary shares in SDS less costs associated with the capital raising. On 28 January 2004, SDS issued 30,000,000 full paid ordinary shares.

14 He deposes that the sum of $1,500,000 has been set aside and is held on deposit by SDS as part of a larger sum that SDS has held on deposit. With it SDS is able to satisfy its obligations under the Agreement in the event the court makes an order for specific performance.

15 Benson further deposes that SDS seeks to lead evidence in relation to the movement in its share price on the ASX since judgment was reserved on 11 November 2003. He attaches a schedule disclosing SDS's share price for the period 11 November 2003 to 4 February 2004, and states that SDS's then current share price was 69 cents. Finally, he deposes to his belief that SDS's share price is relevant to the question whether the defendants are likely to suffer loss as a consequence of reliance on the alleged representations pleaded in the defence and in particular whether the discretion to grant relief has been enlivened.

16 The purpose of Ms Del Fuoco's and Mr Bellamy's affidavits was simply to annex copies of correspondence between the solicitors for the parties, as to the plaintiff's intention to seek an order re-opening the trial, the evidence sought to be led and the reasons for the defendants' opposition to that.

17 However, it is from that correspondence that the evidentiary issues sought to be raised by the plaintiff and the defendants' response to them, may be discerned.

18 For the plaintiff it is said that SDS has recently raised $16.5 million by way of share issue and that is relevant to its ability to settle pursuant to the Agreement. Further, it is said the then current (February 2004) share price is 75 cents and it has been at similar levels for three months or so. That is relevant to the question whether the respondents suffered or are likely to suffer any loss as a consequence of the representations pleaded in the defence and in particular whether the relief sought should be granted.

19 For the defendants it is said that evidence concerning the share issue and its impact on the share price is not fresh evidence. That position is argued because it is contended the plaintiff must have taken steps or developed a strategy concerning that before the trial ended and that was the time for the issue to have been litigated. It is further argued that evidence concerning the recent share price is no answer to the defendants' claim of loss. That was said to be because recent trading at a particular price is not evidence of the volume of shares traded each day in the relevant period, and the parties who traded (and in particular whether any buyer or seller had any connection with Mr Moir) or whether the defendants would be able to sell the shares to be granted to them, at particular prices, at all, or without collapsing the market.

20 The arguments of the solicitors for the parties descended to greater particularity than this, but what I have already said is sufficient for the purposes of this application.

21 There are no affidavits from deponents who would give the further evidence the plaintiff is seeking leave to adduce. For that reason, Mr Kilpatrick, who appeared for the plaintiff, applies to have the chamber summons adjourned to a special appointment so that witness statements can be filed and discovery given. The programming directions suggested by the plaintiff mean the trial could not be re-listed until early March 2004. I am listed to be on circuit that month and otherwise listed, committed or out of the jurisdiction until the end of September 2004. Then there would be the time taken for the further actual hearing.

22 Mr Kilpatrick submits that notwithstanding the listing difficulties, the proper time for determining the application would be when all the witness statements were before the court and the position could not properly be assessed until then.

23 Alternatively, Mr Kilpatrick submits that if the application were to be dealt with today, it would have to be on the basis the plaintiff's evidentiary case was taken at its highest.

24 In the further alternative, he submits that I could hand down "preliminary reasons" and if the outcome turned on either a lack of liquidity or the representations regarding the share price pleaded in the defence, then at that stage I could consider whether to allow the plaintiff to re-open, on the basis the application to do so had been made at the first available opportunity.

25 Mr Solomon points out the action has been tried in the Expedited List, the defendants are under continuing serious interlocutory restraint of their business and there is the very serious health issue of the second defendant. He submits that any delay would be extremely prejudicial to the defendants. There are likely to be evidentiary issues which would need to be canvassed and they could take some time. Further discovery might be required and there may be a need for the defendants to issue third party subpoenas.

26 The relevant principle in determining an application for leave to re-open is "whether the interests of justice are better served by allowing or rejecting the application" (Urban Transport Authority v Nweiser (1992) 28 NSWLR 471 at 478, per Clarke JA (with whom Mahony and Maher JJA agreed).

27 Different considerations may apply depending upon whether the case is simply one in which the hearing is complete (Watson v Metropolitan (Perth) Passenger Transport Trust [1965] WAR 88) or one in which reasons for judgment have already been delivered. In the former situation (which is this case) the primary consideration is that of the embarrassment or prejudice to the other side (Smith v New South Wales Bar Association [1992] HCA 36; (1992) 176 CLR 256 per Brennan, Dawson, Toohey and Gaurdron JJ at 267).

28 To my mind, the circumstances referred to by Mr Solomon carry substantial weight. They demonstrate very real prejudice to the defendants should the application be granted. In the circumstances, and even taking the proposed evidence for the plaintiff at its highest, the interests of justice are in my view clearly better served by rejecting the application.

29 The plaintiff's chamber summons will be dismissed.