Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd & Ors

EQUITY - GENERAL PRINCIPLES - FIDUCIARY OBLIGATIONS - GENERAL PRINCIPLES - Where Chief Executive Officer of a company, entered into contract with employer; contract not in best interests of employer; CEO benefited from contract - Whether the CEO is in breach of fiduciary duty;

EQUITY - GENERAL PRINCIPLES - FIDUCIARY OBLIGATIONS - CONFLICT OF INTEREST AND DUTY - Whether CEO, an employed fiduciary, could negotiate such contract with employer;

EQUITY - GENERAL PRINCIPLES - FRAUDULENT MISREPRESENTATION AND INNOCENT MISREPRESENTATION - THE REPERESENTATION - NON-DISCLOSURE AND CONCEALMENT - Whether employer's consent induced by fraudulent misrepresentation;

EQUITY - GENERAL PRINCIPLES - EQUITABLE DEFENCES - LACHES AND DELAY - WHAT CONSTITUTES GENERALLY - Whether concealment and misrepresentation by CEO brought about delay relied upon as defence;

EQUITY - GENERAL PRINCIPLES - EQUITABLE DEFENCES - ACQUIESCENCE - WHAT CONSTITUTES - Whether employer acquiesced in breach by fiduciary;

EQUITY - GENERAL PRINCIPLES - REMEDIES AND PROCEDURE - OTHER CASES - Whether property acquired by fiduciary by breach of duty is held on constructive trust.

Allcard v Skinner [1887] 36 Ch D 145, cited;

Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23; (2005) 79 ALJR 993, cited;

Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51, cited;

Baburin v Baburin (No. 2) [1991] 2 Qd R 240, cited;

Barnes v Addy (1874) LR 9 Ch App 244, cited;

Bennett v L and W Whitehead, Ltd [1926] 2 KB, cited;

Boardman & Anor v Phipps [1966] UKHL 2; [1967] 2 AC 46, cited;

Boral Resources (Qld) Pty Ltd v Pyke [1992] 2 Qd R 25, cited;

Bristol and West Building Society v Mothew (1998) Ch 1 at 18, cited;

Chan v Zacariah [1984] HCA 36; (1983-1984) 154 CLR 178, discussed;

Concut Pty Ltd v Worrell (2000) 75 ALJR 312, cited;

Cook v G.S. Deeks & Ors [1916] UKPC 10; [1916] AC 554, cited;

Daly v The Sydney Stock Exchange Ltd [1986] HCA 25; (1985-1986) 160 CLR 371, cited;

Dunne v English [1874] LR 18 EQ 524, cited;

Erlanger v The New Sombrero Phosphate Company & Ors (1878) 3 App Cas 1218, discussed;

Evans v Benson & Co [1961] WAR 12, cited;

Furs Ltd v Tomkies & Ors [1936] HCA 3; (1936) 54 CLR 583, cited;

Fysh v Page [1956] HCA 13; (1956) 96 CLR 233, cited;

Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298, discussed;

Hospital Products Ltd v United States Surgical Corporation & Ors [1984] HCA 64; (1984) 156 CLR 41, cited;

Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443, cited;

Maguire & Anor v Makaronis & Anor [1997] HCA 23; (1996-1997) 188 CLR 449, cited;

Marquis of Clanricarde v Henning [1857] EngR 848; (1861) 44 ER 855, cited;

O'Sullivan & Anor v Management Agency and Music Ltd & Ors [1985] QB 428, cited;

Regal (Hastings) Ltd v Gulliver & Ors [1967] 2 AC 134, cited;

The Lindsay Petroleum Company v Hurd & Ors (1874) LR 5 PC 221, discussed;

Transport Commission (TAS) v Neale Edwards Pty Ltd [1954] HCA 21; (1954) 92 CLR 214, cited;

United States Surgical Corporation v Hospital Products International Pty Ltd & Ors (1983) 2 NSWLR 157, cited;

Warman International Ltd & Anor v Dwyer & Ors (1994) QCA 012b, cited;

With v O'Flanagan [1936] Ch 575, cited;

Yorke & Anor v Lucas [1985] HCA 65; (1985) 158 CLR 661, cited.

Law Reform Act 1995 (Qld)

Trade Practices Act 1975 (Cth)

Mr T Bradley for the first and second defendants added by counterclaim and the fourth party to the counterclaim;

Mr K Barlow for the third party to the counterclaim

Allens Arthur Robinson Lawyers for the first to fifth defendants;

Minter Ellison Lawyers for the first and second defendants added by counterclaim and the fourth party to the counterclaim;

Macrossans Lawyers for the third party to the counterclaim

14 2.0 Claims Against Defendants Added by Counterclaim and Plaintiff

141 2.24 Analysis and Conclusion Concerning Fiduciary Duty and Representations

[1] These reasons for judgment comprise four main parts. In the first part I give a brief introduction to the parties involved in the litigation, an outline of the facts and issues, a chronology of important events and observations upon the witnesses who gave evidence. In the second part I deal with the claims against the plaintiff and the defendants added by counterclaim, but predominantly the first defendant added by counterclaim: Mr Kenneth John Foots. In the third part I deal with the plaintiff's claim against the third party to the counterclaim: Mr Kenneth Joseph Hill. In the fourth part, I deal with Mr Hill's claim against Mr Foots.

[2] The facts are quite complex. For the sake of clarity, I traverse the evidence on issues as they were raised and events as they occurred as close to chronological order as I could sensibly manage. The headings in the reasons form a guide to the issues/events to which I had to have regard when reaching conclusions about the legitimacy of the various claims. I state my reasons for judgment throughout.

[3] The second, third, fourth and fifth defendants are joint venturers who together own a large open-cut coal mine ('the Ensham mine' or 'the mine') located near Emerald in central Queensland. Their respective interests in the joint venture and the mine, differed. The third defendant, together with the second defendant, which was its wholly-owned subsidiary, shared in the assets and profits of the joint venture to the extent of 85 per cent. The fourth defendant had a ten per cent interest in the mine and the fifth defendant five per cent. The third defendant ('IQ') is the subsidiary of a large Japanese resources and energy company. The fourth defendant ('EPDC') is also a subsidiary of a large Japanese power generating company. The fifth defendant ('LG') is a subsidiary of the well known Korean company. The first defendant ('Ensham') is a company owned by the joint venturers, the extent of whose shareholding accords with their respective interests in the joint venture.

[4] Ensham operates and manages the mine on behalf of the second, third, fourth and fifth defendants, each of whom appointed one of its officers a director of the company. For some of the time which is relevant to this action, the Ensham mine was being developed. That process required a substantial amount of capital expenditure from the joint venturers. The planning and timetable for the development, including its budget, and the overall supervision of the implementation of the plan, was the responsibility of a Management Committee, the members of which were a representative from each of the four joint venture companies. Despite being a subsidiary of IQ, the second defendant ('Bligh') also appointed one of its officers as a director of Ensham and sent a representative to the Management Committee. Ensham's senior managers attended meetings of the Management Committee, for obvious reasons.

[5] The joint venturers regulated their relationship between themselves and to the Ensham project by an Operating Agreement which provided that Ensham should take custody and control of all property acquired for the purposes of the joint venture. All items of property were to be held by Ensham in its own name on trust for the joint venturers.

[6] Pursuant to the Operating Agreement, Ensham owned and operated two draglines at the mine, which were used to strip overburden from above the coal seams to allow coal to be extracted. Both draglines were large: one, a Marion 8050 had a bucket capacity of 47 cubic metres and the other, a P&H 9020 had a bucket capacity of

[7] The plaintiff ('Southern Cross') is the owner of a smaller dragline, a BE 1260 with a bucket capacity of 25 cubic metres. By a written agreement ('dragline agreement') dated 30 July 1999 the plaintiff hired its dragline to Ensham for five years for a consideration fixed by reference to the volume of overburden removed. The agreement was conditional upon Southern Cross executing contracts (i) with Bucyrus Australia Pty Ltd ('Bucyrus' or 'BE') to maintain the dragline in good working order during the term of the dragline agreement and (ii) with Westpac Banking Corporation ('Westpac') for the loan of $2,300,000 to enable

Southern Cross to buy the dragline. The dragline agreement became unconditional on 3 December 1999.

[8] Bucyrus is the subsidiary of a large American-owned engineering company, which specialises in building large machines. In Australia, its business is the construction, repair, sale and maintenance of draglines.

[9] Prior to its acquisition by Southern Cross the small dragline was at Blackwater mine, which was operated by Central Queensland Coal Associates ('CQCA') a joint venture between BHP Coal Pty Ltd ('BHP'), Mitsubishi and Queensland Coal Trust ('QCT'). The machine was about 30 years old and was surplus to its owners' requirements. It was in reasonably good condition. Each of BHP, Mitsubishi and QCT had to agree to the sale of the dragline. The mode of Southern Cross' acquisition had some complexity. Bucyrus contracted with the owners to buy it. Bucyrus then, by separate contract, sold the dragline to Southern Cross for the same purchase price. As I have mentioned Bucyrus also contracted with Southern Cross to maintain the dragline in good working order during the term of the dragline agreement. As part of that arrangement it was to keep on hand a supply of spare parts to allow speedy repairs should the dragline break down.

[10] On 16 September 2002, Ensham acted to rescind the agreement following which it took possession of the dragline. Since then it has continued to operate the dragline but has not paid Southern Cross for its use. Southern Cross seeks a declaration that it is the owner of the dragline and an injunction restraining Ensham and the joint venturers from preventing Southern Cross from taking possession of the dragline. As well it seeks to recover monies due under the dragline agreement and damages for wrongful detention of the dragline. The parties have agreed that if Southern Cross should succeed on its claim it is entitled to recover $11,175,905.20 plus $2,608.77 per day from 25 July 2005 to the date on which the dragline is returned to it.

[11] Ensham and its owners have defended Southern Cross' claim to be paid for the use of the dragline and have counterclaimed against it, as well as against Kenneth Foots ('Mr Foots'), Foots Pty Ltd, Little Digger Mining Ltd ('Little Digger') and

Norma Foots ('Mrs Foots'). These parties are respectively the first to the third and the fifth defendants added by counterclaim. Raymond Bird ('Mr Bird') had been the fourth defendant added by counterclaim. The actions to which he was a party were settled in the ninth week of the trial.

[12] (a) Mr Foots was employed by Ensham as its Chief Executive Officer between

(b) Mr Bird was employed by Ensham as its Mine Manager between 1 September 1992 and 21 June 2001.

(c) Mr and Mrs Foots are husband and wife. They were at relevant times shareholders and directors of Foots Pty Ltd (which was earlier known as Foots Consulting Pty Ltd). Mrs Foots resigned her office and transferred her shares on 30 October 2002.

[13] Southern Cross was a company acquired by Mr Foots in December 1998. At its inception Mr Foots was its only director and Foots Pty Ltd was the sole shareholder. Mr Bird (and others) subsequently became directors of Southern Cross. After the dragline agreement was made, Messrs Foots and Bird, by their respective companies, were the major shareholders in Southern Cross. Each held 25.5 per cent of its share capital.

[14] On 22 May 2001 Little Digger acquired all of the share capital of Southern Cross so that it became Little Digger's wholly-owned subsidiary. The shares in Little Digger are owned by Foots Pty Ltd, Mrs Foots, Mr Bird and members of his family. At all relevant times the directors of Little Digger were Messrs Foots and Bird.

[15] Ensham has alleged against Mr Foots that he owed it fiduciary and contractual duties of good faith and that, in breach of those duties, he failed to disclose to Ensham and the joint venturers facts material to Ensham's decision to make the dragline agreement with Southern Cross. It is also alleged that, in breach of those duties of good faith, Mr Foots put himself in a position where his personal interest as a shareholder of Southern Cross conflicted with his duty to Ensham and he preferred his own interests, and those of Southern Cross, to his employer's. Additionally, it is pleaded that Mr Foots made a number of fraudulent misrepresentations which induced Ensham to make the dragline agreement. Subsequent to the date of the agreement but before it became unconditional Ensham expressed a desire to terminate it but was induced by further misrepresentations to believe that it could not lawfully do so. The belief was induced by Mr Foots concealing his prior breaches of duty and making further misrepresentations.

[16] Mr Foots' alleged misconduct is said to constitute contraventions of section 52 of the Trade Practices Act 1975 (Cth) ('TPA'), for which both Mr Foots and

[17] The agreed rate of remuneration paid to Southern Cross for the hire of the dragline has returned substantial profits to Southern Cross and its shareholders, particularly Mr Foots, Mr Bird and Little Digger. Ensham seeks to recover those profits. There are derivative claims to recover profits, or for compensation or damages, against the shareholders of Southern Cross, Mr Foots, Foots Pty Ltd and Little Digger. An account of profits is also sought against Mrs Foots in respect of her shareholding in Little Digger. The parties have agreed that should Ensham succeed in its counterclaim, and elect to recover damages and/or compensation rather than an account of profits, the amount for which judgment should be given is $2,460,000.

[18] Ensham alleges against Southern Cross that it dishonestly assisted Mr Foots in his breach of fiduciary duties to Ensham by which he received profits from the dragline agreement which should have gone to Ensham, his beneficiary. He, of course, was a director of Southern Cross and a principal shareholder.

[19] Ensham claims that the dragline is held on a constructive trust for it by reason of

Mr Foots and Southern Cross' breaches of fiduciary duty.

[20] Mr Foots defends these allegations on the grounds that:

(a) any fiduciary or contractual duties of good faith he owed to Ensham did not extend to the negotiations for the dragline agreement;

(b) Ensham did not wish to purchase the dragline itself so it lost no opportunity to its fiduciary;

(c) Ensham gave its informed consent to the transaction with its fiduciary; therefore Mr Foots denies misleading Ensham and asserts that he gave the joint venturers all relevant information;

(d) Ensham acted subsequent to the making of the agreement in such a manner as to indicate its acquiescence in, or affirmation of, the agreement;

(e) by deed dated 21 June 2001 Ensham released Mr Foots from any claim or proceeding arising out of, or relating to, his employment, other than claims for gross negligence and/or wilful misconduct. The release applies to Ensham's claims against Mr Foots.

[21] The claims against the other defendants to Ensham's counterclaim are predicated upon those parties having assisted Mr Foots in his dealings with Ensham, which were in breach of his fiduciary duties, with knowledge of the breach. On this basis the claims are made against Southern Cross, Little Digger, Foots Pty Ltd and

Mrs Foots to recover profits from the agreement, in the case of Southern Cross, and dividends declared by Southern Cross from its profits, in the case of the other defendants.

[22] Ensham's counterclaim against Southern Cross is for rescission of the dragline agreement, a declaration that the dragline is held on a constructive trust for Ensham, an account of profits made by Southern Cross from the agreement, or alternatively equitable compensation and/or a declaration avoiding the dragline agreement pursuant to section 87 of the TPA. Southern Cross' answer to the counterclaim substantially replicates Mr Foots' defence to the counterclaim against him.

[23] Little Digger also defends the action against it on the same grounds. As well it denies that its shareholding in Southern Cross, or any dividends received from that shareholding, were received as a consequence of Mr Foots' alleged breaches of fiduciary duty. Little Digger contends that Ensham has acted inconsistently with its claim to a beneficial interest in Little Digger shares in Southern Cross by seizing the dragline and electing to claim an account of profits from Southern Cross.

[24] In its resistance to Ensham's counterclaim against it, Southern Cross has joined Kenneth Hill ('Mr Hill') as a third party. Mr Hill was employed by Ensham as the Manager of Technical Services between March 1996 and June 2001. He was a senior manager with qualifications in mining and accounting. He also became a shareholder and director of Southern Cross. He prepared a number of financial analyses which were given to Ensham during the negotiations for the dragline agreement. Southern Cross complains that Mr Hill should have known that it would rely upon him to prepare the analyses with reasonable care, and that errors in the models would expose Southern Cross to subsequent claims by Ensham. Accordingly Southern Cross claims Mr Hill owed it a duty to take that care. Separately it is alleged that Mr Hill owed Southern Cross duties as a director to act in good faith in the best interests of Southern Cross and to discharge his duties with reasonable care. If, as Ensham alleges, the analyses were flawed then Mr Hill breached his duty to Southern Cross and it claims damages, or an indemnity or contribution towards any liability that Southern Cross may have to Ensham or the joint venturers pursuant to their claims.

[25] Mr Hill accepts that he owed Southern Cross a duty of care in preparing the analyses after he became a director on 12 July 1999. He defends the claim against him on the basis that the analyses were prepared in accordance with instructions given to him by Mr Foots with whom he discussed their contents and results. He asserts that his work was done relying upon the information given to him by

[26] A further ground of defence is that Southern Cross has not suffered any loss by reason of his alleged negligence because, had Ensham been given the information which it is said the analyses should have contained, it would not have made the dragline agreement and Southern Cross would not have made any profits and is not entitled to damages in respect of profits it must reimburse Ensham.

[27] To complete the circle Mr Hill joined Mr Foots as a fourth party to the counterclaim Ensham brought against him. The basis for Mr Hill's claim against Mr Foots is that, as a director of Southern Cross, he owed the same duties to the company and breached them by providing Mr Hill with erroneous information for inclusion in the financial analyses. Accordingly Mr Hill seeks contribution or indemnity against

[28] Finally Ensham seeks to set aside the transfer of real and personal property from

Mr Foots to Mrs Foots between 26 September 2002 and 5 February 2003 on the ground that the transfers were intended to defraud creditors and are voidable pursuant to section 228 of the Property Law Act 1974. Another impugned transfer concerns 170,000 shares in Little Digger which Mr Foots caused Foots Pty Ltd to transfer to Mrs Foots. Ensham claims that Mrs Foots received those shares knowing that Foots Pty Ltd had acquired them as a result of Mr Foots' breaches of fiduciary duty he owed to Ensham. It asserts that there is a constructive trust of the shares in its favour.

[29] The claims against Mrs Foots and the claims pursuant to section 228 of the

Property Law Act against Mr Foots were ordered to be tried separately and subsequently to the trial of the other claims.

[30] Despite the complexity and circularity of the actions the dispute is relatively confined. It turns upon what was said at a number of meetings between

September 1998 and December 1999 about the small dragline, and what the joint venturers knew about the transaction which led to its acquisition by Southern Cross.

[31] The content of the last paragraph may suggest an unwarranted optimism. A very large number of witnesses gave evidence at the trial. Their evidence in chief, with two or three exceptions, was given in the form of written statements. The statements from many of the witnesses are long and detailed. The evidence touches upon numerous meetings and conversations between the joint venturers' representatives, Mr Foots and Ensham's other senior managers, as well as other parties who became involved in the provision or operation of the dragline. There were frequent meetings between the joint venturers, or some of them, and Mr Foots (and/or his subordinates) with respect to the negotiations for the dragline agreement. On Ensham's side each joint venturer was represented by two or three employees who attended the same meetings. Each of them has given evidence. As well the joint venturers changed their Australian representatives regularly so that the number of witnesses who attended meetings multiply.

[32] To do justice to the respective cases it is necessary to deal in some detail with many discussions involving many witnesses over a lengthy period.

[33] A brief chronology of the major events with which the actions are concerned may assist with an early understanding of what is involved.

10 June 1997 Mr Foots provided Ensham with a 'third dragline option study' recommending the early acquisition of another larger dragline anticipated to cost about $20,000,000.

15 August 1997 IQ informed Mr Foots that it wished to defer the purchase of a third dragline for as long as possible.

16 January 1998 Mr Foots informed the joint venturers that he would request a budget expenditure of $20,000,000 in 1998 to buy another (third) second-hand dragline.

14 December 1998 Southern Cross was incorporated. Mr Foots was the sole director and Foots Pty Ltd was the sole shareholder.

April 1999 Mr Foots on behalf of Southern Cross applied to Westpac for a loan to buy the small dragline.

1 June 1999 Mr Foots proposed to the joint venturers that a company, to be owned by Ensham's employees, should hire the small dragline to Ensham. The company was Southern Cross.

12 July 1999 Mr Hill and Mr Bird became directors of Southern Cross.

11 August 1999 Bucyrus agreed to sell the dragline to Southern Cross.

12 August 1999 Mr Foots distributed an Information Memorandum offering shares in Southern Cross to selected employees of Ensham. He predicted dividends of at least 15 per cent in the first three years of the dragline agreement, 100 per cent in the fourth year and 175 per cent in subsequent years.

23 August 1999 BHP contracted to sell the small dragline to Bucyrus.

25 October 1999 The directors of Southern Cross approved the allotment of shares in the company.

3 December 1999 Westpac approved finance to Southern Cross and the dragline agreement becomes unconditional.

7 June 2001 Mr Foots' employment was terminated peremptorily.

16 September 2002 Letters rescinding the dragline agreement were sent by Ensham to Southern Cross, Mr Foots and Foots Pty Ltd.

[34] The Japanese witnesses who gave evidence on behalf on Ensham were able to communicate in English with varying degrees of fluency. Some, like Mr Fujiwara and Mr Ishizaki, testified wholly in English. Despite their linguistic competence their testimony exhibited occasions of confusion or misunderstanding and sometimes an inability to express themselves clearly. Other witnesses gave evidence partly in English and partly in Japanese, with the aid of an interpreter. A number of witnesses made no attempt to testify in English, though all of these professed to be able to read and write the language. It would appear that some, like Mr Nagano and Mr Nakatsuka, could converse in English in a social or relaxed business setting but were unable to do so in the more intimidating and formal setting of the courtroom.

[35] Despite criticism of the approach there is no doubt that demeanour is of some assistance in forming an opinion as to witnesses' credibility. Somewhat to my surprise I thought that it was helpful in determining whether or not to accept evidence from some witnesses who testified through an interpreter. Having said that I should record that I saw no reason to doubt the evidence of any of the witnesses called to support Ensham's case. A sustained attack was made on

Mr Ishizaki's credit. The submissions did not, however, cause me to doubt

Mr Ishizaki's overall honesty or recollection. For reasons which I will try to make apparent I regarded Mr Foots' testimony as thoroughly dishonest. He was a most unconvincing, unsatisfactory and untrustworthy deponent. A difficulty for Mr Foots is that the evidence includes a number of his documents which contain serious misrepresentations of fact. Each document was prepared by Mr Foots to advance his pecuniary interest. As well his testimony brings him into conflict in important respects with other witnesses, such as Messrs Nienaber, Gazzard, Quinn, Pegler and Harley, all of whom were disinterested and impressive witnesses. There was nothing in the evidence, nor their manner of giving it, of Mr Hill and Mr Dawson (with one exception in Dawson's case) which would lead me to disbelieve them. For reasons which I will explain, some caution is needed in assessing Mr Hill's testimony, which is important. I thought his evidence should be accepted.

[36] I have taken the narrative for 'the third dragline' substantially from the evidence of Mr Ishizaki because he attended nearly all of the relevant meetings and, with one exception, made a note of what had been said. As well he was the IQ employee with particular responsibility for the Ensham mine. I have thought it safe to rely upon his account. I thought he was a reliable and honest witness. There is no doubt that at times he struggled to comprehend what was being put to him or to express himself clearly in response to questions. The gist of what he said was plain enough.

[37] There are two respects in which Mr Ishizaki appears to have been mistaken. One concerns his account of the signing of the dragline agreement on 30 July 1999 and the other the events at a meeting on 14 July 1999. What I regard as Mr Ishizaki's mistaken account of these two events does not lead me to disbelieve him or regard him as an unreliable witness.

[38] Their impaired facility to comprehend and express themselves in English, which the joint venturers' representatives to a greater or lesser extent possessed, must have meant that in their dealings with Mr Foots there was considerable scope for misunderstanding or incomprehension. This would have been so whether or not there was any chicanery on Mr Foots' part. Any attempt by him to mislead or deceive a Japanese audience would have been made easier by that lack of facility.

[39] Mr Andrew Smith, IQ's solicitor for many years, noted that:

'... generally, the Japanese representatives had difficulty understanding what I was saying to them and then would ring me up to ask me to explain it ... I would often put my advice in writing because it was my experience that they preferred to have the time to digest the advice and understand what was being conveyed to them as opposed to ... simply (providing) oral advice.

It is unlikely that I gave any oral advice to (Mr Ishizaki on 3 June 1999). As a matter of practice I did not do so because I had found, by experience that representatives of Idemitsu would give an impression that they understood, by nodding their heads, but in fact did not understand advice given to them.'

In oral testimony Mr Smith said (T 1512.19 - 32):

'I usually asked (Mr Nakatsuka) to put his requests in writing.

Is that because you found it difficult to understand each other intelligibly? - It shortened the process of understanding. Over a period of time when we discussed things, I would understand what he needed, but it took some time; sometimes a great deal of time.

I take it you are saying there was a comprehension difficulty between you and the various Japanese gentlemen from Idemitsu that you spoke to over the years? - Yes, to a greater or lesser extent. Usually their command of written English was much better than their command of spoken English.'

[40] I would accept Mr Smith's assessment in its entirety given my reading of the evidence in this case and my observation of the witnesses.

[41] It was the habit of the Japanese representatives of the joint venturers who attended meetings with Mr Foots or other senior managers to make notes of what was said and to compile a written memorandum of the meeting afterwards, both as a record and as the basis for a report to be transmitted to their head offices in Tokyo. There are, accordingly, usually several records of the same meeting. As well the Ensham employees, usually Mr Dawson, would often prepare a minute of meetings. Formal minutes were kept of the Management Committee meetings. With the exception of one document, which is discussed at some length, the contemporaneous written records appear to be reliable, though incomplete on occasions.

[42] The communications between the defendants' officers in Australia and their superiors in Asia were in Japanese. The documents have been translated for the purposes of the trial and, despite some initial quibbling about the accuracy of translation, the effect of the original communications appears to have been caught in the English versions, though there well may be nuances of meaning and subtleties of expression that are not captured. On some occasions a witness who was bilingual was asked to read in English what he had written in Japanese. Once, a little irregularly but without objection, the interpreter was asked to give the English rendition of a Japanese passage.

2.0 CLAIMS AGAINST DEFENDANTS ADDED BY COUNTERCLAIM AND PLAINTIFF

[43] Idemitsu Kosan ('IK'), which is the Japanese parent of IQ, had a number of mining interests in Australia in addition to the Ensham mine. It owned a mine at Muswellbrook, as well as one at Ebenezer near Ipswich. By a process which need not be recounted in any detail IK became the owner of a wholly-owned subsidiary, Apollo Resources Pty Ltd ('Apollo'), which then became the owner of a number of coal mines in Australia (although not Ensham) and which supervised and managed IK's coal mining interests, including Ensham.

[44] Despite its enormous size and wealth IK is a privately owned, family, company. Its principal business is the production and sale of petroleum products. It has interests in coal, but these amount to only about three per cent of IK's business.

[45] Apollo's office was initially in Sydney but moved to Brisbane on 1 July 1999. Its senior staff consisted mostly of IK employees who were seconded to Apollo, usually for a term of only two or three years. The terms of the secondment, at least of the more senior people, included appointment to directorships in Apollo, IQ and Bligh, or some of them. As well an IK employee at Apollo would represent IQ at Management Committee meetings; another would represent Bligh. They would have responsibilities to Apollo and IK not only for the Ensham project but for IK's other coal mines in Australia.

[46] IQ was the largest shareholder in Ensham. It held 85 per cent of the shares and

85 per cent of the joint venturers' interest in the Ensham project; its employees supplied the chairman of the Management Committee. The other joint venturers tended to follow IQ's lead in matters concerning the development or operation of the Ensham mine. That is not to say they did not take their responsibilities seriously, but their smaller interest and lesser financial commitment meant that IQ played a larger role in the management and decision-making of the joint venture.

[47] A consequence of the rotational policy by which IK's employees served relatively short terms in Australia meant that new and inexperienced employees were required to deal with negotiations or decision-making processes which pre-dated their appointments and about which they had no prior knowledge.

[48] There can, I think, be no doubt that the joint venture representatives placed great confidence and trust in Mr Foots' knowledge, experience and integrity. They had little choice, but it is clear that they regarded him highly as a competent and knowledgeable Chief Executive. Their faith in his skill and competence was, no doubt, well placed. As I have indicated, and as will emerge more clearly, their faith in his honesty was misplaced. None of the representatives had any particular knowledge of coal mining in general, nor the operation of open-cut coal mines in particular, or the characteristics and operational requirements of draglines.

Mr Foots had such knowledge, acquired from a lifetime in mining, and decades in coal mining.

[49] The senior managers employed by Ensham were often referred to as 'the Foots team' or the 'management team'. In fact the senior managers had all been recruited by Mr Foots, or on his recommendation. This was true of Mr Bird, Mr Hill,

Mr Edmondson and Mr Dawson, who between them occupied all the important managerial roles in Ensham. Mr Edmondson was the Commercial Manager and Secretary. Mr Dawson was initially appointed as Exploration Manager but soon became the General Manager of Marketing. Mr Hill was appointed later as Manager of Technical Services. Mr Edmondson died before the action commenced.

[50] There is no doubt that Mr Foots, and his 'team', did manage the development of Ensham's mine efficiently, economically and expeditiously. A particular achievement was to secure a non-unionised workforce which gave Ensham an enviable record of industrial harmony and minimal stoppage in production or disruption to supply by reason of industrial action. This achievement was particularly prized by the joint venturers.

[51] It is equally clear that Mr Foots appreciated that his superior knowledge and experience gave him an ascendancy over the joint venture representatives in his dealings with them. They were in no position to argue with him about the correctness of his assertions or recommendations. In particular Mr Foots understood that the joint venturers did not 'have the dragline experience that we had' and that in dealing with them on the subject of draglines 'they were at a disadvantage.' (T 2401.50 - 58)

[52] Mr Foots did not bother to conceal his realisation that he was superior to the joint venture representatives in knowledge of things pertaining to coal mines and, therefore, power with respect to decisions affecting the operation of coal mines.

Mr Ishizaki, upon taking up his duties in Australia in July 1998, was reminded by Mr Foots that he had recently been 'working as a trainee in the coal department' in IK in Tokyo. Mr Ishizaki recognised the comment as a deprecation and a claim by Mr Foots to dominance in their relationship.

[53] Mr Nagano had a somewhat similar experience. When he expressed his anxiety about mining in an area which had not been part of the original proposal for Ensham, Mr Foots told him that he was a 'green boy' and should not worry because he, Foots, 'was very experienced'. Mr Nagano was, in fact, a mature, educated and intelligent man.

[54] Mr Foots was capable of rudeness when he became, or professed to become, impatient with the joint venturers' ignorance. On one occasion he told Mr Ishizaki that 'an employee like you is referred to as a post box in Australia. You have no powers of decision and confer with head office on everything.' The second part of the observation may have been accurate, though the personal slight was unnecessary. There is also evidence from Mr Matake that on occasions when

Mr Foots was questioned about a recommendation, so that the joint venturers could have a better appreciation of what this involved, Mr Foots was dismissive.

[55] Of more immediate relevance to the issues in the trial is the fact that, as well as possessing vastly superior knowledge about coal mining, Mr Foots had all the relevant information concerning the contentious third dragline. He and his team were Ensham's and the joint venturers' only source of information about operations at the mine and the prudence or desirability of acquiring the third dragline.

[56] IQ's interest in the Ensham mine began in the 1980s when it, and some other companies, acquired exploration and prospecting rights. By 1991 more than $26,000,000 had been spent on investigating the coal deposits and IQ had paid its share. In 1988 IQ bought out the second defendant's ('Bligh') interest in the joint venture for $6,120,000 by acquiring all the shares in that company. In 1989 IQ paid a little over $3,000,000 to acquire the interests of two other joint venturers. There were, however, difficulties involved in developing the mine. In large part these were due to disputes which arose between IQ and those other joint venturers who complained that their interests had been unlawfully circumvented by IQ and that they still had an interest in the mining tenements. This led to protracted litigation in this court which was not resolved until 1992. The result was that IQ, Bligh and LG were confirmed as the owners of the mining tenements but were obliged to pay substantial compensation to their former partners. At that time EPDC had not joined the joint venture. The judgment left outstanding a dispute between the joint venturers and their former partners about the right to mine over land adjacent to the Ensham mine but necessary for its mining activity. The exploration and extraction rights were held by the former partners. By mid-1992 a compromise had been negotiated which allowed the joint venturers to exploit that land.

[57] In the meantime Ensham had proceeded to develop an area outside the main mine area, known as Yongala.

[58] The litigation delayed the development of the mine and the commencement of mining. As a result the joint venturers lost opportunities to sign contracts for the sale of coal. In October 1991, however, they managed to secure a contract to supply coal to a Korean power company.

[59] In July 1992 the joint venturers acquired their first dragline, a second-hand Marion 8050 from Capricorn Coal Management Pty Co. ('Capcoal'). There was some delay in its acquisition. It had first been inspected in February but IQ would not commit itself to the expenditure until the litigation was resolved and the joint venturers' right to exploit the mine was established. The dragline did not start work immediately at the mine which was not then at a stage where the dragline could be utilised. Instead it was leased back to Capcoal until March 1993 when it was moved to Ensham and commenced stripping overburden at Yongala.

[60] Mr Foots was employed by Ensham pursuant to a contract evidenced by a letter dated 23 July 1991 to him from Ensham, which he and Mr Horii, who was at the time chairman of Ensham's board of directors, both signed. The contract relevantly provided:

You shall be responsible for ensuring the implementation of the objectives of (Ensham) ..., in accordance with the policies and directions of the board of directors ... and the Management Committee ..., and subject to such controls ... you will be responsible for:-

- Review and finalisation of the development programme and budget.

- The formulation of an appropriate management structure.

- Operation of the Ensham Project on a competitive basis.

- All other matters customarily performed by a person holding the position of Chief Executive Officer ...

During the term of your employment, you shall devote your full time and attention to, and use your best efforts in furtherance of the interests of (Ensham) ...

Your employment will commence on 1 August 1991 and shall continue until 31 July 1994 and will be extended thereafter for successive periods of one year each unless either you or (Ensham) gives notice ...

You shall be paid a remuneration package of $250,000 per annum ...

You shall not, either during or after your employment with (Ensham), except as authorised by (Ensham), use or make known to any other party any confidential information obtained in the course of your employment.'

[61] An attachment to the letter was headed 'MAIN ACCOUNTABILITIES'. It stipulated that Mr Foots was to:

'8. Prepare and present to the Board the Company's development and operation plans.

10. Prepare recommendations regarding matters requiring Board approval and present the same to the Board.

11. Ensure a fully informed Board through accurate and timely reporting on a regular basis in accordance with the Board requirements.'

[62] Mr Inoue replaced Mr Horii, who returned to Tokyo in July 1994. Mr Inoue was appointed chairman of the Management Committee during his secondment to Apollo between mid-1994 and 1998. Shortly after his appointment Mr Foots' term of employment expired and an extension was negotiated. By a letter dated

13 July 1994 from Mr Inoue to Mr Foots and signed by them both, Mr Foots' appointment as Chief Executive Officer of Ensham was extended until 31 July 1997. His remuneration was increased but the terms of the previous contract were largely replicated. Mr Foots' duties specifically referred to were:

•

'The development and operation of the Ensham and Yongala Mines.

•

Review, finalisation and implementation of development programmes and budgets.

•

The administration of the management structure, and the formulation of any modifications.

•

Operation of the Ensham Project on a competitive basis.'

This contract did contain a new term, by which Mr Foots was to be paid incentives:

•

Two per cent of any savings which reduced the amounts expended on Stage 2 of the Ensham Coal Project ... to less than $20,720,000; and

•

20 cents per tonne of coal produced in excess of 1.1 million tonnes per annum (MTPA) not to exceed $40,000.

The latter term was included at the request of Mr Foots who advised Mr Inoue that it was 'normal'.

[63] In 1994 Ensham was producing coal from the Yongala pit which was Stage 1 of the mine's development. The dragline purchased in 1992 was operating there. Stage 2 of the development was the exploitation of coal from the main pit at Ensham itself. This activity was underway by July 1994. At this time the joint venturers turned their attention to the third stage of development. Quite lengthy consideration was given to whether the project should move to Stage 3 or whether that development should be deferred.

[64] In May 1995 Mr Foots recommended to Ensham that it purchase a second dragline in order to increase coal production. The dragline was the most cost-effective means of gaining access to the coal. In July 1995 Mr Inoue notified Mr Foots that IK had not approved advancing to Stage 3 of the development and that acquisition of a second dragline was considered part of that stage. Accordingly Mr Foots' recommendation to acquire the second dragline was not acted on. Mr Inoue requested Mr Foots to prepare, for the consideration of the Management Committee, a detailed feasibility study for the further development of the Ensham mine. On

3 January 1996 Mr Foots delivered his report entitled 'Ensham Coal Project Stage 3 Development - 25 Year Feasibility Study'.

[65] It is worth quoting from the report because it provides a description of the mining operation at Ensham, and its development, as well as dealing with some aspects of relevance concerning the proposed use of draglines. It read, in part:

'This report has been prepared following a request from Idemitsu to prepare a study detailing the development of the third stage of the Ensham Project to give a nominal production level of 5.5Mtpa from the opencut coal reserves through to the year 2019.

This report sets out a strategy for the further development of the ... Mine and covers Stage 3 which consists of a commitment by the Joint Venturers to construct:

•

Dragline Nos. 2 and 3 and associated mining equipment.

•

Coal treatment facilities (crushing, stockpiling and train loading).

•

Small coal preparation plant.

•

Support services and facilities including workshop/store and office.

•

Ensham village accommodation.

•

Rail spur line.

•

Water management system.

•

Roads, access and haul roads.

The implementation of this strategy results in an increase in coal production from the current 1.8Mtpa to 3.8Mtpa by JFY 1998 and to 5.5Mtpa by 2000 following the Stage 3 capital expenditure program of A$268.514 million and results in a rate of return to the Joint Venturers of 29.3%.

The Ensham Joint Venture was established in November 1990 to develop the Ensham coal reserves ...

In order to satisfy contractual coal supply obligations a small scale operation was commenced in the Yongala pit with first coal rail to the port in September 1993. This Stage 1 operation commenced at an annual production of 0.9Mtpa, using a secondhand dragline purchased from German Creek.

