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Supreme Court of New South Wales - Court of Appeal |
Last Updated: 25 February 2011
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Case Title:
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Decision:
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The appeal is dismissed with no order as to costs.
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] |
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Catchwords:
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CONTRACT - construction and interpretation -
contra proferentem rule - agreement by investment banker to advise takeover
target -
bidding war - calculation of fees
CONTRACT - whether claim by investment banker for fees settled by accord and satisfaction - whether banking of cheque proffered in part payment of invoiced amount precluded claim for balance |
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Legislation Cited:
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Cases Cited:
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Australian Broadcasting Commission v Australasian
Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99
Burswood Management Ltd v Attorney General (Cth) [1990] FCA 203; (1990) 23 FCR 144 Claremont Petroleum NL v Cummings [1992] FCA 446; (1992) 110 ALR 239 Codelfa Constructions Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500 Elkateb v Lawindi (1997) 42 NSWLR 396 Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 264 ALR 15 Galea v Bagtrans Pty Ltd [2010] NSWCA 350 Hatfield v Health Insurance Commission (1987) 15 FCR 487 Health Insurance Commission v Freeman [1998] FCA 1340; (1998) 158 ALR 267 Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 Nissho Iwai Australia Ltd v Malaysian International Shipping Corporation [1989] HCA 32; (1989) 167 CLR 219 R v Isaac; Ex parte Transport Workers' Union [1985] HCA 80; (1985) 159 CLR 323 R v Orcher [1999] NSWCCA 356; (1999) 48 NSWLR 273 Rustenburg Platinum Mines Ltd v South African Airways [1979] 1 Lloyd's Rep 19 Thomas v State of New South Wales [2008] NSWCA 316; (2008) 74 NSWLR 34 |
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Representation
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Decision Under Appeal
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- Date of Decision:
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- Citation:
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J P Morgan Australia Limited v Consolidated
Minerals Limited [2010] NSWSC 100
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- Court File Number(s)
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Publication Restriction:
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1 CAMPBELL JA : I agree with Macfarlan JA. 2 MACFARLAN JA :
Nature of Case and Conclusions
3 By Engagement Letter dated 8 June 2006, but signed in September 2006, the respondent, Consolidated Minerals Pty Ltd, appointed the appellant, JP Morgan Australia Ltd, to advise it and to provide other services to it in relation to "takeover, merger or other business combination offers" that Consolidated Minerals anticipated might shortly be made to it or its shareholders. Consolidated Minerals was the holding company of a diversified minerals group and was listed on the Australian Stock Exchange ("the ASX"). JP Morgan is an investment banker and corporate advisor with experience in advising takeover targets. The form of the Engagement Letter appears to have been prepared by JP Morgan. It was signed by that company on 8 September 2006 and by Consolidated Minerals on 11 September 2006. 4 In the period from October 2006 to November 2007 Pallinghurst Resources Australia Ltd ("Pallinghurst") made a number of takeover offers for Consolidated Minerals' shares. In mid-2007 an offer was also made by Territory Resources Ltd ("Territory"). The successful bidder was ultimately another company, Palmary Enterprises Ltd ("Palmary"). Its first bid was made on 31 August 2007 and its last bid on 4 December 2007. The directors of Consolidated Minerals recommended that its shareholders accept the latter bid. The company subsequently became a wholly owned subsidiary of Palmary and was removed from the Official List of the ASX. Both parties to the present proceedings, and the primary judge, described what occurred in relation to Consolidated Minerals' shares between October 2006 and December 2007 as a "bidding war". During that period Consolidated Minerals' share market price rose from approximately $1.71 to $5.00 per share. 5 Further details of the offers made, the responses of Consolidated Minerals and other information concerning the bidding war may be found in the decision of the primary judge ( J P Morgan Australia Ltd v Consolidated Minerals Ltd [2010] NSWSC 100 at [7] - [38]) and below at [17] - [23]. 6 On 8 January 2008 JP Morgan rendered an invoice to Consolidated Minerals claiming fees and out of pocket expenses totalling $50,818,436.08. It commenced the present proceedings against Consolidated Minerals to recover that amount, less an amount of $20,000,000 paid by Consolidated Minerals on 6 February 2008. At first instance, Hammerschlag J, sitting in the Commercial List of the Equity Division of the Supreme Court, dismissed JP Morgan's claim and also a cross-claim filed by Consolidated Minerals. 7 The issues that arose on JP Morgan's appeal and in respect of a Notice of Contention that Consolidated Minerals filed, and a summary of my conclusions in relation to them, are as follows. 8 First, JP Morgan contended that Palmary's cost of acquiring a pre-bid stake of 14.29 per cent in Consolidated Minerals (the "Pre-bid Stake") should be included in the calculation of the value of the takeover transaction for the purpose of arriving at the amount of the Base Defence Response Fee for which the Engagement Letter provided. I have concluded below that the primary judge was correct in finding that the cost of acquisition of the Pre-bid Stake did not form part of the "Transaction Value" for the purpose of calculating the relevant fee (see [40] - [66]). 9 Secondly, JP Morgan contended that an Incentive Fee for which the Engagement Letter provided should be calculated by reference to the amount by which the ultimately successful bid (being that of Palmary) exceeded the initial bid of Pallinghurst. I have concluded below that the primary judge was correct in finding that the correct comparison was between the last bid made by the ultimately successful bidder and the first bid made by the same bidder, that is, Palmary (see [67] - [83]). 10 Thirdly, JP Morgan contended that if the primary judge's finding on the second issue were correct, it was entitled to Base Defence Response Fees in relation, not only to the Palmary offer, but also to the Pallinghurst and Territory offers as they were ones that were "successfully defend[ed]" within the meaning of the Engagement Letter. I have again concluded that the primary judge was correct in rejecting JP Morgan's contention (see [84] - [96] below). 11 Fourthly, Consolidated Minerals argued, in accordance with the Notice of Contention that it filed, that the decision of the primary judge should be upheld upon the basis that, even if some or all of the arguments of JP Morgan referred to above were correct, JP Morgan's acceptance of Consolidated Minerals' payment of $20,000,000, in the circumstances in which that occurred, precluded JP Morgan from recovering the balance of the fees claimed in its invoice. The primary judge rejected Consolidated Minerals' contention that there was, in this way, an "accord and satisfaction" in relation to JP Morgan's claim. I have concluded that the primary judge was correct in relation to this issue also (see [97] - [120] below). 12 The result of my conclusions is that the appeal should be dismissed. For reasons that I give at [121] - [122] there should be no order as to the costs of the appeal.