With legal impediments removed to the establishment of a mine in the lower stripping ratio Ensham area the Joint Venture moved to utilise these coal reserves by committing to the development of Stage 2 with first coal being mined in December 1994 from a contract truck and shovel operation. The dragline moved from Yongala to this area in March 1995 and production now has doubled to 1.8Mtpa.

The mine plan for Stage 3 development allows for the existing 8050 Marion dragline to strip overburden ... until a new and larger dragline is commissioned in 1998. At this time the 8050 dragline will move south ... and commence work in Pit B. The new machine will move to Pit D.

Contract removal of overburden will continue in Pit C and then will supplement the draglines by pre stripping. ...

Coal extraction will continue as presently (practiced) using hydraulic excavator or front end loaders mining carefully in whole of seam or (piles) as needed to satisfy quality considerations. Coal will be hauled by bottom dump truck or by side dumping road trains to the Ensham coal treatment facility.

The key milestone dates associated with Stage 3 development are:

•

Stage 3 approval by Joint Venturers 1 April 1996

•

Coal Treatment Facility and Loadout 1 May 1997

•

Rail Spur Line and Balloon Loop 1 May 1997

•

Dragline No. 2 Commissioned 1 September 1998

•

Dragline No. 3 Commissioned 1 April 2000

•

Coal Preparation Plant 1 April 2001

1.15

Project Cost Estimates and Economics

The capital costs ... including the completed Stages 1 and 2 plus Stage 3 are estimated in current terms at $385.7 million ...

Stage 3 has been divided into Stage 3(a) which is up to completion of the second dragline in September 1998 and then Stage 3(b) which is at completion of the third dragline and a small preparation plant.'

[66] The utilisation of draglines was dealt with in greater detail in the body of the report:

The two present pits are mined using an 8050 dragline in D pit, and a contract truck and shovel fleet in C pit. Truck and shovel stripping is necessary in C pit due to large thicknesses of sand which pose difficulties for a dragline operation.

Large walking draglines will be the main excavation units. The study considers three machines, a smaller 8050 Marion dragline currently in operation, with a bucket size of 47 cubic metres, and two larger, new draglines with 75 cubic metre buckets. All machines essentially have similar operating dimensions with the larger draglines each accounting for an overall production rate of 19.84 million cubic metres per year, and 13.0 million cubic metres per year for the 8050.

The mine development hinges around three principal events, the first being the completion of the rail spur and loadout facility, and the second and third being the completion of each of the new draglines. All other activities such as contract stripping, and the smaller dragline movements are dependent on these events.

The rail spur will be completed in May 1997, while the first new dragline will be operational in September in 1998 and the second at the commencement of JFY 2000.'

"JFY" is a reference to the Japanese financial year, which commences on 1 April.

[67] The reference to 'truck and shovel operations' is a reference to the removal of overburden by mechanical shovels and trucks. Shovels, in this context, come in a variety of types but at Ensham they were excavators of the familiar kind. Excavation by truck and shovel was performed as a preliminary to large scale overburden stripping by a dragline. This was referred to as 'pre-stripping'. As well light, sandy soils were better suited to excavation by mechanical shovels rather than draglines. Ensham's truck and shovel contract was with Golding Contractors Pty Ltd ('Golding'). The overburden removed by dragline or excavator was measured in 'bank cubic metres' or 'bcm'. Golding charged $1.55 per bcm.

[68] The report also dealt with the sale of coal from which the joint venturers' profits would come. The economics of the project were predicated upon the mine producing and selling 5.5 million tonnes of coal per year from the year 2006 to the year 2019. Ensham did not have committed purchasers for those quantities.

[69] The report estimated the cost of the third dragline, to become operational in the year 2000, to be $55,000,000. Its commencement was to coincide with the increased production of coal to 5.5 million tonnes per annum ('MTPA'), which was to remain constant as the volume of coal produced and sold until the year 2019.

(a) a second dragline with a 75 cubic metre bucket capacity would be acquired as part of Stage 3a;

(b) a third dragline, also with a 75 cubic metre bucket capacity would be acquired as part of Stage 3b;

(c) Ensham's first dragline, the Marion 8050 would commence work in B Pit in 1998;

(d) there would be some mining operations in the flood plain where overburden would be removed by truck and shovel operations; and

(e) these initiatives would result in an increase in coal production from 1.8 MTPA to 3.8 MTPA by 1998 and to 5.5 MTPA by 2000.

[71] In May 1996 Mr Foots recommended to the joint venturers that Ensham buy a new P&H 9020 dragline with a bucket capacity of 89 cubic metres for an estimated cost of $54,000,000. 'P&H' was the name by which Harnischfeger of Australia Pty Ltd was known. The Management Committee which met on 31 May 1996 approved the purchase of that dragline and formally gave their approval for the mine to be developed to Stage 3(a). On 5 June 1996 P&H duly contracted to build the new dragline which was completed, about seven weeks late, in August 1998.

[72] In February 1997 EPDC became a joint venturer by acquiring a ten per cent interest in the Ensham coal project from IQ. EPDC's parent company was a very large power generating company in Japan which bought substantial quantities of coal. At about this time EPDC's Japanese parent entered a long-term contract for the purchase of coal from Ensham. It took an interest in the joint venture to ensure the continuity of supply. The agreement provided for the delivery of coal over 15 years. The volume of coal to be sold increased from 300,000 tonnes in the first year to 2,000,000 tonnes in the fifth and each subsequent year of the contract.

[73] It was a term of the contract that the coal should contain no more than 700 parts per million of chlorine. If the chlorine content exceeded 1,000 parts per million the buyer was entitled to reject the shipment. This requirement posed a problem for Ensham because its coal was relatively high in chlorine. There were deposits of coal which had a low chlorine content and the contract specification could be met by blending coal from these deposits with other coal to provide an average chlorine content which met the specification.

[74] The contract to supply coal to EDPC was of particular importance to Ensham and the joint venture. As Mr Dawson explained, a 15-year contract was exceptional. Mostly coal sales contracts were for one, two or three years. As well the quantity of coal to be sold each year was unusually large. The contract was, therefore, valuable to Ensham. For its part EDPC stressed their need for the reliability of coal supply for their power stations. This was of paramount importance to EPDC and, therefore, Ensham. Mr Dawson explained:

'Our Japanese customers (more than any others), and especially EDPC are extremely sensitive to, and anxious about, the possibility of any disruption in the supply of coal ... EPDC is, without a doubt, our most demanding customer.'

[75] Part of the land included within the Ensham mine site was a flood plain of the Nagoa River. The permits and approvals which gave Ensham the right to extract coal made an exception of the flood plain, but following negotiations with the relevant authorities in about May 1997 the flood plain was included in the area from which coal could be extracted. The result was that a significant quantity of coal covered by relatively thin layers of overburden was available for mining. This became B Pit.

[76] Mr Foots reported to the Management Committee meeting of 30 May 1997 that 'the impact of opening up this area will mean the production will go straight to five million tonnes next financial 1998/1999 from the main mine and 5.5 million tonnes in future years ... The new coal handling plant ... would be adequate to handle the additional capacity with the only extra expenditure required being about $0.5 million for a conveyor. This could be funded from the Stage 3 budget.'

[77] According to the minutes Mr Foots advised that studies were being undertaken to determine what Ensham's future requirements for additional dragline capacity would be. The minutes record that Mr Foots 'indicated that the preferred option would be the purchase of a second-hand Marion 8050 dragline or equivalent should a suitable machine become available at the right price. ... Now the ... flood plain is available for mining, the urgency for a third dragline has been reduced. A decision on a new dragline is not required for at least two years while the flexibility with the second-hand dragline puts us in a better negotiating position when a suitable machine becomes available ... a second-hand machine is not likely to be available for at least 6-12 months.'

[78] On 10 June 1997 Mr Foots sent the joint venturers a document entitled 'Third Dragline Option', which discussed the viability of purchasing a third dragline. Five studies were carried out and the conclusion was summarised by Mr Foots in a memorandum which accompanied the report. He wrote:

'The new ability to mine the Flood Plains coal reserves just south of the Nogoa River ... has greatly influenced the Ensham Mine's production and capacity for the next few years. This is the result of the low strip ratios on the flood plains, and the necessity to open up B Pit North of the flood plains with contractors (shovel/truck) to meet government conditions.

This has resulted in a completely new mining schedule which cannot be compared directly with previous studies ...

"Our recommendation is that a secondhand Marion 8050 or equivalent be purchased as soon as one becomes available which is acceptable in terms of price and condition"

The study highlights there is some flexibility in the timing of purchasing a secondhand dragline ... Ensham believes there will be at least one dragline, with a maximum of three draglines, available in the next eighteen months.'

[79] The cost of the second-hand Marion dragline was said to be $20,000,000. Mr Foots sought approval for the recommendation by 10 July 1997.

[80] It will be appreciated that the recommendation contained in the report of 10 June differs significantly from the report to the Management Committee on 30 May. Within two weeks of that meeting Mr Foots was advocating the purchase, for a cost of $20,000,000, of a dragline 'as soon as one becomes available' when the recommendation to the meeting was that a decision on a new dragline would not be required to at least two years. Ensham's counsel suggests, with some justification, that the reason for the change is to be found in the renegotiated contract of employment with Mr Foots of 6 June 1997. The terms were roughly similar, though two points of distinction emerge. The first concerns Mr Foots' obligation to serve Ensham. In the earlier contracts he had been required to devote his 'full time and attention' to Ensham's business. The new contract required Mr Foots only to devote his 'time and attention' to Ensham. The second point of distinction is that Mr Foots was to be paid incentives, being 1.5 per cent 'of any savings which reduce the amount from the annual approved budgeted ... cash cost ... multiplied by the annual invoiced sales tonnage.' The result was that Mr Foots stood to gain financially from producing coal cheaply, whether or not it could be sold profitably. Mr Foots or his staff prepared the draft of the employment contract which was accepted by Mr Inoue who did not notice the first change. The second change was suggested by Mr Foots; Mr Inoue probably did not appreciate its significance. The recommended acquisition of the third large dragline would have led to increased production of coal more economically than the truck and shovel contract.

[81] On 15 August 1997 Mr Inoue, having consulted his superiors in Tokyo, wrote to

Mr Foots to express IQ's attitude to the acquisition of the third dragline. The facsimile reads:

'... [I]t is the best option for the Joint Venture to purchase a second-hand Marion or equivalent as the third dragline when we proceed to the production increase to 5.5 MTPA.

Secondly, we note that even with two draglines the Ensham mine will have the production capacity of 5.0-5.5 MTPA from Y1998 through Y2001 under the Stage 3(a) Development with the recent approval to mine the River Flood Plain without any further capital expenditure.

Thirdly, (Bligh) ... and (IQ) would need to consider the sales prospects for the possible increased tonnage before the Management Committee can approve the increased production ... We would need to be reasonably satisfied with the sales prospects for the increased tonnage and the profitability of such sales.

Obviously, under the present low priced market we do not need to hurry for purchasing the third dragline when the ... Mine is soon to hold the capacity ... of producing up to 5.5 MTPA for the next couple of years with the two draglines. ... [W]e would like to defer the timing to purchase the third dragline as late as practically possible.'

[82] The concern about obtaining customers for the additional coal produced and the profitability of sales was a reflection of the then market conditions. It was the time of the Asian currency crisis when economic activity in east Asia had declined, as had the price of coal. IQ thought, reasonably enough, that there was little point in incurring the costs of producing additional coal that could not be sold, or sold at a profit. Moreover the increase in production to the projected maximum amount was possible without the acquisition of a third dragline, as the letter explains.

[83] At the Management Committee meeting on 29 August 1997 the joint venturers accepted that the purchase of a second-hand dragline was a preferable course but IQ, Bligh and EPDC all considered it essential to have firm prospects of selling the additional coal before the third dragline was purchased. Mr Foots expressed his confidence at the meeting that a second hand dragline, equivalent to a Marion 8050, would become available from an adjacent mine within 12 months and for a price less than $20,000,000.

[84] At the next meeting of the Management Committee on 4 December 1997 Mr Foots said that there was a dragline at the Gregory mine which had not been in operation for about four months and he expected that it would become available for sale.

Mr Sato, the representative of EPDC, asked Mr Foots to explain how the acquisition of a third dragline would benefit the joint venture because, unless the acquisition could be justified on financial or economic terms none of the joint venturers would consider it.

[85] Mr Foots' response was that a second-hand dragline could remove the overburden from above the coal under the flood plain more cheaply than utilising the truck and shovel contractor which, to that time, was engaged in the task. The truck and shovel operation would remain necessary because some material was not suitable for removal by a dragline but if a dragline were acquired the volume of material to be removed by truck and shovel would be greatly reduced. Mr Foots also said that the joint venturers should decide at an early stage whether to acquire a third dragline because second-hand machines were not always available for sale and a new machine would take about two years to have built.

[86] On 21 January 1998 Mr Foots sent the joint venturers a copy of a memorandum prepared by Mr Hill. It read, relevantly:

'The 25 Year Feasibility Study dated January 1996 outlines the staged expansion of Ensham Coal Project. Stage 3A is nearing completion ... The second dragline ... is due to be commissioned in June 1998, some three months ahead of the original plan of 1 September 1998.

Stage 3B includes the purchase of an additional dragline to be operational on 1 April 2000. To achieve this timetable for a new dragline requires the order to be placed prior to 1 April 1998.

There are several options available, these include various sized new draglines and the option of a secondhand dragline. The following table summarises the capital costs of these options ...

The Third Dragline Option Study of June 1997 indicated a superior economic option to purchasing a new dragline was the purchase of a second hand dragline. There is currently a second hand Marion 8050 dragline idle at BHP's Gregory Mine. It is likely that this machine could be purchased for approximately $16.7 million, including walking it to Ensham.

The earlier delivery period ... means two years earlier production ...'

[87] Mr Inoue sent Mr Hill's memorandum to IK's head office in Tokyo and received a response from Mr Fujiwara (who was then a senior manager in IK's office and is now the Managing Director of Apollo Resources). Mr Fujiwara's reply, translated, reads:

'1. We are fully aware of the benefits of the second hand dragline.

1. On the premise that we can sell 5.5 million tonnes/year at the stated price the cash flow for the option of the second hand dragline is greater than that of the contractor option. (Approximately A$10 million/year)

2. However, we would like to proceed in the following manner as an investment project on the basis of sales forecasts and the investment environment within Idemitsu.

1. We will make a decision to purchase the second hand dragline when the following conditions are met.



When sales of 5.5. tonnes/year are substantially in sight.



When it has been confirmed that (Apollo's) loan repayments are being made ahead of schedule.



When we can cover the loan repayments and investment with Ensham's cash flow.



When we are able to obtain a second-hand dragline in good condition.

2. We think the timing ... on the purchase of the second hand dragline will be in the second half of 1999.

4. In the unlikely event that there is no second-hand dragline at that time we will continue production with the contractor. (On the basis of our judgement that a second hand dragline will come on the market in the future)

3. In line with your proposal, please pursue the possibilities for renting a second-hand dragline in place of the contractor.'

[88] The translation may not reflect the true meaning of Mr Fujiwara's original, Japanese, communication. It is likely that the second dot point in paragraph 2(1) should be understood as a requirement that the loan repayments be made on schedule, not ahead of it.

[89] On 4 February 1998 Mr Inoue attended a regular marketing and sales meeting involving officers of Ensham, ECS (Ensham Coal Sales Pty Ltd, the selling company for the joint venturers' coal) and Apollo. During the meeting Mr Foots said that if EPDC's demands for low chlorine coal were to be met a third dragline was essential. He said there were two possibilities: a Marion 8050 at Gregory mine or another Marion 8050 at Norwich Park. Mr Inoue asked Mr Foots whether it was necessary to make a decision on acquiring a third dragline immediately when the two draglines then in operation at Ensham, together with the truck and shovel contractors, could achieve the desired production of 5.5 million tonnes per year until 2001 and the dragline would not be fully used for two years. Mr Inoue also raised the possibility that a dragline might be rented for a period and bought later.

[90] Two days later, on 6 February 1998, Mr Foots sent a memorandum to the joint venturers enclosing a note written by Messrs Hill and Edmondson of the same date. Mr Foots summarised:

'The recommendation is to urgently decide on the purchase of a second hand dragline.

In relation to the three potential second hand draglines discussed previously, my latest confidential information is that there will not be a dragline coming available from Curragh. Oaky Creek have recently re-commissioned the dragline ... BHP ... could return the ... draglines at ... Norwich Park to production ... This increases the urgency for a decision on this matter.

Ensham's earlier correspondence indicated some flexibility in the timing of a second hand dragline purchase. This was correct in June 1997. Now a decision must be made to either purchase a second hand dragline or a new dragline on 1 April 1998. The flexibility regarding the timing of this decision has been consumed with the number of available draglines decreased.

A decision on this matter is requested at the next Joint Venture meeting.'

[91] Despite Mr Foots' urging Mr Inoue thought it unlikely that a commitment to acquire a third dragline could be made at the next Management Committee meeting. He was not satisfied that such an acquisition was necessary. He had not received what he regarded as a satisfactory explanation from Mr Foots as to why the long term sales contracts which Ensham had could not be met using the current draglines and contractor. Mr Inoue was concerned about the prospect of selling coal to Asia; demand was low. He thought the acquisition of a new dragline should be deferred until it was clear that there would be 'profitable sales to match production of 5.5 MTPA ...'. Mr Sato of EPDC shared these concerns. He was unpersuaded that a third dragline was needed, or that additional volumes of coal would be sold profitably.

[92] Mr Inoue corresponded with Mr Fujiwara in Tokyo. On 24 February 1998

Mr Inoue sent Mr Foots a facsimile to explain IK's attitude. It read:

'... [W]e have fully understood the advantage to introduce the third dragline when we increase the nominal production level ... to 5.5 MTPA. We basically agree ... that it is the best option to purchase a second-hand dragline ...

However, we are of the view that it is premature to purchase a second-hand dragline at present and therefore we should defer the dragline purchase due to the following reasons.

Firstly, ... we have not had a clear sales prospect for a level of 5.5 MTPA ... [I]t would take some more time for ECS ... to secure more term contracts which we believe will be required for the Joint Venturers to decide on the third dragline.

Secondly, it has become rather difficult for us to project the future coal demand in the Asia due to the change in the economic situations ... It would be wise for us to hold a conservative view that coal prices would not pick up at least for the next couple of years ...

Thirdly, even if we purchased the third dragline and increased the production, ... ECS would need to sell Ensham Coal at cheaper prices in the spot market, resulting in simply lowering market coal prices. This would be contrary to the benefit to the Joint Venturers.

Fourthly, the Operator has advised the Joint Venturers ... that even with two draglines the Ensham Mine will be able to achieve a production level of 5.5 MTPA through FY2001 ...

While we fully understand the disadvantage of using mining contractors ... when compared to using draglines, we would need to consider the sales prospect for the ... increased tonnage and the profitability of such sales ... (before) we could make a decision to purchase ... a second-hand dragline.'

[93] There was another meeting of the Management Committee on 27 February 1998. LG had given its approval to the purchase of a second-hand dragline prior to the meeting and Mr Foots pressed the other joint venturers for their approval. He said that coal could be supplied to meet sales commitments using the two draglines and the truck and shovel contractors until 1999, but in the following years there would be a problem extracting sufficient low chlorine coal to satisfy requirements. He said it would be cheaper to have the third dragline and that it was not always possible to acquire a second-hand dragline and that the purchase of a new dragline would take at least 28 months. To begin operation in 2001 a new machine would have to be ordered in 1998. He asked the joint venturers to make a decision.

[94] The minutes of the meeting record that Mr Foots said he had held preliminary discussions with contractors who were prepared 'to finance the purchase of a second hand dragline secured by long term stripping contracts.' This is apparently a proposal that an independent contractor acquire the dragline and hire it to Ensham. The business risk was to be avoided by long term stripping contracts, the return from which would cover the contractor's costs of acquisition and operation. This is the first time such a proposal appears to have been mentioned.

[95] On 25 March 1998 Mr Foots sent a facsimile to the joint venturers enclosing an updated third dragline study. Mr Foots summarised the effects of the study as being that, unless the third dragline was put into operation by 2001, there would be an 'inability to satisfy forecasted customer requirements for low chlorine coal ... There is a severe shortfall predicted for JFY 2001 and beyond.'

[96] On 20 April 1998 Mr Inoue attended the regular sales and marketing meeting at Apollo's office in Sydney. During the meeting Mr Foots said that the Marion 8050 dragline at Gregory mine was to be moved to Blackwater, that all four draglines at Curragh were operating, and that the dragline at Oaky Creek was in poor condition and even if acquired may not be got to operating condition by 2001. Mr Inoue told Mr Foots that IK's attitude to the acquisition of a third dragline had not changed. He (or another IK employee) said that IK would like to conduct its own investigation into the economic feasibility of acquiring a third dragline. He asked for a copy of the relevant information to be provided on a compact disc. Mr Foots said he would tell Mr Edmondson to provide it.

[97] Something should be said about a suggestion made to the joint venturers by

Mr Foots. It concerned the formation of a company to be owned by Mr Foots and his 'team'. The proposal was that the company would manage and operate coal mines, including but not limited to Ensham. The management would be undertaken by Mr Foots, Mr Bird and other managers employed by Ensham. The proposal had obvious difficulties from the joint venturers point of view. It would involve its Chief Executive Officer and Mine Manager, as well as other senior employees, giving their time and attention to businesses other than theirs. Moreover, those businesses were competitors of Ensham's. This episode occupies much documentary evidence in the case and is relied upon by Ensham as providing proof of Mr Foots' perfidy. It has some relevance in that regard and as showing the provenance of the dragline agreement.

[98] In March 1998 Mr Foots was in Tokyo where he met Messrs Nagano, Ishizaki and Fujiwara. Mr Nagano was the General Manager of the department responsible for IK's coal interests. At this time Mr Ishizaki worked in Tokyo. After Mr Foots returned on 11 March he consulted Mr Andrew Smith, a partner in Clayton Utz who were the solicitors for Ensham and for IQ, though not for EPDC or LG. Mr Smith had been Ensham's solicitor for some years. He knew Mr Foots, who came to the meeting with Mr Bird. Mr Smith cannot recall the meeting but his notes indicate that he was consulted about a company, described by Mr Foots as 'XYZ Pty Ltd' which would perform the role of a management company providing operational services to coal mines. In this context Mr Foots mentioned the 'dry hire of (dragline)' and 'employee share'. Mr Smith's recollection, or reconstruction, is that 'Mr Foots thought it would be a good idea for the employees to have shares in a company which would own the dragline.'

[99] Mr Smith did not inform anyone at Ensham or IQ that he had consulted with

Mr Foots and given him advice. Mr Foots did not tell his employer of his consultation.

[100] On 21 April 1998 Mr Foots sent a lengthy facsimile to Messrs Fujiwara, Nagano and Abe, who was IK's senior employee in Apollo. It bore the letterhead 'Foots Consulting Services Pty Ltd'. Under the heading 'Separate Managing Company' Mr Foots wrote:

'A separate managing company needs to be formed similar to the XYZ Pty Ltd in the information left with (IK) during my last Tokyo visit.

... [A]s discussed with Mr ... Nagano ... ownership of the XYZ company needs determining. The problems of various ownership relationships were spelt out in the notes given to (IK) ...

As suggested by Mr ... Nagano ..., if the ownership of the managing company was by Ken Foots and his staff I believe it would be beneficial ...

As discussed ..., the Ensham team has been approached by other organisations to introduce the Ensham Culture and to manage some of their operations. ...

[A]t present Ensham staff have been approached by another group on this matter of management and possibly some ownership. Ensham staff with a couple more additional personnel, could easily handle these new operations. Unfortunately, with the present situation Ensham staff cannot perform both, unless there is a separate management company, and thus will have to choose between staying with Ensham or moving on to manage other projects. It would be better for all parties if this choice doesn't have to be made as I believe there would be mutual benefits for all if the separate management company is formed and given the appropriate terms as discussed above.'

The terms were that Mr Foots' management company should manage and oversee all of IK's coal mines in Australia, the Ensham open-cut joint venture, and the sales of coal by the other joint venture companies.

[101] It is not true that Mr Foots, or his team, had been approached by other organisations to manage their operations. He had made the approach, as will appear.

[102] Mr Nagano disputes that he requested such a proposal from Mr Foots. He denies that he ever intended, or suggested to Mr Foots, that a company owned by him and his staff should manage IK's mines. The possibility that Mr Foots and his staff might leave Ensham to manage other mines was of particular concern. As

'They were very important to us. They had developed the mine and we trusted them to run the operations for us.'

[103] In the first half of 1998 the owners of the Curragh open-cut coal mine engaged Macquarie Bank Ltd to find a buyer for it. Mr Foots became interested in the prospect of owning the mine. This event coincided with his interest in establishing his separate management company. Mr Foots opened communications with the subsidiary of Macquarie Bank Ltd handling the sale. He did not immediately tell Ensham of his activity. Instead he asserted he had been 'approached'.

[104] On 15 June 1998 Mr Foots sent in his bid. It was on the letterhead of 'Foots Consortium' which the first paragraph sought to introduce. It read:

'A new consortium has been constructed to bid for and hopefully purchase the Curragh Project and surrounds. This consortium is referred to in this indicative bid as the Foots Consortium. As discussed earlier the management team of Ensham Resources has obtained the consent of its Joint Venture Partners to form a company that would manage the Ensham Coal Project and be able to manage and operate other coal projects. This process of restructuring is still progressing and as an interim the term Foots Consortium has been adopted for this bid.'

[105] The paragraph contains a serious misstatement of fact. The 'management team' had not obtained the consent of the joint venturers to the establishment of a company to manage the Ensham project, let alone other, competing, coal projects. The bid was composed at a time when Mr Foots was negotiating with the joint venturers for the right to establish a company which would manage Ensham and other projects. He had not obtained that approval, and indeed never did so. The misstatement was clearly intended to improve the chances that his bid for Curragh would succeed.

[106] Mr Inoue consulted Mr Smith about the implications of Mr Foots' proposal on

22 April 1998. Mr Smith gave a letter of advice on 28 April but did not inform

Mr Inoue that he had earlier spoken to Mr Foots about that very proposal. The letter noted the substantial difficulties to which the proposal might give rise and the need to address each of them carefully if the matter were to proceed.

[107] In May 1998 Mr Foots contacted Mr Smith and asked him to conduct a search to ascertain whether 'Southern Cross Mine Management Pty Ltd' was available as a business name. Following the search, on 25 May 1998 Mr Foots asked Mr Smith to reserve the name for him. That was done, Mr Smith regarding it as a favour for the Chief Executive of a substantial client. He did not tell anyone at IQ of the request nor of his action.

[108] On 15 May Mr Foots met with Mr Abe in his office and again raised the question of the management company. He revealed the existence of that company's interest in Curragh and asked for an answer to his proposal by the beginning of June.

Mr Foots suggested that IQ could itself give permission without getting consent from its joint venturers. He said that if IQ did not give consent he thought 'problems will arise in the future with the management of Ensham.'

[109] The Management Committee met on 29 May 1998 and discussed Mr Foots' proposal for a management company, which he asked to be approved 'urgently'. The joint venturers did not like the idea and asked Mr Foots to prepare a report explaining the proposal in detail. It was suggested that Mr Smith should assist

Mr Foots in the formulation of the report which was sent to the joint venturers by Mr Foots under cover of a memorandum of 11 June 1998, a copy of which was also sent to Mr Smith. The memorandum stated:

'Mr H Inoue ... requested Mr. Andrew Smith ... to prepare this report as Mr Smith already has a detailed knowledge of all the Ensham Joint Venture Agreements. Subsequently, Mr. Andrew Smith had two meetings with me ...

Mr. Andrew Smith ... has put in writing the report attached as explained to him by me. He has taken into consideration the legal and Joint Venture Agreement aspects of the Management Contractor Proposal.

To retain the high calibre Ensham staff ... your prompt consideration is requested.'

[110] Mr Smith rejected the accuracy of the statements. The report was essentially

Mr Foots' work, not his. In particular those important parts which dealt with the commercial arrangements and advantages said to flow from the proposal were composed by Mr Foots. Mr Smith resented the suggestion that the report was the work of Ensham's disinterested solicitor rather than the man who stood to benefit from the management company.

[111] A draft of the report had been prepared by Mr Smith and sent to Mr Foots for his contribution. The draft contained clause 27, 'Equipment', which provided:

'At the request of the Joint Venturers, the Management Contractor may also provide equipment to the mine on an agreed hire basis. ...'

[112] The report was less than modest. It stated that the 'management team' comprised 'a highly dedicated band of professionals' who wished to maintain their involvement with Ensham while at the same time using their skills to manage more than one coal project. It was said the team would prefer not to sever its relationship with Ensham but that 'their needs to face new and interesting challenges' could be met without their 'being forced to withdraw from Ensham' if they were allowed to contract with other coal mine owners to provide management services. The proposal was that Foots Consulting Services Pty Ltd, Mr Bird and other senior managers should own a company which would 'take over the employment of the current management personnel' at Ensham mine. The list of personnel included all important employees. Their roles were to be performed by the management company which would make their services available.

[113] The report contained the clause which Mr Foots had amended. It said that the management company might also provide equipment to Ensham 'on an agreed hire basis or contract basis e.g. third dragline.' The report and accompanying memorandum contained no fewer than three intimations that the 'management team' would, or might, leave Ensham if the proposal was refused.

[114] Mr Ishizaki came to Australia and replaced Mr Inoue in July 1998. His first task was to come to grips with the proposal for a management company. It had, he said, 'caused a great amount of concern ... in Tokyo.' Accordingly, on 10 July 1998 he met with Mr Foots and Mr Dawson to discuss the proposal. Mr Foots explained that he had told some senior staff, including Mr Bird, about the proposal. They hoped not to leave Ensham but 'if ... forced to leave by Idemitsu' the mining operation would close down, for about a month. Mr Foots justified the proposal by saying that mining engineers in Australia move to new coal mines for a challenge and to improve their skills. Ensham's managers had been approached by other mine owners but he had persuaded them to stay by saying that 'he would find them a challenging job.' The management company would provide that opportunity.

[115] Mr Ishizaki put his thoughts on the matter in writing in a report to Mr Fujiwara. He thought that Mr Foots' proposal was incompatible with IK's basic position, which was that the responsibility for managing the Ensham mine must be undertaken by Ensham, or IK, itself. It was unthinkable that the role could be performed by a company which did not have undivided loyalty to Ensham and the joint venture. He requested Mr Nagano, the Deputy General Manager, to come to Australia to discuss the issue with Mr Foots.

[116] Mr Fujiwara replied on 20 July to confirm Mr Ishizaki's approach.

[117] By August 1998 Mr Foots had learned that his bid for ownership of the Curragh mine had failed. He was offered management of part of Curragh operations, drilling and blasting, but he rejected the opportunity as inadequate. It was also in August that Mr Foots learned of the existence of the BE 1260 dragline at Blackwater and that it might be for sale. He had Mr Hill commission a report on its condition from Bucyrus.

[118] On 1 September 1998 Mr Nagano attended a meeting to discuss the management company proposal and to reiterate IK's opposition to it. The result was an amended proposal by Mr Foots to form a consulting company, owned by Ensham staff, including himself, which would act as a consultant to other mine owners but would give first priority to Ensham. This proposal was eventually accepted and a company, Queensland Coal Management Pty Ltd, was formed to undertake the consultancy work. The agreement was signed on 19 January 1999 but not before Mr Foots had, on 2 December 1998, complained to Mr Ishizaki about delay and intimated that 'if the ... contract was not agreed on quickly, Ray Bird and those under him had said they would quit the mine and go elsewhere.' In that event, he said, the mine would close in January. Mr Foots said that he had spent 'two hours talking Mr Bird out of it.' Mr Ishizaki explained that EPDC wished to have the proposed agreement considered by their solicitors and that was taking some time. Mr Foots suggested that IQ should proceed without EPDC's consent. Mr Ishizaki demurred on the ground that EPDC was an important customer. Mr Foots' reply was that he, too, was important.

[119] Between May and December 1998 Clayton Utz, at the request of Mr Foots, applied to extend the reservation of the Southern Cross name on three occasions. The extensions were granted. In December 1998 Clayton Utz, again at the request of

Mr Foots, applied to register Southern Cross as a company. Registration was effected on 14 December 1998. Mr Smith did not tell Ensham nor IQ of these matters.

[120] At the Management Committee meeting of 29 May 1998 Mr Foots said that he had 'recently received an offer from BHP to sell one of the Gregory draglines to Ensham. The offer would lapse today.' He also said that if no buyer could be found, BHP would move it to Blackwater where it could be put to use. He asked the joint venturers to agree immediately to buy the dragline. He said the opportunity would be lost unless the decision to buy was made that day. He thought the price would be less than $10,000,000. The representatives of the joint venturers confirmed that they remained of the view that the acquisition of a third dragline should be deferred. Mr Inoue recalls that Mr Foots became angry. He left the meeting saying he was going to ring BHP to tell them that Ensham 'would be passing up the sale.'

[121] It is clear from Mr Madden's evidence that there was no offer from BHP to sell one of its 8050 draglines. Such a proposed sale could not have been made without reference to Mr Madden, and he knew nothing of it.

[122] Mr Foots accepts that what he told the joint venturers was untrue. He admitted that BHP had not imposed any deadline for the sale of their dragline. A decision to buy it did not have to be made that day. Mr Foots seeks to justify his actions by saying that the joint venturers, and IQ in particular, were tardy decision-makers and their indecision had cost Ensham opportunities in the past. He fabricated the deadline to obtain an immediate commitment to the purchase which he thought would be in Ensham's interest.

[123] Mr Foots' deceit was more extensive than his admission. Not only was there no deadline, there was no offer. Mr Foots claims to have made a telephone call to someone at BHP whose name he cannot recall. It is unlikely he telephoned BHP. What could he have said? His precipitate departure from the meeting, falsely saying he was going to telephone BHP, was aptly described by Mr Sofronoff QC as a pantomime. Mr Foots cannot seriously have thought that such a manoeuvre would bring about the decision he wanted. On his own account IQ had a laborious decision-making process which was bureaucratic and may appropriately, if unkindly, be described as cumbersome. Mr Foots knew that very well. The process could not be accelerated, even by histrionics. Moreover the Australian representatives of IK were relatively junior and would not make a decision without specific authority from IK's office in Tokyo. Mr Foots knew that very well too. His motives for his conduct are not those he professed.

[124] Mr Ishizaki became General Manager of Apollo on 1 July 1998 and remained until March 2001. He has stayed in employment with IK and been promoted to levels of senior management. Mr Ishizaki knew little about coal mining when he took up his position in Apollo. He had been a trainee in IK's energy development department in Tokyo from April 1997 until his assignment to Australia. Upon his arrival,

Mr Ishizaki became a director of IQ, Bligh and of Ensham. Mr Matake replaced

Mr Abe as Managing Director of Apollo in July 1999.

[125] Mr Ishizaki was appointed chairman of the Management Committee at its first meeting after his arrival in Australia, on 4 September 1998. He held the position as chairman of the Committee until he returned to Japan in March 2001.

[126] On 1 September 1998 Messrs Ishizaki, Abe and Nagano, who had come from Japan for the purpose, met with Mr Foots and Mr Dawson at Ensham's Brisbane office. The meeting had been called to discuss Mr Foots' proposal for a management company, which I have dealt with. A solution to the disagreement between IK and its important Australian Chief Executive had to be achieved with as much amity as possible. In addition IK was changing its coal mine ownership structure in Australia which involved change to the senior management in Apollo. This also concerned Mr Foots and there was discussion on the topic. In addition to these topics the acquisition of a third dragline was mentioned.

[127] Mr Ishizaki's note of the meeting records, under the heading 'Third Dragline':

'... Nagano stated that they would reach a conclusion in October regarding what option to take - new, second hand or rental.

... Foots explained that it would be cheaper to get someone to buy a small dragline (25 m3) ($2-3 million; he commented that he could buy it himself) that was purchased in 1966 by BHP Blackwater, and rent it from someone. Under present circumstances, the [truck and shovel] contractor is paid $1.50-$1.60 per tonne, but with a five-year rental, this could be cut to $1.00 per tonne. Moreover, a dragline hauler just happened to be moving from BHP Gregory Mine to Blackwater Mine, so (using) the backhaul from this, the transport costs could ... be reduced. ...

He said that BHP is saying that it "cannot sell to a competitor", so, instead of ER buying it directly, it would be a good idea to have a third party buy it and then rent it.

... Foots said that, the ... trucks and shovels ... stripping costs amount to A$4-7 million a year. He proposed that, with the introduction of a small dragline, these costs could be saved ...

... In any event, he said that before negotiating with BHP for the third dragline, he would first obtain the permission of the JV, and Idemitsu in particular.'

[128] Mr Ishizaki's recollection of the meeting was that Mr Foots said that a

25 cubic metre dragline, which BHP had bought in 1966, was for sale. He said the price was between $2,000,000 and $3,000,000, a price so cheap he could buy it himself. He went on to say that if Ensham had someone buy the dragline and rent it to Ensham it would be 'a cheap option' and would save about $1 per tonne on the cost of removing overburden. Mr Foots said that he was currently talking with

Mr Kirkby, an employee of BHP, who had formerly been one of his subordinates. Mr Foots also said that BHP had told him that it would not sell the dragline directly to a competitor, such as Ensham, so that Ensham should get a third party to buy it and have the third party rent the dragline to Ensham.

[129] As I mentioned the question of Mr Foots' proposed management company was discussed. In this context Mr Ishizaki's note records that Mr Foots said that Ensham's employees had asked whether they could own an interest in the Ensham mine but he had told them it was not possible because it was owned by an unincorporated joint venture. Mr Foots went on to say that Mr Bird and Mr Dawson had 'thought of an idea in which heavy machinery, freight wagons and the like, would be owned by a separate company (e.g. a management company) and some of the workers could own shares in that company.'

[130] There are three other written records of the discussions of 1 September 1998. One was made by Mr Abe. It reads: 'Ken started talking about rental of the dragline. He said "get a contractor to buy a baby dragline (25 cubic metres) and rent it from them. The purchase price would be about $3 million. The contractor would buy it from BHP.'

[131] The second written record was produced by Mr Dawson, Ensham's Coal Sales Manager. Relevantly, his note reads:

'X We want to take a decision on the third dragline in October.

X Could justify by savings on contractor costs that would result.

Are you happy for me to go ahead Toshi, and look at purchase of small dragline?

The last statement in that quotation is Mr Nagano's response to the preceding statements of Mr Foots. 'Toshi' was the name by which Mr Nagano was familiarly known.

[132] There is a fourth written version of the meeting. It is an amplified version of that produced by Mr Dawson. The content of the second passage which appears in the preceding quote has been expanded. It reads:

'• IKC could justify the purchase of a third dragline by the savings that would be achieved on contractor costs as a result of the purchase. The dragline could be bought by a contractor group or even the members of Ensham, and run on a 5 year contract basis which would mean that the costs are operating costs with no capital required. There is currently a number of machines that may be available including a small dragline that could be useful for us to have for around 5 years. I could look at the possibility of a group securing that dragline and then I could negotiate a user rate with the Chairman (Mr Ishizaki).'

[133] The insertion of the reference to a 'contractor group or even the members of Ensham' and of Mr Foots negotiating a price on its behalf is significant. It suggests that at this meeting Mr Foots raised the possibility that the supplier of the dragline to Ensham on a hire contract basis would be Ensham's, i.e. the joint venturers', employees and that Mr Foots could negotiate the hire on their behalf with Ensham.

[134] Mr Ishizaki was adamant in his evidence that Mr Foots did not say at the meeting that Ensham employees would or might purchase the small dragline or that he would negotiate a hire rate with him. Mr Abe and Mr Nagano gave evidence to the same effect.

[135] On the next day, 2 September 1998, Mr Ishizaki sent by facsimile a report of the conversation to Mr Fujiwara in Tokyo. He wrote:

'... Foots has explained that it will be economical if we have a contractor buy (A$3 million) the small-scale (dragline) owned by BHP and then rent it. The current cost ... can be reduced ...

BHP have said they will not sell to competitors so, rather than (Ensham) purchasing it directly, ... Foots said it would be better if a third party bought the dragline and we rented it from them.

... I will speak about this matter with EPDC ... tomorrow ... I would like to give permission to negotiate with BHP on this matter at the (management committee meeting) but I will deal with it after hearing your opinion and that of EPDC'.

The message contains no mention of a group of Ensham employees being the 'third party'.

[136] There was a meeting of the Management Committee on 4 September 1998. The minutes, prepared by Mr Edmondson, recite in relation to the topic of the third dragline only that:

'Mr Foots explained that while there are no suitable draglines available for sale at the current time, there is a possible opportunity to enter into an agreement with a dragline contractor for a long term stripping contract.'

[137] Mr Ishizaki's recollection is that Mr Foots explained to the meeting that stripping by the truck and shovel contractor removed 10,000,000 cubic metres of material per year at a cost of between $1.47 and $1.55 per cubic metre. He said that about 6,000,000 cubic metres of material could be removed instead by a small dragline at an estimated cost of about $1 per cubic metre which would create savings per year of about $3,000,000. Mr Foots said that the dragline would cost about $3,000,000. He also said that the terms of the contract with Golding did not prevent Ensham utilising a dragline to remove part of the overburden. He said that the increased amount of overburden removed would not result in production increasing beyond the amount set in the 25-year plan. Mr Foots also advised that at the end of the five-year dragline contract a decision could be made whether to keep it or replace it by a larger dragline.

[138] Mr Ishizaki reported this aspect of the meeting to Mr Fujiwara by facsimile of the same day, 4 September. The only point of present importance is that the facsimile referred to 'a company other than the present Golding' as the buyer of the small dragline. There was no reference to the contractor being a company owned by Ensham's employees.

[139] Mr Dawson typed the shorter version of the minutes on his own computer using Word Perfect as his word processing program. That program had been superseded by Microsoft Word, which had been installed on the secretaries' computers in Ensham's office. A feature of Word Perfect was that it produced an 'X' as the marker to indicate the commencement of a new topic. By contrast, Word produces the more familiar '•' as a means of indicating a new point or topic. The shorter document, which Mr Dawson typed, displays 'X' at the commencement of each new line. The longer version marks each line with a '•'. Mr Dawson's computer retained a memory of the shorter version of the minutes but has no record of the longer one.

[140] In September 1998 Ensham employed two secretaries in its office. Both their computers were fitted with Microsoft Word. Mr Foots himself was not proficient in the operation of word processing or keyboards. He did not have a computer in his office.

[141] It is likely from this evidence that the longer version was produced by one of the secretaries on an updated computer. Mr Dawson did not produce the document on his computer. Although one still works for Ensham, neither secretary gave evidence. The absence of both was unexplained.

[142] Mr Nagano had some recollection that the discussion, which is recorded in the controverted passage in the longer minute was discussed at the meeting of

1 September 1998. His English was limited and he gave evidence through an interpreter. For that reason the cross-examination was limited and his answers are brief. I think he may have confused a discussion which did occur later in the meeting which Mr Ishizaki reported under the heading 'Management Company' which did involve a suggestion that employees provide equipment to the joint venture for its use. Mr Nagano was not asked in terms whether his recollection of that topic was that the discussion occurred in the context of the third dragline or something else.

[143] Mr Araki of EPDC who was at the meeting thought that he was first aware of the possibility of a conflict of interest arising from the use of the dragline on

1 September 1998. This, if accurate, would also suggest that there was discussion at the meeting concerning the third dragline being owned by Ensham's employees. Mr Araki also gave evidence through an interpreter and I suspect he was confused on this point.

[144] It should also be mentioned that there was evidence that the longer version of the minutes, that prepared on a computer other than Mr Dawson's, was not to be found in Ensham's files. It came from Mr Foots' possession. A copy of it only came to light when Mr Foots returned papers he took with him after his dismissal in

[145] The evidence concerning the provenance of the longer minute of the meeting is unsatisfactory because of the lack of testimony from the secretaries. Nevertheless I am prepared to find that Mr Dawson's note and Mr Ishizaki's report are accurate, and the third version is not. That is, I am prepared to find that the prospect that the dragline contractor could be 'the members of Ensham' was not mentioned at the meeting of 1 September 1998. The reasons for my finding are the omission of such a topic from Mr Ishizaki's note of the meeting and his report to Mr Fujiwara; and its omission from both Mr Dawson's minute and Mr Abe's note. More importantly, when the proposal that the dragline contractor be a company owned by Ensham's employees was put to the joint venturers on 1 June 1999 it gave rise to an immediate reaction. It instantly became the subject of communications between Brisbane and Tokyo and of a great deal of recorded consideration by IQ's representatives. It is impossible to believe that the reaction would not have been the same nine months earlier.

[146] The implication is that Mr Foots had the document prepared in an endeavour to manufacture evidence of the revelation to the joint venturers of a proposal that a company such as Southern Cross become the dragline contractor and the joint venturers gave their acquiescence to the proposal.

[147] On 16 September 1998 Mr Ishizaki and Mr Abe met Messrs Foots and Dawson at Ensham's office in Brisbane to discuss the latest proposal for their own management company. In the course of that meeting Mr Foots raised the subject of the third dragline. He said he was preparing some calculations to explain the advantage of the dragline and would show the results to the joint venturers. He also said that he intended that the dragline should be purchased by a separate contractor but 'they' had asked that Mr Foots and Mr Bird and their team operate the dragline. Mr Foots said that he was investigating how the dragline agreement could accommodate this request. Mr Ishizaki sent a report of the meeting to Mr Fujiwara. It contains a passage corroborative of Mr Ishizaki's testimony.

[148] On 16 September Mr Ishizaki received a facsimile from Mr Fujiwara seeking answers to some technical questions about the operation of the dragline but saying that he did not see a problem 'with bringing it in if there are no impediments to the contract with the existing Golding company contractor and ... that it results in cost reductions.'

[149] Early in September 1998 Mr Foots asked Mr Hill to prepare a financial assessment of the cost to Ensham of using the BE 1260 as the third dragline. Mr Foots told him to assume that the capital cost would be $7,000,000. Mr Hill compiled the assessment taking as the basis for his figures the known costs of using Ensham's other draglines. He assumed the machine would move 8,000,000 cubic metres of spoil per year while rehandling 30 per cent of that. He thought the assumption was conservative.

[150] On 5 November 1998 Mr Foots sent the joint venturers 'supportive documentation for the cost savings of a dragline stripping contract over five years ...'. The document was headed '25 M3 DAGLINE INVESTIGATION' and said:

'This report details investigation into the application of a 25 cubic metre dragline to the Ensham Coal Project. This dragline option provides additional stripping capacity and thereby reduces the amount of contract truck shovel stripping required. This investigation determines the reduction in truck shovel stripping required to satisfy the forecasted shipping schedule. An appropriate contract rate for this dragline has then been estimated and the resulting operating cost saving quantified.

Several previous investigations have shown that the current two draglines have insufficient stripping capacity to satisfy the planned shipping forecast. The 25 Year Feasibility Study included the purchase of an additional dragline to be operational by June 2000. If this additional dragline was to be a new machine it would have to have been ordered in January 1998.

Since this report, several changes have been made to the mine plan. The significant increase in the available strike length in B Pit has altered the short to medium plan. This low ratio area has a much larger role in Ensham's future. The current strategy ... balances the necessity to develop the (B Pit) area as soon as possible ...

To satisfy the specific customer sales profiles 2 million tonnes per annum of this coal is required from B Pit. This constraint has formed the basis of this investigation.

Discounted cash flow analyses have been undertaken to determine the financial impact of utilising a third dragline ... In effect this analysis quantifies the cost of additional stripping for the three options investigated.

... The figures ... are speculative but reflect a best estimate approach. The capital costs assumed are $7M for BE1260, (and) $15M for M8050 ...

This analysis shows the lowest cost option is achieved with the larger second hand draglines. The longer the guaranteed period of operation the lower the ownership costs per bcm.

The financial analysis results show the lowest cost option is to commit to a dragline stripping contract for a 10 year period. This extended period while lowering costs may be too restrictive. The five year contract option with the smaller dragline while slightly more higher in cost provides a greater amount of flexibility for future operations.

It is clear that a second hand dragline offers significantly lower costs than the contract truck shovel options. Ensham Resources has commenced discussions with interested parties to secure a dragline stripping contract ... The actual duration and size of dragline would be dependent on the actual bids received.'

[151] Parts of the 'Conclusion' deserve comment. The assertion that Ensham had commenced discussions with interested parties to secure a dragline stripping contract was completely untrue. Neither Mr Foots nor any other of the senior managers of Ensham had approached anyone with a view to having them bid to become a stripping contractor. Mr Foots himself said that he did not approach a number of prominent mining contractors such as Roche Bros or Thiess because their workforces were highly unionised and Mr Foots did not want that taint at Ensham. He had, he said, spoken to managers at Bucyrus who flatly rejected any suggestion that they might become a stripping contractor. There is no doubt that had Mr Foots made the approach he would have received that response. Mr Nienaber, the managing director of Bucyrus, however, has no recollection of Mr Foots' approach. Mr Foots said he received the same response from Mr Quinn of P&H, the only other dragline builder and repairer in Australia. Mr Quinn's evidence will have to be recounted at some length but it can be summarised here by saying that he, on behalf of P&H, was enthusiastic about the opportunity of becoming a stripping contractor to Ensham, but his overtures were rejected. Another possibility was Golding, but Mr Foots said that Mr Bird had told him that Golding was not interested in undertaking the financial responsibility of buying the dragline. Mr Woolcock, Golding's General Manager, has no recollection of being asked by Mr Bird whether the company would be interested in a dragline stripping contract with Ensham.

[152] At best, then, if Mr Foots' evidence on this point be accepted, he had approached Bucyrus, P&H and Golding, none of whom had expressed interest in becoming a stripping contractor. He had not approached those other contractors whom he thought might have been interested. It was a blatant untruth to say that Ensham had commenced discussions with interested parties to secure a dragline stripping contract, or to suggest that bids from such parties might be received.

[153] A rather similar criticism can be made of the assertion that the smaller dragline provided 'a greater amount of flexibility for future operations'. The evidence of all the witnesses who were knowledgeable about draglines was that a larger dragline, one with a bucket capacity of 47 cubic metres, would provide greater operational flexibility for Ensham. The essential reason is that the larger machine can do everything that the smaller one can do, and more. It is also more economical in its operation because of the capacity to remove more material per cycle than a smaller machine.

[154] Significantly Mr Foots himself admitted (T 2256.50-52) that a dragline larger than the BE 1260 would have been more suitable for Ensham's purposes. In

'Generally a large dragline will be cheaper per bank cubic metre than a small dragline ... [I]f you compare them physically, a big dragline will move more volume and have better operating characteristics than a small dragline.'

Mr Hill also thought that a Marion 8050 dragline, or a similarly sized machine, would have been preferable for use at Ensham. The same opinion can be gleaned from the evidence of Mr Madden which will be discussed later in connection with the purchase by Southern Cross of the BE 1260. In essence Mr Madden was prepared to sell the small dragline to Ensham, or to Southern Cross for use at Ensham, because it was less productive and more expensive than a dragline with a bucket capacity of 47 cubic metres or more. Mr Madden was content to see Ensham buy a smaller, high cost machine, rather than a more productive and more economical one. The two mines were, to some extent, competitors.

[155] Mr Hill also gave evidence that had he been advising Ensham which was the more desirable dragline from the point of view of operational flexibility he would have recommended the lighter dragline because mining operations at Ensham were being conducted at greater depths in most areas 'and getting deeper'. (T 1378.26-.28)

[156] Mr Alexander was the mining engineer called by Ensham as an expert on the topic. He concluded in his report that there were advantages in the use of a larger dragline such as a BE 1370 or Marion 8200, over the BE 1260. The machines first mentioned had a bucket capacity of about 56 m3. The advantages were:

'• The ability to reach deeper coal, leading to increased coal reserves.

•

A significant reduction in shovel-truck material leading to lower total overburden removal costs

•

A significant increase in material moved by lower cost draglines rather than high cost shovel-truck methods, or a high cost small dragline

•

The provision of additional operational flexibility to increase coal rates, and therefore coal sales.'

[157] Mr Alexander's opinion was attacked on the basis that he had analysed the performance of the BE 1260 against larger machines on the assumption that the smaller machine would be put to work at a deeper pit while the large machine worked over the shallower coal reserves. This deployment would exacerbate the discrepancy in productive capacity and was unrealistic. I accept the criticism but it does not detract from the general thrust of Mr Alexander's opinion that a larger machine would have been better all round in terms of capacity and cost. The extent to which it would out-perform the smaller machine in terms of volume of material removed and cost would depend upon the particular circumstances in which the two machines were deployed at the mine. Their deployment might be such as to minimise or maximise the performance differential between them, but there is no doubt there was such a differential. Moreover it is proper to assume that if a larger dragline had been acquired it would have been put to use in such a way as to obtain the best return from it. The evidence established that there were methods available by which a larger dragline could have been used effectively at Ensham. On the evidence such effective use would have produced overall increases in production and decreases in cost over the performance of a smaller machine.

[158] Mr Hill was the author of the '25 Cubic Metre Dragline Investigation' of

5 November 1998. He has commented that the statement in the report, that the

BE 1260 would be fully utilised from its commencement whereas a Marion 8050 could not be fully utilised for three years, was based on the mine plan, the plan for mining operations, then in existence. According to Mr Hill if Ensham had purchased a larger dragline he would have altered the mine plan to ensure that it, too, was fully utilised. This information does not appear in the report. Mr Hill also explained that the smaller dragline would not give greater operational flexibility than a larger machine. Indeed it provided less operational flexibility because it could not be used for stripping in deeper areas.

[159] It will be recalled that the memorandum spoke of 'flexibility for future operations'. Mr Alexander understood this to mean operational flexibility, in the sense that the machine could operate in a variety of circumstances. The assumption would appear reasonable but counsel for Mr Foots adamantly submits that the assumption was unjustified. Mr Hill, in the end, explained what he meant by the phrase; it had nothing to do with the operational characteristics of draglines but instead was a reference to the respective costs of large and small draglines. The choice of the smaller dragline would give Ensham greater 'financial' flexibility. Mr Hill explained (T 1377.21-26):

'... [B]y flexibility ... I meant that a five-year contract with this dragline ... relative to a ten year contract with a 47 metre dragline would provide the mine with an opportunity to reevaluate its future and get an optimum fleet for its view of the world in five years' time.'

In other words the flexibility came from the cheapness of the BE 1260 dragline. Its acquisition would entail such a small capital outlay that after five years Ensham could afford to buy more, and more expensive, draglines.

[160] One can be forgiven for not discerning that this was the proper meaning of the recommendation to acquire the small dragline because it would give 'greater flexibility for future operations.'

[161] During October and November 1998 Mr Ishizaki was engaged in the restructuring of Apollo. The discussions concerning IK's proposals for Apollo are of incidental importance to the case. What is relevant may be stated briefly. Mr Abe and

Mr Ishizaki supported the appointment of Mr Foots as CEO of the restructured Apollo. That, however, involved Mr Foots' resignation as CEO of Ensham to take up the new position. Mr Foots declined to relinquish his position at Ensham though he was content to accept the additional position at Apollo. This was not satisfactory to IK which appointed Mr Mathieson to the new position. Mr Foots reacted badly and told Mr Abe that he would resign if Mr Mathieson was given any responsibility over Ensham's operations. Because it did not wish to lose Mr Foots IK devised a compromise: Mr Mathieson was to become the chief executive of Apollo but his responsibilities would be limited to the mines at Muswellbrook and Ebenezer. He was to have no role to play in overseeing mining operations at Ensham: these would remain Mr Foots' province. Mr Foots accepted the compromise but remained peeved that he had not been appointed CEO of Apollo as well as of Ensham.

[162] Late in 1998 Mr Foots told Mr Hill of his proposal for a company, to be owned by Ensham's employees, which would purchase the BE 1260 and enter into a stripping contract with Ensham. He said that the joint venturers had asked him to get a dragline stripping contractor but he thought it would be a good investment for the employees 'rather than letting a contractor come in ...'. Mr Hill agreed to become one of the shareholders. He knew that Mr Dawson and Mr Edmondson had also been approached and had agreed to become involved. Mr Bird was also a participant.

[163] Mr Ishizaki attended the Management Committee meeting on 9 December 1998. Mr Abe and Mr Takahashi also attended. Mr Takahashi was a junior employee at Apollo with responsibility for coal sales. He returned to Tokyo in July 1999. He took notes from which he prepared a report which was sent to Mr Fujiwara on

11 December 1998. Mr Ishizaki reviewed and approved the report before it was sent. The report reads:

' ... [A]t the previous (meeting) ... (Mr Foots) gave details of the case in which a contractor would acquire a D/L (second hand) with a bucket size of 25m3 and had negotiations with BHP, which now owns the D/L, but BHP is now promoting re-evaluation of the assets it holds ... As a result, the sale of assets has become problematic and it appears the sale of the mini D/L cannot be settled ... Accordingly, CEO Foots commented that the chance of being able to obtain it was low.

 On the other hand, he is now ... investigating the possibility of a Marion 8200 (bucket size 56 m3) at Oaky Creek ...

 Even though the condition of this D/L cannot be said to be ... good, it has many parts we can exchange with the Ensham No. 1 D/L ... so we are taking into consideration its capacity to keep maintenance costs down.'

The report went on to record that Mr Foots had also mentioned other mines from which a second-hand dragline might be acquired.

[164] On 10 December 1998 Mr Foots wrote a number of letters on behalf of

Foots Consulting Services Pty Ltd of which he was director. The effect of the letters was to appoint himself the only director of Southern Cross. By a letter also dated 10 December 1998 Mr Foots as Chief Executive Officer of Ensham wrote to the director of Southern Cross, himself, giving Southern Cross 'consent ... to use the premises (at Level 20 AMP Place, 10 Eagle Street, Brisbane) as its registered office.' That was Ensham's address so the letter was written by Mr Foots from his office to Mr Foots at the same office giving Southern Cross consent to use Ensham's leased office space as its own until the consent was 'withdrawn in writing'. Mr Foots did not inform Ensham or the joint venturers of this correspondence.

[165] On 2 March 1999 Mr Foots sent the joint venturers a memorandum on the subject of the 'dragline stripping contract'. He wrote:

'This memo provides additional detail on the impact of the dragline stripping contract. This memo sets out the savings available to Ensham ...

A broadbrush 5 year forecast has been undertaken to determine the stripping quantities required to enable the long term sales forecast to be satisfied.

... The current forecast includes entering into a dragline stripping contract to uncover coal in B Pit. ... The figures are based on a dragline with a 25 cubic metre sized bucket. As set out in my memorandum of 5 November 1998, this dragline would move approximately 6.2 million prime bank cubic metres per annum. It is envisaged this contract would be in place in August 1999 for a 5 year duration. The two existing draglines would continue to uncover coal ... as per the current budget. ...

... The dragline stripping contract replaces material that would otherwise be moved by truck shovel contract. This represents a cost saving of approximately $0.45 per prime bank cubic metre. This saving amounts to $2.8 million per annum ...'

[166] Mr Hill prepared this 'broad brush review'. The figures used in it were based upon Ensham using the BE 1260 dragline. He had been told to make that assumption by Mr Foots.

[167] The memorandum was sent to Mr Fujiwara who was confused by it. He had thought that Mr Foots was investigating the acquisition of a larger dragline, one with a 47 cubic metre capacity. This was the gist of what Mr Foots had reported to the Management Committee on 11 December.

[168] There was a meeting of the Management Committee on 5 March 1999 at which

Mr Foots reported that the Marion 8200 dragline at Oaky Creek had been investigated but its condition had been found to be poor with the result that the overall cost of acquisition, including the cost of reinstatement, would be higher than anticipated. For that reason he wanted to postpone consideration of acquiring that dragline. He went on to say that there had been no substantial progress in negotiations with BHP to acquire the smaller dragline but they were pursuing the possibility and hoped to finalise negotiations by the end of April. Mr Foots said that if BHP agreed to the sale the dragline could be operational at Ensham about August.

'In late April or early May 1999 ... Edmondson and I met with Mr Ishizaki ... It was not a formal meeting. I took the opportunity to discuss the concept of Ensham staff and employees being the contractor for the third dragline using (Southern Cross) ... Edmondson and I explained the concept to Mr Ishizaki. It took some time ... to explain ... that Ensham employees ... had been asking Bird whether there was any opportunity for them to have shares in Ensham. We also told Mr Ishizaki that because we had not been able to find a suitable dragline stripping contractor ... that if the employees were allowed to form a company to buy the dragline to lease to Ensham, Ensham could enjoy the cost savings of reducing truck and shovel stripping volume ... After sitting quietly for some time, Mr Ishizaki said ... that he understood the proposal, but thought that if such a proposal was to be accepted by the Joint Venturers, Bird and I should be the majority shareholders so the Joint Venturers would be able to negotiate easier with (Southern Cross). Mr Ishizaki said ... that he was concerned that if employees had control of the company it could cause union like problems ...'

[170] Mr Ishizaki adamantly denies there was ever any such conversation, and that he ever suggested that Mr Bird and Mr Foots should be the majority shareholders in Southern Cross. Indeed he denies that he knew of that shareholding until August 1999 when Mr Dawson told him and Mr Matake. It should be noted that there is no written record of the conversation. Mr Ishizaki did not mention it in any report to his head office which would appear to be unique in the annals of this case. It may also be worthy of comment that Mr Foots did not speak to Mr Abe who was

Mr Ishizaki's superior. The evidence does not sit entirely comfortably with

Mr Foots' particulars which mention the meeting but do not suggest the presence of Mr Edmondson, who, of course, is dead.

[171] On 5 May 1999 Mr Hill drafted a letter which was to go from Mr Foots, representing Southern Cross, to Mr Bird, representing Ensham, by which Southern Cross offered to undertake dragline stripping at a price of 85 cents per cubic metre. Mr Hill used Microsoft Word to create a letterhead for Southern Cross. The address, telephone number and facsimile number were all Ensham's. At the same time Mr Hill drafted another letter to Mr Darryl Crank, Ensham's Administration Manager at the mine. This too was on Southern Cross' newly created letterhead, which showed that it utilised the office space and communication facilities of Ensham. The letter said:

'Southern Cross ... are preparing a tender to Ensham ... for Contract Dragline Stripping. As part of this process, Southern Cross would prefer to contract to Ensham Resources the payroll administrative function ...

Could you please supply a quote for Ensham ... to undertake the following services ...

The personnel associated with this contract would be employed by Southern Cross. Ensham ... would administer this payroll function ...'

[172] On 28 May 1999 Mr Ishizaki received from Mr Wakahara and Mr Fujiwara a report advising that those officers would meet with the Investment Committee in Tokyo on 9 June and then meet with IK's directors on 14 June to inform them that they (Wakahara and Fujiwara) thought it was appropriate to obtain a second-hand dragline with a bucket capacity of 47 cubic metres in 2001 when production of the mine would have increased to 5.5 MTPA but, in the meantime, to obtain the smaller 25 cubic metre dragline against the eventuality that a large dragline might not be available in 2001. Mr Wakahara was Mr Fujiwara's Deputy General Manager. The report requested Mr Ishizaki to ascertain from Mr Foots the position with respect to the negotiations with BHP and the stripping contractor. Mr Ishizaki was also asked to ascertain which dragline was being pursued (the larger or smaller), its price, the identity of the contractor who would own the dragline and the likely term of the stripping contract.

[173] The report from Messrs Wakahara and Fujiwara contained a surprising element. Up to this time Mr Ishizaki had understood that IK's policy was not to make any further outlays of capital to acquire additional assets. It was for this reason that the arrangement utilising a stripping contractor had been contemplated. The report of 28 May suggested that the joint venture might acquire two draglines: a small one immediately and a larger one two years later.

[174] Until his retirement in June 2004 Mr Quinn was the Managing Director of P&H whose business was the manufacture and marketing of surface mining equipment, including draglines. It also undertook the maintenance of draglines, and other equipment. Ensham's second dragline was a P&H 9020 which had been built and sold to Ensham by P&H. The machine was commissioned, after some delay for which P&H was responsible, in August 1998.

[175] On 17 March 1998 Mr Quinn met with Mr Bird and other Ensham managers at the mine site to discuss progress on the new dragline. At the conclusion of the meeting Mr Quinn spoke privately to Mr Bird about a number of topics concerning draglines. In the course of the conversation Mr Bird asked whether P&H would be prepared to operate and maintain a second-hand dragline at Ensham. Mr Quinn said he would be keen to undertake such a contract, and also said that P&H would finance the purchase of such a dragline on a ten year term.

[176] Although the discussion was a preliminary one Mr Quinn regarded it as a very good business opportunity for P&H. He thought the contract, if it eventuated, would advance P&H's business development in Queensland. He reported Mr Bird's overture to Mr Hale, his superior in America.

[177] During another visit to the Ensham mine, perhaps in June 1998, Mr Quinn met

Mr Foots. They spoke briefly about P&H's interest in operating a third dragline at Ensham. The conversation did not descend to particulars but Mr Foots was aware of the previous discussion between Mr Bird and Mr Quinn. Mr Quinn repeated that P&H was enthusiastic about the prospect of operating a dragline for Ensham.

[178] The delays to the completion of the 9020 dragline annoyed Mr Bird. In an endeavour to improve relations Mr Quinn met him at the mine on 5 August 1998. After the meeting he telephoned Mr Bird to ask what role P&H should have 'in relation to the acquisition and operation of the ... dragline ...'. Mr Bird said bluntly that P&H would have no role to play. He said that he 'had other plans now'. He was critical of P&H's performance in building and delivering the second dragline and said that P&H had 'lost its opportunity to become involved.' There is no evidence that Mr Bird was speaking for Mr Foots; he was, however, a director of Southern Cross.

[179] On about 29 January 1999 Mr Quinn (and other P&H employees) met with

Mr Foots and Mr Hill at Ensham's Brisbane office to discuss matters concerning a number of contracts between P&H and Ensham. These contracts did not relate to draglines. Mr Quinn at one stage steered the conversation to the question of a third dragline for Ensham. He said that P&H remained interested in performing any role in the purchase, overhaul, operation or maintenance of the third dragline. He said that P&H was open to suggestions as to what its role might be with respect to that dragline.

[180] Mr Foots was unenthusiastic; he said that he did not want Mr Quinn to inquire into the availability of draglines which Ensham might buy as such activity would increase the price prospective sellers would ask for. Instead he asked Mr Quinn to pass on any information about available draglines to Mr Hill.

[181] On 15 April 1999 Mr Foots attended a function which Mr Quinn hosted at the Cricketers' Club in Brisbane. The occasion was meant to promote good business relationships between P&H and Ensham. Mr Foots did not say anything about P&H operating the third dragline.

[182] Mr Foots has a different recollection of things. He deposes to a conversation in the first half of September 1998 with a P&H employee who was 'likely' to have been Mr Quinn. Mr Foots spoke of the possibility of P&H buying a dragline and entering into a contract with Ensham for the provision of dragline services. Mr Quinn said that before P&H could consider such an arrangement it would want 'input from experienced dragline operators like' Mr Foots or Mr Bird.

[183] Mr Quinn has no recollection of such a discussion which would have been significant to him because of his interest in advancing P&H's business activities. Mr Quinn denies that he would have said that P&H would require assistance from experienced dragline operators such as Mr Foots or Mr Bird. That was not, he says, his view and he would not have said it was.

[184] Mr Foots has also deposed that between September 1998 and the end of

January 1999 he spoke on a number of occasions by telephone to Mr Quinn. On most of those occasions he asked Mr Quinn about the possibility of P&H entering into a stripping contract with Ensham. Mr Quinn replied that P&H was only interested in the 'parts and maintenance side of the business' and had reservations 'about buying a dragline to contract with Ensham.'

[185] Mr Quinn denies there were any such conversations. His attitude remained that he was keen for P&H to pursue the business opportunity a stripping contract with Ensham would provide. P&H was not interested only in 'parts and maintenance' and Mr Quinn had no reservations about P&H buying a dragline to operate at Ensham; on the contrary he was 'keen to advance that prospect.'

[186] Mr Foots recalls the occasion on 15 April 1999 when he met Mr Quinn, and his superior, Mr Hale, he says at Michael's Restaurant. Mr Foots recalls asking

Mr Hale if P&H were interested in contracting with Ensham to provide a dragline. Mr Hale replied that P&H was not 'in the dragline operation business' but in the business of 'selling and maintaining draglines.'

[187] This is clearly the occasion to which Mr Quinn referred and places at the Cricketers' Club. Mr Hale was present as were several others. Mr Quinn gave evidence that he did not hear any part of the alleged conversation and Mr Hale did not mention it to him. Mr Quinn thinks it surprising that Mr Hale would not have mentioned it to him, had the conversation occurred, because Mr Quinn was the Managing Director of P&H's Australian operations. Furthermore on 20 March 1998 Mr Quinn had written to Mr Hale and mentioned the potential for P&H to purchase and operate a dragline at Ensham. Mr Hale had not expressed opposition to such a venture.

[188] I prefer the evidence of Mr Quinn to that of Mr Foots where their testimonies conflict. Mr Quinn appeared a forthright witness; he had no interest in the outcome of the litigation. I accept his evidence that he was enthusiastic for P&H to pursue the business opportunity of a stripping contract with Ensham. This means it is impossible to accept Mr Foots' evidence that Mr Quinn eschewed the chance. I do not believe that Mr Foots spoke to Mr Hale as he claims. That evidence is implausible. Mr Quinn was P&H's decision-maker in Australia. Mr Hale visited twice a year. It is difficult to understand why Mr Foots would have raised the topic when Mr Quinn had rejected P&H's involvement in a stripping contract on several occasions in numerous telephone conversations over months.

[189] Counsel for Mr Foots stress two aspects of the evidence to support a submission that P&H could never have made a stripping contract with Ensham. The first is that its American parent company went into what was called 'protective bankruptcy' at about the end of 1998 and remained in that state for two or three years. The result is that P&H could not have acquired, or would not have been permitted by its parent to acquire, a large capital asset such as the dragline, to perform a stripping contract. The second point is that Mr Bird had a particular reason for distrusting P&H's ability to perform any contract it might execute. This arose from P&H's delays in completing the second dragline and some problems with the standard of the product.

[190] The submission misses the point. It is Mr Foots' evidence that Mr Quinn rejected the suggestion that P&H might become a dragline operator to strip overburden at Ensham. It is not that P&H was unable to make such a contract, or that Mr Bird did not want it to. It is clear from Mr Foots' evidence that Mr Bird's discontent with P&H was not a reason why it was not approached to become a stripping contractor. The evidence is that it was approached, and declined.

[191] I have preferred Mr Quinn's evidence with the consequence that I am satisfied that Mr Foots has invented his version of his conversations with Mr Quinn.

[192] Moreover the evidence of Mr Scanlan, an employee of P&H at the relevant time, establishes that the predicament of P&H's American parent would not have precluded it from buying the dragline and hiring it to Ensham. Mr Scanlan was called in Mr Foots' case to prove the impossibility of such an arrangement, but his evidence did not have that effect. There is no reason not to accept Mr Scanlan's evidence; he was another of the witnesses whose abilities have led him to prominence in the mining industry and about whose recollection and integrity there is no question. He said that P&H could have leased the dragline from a financier which would have been approached to buy the dragline. P&H would then have hired the dragline to Ensham and operated it there. The lease payments would have been covered by the dragline's earnings from the stripping contract. Such an arrangement would not have involved the acquisition of a capital asset which would appear on P&H's balance sheet. The only difficulty in the arrangement was that there would have to be a purchaser for the dragline at the expiration of the lease. The financier would insist upon the purchase of the dragline from it, and P&H could not buy it. If a third party could be found to purchase the dragline the arrangement was feasible.

[193] The evidence which is yet to be rehearsed establishes, to my satisfaction, that had such an arrangement been proposed to Ensham, i.e. that it purchase the dragline at the termination of the lease for its residual value, it would have agreed to it.

[194] On 31 May 1999 Mr Edmondson telephoned Mr Howard, a Senior Associate at Clayton Utz. Mr Smith was away. Mr Edmondson asked if Clayton Utz could act 'in respect to some new instructions'. According to Mr Howard's note,

Mr Edmondson told him that Southern Cross intended to purchase a dragline for $2,000,000 and sign a stripping contract with Ensham. He explained that Mr Foots and Mr Bird between them would own 51 per cent of the share capital in

Southern Cross (510,000 shares) and that the remaining 49 per cent would be held by a number of employees not exceeding 24. Westpac was to be approached in order to borrow $1,000,000. Shares were to be issued at $1 each to provide shareholders' funds for the balance needed to buy the dragline. Mr Edmondson was concerned to receive urgent advice about how Southern Cross should go about raising the share capital. He asked what kind of 'offer document' was appropriate and if a prospectus would be necessary.

[195] A solicitor at Clayton Utz prepared a more formal note setting out the content of

Mr Edmondson's instructions. It identified the issues which had to be addressed to advise Southern Cross how to go about raising capital from shareholders. This note was given to Mr Smith on 2 June. He thought that Clayton Utz should not accept Southern Cross' retainer because Ensham and IQ would disapprove. He left it to Mr Howard to convey his decision to Mr Edmondson. He did not tell Ensham or IQ of his decision or of Mr Edmondson's approach.

[196] On 1 June 1999 Mr Ishizaki met with Messrs Nabetani and Kotake of EPDC and Messrs Foots, Edmondson and Hill at Ensham's Brisbane office. This was the day after Mr Edmondson approached Mr Howard. The meeting seems to have been arranged to allow the joint venturers to gain a better understanding of the reasons for acquiring a 25 m3 dragline. Mr Hill gave an explanation which stressed the positive effect on Ensham's cashflow expected from the dragline. At this meeting Mr Foots revealed ('casually' according to Mr Ishizaki) for the first time that the dragline contractor would be a company owned by Ensham's employees. The company was identified as Southern Cross. The proposal surprised Mr Ishizaki.

Mr Foots explained, according to Mr Ishizaki's report of the meeting, that:

•

The use of a dragline contractor, rather than the operation of a dragline owned by a mine, itself was unprecedented in Australia. The Ensham proposal for such a contract would be the first of its type.

•

The most important aspect of such a contract would be the maintenance of the dragline. To ensure its maintenance in good working order a maintenance agreement with Bucyrus to ensure ongoing operation should be signed.

•

To ensure "perfect operation" of the dragline "people from Ensham and not a third party" will be the contractor. More particularly "25 employees including Ken Foots and other subordinates, a small number of workers, and a third party will invest and establish a new company." The company will borrow money to allow it to acquire the dragline. It would sign a stripping contract with Ensham.

•

He (Foots) had already consulted lawyers and prepared a draft stripping contract. He appreciated that the proposal would give rise to a conflict of interest and he proposed to give an explanation of the draft agreement to the joint venturers following the management committee meeting of 4 June and to obtain their approval for the scheme.

[197] Mr Ishizaki recalls Mr Foots saying that a contractor to operate the dragline could not be found. Mr Kotake made a note of this statement, as well as Mr Foots assertion that 'the joint venturers decided not to purchase the third dragline itself but ... to get a contractor to purchase it and ... carry out the stripping'.

[198] At the same meeting Mr Hill advised that due to changes in the plan to develop the mine and a consequential alteration to the stripping required to gain access to coal, 'from the point of view of size and price the 25 cubic metre dragline ... is the most economical.' He went on to say that if a larger, 47 cubic metre, dragline became available in 2001 there would be even greater economic efficiency if that were acquired as well and used in conjunction with the smaller dragline.

[199] Mr Foots also explained that he thought two weeks would be required to negotiate and conclude the purchase of the dragline from BHP. He thought that would happen by about the third week in June and that it would take a further month to transport the dragline to Ensham where it would arrive about the end of July.

[200] Mr Ishizaki identified two issues which arose from the meeting. The first was whether the joint venture should acquire, or hire, a large dragline or a small one. As to this he was persuaded by Mr Hill's advice that the smaller dragline was the most economical option available. The second issue was, if a dragline was to be hired, whether Ensham's employees should own the stripping contractor. He reported to head office that while he could 'understand the participation of Ensham staff as investors, signing a stripping contract with ER as a contractor will only complicate the system, and, in considering the profit of the J/V, (he did) not believe that ... this can be recognised.'