The Engagement Letter
13 The Engagement Letter commenced by confirming the appointment of JP Morgan:
"... to act as the Company's [i.e. Consolidated Minerals'] exclusive financial adviser in connection with the formulation of the Company's takeover response plan and advising the Company on its response to any actual takeover, merger or other business combination offers (together the 'Transaction')".
14 The services that JP Morgan agreed to provide were then listed. These included advising Consolidated Minerals as to prevailing market conditions for mergers and acquisitions, preparing a financial analysis, assisting in the preparation and updating of the Company's "standing tactical defence plans and strategy" and evaluating any takeover, merger or restructuring proposals that the Company might receive. 15 The provisions concerning fees payable to JP Morgan were relevantly as follows:
"3. Compensation(a) Defence Advisory Fees
(i) Initial Advisory Fee
The Company will pay JPMorgan an initial Advisory Fee of US$100,000 to retain JPMorgan as defence adviser and to perform the Services as outlined in Clause 1(a)(a)-(g). The Initial Advisory Fee will be invoiced and is payable by 31 December 2006.
(ii) Ongoing Retainer Fee
As consideration for retaining JPMorgan as the Company's ongoing defence adviser, the Company will pay to JPMorgan a monthly Retainer Fee of US$5,000. The first month Retainer Fee shall be payable in respect of the month ended 31 January 2007. The Retainer Fee will be invoiced each quarter and payable within 30 days of receipt of invoice.
(b) Defence Response Fees
In the event that any solicited or unsolicited, formal or informal, proposal by any third party in regard to a takeover or merger or other business combination offer ('Offer') is made in respect of the Company (other than a transaction first identified to the Company by an advisor acting on behalf of the Company and where JPMorgan does not act as advisor to the Company on that transaction) and during the term of this Agreement or within twelve (12) months of its termination by the Company where such termination is without cause, such Offer
(A) results in a completed takeover, merger or other business combination being effected between the Company and the bidder; or
(B) is successfully defended by the Company in circumstances where the majority of directors of the Company recommend to shareholders that they reject the Offer or otherwise determine to defend the Offer,
the Company will pay JPMorgan a Defence Response Fee which will comprise the aggregate of two components (i) and (ii) below:
(i) Base Defence Response Fee
for advice in relation to an Offer that proceeds to completion, a fee equal to 0.75% of the Transaction Value; or
in the event the Company successfully defends an Offer, a fee equal to 1.0% of the proposed Transaction Value; plus
(ii) Incentive Fee (if any, as defined below).
The Incentive Fee will recognise the achievement of additional value to the Company's shareholders beyond that contemplated at the announcement of an unsolicited Offer initially proposed in relation to a friendly Offer. The Incentive Fee will be equal to:
3.0% of any increase in the Offer price, up to 25% above the initial Offer price which was communicated to the Company publicly or privately; plus
5.0% of any increase in the Offer price in excess of 25% above the initial Offer price which was communicated to the Company publicly or privately.
The Defence Response Fee (Base Defence Response Fee plus Incentive Fee) will be invoiced and is payable within 30 days of the relevant Completion Date.
(c) Expenses
...
(d) No withholdings or deductions
...
(e) Goods and Services Tax ('GST')
...
(f) Definitions
In this clause 3:
'Completion Date' means the date on which the transaction the subject of the Offer is completed in accordance with its terms or the date on which an Offer is withdrawn or successfully defended, as applicable.
...
'Transaction Value' means the total proceeds and other consideration paid and to be paid or contributed and to be contributed in connection with the Offer (which shall include amounts paid and to be paid into escrow, and includes any proceeds and other consideration transferred directly or indirectly, pursuant to a merger, acquisition or scheme of arrangement) to the Company and/or its shareholders (whether all or selectively), including, without limitation:
(i) cash;
(ii) net debt (including all interest bearing liabilities);
(iii) notes, securities and other property (including all options, warrants or other instruments or arrangements convertible into or exercisable for any of the foregoing) at the Fair Market Value of such property;
... ".
16 Clause 13 of the Engagement Letter provided that "[t]his agreement ... expires automatically on the Completion Date (as defined in clause 3(f))". It provided for earlier termination in certain circumstances.
The Takeover Offers
The Pallinghurst Offers
17 The first approach to Consolidated Minerals that JP Morgan contended was an "Offer" for the purpose of the calculation of its fees under the Engagement Letter was made by means of a letter dated 12 October 2006 from Pallinghurst to Consolidated Minerals. This foreshadowed "a combined cash and paper offer by which Pallinghurst would acquire a majority stake in CML [that is, Consolidated Minerals]" but did not identify the price or value of the offer. 18 By letter to Consolidated Minerals of 23 October 2006 Pallinghurst conveyed an "Indicative Offer" that identified the amount of cash to be offered and the manner of calculation of the value of the paper element of the offer. It was common ground in the proceedings that the overall value of the offer calculated in accordance with the letter was $2.24 per share or, if calculated by reference to the market price for Consolidated Minerals shares at the date of the earlier letter, that is, 12 October 2006, $2.08 per share. 19 The total value of the offer increased when variations to it were communicated to Consolidated Minerals on 15 February and 25 June 2007. The value of the offer as varied on 15 February 2007 was $2.28 per share and on 25 June 2007 was $2.82. On 23 February 2007 the directors of Consolidated Minerals had publicly announced their unanimous recommendation of the offer as varied on 15 February 2007. 20 On 20 July 2007 Pallinghurst made a cash only offer of $3.30 per share. It increased this to $3.60 per share on 28 August 2007, and to $4.10 per share plus a top up payment and to $4.50 per share plus a top up payment on 6 September and 12 October 2007 respectively. The top up payment element of these offers was withdrawn on 13 November 2007.