[201] Mr Foots' account of the meeting is brief but does not appear to contradict

Mr Ishizaki's account. Both Mr Ishizaki and Mr Kotake made a comprehensive written note of the meeting.

[202] There is ample evidence that when Mr Foots was negotiating for the purchase of the BE 1260 dragline and discussing with the joint venturers the need for a third dragline at Ensham, a number of second hand draglines were available for sale. This is well established by the evidence of Mr McMahon, Mr Aplin, Mr Shea,

Mr Nienaber and Mr Hill. One of these machines was the Marion 8200 at

Oaky Creek which, according to Mr Hill, would have been the 'ideal option' for Ensham.

[203] On 2 June Mr Ishizaki met again with Mr Foots and Mr Edmondson in the company of Mr Kotake to make sure he properly understood the proposal. His report to

Mr Shibata, who had replaced Mr Fujiwara, is a record of the meeting. Mr Ishizaki expressed concern about the proposal; he said that IK had agreed to Mr Foots establishing a consultancy company because it was thought to have some benefit for the joint venturers in terms of reducing cost and providing motivation for staff to perform well. However the dragline proposal appeared unnecessary and could give rise to problems. As Mr Ishizaki put it quaintly the proposal 'seemed to be putting a roof on top of the roof.' It was an unnecessary layer on top of the consultancy company and was not beneficial for the joint venture. He asked Mr Foots to explain if there were any benefits for the joint venturers.

[204] Mr Foots' reply was that the small dragline was older than the other two Ensham owned, and differed from them in its operating method. Ensham's operators would, for that reason, be reluctant to operate it. The workers were given some latitude in the choice of what machines they would operate. He intended to select about ten miners to operate the small dragline. Mr Foots also said that the idea of a company owning the dragline and contracting it to Ensham came about because the joint venturers had declined to invest in a dragline. (This was apparently a reference to the events of 29 May 1998). Mr Foots also said that he had 'joined' this idea with the miners' request to own shares in the joint venture, which was long-standing. The result would be that the mine workers who would operate the small dragline would have shares in the contractor company which would raise their morale and loyalty.

[205] Mr Foots made it clear that the proposed structure was 'just ideas' and had not been discussed with the prospective shareholders. He thought they would comprise four employees from the Brisbane office, five from the mine staff, 16 mine workers (ten of whom would be operators) and one person external to the company. He proposed that the ten operators should terminate their employment with Ensham and be re-employed by the contractor, though it might be preferable to allow them to remain with Ensham so as to avoid the cost of their termination.

[206] Mr Ishizaki remarked that the proposal seemed quite complicated and asked whether, if the joint venturers bought the small dragline, the morale of staff and mine workers would be reduced. Mr Foots replied that there was no problem in the joint venturers purchasing the dragline though its acquisition 'would do nothing for the staff's morale.'

[207] Mr Kotake asked if the dragline could be leased. Mr Foots said it could, but the financier would require a higher degree of maintenance for the dragline than a contractor and that would drive up the cost of leasing. He said that a contractor who owned the dragline could negotiate a cheaper maintenance contract with Bucyrus and thereby lower the stripping contract rate.

[208] Mr Ishizaki said that he feared that if some mine workers had shares in the company, while others did not, there would be a degree of divisiveness and animosity between employees. Mr Foots said that such a fear was unfounded because the miners 'were like brothers'.

[209] Mr Foots' account of the meeting does not differ markedly from Mr Ishizaki's.

'(c) that because the joint venturers had indicated they would not provide any funds for major capital equipment, the new company would own the Dragline and enter into an operating contract with Ensham and a maintenance contract with Bucyrus;

(e) the Manager of the new company could be a person outside ... Ensham to manage any potential conflicts of interest;

(h) the arrangement would be more beneficial to the joint venture than a lease option as it created incentive to the employees;

(j) a lease would offer no incentive to the ... employees and ... the lease case would be more expensive because the maintenance and finance costs would be greater...

(k) ... Ensham could purchase the dragline at a later date...'

[210] On 2 June, probably too late for the meeting, Mr Ishizaki received instructions from his superiors in Tokyo setting out the approach he was to take when he met

' K Foots' present proposal of ER employees establishing a new company, and that company buying the D/L, and furthermore the issue that ER workers be loaned and operate the D/L is absolutely out of the question.'

[211] On 3 June 1999 Mr Ishizaki met with Mr Andrew Smith, a partner at Clayton Utz, Ensham's solicitors. He sought advice about Mr Foots' proposal that Ensham's employees own a company which would contract with Ensham to provide the services of the dragline. That afternoon Mr Smith sent Mr Ishizaki a brief advice by facsimile. It read:

'I consider that for the Ensham Joint Venturers to ... decide that the transaction is commercial, and viable, they would need to be satisfied of the following:-

2. that the offer from (Southern Cross) is made to all relevant eligible employees, and is therefore made fairly; and

3. that the agreement to be entered between Ensham ... and (Southern Cross) is appropriate, and has been independently verified.'

Mr Smith provided, by separate document, some advice in relation to the provisions of the corporations legislation with which Southern Cross would have to comply if it sought shareholder funding to buy the dragline.

[212] It will readily be appreciated that this advice was worthless. It did not address the fundamental question of what a fiduciary, intending to deal with his beneficiary and principal, needed to disclose in order to obtain an effective consent to the dealing. It did not address any detail of the facts pertinent to the dragline agreement. Remarkably Mr Smith did not even disclose to Mr Ishizaki what he knew: that

Mr Foots and Mr Bird between them would own 51 per cent of the shares in Southern Cross: that the dragline would effectively cost $2,000,000: that Westpac was to provide funding of $1,000,000 by way of loan and that $1,000,000 would be raised by way of a share issue.

[213] A Management Committee meeting was scheduled for 4 June 1999. Shortly before it was due to commence Mr Ishizaki received a memorandum from Mr Foots which summarised the results of a revised plan for the Ensham operation. Entitled 'Ten Year Plan' (and sent to all joint venturers) it read:

'The Ten Year Plan is an improvement from the 25 Year Feasibility Study due mainly to the earlier expansion of B Pit onto the river flats. This has resulted in a reduction in the required prime stripping to satisfy the production targets.

The Ten Year Plan is based on the current two draglines with the adoption of a contract dragline operation utilising a 25 m3 sized dragline and contract truck shovel stripping.

The decreased prime requirement combined with Dragline 2 being larger than the second dragline in the 25 Year ... Study ... has deferred the need for a third large dragline.

For the first three years of the plan a 47 m3 dragline would be substantially under-utilised. As the plan progresses the amount of material handled by truck shovel that could be handled by dragline increases. From 2003-2004 the total amount of truck shovel stripping required exceeds 18million bcm per year. At that stage it is envisaged a fourth dragline (47 m3) could be incorporated into the stripping strategy. This further option has yet to be evaluated in detail.

The 25 m3 dragline reduces Ensham Resources operating costs by approximately $3million per annum by supplementing some of the truck shovel contracting. This approach provides a transition for the increasing amount of extra material that can be handled by dragline.'

[214] The plan itself, attached to the memorandum, asserted that an 'additional 47 cubic metre dragline' was 'not currently available' but if available would be under-utilized until, at the earliest, the year 2003-2004. There was, as I earlier mentioned, a number of second-hand 47 cubic metre draglines for sale. There were two

BE 1370 machines at Oaky Creek, which could have been bought for about $2,500,000 each. There is no cogent evidence that Mr Foots knew of the two draglines, or their price. However, that knowledge could have been easily obtained. Mr Shea and Mr Nienaber, among others, made it their business to be informed about what draglines had been parked, which were available for sale, their general condition and their price. Mr Foots had utilised their services earlier when investigating the availability of second hand draglines when he contemplated that Ensham would buy one. If Mr Foots did not know that the two BE 1370 draglines were for sale it was only because he did not ask for relevant information. His statement, in that event, that there were no available draglines was made recklessly.

[215] Mr Hill prepared the ten year plan at Mr Foots' request. It was based upon using Ensham's own two draglines, a contract dragline operation utilising a 25 cubic metre dragline and the contract truck and shovel stripping. The plan stated that the need for a third large dragline had been deferred because of reduction in the amount of stripping required and because the second dragline was larger than had been contemplated in the 25-year feasibility study. As I understand Mr Hill's evidence this statement was false. The 25-year study had been predicated upon one dragline with a capacity of 47 cubic metres and two new draglines each with a capacity of

75 cubic metres, giving a total capacity of 197 cubic metres. The combined capacity of the existing draglines and the proposed smaller dragline was only

161 cubic metres. I have already noted Mr Hill's opinion that Ensham's stripping needs would be better met by acquiring a dragline larger than the BE 1260.

[216] The statement contained in the ten-year plan, that for the first three years a 47 cubic metre would be substantially under-utilised, was true only if it were assumed that the dragline would be used in accordance with the mine plan set out in the earlier 25-year study. If a larger dragline had been acquired, the mine plan could have been changed to utilise the larger machine fully. This could have been done by opening another pit to use the excess dragline capacity. Moreover, even if a larger dragline was not fully utilised, it may still have been more economical in its use than the smaller one. These matters were not adverted to in the document.

[217] Another egregious omission from the 'Ten Year Plan' was the information that the cost of the dragline was such that the estimated savings from using it rather than the truck and shovel contractor would have paid for the dragline in about a year. Such knowledge would, obviously, have been of critical importance to a decision whether or not to buy the dragline or to hire it from Southern Cross. The information was withheld from Ensham and the joint venturers by Mr Foots.

[218] By arrangement there was no discussion at the Management Committee meeting about the ten-year plan or the dragline stripping contract. These matters were to be discussed at a separate meeting, which was convened when the Management Committee meeting concluded. The special meeting lasted from 11:00 am to noon. Those present were Mr Ishizaki and Mr Takahashi of IQ, Mr Nabetani and

Mr Kotake of EPDC, Mr Kim of LG, Mr Hill, Mr Edmondson and Mr Foots. The meeting reconvened at 1:30 pm though Mr Foots did not attend the second session.

[219] Mr Foots said that B Pit, the flood plain area, was not suited for the use of a large dragline because the stripping ratio was low (i.e. the overburden was shallow) and the ground was sandy. The second dragline bought from P&H had a bucket capacity of 89 cubic meres. The 25-year plan for the mine had assumed that the second dragline would have a bucket capacity of 75 cubic metres. He said that a

25 cubic metre dragline was appropriate as the third dragline for Ensham. There were no 47 cubic metre draglines available but, even if one were, its utilisation rate would be only about 65 per cent. It would not be fully utilised until the fourth year of operation. At that time both a 47 cubic metre dragline and a smaller, 25 cubic metre dragline could be fully utilised.

[220] Mr Foots went on to describe the 'potential' availability of second-hand 47 cubic metre draglines. There was one, he said, at Oaky Creek which could be got for between $10,000,000 and $15,000,000, but it was thought to be in poor condition and reinstating it to good working order would cost about $10,000,000. (There were in fact the two BE 1370s which I mentioned earlier.) There was a future possibility that a dragline at Curragh could be obtained. There was also a dragline at Norwich Park, but it was thought that that mine's owners would use it in the future. Mr Foots also said that the small dragline was at Blackwater, which was a mine owned by CQCA.

[221] Mr Foots described the nature of his proposal diagrammatically on a white board. It showed that Southern Cross would have 21 shareholders comprising four of Ensham's managers, 16 of its employees and one 'outside party'. Southern Cross would enter into a stripping contract with Ensham Resources. It would also enter into a maintenance contract, a purchase contract and a relocation contract with Bucyrus, and a finance contract with Westpac. These contracts would allow Southern Cross to buy the dragline, move it to Ensham and have it maintained in good working order while it performed the stripping contract. Mr Hill advised that the total cost of acquiring, relocating and bringing the dragline to a state of good working order would 'be less than $7,000,000'.

[222] Mr Foots' account of what he said at the meeting was, relevantly, that:

•

if Ensham introduced the BE 1260 dragline there was a possibility that a fourth dragline with a bucket capacity of 47 cubic metres could be introduced in 2003/2004;

•

as at the end of March 1999, the Marion 8200 dragline was no longer available; and

•

there were currently no suitable 47 cubic metre draglines available.

[223] Mr Ishizaki said that IK insisted upon three conditions if Southern Cross were to become the contractor: that there should be no conflict of interest, there should be a transparency of Southern Cross' costs and that all employees should be treated fairly. These were the conditions that Mr Smith had advised as being appropriate the day before. Mr Ishizaki also asked for an economic analysis of three options for the purposes of making a comparison. He wanted an analysis of the financial consequences of: (i) Southern Cross buying the dragline itself; (ii) Southern Cross owning the dragline but leasing it to Ensham; and (iii) a finance company buying the dragline and leasing it to Ensham. In each case the dragline would be operated by Ensham's employees. No formal minute of this meeting was made although

Mr Kotake made a full note. Some months later Mr Ishizaki asked Mr Edmondson to prepare minutes of the meeting, which he did, relying on Mr Kotake's notes.

[224] It will be observed that at none of the meetings on 1, 2 or 4 June when Mr Foots spoke about the proposed shareholding in Southern Cross did he mention that he and Mr Bird would between them own 51 per cent of the shares. He gave some detail of shareholding, but not that particular. Equally significantly he did not say that that majority shareholding had been suggested by Mr Ishizaki. This is a remarkable omission, if Mr Ishizaki had made that suggestion, given that Mr Foots was endeavouring to persuade the joint venturers to accept his proposal for an employee owned company to be the dragline contractor. There can be no doubt as to what Mr Foots did say about the proposed shareholding at those meetings; his remarks were noted in writing by others present.

[225] Only Mr Foots suggests he said at the meeting of 4 June that the Marion 8200 was not available for sale. He had certainly said that at an earlier meeting; it had been the subject of an investigation conducted by Mr Hill and Bucyrus late in 1998.

Mr Foots had asked to be provided with information about the Marion 8200 - its condition, likely price and likely cost of reinstatement to good working order. Bucyrus investigated the machine and Mr Hill undertook an economic analysis of the cost and benefits to be gained from its use.

[226] The report from Bucyrus on its inspection of the dragline was completed on

26 October 1998. The dragline had not been 'looked after ... particularly well' but 'it could be brought to good operating condition.' Bucyrus estimated that necessary repairs and refurbishment would cost about $8,000,000. This amount included an allowance for the total replacement of the dragline base which would itself cost $3,500,000. The replacement was a counsel of perfection and the dragline could have been operated satisfactorily with the existing base. Indeed that happened when it was subsequently purchased by BHP and put to work.

[227] On 21 December 1998 Mr Shea advised Mr Hill of his estimate of the cost of bringing the Marion 8200 dragline to workable condition over the ensuing three or four years. His quotation included an amount to prepare the dragline for its transport to Ensham: this amount was $1,900,000. The total cost included in that exercise came to $10,700,000; it too included the $3,500,000 for replacing the base.

[228] Mr Nienaber had discussions with the managers at Oaky Creek about the price for which they would sell the Marion 8200 dragline. The price was $3,500,000 if sold without spare parts and $4,000,000 with the parts. There is no doubt that

Mr Nienaber passed on this information to Mr Foots. A facsimile of

11 December 1998 indicates they had discussed the offered price. The dragline in fact was sold in October 1999 for $4,250,000.

[229] Mr Hill recollects speaking to Mr Foots about Bucyrus' estimate for refurbishing the dragline. They both thought the estimate conservative, in the sense that it recommended the replacement of parts that they, as experienced dragline operators, thought were unnecessary. They thought the actual cost of putting the dragline into workable condition would be less than the amount estimated.

[230] Some time around August of 1998 Mr Foots became aware that CQCA had a

BE 1260 dragline at its Blackwater mine for which it had no use. In the jargon of the industry it had been 'parked'. It is likely that he learned of the dragline from

Mr Shea, the Sales Manager of Bucyrus, who had been approached earlier that year when Mr Foots and his managers were investigating the deployment of a third dragline at Ensham. Mr Shea had been asked about the availability of second-hand draglines and the cost of a new one.

[231] Mr Hill approached Mr Shea, or Mr Nienaber, the Managing Director of Bucyrus, to inspect the BE 1260 dragline and provide a report on its condition.

Messrs Nienaber and Shea inspected the dragline in the second half of August and sent a report to Mr Hill on 3 September. Although the dragline was about 30 years old it was in good condition.

[232] Some time prior to 7 September 1998 Mr Bird telephoned Mr Shea and asked him if Bucyrus would purchase the 1260 dragline on behalf of Ensham. He said that Ensham did not want to be named on the contract as purchaser 'because of issues with the unions'. Apparently Mr Bird explained that the miners at Blackwater might try to prevent the dragline's deployment to Ensham if they knew that was its destination. Mr Shea understood that Mr Bird was proposing that Bucyrus should buy the dragline from CQCA and then on-sell it to Ensham.

[233] On 7 September, no doubt as a consequence of Mr Bird's approach to Mr Shea,

Mr Nienaber wrote to BHP Coal Ltd to indicate his interest in buying the dragline.

[234] At about this time Mr Foots spoke to Mr Nienaber and asked him whether Bucyrus would purchase the dragline on the basis that it would receive a commission for doing so and would then agree to sell it to Mr Foots' company, which Mr Nienaber later learned was Southern Cross. Mr Nienaber agreed to the proposal.

[235] On 21 February 1999 Mr Gazzard, who was the Group General Manager for BHP's northern operations, which included a number of coal mines as well as the shipping port at Hay Point, sent an email to Mr Madden. It read, in part:

'I agree we should dispose of our surplus draglines and so you should get a price for Ensham to purchase dragline 1. This is a very sensitive issue particularly with QCT and I have used the same argument with Chris Rawlings - that is Ensham will pick up one of the Oaky Creek machines anyway so we may as well convert our old steel into cash. He and I have agreed that once we get a firm offer we should put it to the CQCA JV for a decision.

I met Ken Foots a few weeks ago and confirmed with him that this was our position, so the ball is in his court - he (or BE) has to come up with an offer ...'.

[236] It did so, and on 5 May 1999 Mr Nienaber informed Mr Foots by memorandum that BHP and Mitsubishi had agreed to the sale of the BE 1260 dragline but that QCT had not yet agreed.

[237] Three weeks later, in an email sent to Mr Nienaber on 26 May 1999, Mr Gazzard said:

'I am pleased to advise that we have today got the approval from all joint venturers to proceed with the sale of the 1260 dragline and associated spares for $1.5M in cash, "as is, where is". We would like to proceed as quickly as possible to completion ...'

[238] The communications which led to the agreement to sell make it clear that BHP and the other members of CQCA knew that the dragline, once bought by Bucyrus, was to be put to use at Ensham. It is equally clear that BHP had no hesitation in selling the dragline for use at Ensham though one of its joint venture partners, QCT did hesitate and had to be persuaded. The arguments that appear to have won the day were that the BE 1260 dragline was of no use to CQCA, could be sold and CQCA was in need of funds. It was an old, small machine and would provide Ensham with less stripping capacity than a newer, larger machine. It was more costly to operate than a large machine. If Ensham were determined to obtain a dragline it would do so, regardless of whether or not it bought the BE 1260 dragline and, in that event, it would probably acquire a bigger machine. It would be preferable, therefore, to let the competitor have the smaller machine.

[239] Apart from the content of the written communications it is well established by the evidence that BHP knew the dragline was destined for Ensham. Mr Shea himself told Mr Madden, the Manager at the Blackwater mine. Mr Madden corroborates

Mr Nienaber's evidence that he was told that the dragline bought by Bucyrus was to go to Ensham. Mr Gazzard met Mr Foots in about January on 1999 when Mr Foots told him of his interest in having the dragline operate at Ensham. Mr Gazzard saw no difficulty in the sale by BHP of the dragline. I have already summarised his reasons. QCT did not initially share his opinion but was convinced that the sale should go ahead. Mr Gazzard undertook the successful advocacy.

[240] It is also clear from the evidence of Mr Gazzard and of Mr Madden that BHP did not have a policy at any relevant time which forbad the sale of items of capital equipment to other coal mine owners who might be regarded as competitors of mines in which BHP had an interest. There was a reluctance to sell large capital assets, such as draglines, to anyone. After the negotiation for the sale of the BE 1260 dragline, Mr Gazzard formulated a policy that large draglines should not be sold to competing coal mine owners. At the times relevant to this action there was no such policy in place and there was never such a policy applicable to the BE 1260 dragline.

[241] By a written agreement dated 11 August 1999 between Bucyrus as seller and Southern Cross as purchaser the dragline and spare parts were agreed to be sold for $1,500,000 payable in two instalments. The first payment of $500,000 was to be made on the day that Bucyrus and BHP executed a contract for the sale of the dragline and the balance would be paid on 1 December 1999. Mr Hill signed for Southern Cross.

[242] Southern Cross subsequently made other agreements with Bucyrus. One was for the relocation of the dragline from Blackwater to Ensham. This was a substantial, time consuming and costly task. The second contract was one by which Bucyrus agreed to maintain the dragline during the term of the dragline agreement between Southern Cross and Ensham. The consideration for Bucyrus' purchase and on-sale of the dragline was subsumed in the price for the maintenance agreement.

[243] By a sale agreement dated 23 August 1999 BHP Coal Pty Ltd agreed to sell to Bucyrus the dragline and spare parts described in the agreement for an inclusive price of $1,500,000.

[244] Mr Nienaber deposed that, had he been asked to have Bucyrus assign the benefit of the agreements made with Southern Cross to Ensham, he would have agreed. He was never asked to agree to the assignment or to terminate the contract to allow Ensham to purchase the dragline directly from Bucyrus or from BHP.

[245] Mr Nienaber has no recollection that Mr Foots ever asked him whether Bucyrus would be interested in becoming a stripping contractor for Ensham. Likewise he has no recollection of saying that if Bucyrus did undertake such a contract it would want assistance from an experienced dragline operator. Mr Nienaber deposes that such a statement 'would have been inconsistent with Bucyrus' practice and policy.' It was said in evidence that Bucyrus had no interest in undertaking stripping contracts. No doubt if asked Mr Nienaber would have said so. He does not recall being asked.

[246] Mr Foots' statement asserts that on 28 January 1999 he met Mr Gazzard in Brisbane. During their meeting Mr Foots asked whether BHP might sell a dragline. Mr Gazzard's reply was that BHP would not sell a dragline to a competitor and would not sell any of their larger draglines but 'would be prepared to consider an offer for the 1260 from Bucyrus or someone else even though the dragline may be used at ... Ensham ...'.

[247] Mr Foots also said that he spoke by telephone to Mr Gazzard in April of 1999 during which Mr Gazzard said that BHP would not sell a dragline to a competitor. Mr Foots asked if the BE 1260 dragline could be sold to a contractor who would use the dragline at Ensham. Mr Gazzard said that would be acceptable.

[248] Mr Gazzard also denies that in April 1999 he told Mr Foots that BHP would not sell the dragline to a competitor but would be agreeable to its sale to a contractor who would use it at Ensham.

[249] Mr Gazzard denies telling Mr Foots that BHP would not, as a matter of principle, sell a dragline to Ensham though he may have said that he thought CQCA was unlikely to sell a dragline to a competitor. The remark referred to larger draglines, not the BE 1260. Mr Gazzard told Mr Foots that he should make whatever offer he wanted for a dragline; he did not discourage Mr Foots from making such an offer. Mr Gazzard denies telling Mr Foots that BHP would not sell the BE 1260 dragline to Ensham, but would have no objection to it being sold to Bucyrus, who would then use it to remove overburden at Ensham. It did not matter to Mr Gazzard whether Ensham or Bucyrus purchased the dragline; he knew it was proposed to be used at Ensham.

[250] Mr Gazzard was an impressive and disinterested witness. The proposition to which Mr Foots says Mr Gazzard gave his assent is not sensible. If BHP wished to prevent its draglines from being put to use at other mines it would not sell either to the mine owner or to a contractor who would use it at the other mine.

[251] There is convincing evidence that Mr Foots told the joint venturers that BHP would not sell the small dragline to Ensham because it was a competitor. The representation was made to those present at the meeting on 1 June 1999 and the subsequent Management Committee meeting on 4 June. Mr Ishizaki made a note of the statement on 1 June and Mr Kotake recorded it on 4 June. Mr Foots repeated the statement in the week following his return from Tokyo in July 1999 to

Mr Matake. Mr Matake did not make a note of the conversation but I accept his evidence.

[252] Counsel for Ensham places great emphasis on this representation. It is said, I think correctly, that it provided the foundation for Ensham's acceptance of the arrangement by which Southern Cross would buy the dragline and hire it to Ensham. By reason of the representation Ensham, and the joint venturers, believed that Ensham could not itself acquire the dragline.

[253] I have no doubt that that representation was erroneous. The evidence of

Mr Gazzard and Mr Madden, which has just been noted, establishes that BHP had no such policy. It may be of significance that Mr Brett, a witness called by

Mr Foots and who was formerly employed by BHP, was not asked about the existence of such a policy.

[254] The pertinent question is whether Mr Foots made the representation fraudulently, or whether he had a genuine belief in the existence of the policy.

[255] An important factor for this determination is Mr Foots' admitted statements to the joint venturers at the Management Committee meeting on 29 May 1998. He told them that he had received an offer from BHP for the sale of a large dragline and wanted the joint venturers to agree to its purchase that day. Mr Foots himself admits he made the statement. It cannot stand with the belief that BHP would not sell a dragline to Ensham because it was a competitor.

[256] Equally telling is the fact that Mr Foots denies having made the representation. His evidence was that he said only that 'BHP may have reservations about selling to a competitor'. The basis for that statement, as appears from Mr Foots' evidence is that:

•

On 28 January 1999 he spoke to Mr Gazzard in Ensham's Brisbane office about 'the possibility of BHP selling a dragline. Mr Gazzard said "words to the effect that BHP would not sell a dragline to a competitor"; it would not sell any of its large draglines; it would be prepared to consider an offer for the small dragline from Bucyrus or someone else even though the dragline may be used at the Ensham mine.'

•

In April 1999 in a telephone conversation, Mr Gazzard told Mr Foots 'words to the effect that BHP would not sell a dragline to a competitor', but when asked if 'there was a problem in the selling of the 1260 to a contractor if the contractor used the dragline at Ensham' Mr Gazzard said that 'that would be no problem'.

•

On 16 April 1999 at a meeting which both Mr Foots and Mr Kirkby attended, Mr Kirkby told Mr Foots 'that BHP's preferred option was not to sell the 1260 to a coal producer but rather to sell it to a contractor'.

[257] The distinction which Mr Foots attempts to draw, between BHP selling a dragline to another coal mine owner and selling it to a contractor to be used at that other owner's mine, is nonsensical. If BHP had a policy designed to prevent its second hand draglines being used at a rival coal mine the policy, to have any coherence, must have extended to the use of the dragline in the coal mine, not the mechanism of ownership. Mr Gazzard said that 'it made no difference to (him) whether the dragline was sold directly to Ensham or whether it was sold to Bucyrus and then hired to Ensham'.

[258] I do not accept this evidence of Mr Foots'. In any event it was contested by

Mr Gazzard whose credit was not in issue. It is clear from Mr Gazzard's part in the negotiations for the sale of the dragline that he spoke to Mr Foots and expected him to make an offer for the dragline. This stance is documented. It is irreconcilable with Mr Gazzard telling Mr Foots BHP would not, as a matter of policy, sell the dragline to a competitor. There is, as I have said, no doubt that Mr Foots represented that BHP had a policy that precluded the sale of the dragline to Ensham. The fact that he denies making the representation and instead presents a diluted version of it suggests that he is not prepared to justify the accuracy of the representation, nor his belief in it.

[259] Mr Nienaber accepts that he believed BHP did have a policy against selling draglines to competitors. He thinks it is possible he mentioned that to Mr Foots. Even if he did so, Mr Foots knew better. He had spoken to Mr Gazzard and discussed with him the purchase of the small dragline and the fact that Mr Gazzard expected him to make an offer for it.

[260] Even if one accepted Mr Foots' testimony his conduct was not consistent with honesty. He admitted that the acquisition of the dragline by Ensham would have been advantageous to it. (T 2357.30). He also accepted that he made no attempt to persuade BHP to sell the dragline to Ensham (T 2283.12-14). He did not approach the men he knew from his days at BHP to test the strength of the 'reservation'. Indeed Mr Kirkby had told him only that BHP had a 'preference' not to sell the dragline to Ensham. These are things he would have done had he been acting in the best interests of Ensham and had he been told only that there 'may be' some reluctance on BHP's part to sell to Ensham.

[261] I conclude that the representation was false to Mr Foots' knowledge.

[262] In April 1999 Mr Foots submitted a proposal to Westpac in support of Southern Cross' application to borrow funds necessary to buy the dragline. The proposal had been put together by Mr Hill and Mr Edmondson and shown to Mr Foots for his review. It read in part:

'Southern Cross ... is considering an opportunity to provide contract services to Ensham Resources ...

This proposed five year contract would involve stripping overburden at the Ensham Mine ... An integral part of this contract would be the purchase and refurbishment of a second hand dragline.

(Southern Cross) has been formed ... to enable the Ensham Management Team ... to undertake contracts in overburden stripping and mine management throughout the mining industry.

Ensham Resources are currently expanding ... production ... To enable this expansion an increased quantity of overburden is required to be moved ... [T]here now exists an opportunity to lower Ensham Resources operating costs by moving more of this material with lower cost dragline operations.

Southern Cross aims to take up this opportunity ... The Joint Venture partners have agreed in principle to this concept.

To further reduce the total cost of the operation Ensham Resources have agreed to fully utilise the dragline capacity provided through the contract'.

(i) Mr Foots did not reveal to the joint venturers his proposal that his company, Southern Cross, should contract with Ensham to provide a dragline until 1 June 1999, about two months after this proposal. To say, therefore, that the joint venturers had agreed in principle to the concept was a downright falsehood.

(ii) The proposal contains the admission that Southern Cross had been formed for the purpose of becoming a stripping contractor. It is clear from Mr Foots' meeting with Mr Smith in April 1998 that he contemplated that his management company would become a stripping contractor to Ensham. The same indication appears from Mr Foots' report on his management company proposal to the joint venturers of June 1998.

(iii) The assertion that Ensham Resources had agreed to utilise the dragline fully was a deliberate misrepresentation because there was no agreement. That apart, the point is that the revenue earned by Southern Cross from the dragline operation was dependent upon the amount of spoil removed. Revenue would be maximised if the dragline were used to its full capacity and did not periodically stand idle. The assertion would no doubt be of interest to a lender which depended on the borrower's cashflow for the repayment of the loan. The result to Ensham of fully utilising the dragline was that the amount payable under the stripping contract would increase.

[264] Mr Foots' answer to these criticisms was that the document was not intended to set forth statements of fact but was a 'scenario' or 'feasibility' in which only conjectural states of fact were discussed. It is impossible to regard the funding proposal as having that complexion. It was in terms an application to Westpac to borrow $2,300,000. It is not to be supposed that Mr Foots thought the bank would deal in conjecture rather than fact. There is nothing in the expressions found in the proposal to indicate that statements of fact found in the document were not meant to be taken at face value.

[265] Mr Foots and members of his team met with officers of Westpac on 28 April 1999 to discuss their funding proposal. Mr Erfurth, one of the officers, summarised in a note of the meeting what he had been told in support of the application for funding by Southern Cross. He wrote:

'Management have a distinct advantage in being asked to prepare a draft contract agreement between Ensham Resources and SCMM. (This) coupled with knowledge of the costs currently being incurred by the company under contracts and the firm purchase contracts for the supply of coal should allow the venture to be profitable.'

[266] It is obvious that one of the sources of Mr Foots' 'distinct advantage' in dealing with his employer on behalf of Southern Cross was that he had knowledge of the cost to Ensham of the Golding contract, and the price Ensham received for the coal it sold. This was information which his contract required him to keep confidential.

[267] On 19 May 1999 Mr Edmondson met Mr Quinlan of Deloitte Touche Tohmatsu, chartered accountants, who were IK's accountants in Australia. Mr Edmondson sought advice from Mr Quinlan 'in relation to issues ... to be addressed in putting together the proposed share issue by (Southern Cross) and (taxation implications).' Mr Edmondson summarised Mr Quinlan's advice in a memorandum to Mr Foots of 28 May 1999. Neither Mr Foots nor Mr Edmondson informed Ensham of this approach to its accountants. Mr Quinlan believed that he had been consulted on behalf of Ensham. It was not made clear that he was being asked to advise Southern Cross.

[268] On 9 June 1999 Mr Fujiwara met with the members of the Investment Committee of IK in Tokyo. He sought approval for IQ to proceed with the proposal that the joint venture enter into a stripping contract with the company which owned the small dragline. He did not reveal to the Investment Committee that the contractor would be Southern Cross. What he wanted was approval in principle to the contract. The Investment Committee gave its approval but advised that it was prepared to sanction the purchase of the dragline by the joint venture itself, at least if the cost could be recovered from savings within three years. He reported this outcome to

[269] On receipt of the report Mr Ishizaki met Mr Foots to inquire about the possibility of the joint venturers buying the dragline. They were alone; Mr Ishizaki made no note of the meeting but believes it was shortly after he received Mr Fujiwara's intimation of 9 June. Mr Ishizaki reminded Mr Foots that he had said on 2 June that the joint venturers could, if they wished, buy the dragline. According to Mr Ishizaki

Mr Foots became angry and said that he had worked on the scheme and had been negotiating to promote it for a long time. It was to be an incentive for the mine workers. He went on to say that he had conducted all the negotiations with BHP and if the joint venturers wished to set all his efforts at naught and 'start again' they should do so themselves but he would give no assistance; he would take no part in further negotiations. Mr Foots remarked that he had proceeded because IK had, twelve months earlier, decided not to buy the dragline, as a result of which he had formulated the idea of a contract which the joint venturers had accepted and told him to proceed with it.

[270] Mr Foots was at the mine on 9, 10 and 11 June. He denies that Mr Ishizaki spoke to him at about this time. He also denies that he spoke at any time to Mr Ishizaki in the terms he has described.

[271] There is no written record of the conversation. Unusually Mr Ishizaki did not commit to paper his recollection of the conversation nor report it to IK. However on 29 June 1999 he wrote to Mr Shibata in Tokyo and that report does contain a reference to a statement by Mr Foots that if the joint venture were not to proceed with the proposal to hire the dragline from Southern Cross but wanted to buy the dragline itself Mr Foots would withdraw from the negotiations with BHP. This appears to offer some corroboration for Mr Ishizaki's account of the conversation.

[272] Mr Ishizaki said in evidence that when he spoke to Mr Foots he felt IK's position to be vulnerable. Neither he, nor any other of Apollo's employees in Australia, knew anyone in BHP whom they could approach to buy the dragline. He had no idea how to commence an approach to BHP. He also recognised the justice of Mr Foots' contention that he had proceeded to acquire the dragline only after IK had declined to commit any capital to its purchase.

[273] Mr Ishizaki accepted Mr Foots earlier advice that the small dragline was needed for the mine's smooth operation and was afraid that if he insisted on the joint venturers buying the dragline they might lose it altogether.

[274] On 11 June 1999 Mr Hill sent by facsimile to Mr Ishizaki a summary entitled 'Third Dragline Options' which purported to compare the costs to the joint venture of engaging the services of the dragline from its owner. The summary contained three options entitled, respectively, 'Contractor', 'Equipment Hire' and 'Equipment Rental'. The three options varied only in the extent to which Ensham was to provide the services ancillary to the dragline's operation. In the first option Ensham was said to have no involvement; all expenses and receipts were to the account of Southern Cross. The cost to Ensham was 85 cents per cubic metre. No cost was given for either of the other options which described Ensham's involvement which was greater in the case of 'Equipment Hire'. This document was apparently sent in response to Mr Ishizaki's request of 4 June for comparisons of cost.

[275] At about this time Mr Foots and Mr Hill discussed their response to the request. They agreed that Mr Ishizaki should be given 'as little detail as possible'. Mr Hill showed the document to Mr Foots before it was sent to Mr Ishizaki. Mr Hill explained that 'the difference between the options merely came down to the items of cost' for which Ensham would be responsible.

[276] The document did not allow any proper analysis of the comparative values of the three options it set out. On 16 June Mr Hill sent a revised comparison (wrongly dated 11 June) which provided more detail of the comparative costs of the three options. This document did provide the cost, on a cubic metre basis, for the 'Hire' and 'Rental' options. It also contained a statement of the savings the dragline contract would produce as opposed to the truck and shovel contract. The minimum saving was said to be between $2,500,000 and $3,000,000 per year. The document also estimated the cost of items supplied to Golding under its contract and those which would be supplied to Southern Cross under its contract. The difference was said to be $43,000 per month to Golding and $57,000 per month to Southern Cross.

[277] This last comparison suggested that the cost to Ensham of providing goods and/or services to Southern Cross under the proposed dragline agreement would not be hugely different to the cost of providing similar services and goods to Golding. The comparison was contrived. Mr Hill sent a draft of the memorandum to Mr Foots which noted that 'the approximate cost of the service it provided to Goldings is $10,000 per month' and '[t]he approximate cost of the services to be provided to Southern Cross is $50,000 per month.' When the memorandum was sent to

'The estimated cost of items supplied to Goldings is $43,000 per month including depreciation of the capital items above ($4 million). For the Southern Cross contract this amount is approximately $57,000 per month (capital base of $400,000).'

[278] To increase the cost of services supplied to Golding, Mr Hill included depreciation of some accommodation huts at Yongala, which it owned and which the Golding employees occupied.

[279] The accommodation huts were a capital asset which Ensham had acquired and paid for. They were not built for the purpose of housing Golding's employees; it was for convenience only that they were made available for those employees. To the extent that they were a depreciating asset, Golding's occupation of them had a negligible effect on their depreciation. Mr Hill appeared to concede (T 1371.3-.50) that the decision to include depreciation as a cost to Ensham of the Golding contract was questionable. The result was that the memorandum gave Ensham a distorted view of the comparative costs of supporting the truck and shovel contractor, and the dragline contractor.

[280] Mr Ishizaki was confused by these memoranda. They did not provide the comparisons he had requested at the meeting of 4 June and they did not allow Ensham to compare the cost of buying the dragline itself to leasing it from Southern Cross, or leasing it from a finance company. Mr Ishizaki expressed his confusion and, in return, received from Mr Foots on 17 June a table entitled: 'Dragline Contract Rates', which purported to show, in a simpler format, the same comparison Mr Hill had essayed.

[281] Mr Ishizaki had asked for the economic comparisons on 4 June. By 17 June he had not been given them. Instead he had been given worthless comparisons between variations of the dragline agreement. The variations consisted of differing levels of services which Ensham would provide under the dragline agreement. Mr Foots

(T 2382.10-.15) could not explain why the comparisons actually asked for had not been provided.

[282] Shortly after the meeting of 4 June Mr Foots, Mr Bird, Mr Edmondson and Mr Hill met and discussed the request for the economic comparison. They agreed, according to Mr Hill, that Mr Hill should not prepare a financial analysis for the option by which a financier would buy the dragline and lease it to Ensham. He said, candidly, in his statement that they 'were not prepared to do a deal on that basis. Southern Cross would have been cut out altogether.' Nevertheless a little later

Mr Foots told Mr Hill that the joint venturers insisted upon an evaluation of such an option. Mr Foots told Mr Hill to prepare one but 'not to disclose the capital costs.' They discussed and then agreed that Mr Hill should prepared two estimates: one based upon a capital cost of $4,000,000; and the second on capital costs of $6,000,000. The figures had no basis in fact; they were chosen arbitrarily.

Mr Hill's justification of his conduct is that he 'considered that we were negotiating with Southern Cross and we were entitled to withhold the ... capital costs from the joint venturers.' He concedes, perhaps wryly, that the information was given to the joint venturers on the letterhead of Ensham Resources. It emerged in his oral testimony that the joint venturers were never told that the information was being provided by their employees, not in their capacity as loyal servants, rather in their capacity as an opposing contracting party.

[283] I have taken the account of the conversations between Mr Hill and Mr Foots inter alia from Mr Hill's statement. Mr Foots disputes that testimony but, as I explain later, I prefer Mr Hill's evidence to that of Mr Foots and I accept Mr Hill's account of the conversations as accurate.

[284] On 24 June 1999 Apollo received an advice from Mr Smith of Clayton Utz concerning the third drag line. The letter stated, inter alia,

'Whether there is a conflict of interest will depend on the following:- -

1. whether the Joint Venture ever intended to buy or lease the third dragline itself. If this is so, then Southern Cross is taking over a Joint Venture opportunity, and that is a conflict of interest to the extent that Southern Cross is controlled by Ensham Resources personnel.

2. Whether the Joint Venture indicated that it would not be buying the third dragline. It would then be open for Southern Cross to buy it. There would not appear to be a conflict of interest in that case.

3. Whether Southern Cross understood that the Joint Venture would not buy the dragline, and therefore Southern Cross could take out the commercial opportunity.

These are some of the matters that would be relevant. I would need detailed instructions before I was prepared to express a view ...

The Joint Venture could "cure" any conflict of interest by ... voting to approve the contract ...

I understand that ER staff have prepared the contract between Southern Cross and ER. That is a conflict of interest. Before the Joint Venture allows that contract to be signed, it should ensure that the contract is independently checked...'

The advice was so inadequate as to be wrong. It did not tell Ensham of what it should expect of its fiduciary.

[285] On 25 June 1999 Mr Foots sent further cash flow spreadsheets to the joint venturer evaluating several options. These were: 'dragline contract with Southern Cross'; 'equipment hire from Southern Cross'; 'equipment rental from Southern Cross'; 'lease equivalent for $4,000,000 capital'; and 'lease equivalent for $6,000,000 capital'. The last two options were new; the others had been the subject of

Mr Hill's earlier studies. In a covering memorandum Mr Foots tabulated the cost to Ensham of the five options analysed. The cost was expressed as a price per cubic metre of spoil removed. The 'dragline contract' option was shown to be the most economical. Mr Foots wrote:

'To evaluate the reasonableness of Southern Cross' investment the rate of return ... has been determined for a $4 million capital outlay and a $5 million capital outlay. The (rates of return) are 20% and 13% respectively. ... The attached cashflows show these calculations. This return is reasonable in comparison to rates of return required by Australian mining companies investing in coal mining.

The actual capital cost for Southern Cross is confidential, but clearly Ensham ... would have to purchase and commission the dragline for significantly less than $4 million to be able to pay off the dragline in the required 3 years and provide the Joint Venturers with an equivalent stripping cost below the contracted price.'

[286] Mr Foots stated in his memorandum that the options he had enclosed were those requested by Mr Ishizaki. They clearly were not.

[287] The spreadsheets together comprise Exhibit 66. They are not easy to read and are less easy to understand. It would be surprising if the untutored reader could make much of them, although no doubt they are comprehensible to those with a specialist knowledge of financial modelling. Mr van Homrigh and Mrs Micalizzi, both chartered accountants, had no difficulty understanding them and giving an exposition to the court. Mr Ishizaki remarked that he looked only at 'the bottom line' in the spreadsheets and did not bother with the preceding detail, which appeared to justify the results. It may be remarked that, when cross-examined about the spreadsheets and what each of them demonstrated, Mr Foots appeared to do the same thing.

[288] Altogether Mr Hill prepared and sent to the joint venturers some thirty-nine documents in spreadsheet format in response to Mr Ishizaki's request. They were sent in batches between 25 June and 15 July 1999. Discussion and analysis of the spreadsheets occupied much time at the trial and in addresses. It is necessary to review the spreadsheets and the evidence concerning them, though I will endeavour to do so as briefly as possible. Before embarking upon the task it may be helpful to explain the contentions of the parties with respect to them.

[289] It is Mr Foots' case that the spreadsheets were prepared by Mr Hill in an honest attempt to display to the joint venturers the financial and economic incidents of the three possibilities in which Mr Ishizaki had expressed interest. They were, he said, compiled using information that was, or was believed to be, accurate, and assumptions of facts that were reasonable to make. The end was a realistic comparison of cost which enabled the joint venturers to make an informed decision whether or not to enter the dragline agreement with Southern Cross.

[290] Ensham's position is that the spreadsheets were concocted to produce a predetermined result showing little difference in the economic outcome between the three options. Certainly the purchase (by Ensham) option was shown to be the cheapest, but the difference between it and the other options was small. It is Ensham's case that an honest comparison would have shown that the purchase case was so much cheaper that Ensham would obviously have chosen it.

[291] The spreadsheets were all prepared by Mr Hill. He showed them to Mr Foots before they were given to the joint venturers. Mr Hill said that Mr Foots was fully conversant with their contents and, indeed, directed their production. Mr Hill said that:

'I went through the spreadsheets with Ken Foots. ... I have no doubt that he read and understood the spreadsheets. ... Ken Foots was a qualified CPA and had had a lot of experience. He had been chairman of a publicly listed company and had held a very senior position at BHP in which well, to my knowledge, he had reviewed capital and project investments for BHP.'

Mr Foots disputes that he was in any way the author of the spreadsheets.

[292] In general terms the spreadsheets appeared to analyse the cost of four different cases:

(i) The cost of removing overburden by truck and shovel. These costs were known. Golding was the contractor. It was the most expensive method of removing overburden.

(ii) The cost of removing overburden by the small dragline pursuant to a stripping contract with Southern Cross.

(iii) The cost of removing overburden by means of the small dragline, which Ensham bought.

(iv) The cost of removing overburden by the small dragline, which Ensham leased from a financier.

[293] Spreadsheets dealing with the second case were entitled either 'Southern Cross Dragline Rental' or 'Southern Cross Internal'. They purported to show the costs Southern Cross would incur in acquiring and operating the dragline and the return it would need to discharge its obligations to the bank and pay a dividend of ten per cent to shareholders.

[294] The spreadsheets which demonstrated the cost of the contract case, i.e. case

(ii) above, contained a number of errors in terms of methodology and assumed facts which formed the basis for the analysis. These errors, their effect and their origin gave rise to much debate at the trial. There is no doubt that some of them were genuine errors by Mr Hill; some worked in favour of Ensham. From this it is submitted that the spreadsheets cannot have been intended as an instrument of fraud. That may well be true, but the point is limited to the spreadsheets which dealt with the cost of the dragline agreement. If Mr Hill's evidence is accepted some of the errors, or assumptions, were made deliberately to inflate the contract rate and hence the return to Southern Cross. In particular Mr Hill gave evidence that, as negotiating points, he included in his costs for the spreadsheet analysis of the 'Southern Cross internal' spreadsheets:

1. the sums needed to move the dragline to Ensham and to remove it from Ensham when the dragline agreement came to an end;

3. a uniform contract rate for the five year term of the agreement, despite the fact that after three years, when Southern Cross repaid Westpac, its cost base would substantially reduce.

That is to say he expected that, in the course of negotiations with Ensham for the dragline agreement, these inclusions, all of which increased the contract rate, could be reduced or removed. (T 1194.20-30).

[295] Between 25 June and 1 July 1999, Mr Hill discussed with Mr Foots one of the spreadsheets for the contract case. Mr Foots asked why an item for interest appeared in that part of the analysis which dealt with cashflow but not in that part which valued the dragline contract. Mr Hill explained that interest should not be included in the project evaluation. Mr Foots instructed Mr Hill to include it 'anyway' as 'it would probably come out later during negotiations.' The inclusion of interest in that part of the spreadsheet slightly increased the contract rate. From that point on, Mr Hill says, he proceeded on the basis that the cashflow models were a (negotiating) position for Southern Cross rather than an evaluation of the cases ... requested by the joint venturers.'

[296] The effect of the errors has been analysed by Mrs Micalizzi. She was called really to prove that the effect of the errors on the result was small and that some of the errors favoured Ensham. Her calculation was accepted as correct by

Mr van Homrigh. Adjusting for all the errors which have now been identified, and performing the analysis which is implicit in the spreadsheet, the contract rate becomes 1.9 cent per bcm lower than the rate demonstrated by the spreadsheets: $0.698. The adjusted figure is $0.679. By coincidence this is the rate which was finally fixed in accordance with the dragline agreement.

[297] On 2 July 1999 Mr Hill reworked the spreadsheets which analysed the cost to Ensham of leasing or purchasing the dragline. He changed the percentage of material excavated that would require rehandling from 30 per cent to 20 per cent. He did this because it made the cost per prime bcm for these cases compare more favourably with the cost of the truck and shovel contract. The change had no impact on the contract rate. Nor was any analysis done which would justify reducing the amount of rehandle from 30 per cent to 20 per cent.

[298] On 13 July 1999 Mr Hill prepared a further financial analysis for the contract case. For this and subsequent analyses Mr Hill assumed that the dragline would move seven million cubic metres of spoil per year rather than eight million cubic metres which had been the assumed quantity in the earlier analyses. The change followed a conversation between Mr Hill and Mr Foots in which the latter said that he thought 'the machine would do eight million cubic metres/year but so (as) not (to) be caught short' the more conservative figure should be used. The effect of the change was to increase the cost of the dragline to Ensham by about three cents per cubic metre. This was because the total revenue to be earned by Southern Cross was not altered but the amount of material to be moved in order to earn that revenue was reduced.

[299] The spreadsheets designated 35, 36, 37, 38 and 39, given on 15 July 1999, were the last given to the joint venturers. Spreadsheet 35, 'Southern Cross - Internal', showed the cost of removing overburden, per bcm, to be $1.109. Spreadsheet 37 showed the cost in the purchase case to be $1.103 per bcm. Spreadsheet 38 dealt with the case of the lease of the dragline to Ensham. The cost here was $1.125 per bcm. Spreadsheet 39 dealt with the Golding contract, which was known to be $1.639 per bcm. It will be seen that there is no great cost differential between the three cases involving the dragline.

[300] This is the real point for Ensham. It claims that properly prepared the spreadsheets would have shown that the dragline agreement compared badly with the other options, particularly the purchase of the dragline by Ensham.

[301] It is necessary then to consider the evidence concerning the spreadsheets for the purchase and lease cases.

[302] Mr Hill professes to having felt uncomfortable about the preparation of the spreadsheets purportedly analysing the cases where Ensham bought the dragline or leased it 'because there was little or no substance to many of the figures contained in them.' He justified his actions because he believed 'a decision had already been made to go ahead with Southern Cross and that the exercise we were going through was a hypothetical one'. He confided his unease to Mr Foots who told him that he should 'just give (the joint venturers) what they wanted because in six months ... these people ... would be gone.'

[303] Mr Hill accepts, a little reluctantly, that the financial models showing the cost of Ensham purchasing the dragline or leasing it 'were largely baseless and ... had been prepared so that "results" were close to the ... figure' that Southern Cross proposed to charge.

[304] Speaking of the lease case, Mr Hill explained (T 1266.21-25):

'... I created the process in doing those inputs such that the purchase was slightly better than the contract case and the lease was worse. They were the expected outcomes, and I put inputs in there such that those expected outcomes were achieved ...'

[305] An astonishing feature of the spreadsheets (9, 11, 17 and 38), which analysed the lease case, is that all assume that Ensham would be charged an effective interest rate of 29.5 per cent. This is admitted. That figure does not appear anywhere on the face of the spreadsheets but an analysis conducted by Mr van Homrigh for the purposes of the trial has shown that to be the outcome from the assumptions that do appear in the spreadsheets. One assumption is that the financier who leased the dragline to Ensham would itself pay 15 per cent interest on the money it borrowed to acquire the dragline. No attempt was made to justify the figure. It may be remarked that the directors of Southern Cross were, when the spreadsheets were prepared, negotiating with Westpac to borrow, as retail customers, at a rate of less than 7 per cent.

[306] The assumption as to interest rate clearly inflated the cost of leasing the dragline, as shown by the spreadsheets. Mr Foots admitted (T 2461.8-10) that Ensham had been misled by this aspect of the spreadsheets. Mr Hill gave evidence that he and

Mr Foots discussed the choice of interest at 15 per cent and they agreed to it. He said:

'Ken Foots told me before I prepared the model that I should use an interest rate that was higher than the rate used in the Southern Cross case. I had no basis for using a rate of 15% - it was simply a higher rate than the 8% used in the Southern Cross model. I told him I had used 15% and he agreed with this.'

[307] There is a question whether the inclusion of interest at 15 per cent, which misled Ensham, was chosen deliberately for that purpose. I have mentioned Mr Foots' experience of borrowing from a reputable bank by Southern Cross, a 'start up' company, to buy a dragline. That might be thought of particular relevance to the question whether Mr Foots had any basis for believing that a finance company would pay 15 per cent on money it borrowed to buy a dragline. There is, in addition, evidence that in June 1995 Mr Foots, on behalf of Ensham, enquired of Westpac what terms it would impose on a $20,000,000 lease finance facility for a dragline. Westpac quoted a rate of about 6.5 per cent. At about the same time

Mr Foots addressed the same enquiry to Senstar Capital Corporation. It quoted a rate of about 5 per cent. There is no evidence that Mr Foots (or Mr Hill) made any enquiries in mid-1999 of reputable financiers as to what interest rate they would charge Ensham on a lease of a dragline costing about $3,000,000.

[308] Mr Foots admitted that he had made no enquiries of financial institutions 'concerning the terms on which (it) would be prepared to advance the necessary funds ... to acquire this machine ...'. Mr Foots asserted that Mr Edmondson had undertaken enquiries and recommended the figure of 15 per cent. Mr Edmondson is dead and cannot corroborate or controvert the assertion. Mr Hill, who prepared the spreadsheets did not suggest that Mr Edmondson supplied the figure for interest. In fact, as I have mentioned, he said he and Mr Foots chose the figure. Mr Foots claimed that his experience made him think that it was reasonable to assume a financier would borrow at 15 per cent. When pressed to provide the detail of that experience Mr Foots was evasive. He gave no detail but omitted matters I have mentioned, which were within his experience and which would have been relevant to the interest to be paid on the lease of a dragline.

[309] The conclusion is inescapable that the choice of interest at 15 per cent to the financier and 29 per cent to the lessee was made, at best, recklessly and without any belief in its truth.

[310] A second assumption was made in the lease case, which increased the final cost concerned ongoing maintenance costs. It was that the cost of maintaining the dragline during the term of the lease would be 17 per cent greater than if the machine were bought by Ensham, or hired from Southern Cross. The assumption appears in the face of the spreadsheets. Mr Foots frankly agreed that he had told the joint venturers that the maintenance costs for the dragline would be higher were it leased (T 2344.51-55). Mr Hill testified that Mr Foots was the origin of the assumption. He said:

'Ken Foots told me that it would cost more to maintain the dragline if a financier was involved and that we should allow for that in the ... lease (case). I came up with the figure 117 per cent of the maintenance costs in the Southern Cross case. ... Ken Foots agreed.'

[311] No analysis or inquiry was undertaken to arrive at that figure. It was chosen arbitrarily. Mr Hill agreed in oral evidence that his assumption could have been verified (T 1363.47-52):

'To do it thoroughly, I would probably try and find a third party lease company who would be interested, have discussions with them; they would probably try and find an expert and go to someone similar to Bucyrus ... to discuss what maintenance they think would be applicable ...'

[312] Moreover there was no basis in the evidence for the assumption that a financier would require a higher standard of maintenance than Southern Cross or Ensham, should either of those purchase the machine and use it, or hire it. Such evidence as there was showed the assumption to be unwarranted. The negotiations with Westpac in 1995 and 1999, and with Senstar Capital Corporation in 1995 did not produce a term that the dragline be maintained to any particular standard.

[313] Again the conclusion is inescapable that the representation that maintenance costs in the event that the dragline was leased would be higher than otherwise by a factor of 17 per cent was made with reckless indifference to its truth.

[314] The spreadsheets which dealt with both the lease and purchase cases included an assumption that $1,250,000 would be spent by the lessor in the lease case, and by Ensham in the purchase case, at the commencement of the lease or at the time of purchase. The assumption was not made in the contract case spreadsheets. The assumption is obvious on the face of the spreadsheets (37 for the purchase case and 38 for the lease case). Mr Hill explained that Mr Foots had suggested to him that Ensham would need 'additional capital expenditure on the dragline.' He 'came up' with $1,250,000 which he put 'into the spreadsheet ... and checked the result ...'. He discussed it with Mr Foots who agreed with the amount. There was 'no particular reason for choosing this figure.' Mr Hill in oral evidence accepted the obvious: that the effect of including in the spreadsheet an initial additional expenditure of $1,250,000 would be to increase the cost to Ensham either in rent or price.

[315] The suggested justification for the extra capital expenditure was that it would be required to bring the dragline into a better state of repair than would be necessary if Southern Cross bought the machine and hired it to Ensham. To state the proposition is to expose its fallacy. Southern Cross bought the machine and hired it to Ensham without undertaking the additional $1,250,000 worth of refurbishment. There was, of course, a risk that the machine might break down and be unable to earn income until it was repaired. Mr Foots accepted that, in his capacity as chairman of Southern Cross, it was in the best interests of the company to take that risk because it was 'worth facing'. (T 2404.45-46) It was clearly then in Ensham's interest to take the same risk, though Mr Foots could not bring himself to say so. As to the suggestion that a financier who was leasing the dragline to Ensham might have required the additional expenditure, one only has to consider the terms that Westpac actually imposed.

[316] Mr Brett, who was called by Mr Foots to support the reasonableness of these two assumptions, had no relevant store of knowledge or expertise.

[317] Here, again, there is an inevitable conclusion that the representation that was made without belief in its truth, with reckless indifference as to its truth.

[318] A further assumption which appears in the spreadsheets for the purchase case is that Ensham would need to borrow $500,000 for working capital at the time of the purchase. The assumption is 'that Ensham would borrow the entire amount needed for equipment, expenditure, dozer and vehicles, tidy up costs, mobilisation and working capital'. 'Tidy up costs' is a reference to the expenditure on refurbishing the dragline to put it in good working order. The justification for this particular assumption is that Ensham would require a stock of spare parts on hand, or a fund to buy spare parts, in the event that there was a breakdown. The $500,000 is the fund to be kept for that purpose. The assumption underlying this part of the spreadsheet was, as explained by Mr Hill in cross-examination (T 1253.17-31), that:

(a) At the beginning of the project Ensham would borrow $500,000 to be held as a contingency fund, in case an unexpected need for parts or maintenance arose.

(b) That sum would never be spent but Ensham would continue to pay interest on it.

(c) The sum would be 'returned' at the end of the project.

[319] There are, as counsel for Ensham pointed out in their submissions, real reasons to doubt that, if it purchased the dragline, Ensham would have borrowed $500,000 for working capital. The reasons are:

(a) The spreadsheet calculations assume that Ensham would already have spent $1,610,000 to refurbish the dragline and get it into good working order.

(b) Ensham would already have spent the additional $1,250,000 to put the dragline into an even better state of repair.

(c) Ensham would have in place an ongoing maintenance contract, which would cost $7,750,000 over the five-year life of the project.

(d) As part of its maintenance contract, there was a program for major maintenance works which would cost $4,200,000 over five years.

(e) The amount allowed for major maintenance included a contingency for unexpected breakdowns.

These provisions were thought to be so ample to maintain the dragline in good working order that the spreadsheets assumed that at the end of the five years the $500,000 would not have been touched and would be returned to the lender.

[320] The only evidence led in support of the fund came from Mr Brett, a mining engineer called by Mr Foots. His evidence was that it was reasonable to have a sum for working capital 'as an allowance for either acquiring spare parts and having them sitting there, or being able to acquire them at short notice if there was a need ...'

(T 2620.45-47). He accepted, however, that if Ensham had access to funds to buy spare parts when needed there would be no need to have $500,000 sitting idle and incurring interest (T 2622.1-6).

[321] The assumption, included in the spreadsheets, that Ensham would need to borrow $500,000 if it bought the dragline as working capital has no rational basis. It inflated the displayed cost to Ensham of purchasing the dragline.

[322] Mr van Homrigh was asked to compare the cost to Ensham 'on the (Southern Cross) contract case', i.e. the cost of making the dragline agreement, with the cost to Ensham on the lease and purchase cases.' He undertook the comparison 'on the assumption that the cases included only the items in spreadsheet 35 and by continuing to use the methodologies adopted in spreadsheets 35, 37 and 38', all of which were given to the joint venturers on 15 July 1999. Spreadsheet 35 displayed the internal costs and cashflows to Southern Cross and formed the basis for the contract rate in the dragline agreement; spreadsheet 37 was the calculation of the cost to Ensham of purchasing the dragline; and spreadsheet 38 dealt with the cost to Ensham of leasing the dragline.

[323] The method of calculating the costs was different for each of the three cases.

Mr van Homrigh in his comparison reworked the analyses contained in the spreadsheets by using the same methods of calculation for each case which Mr Hill had used. However he included only the costs which had been assumed for the 'Southern Cross contract case' which appeared in spreadsheet 35. That is to say he deleted the additional costs for maintenance and the expenditure on working capital which appear in the lease and purchase case spreadsheets, but not the contract case spreadsheets. As well he assumed that interest would be charged to Ensham at

8 per cent on the lease case. Having made these adjustments Mr van Homrigh performed the comparison. This, it should be remembered, is the exercise which

Mr Ishizaki had requested of Mr Foots on 4 June 1999.

[324] The results of the recalculation are to be compared with the Southern Cross contract rate of $0.698 per cubic metre and show the cost to Ensham of:

(i) leasing the dragline over five years to be a rate (per cubic metre) of $0.516, an annual saving of $1,274,000;

(ii) leasing the dragline over three years to be a rate of $0.519, an annual saving of $1,253,000;

(iii) purchasing a dragline and using it for five years to be $0.532 per cubic metre, an annual saving of $1,162,000;

(iv)

purchasing the dragline and using it for three years to be $0.542, an annual saving of $1,092,000.

The common assumption in all cases was that the dragline would move 7,000,000 tonnes of spoil per year.

[325] Mrs Micalizzi looked at the spreadsheets for the three cases, contract, lease and purchase, and concluded that:

'... [T]he outcomes calculated by the financial models (Southern Cross Internal) ... cannot be directly compared with the outcomes calculated by the financial models (purchase or lease cases) ... for the purposes of assessing the most economic option for Ensham Resources in obtaining the use of the Dragline as they are prepared from the perspective of different parties. As the financial models (for Southern Cross Internal) ... are not prepared from the perspective of Ensham Resources, they do not include all the costs Ensham Resources would incur in operating the Dragline to remove overburden.'

[326] No doubt this is true but it does not cast doubt upon the exercise undertaken by

Mr van Homrigh which was not challenged in cross-examination. The spreadsheets prepared by Mr Hill were meant to allow Ensham to make the comparison between the cost of buying, leasing or hiring the dragline. The 'Southern Cross Internal' spreadsheets may have shown the projected costs to Southern Cross of acquiring and operating the dragline but the spreadsheets in the category 'Southern Cross Rental Case' were meant to show the cost to Ensham of renting the dragline, for the purpose of making the comparison I have mentioned. Mr van Homrigh's evidence demonstrates that the financial models were capable of producing a true comparison.

[327] On 1 July 1999 Mr Ishizaki, Mr Nakatsuka and Mr Uchiuzo from EPDC met with Mr Foots and Mr Hill to discuss the spreadsheets. None of the joint venturers' representatives had any clear understanding of what they signified, nor what factors had been included to produce the end results, nor how the calculations were performed to produce those results. Mr Ishizaki left it to Mr Nakatsuka, who was junior to him, to come to grips with the information contained in the spreadsheets.

[328] Mr Hill gave Mr Nakatsuka a computer disc which contained the spreadsheets in electronic form, and showed him the rudiments of manipulating the data so as to produce varying results. Mr Nakatsuka seemed to understand that, for example, by altering the assumption as to internal rate of return ('IRR') the outcome could be varied. No doubt he also understood that if other assumed factors were altered the outcome would vary. That appears to have been the limit of his understanding. He was not given information which would have allowed him to make sensible changes to any of the assumptions as to cost, expressed or implied, in the spreadsheets.

'Did you discuss with him the information which led to the selection of the figures ...? I understand that ... the answer depends on the validity of the figures you are putting in. Was there discussion between you and Nakatsuka about the information that led to the adoption of the figures you put into the program? - There was no discussion about the validity ... of the inputs. The questions that I answered of his were: How does this work? What does that add up to? How does the spreadsheet work?

You discussed the mechanics of the spreadsheet; not the accuracy of the figures with which you were working? - Correct.'

[330] Mr Nakatsuka gave evidence that on or about 29 June 1999 Mr Hill told him that he did not know what assumptions to make for the lease case. Mr Nakatsuka did not know what assumptions should be made. Indeed at the time he said he did not understand the very concept of the lease and did not understand the difference between the basis for the lease case spreadsheets and the others. In answer to

Mr Hill, Mr Nakatsuka said that Mr Hill 'had to do the calculations because head office wanted them.'

[331] This evidence is taken by Mr Foots as indicating that Mr Nakatsuka, and therefore Ensham, was given notice that the lease case spreadsheets were baseless and were to be disregarded. The consequence contended for is that Ensham cannot have been misled by those spreadsheets. The conclusion, which moves a long way from its factual basis, is disproved by an examination of what Mr Nakatsuka actually said. He did not tell Mr Hill that he could fabricate assumptions for the lease case. He told Mr Hill that head office wanted the calculations relevant to the lease case. The clear intimation was that Mr Hill should enquire and ascertain what assumptions were proper to be made.

[332] I think it necessary to approach Mr Hill's evidence with caution. There are reasons for thinking he may have a motive for damaging Mr Foots; he was instrumental in having Mr Foots dismissed by Ensham. He approached IQ to complain that

Mr Foots' management was harming the mine. The complaints were investigated and acted upon to Mr Foots' detriment. One must wonder whether some animosity between the two men lingers. Mr Hill's own evidence suggests that he was

Mr Foots' willing accomplice in the task of persuading Ensham, and the joint venturers, to accept the dragline agreement to the benefit of Southern Cross and its shareholders. Mr Hill remained in Ensham's employment when his statement was made in support of his employer. He had, however, left by the time he gave evidence. No substantial attack was made upon Mr Hill's credit in cross-examination, no doubt for the reason that it would not advance Mr Foots' cause to establish that his subordinate employee and fellow director of Southern Cross had actively engaged in deceiving their employer.

[333] Mr Hill sought to diminish his role in the deception which the spreadsheets practised on the joint venturers. He also tended to understate his involvement in Southern Cross' activities leading up to the dragline agreement. No doubt by assisting Ensham in its case he reduced the chance that he too would be sued. I have no doubt that he was a willing assistant to Mr Foots in the preparation of the dragline agreement and that he failed to give his employer the assistance it could properly expect from him.

[334] Despite these reasons for there being some reticence in accepting his evidence I prefer it to that of Mr Foots'. His discomfort was apparent when the awkwardness of his conduct was disclosed by his own account. I do not think he would have put himself in that position or admitted to his part in taking down his employer if he had not done so. He did not evade any questions put to him by any cross-examining counsel and dealt frankly with the points put to him even when the implication of his evidence was unfavourable to him.

[335] The question has to be addressed whether the key assumptions in the spreadsheets, which had the effect of inflating the cost to Ensham of leasing or purchasing the dragline, were erroneous, and if so whether they were deliberate so as to mislead the joint venturers. I have already expressed my opinion that critical assumptions were erroneous; there was no rational basis for them. From this an inference may arise that they were inserted to distort the result and mislead the joint venturers. This conclusion, a serious one, would be more readily come to if one accepted Mr Hill's evidence in preference to Mr Foots', as I have done. I conclude that the spreadsheets were not designed to produce a factual comparison to enable the joint venturers to make an informed decision but were designed to persuade them to make the dragline agreement with Southern Cross.

[336] On 21 June 1999 IQ's request for approval to use the small dragline under a stripping contract was considered by a meeting of General Managers in Tokyo. The meeting approved the proposal but noted that the purchase of the dragline by the joint venturers could be categorised as a 'rationalisation investment' and, as such, purchase could be approved. Such an investment was one for no more than about AUD$10,000,000 and which would result in costs savings, over three years or less, equal to the value of the investment. These criteria appear to be satisfied in the case of the dragline. Accordingly Mr Shibata reported on the outcome of the meeting to Apollo. The report read:

1. will, in the first proposal, be held by the contractor, and the JV will commission that contractor to do the stripping work.

2. (Under) various conditions (the dragline) may also be purchased ... by the JV.

b) We would like to request your favour in considering changing the direction of the study of the methods of introduction.

2. The lease company is made to carry out the purchase and the JV leases (the dragline) ...

(3) We ask that you explain to CEO Foots the background to the change ... and obtain his agreement.'

[337] Following that instruction on 28 June 1999 Mr Ishizaki and Mr Nakatsuka met with Mr Foots and Mr Hill at Ensham's office. Mr Nabetani, Mr Kotake and

Mr Uchiuzo from EPDC also attended. Mr Ishizaki recorded the events of the meeting in a letter which he sent Mr Foots the next day. He wrote:

(1) We would like to proceed with Southern Cross Contracting Scheme with proviso of conditions (3) - (7).

Please note this is subject to (IK's) consent, as Tokyo still regards purchase idea as theoretically [the] best one while showing some understanding to Southern Cross contractor idea.

(2) ...

(3) Transparency and accountability

Southern Cross maintains transparency in your purchase price and the cost in related to the operation of the equipment, but not limited to these items. Southern Cross fully accounts for its financial status and relevant information.

(4) Southern Cross provides the best estimate of capital cost ... Once the purchase contracts with BHP, BE and other relevant company are made, actual price to be advised to us.

(5) We recognize the agreements ... are needed before purchase of dragline is complete.

(6) The detailed calculation for comparison or case-study between Contractor, Third-party-lease and Purchase is needed. ...

The purpose of this calculation is to ourselves and Tokyo.

(7) As for third-party-lease study, (IQ) will consult with other external bank or auditor.'

[338] Mr Nabetani has a recollection of the meeting of 28 June, reinforced by the notes made of it by Mr Kotake. His recollection is that there was first discussion about the spreadsheets which had been sent on 25 June. Mr Foots or Mr Hill explained that although the joint venturers had asked Ensham to evaluate two lease cases, one with a capital cost of $5,000,000 and the other with a cost of $7,000,000, the studies had been conducted on $4,000,000 and $6,000,000, respectively 'as these were more likely'. Questions were asked and answered about the mobilisation costs of $1,000,000 and what was meant by 'tidy up'. It was said to be 'a small shut down before the commencement of operation.' More questions were asked about the mode of transporting the dragline from Blackwater to Ensham. Mr Foots explained the difference between the options set out in the spreadsheets: 'dragline contract', 'equipment hire', 'equipment rental' and the lease cases. He said that the 'equipment hire' option was preferable for the joint venturers but Mr Nabetani did not understand why.

[339] Mr Nabetani recalls that Mr Foots said that if the bank purchased the dragline and leased it to Ensham, the expenditure on equipment would be between $1,000,000 and $1,500,000 higher than if Southern Cross bought the dragline because 'the bank was unwilling to take risks and would renew as many parts as possible ...'.

Mr Kotake asked what was meant by 'working capital' and was told, either by

Mr Foots or Mr Hill, that it was 'necessary funds for payment which would be kept in a bank'.

[340] Mr Nabetani has a recollection that Mr Ishizaki said to Mr Foots that IK was considering the direct purchase of the dragline by Ensham. He remembers 'clearly' that Mr Foots became angry and said insistently that he had been negotiating the purchase of the dragline, had made the necessary arrangements, and it was not open for the joint venture to 'now purchase the dragline'. Mr Nabetani has a recollection that Mr Foots said that BHP would not sell the dragline to Ensham and that was 'why (Ensham) needed Southern Cross.'

[341] Mr Kotake has no recollection of the meeting but his note of it records that IK was considering the purchase of the dragline by the joint venture. He wrote: '(IK) is exploring the possibility of the purchase of the dragline by the JV.' It also records that Mr Foots said that should Ensham lease the dragline from a bank (or other financier) the cost would be between $1,000,000 and $1,500,000 higher than if Southern Cross bought it. The basis for this was said to be that a bank 'would be unwilling to take risks and would want to renew as many parts of the dragline as possible'.

• There was no discussion that IK was considering having Ensham buy the dragline. Rather, 'Idemitsu representatives' said that 'Tokyo regarded purchase as theoretically the best option', by which Mr Foots understood that IK recognised the superior economics of the purchase case but they did not have sufficient funds to buy the dragline.

• There was discussion about the cost comparisons set out in the memorandum sent on 25 June and Mr Foots explained the practical differences between the three options.

• Mr Foots explained, in answer to a question, that working capital 'was required for payment of unexpected outlay.'

• He did not say that Southern Cross was purchasing the dragline direct from CQCA because the proposal had always been that Southern Cross would buy from Bucyrus who would buy from CQCA.

[343] It will be seen from his letter of 29 June that Mr Ishizaki's command of written English is not perfect. He explained that by 'theoretically' he meant to convey that the purchase of the dragline by the joint venture was 'logically' the best.

Mr Ishizaki has no recollection of the meeting of 28 June.

[344] Given Mr Shibata's instruction to Mr Ishizaki on 26 June and Mr Kotake's note, it is likely that Mr Ishizaki passed on to Mr Foots IK's interest in having the joint venture purchase the dragline itself.

[345] Mr Ishizaki was in a delicate position. He had dealt, on behalf of IQ, with Mr Foots on IK's position stated in 1998 that it would not invest in the purchase of a new dragline. The joint venture had been convinced that the mine needed the dragline if production requirements were to be met. The problem had been solved, apparently, by the proposal to engage a contractor to supply the dragline. Having got that far Mr Ishizaki's instructions were changed to the degree that the joint venture should purchase the dragline but Mr Foots refused to cooperate. He hoped to escape the dilemma by encouraging IK to accept the contract option. Accordingly on

29 June 1989 he wrote to Mr Shibata in these terms:

'... It goes without saying, [we] believe, that the purchase of the third dragline by the J/V is the most appropriate ... from the perspective of economic efficiency. ...

... [A]fter [we] received communication (from the investment committee meeting of 9 June) we have had several dialogues with Ken Foots regarding the possibility of the purchase ...

... However, after having understood the advantages and disadvantages ... [w]e would like to proceed with the contractor proposal, taking into consideration the ... background...:

(1) At the (Management Committee meeting) in June last year the J/V partners (decided) that [they] "would not purchase the third dragline";

(2) When a 25m3 small-scale dragline appeared [we] did not purchase [it] and consented to furthering negotiations over the contractor proposal at the September ... [meeting];

(3) Based on this, ... Ken Foots, along with staff from Ensham, created a contractor company ... and have been furthering talks with BHP, ... (the dragline manufacturer), and the bank.'

[346] Mr Ishizaki also mentioned the results of his meeting with Mr Foots at which the latter had said that he would not assist the joint venture to purchase the dragline and would not negotiate with BHP. This is apparently a reference to the disputed meeting with Mr Foots. Mr Ishizaki asked his superior to note the change from his report of his meeting with Mr Foots on 2 June.

[347] To encourage Mr Shibata to support the contract proposal Mr Ishizaki reported that a condition of any stripping contract would be that Southern Cross would provide accurate details of the purchase price of the dragline and its operating costs and, further, would provide detailed calculations to allow Ensham to compare the respective costs between the purchase of the dragline itself, the lease from a finance company or the use of a contractor. The calculation process to achieve these comparisons was to be observed by employees of EPDC and IQ. As well the joint venturers were to seek advice from a firm of reputable accountants about the adequacy of the comparisons.

[348] Mr Ishizaki also pointed out that the permits to move the dragline from Blackwater to Ensham would expire at the end of July. Mr Foots had made this point at an earlier meeting; he stressed that a prompt agreement was necessary if the dragline was to be moved before the permits expired.

[349] On 29 June Mr Foots sent Mr Ishizaki a memorandum enclosing some further cash flow analyses, which quantified the costs of:

•

Ensham buying the dragline;

•

Ensham hiring the dragline from Southern Cross;

•

The truck and shovel contract with Goldings in operation at the mine.