Territory's Offer
21 Territory made a partly cash and partly paper offer on 17 July 2007. The value of it was $3.65 per share at that time.
Palmary's Offers
22 Palmary made a cash offer of $3.95 per share on 31 August 2007. It increased the offer to $4.50, $4.70 and $5.00 per share on 12 September, 14 November and 4 December 2007 respectively. 23 When on 4 December 2007 Pallinghurst indicated it would not extend its last offer of $4.50 per share, the directors of Consolidated Minerals recommended to shareholders that the final offer of Palmary be accepted. Sufficient shareholders accepted Palmary's offer to enable it to compulsorily acquire the remainder of the shares in Consolidated Minerals. This led to the removal of Consolidated Minerals from the Official List of the ASX.
The Fee Claim
24 After JP Morgan submitted to Consolidated Minerals its invoice dated 8 January 2008 in the sum of $50,818,436.08, Mr John Abbott of Consolidated Minerals provided a memorandum dated 1 February 2008 to the directors of Consolidated Minerals. It included the following in relation to the claimed fee:
"Management is of the view that this fee is excessive. It is not reflective of the work undertaken by JP Morgan and a significant part of the value increase can be attributable to factors external to the takeover process, particularly the increase in manganese prices, rather than input from JP Morgan.JP Morgan have used Pallinghurst's initial offer price as the base from which to calculate the incentive fee. There is a strong argument that this calculation is not in accordance with the wording of the engagement letter and that the base should be Palmary's initial offer price. On this basis, the total fees payable would be $20,491,564 inclusive of GST.
Recommendation
It is recommended that directors approve an offer of $20m (inclusive of GST) to JP Morgan in full and final satisfaction of their claim for fees".
25 On 5 February 2008 a telephone discussion occurred between Mr Abbott and the Managing Director of JP Morgan, Mr Jonathan Gidney, concerning Consolidated Minerals' intention to provide a cheque for $20,000,000 in response to JP Morgan's invoice. Neither party contended on the appeal that the terms of this conversation were of any particular significance in determining whether the parties later reached an accord and satisfaction. It is accordingly unnecessary to refer further to the conversation. 26 On 6 February 2008 the Managing Director of Consolidated Minerals, Mr Baxter, sent to Mr Gidney a letter marked "Without Prejudice" and in the following terms:
"We refer to our previous correspondence concerning the fees payable by Consolidated Minerals Limited to JP Morgan Australia Limited pursuant to an engagement letter executed in September 2006.We note your letter of 18 December 2007 and your invoice of 8 January 2008. As foreshadowed in our letter of 24 December 2007, we do not accept the quantum of fees JP Morgan is claiming as payable.
We have reviewed the engagement letter and we consider that an appropriate payment in respect of the transaction is $20,000,000.00.
Accordingly, we are pleased to enclose a cheque for $20,000,000.00 in full and final settlement of this matter.
We trust that this brings this issue to a close".
27 Upon his receipt of the letter of 6 February 2008, Mr Gidney indicated to Consolidated Minerals that he did not have the letter of 24 December 2007 referred to in it. Consolidated Minerals thereafter provided a copy to him. That letter was also marked "Without Prejudice". It included the following comments in relation to a letter from JP Morgan dated 18 December 2007 which claimed fees totalling $50,617,996. This letter was later superseded by the invoice of 8 January 2008 for $50,818,436.08:
"While Consolidated Minerals Limited acknowledges that a fee is payable to JP Morgan, we dispute the level of fees that you are claiming will be payable. For present purposes, we believe that a fee is payable in relation to an 'Offer' that proceeds to completion. The fee will therefore be payable when completion has occurred and is calculated according to the Transaction Value (as defined). That value will vary depending on the percentage of CSM [Consolidated Minerals] shareholding that is acquired under the Offer.We also note that the engagement letter refers to an Incentive Fee which 'will recognise the achievement of additional value to the Company's shareholders beyond that contemplated at the announcement of an unsolicited Offer'. In our view, any incentive fee based on the additional value achieved should be referrable to the efforts of JP Morgan in securing that additional value.
In light of the above, we are of the view that the fee ultimately payable to JP Morgan is substantially less than that which you are claiming.
We would be pleased to discuss these matters with you and look forward to reaching an amicable agreement".
28 Also enclosed with the letter of 6 February 2008 was Consolidated Minerals' cheque for $20,000,000. JP Morgan banked the cheque on 12 February 2008. The bank records of each party indicate that payment of the cheque occurred on that date. 29 Also on 12 February 2008 JP Morgan sent a letter by overnight courier from its office in Sydney to the office of Consolidated Minerals in Perth. It was common ground on the appeal that Consolidated Minerals received the letter on 13 February 2008. It referred to receipt of the cheque for $20,000,000 and stated the following:
"JP Morgan does not accept the Cheque in full and final settlement of this matter. We remind you that JP Morgan is owed the amount of $50,818,436.08 by Consolidated Minerals Limited, as outlined in our previous correspondence, and our tax invoice no. 2055 dated 8 January 2008.Nevertheless, JP Morgan will retain and bank the Cheque and deduct the amount of $20,000,000 from the amount owing to it by Consolidated Minerals Limited.