'The ... cost for the purchase option is $0.951 per cubic metre ... The equipment hire option from Southern Cross results in an equivalent contract rate of $0.999 per m3. This option is $0.048 per m3 higher than if Ensham Resources were to purchase the equipment directly.

The Goldings contract option results in a cost of $1.634 per prime m3. To remove the material using Goldings results in costs of $10.05 million per year for Ensham Resources. If Southern Cross are contracted to Ensham Resources to move the material the cost is reduced to $7.00 million ... a reduction of $2.07 million annually.

If Ensham Resources were able to purchase the dragline directly the costs could be reduced to $7.61 million, a further saving of $0.38 million per year. Of course this option is theoretical only as this dragline is no longer available to Ensham Resources directly.

This shows that of the potential $2.45 million savings in utilising this dragline 16 per cent ($0.38 million) is paid to Southern Cross and the remaining 84 per cent ($2.07 million) is realised by Ensham Resources.'

[350] The memorandum though on its face coming from Mr Foots was in fact prepared by Mr Hill. The statement that the purchase of the dragline by Ensham was 'theoretical only as this dragline is no longer available to Ensham' was, Mr Hill explained, based upon the fact that Mr Foots had negotiated with BHP to buy the dragline on behalf of Southern Cross. He told Mr Hill, at about this time, that 'the joint venture could not buy the dragline because he had got in before them and secured the rights to the dragline'. Mr Foots denies he made any such comment to Mr Hill. Mr Foots, however, accepts that the memorandum was written by Mr Hill at his request and that he saw it the next day. He did not correct it. Mr Hill said that he showed the memorandum to Mr Foots before it was sent.

[351] In any event in cross-examination Mr Foots accepted that he did ask Mr Hill to include the statement that the dragline was no longer available. Mr Foots' explanation of the meaning of that statement was nonsensical (T 2140.33-39). The dragline was no longer available 'because the joint venturers did not have the authority to purchase a dragline ...' This is the opposite of what the memorandum states. The assertion that the dragline was 'no longer available' carries the clear implication that it had once been available. The only event capable of explaining why it had become unavailable is Mr Foots boast to Mr Hill that he had 'got in' first and 'secured' the dragline for himself. No comment is needed on this behaviour by Ensham's most senior employee.

[352] On 30 June 1999 Mr Ishizaki, Mr Nabetani and Mr Uchiuzo met with Mr Foots and Mr Hill to discuss the proposed contract with Southern Cross. The four men reached broad agreement that the joint venture would contract with Southern Cross for the stripping of overburden on conditions that:

•

Southern Cross would reveal to the joint venturers the price it paid for the dragline and other equipment, such as transformers and buckets;

•

Southern Cross would reveal the amount it paid for maintaining the dragline;

•

The financial consequences to Southern Cross of making the agreement would be revealed to the joint venturers who would have the right to audit Southern Cross' accounts;

•

Southern Cross would provide detailed calculations showing how the financial consequences of the contract differed from those which would follow Ensham's own purchase of the dragline or leasing it from a financier. Officers from IQ were to observe the calculation process;

•

The joint venturers and Southern Cross were to agree upon a fair rate of profit to be made by Southern Cross from the contract;

•

The joint venturers should have the option of purchasing the dragline after the contract had run for five years.

[353] Mr Ishizaki reported the outcome of the meeting to Mr Shibata.

[354] Early in the evening of 30 June 1999 Mr Ishizaki received two facsimiles from

Mr Foots. The first was a brief memorandum which referred to the discussions between them earlier in the day and said that an investigation into the total cost of removing overburden had been undertaken 'for various options'. These were said to show what would be 'the likely contract price' charged by 'an external contractor'. The 'contractor X price' was said to be $1.45 per cubic metre, which would give Ensham savings of 18 cents per cubic metre, resulting in a saving in annual operating costs of $1,200,000 together with a reduction in the workforce of about 25 operators. The memorandum said that 'contractor X would position his price to provide just enough benefit to Ensham ... to obtain the contract.' By contrast, the memorandum said, Southern Cross had 'determined its contract rate to satisfy the financial constraint of paying off the loan in three years. This results in a significantly lower price than both Goldings truck shovel price and contractor X price.'

[355] The second facsimile enclosed a spreadsheet financial analysis showing the cost to Ensham of leasing the dragline from a financier. Mr Foots commented that:

'The lease option includes additional capital to improve the condition of the dragline. This $1.25 million is then deducted from the maintenance costs in years 1 and 2. The ongoing maintenance is estimated at 17% higher than the Southern Cross option. ... [T]he lease company would require a higher standard of operating condition to protect their investment.

The resulting total cost to Ensham ... would be $1.00 per cubic metre ...'

[356] Mr Hill prepared both facsimiles. The first was prepared in response to something said at the meeting. Mr Ishizaki or Mr Nabetani said that the profit from the dragline contract should be coming to the joint venture, not going to

Southern Cross. Mr Foots replied that a contractor other than Southern Cross 'would not look at costs but at the alternative for the joint venture, which was truck and shovel and price the work just below that.' Mr Hill prepared the first memorandum to reinforce that statement, that an outside contractor (whom he designated 'Contractor X') would fix his price just below the contract price for the truck and shovel excavation of $1.63 per m3. Mr Hill explains that his 'Contractor X' price was 'simply a figure ... used to illustrate the point. There had been no bids received from third parties ... so (he) did not know what price a third party contractor might have bid.'

[357] Mr Hill also prepared the second memorandum and the attached spreadsheet which was meant to demonstrate the cost to Ensham of leasing the dragline from a financier. In preparing this spreadsheet Mr Hill included the $1,250,000 for additional capital expenditure and increased the estimated maintenance cost by

17 per cent 'on the basis that the lease company would require a high standard of operating condition to protect their investment.' He also assumed that the lease company would borrow money of 15 per cent and that that cost would be passed on to the lessee.

[358] On 2 July 1999 Mr Foots sent a facsimile to IQ and EPDC which identified the risks to Southern Cross of making the dragline stripping contract with Ensham. These were said to be: (i) the age of the dragline; (ii) the chance that it might break down and not earn revenue whilst Southern Cross had to repay its loan from the bank; (iii) the provision for maintenance may prove inadequate with additional expense being incurred by Southern Cross; (iv) if inflation increased there would be an erosion in the value of the returns to the shareholders in Southern Cross; and

(v) that the dragline might not find employment elsewhere.

[359] On 2 July Mr Ishizaki reported to Mr Shibata what he understood to be the results of the spreadsheets given to him which compared the options of leasing the dragline from a financier, renting it from Southern Cross, or buying it. He concluded:

'(1) The case of rental from Southern Cross compares favourably with a case of a third party lease.

(2) Even compared with the cost reduction of A$3,280,000/per annum in the case of purchasing by (Ensham), we consider the case of rental with Southern Cross at A$2,950,000/per annum to be reasonable.

(3) Accordingly we would like to proceed with rental from Southern Cross.'

As the conclusion shows the spreadsheets indicated that the annual saving to Ensham by the use of the dragline in place of the truck and shovel contractor was $2,880,000 where the dragline was leased; $2,950,000 where it rented the machine from Southern Cross; and $3,280,000 if it bought the machine itself.

[360] Mr Foots was in Tokyo between 4 and 9 July. He went just after Mr Matake replaced Mr Abe as Managing Director of Apollo. Mr Matake asked Mr Wakahara and Mr Shibata to speak to Mr Foots about the dragline, and whether Ensham could purchase it. Mr Foots duly met with several senior managers of IK including

Mr Wakahara and Mr Shibata. Mr Foots recalls that the 'meetings were very informal ... and the tone of the meetings was friendly and co-operative.' Mr Foots recalls Mr Wakahara or Mr Shibata saying that IK 'accepted the (Southern Cross) scheme' and they discussed the shareholding and structure of Southern Cross.' He told 'Idemitsu representatives' that 'it was proposed' that he and Mr Bird hold the majority of the shares. They also discussed 'the requirement of an IRR of 25 per cent'. According to Mr Foots neither Mr Wakahara nor Mr Shibata said anything to suggest that Ensham or the joint venturers wished to purchase the dragline.

[361] Mr Shibata's recollection of the meeting, which was on 5 July, is that Mr Wakahara asked why the joint venturers could not purchase the dragline. Mr Foots' answer was that since June of the previous year when the joint venture announced that it would not be able to purchase the dragline, Mr Foots, with several members of Ensham management team, had formed a company which had purchased a second-hand dragline. He said that BHP was the seller and the managers who had formed the company had arranged a loan from the bank to purchase it. Mr Foots explained that it would not be possible to cancel all the arrangements and organise the joint venture to purchase the dragline itself.

[362] Mr Shibata sent a report to Apollo, about a week later, on 13 July, which contained a record of Mr Foots' reasons why the dragline could not be bought by Ensham.

[363] Mr Wakahara's evidence was to the same effect as Mr Shibata's. It was that

Mr Foots said 'that he had arranged finance with his bank and had all the negotiations with BHP. ... He had finished the arrangements for purchase of the dragline and he could not cancel these arrangements. As a result ... he could not arrange for the joint venturers to buy the dragline.'

[364] Following that information Mr Wakahara said that the dragline agreement could be made, but that Southern Cross should make 'no profit and no loss'.

[365] At this time, 5 July 1999, Southern Cross had not executed its contract with Bucyrus to buy the dragline and Bucyrus had not contracted with BHP to buy the dragline. There was no maintenance contract between Southern Cross and Bucyrus, and Westpac had not agreed to lend Southern Cross any money. Southern Cross had only one director, Mr Foots, and one shareholder, Foots Pty Ltd.

[366] Something unusual happened to Mr Foots when he was in Tokyo. According to his statement:

'On July 7 ... after returning from ... an Afforestation Meeting I was taken upstairs by Mr Horii in the Idemitsu Office, outside the CBD of Tokyo, to what I believed was the Insurance department ... where I met with Mr Akira Idemitsu and Mr Horii who translated for me. ... During this meeting I gave Mr Idemitsu a broad update on the Ensham ... project and referred specifically to the third dragline contract proposal. ... I recall explaining that the Dragline would be owned by Ensham staff and employees with the majority ownership by Bird and me. Mr Horii indicated to me that Mr ... Idemitsu understood the explanation and I recall that Mr ... Idemitsu nodded his head ...'

[367] Mr Akira Idemitsu was, at that time, 'the head of the company'.

[368] There is a note in Mr Foots' diary for 7 July 1999. It reads 'Meet Akira Idemitsu'. Mr Foots' evidence about his diary was that he used it to make advance notes of meetings and events he was to attend. It was not a record of past activity. He did not know of the meeting with Mr Idemitsu until he was summoned unexpectedly into his presence. The diary note, read literally, suggests it was made in advance of the meeting.

[369] Mr Horii was emphatic in his denial that there was any such occasion as Mr Foots described. His own diary for 7 August contains no reference to Mr Foots, though his diary for the next day shows that the two men were together between 3.00 and 5.00 in the afternoon. He said that a meeting with Mr Idemitsu 'as president of Idemitsu Kosan is a very serious matter ...' so that he would have recorded it if he had arranged it. As part of making the arrangements for the meeting notice would have to be given of its subject matter. Moreover the meeting would have had to have been arranged by an officer of the Industrial Energy Department and Mr Horii was not then in that department. Mr Horii was clear that he did not make the appointment for Mr Foots to meet Mr Idemitsu.

[370] To meet Mr Horii's evidence Mr Foots' account of the meeting in oral evidence may have differed from that in his statement. He said (T 2143.16-28):

'I met with Akira Idemitsu. It was a meeting I remember very well because it was unusual. Normally when I met with the senior management ... or the Idemitsu family, it was in the main office ... and it was a very formal process. ... [Y]ou went up and you were seated in special meeting rooms. ... You were told where to sit and how the meeting would be conducted ... [W]hat happened at this meeting is that I was at the ... office ... and there was a bit of a kafuffle and that was a sudden rushed up informal meeting with Akira Idemitsu ...

It was a very short meeting ... (no) more than 10 or 15 minutes, and I explained points on the project ... and I also spoke about the dragline contract and the ... ownership of ... Southern Cross ...'

[371] It might be thought surprising that Mr Foots would tell Mr Idemitsu of the proposal to have Southern Cross, owned by Ensham employees, buy a dragline and hire it to Ensham. He had, according to his evidence, had discussions with Mr Wakahara and Mr Shibata on that very topic a day or two earlier and obtained their complete assent to the proposal. Mr Foots explained that he passed on this information to

Mr Idemitsu to fill a conversational void. The meeting with Mr Idemitsu was 'a total surprise' and he was given 'no information' about why he was summoned into Mr Idemitsu's presence. It appears that, despite calling for Mr Foots, Mr Idemitsu had nothing to say to him.

[372] When Mr Foots returned from Tokyo Mr Matake met him and asked 'about the possibility of the joint venture buying the dragline.' Mr Foots said that 'there was no way for Ensham to buy the dragline' because 'BHP would not sell to a competitor and he had made all the arrangements and it was too late to change them.' He said that only Southern Cross could buy the dragline. Mr Matake accepted what he was told.

[373] On 9 July Mr Ishizaki, having obtained help from Mr Smith of Clayton Utz with the composition, wrote to Mr Foots to record the outcome of their meeting of 30 June:

'In addition to our summary letter dated 29 June 1999, we would like to confirm the following minutes for the meeting of 30 June 1999. ...

(1) Joint venture partners are pleased to agree to pursue the Southern Cross contracting scheme for details to be mutually agreed, and with conditions from (2) to (5) below.

•

Southern Cross advises Joint Venture partners of the purchase prices of Dragline, ... and other equipment with payment voucher, i.e. invoices or receipts.

•

Southern Cross also advises Joint Venture partners of the cost of maintenance with payment voucher.

•

Joint Venture partners have the right to audit Southern Cross if they so wish.

The detailed calculation for comparison or case-study between Contractor, Third-party lease and Purchase is needed.

This calculation to be made by ER together with attendant(s) from Idemitsu and/or EPDCA.

The purpose of this calculation is to enable us and Tokyo to consider more fully the proposal.

Profit from the operation of the BE1260 is mutually agreed between Joint Venture partners and Southern Cross. Details to be discussed.

Joint Venture partners have option to purchase BE1260 ... and other equipment at the end of five year contract at the price independently determined by the third party.'

[374] On 14 July Messrs Matake, Ishizaki and Nakatsuka from IQ, together with

Messrs Nabetani and Uchiuzo from EPDC met at Ensham's office with

Messrs Foots, Hill and Edmondson. Recollections about the meeting differ markedly. Two officers from Westpac, Mr Alex Ross and Mr Warren Erfurth, were also present. The meeting was called to discuss the terms of the proposed dragline agreement, in particular, the rate of return, or profit, which Southern Cross could make. It is clear, at least, that the joint venture representatives were concerned at the proposal that Southern Cross should receive a return on investment of

25 per cent. The joint venturers wished to keep Southern Cross' profits as low as possible, for obvious reasons. Southern Cross, for equally obvious reasons, wished to keep them as high as possible. The meeting seems to have been called principally to persuade the joint venturers that a 25 per cent return was reasonable.

[375] Mr Ishizaki recalls 'some general discussion' but more particularly recalled

Mr Foots turning to the Westpac officers and saying, in effect, 'You need an IRR of 25 per cent don't you?'. They said 'Yes'. Mr Ishizaki also recalls one of the officers saying that 'there had to be an IRR of 25 per cent because the charge over the dragline was worth nothing'.

[376] The other joint venture representatives have no specific recollection of what was said. Mr Ishizaki in oral testimony seemed not to have a good memory of the meeting.

[377] Mr Foots' evidence was that he effected an introduction of the joint venture representatives to the bank officers and then he, Hill and Edmondson left them alone.

[378] The only written note of the meeting was made by Mr Nakatsuka, briefly on

15 July, and then more fully on 1 November 1999. According to these notes the Westpac officers 'confirmed that an IRR of 25 per cent is appropriate ... because the dragline is special heavy equipment (with) no security value ...'. It seems there was a discussion in general terms about the lending criteria of Australian banks. The joint venturers gained the understanding that banks would require a borrower to receive a return, on an investment being financed of between 22 and 30 per cent, depending on the nature of the investment.

[379] There is no doubt that the joint venture representatives came away from the meeting with the understanding that Westpac required Southern Cross to achieve a rate of return of 25 per cent before they would advance it the purchase price for the dragline.

[380] Mr Erfurth has a good recollection of the meeting of 14 July. He was in all respects a disinterested witness. I accept his evidence without reservation. It is unlikely that Mr Erfurth spoke about the evaluation of projects by reference to a required IRR given his approach to the assessment of business loan applications. The topic of rates of return is more likely to have arisen between Mr Foots and/or Mr Hill and the joint venture representatives. I am satisfied from Mr Erfurth's evidence that he said that a rate of return of 25 per cent on an investment, such as that contemplated, was reasonable but he did not say that Westpac required it as a precondition for its loan. That was not the situation. Mr Ishizaki's recollection of what Mr Foots said to the Westpac officers is mistaken.

[381] Mr Erfurth was adamant that Messrs Hill and Edmondson remained throughout the meeting. He firmly believed that Mr Foots did, too. I accept his evidence.

[382] Mr Nakatsuka's minute of the meeting made on 1 November 1999 from notes made at the time do record a detailed discussion about different types of business activity by reference to their internal rates of return. The notes appear to show what rate must be achieved in order for a bank to approve a loan. Mr Erfurth denied that he was the author of such statements and I accept his evidence. The joint venturers appear to have misunderstood the bank's requirements.

[383] At the meeting of 14 July, after Messrs Ross and Erfurth had left, there was a discussion between Mr Foots and Mr Hill and the joint venture representatives. They said they could not accept Southern Cross receiving the projected income of $1,500,000 per annum after the loan to Westpac had been repaid, which was projected to occur after three years. Agreement was reached that the contract rate should be reduced after Southern Cross had repaid the loan. It was also agreed that the contract rate should be set provisionally at $0.698 per m3 but the rate would be finalised once the actual costs of operating the dragline were established by experience. There was also agreement that if the dragline should move more than 7,000,000 m3 of spoil per year there would be a reduction in rate for the excess. This reflected the fact that the cost of operating the dragline, expressed as an amount per cubic metre removed, would decline proportional to the volume of material excavated.

[384] Mr Ishizaki remembers that, at the end of the meeting, Mr Foots asked the joint venturers to give their approval to the dragline agreement by the end of the week. He said that a decision had to be made within that time because he had to finalise the agreements with Bucyrus and Westpac before the end of July when the approval by the native title owners, across whose land the dragline would have to move, would expire.

[385] On 15 July Mr Ishizaki received a communication from Mr Shibata dated 13 July which referred to his meeting with Mr Foots the week before, and sought confirmation that there would be no substantial difference in the savings to be made in the cost of stripping whether Ensham purchased the dragline or hired it from Southern Cross. The message recited that Mr Shibata had obtained approval from the relevant departments of IK's head office for the dragline agreement.

[386] On 15 July 1999 Mr Foots sent a further, and final, set of spreadsheets to IQ and EPDC. On the same day Mr Hill wrote, on Southern Cross letterhead, to

'Southern Cross are pleased to submit a tender for the dragline rental contract at Ensham Mine. This offer is submitted in accordance with the contract documents ES-017 supplied by Ensham Resources. Our bid to supply and maintain a second hand BE1260 dragline is:

This offer is subject to signing contracts with the following parties:

•

BE - ongoing maintenance of dragline

•

BE - purchase, relocation and shutdown of dragline

•

Westpac - provision of finance

As stated in the contract terms this price is based on current estimates for the capital expenditure and a final rate will be negotiated when these contracts are finalised. This bid forms the basis of these negotiations.'

[387] On 16 July Mr Foots, who had returned to Australia, telephoned Mr Shibata who was in Tokyo. He said that he wanted a letter by the following Monday saying, in essence, that IK intended to proceed with the dragline agreement. As a consequence of the request Mr Ishizaki wrote a letter dated 20 July 1999 addressed to the directors of Southern Cross. The letter had been drafted by Mr Hill and given to

Mr Nakatsuka. He had it settled by Mr Smith of Clayton Utz. The letter was said to:

'... advise the support of the Ensham Joint Venturers to the agreed arrangements between Ensham Resources ... and Southern Cross ... in relation to the provision of a ... dragline ...

Ensham ... particularly wishes to confirm the following:-

1. the applicable rate will be that advised by Southern Cross ... in its letter of 15 July 1999.

2. the applicable rate is subject to agreed adjustment after the final capital cost is determined.

3. the initial term is to be 5 years, with our option to extend for a further term.

As we understand that the bank, as financier, is obtaining security, it is not the current intention of the joint venturers to seek additional security.

We are agreeable ... for Southern Cross ... to show or give a copy of this letter to Bucyrus and/or Westpac.

Finally, we wish to confirm the support of Ensham Resources ... for this contract with Southern Cross ...'

[388] There is evidence that Mr Foots exerted pressure on the joint venturers to execute the dragline agreement as a matter of urgency. He was critical of joint venture representatives for taking so long to come to terms with what they had agreed in principle to the contract with Southern Cross.

[389] On 22 July 1999 Mr Ishizaki and Mr Nakatsuka met with Mr Howard of

Clayton Utz for advice on the terms of the draft agreement. Later Mr Foots and

Mr Hill joined them to discuss some outstanding terms, in particular Ensham's option to purchase the dragline, the method of calculating the total amount of spoil moved and some technical issues. Mr Foots said that he had been negotiating on behalf of Southern Cross with BHP and Bucyrus since March. He pointed out that more than a month had elapsed since the draft agreement was proposed at the 4 June Management Committee meeting. Mr Foots intimated that he had information from BHP that it would 'call off' the sale of the dragline because of the length of time negotiations were taking. He thought that if there were further delays the joint venture would lose the chance to secure the services of the dragline.

[390] Mr Ishizaki accepted Mr Foots' intimation and became concerned that if the agreement was not finalised quickly Southern Cross might lose the chance to buy it and the joint venturers lose a chance to hire the dragline from Southern Cross.

[391] To add to Mr Ishizaki's worries he received a report from Tokyo on 24 July advising that IK had not agreed to Southern Cross receiving a return of 25 per cent from the dragline agreement. Mr Ishizaki had agreed that provision with Mr Foots and Mr Hill earlier. As well the message from IK raised a number of queries about other terms of the agreement which were to be clarified before the agreement could be executed.

[392] On 27 July Mr Foots sent to the joint venturers for their signature a circulating resolution approving the dragline agreement and authorising Mr Ishizaki as chairman of the Management Committee to sign on behalf of Ensham.

[393] On 28 July Mr Shibata telephoned Mr Nakatsuka and authorised IQ (and Bligh) to sign the resolution. Mr Ishizaki duly did so the next day.

[394] On 29 July Mr Hill wrote to Ensham on behalf of Southern Cross

'... to confirm that if Ensham ... so desires, Southern Cross will first offer to sell the dragline to Ensham ... at the end of the fourth year of (the) ... Dragline Agreement, on terms and conditions including price, to be determined by agreement negotiated in good faith at that time.'

[395] Mr Ishizaki attended Mr Foots' office on 30 July to sign the agreement. Mr Ishizaki signed on behalf of Ensham and Mr Hill signed on behalf of Southern Cross.

[396] Mr Ishizaki gave evidence that when he went to sign the agreement Mr Foots said to him that 'normally' he would sign that kind of contract as the CEO of Ensham, but he could not sign 'both (for) Ensham and Southern Cross'. Accordingly he asked Mr Ishizaki to sign the agreement for Ensham. I think this is unlikely. As I have mentioned the inappropriateness of Mr Foots signing the dragline agreement on behalf of Ensham had been recognised earlier by the 'flying minute' which the joint venturers signed authorising Mr Ishizaki to execute the agreement. When he arrived at the office he must have expected that he would sign and that Mr Foots would not.

[397] Something should be said about the manner in which the dragline agreement was negotiated. A point which counsel for Mr Foots stress is that 'at least from

23 June 1999 onwards Ensham proceeded in its dealings with Mr Foots ... on the basis that (it) and (Southern Cross) were negotiating on a commercial basis as separate entities'. It is stressed that during the negotiations the joint venturers had recourse to legal advice from Clayton Utz and that as the result of the negotiations some terms were agreed that were for Ensham's benefit. One was the removal from the agreement of the cost to Ensham of removing the dragline from its mine site. These were known as 'demobilisation costs'. A second was that the option to purchase a dragline was contained in a separate letter rather than in the body of the agreement. This was a point requested by Ensham on legal advice to save stamp duty. Mr Foots relies upon the facts of the negotiation, as well as these indications that Ensham was looking to its own position, as evidence that Ensham, and the joint venturers, gave their consent to the dragline agreement.

[398] There are some difficulties in this approach. One, obviously, is the very concept of a fiduciary negotiating with his beneficiary over the terms of a contract from which the beneficiary stands to profit. Given the nature of a fiduciary's obligations negotiations in such a case are fraught with danger for the fiduciary if he is to retain his profit. His obligation is to advise the beneficiary what is in the beneficiary's best interests. He is not to negotiate for his own advantage, at least without exposing in clarity and detail what he is doing and what his advantage is.

[399] The authors of 'Actionable Non Disclosure, 2nd ed.', Spencer Bower, Turner and Sutton, discuss the duty of disclosure owed by a fiduciary in chapter 16. In the first edition, Mr Spencer Bower had expressed the view:

'... [W]here a fiduciary relation exists ... the person in whom confidence is reposed ... owes to the person who has reposed it a duty ... to place at his disposal all the knowledge, acquired or possessed by himself in the course and by virtue of such relationship, which has a bearing on any transaction ... between the parties themselves, or between either of them and a third person, with reference to any matter which is the subject of the confidence.'

[400] The authors of the second edition thought that 'in many instances that description of the ... duty of disclosure is an accurate one' (p. 312) but offered a refined description of the duty (p. 314). They said:

'This distinction (between fiduciaries who control another's property and those who act on the other's behalf) has important implications for the duties a fiduciary may owe when contracting with the principal. ...

In the one case, the principal is relieved from the transaction because the information used by the fiduciary and not disclosed, belongs in a sense to the principal; in the other, because that advice is not given, which the fiduciary has undertaken to give. ... [I]n the latter, the fiduciary is expected to take all due care on behalf of the principal.'

[401] It was a term of Mr Foots' contract that he advise Ensham of all matters concerning the operation of the mine. He was, therefore, accepting the views of the text writers, obliged to pass on to Ensham all the information he had relevant to the dragline agreement. Otherwise he would not have taken 'all due care on behalf of the principal'.

[402] Speaking of the obligations of disclosure owed by an investment adviser, a fiduciary, to a client, Brennan J said in Daly v The Sydney Stock Exchange Ltd [1986] HCA 25; (1985-1986) 160 CLR 371 at 385:

'His duty is to furnish the client with all the relevant knowledge which the adviser possesses, concealing nothing that might reasonably be regarded as relevant to the making of the investment decision ..., to give the best advice which the adviser could give if he did not have but a third party did have a financial interest in the investment to be offered, to reveal fully the adviser's financial interest, and to obtain for the client the best terms for which the client would obtain from a third party if the adviser were to exercise due diligence on behalf of his client in such a transaction.'

[403] The consequence is that Mr Foots could not negotiate for himself or Southern Cross in any conventional sense. His obligations as a fiduciary were to obtain the best terms available for Ensham, not for Southern Cross. He could not, consistently with his fiduciary duty, conceal from Ensham any information relevant to its decision whether or not to make the dragline agreement and on what terms. He was obliged to prefer Ensham's interests, not his own.

[404] The facts show the negotiations to have been conducted with complete disregard for those principles, and with a marked lack of frankness.

[405] The first point to make is that those negotiating on behalf of Southern Cross,

Mr Foots, Mr Hill, Mr Dawson and Mr Edmondson, were those whom Ensham had employed to advise it and advance the joint venturers' interests. Ensham's only source of advice on technical matters concerning coal mining and draglines came from those employees. Mr Hill said (T 1382.9-19):

'And you told his Honour, in answer to a question, that you accepted that you had expertise in your field; that the joint venture representatives did not. Do you remember giving that evidence ...? - ... I can remember that.

At the time that ... the spreadsheets were being prepared and given to them, did you consider who would be advising them on the technical issues that you were negotiating with them about? - No, I did not consider that.'

[406] It will be recalled that Mr Hill testified that the spreadsheets dealing with the Southern Cross contract case were put together on the basis that they contained items about which Southern Cross was prepared to negotiate downwards. That is those spreadsheets expressed the best case for Southern Cross. Mr Hill was asked (T 1226.40-44):

'Did you tell them in the preparation of these spreadsheets that you were putting forward the best case for Southern Cross and that you weren't in the compilation of the spreadsheets having regard to Ensham's best interests? - No, I didn't make that clear.'

[407] I have dealt at some length with the provision and content of the spreadsheets, but some other facts should be mentioned. According to Mr Hill after the second meeting on 4 June concluded he reported to Mr Foots what had transpired. He mentioned that he had been asked to provide the economic comparisons between the contract case, lease case and Ensham purchase case. Mr Foots told Mr Hill 'not to worry about doing them because the other options were not viable ...'.

[408] The comparisons were not prepared 'until later in June when (Mr Hill) was pressed for them by the joint venturers.' I have already noticed that the first spreadsheets dealing with the required comparisons were not delivered until 25 June. It may be noted that Southern Cross was in possession of spreadsheet analyses of what has been called the 'Southern Cross contract case' since late April when they were provided to Westpac in support of the loan application. Mr Foots could offer no explanation for omitting to provide at least these spreadsheets to Ensham before

[409] When information was provided to the joint venturers it was not made clear that it was not proffered as disinterested advice to advance their interests. Despite coming from their employees and fiduciaries the memoranda sent by Mr Foots and Mr Hill conveyed information intended to benefit Southern Cross, or at least not to unambiguously advance the interests of the joint venture. About the memorandum of 16 June which was mentioned earlier, Mr Foots said (T 2386.3-25) that he believed:

'... I was trying to be fair - I was being fair and acting on behalf of both groups. ... I believe it was prepared on behalf of both parties, yes. I don't recall thinking separately on those two things at the time, but that's what I think would have been in my mind.

How did you draw a line of demarcation between your duty to Southern Cross, the company you owned, and your duty to Ensham, the company that paid ... your salary? ... - I don't recall thinking about that specifically at the time.'

[410] A feature of the spreadsheets and the accompanying memorandum of 25 June was that they did not disclose the capital cost of the dragline to Southern Cross. This was said to be 'confidential'. Mr Hill explained why:

'Ken Foots told me not to disclose the capital costs. He said that he was not prepared to show our hand until the joint venturers had made a commitment to the deal. We discussed the assumptions ... and ... agreed that I would do one based on capital costs of $4,000,000 and another based on capital costs of $6,000,000. ... I cannot say why we used these figures. There was no particular logic to it ...'

It may be said in parenthesis that a lease case based upon the cost of a dragline at $6,000,000 was known to be wrong. The price for the dragline was known to be $1,500,000. The refurbishment costs were known to be about $2,500,000. Mr Foots admitted that he knew, on 25 June, the price of the dragline and that he had 'an idea of the costs' of refurbishment. He knew them with enough precision 'to calculate the Southern Cross rate.' (T 2391.41-42)

[411] This significant passage occurred in the cross-examination (T 2393.9-20):

'The reason you kept the capital costs confidential is this: had you revealed them, you would have revealed the economics of the deal that would have inevitably been one that Ensham would have embraced itself. That's the reason, isn't it, Mr Foots? - No, I disagree entirely with that.

Well, can you think of another reason that you kept the costs confidential? - ... I cannot think of a reason.

Your answer is you can't think of any other reason? - No.'

[412] Mr Foots explained that at the conclusion of the meeting with the joint venturers on 28 June he understood:

'... that while the Joint Venturers recognised purchase of the Dragline as theoretically the best option, because of the funding issues they wanted to proceed with the (Southern Cross) proposal subject to ...

(a) (Southern Cross) maintaining transparency in the purchase price and all costs ...;

(b) (Southern Cross) accounting fully for its financial status and relevant information; and

(c) the provision of detailed calculations for comparison between the Contractor, third party lease and purchase by Ensham.'

The 'funding issue' was that the joint venturers did not have funding approval to purchase the dragline. Hence the proposal to purchase was only ever 'theoretical'. In his oral evidence Mr Foots said that the joint venturers had accepted the

Southern Cross proposal on 28 June and thereafter 'it was basically a commercial matter and it would be subject to negotiations commercially.' (T 2139.31-32).

[413] Mr Ishizaki's letter which summarised the outcome of the meeting makes it plain that there had been no acceptance of the proposal. Before the dragline agreement could be made seven specified conditions had to be fulfilled. One of them was the provision of the economic comparisons 'to enable us and Tokyo to consider more fully the proposal'.

[414] Mr Foots had this to say about his commercial negotiations with Ensham

'And did you ever tell the joint venturers that you were in negotiations with them? - I can't remember saying those words. But when you sit around a table and you negotiate or talk about the clauses in a contract, I think it is fairly obvious what's happening.

Would it have been obvious that when you supplied them with figures ... on Ensham Resources letterhead in terms that looked identical to the terms the written advice from you to them in the years preceding they would have appreciated that that was coming from you as the sole director ... of Southern Cross? ... It was all written on Ensham Resources letterhead in the form of a memorandum addressed to the joint venture companies, that's right isn't it? - Yes.

So how would they know, when you used exactly the same format, that you had begun writing not on their behalf and not for their best interests; but for the best interests of Southern Cross and on its behalf? ... I think you are correct, it's probably - it's not obvious.'

[415] One of the conditions imposed by the joint venturers on entry into the dragline agreement was 'transparency' of Southern Cross' costs. Mr Foots understood by this that there was to be full disclosure of those costs including, obviously, the price of the dragline. He admitted, however, that by 29 June when a further batch of spreadsheets was delivered to the joint venturers, the price of the dragline had not been disclosed.

[416] Mr Hill also had this to say about the negotiations (T 1225.41-52):

'HIS HONOUR: Mr Hill, you, as Mr Gibson has established, by the time you went to work for Ensham had years of experience in evaluating the economics of dragline operation; is that right? - Yeah, I remember.

Did any of your employers or their representatives: Mr Nabetani, Mr Ishizaki, Mr Nakatsuka, have anything like that knowledge? - Not - no.

Did you ever tell them, or any of them, that Ensham could negotiate the contract rate downwards from figures you had put in the spreadsheets? - No. I had not given that indication.'

[417] Another feature of the negotiations was that Mr Foots used information, to

Southern Cross' advantage, which came to him in his capacity as Chief Executive Officer of Ensham and was confidential to Ensham. The obvious example is that Southern Cross' contract price was fixed by reference to the Golding contract price. Any arrangement involving the dragline would produce savings if the cost per bcm of removing overburden was lower than the Golding cost. Mr Foots knew what that was and accepted that it was not available to anyone outside Ensham. The whole thrust of the negotiations for the use of the dragline was predicated upon that knowledge. Mr Foots had this to say about it (T 2409.37-2410.21):

'Did you think there was anything wrong in offering a price to your employer ... and in using confidential information relating to ... the earthmoving contract ... in place ... to pitch your own price ...? - What we used that for was to show to the joint venturers what the cost savings were between a dragline contract and what they were presently paying for Goldings. ...

The information that we used was information that was within the knowledge of all the parties involved.

HIS HONOUR: But you gave Southern Cross information that was confidential to Ensham, but you didn't give Ensham information that was confidential to Southern Cross, did you? - Early on we didn't from that memo, your Honour, yes.'

[418] Mr Foots' attitude is also apparent from what he said concerning the memorandum of 16 June which purported to compare the cost to Ensham of supporting Golding with the cost of supporting Southern Cross in the event that the dragline agreement was made. This, it will be recalled, inflated the figure in respect of Golding by including depreciation on the accommodation huts. That fact is rather occluded by the manner of its expression. Mr Foots thought that if the joint venturers did not understand the memorandum they could have 'come down and questioned us'. He went on (T 2388.10-23):

'How were they to know what questions to ask? - Well ... if they didn't understand something, they would come down and go through the - how we did things.

Why wouldn't you tell them? You were their chief executive officer. Why should they have to ask? If they asked you for information, why didn't you give it to them? - I thought we were giving the information there, and it's only when I get questioned here from Mr Sofronoff that I realise that it's not - it's not as clear as what I obviously thought.

Did you honestly think you were being fair to Ensham? - Yes.

[419] The spreadsheets prepared by Mr Hill and given to the joint venturers which considered the 'Southern Cross contract case', showed, as part of Southern Cross' cashflow from the proposed contract that it would pay a dividend of 10 per cent in each of the five years of the proposed dragline agreement. This rate of dividend remained constant in all of the spreadsheets. The level of profit to be made by Southern Cross from the agreement was, understandably, a concern for the joint venturers and they had made this clear at a number of meetings including those of

4 June and 28 June 1999. The concern was reinforced subsequently at a meeting on 24 August between Mr Foots and Mr Matake.

[420] By 29 July 1999 Mr Hill had performed some calculations on the projected returns Southern Cross would receive from the dragline agreement. These showed that a dividend of 15 per cent in the first year of the agreement was achievable.

[421] On or about 12 August 1999 the directors of Southern Cross issued an information memorandum inviting subscriptions for shares in the company. It included a letter from the chairman, Mr Foots, which included these remarks:

'The company has been formed to give management and employees of Ensham Resources the opportunity of indirect participation in the Ensham Coal Project through a 5 year contract to supply a Dragline to the Ensham Coal Project.

The Dragline has been inspected by ... our Directors and by ... Bucyrus. A comprehensive maintenance program has been put into place ...

The Directors of Southern Cross with their extensive experience in Dragline operations will ensure that the risks associated with such a project will be minimised as much as possible.

This is a unique opportunity which has the full support of the Ensham Joint Venture Partners ...'

The memorandum contained a further statement that:

'All the contracts signed by the Company have been negotiated in such a way as to minimise the risks associated with the purchase, operation and maintenance of the second hand Dragline.'

[422] The memorandum went on to explain that it was intended to raise $1,000,000 by issuing one million shares at $1 each. $3,000,000 was to be borrowed from Westpac to provide total capital assets of $4,000,000 which would be applied in the acquisition, relocation and operation of the dragline. The cashflow included in the memorandum predicted that for each of the first three years of the dragline agreement a dividend of 15 per cent would be paid. In the fourth and fifth years a dividend of 100 per cent was predicted and in the sixth year a dividend of

[423] The memorandum was prepared by Mr Hill and Mr Edmondson. Some time between 29 July and 12 August Mr Hill discussed with Mr Foots the fact that there would be a cashflow sufficient to pay a dividend of 15 per cent for each of the first three years, and a much larger dividend in subsequent years. Mr Foots assented to the memorandum containing an expression of that dividend policy. It appeared in a draft of the memorandum dated 2 August. The increase in dividend in the later years was a reflection of the repayment of the loan after three years.

[424] Mr Foots knew that the joint venturers had been told that Southern Cross' profits would pay a dividend of only 10 per cent.

[425] The projected rate of dividend contained in the information memorandum yielded shareholders in Southern Cross a return of 420 per cent over six years. It is also worth mentioning that the value of shares in Southern Cross increased three-fold between their issue in October 1999 and March 2002. This appears from the fact that the shareholders in Southern Cross exchanged their shares for an equal number of shares in Little Digger in May 2001. In March 2002 Mr Hill sold his shares in Little Digger to Mr Foots and Mr Bird for a price of $3 each.

[426] The fact that Southern Cross' projected rate of dividend increased above 10 per cent and was presumably paid at the increased rate was not revealed by Mr Foots to Ensham or the joint venturers before the rescission of the dragline agreement. There is no clear evidence that he knew of it before 30 July 1999 but he certainly knew before 12 August and probably before 2 August.

[427] The dragline agreement was put together as a draft by Mr Hill. He used as a basis the existing contract between Ensham and Golding. The fact that he was preparing a draft agreement must have become known to the joint venturers because, on

24 June 1999, Mr Smith advised Mr Nakatsuka that it was a 'conflict of interest' for Ensham staff to prepare the agreement and the joint venturers should, before signing it, 'ensure that the contract is independently checked'. Subsequently Mr Hill sent the draft agreement, which he had first shown to Mr Foots for approval, to

[428] The agreement in its form was unusual, given its provenance. It appears to be the acceptance of a competitive tender by an earthworks contractor. It was, in reality, a private treaty where one party, Southern Cross, was represented in the contract negotiations by the managers of the other, Ensham. In a letter of advice which drew attention to the deficiencies in the draft Mr Smith pointed out that clauses 12, 14 and 15 were 'either uncertain in their terms or (were) agreements to agree in the future. Consequently these clauses (were) unenforceable.' The draft clause 12 can be ignored because, in its final form, it was given certainty. The other two clauses which had been drafted by Mr Hill and approved by Mr Foots read:

'14.0 After the Contractor has fully repaid its bank loan and satisfied all financial commitments to the lending authority, the contract rate shall be renegotiated to a mutually agreeable rate.

15.0 The contract rate in ... Clause 5.0 ... is based on estimated capital expenditure, when these amounts are finalised a final contract rate shall be determined and mutually agreed.'

[429] The joint venturers had expressed an interest in acquiring the dragline themselves at the end of the contract period. By letter dated 29 July 1999 from Mr Hill, on behalf of Southern Cross, the right was conferred by way of collateral agreement. Mr Hill wrote:

'Southern Cross ... wishes to confirm that if Ensham Resources ... so desires, Southern Cross will first offer to sell the dragline to Ensham ... at the end of the fourth year of (the) ... Dragline Agreement, on terms and conditions including price, to be determined by agreement negotiated in good faith at that time.'

[430] The dragline agreement itself is described as 'Contract ESO 17 Provision of Dragline Agreement' and incorporates the Australian Standard General Conditions of Contract, most of the contents of which appear to be inapplicable or inappropriate. The agreement suggests ingenuously that it was the product of an open tendering process. Its terms include:

An Expression of Interest has been invited from Southern Cross ... to formally quote on the removal of overburden at Ensham. The Contractor was provided with plans of the areas ... for stripping and discussions were held to ensure that the Contractor had the opportunity to gain sufficient knowledge of the works required ...

The letter from the Contractor dated 15 July 1999 is accepted ...

The Contractor's offer shall remain valid for acceptance ... for a period of sixty (60) days from the Tenders' closing date ...

The contractor is responsible for examining any tender documents provided by the Principal ... to determine the risk and cost in the performance of the work ...

The Principal shall not be bound to accept the lowest or any Tender.'

[431] The agreement itself is contained in Section B 'Agreement'. It provided:

'4.0 As full consideration for the satisfactory performance by the Contractor of this Agreement, the Principal will pay the Contractor in accordance with this Agreement.

2. Deadheading as set out in Section D Clause 13.0 ...

6.0 The agreement is for the period of 5 years ... [T]he Agreement shall be effective when the Contractor finalizes the contracts with BE and Westpac. The commencement date of digging shall be advised by the Contractor and confirmed by the Principal in writing. At the end of year 4, the Principal will nominate whether an optional additional period of up to 5 years will be negotiated.

11.0 The Contractor agrees to the Principal's request to limit the activities of its company to business for the Ensham Coal Project unless otherwise agreed.

12.0 At the end of each year of the Agreement if the m3 of overburden ... moved is greater than 7M.m3, a 50:50 sharing of the cost savings due to the increased volume will occur. These savings will be calculated for the full volume moved in that year and will be calculated by the parties using a method to be agreed, and failing agreement, determined by the dispute resolution mechanism in the General Conditions.

13.0 The Contractor agrees to the Principal's request to provide transparency to the Principal in regard to all contracts signed, capital expenditure, operating costs and company accounts. This transparency includes the right to audit the Contractor's financial records.

14.0 After the Contractor has fully repaid its bank loan ... the Contract Rate shall be reduced to an agreed rate which shall not exceed the total of the Contract Rate specified in Clause 5.0 ... and any CPI review.

15.0 The Contract Rate ... is based on estimated capital expenditure. When these amounts are finalised a final contract rate shall be determined and agreed.'

[432] Section D of the agreement was entitled 'Scope of Work'. By clause 1:

'The Principal shall nominate a Superintendent to administer this Agreement on the Principal's behalf.

Through the Superintendent, the Principal shall fully utilise the stripping capacity of the dragline. The resulting contract production rate of overburden (including rehandle) will be approximately 7 million cubic metres per year.

The Principal shall supply operating labour, dozer and other necessary labour and equipment to ensure the productive use of the dragline.'

[433] Clause 2 provided that the quantity of overburden moved should be determined and paid monthly by the superintendent. Payment was to include material rehandled and deadheading time.

[434] 'Rehandled' is a term applied to the material which is moved more than once by the dragline, for example, where excavated material is stockpiled near the dragline and then moved to another stockpile or dumped into an adjacent worked out pit. 'Deadheading' describes the movement of the dragline when it 'walks' from an existing digging face to the next digging face. Southern Cross was to be paid deadhead time at 75 per cent of the average hourly digging rate.

[435] On 2 August 1999 Mr Nakatsuka reported to Mr Shibata that the agreement had been signed and sent him a copy of it. In response an email was sent on 3 August from Mr Takahashi, who had moved to a staff position in one of IK's departments in Tokyo. He wrote that the General Accounting Division required 'transparency' in the agreement and sought 'a full account from (Southern Cross) regarding the current discrepancy with the initial forecasts for ... movement costs and ... maintenance costs' and justification for a contract rate which provided

Southern Cross with a rate of return on the agreement of 25 per cent. The message concluded with a comment that because Mr Foots was both CEO of Ensham and a shareholder and director of Southern Cross that 'under commercial law in Japan the approval of the board of directors is required' for such a transaction. Mr Nakatsuka was asked to obtain advice from an Australia lawyer. He relayed the contents of the message to Mr Ishizaki and Mr Matake.

[436] On 6 August 1999 Mr Matake received a report from Mr Shibata which expressed concerns raised by officers in the document section of IK. This is the section which provided internal legal advice to IK. The report noted that there were 'discrepancies' between the facts given to both the investment committee which met on 9 June and the General Managers who met on 21 June on the one hand, and the 'content' of the dragline agreement. Concern was expressed that the discrepancies might 'cause huge trouble in terms of the ... management of the Ensham project'. The report noted that IK would not permit its employees 'to create separate companies and have those companies conduct business with' IK. The same requirement was said to apply to Ensham. It noted that the objectives of

Southern Cross from the joint venture's point of view was to introduce the third dragline to reduce costs and improve productivity and that 'considering' that Southern Cross was a company owned by Ensham employees who 'are already receiving salaries as employees of Ensham resources' Southern Cross ought to be a 'cost-through' company'. The report also noted that the shareholders of

Southern Cross, who were at the time employees, were 'violating their fiduciary duty to the joint venture'.

[437] The criticism had come late and caused obvious difficulties for IK's representatives in Australia. The agreement had been signed with the authority of Mr Shibata. The senior officers of IK in Tokyo had been kept informed of the negotiations with Southern Cross for the dragline agreement and had not allowed these misgivings to get in the way of signing the contract. Mr Ishizaki thought the best solution to the difficulty was to obtain further advice from Clayton Utz. Advice of an anodyne kind was received on 10 August. Its contents were not such as to generate any concern. Relevantly it pointed out that the conflict of interest which would arise where an employee of a company contracted with it could be satisfactorily resolved if the employer was aware of the interest prior to the agreement and consented to it.

[438] On 12 August Mr Matake received another letter from head office, this one from

Mr Wakahara and Mr Takahashi. It sounded the same warning that the previous letters had done. It expressed a concern that the implications of the dragline agreement had not been explained to EPDC or LG who might take action against IQ and Bligh. An enclosure with the letter noted that the cost of the drag line agreement appeared to have increased without explanation or approval, and concluded that IK "should urgently proceed with the following measures.

1. If (Southern Cross) has not bought the dragline yet, then immediately stop this transaction. If (Southern Cross) has already bought it a claim for damages may be made ... so we will need to confer closely with our lawyers.

2. Fully investigate the details of this matter ..."

[439] The enclosure was a note which had been prepared by Mr Omori, an employee of the document section of IK. Mr Omori had a degree in law but was not a qualified lawyer. He had been given a draft of the dragline agreement with some other materials and an explanation of the Southern Cross arrangement by Mr Takahashi in July 1999. He became concerned that it appeared to infringe article 265 of the Japanese Commercial Code, which proscribes 'self trading conflict of interest trading'. Mr Omori prepared a memorandum, dated 12 August 1999, which he gave to Mr Wakahara.

'1. We have discovered ... that ... Ken Foots, ... Ray Bird, ... Ken Hill, ... and Trevor Edmondson ... wants to purchase the second-hand dragline and lease it to Ensham.

2. It goes without saying that when the executives of Company A have personally established ... Company B, then there is a danger that its trading with Company A will lead to dishonest conduct ...

3. In this case, it will possibly lead to serious problems in [the] future ... because the above listed executives hold almost 100% of the real power in Ensham.

4. There are also outstanding legal problems. Trading under this arrangement constitutes a conflict of interest in transactions under the Japanese Commercial Code and Australian commercial law also requires a decision by a general meeting of shareholders. According to the documents ... it appears authority to conclude contracts is delegated by the Management Committee, which is the equivalent of the general meeting of shareholders for Ensham ... On the surface, therefore, one could assume that there is no problem.'

It concluded with the recommendations quoted a little earlier.

[441] Mr Omori explained that he thought the Southern Cross 'deal' was against IK policy and involved a conflict of interest. He asked Mr Wakahara to pass on an expression of his concern to Mr Noda, the General Manager of the relevant department who was then in Australia.

[442] The letter from Mr Wakahara recounted that when negotiating and executing the dragline agreement IK relied 'on our trust in ... Foots and we are confident that the interests of the JV will be give priority. On the other hand, with the legal problems ... with actually conducting business on the basis of this agreement, it is also a fact that there is a risk the reputation Ken Foots has built up ... will be lost, with the same applying to (IK) as well.' Mr Wakahara noted that the documents section proposed that the agreement be set aside and the parties reconsider the acquisition of the dragline afresh.

[443] Mr Ishizaki remained puzzled that officials in Tokyo should raise the problem after the contract had been signed. As requested he and Mr Matake spoke to Mr Noda who had just been appointed as General Manager of the Industrial Energy department of IK. This was the department to which Mr Ishizaki and Mr Matake were answerable. Mr Noda expressed his view that if the objections had been raised earlier the negotiations could have been stopped and the agreement not made, 'but it was too late'. He thought there was no point in engaging in recrimination and pointed out that the dragline had been introduced to lower costs and as long as it did so there was 'no fundamental problem'. He cautioned that IQ's representative should keep a close watch on the performance of the dragline agreement to ensure that nothing untoward happened.

[444] On 23 August Mr Shibata again wrote to Mr Matake to express the concerns of the document section about the agreement. He asked Mr Matake to meet with Mr Foots to explain IK's concerns. He expressed his view that the best solution was to 'return to the starting point' and have the joint venturers consider purchasing the dragline themselves. Mr Matake was urged not to express any criticism of

Mr Foots. Mr Shibata proposed some alternative measures to achieve the resolution of the conflict of interest. They were: that the joint venture should itself purchase the dragline; or, that the joint venture should buy the shares in Southern Cross; or, that the dragline agreement should be honoured, though with a reduction in the contract rate to ensure that Southern Cross made no profit.

[445] Mr Matake duly met with Mr Foots on 24 August. He explained that the agreement with Southern Cross had caused serious disquiet in IK's legal section because of the conflict of interest for the Ensham senior managers to establish Southern Cross and make a profit from the agreement. Mr Matake explained that IK wanted Mr Foots to agree to cancel the agreement between Ensham and Southern Cross and to have Southern Cross assign the agreements with Westpac and Bucyrus to Ensham. He said that if this could not be done then Southern Cross should become 'a cost company' and not make profit. According to Mr Matake Mr Foots said that the notion of putting an end to the contract, or assigning agreements to Ensham was ridiculous as Ensham had already executed the dragline agreement. He said that if the agreement were terminated he and other employees would be obliged to leave Ensham. Furthermore, he claimed that there was an opportunity for him to enter into a management contract with BHP. He then asked what price the joint venturers would pay for Southern Cross to give up its agreement. Mr Matake said that IK would bear all the expenses involved. Mr Foots became angry; he said the meeting was a waste of time and he left.

[446] Mr Matake made a note of the conversation, which he passed to Mr Ishizaki, who typed and sent a report of the meeting to head office.

[447] Mr Foots' recollection of the meeting is a little different. He testified that

Mr Matake said there was 'a real problem in Tokyo with the dragline agreement.' When asked what the problem was Mr Matake explained that 'the industrial energy ... department was in trouble with the rest of (IK) ... There was not a problem within Ensham ... but ... an internal Idemitsu ... "conflict of interest" problem because ... (IK) had a policy against employees acting in self ... dealing ...'.

Mr Foots said that he was not an employee of IK but asked what that company had in mind. Mr Matake asked if it was possible to cancel the dragline agreement and Mr Foots answered negatively. The rest of Mr Foots account of the conversation conforms to Mr Matake's account.

[448] Mr Matake and Mr Ishizaki took Mr Foots' threat to leave Ensham seriously. They thought that if Mr Foots and the senior managers left they would take the small dragline to another mine. They, and the other joint venturers, had been advised by Mr Foots and Mr Hill that the dragline was necessary if Ensham were to meet its production targets. They feared as well that if Mr Bird left Ensham would have no Mine Manager and production would stop with the result that Ensham could not ensure a stable supply of coal to its customers. This was of particular concern for EPDC.

[449] Mr Ishizaki was right to take Mr Foots' threat seriously. That was, no doubt, what Mr Foots intended. He meant the threat to persuade IQ, and the other joint venturers, not to terminate the dragline agreement. This emerged in cross-examination (T 2470.30-.45):

'So on your evidence, if the contract were cancelled, it was true that some people might find they had no choice but to leave? - I think some people might have left with me, yes.

So you had placed your employer in the position where to undo the contract would have meant it would have had to accept the risk of losing some important members of staff; is that what you achieved? - As I stated here, as I just stated to you -

MR SOFRONOFF: You had put your employer in the position where if it wished to cancel the contract, it had to take the risk that some of its important employees would leave. That's what you achieved, isn't it? - Yes. If you put it that way, yes.'

[450] It is likely that Mr Foots told Mr Dawson of the concerns expressed within IK about the dragline agreement. As a result Mr Dawson telephoned Mr Shibata, whom he knew personally, and asked whether it was true that Mr Wakahara and Mr Shibata were the subject of criticism in IK because of the dragline agreement. Mr Shibata told Mr Dawson that he and Mr Wakahara were 'in a difficult position'. Mr Shibata then rang Mr Matake to tell him about Mr Dawson's enquiry and to express the belief that Mr Dawson had rung at Mr Foots' direction. Mr Shibata asked

Mr Matake to meet Mr Dawson and enquire what was behind his approach to

[451] They met at the Hilton Hotel on 30 August; Mr Ishizaki also attended. Mr Dawson confirmed that he had spoken to Mr Shibata by telephone but the approach had not been instigated by Mr Foots. Mr Dawson said that he and Mr Foots were concerned about the fact that the dragline agreement was causing difficulties for IK; only he and Mr Foots knew about IK's anxiety, but if Mr Bird learned of it he might quit. Mr Dawson said the scheme was 'common' and asked what was wrong with it.

Mr Matake explained what should have been obvious; there was a conflict of interest if Southern Cross, owned by Ensham employees, made a profit from its agreement with their employer. Mr Dawson asked what IK wanted and was told that the options were to cancel the contract and for Ensham to purchase the dragline, or for Southern Cross to assign the agreements with Bucyrus and Westpac to Ensham, or for Ensham to buy all the shares in Southern Cross or, if none of these were acceptable, that Southern Cross should make no profit from the agreement.

[452] Mr Dawson told Mr Matake that Mr Foots and Mr Bird together owned 50 per cent of the shares in Southern Cross. Both Mr Matake and Mr Ishizaki were upset by the revelation. They had not known the particulars of the shareholding before. They had been led to believe that Southern Cross was to be a company owned by employees of Ensham, not one to profit its senior and well remunerated managers. Mr Matake said he felt 'betrayed'.

[453] Mr Dawson said that the agreement had been executed, it was not illegal and it could not be cancelled. He also doubted that the agreement could be assigned and that the shareholders would sell their shares at the price they had paid for them. He explained that the dragline agreement guaranteed profit and, if the agreement were to be cancelled, some way would have to be found to give shareholders a profit. For the same reason the company could not become a cost-through company.

[454] This is an appropriate point at which to discuss Mr Foots' submission that

Mr Ishizaki, if not Mr Matake, knew of his substantial shareholding in Southern Cross much earlier than the meeting with Mr Dawson. It would be recalled that

Mr Foots testified to a meeting with Mr Ishizaki in April or May at which

Mr Ishizaki had suggested that he and Mr Bird be the majority shareholders. The point has no significance for any issue in the action because there is no doubt that Ensham went ahead with the dragline agreement, notwithstanding any misrepresentation or non-disclosure by Mr Foots about his shareholding. Ensham knew of the shareholding at the latest on 30 August and did nothing to bring the dragline agreement to an end. The point, though, has significance for credit: both Mr Foots and Mr Ishizaki's.

[455] Before commenting on credibility some other facts should be noted.

[456] On 3 June 1999 Mr Ishizaki consulted Mr Smith of Clayton Utz for advice about

[457] If the diary note were made in accordance with Mr Smith's ordinary practice it recorded what Mr Ishizaki told him at the consultation so that it is a note that

Mr Ishizaki said that 'Ray' would be the biggest shareholder at the mine. That was Mr Smith's original impression recounted in his statement, though in oral evidence he expressed the view that Mr Ishizaki had not told him that 'Ray' was to be the 'biggest' shareholder at the mine. He had no convincing explanation for his change of opinion. It is clear that he had no recollection of the meeting or what was said at it. It may also be remembered that at the time of the meeting Mr Smith knew the particulars of the proposed shareholding in Southern Cross but was careful not to tell his client what he had been told earlier by Mr Edmondson.

[458] Mr Ishizaki denies that he knew that Mr Bird would be the biggest shareholder of those at the mine, and he denies that he told Mr Smith what is recorded.

[459] Mr Foots' counsel submits that the diary note shows that Mr Ishizaki did know about Mr Bird's shareholding as early as 3 June and that he is not to be believed when he denies that knowledge, and denies that it was he who suggested how the majority of the shares should be held.

[460] That part of the diary note is a puzzle, which the evidence does not solve. It does not matter because I think the other information contained in the note, which it is accepted Mr Ishizaki provided, shows that he did not know of Mr Foots and

Mr Bird's majority shareholding. What he told Mr Smith repeats what is recorded as what Mr Foots told the meetings of the joint venturers on 1 June. If Mr Ishizaki knew that Mr Foots and Mr Bird were to hold between them 51 per cent of the shares, it is impossible to believe that he would not have told Mr Smith that, rather than providing the oblique information which is recorded. The note sets out what Mr Ishizaki knew. It was recited to the solicitor so that he could be given advice. If he knew about the extent of Mr Foots' shareholding he would have said so.

[461] I have no hesitation in preferring Mr Ishizaki's evidence on this point to Mr Foots'. It strains credulity to believe that Mr Foots would not have mentioned Mr Ishizaki's suggestion when he told the joint venturers on 1 June, and again on 4 June, about the proposal in order to win approval for it. It would have been a point very much in its favour that Mr Ishizaki had already approved it and indicated how the shares should be held. It was not mentioned. Instead, as the notes record, he gave an account of the shareholding which omitted names and percentages.

[462] Moreover it is equally hard to believe that Mr Foots would have spoken to

Mr Ishizaki on the topic and not his superior, Mr Abe. It is also impossible to believe that Mr Ishizaki, had he been approached, would have made the suggestion without reference to Mr Abe and to his superiors in Tokyo. It is apparent that no decision of any importance was made by the IQ representatives in Brisbane. All important decisions were referred to IK in Tokyo. The decision is not one

Mr Ishizaki would have made himself. It is not one that Mr Foots would have expected him to make.

[463] I should perhaps mention some inconclusive evidence from Mr Nakatsuka who made notes in which he recorded the percentage of shares to be held by Mr Foots and Mr Bird. One of the notes appears at the end of a draft report dated

14 July 1999. It is not clear from the context that the notes were part of the original draft and Mr Nakatsuka could not recall when he made that note. The second note appeared on an undated document. Mr Nakatsuka had no recollection when he made that note.

[464] More significant is the fact that on 19 July Mr Nakatsuka prepared another draft report concerning the proposed dragline agreement. It contains a statement:

' • Shareholders: Ken Foots, Ray Bird, Ken Hill and other individuals (details will be given in a separate report)'

The separate report does not exist. No trace of it could be found and there is no indication that it was ever prepared. The inference I draw is that on 19 July 1999

Mr Nakatsuka did not know of the distribution of shares in Southern Cross and could not include it in his report.

[465] The consequence is that I find that Mr Foots has given deliberately false evidence about the conversation with Mr Ishizaki in April/May 1999. It is another example of a mendacious attempt to show that the joint venturers had early knowledge of the Southern Cross arrangement and approved it. The point is obvious: had Mr Foots, in fact, informed the joint venturers fully about what was involved in

Southern Cross becoming the stripping contractor, and given their approval to the arrangement, Mr Foots would not have felt the need to fabricate evidence.

[466] On 1 September 1999 Mr Matake and Mr Ishizaki met with Mr Foots. The purpose was to resubmit IK's proposal to eliminate the dragline agreement and the conflict of interest to which it gave rise. Mr Foots confirmed Mr Dawson's report that only the two of them knew of IK's desire to cancel the agreement. He also confirmed that if Mr Bird should find out he might leave Ensham immediately. Mr Foots also said that he had consulted his solicitors about the possibility that the dragline agreement might be 'brought back to the drawing board'. Mr Foots said that his solicitor's advice was that for such an outcome Southern Cross would require a huge amount by way of compensation. This was because the shareholders in Southern Cross had invested their money in reliance upon a prospectus which forecast considerable profits from the dragline agreement. As well Southern Cross had committed itself to contracts with Bucyrus and others. One example Mr Foots mentioned was that his solicitors had 'cited a precedent in which $15,000,000 was paid.' He explained, therefore, that in the short term it was impossible to change the arrangement. Mr Foots asked whether IK's problem was with employees earning shares or Mr Foots himself owning shares. He was told that the problem was that Southern Cross, owned by Ensham's employees, was engaged in self-dealing.

Mr Foots' response was that, if the matter were raised at the next Management Committee meeting set for 3 September, Mr Bird might leave with the result that production would cease.

[467] Mr Foots' account of the meeting is that one or other of Mr Matake or Mr Ishizaki wanted to discuss the 'problem' of the dragline further, and asked who knew that there was a 'problem'. Mr Foots replied that only he and Dawson knew. He had not told Mr Bird because he said he did not know whether, if Mr Bird did find out, he would resign thereby causing a stoppage in production. Mr Foots said that he had spoken to a friend of his, a solicitor, and had been told that 'as an information memorandum had been issued and contractual relations had been entered into with Bucyrus and others, (Southern Cross) had to be careful not to change matters as (it) and their directors could be up for compensation.' In response to a question,

Mr Foots explained that an information memorandum was 'like a prospectus', which Mr Matake and Mr Ishizaki understood. Thereafter they used the term prospectus 'instead of information memorandum'. Mr Foots did not correct them and, in fact, he adopted the same terminology. Mr Foots confirmed that he said he had been told about 'a breach of contract case' and 'that courts can order compensation against people who breach contracts'. He also said that it was difficult to change a scheme in the short term because employees had already applied for shares 'after receiving the information memorandum and contractual relations had been entered into'.

[468] As a result of the conversation the IQ representatives thought that nothing could be done to terminate the agreement.

[469] Mr Foots' statement, which he admits making, that Mr Bird might resign within days if he found out 'that Southern Cross was an issue for Idemitsu' was based only upon Mr Foots' belief about 'Mr Bird's strong reactions on various things'. He had not, in fact, spoken to Mr Bird to ask what he might do in the face of IQ's concern about the dragline agreement (T 2472.55 - 2473.9). The concern was, it will be remembered, legitimate. Mr Foots also accepts that he told Messrs Matake and Ishizaki that, in the event that Mr Bird left, production would stop 'until we got someone in place, yes, it could happen.' (T 2473.9-11)

[470] The intimation that Mr Foots had consulted a solicitor and received advice that Ensham may have to pay very substantial compensation should the dragline agreement be cancelled appears problematic. The solicitor to whom he referred was a friend who lives in Brisbane and with whom Mr Foots still socialises. He was not called as a witness to offer corroboration for the advice he was said to have proffered.

[471] Following the meeting of 30 August with Mr Dawson, Mr Matake sought legal advice as he had been instructed to do from head office. He had been told not to retain Mr Smith from Clayton Utz because he had been advising Mr Foots. Instead he sought advice from Mr Matsuda, partner of Deacons Graham and James, who was prominent in the Japanese community in Brisbane. The questions asked of

Mr Matsuda were whether the dragline agreement was binding and whether it could be cancelled. Mr Dighton, another partner of Deacons, provided a letter of advice on 1 September 1999.

[472] It set out 'preliminary views on the position of Ensham ... in respect of the employment of Mr Foots and the Dragline Agreement.' The letter went on:

'Mr Foots owes a fiduciary duty to his employer, particularly when he arranged for (Ensham) to enter into the agreement with Southern Cross ... In our view he should have provided a comprehensive proposal showing the different alternatives available ... in terms of buying or leasing the equipment and the financial impact of those proposals. We understand ... that no such paper was provided.

In addition, Mr Foots should have ensured that ... competitive bids were obtained.

In reply, Mr Foots would probably say that he made no secret of his involvement...

If we assume that Mr Foots has breached his fiduciary duty ... then what rights does (Ensham) have? (Ensham) would be justified in immediately terminating the employment contract. However, in the case of the Dragline Agreement we do not know at the moment whether the terms of the agreement are reasonably commercial or not.

If it is the case that the terms of the Dragline Agreement are economically reasonable from the perspective of (Ensham) then (Ensham) has suffered no loss and the issue of Mr Foot's fiduciary duty is only academic.

If however the terms of the Dragline Agreement are very harsh for (Ensham), then it would be able to claw back excessive payments and may even be able to terminate the agreement totally. The rights of (Ensham) depend to a large extent upon an examination of the figures and we strongly recommend that you arrange such ... examination.'

[473] Mr Matake and Mr Ishizaki discussed the advice but did not, as suggested, undertake a detailed examination of the financial implications of the agreement. Their reason, principally, was that they believed the agreement was economically reasonable. The contract rate was cheaper than the truck and shovel rate which meant that the dragline agreement provided economic benefits to Ensham. As well the spreadsheets provided by Mr Hill showed that the dragline agreement was, in its financial results, competitive with the cost of Ensham itself buying the dragline. They concluded that any breach of fiduciary duty was, in the terms of the advice, 'academic'. There were subsidiary reasons. One was that at the meeting with

Mr Foots on 1 September he had held out the possibility that the dragline agreement may be brought to an end after an interval of some months. As well there was the constant fear that a confrontation with Mr Foots might lead to the consequence that he and the senior managers would leave, closing the mine and disrupting production.

[474] It is necessary to digress for a few paragraphs to mention Mr Kaneko who was an employee of IK between 1965 and January 2002. From 1971 he was in the treasury department where his work involved 'foreign exchange dealings, project financing ... for companies within the IKC group.' He was a member of the Investment Committee, which, on 9 June 1999, approved expenditure for up to $7,000,000 for 'an investment in a small dragline for the Ensham mine' though 'the method of investment was not fixed.'

[475] Late in July 1999 Mr Takahashi gave Mr Kaneko some of Mr Hill's spreadsheets to review. These were apparently the last of the spreadsheets given to the joint venturers on 15 July.

[476] Mr Kaneko was told 'that it was proposed that Southern Cross would buy a small dragline and lease it to Ensham (who) would pay ... a rate per cubic metre of overburden moved.' He was also told that Mr Foots and some other employees would be the shareholders of Southern Cross. Mr Kaneko 'had to review the cashflow models in a hurry' because he had been told that the contract was about to be signed. Mr Kaneko therefore directed attention only to the spreadsheets dealing with the Southern Cross 'contract model and internal cashflow'. He noticed what he thought were 'serious problems'. The first was that the project evaluation showed a return of 25 per cent but this was calculated after interest, which meant that the rate of return would be about 30 per cent 'based on the numbers in the cashflow'. Mr Kaneko thought that the return was too high. Secondly he noted that at the end of the five year contract period 'the model showed that the dragline had no value'. Mr Kaneko thought this was wrong because if the dragline were well maintained it would remain serviceable for more than five years. Thirdly he noticed that the model included $1,850,000 for demobilisation costs which the joint venture partners were to pay as they were to pay the cost of bringing the machine to Ensham. Mr Kaneko thought it unreasonable that the joint venturers should pay to move it to another site at the end of the contract. Further the payment was inconsistent with the dragline having no value at the end of the contract. Lastly

Mr Kaneko thought that there were no tax advantages for the joint venture in the scheme although there would have been had Ensham bought the dragline or leased it.

[477] Mr Kaneko spoke to Mr Shibata and Mr Takahashi and explained his criticisms of the spreadsheets, and the Southern Cross proposal, to them. He expressed concern that 'the arrangement involved a conflict of interest and that it was possible that

Mr Foots, in his double role as CEO of Ensham and officer of Southern Cross would favour the usage of the ... dragline over the large draglines owned by the joint venture.' He expressed the opinion that the joint venturers should buy the dragline themselves.

[478] Mr Kaneko convened a meeting of senior managers of the relevant departments in IK concerned with the Ensham mine to express his concerns and his criticism of the arrangement as described in the spreadsheet. He prepared a briefing note, dated

2 September 1999, for the meeting, a copy of which was sent to Mr Ishizaki. Judging by his correspondence, Mr Kaneko is of an acerbic character who does not mince words. His report contained these remarks:

'Why do we have to let Ken's company make money? There was never a need to lease. It is normal for a convenient lease to have zero profit. What exactly is promised? Who said do it because you can make a profit? Suspicious? ... There is no way to inspect this. Ken will not expose his faults. AR said that they will show the transparency, but how could they dare say such an impossible thing? Ken has provided some materials ... Who exactly checked the content of those documents? ... The problem is that the lease ... was accepted without any serious examination ... If Ken threatens to resign, then, why don't you consider employing a new management team quickly? Isn't it the worst thing to get into a panic at the threat?'

[479] Despite the strong language it should be noted that Mr Kaneko did not advert to the features of the spreadsheets which made them pernicious: the inflated expenses in the purchase and lease cases which had the effect of making them roughly comparable in cost to the Southern Cross contract case. His criticisms reflected his analysis of only the contract case spreadsheets.

[480] Mr Ishizaki describes his reaction to Mr Kaneko's note:

'Mr Kaneko's comments were frustrating ... because he did not have to account for the consequences of Mr Foots and his team leaving Ensham and production stopping. ... Our situation was not so simple. ... If Mr Foots and his team left we thought that they would take the dragline to another mine. The situation was extremely difficult for us ...'

[481] Mr Omori was one of those who attended the meeting convened by Mr Kaneko.

Mr Kaneko's 'main point' expressed to the meeting 'was simple. He said that the best thing ... was for Ensham to buy directly from BHP.' Mr Omori was not aware at the time of Mr Foots' representations that such a purchase was impossible. It appears Mr Kaneko was also ignorant of it. As a consequence of the meeting

Mr Omori prepared a report which was given to Mr Shibata and Mr Ishizaki.

Mr Kaneko assisted in the drafting. The thrust of the memorandum was that a direct purchase of the dragline was in the best interests of the joint venture and that the dragline agreement should be revoked. It contemplated that Mr Foots might resign over the issue but should be required to 'first hand over (his) duties to (his) successor.' It also contemplated the possibility of litigation with Southern Cross and/or Mr Foots.

[482] The note was sent to Mr Ishizaki under cover of a memorandum from Mr Wakahara which said:

'... Mr Omori ... has raised some points in his memo, but we wish to advise the viewpoint of the ... Department as follows.

... [W]e understand that the Legal Affairs Section's opinion was not based on the overall circumstances of ... Ensham, but was limited only to the circumstances described in this memo. In other words, we believe that their response was extreme because their advice was not based on a grasp of the entire circumstances. ...

Accordingly, we ask you to take the following action. ... [W]e are unable to confirm the cost details sufficiently, and there is a concern that the scheme itself could be deemed to be a conflict of interest transaction.

... [A]t the meeting between Idemitsu and ... Foots on 6 September ... make Idemitsu's position clear, explaining once more that we want to withdraw the agreement with Southern Cross and seeking his understanding. ... Foots will no doubt have his own position, so ... try to find an opening that can be used to resolve the situation ...'

[483] To return to the narrative, on 6 September 1999 Mr Shibata, Mr Matake and

Mr Ishizaki met with Mr Foots and Mr Dawson. Mr Shibata had flown out from Tokyo for the express purpose of meeting with Mr Foots in an endeavour to negotiate the cancellation of the dragline agreement. Mr Ishizaki made a note of the meeting (in fact there were two) and reported on them to head office.

[484] The first meeting commenced at 10.30 am. Mr Shibata said that EPDC had been told that the dragline agreement had become a problem for IK. Similar information had been given to LG. Mr Shibata explained the problem was that Ensham staff were running Southern Cross and that the only solution was for Southern Cross to assign its contracts with Bucyrus and Westpac to Ensham. Mr Shibata said that if Mr Foots had another solution he should advance it. According to Mr Ishizaki's note Mr Foots said that there were problems 'on the Australian side'. Presumably he meant from the point of view of Southern Cross. The first was that the shareholders had invested on the basis of a prospectus issued in accordance with corporation law. Therefore Southern Cross was prohibited from changing the structure of the company 'for a certain length of time'. If change were forced

Mr Foots could be sued by the shareholders. A second problem was the number of shareholders: there were between 25 and 30. Most of the staff, who had become shareholders, had taken their holding in the names of private companies or by family members as nominees. Mr Foots explained that he and Mr Bird each held 25.5 per cent of the shares while the remaining 49 per cent was divided between the rest. The four directors were himself, Mr Dawson, Mr Bird and Mr Hill.

[485] Mr Foots then asked what percentage of shares in Southern Cross owned by Ensham employees IK found objectionable. Mr Matake replied that the concern was not with the percentage of shares in the company owned by Ensham employees but rather the identity of those who controlled Southern Cross. Mr Foots then asked what would happen if the Southern Cross shareholders took the dragline to another mine. Mr Ishizaki replied that Mr Foots could not permit that to happen consistently with his duty to Ensham. Mr Foots countered by saying that he had tried to reduce the possibility of conflict of interest by ensuring transparency in the agreement.

[486] Mr Shibata said that IK wished Ensham to purchase the dragline itself. Mr Foots said that 'things have happened' since the May 1998 meeting of the Management Committee at which it was said that Ensham could not purchase a dragline. He asked what financial consequences would there be for IK if EPDC and LG incurred losses because IK 'changed its mind after signing the contact'. This presumably is a reference to the joint venture having to pay compensation to Southern Cross to procure the termination of the agreement.

[487] Mr Foots went on to say that any solution 'would be difficult in the next six to twelve months'; after that it might be possible for Ensham to buy the dragline but 'in the short term ... that is impossible.'

[488] The first meeting ended on that note. Messrs Shibata, Matake and Ishizaki then met with Mr Matsuda to take his advice on what had transpired at the meeting. He confirmed that the contractual arrangements could not be changed without

Southern Cross being exposed to legal action by shareholders who had invested on the faith of the prospectus. He did not know, but would investigate, the time which must elapse before Southern Cross could depart from the underlying assumptions in the prospectus without incurring liability. He pointed out that shares could be transferred immediately.