We look forward to the prompt payment of the outstanding amount of $30,818,436.08. JP Morgan reserves its right to commence legal action against Consolidated Minerals Limited to recover the outstanding amount should prompt payment not be forthcoming".
30 An internal email of JP Morgan dated 8 February 2008 was also in evidence. This attached a spreadsheet containing calculations of JP Morgan's fees on various bases. One was the basis upon which the fees were invoiced. This calculation concluded with the amount of $50,719,208, approximating the amount invoiced. Another was described as "CSM [Consolidated Minerals] calculation". This concluded with a total of $20,870,289 before multiple Base Response Fees were added to it. 31 Another basis was described as "CSM calculation excluding CSM shares held by bidders", that is, a calculation done upon the basis that the relevant "initial Offer Price" was the first Palmary bid and that the cost of Palmary's Pre-bid Stake was excluded from the calculation of the Transaction Value. The amount so derived was $18,335,603.
The Judgment at First Instance
Base Defence Response Fee - Pre-bid Stake
32 The primary judge commenced by recording JP Morgan's submission that Palmary's acquisition cost of its Pre-bid Stake was part of "the total proceeds and other consideration paid and to be paid or contributed and to be contributed in connection with the Offer ... to the Company and/or its shareholders" within the definition of "Transaction Value" in the Engagement Letter (see [15] above). That stake constituted 14.29 per cent of Consolidated Minerals' share capital and was acquired by a subsidiary of Palmary, Palmary Enterprises Ltd, progressively in the period 13 July to 6 August 2007. Palmary made its first offer for Consolidated Minerals' shares on 31 August 2007. 33 The primary judge's reasoning and conclusions on this issue were as follows:
"80 In support of its submission that the acquisition cost of the pre-bid stake was paid in connection with the Offer, [JP Morgan] referred to what was said by Wilcox J in Claremont Petroleum NL v Cummings & Anor (1992) 9 ACSR 1 at 42:'The phrase 'in connection with' is one of wide import, as I had occasion to observe in a different context in Our Town FM Pty Ltd v Australian Broadcasting Tribunal [1987] FCA 301; (1987) 16 FCR 465 at 479-80; [1987] FCA 301; 77 ALR 577 at 591-2:
The words 'in connexion with'...do not necessarily require a causal relationship between the two things: see Commissioner for Superannuation v Miller [1985] FCA 445; (1985) 8 FCR 153 at 154, 160, 163 ; [1985] FCA 445; 63 ALR 237 at 238, 244, 247. They may be used to describe a relationship with a contemplated future event: see Koppen v Commissioner for Community Relations (1986) 11 FCR 360 at 364, Johnson v Johnson [1952] P 47 at 50-1. In the latter case the United Kingdom Court of Appeal applied a decision of the British Columbia Court of Appeal, Re Nanaimo Community Hotel Ltd [1945] 3 DLR 225, in which the question was whether a particular court, which was given 'jurisdiction to hear and determine all questions that may arise in connection with any assessment made under this Act', had jurisdiction to deal with a matter which preceded the issue of an assessment. The trial judge held that it did, that the phrase 'in connection with' covered matters leading up to, or which might lead up to an assessment. He said...: 'One of the very generally accepted meanings of 'connection' is 'relation between things one of which is bound up with or involved in another'; or, again 'having to do with'. The words include matters occurring prior to as well as subsequent to or consequent upon so long as they are related to the principal thing. The phrase 'having to do with' perhaps gives as good a suggestion of the meaning as could be had.' This statement was upheld on appeal.
81 It puts that the acquisition of the pre-bid stake was made in anticipation of a takeover being made and that this is sufficient for the relevant connection.82 In response, [Consolidated Minerals] puts that no part of the acquisition cost of the pre-bid stake can properly be said to have been paid or contributed in connection with the final Palmary offer, and that the Court should not infer a connection between an acquisition of shares on-market prior to the initial Palmary offer with that offer. It puts that there are many reasons why a shareholder might build up a stake once a bidding war has begun and that there was no evidence of what motivated the acquisition of the pre-bid stake.
83 Although there was no direct evidence of either Palmary's or Palmary Enterprises' intentions, to my mind, the inference that the pre-bid stake was acquired in anticipation of a takeover offer being made is irresistible. But that does not establish the necessary connection. The question here is, whether the payments which Palmary Enterprises made to the sellers of the shares comprising the pre-bid stake were made 'in connection with the Offer'. The reference to Offer is not a reference to offers at large, but to the particular Offer which in this case 'results in a completed takeover'.
84 Even giving an expansive meaning to the words, 'in connection with the Offer', I do not think that the money that Palmary Enterprises paid to the various sellers of the shares which ultimately formed the pre-bid stake was consideration paid by Palmary in connection with 'the Offer' it made to the defendant's remaining shareholders.
85 The acquisition of the pre-bid stake was made in anticipation of a takeover offer being made, but it was not, in my opinion, made in connection with the Offer, that is the particular Offer to the defendant's shareholders which resulted in Palmary's takeover of the defendant.
86 The words 'in connection with the Offer' are, like any other words in the Engagement, to be construed having regard to the purpose of the transaction and the objects it was intended to secure.
87 In my view, the definition of Transaction Value contemplates and requires that the payment or contribution concerned be connected to the particular Offer, not to the contributor's takeover intentions in general. The payment or contribution must be connected with the Offer in the sense that it can properly be seen as part of what is paid or undertaken by the offeror by reason of the Offer, that is, that the Offer requires it, contemplates it or brings it about directly or indirectly.
88 In my view, Palmary Enterprises made the payments concerned not in connection with the Offer, but rather in connection with the acquisition of the pre-bid stake.
89 I should mention that in its submissions, the defendant did not distinguish between Palmary and Palmary Enterprises. As will appear below, however, the plaintiff relied on the distinction between the two entities. If they are to be distinguished, as the plaintiff suggests and I think is correct, this puts further distance between the cost of acquisition of the pre-bid stake, which was borne by Palmary Enterprises and the Offer, which was made by Palmary".
Incentive Fee - "initial Offer Price"
34 The primary judge commenced his reasoning in respect of this issue by referring to JP Morgan's argument that "where cl 3(b)(ii) of the Engagement [Letter] refers to 'any increase in the Offer Price ... above the initial Offer Price which was communicated to the Company publicly or privately', the clause requires and permits a comparison between the price in an initial Offer which does not succeed and the price in a different Offer which does" (Judgment [97]). 35 The judge's reasons for rejecting this contention were as follows:
"104 Clause 3(b)(ii) requires a comparison between ' the (emphasis added) Offer price' and ' the (emphasis added) initial Offer price' which was communicated to the Company. This contemplates the amount being offered in a particular Offer being increased.105 The Incentive Fee recognises the achievement of additional value beyond that contemplated at the announcement of an unsolicited Offer and is calculated by reference to the percentage of any increase in the Offer price above the initial Offer price. The starting point for the comparison is the price in an Offer at its announcement or initiation, and the end point is the final price which the Offer offers.
106 The Incentive Fee is only payable (and nothing to the contrary was suggested) when there has been a completed transaction. That this must be so is demonstrated by the fact that the Incentive Fee recognises 'the achievement of additional value to the Company's shareholders'. There will be no such achievement where there is no completed transaction. The additional value is that beyond that contemplated at the announcement of an Offer and is referable to the percentage of the increase in the Offer price above the initial price 'which was communicated to the Company publicly or privately'. This calls for a comparison between the announced or initially proposed price and the ultimate price in the same Offer when it succeeds.
107 A basic underlying commercial purpose of the Engagement was to enable the defendant to obtain the plaintiff's assistance and expertise in bringing about the best outcome for the defendant and its shareholders. The plaintiff undoubtedly had a duty to do the best it could for the defendant and its shareholders. In the context of a successful takeover, this is achieved by obtaining the best offer price. Its reward in respect of an Offer that succeeds is a fee, calculated by reference to the Transaction Value, which does not depend upon any comparison.
108 The commercially sensible and reasonable operation of the Engagement is one which is consistent with the plaintiff discharging its duty to the defendant and being appropriately rewarded.
109 The plaintiff's proposition that on the defendant's construction it would lack incentive is consistent with neither.
110 Anyway, it is far from inevitable (and so much was accepted by counsel for the plaintiff) that the plaintiff will receive less where it is entitled only to a Base Defence Response Fee for advice in relation to a single Offer that proceeds to completion, than it would receive if it were entitled as well to an Incentive Fee where there has been an initial Offer price and an increase in it.
111 It follows, in my opinion, that $3.95 (the initial Palmary offer) and $5 (the final Palmary offer) are the initial Offer price and Offer price respectively from which the plaintiff's Incentive Fee is to be calculated".
Base Defence Response Fees - offers "successfully defended "
36 In relation to this issue, JP Morgan contended that if the "initial Offer Price" for the purpose of calculating its Incentive Fee relating to the Palmary offer was the first Palmary offer (as the primary judge held it was), it was entitled not only to a Base Defence Response Fee in relation to the Palmary offer but also to additional Base Defence Response Fees relating to the Pallinghurst and Territory offers because the latter offers had, in the words of Clause 3(b) of the Engagement Letter, been "successfully defended". 37 The primary judge gave the following reasons for rejecting this contention:
"131 I am inclined to think that successful defence of a takeover means the repulsion of an Offer in its own right so that the battle ends there.132 However, whatever the outer limits of what the parties may have contemplated by successfully defending a takeover, I do not think it can fairly be said that what was contemplated was the rejection of or non-acceptance by the shareholders of an Offer where a better one is accepted.
133 In my view however, in the circumstances that occurred, neither the final Pallinghurst offer, nor the Territory offer were defended within the meaning of the Engagement. There was no need for either of them to be repelled or warded off. As early as 30 August 2007, the defendant's board of directors announced their recommendation in favour of the then Pallinghurst offer. From then on, it can hardly be said that the defendant was defending itself against Pallinghurst, when all that occurred was that a bidding war ensued, ensuring that the price being offered continued to burgeon. As the two main protagonists progressively increased their offers, the directors adjusted their recommendations accordingly.
134 So far as the Territory offer is concerned, the defendant publicly reacted to it on 31 August 2007 by announcing that the defendant would review Territory's Bidder's Statement and provide guidance to shareholders as soon as possible. By 12 September 2007, Palmary's offer had reached $4.50 per share. The defendant's directors withdrew their recommendation of the then Pallinghurst offer at $4.10 per share. On 21 September 2007, the directors unanimously recommended the rejection of the Territory offer pending receipt of a bidder's statement in respect of the Palmary offer of $4.50 per share. Pallinghurst increased its offer to $4.50 per share on 12 October 2007. On 14 October 2007, the Territory offer expired. Once again, I do not consider that on any realistic view what the defendant did can aptly be described as having successfully defended the Territory offer.
135 There is considerable force in the defendant's submission. However, it seems to me that the answer lies in what the parties contemplated by the successful defence of a takeover.
136 In my view the construction and operation of the Engagement contended for by the plaintiff would result in an outcome which would be capricious, unreasonable and unjust.
137 Perhaps the fact that the plaintiff did not put this outcome as part of its primary contention is implicit recognition of its limitations".