[489] At 4:00 pm Messrs Shibata, Matake and Ishizaki returned to the meeting with

Mr Foots and Mr Dawson. Mr Shibata opened with the remark that the dragline agreement with Southern Cross was the problem and that IK could not accept it. It was not a question of reducing the percentage of shares held by employees; the joint venture wanted to buy the drag line. Mr Foots' reply was that he did not know 'what price BHP would charge the joint venturers for the drag line'. He explained that the contractual arrangement by which the dragline was sold from BHP to Bucyrus and then on-sold to Southern Cross had been necessary because of BHP's resolution that it would not sell a dragline to a competitor. The contractual subterfuge was needed to conceal Ensham as the destination for the dragline.

[490] Mr Shibata said he understood that Southern Cross could not change the structure of the arrangement for some time but that it must be possible for Ensham to buy shares in Southern Cross. He asked for Mr Foots' opinion on this proposal. Mr Foots agreed that up to 20 shareholders could sell their shares in any one year but this number was fewer than the whole of the shareholders. He then reminded the others that the joint venturers had said in May 1998 that they would not invest money in a third dragline. After that they accepted Southern Cross as a contractor to provide the services of the dragline. He asked why that agreement should not endure.

Mr Shibata said that the situation had become 'extremely difficult', which elicited from Mr Foots the question 'how much are you willing to spend to resolve this difficult situation?' Mr Foots asked what IK would like Southern Cross to do 'in six months' time' and whether the joint venturers wanted to purchase the dragline. He pointed out that if an independent contractor, such as Golding, should become the major shareholder in Southern Cross or otherwise own the dragline, the contract rate, and therefore the cost to Ensham, would go up.

[491] The conversations proceeded without progressing. At one stage Mr Foots proposed breaking the impasse by the resignation of the major shareholders in Southern Cross from Ensham. This would certainly have removed the conflict of interest but at the cost of depriving Ensham of its managerial talent. Mr Matake responded that that would be 'the worst solution'.

[492] The meeting ended inconclusively with Mr Foots promising to present alternative plans in a few weeks' time.

[493] Following the meetings of 6 September Mr Shibata:

'... believed that Mr Foots was genuinely searching for some mutual ground to resolve the problems but which would allow him to meet his commitments to the shareholders who had invested in Southern Cross. (He) felt optimistic that (the joint venturers) would be able to find a solution to the difficulties with the contract.'

[494] Mr Foots' account of the two meetings of 6 September contain much that is common with Mr Ishizaki's account which forms the basis of the narrative I have set out. There are some differences: Mr Foots says that after Mr Shibata suggested the three solutions he asked what commitments Southern Cross had at that time.

Mr Foots replied that Southern Cross had issued a prospectus (by which he meant the information memorandum) which had been received by investors and who had applied for shares and paid money for them. The prospectus contained predictions based on the dragline agreement. The directors had an obligation to use their best efforts to realise those predictions and if they relinquished Southern Cross' interest in the dragline agreement their shareholders or ASIC could 'tackle' the directors. Mr Foots also explained that Southern Cross had become a public company in July and, for that reason, it had an obligation to maintain the current company structure for at least six months. He also said that Southern Cross had commitments with Bucyrus and the property owners for the relocation of the dragline and that if Southern Cross assigned the agreement to Ensham 'these contractual relationships may need to be renegotiated'.

[495] At the second meeting, when Mr Shibata said that the Southern Cross arrangement was not acceptable to IK, Mr Foots suggested that 'they let the scheme run for six months ... (when Southern Cross) would ... consider any offer put ... by the joint venturers ...' Mr Foots could not see 'any short term solution'. Mr Foots also said that he understood that a company such as Southern Cross could only increase its shareholders by 20 in any twelve month period. He said that Southern Cross had 'done a deal with Bucyrus' and because of BHP's policy against selling draglines to competitors he did not think it was ethical for Southern Cross to sell the dragline to Ensham. He asked Mr Shibata to have IK's lawyers tell Southern Cross 'what the problem was that Australian law because so far (IK) had only said what the problem was at Japanese law'.

[496] It emerged in cross-examination that Mr Foots' suggestion that the contractual arrangement might be revisited in six months time was arbitrary as to the duration of the period, and baseless as to its choice. The evidence was (T 2476.33-54):

'You told them that you believed that Southern Cross had to maintain the present company structure for six months, at least six months. ... - Yes.

Where did you get the figure of six months? - Basically if you go back to where I referred to Mr Richardson, he had told me to be careful not to change things in the short term, so six months was what I thought was not short-term.

It was nothing Mr Richardson had said to you? - He didn't tell me six months, no.

So you had no basis for that statement? - Not for the six months. That's what he said not to change things, you had to be careful, and so the six months was something that ...

You had no particular reason to use six months as opposed to nine months or three months, did you? - No, no, I didn't.'

Mr Richardson was the solicitor whom Mr Foots knew socially.

[497] Mr Foots has explained why his attitude at the meeting was one of intransigence and why he did not accommodate IQ's desire to remove the conflict of interest constituted by the dragline agreement. He said:

'As I was not the only director of (Southern Cross), ... I could not make the decision ... to abandon the contract; rather it was a decision for the directors ... I did not go to the ... directors ... because ... no formal ... offer had been made ... to terminate the Dragline Agreement and because I was worried about disrupting the performance of Ensham Management, in particular Bird, and disrupting the performance of Ensham Mine. I believed the Joint Venturers would formulate a formal proposal ... (and) once ... put to me I would ... put it to the directors.'

[498] A number of things need to be said about these meetings of 24 August, 1 September and 6 September. The first is that if Mr Foots has not told a barefaced lie about his meeting with Mr Idemitsu in Tokyo on 7 July, he had an obvious answer to the concerns expressed to him by IK's employees. To their expressed alarm about the dragline agreement and that Southern Cross should profit from its shareholders' positions of authority in Ensham, Mr Foots had only to say that he had explained the arrangement to Mr Idemitsu and obtained his consent. All those present at the meetings agreed that he said no such thing. Mr Foots agreed in cross-examination that the only plausible explanation for his silence was that he had not met

Mr Idemitsu, had not told him about the dragline agreement, and had not obtained his assent to it. This was the evidence (T 2481.30-47):

'Why wouldn't it have been the obvious answer to Mr Matake, that ... Mr Idemitsu himself knows all about it and has not complained? - I just - I didn't carry that argument forward ... I don't know why ...

Well, one obvious reason why you might not have mentioned ... Mr Idemitsu's approval is that you have fabricated those things and they never happened? - No, I totally deny that.

Can you suggest any other reason why you didn't mention those things when it would have been most useful and pertinent to have mentioned them? - No, I cannot.'

[499] The second point is that the convening of the meetings, and Mr Shibata's journey to Australia to ask Mr Foots to cancel the agreement, is irreconcilable with Mr Foots' account of his meetings with Mr Shibata and Mr Wakahara in Tokyo early in July. They had not then, according to him, expressed an interest in the joint venture buying the dragline. Instead they had given their approval to the making of the dragline agreement with Southern Cross. The dramatic change of attitude did not elicit from Mr Foots any expression of surprise or remonstration. He did not refer to the earlier meeting and ask why Mr Shibata had changed his opinion so completely.

[500] The third point is that BHP did not have a policy which prevented it from selling draglines to competitors. Mr Foots had no basis for believing there was such a policy.

[501] The fourth point is that, at the time of his elaborate explanation that Southern Cross could not give up the dragline agreement because of contractual and statutory constraints arising from the issue of a prospectus on which shareholders had based their decision to invest, the facts were that Southern Cross, while a public company, was unlisted and had not issued a prospectus. It had delivered an information memorandum, an altogether different document with different legal incidents. Moreover Mr Foots' private company, Foots Pty Ltd, was the only shareholder in Southern Cross. If the dragline agreement had been terminated, or Southern Cross' contract in respect of it had been assigned to Ensham, there could have been no prospect of a shareholders' suit against the directors, unless Mr Foots chose to bring it.

[502] Mr Foots sought to answer this last criticism by claiming that he understood that once applications had been received for the issue of shares the directors were obliged to issue them in accordance with the application, and that the company was contractually bound to issue the shares even though the directors did not meet to resolve on the allotment until 25 October 1999.

[503] Mr Foots had this to say about the point (T 2252.11 - T 2253.2):

'Mr Foots, is it right that in October the directors of Southern Cross met to allot shares in the company? - Yes ... I think the date was about the 25th.

Did you understand what was happening (was) that the people who applied for shares were offering to take shares or asking to be given shares? - They had made an application for shares, and I understood that ... an application was virtually like a contract and an acceptance, yes.

But the acceptance was the directors meeting, as you did in October, to issue the shares in accordance with the applications; you understood that? - ... Yes.

That it was the directors' meeting in October that accepted the offers, which were the application? - Yes, that's correct.

So until you accepted the offers there wasn't a contract, was there? - Well, I thought basically if you had the money and you received it, an offer was only a formality for the 25th. ...

But did you understand when the directors met they could have chosen to reject some or all of the applications, or part of applications? - Well, they did not accept some of the applications, because some people applied for higher than what was expected.

So you did understand that the directors had a choice whether to accept the applications or not? - Yes ... my understanding was whether they accepted the full application, yes.

And until the acceptance was created by the formality, as you describe it, there was no contract; did you understand that? - No, I don't think I understood that ...'

[504] The last answer is unconvincing. It is not credible that a man of Mr Foots' experience would not understand the elementary point that there was no contact with shareholders until the directors resolved to allot shares. That he had the requisite understanding is implicit in his earlier answers. He has been a director of a number of public and listed companies and has accounting qualifications. He is a Certified Practising Accountant and a Fellow of the Australian Institute of Company Directors. I am satisfied that when Mr Foots told the IQ representatives in September that the dragline agreement could not be undone because shareholders had acquired rights on the faith of the prospectus, he was lying.

[505] The fifth point is that, although Mr Foots was only one of four directors of

Southern Cross, he was in a position to control the company absolutely. He did not have to consult the other directors. He was in a position to remove any director who did not conform to his opinions.

[506] There is a passage in the evidence which illustrates both Mr Foots' attitude to his obligation of loyalty to his employer, and his preference for his own reward. The passage is at T2474.29 - T2475.28:

'HIS HONOUR: Mr Foots, I take it that ... by this conversation with Mr Matake and Mr Ishizaki on the 1st of September, you knew that your employer had serious concerns about the Southern Cross contract? - Yes ... Mr Matake told me that on the 24th of August.

Didn't you think then you had some sort of obligation as the Chief Executive officer to try to undo the contract? - Well, I thought I had ... an obligation that we had signed a contract and I thought it was a legal contract.

The contract, of course, stood to make you a substantial amount of money didn't it? ... - It had to make me some money, but I didn't see that as my major income or anything like that.

Well, perhaps it wasn't. But the contract stood to profit you and your family and your friends, is that not right? - Yes, me and my family and Ensham employees.

... [A]nd you knew that your employer had serious reservations about the propriety of this arrangement, didn't you? - I knew Idemitsu had, yes, at that stage, yes.

At this stage there was one shareholder of the company, Southern Cross, effectively you? - Yes, I was the only shareholder ...

And is it your evidence ... that knowing all those facts, you did nothing to seek to bring this arrangement to an end? ... - No.

Or suggest to your employer how it might be brought to an end? - No, I did suggest in the meetings that we could address it at a later date ...

Why not address it then? - Because I thought we had a limited company and we put out an information memorandum and we couldn't really change what we put down, and we'd offered the shares to the prospective shareholders.

At a later date, of course, the shares (had) been allotted, (hadn't) they? - Yes.

It did make it harder then to turn back the clock to set the arrangement aside? - Looking at it now, yes.

It would have been easier to do it on the 1st of September? - It would have been ... easier, but I thought that seeing we had put out the prospectus - not the prospectus, the information memorandum which we referred to as the prospectus, that we really (couldn't) do that.'

[507] A little later this exchange occurred (T 2477.51 - T 2478.29):

'You suggested (to the joint venturers on 6 September 1999) that they let the scheme run for six months? - Yes ...

In whose interest was it that the scheme run for six months? - Well, I thought we couldn't change the scheme ... and so for six months it would be in the interest of - it could be in the interest of both parties.

But by then shares would have been issued as you well knew? - Yes.

And the contract would have been in place and operational for a period of months, right? - ... [Y]es.

And I think that you agreed with his Honour that to change the scheme after shares had been issued would be more difficult, didn't you? - Yes ...

So it could only have been in Southern Cross' interests to let the scheme run for six months, couldn't it? - No, I don't believe so.

How was it in Ensham's interests? - I can't - I don't - without some thinking, I don't think I can answer that.

You admit you had not thought about it from the point of view of Ensham's benefit, don't you? - No, I had not.'

[508] It will be obvious from this commentary that I regard Mr Foots' testimony as grossly dishonest. I am satisfied that he has fabricated his testimony of the meeting with Mr Idemitsu in July and with Mr Ishizaki in April/May. I reject his accounts of the meetings with Mr Wakahara and Mr Shibata in July. I prefer the accounts of the meetings of 24 August, 1 September and 6 September given by Mr Ishizaki,

Mr Matake and Mr Shibata. I am satisfied that Mr Foots invented the tale of

Mr Idemitsu's assent from a consciousness of wrongdoing: that he knew that he had not obtained his employer's informed consent to the dragline agreement and he felt the need to fabricate evidence of that consent.

[509] Moreover I am satisfied that Mr Foots' lies were part of a deliberate attempt to secure the dragline agreement for Southern Cross for his own financial benefit. I am satisfied that he deliberately withheld from the joint venturers his knowledge that the dragline agreement could have been terminated if he, and he alone, gave up the benefits which Southern Cross stood to make from the dragline agreement. The misrepresentations of fact he made about the existence of shareholders' rights and the issue of a prospectus were deliberate acts of deceit to mislead the joint venturers into believing that they could not terminate the dragline agreement without great expense and difficulty.

[510] Indeed it is remarkable that Mr Foots should proceed to the allotment of shares knowing that the joint venturers, and IQ in particular, were deeply anxious about the dragline agreement and the difficulties it would create for the joint venturers in their dealing with their senior managers.

[511] The information memorandum, it will be recalled, contained a statement that the proposed arrangement with Southern Cross had the full support of the Ensham joint venture partners. Mr Foots admitted (T 2248.20) that at the time the shares were allotted he knew that the scheme did not have the full support of the joint venturers. He further admitted (T 2248.30) that he took no steps to correct the statement and did not inform the applicants for shares that the joint venturers were 'desperate to get out of this contract'.

[512] The joint venturers did not know until the action had commenced that

Southern Cross had not issued a prospectus and that Mr Foots was its only shareholder until 25 October 1999. Mr Ishizaki explained that as a result of

Mr Foots' statements at the meetings he believed that the dragline agreement was binding. Consequently, if IQ sought to cancel it unilaterally, the joint venturers would be involved in litigation with Southern Cross with one of two consequences. Either there would be a court battle with Southern Cross which in reality was the senior management and employees of Ensham. This option would have led to dissatisfaction and reduced enthusiasm in the workforce. The second was that

Mr Foots and the management team would leave Ensham, taking the dragline with them, thereby deleteriously affecting Ensham's productivity. As Mr Ishizaki put it: 'the outcome would be disastrous either way.' For these reasons Mr Ishizaki thought that to negotiate with Mr Foots to replace the dragline agreement was the only possible option.

[513] On 23 September a draft report was sent from IK's head office to Apollo setting out instructions for future negotiations with Mr Foots. They were to accept that the dragline agreement could not be cancelled 'right away' because of restrictions imposed by the corporations law. The consequence was that IK was obliged to perform the agreement but, if it were to be changed 'in due course' then consideration should be given to how that change should occur. In the event that the agreement were to remain on foot for the time being it was necessary to negotiate with Southern Cross a contract rate that was close to its cost figure so as to achieve maximum profit for the joint venturers. Instructions were also given to enquire whether there was a legal basis for terminating the agreement. Mr Matsuda was to be asked for his opinion.

[514] A further meeting to negotiate the situation was held between Mr Matake and

Mr Ishizaki and Mr Foots on 27 September 1999. According to Mr Ishizaki's note of the meeting he reminded Mr Foots that on 6 September he had promised to produce some proposals by about the end of September. Mr Foots had no proposals. He said that his lawyers had advised him that nothing could be done to change the composition of Southern Cross or the dragline agreement for at least six months and that, before any changed was posed, all shareholders had to be consulted. For that reason he had no suggestions to resolve the difficulties between IK and Southern Cross. When Mr Matake and Mr Ishizaki remonstrated with

Mr Foots for apparently reneging on his earlier promise he said that his promise to present constructive proposals for ending the problem had been conditional upon favourable legal advice. Mr Matake and Mr Ishizaki accepted that the condition had been expressed at the earlier meeting on 6 September and the meeting ended, as had the others, inconclusively.

[515] In his report of the meeting to head office Mr Ishizaki pointed out that there was some inconsistency in the instructions they had received for dealing with the conflict posed by the Southern Cross agreement. These had required IQ both to remove the conflict of interest and to honour the agreement but seek a lower contract rate. Mr Ishizaki advised that in his opinion the preferable course was to accept the agreement 'given that it has been concluded' but seek to negotiate the contract price substantially downwards.

[516] On 4 October 1999 Mr Foots sent the joint venturers a revision to the budget submitted on 4 June 1999. The only 'major change' to the 10-year plan given on that date was 'the inclusion of additional stripping capacity from July 2003 in the form of a fourth dragline the equivalent to a second Marion 8050.' The amount to be included in the budget for this acquisition was $20,000,000.

[517] On 8 October 1999 Mr Vickery of Deacons, Graham and James sent an advice to Mr Ishizaki dealing with the question whether there was a legal embargo on the transfer of shares in Southern Cross for the period of six to ten months which

'... [T]here is no specific restriction ... which places any time limitation on a company which is issuing a prospectus from changing its shares. However, section 995 of the Corporations Law makes it an offence for the company to engage in misleading ... conduct where any prospectus has been issued. In addition, Section 1006 ... provides that an action can be brought against officers of a corporation where the director ... makes a material statement ... which is later found to be false ...

It could be argued ... that Southern Cross ... may be engaging in "misleading ... conduct" if it has recently offered shares ... under a prospectus ... in which an assurance was given that no new shares would be issued or ... sold by ... Mr Foots for a specified period.

The only other ... explanation for a time linkage ... is that any company ... is generally only able to make offers of shares to 20 prospective shareholders in a 12 month period. ... Should it have offered shares to the maximum of 20 people in the last 12 months, it would not be able to offer shares to another party until the 12 month period elapsed...'

[518] It is likely that Mr Vickery was consulted for verification of Mr Foots' advice that the shareholding in Southern Cross could not be altered for a period of between six and ten months. Mr Vickery's opinion was generally confirmatory of the advice, though expressed with the usual professional caveats. There was nothing in the letter to indicate that Mr Foots' assertion was false.

[519] On 8 October 1999 Apollo received further instructions from IK and Tokyo as to the future course to pursue with Southern Cross and Mr Foots. They were to bring to Mr Foots' attention IK's desires concerning the dragline agreement. Once he had been brought to 'understand' IK's thoughts Mr Matake and Mr Ishizaki were 'as the next step' to bring the stripping rate as close as possible to the cost base. The ultimate goal was said to be to remove the conflict of interest constituted by the agreement but as a recognition of 'current circumstances that we have to honour the existing agreement' Mr Ishizaki was to negotiate to bring the stripping rate as close as possible to cost. After the lapse of six to ten months they were to reopen discussions 'with the objective of removing the conflict of interest.'

[520] A further set of instructions received the same day, 8 October, contained the direction that Mr Mathieson should be asked to review the spreadsheet calculations, which had been used to justify the contract rate which appeared in the dragline agreement. Accordingly Mr Matake gave a copy of the agreement and some of the cash flow spreadsheets to Mr Mathieson, who reported by memorandum, dated

'• The rate of return of 25% after interest and tax is very high considering that the rate of return of ER over the next 10 years before interest and tax is only 8%. There is also no risk associated with this investment by Southern Cross.

...

• The financing charge of 0.35c/m3 seems high, and this is reinforced by the fact that the borrowings of Southern Cross are paid back after two years. If this is the case why are we continuing to pay a financing charge at all? Have receipts for the purchase price and other charges been sighted? Why is the contract for 5 years if the financing is paid off after 2 years(?)

• There is a clear case of conflict of interest here with ER management also being management of Southern Cross. How are we to be satisfied that there is no abuse of their positions(?) There is considerable scope for ER management to transfer costs from this machine to one of the other Draglines. ...

• I understand that when approached by AR to terminate this arrangement Ken indicated that it was too late because of commitments made to third parties. From my reading of the documents this was not the case. If so, then he has used deceptive and misleading conduct to provide personal benefit to himself and others. There may be a case to say that the contract is therefore null and void.'

[521] Mr Mathieson explained in evidence what he meant by the last point was that his perusal of the contract documents revealed the dragline agreement had not become unconditional for the reason that Westpac had not agreed to advance the money necessary for Southern Cross to fund the purchase. The dragline agreement was conditional on, inter alia, Westpac approving the loan. The point is that

Mr Mathieson believed, and said, that Mr Foots' assertions that there was a binding dragline agreement in place may have been untrue.

[522] Nothing of substance was done in response to Mr Mathieson's memorandum.

Mr Matake explained this was because he knew that Mr Mathieson and Mr Foots did not like each other for reasons which do not matter but which include the appointment, already noted, of Mr Mathieson to the position of Vice-President of Apollo. Mr Matake had been told by his predecessor, Mr Abe, that Mr Foots had said he would leave if Mr Mathieson was given any responsibility over Ensham. Mr Matake also considered that Mr Mathieson was not a lawyer and that the advices received from Messrs Deacons, Graham and James had not suggested that the dragline agreement was other than binding. Mr Matake's principal reason for not acting upon Mr Mathieson's report was that it supposed that Mr Foots had actively deceived the joint venturers. Mr Matake refused to believe this was possible. He did not believe Mr Foots capable of such deception and had, as he put it, 'complete faith in his honesty'. He did not send a copy of Mr Mathieson's memorandum to Tokyo, though he may have discussed its contents with someone at head office.

[523] On 27 October 1999 Mr Foots was in Tokyo. He met with Mr Wakahara and

Mr Shibata. Mr Wakahara flattered Mr Foots, saying that IK greatly appreciated the results that he had achieved for Ensham and reaffirmed the trust the joint venturers had in him. Coming to the point, he explained that the dragline agreement would not achieve the maximum profit for the joint venture and that, although the contract had been signed, internal advice was that the scheme 'involved profit splitting' and was objectionable. Mr Wakahara discussed some other points concerning the calculation of the contract rate, including the maintenance provision. He said that he thought it was 'strange' that Ensham had to bear the cost of removing the dragline at the end of the contract (about $1,000,000). Mr Foots said he would 'remove this cost'.

[524] Mr Wakahara then said that IK could not accept the rate of profit the contract would give Southern Cross in the years after it had repaid Westpac. He thought that there should then be no profit. Mr Foots replied that, 'based on the expected profits that he promised the shareholders', that could not happen. Mr Foots then asked 'what the problem was'; he asked what percentage shareholding IK 'would let the Ensham employees have'. Mr Wakahara asked Mr Foots 'for a list of the employees and their percentage shareholdings', which Mr Foots said he would provide it later.

[525] After some further discussion Mr Wakahara proposed that the joint venturers should invest $2,410,000 in Southern Cross in return for a 70 per cent shareholding in the company. The figure was his estimated cost to Southern Cross of its acquisition of the dragline, i.e. investment costs of $3,400,000 less shareholders' capital of $990,000. The offer was to acquire a 70 per cent interest in Southern Cross for a price equal to the whole of its indebtedness. Mr Foots said he would 'investigate' the proposal.

[526] Mr Foots' account of the meeting is, relevantly, that:

•

He asked what percentage of shares in Southern Cross Ensham employees could own and Mr Wakahara said he 'would get back to (Mr Foots) on this point';

•

Mr Wakahara said the priority was to minimise the capital expenditure for the joint venturers;

•

Mr Foots said that the total capital expenditure was about $3,400,000, that Southern Cross' equity capital was $990,000 and the company had a loan of $2,410,000;

•

Mr Wakahara said that the contract rate, after the repayment of the bank loan, should be zero in order to maximise joint venture profits, but Mr Foots said that the shareholders invested in Southern Cross believing the expected return would endure for the life of the agreement. Mr Wakahara said that Southern Cross should only make a profit until it repaid Westpac;

•

Mr Wakahara suggested that after Westpac had been repaid, Ensham should buy the dragline or the agreement should be cancelled. Mr Foots asked what the joint venturers expected Southern Cross' profit to be when Westpac was repaid. Mr Wakahara said there should be no profits to which Mr Foots replied that would be 'difficult';

•

Mr Wakahara then offered to buy 70 per cent of Southern Cross' shares for $2,400,000 and Mr Foots said he would 'take the offer back to the shareholders.'

[527] It was only two days earlier, on 25 October, that the directors of Southern Cross resolved to allot the shares. Presumably Mr Foots was aware that, when he joined in the resolution, he was about to go to Tokyo where he would be questioned about Southern Cross and asked whether the agreement could be terminated.

[528] Late in October, on 27 or 28, Mr Ishizaki met with Mr Hill and Mr Edmondson to discuss the minutes of the special meeting of 4 June which Mr Ishizaki had asked Mr Edmondson to produce retrospectively. In the course of the meeting Mr Ishizaki said that he had a copy of the contracts between Bucyrus and Southern Cross, and between Southern Cross and Ensham, but not of the contract between

Southern Cross and Westpac. Mr Hill explained that that contract 'had not yet been finalised' and mentioned that it had been delayed because of Westpac's requirement for what he called a 'side deed'. Mr Ishizaki became angry and asked if

Southern Cross was going to sign a contract with Westpac. Mr Hill said that finance had been approved but it was 'awaiting the finalisation of issues'.

Mr Ishizaki asked to see the side deed. He was told that a draft had been sent 'in error' by Westpac's solicitors to Clayton Utz. This annoyed Mr Ishizaki even more because Clayton Utz were Ensham's solicitors. Mr Ishizaki angrily pointed out that he had been pressed to sign the dragline agreement months earlier when it was, in fact, inappropriate because Westpac was not committed to lending the money.

Mr Hill tried to placate Mr Ishizaki by explaining that if the agreement had not been signed in July the dragline would not have been brought to Ensham and would not be available in the future to commence stripping. Mr Ishizaki remained angry and pointed out that the existence of, and need for, the side deed had been kept from him.

[529] The side deed in terms was between Westpac, Southern Cross and Ensham. By clause 2.1, Ensham was to consent to the creation of a mortgage debenture by Southern Cross, in favour of Westpac, over its assets, including the dragline, to secure the loan. The clause further provided that the bank, or a receiver appointed by it, might, at any time, exercise all of the powers that Southern Cross had in relation to the dragline agreement, including the right to enter onto and remain on the Ensham mine site, and to take possession and control of the dragline. By clause 3.2, Ensham was obliged to release any proprietary interest it had by way of security over any asset of Southern Cross if Westpac released that asset from its debenture to allow Southern Cross to dispose of surplus assets or to permit the enforcement of rights given by the debenture. By clause 5, Ensham was forbidden from assigning or dealing with its interest in the dragline agreement, except with Westpac's consent. By clause 6.2, Ensham was precluded from terminating, rescinding or accepting any repudiation of the dragline agreement without first giving Westpac notice of the default in reliance on which it proposed to act.

[530] A copy of the side deed was sent to IQ by Clayton Utz early in November.

Mr Matake and Mr Ishizaki, having discussed it, decided that Ensham should refuse to sign the deed. They did not want to assist Southern Cross to obtain finance. That had not been part of the negotiations and was regarded by them as being wholly the responsibility of Southern Cross. They also realised that should Westpac refuse finance because Ensham would not sign the deed the dragline agreement would remain conditional and Ensham would not be bound by it. Such an eventuality would provide a solution to the problem with which IK was concerned and which had led to the fruitless negotiations with Mr Foots to bring an end to the agreement. Mr Ishizaki and Mr Matake believed that if Southern Cross could not obtain finance Mr Foots would be forced to approach Ensham to ask it to buy the dragline itself, thus removing all difficulties posed by the existence of the dragline agreement.

[531] Mr Ishizaki discussed the question of the side deed with Mr Nabetani of EPDC and Mr Kim of LG. They agreed with IQ's approach. The joint venturers were concerned that a product of their refusal would be that Mr Foots would leave Ensham. Mr Ishizaki thought the risk was small because by this time the dragline was physically at Ensham. Mr Nabetani expressed the same fear, but more forcibly. He represented EPDC which depended upon assured supplies of coal. He expressed concern that if Mr Foots left an appropriate replacement could not be found.

[532] On 1 November 1999 Mr Hill wrote to Mr Bird 'General Manager - Mine, Ensham Resources Pty Ltd, ... Emerald ...'. The letter read:

'Southern Cross are pleased the dragline has been successfully relocated to Ensham ... [I]n accordance with the above contract, the first invoice for the progress claim covering the relocation has been prepared and is attached. ...

This invoice is for $979,499.00 which represents approximately 60% of the forecast cost of $1,600,000. This represents a saving ...'

The letter was written on letterhead bearing Southern Cross' name but showing its address to be Ensham's Brisbane office. The telephone and facsimile numbers were also Ensham's. Mr Bird duly arranged for Ensham to pay the invoice on

19 November 1999; the sum was almost $1,000,000. The joint venturers were not told. The dragline agreement was still contingent.

[533] On 4 November Mr Hill again wrote to Mr Bird, again on Southern Cross letterhead. The letter advised Mr Bird that the dragline had been successfully overhauled and was expected to commence digging on 10 November. Mr Bird was asked to nominate the superintendent for the dragline agreement and to provide a plan showing where the dragline should be put to work.

[534] Mr Bird replied by letter on the same day addressed to Mr Hill as a director of Southern Cross. The letter was directed to Ensham's post office box. Mr Bird notified Mr Hill that 'Mr Nick Charles and Mr Steve Nicol ... will be administering' the dragline agreement. He informed Mr Hill that he saw 'no problems with Ensham Resources supplying power, operators and a dozer for your dragline operations.' Mr Charles and Mr Nicol were both shareholders in

[535] On 11 November 1999 Mr Matake and Mr Ishizaki met with Messrs Foots, Dawson, Hill and Edmondson to advise them that the joint venturers would not sign the side deed and that finance from Westpac was a condition precedent to the dragline agreement. Mr Ishizaki referred angrily to the pressure to which he had been subjected in July to sign the contract. Mr Foots laughed and said that had

Mr Ishizaki not signed the contract then, the dragline would have gone to Jellinbah mine. This increased Mr Ishizaki's anger because it indicated a lack of concern for Ensham by its Chief Executive. He asked Mr Foots to remember his position but Mr Foots dismissed his remonstration by saying that taking the dragline to Jellinbah was no more than 'common sense in the coal industry' of which Mr Ishizaki had no knowledge.

[536] Following the meeting of 11 November 1999 Mr Hill and Mr Edmondson met with Westpac officers to ask them to waive the requirement for the tripartite deed. The officers asked instead for a right of entry to the mine. Mr Hill discussed this request with Mr Foots later that day.

[537] IQ received advice from Mr Smith of Clayton Utz that the dragline agreement would be invalid should Southern Cross not obtain finance from Westpac. Legalities aside, the reality was that without bank finance Southern Cross could not pay for the dragline or the cost of making it operational.

[538] On 24 November Mr Matake and Mr Ishizaki again met with Mr Foots to discuss the question of finance. Mr Foots said that the contract between Westpac and Southern Cross was ready to be signed but he was negotiating to reduce the interest rate by 0.5 per cent. He said that the side deed had been a mistake made by a bank officer and it was not required; it should not have been sent to Ensham. He went on to say that he had received an apology from the Lending Manager for the 'precipitous action' by the employee, who had since left the bank.

[539] Mr Hill was not aware of any negotiation to reduce the interest rate. Exhibit 75, the Westpac file, does not support a finding that there were such negotiations.

[540] Sometime in late November 1999 Mr Ishizaki discovered that Mr Foots, Mr Hill, Mr Bird and Mr Edmondson had been corresponding. He asked to be sent copies of the letters, which Mr Hill did on 25 November 1999. These were the three letters of 1 and 4 November I have recently described. Mr Ishizaki was naturally concerned when he learned of these events given that the contract remained conditional and that these arrangements had been made without informing the joint venturers. He told Mr Matake what he had learned. Mr Matake shared his concerns.

[541] Mr Hill recalls that late in November 1999 he spoke to Mr Foots about the joint venturers' desire to prevent the dragline agreement becoming unconditional.

Mr Foots said that the joint venturers' intentions 'were a hurdle' which would be surmounted and 'life would go on'.

[542] Having sought advice from Mr Smith again, Mr Matake and Mr Ishizaki met with Mr Foots on 30 November. They told him that the contract was not yet effective and that the dragline should stop operating immediately. Mr Foots became angry and remarked that they 'should go to court'. He also said that he could 'not guess how Mr Bird and the other workers would react'. Mr Ishizaki took this to be reference to the possibility that Mr Bird and a number of mine workers might quit.

[543] Having discussed matters with Mr Noda, Mr Matake and Mr Ishizaki, together with Mr Nabetani and Mr Uchiuzo, met with Messrs Hill and Dawson on

2 December 1999. They gave a letter, addressed to Mr Foots, to Mr Dawson and Mr Hill for them to deliver. Mr Ishizaki told them that the dragline agreement was not effective and expressed concern that 'important things' were happening without the joint venturers' knowledge. The joint venture representatives expressly mentioned the difficulty posed by the fact that the very people employed to operate the mine and give the joint venturers sound advice were those who stood to profit from the dragline agreement. They expressed annoyance that the dragline had commenced operation before finance had been approved and that it had commenced operation without their knowledge.

'We understand that the ... Dragline Agreement is not effective yet ...

Under such circumstances, we would like to provide you our understanding and expectation of the third drag line status.

3. Item 6.0 of the contract ... states: "The Agreement is for ... 5 years ... but the Agreement shall be effective when the Contractor finalise(s) the contracts with ... Westpac". We understand the contract with Westpac has not yet been finalised ... In view of this, the Agreement ... is not yet effective...

4. (IQ) pointed out this matter in the meeting on 11 November ...

5. However, the payment of walk cost has already been made without effective Agreement.

6. It is very serious that the correspondence between Southern Cross and Ensham Resources regarding the commencement of digging was made without Joint Venturers' knowledge.

7. It is a matter of concern that you appear to have acted as if you have ignored our concerns raised at meeting of 11 November ...

8. As you are fully aware, and as you confirmed, conflict of interest was the issue to be avoided when this Agreement was made in last July...

9. However, 1) a payment being made without any effective Agreement and therefore without any legal obligation to make such a payment; and 2) the correspondence between Southern Cross and Ensham Resources without the prior consent or knowledge of the Joint Venturers, cause us significant concern in relation to any future conflict of interest.

10. To avoid any conflict of interests in the future, the Joint [V]enturers require that all correspondence and communications between Southern Cross and Ensham Resources in (relation) to the "... Dragline Agreement" shall be made between Southern Cross and all individual Joint Venturers and not by such of the management of Ensham Resources who have interests in Southern Cross.

...

13. Taking these facts into ... consideration ... we require you, as CEO of Ensham Resources:

1. to inform Southern Cross that it must stop its ... digging,

2. to hold payments from Ensham Resources to Southern Cross ...

[545] Later that day, 2 December, Mr Foots telephoned Mr Ishizaki and intimated that there might be a strike at the mine. Presumably Mr Foots had read the letter.

Mr Ishizaki asked why there should be a strike if the dragline stopped work.

Mr Foots response was that 'the workers who have shares will not keep quiet'. There had never been industrial unrest at Ensham; that was one of Mr Foots' most noteworthy achievements. It was also a matter of pride and satisfaction to the joint venturers. Mr Ishizaki said that the shareholders should not be workers and suggested that there was no basis for a strike. Mr Foots then changed ground and said that the problem was not with the shareholders but that mine workers went on strike for 'lots of different reasons'.

[546] On 3 December 1999 the Management Committee met. Mr Foots informed those present that Southern Cross had obtained Westpac's approval for the loan.

Mr Ishizaki remembers Mr Foots coming into the room and announcing that Southern Cross had obtained finance. He had, Mr Ishizaki thought, a triumphant air. On the strength of that information the joint venturers had no choice but to confirm that the dragline could recommence stripping. Later that day Mr Foots told the joint venturers that he had given his personal guarantee for the loan. This was true, but the statement was a half truth which hid a greater lie.

[547] Mr Foots had indeed given his guarantee, though it was not one supported by a charge over any of his assets. It was not that which had persuaded Westpac to approve the loan. On 1 December Mr Foots had written a letter to Westpac on Ensham Resources letterhead:

'Ensham Resources ... hereby acknowledges Westpac's interest as mortgagee of the Dragline and as mortgagee of all the assets and undertaking of Southern Cross whatsoever.

While Westpac is mortgagee of the Dragline and the above Debenture Mortgage Ensham shall permit Westpac, its employees, agents, contractors and other representatives to enter, re-enter and remain upon the Mine for any purpose in connection with the Dragline including operation, inspection, repair, maintenance and removal of the Dragline and the exercise of Westpac's rights as mortgagee under the Debenture Mortgage.'

The letter was signed by Mr Nicol as registered Mine Manager, Mr Bird as General Manager of Mines and by Mr Foots as Chief Executive Officer of Ensham. They were all shareholders of Southern Cross.

[548] The letter purported to give Westpac the most important of the rights which would have been conferred by the side deed. The evidence of Mr Erfurth, which I accept, is that Westpac would not have advanced the money to Southern Cross unless it had the right to enter the mine to realise its security. This right was apparently conferred by the letter. Mr Foots did not reveal the existence of the letter to the joint venturers when they met on 3 December. He never did. They did not learn of it until the litigation had commenced. The latter was, of course, written without Ensham's authority. It conveyed to the bank the clear but fraudulent representation that Ensham granted it the right to enter the mine site. It was written in express defiance of Ensham's explicit intimation to Mr Foots that it would not confer those rights on Westpac.