Notice of Contention - Accord and Satisfaction
38 Consolidated Minerals contended, by way of an alternative response to JP Morgan's claim for the balance of its invoiced fees, that it and JP Morgan had agreed that the dispute between them over JP Morgan's entitlement to its invoiced fees would be settled by Consolidated Minerals' $20,000,000 payment to JP Morgan. Consolidated Minerals argued that its letter of 12 February 2008 contained an offer to this effect which was accepted by JP Morgan banking the cheque enclosed with the letter. 39 The primary judge rejected Consolidated Minerals' contention on this issue, for the following reasons:
"152 There is no doubt that as at 12 February 2008 the parties were in disagreement as to the extent of the plaintiff's entitlements, although there was no dispute that some money was owed. On 5 February 2008, Mr Abbott on behalf of the defendant told Mr Gidney that there was approval for $20 million against the plaintiff's invoice. Mr Gidney said the plaintiff would need to think about it and get back to the defendant. Before that happened, the defendant sent the 6 February 2008 letter.153 In my opinion, objectively viewed, the defendant's 6 February 2008 letter was not an offer at all, let alone one which articulated a condition to the effect that if the plaintiff kept the cheque it was giving up any further claim. Rather, by it the defendant informed the plaintiff how much it thought it should pay under the Engagement and that it was paying that amount in discharge of what it considered to be its obligations. Far from stipulating a condition that taking the cheque would end the matter, the letter left the matter open by concluding with a statement of 'trust' that the payment would bring the matter to a close.
154 On the assumption that Mr Gidney's concession that he understood the letter and cheque to be an offer was an admission which might bind the plaintiff (which I doubt - see Bond Media Ltd v John Fairfax Group Pty Ltd (1988) 16 NSWLR 82), it does not assist the defendant because the objective theory of contract applies. Moreover, the concession did not extend to Mr Gidney accepting that it was an offer which, on acceptance meant the end of any further claims by the plaintiff.
155 If, contrary to what I have found, the letter was an offer, it stipulated no mode of acceptance. Objectively viewed, the plaintiff's conduct in banking the cheque did not amount to acceptance of the offer, because at the same time it dispatched a letter making it clear that this was not so.
156 In addition, and adopting the analysis of the Queensland Court of Appeal in McMahon's (Transport) Pty Ltd v Ebbage [1999] 1 Qd R 185, even if upon its proper construction, the 6 February 2008 letter purported to impose on the plaintiff a binding condition under which if it banked the cheque it gave up its rights, the attempt to do so was ineffective because the general law does not so allow.
157 It follows that I would not uphold the defendant's plea of accord and satisfaction so that if the plaintiff were entitled to more than the amount paid, the acceptance of the cheque would amount to part payment and the plaintiff would be entitled to pursue its rights".
Base Defence Response Fee - Pre-bid Stake
40 As the meaning to be ascribed to the expression "in connection with" is critical to the determination of this issue, it is appropriate to refer to the following authorities which discuss that and cognate expressions.
"In connection with": relevant authorities
41 Both at first instance and on appeal JP Morgan relied upon the following observations of Wilcox J in Claremont Petroleum NL v Cummings [1992] FCA 446; (1992) 110 ALR 239 (which are also set out in [80] of the judgment of the primary judge - see [33] above):
"The phrase 'in connection with' is one of wide import, as I had occasion to observe in a different context in Our Town FM Pty Ltd v Australian Broadcasting Tribunal [1987] FCA 301; (1987) 16 FCR 465 at 479-80; [1987] FCA 301; 77 ALR 577 at 591-2:
The words 'in connexion with' ... do not necessarily require a causal relationship between the two things: see Commissioner for Superannuation v Miller [1985] FCA 445; (1985) 8 FCR 153 at 154, 160, 163; [1985] FCA 445; 63 ALR 237 at 238, 244, 247. They may be used to describe a relationship with a contemplated future event: see Koppen v Commissioner for Community Relations (1986) 11 FCR 360 at 364, Johnson v Johnson [1952] P 47 at 50-1. In the latter case the United Kingdom Court of Appeal applied a decision of the British Columbia Court of Appeal, Re Nanaimo Community Hotel Ltd [1945] 3 DLR 25, in which the question was whether a particular court, which was given 'jurisdiction to hear and determine all questions that may arise in connection with any assessment made under this Act', had jurisdiction to deal with a matter which preceded the issue of an assessment. The trial judge held that it did, that the phrase 'in connection with' covered matters leading up to, or which might lead up to an assessment. He said ...: 'One of the very generally accepted meanings of 'connection' is 'relation between things one of which is bound up with or involved in another'; or, again 'having to do with'. The words include matters occurring prior to as well as subsequent to or consequent upon so long as they related to the principal thing. The phrase 'having to do with' perhaps gives as good a suggestion of the meaning as could be had.' This statement was upheld on appeal".
42 In Elkateb v Lawindi (1997) 42 NSWLR 396 Giles CJ Comm D (as his Honour then was) said:
"The phrase 'in connection with' has on many occasions been said to be of considerable width, satisfied by a link or an association ( Commissioner for Superannuation v Miller [1985] FCA 445; (1985) 8 FCR 153) or a relationship ( Our Town FM Pty Ltd v Australian Broadcasting Tribunal [No 1] [1987] FCA 301; (1987) 16 FCR 465; Drayton v Martin (1996) 137 ALR 145) and summed-up in the phrase 'having to do with': see the same cases and Nanaimo Community Hotel Ltd v Board of Referees [1945] 3 DLR 225. As with the phrase 'in relation to', no doubt the context or the purpose may require that the link, association or relationship be of a particular kind, sometimes described as an appropriate or relevant relationship ( Perlman v Perlman [1984] HCA 4; (1984) 155 CLR 474; R v Ross-Jones; Ex parte Green [1984] HCA 82; (1984) 156 CLR 185 and O'Grady v Northern Queensland Co Ltd [1990] HCA 16; (1989) 169 CLR 356), but it should not be read down unless there be compelling reason to do so ( Fountain v Alexander [1982] HCA 16; (1982) 150 CLR 615). This approach to the phrases 'in relation to' and 'in connection with' has been recognised in the context of arbitration clauses (see IBM Australia Ltd v National Distribution Services Ltd (1991) 22 NSWLR 466), and in Dowell Australia Ltd v Triden Contractors Pty Ltd [1982] 1 NSWLR 508 it was said (at 515) that the latter phrase 'should ... exclude only claims entirely unrelated to the commercial transaction covered by the contract' and extended to a claim to rectification. IBM Australia Ltd v National Distribution Services Ltd is also authority for the more general proposition that an arbitration clause expressed in language of this kind is not to be narrowly construed" (at 402).
43 In R v Orcher [1999] NSWCCA 356; (1999) 48 NSWLR 273 the New South Wales Court of Criminal Appeal was concerned with an offence under s 326(1) Crimes Act 1900 of threatening, "to do or cause ... any injury or detriment to any person on account of anything lawfully done by a person:
...
(c) as a public justice official in or in
connection with any judicial proceeding".
44 Spigelman CJ (with whom Grove and Sully JJ agreed) referred to the following statement that the Full Federal Court made in a statutory context in Burswood Management Ltd v Attorney General (Cth) [1990] FCA 203; (1990) 23 FCR 144 at 146:
"'[I]n connection with' are words of wide import: and the meaning to be attributed to them depends on their context and the purpose of the statute in which they appear".
45 His Honour also referred to the observation (quoted with approval in Burswood ) of Davies J in Hatfield v Health Insurance Commission [1998] FCA 1340; (1987) 15 FCR 487 that words such as "in connection with" are "subject to the context in which they are used, to the words with which they are associated and to the object or purpose of the statutory provision in which they appear" (at 491). 46 His Honour further referred to the decision of the Full Federal Court in Health Insurance Commission v Freeman [1998] FCA 1340; (1998) 158 ALR 267 which, again in a statutory context, referred to the determination of the meaning of the subject expression as requiring a "value judgment about the range of the statute" (at 273). 47 In Thomas v State of New South Wales [2008] NSWCA 316; (2008) 74 NSWLR 34 Campbell JA applied these authorities to the question of statutory construction before the Court in that case. 48 A number of these decisions were concerned with the use of the expression "in connection with" in a statute rather than, as in the present case, in a contract. Nevertheless, the decisions are in my view applicable to the present case insofar as they emphasise not only the width of the relevant expression but also the fact that its meaning in a particular case must be determined by the context in which it is used and the object or purpose of the instrument in which it appears.
"In connection with": the Engagement Letter
49 "Offer" is defined at the commencement of Clause 3(b) of the Engagement Letter. A Base Defence Response Fee is payable under 3(b)(i) where an Offer "proceeds to completion" or where Consolidated Minerals "successfully defends" it. The fee is a percentage of the Transaction Value. 50 The definition of Transaction Value expressly requires that, to be taken into account for the purposes of that definition, any payment or contribution must have been made "in connection with" the particular "Offer" under consideration. The initial Palmary offer (to take that as an example because that was the offer that the primary judge held to be the "initial Offer" for the purposes of Clause 3(b)) was, at least in theory, made to all shareholders of Consolidated Minerals, including the subsidiary of Palmary that had acquired the 14.29 per cent Pre-bid Stake. However as the subsidiary did not accept the offer, the consideration paid by Palmary pursuant to the "Offer" as defined could not have included the cost to Palmary (or its subsidiary) of acquiring the Pre-bid Stake. That expense would thus not have been part of the consideration paid "under" the Offer, if that had been the expression used in Clause 3(f). But was it paid "in connection with" the Offer? 51 The use of the broader expression "in connection with" appears to me to have been designed primarily to capture within the definition of Transaction Value those much broader aspects of consideration paid under the Offer that are described in the parentheses following the words "in connection with the Offer". A broader word than "under" was required aptly to embrace those expressly identified extended forms of consideration. I do not therefore see any reason to treat the relevant expression as extending to expenses incurred prior to the Offer being made. It is not necessary to do so in order to give the expression work to do. 52 Bearing in mind that the expression "in connection with" forms, via a definition clause, part of the description of the fee entitlement relating to work done to respond to the Offer (this being indicated by the title given to this fee: "Base Defence Response Fee"), and that there is another explanation for the use of the broad term, the natural reading of the expression in its context is in my view that it relates to matters occurring after but not those occurring before the Offer was made. 53 In my view the contra proferentem rule is relevant here and supports this conclusion. The provision in question, being one that entitles JP Morgan to a fee, is undoubtedly one for its benefit and, on the face of it, the Engagement Letter appears to have been drafted by JP Morgan. When on the appeal the Court raised the possible application of the contra proferentem rule with senior counsel for JP Morgan, he did not suggest that the letter was not drafted by JP Morgan. 54 The provision in the Engagement Letter under consideration is one defining JP Morgan's entitlement to sizeable fees in relation to the supply of sophisticated financial services. If, as I consider to be the case, JP Morgan did not make clear its entitlement to the element of the fees now under consideration, as the drafter of the provision it has no claim to have doubts as to its meaning resolved in its favour. 55 As said in J Beatson, A Burrows and J Cartwright, Anson's Law of Contract , 29 th ed (2010) Oxford University Press, the rule that "[t]he words of written documents are construed more forcibly against the party putting forward the document ... is based on the principle that a party putting forward the wording of a proposed agreement may be assumed to have looked after its own interests [and] is responsible for ambiguities in its own expression ..." (at 170). 56 In Nissho Iwai Australia Ltd v Malaysian International Shipping Corporation [1989] HCA 32; (1989) 167 CLR 219 at 227, the High Court referred with approval to its earlier recognition in Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500 of the continuing relevance of the contra proferentem rule to contractual interpretation in the case of ambiguity. Both cases were concerned with contractual exclusion or limitation clauses but in Darlington Futures the Court said that its statement of the appropriate principle to be applied in the construction of exclusion and limitation clauses "does no more than express the general approach to the interpretation of contracts" (at 510). 57 Even if it be accepted that the expression "in connection with" is capable of extending to consideration paid prior to the making of the Offer, the "consideration paid" must in my view have been paid in connection with the particular Offer subsequently made and not simply represent an expense incurred prior to the Offer in contemplation of some offer being made at some time in the future. This was also the view of the primary judge. I agree with the reasons that his Honour gave for forming that view (see Judgment [85] - [88] quoted in [33] above). 58 JP Morgan relied upon the decision in R v Isaac; Ex parte Transport Workers' Union [1985] HCA 80; (1985) 159 CLR 323 that workers engaged in the development of infrastructure prior to mining operations commencing were workers engaged "in connexion with" mining and thus eligible for membership of the relevant industrial union. Wilson J (with whom Deane and Dawson JJ agreed) held that "[a] sufficient connexion may ... be found in an occupation which takes place either before or after the actual work that identifies the industry in question" (at 346). In so holding Wilson J however noted that the case before the Court was one where a broad construction was to be preferred to a narrow one (ibid and at 340) in light of the nature and purpose of the provision in question. The same cannot be said of the present case. 59 Whilst the decision indicates the potential ambit of the expression under consideration here, it does not dictate its proper construction in the Engagement Letter, as that must be determined by reference to the context in which the present provision appears and by the purpose and object of the Engagement Letter. As I have indicated these matters point to a narrower interpretation of the expression than that arrived at in R v Isaac . 60 JP Morgan further contended that "[t]he words of the Contract itself make it plain that [the] Base Defence Response Fee is to be calculated by reference to the amounts paid in connection with [a] completed takeover. There is no basis for excluding from those amounts the Pre-bid Stake, especially in circumstances where it has been found to have been 'acquired in anticipation of [a] takeover offer'" (Written Submissions [51]) in part quoting Judgment [83]). 61 The flaw in this submission is that Clause 3(b) confines the relevant consideration paid to that paid in connection with the Offer, not with the "completed takeover". If the latter had been the language used at this point in the Engagement Letter it might more readily have been construed as embracing the cost of acquiring the Pre-bid Stake. However the term in fact used was "the Offer". The "Offer" was made at a time when the Pre-bid Stake had already been acquired and although, at least technically, it was made to the subsidiary of Palmary that had acquired the Pre-bid Stake, it was not accepted by that subsidiary. In that sense the cost of the "Offer" can be seen as different to the cost of the "completed takeover" referred to in JP Morgan's submissions. 62 Another contextual matter that points against JP Morgan's construction is that the fee in question is described as a "Defence Response" fee. The fee is for services provided in relation to Consolidated Minerals' response to an "Offer", that is, according to the definition in Clause 3(b), a proposal for a "takeover or merger or other business combination" involving Consolidated Minerals. The fee is calculated by reference to the Transaction Value of the proposal. 63 This context in which the Transaction Value becomes relevant in my view suggests, in the absence of a clear indication to the contrary, that that expression relates to the value of the "proposal" that JP Morgan assists the company to defend. The Engagement Letter only provides for JP Morgan to supply services after, and in response to, the "proposal". JP Morgan's services were accordingly not engaged in respect of an intending bidder's acquisition of a stake in the company that occurred prior to that bidder making a "proposal". It would be surprising in these circumstances if JP Morgan were entitled to a fee calculated by reference to the value of that activity, in which it had no involvement. 64 JP Morgan also contended that the primary judge erred in failing to find that the Pre-bid Stake was in fact acquired in connection with the particular takeover offer that Palmary subsequently made. However there was no evidence as to what Palmary intended, at the time that it acquired the Pre-bid Stake, to do at a later stage. For all that the evidence showed, it might have intended to make an offer quite different to that which it subsequently did, or to make a similar offer but at a quite different time. Indeed it may have simply considered that the Pre-bid Stake was a good investment because of the potential for further takeover offers to be made beyond those that had already been made by Pallinghurst, or the potential for the market price of minerals that were central to Consolidated Minerals' business to rise. 65 JP Morgan submitted that an adverse inference concerning Palmary's intentions could be drawn against Consolidated Minerals because Palmary was its owner at the time of the hearing at first instance and therefore it was in a position to lead evidence as to Palmary's intentions at the relevant (earlier) time. This submission, based upon the principle in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298, was not well-founded because that principle may only be used to draw more readily an inference that is already open on the evidence, not to construct the basis for an inference that is not otherwise available ( Galea v Bagtrans Pty Ltd [2010] NSWCA 350 at [2] per Allsop P). 66 A period of some weeks passed between the completion on 6 August 2007 of Palmary's acquisition of its Pre-bid Stake and the making of Palmary's first offer on 31 August 2007. The fact that this time passed tends to emphasise the lack of evidence connecting the acquisition of the Pre-bid Stake to the making of the particular offer. JP Morgan sought to explain this lapse of time by pointing out that as a foreign corporation Palmary would have been subject to the provisions of the Foreign Acquisitions and Takeovers Act 1975 (Cth) and that that could have accounted for the delay. The submission was not however supported by reference to any evidence of steps taken under that Act or, if steps were taken, as to the time at which they were taken. The only reference that JP Morgan gave was to the terms of the offer that Palmary made on 31 August 2007 stating that the offer was subject to foreign investment approval. In these circumstances I do not consider that the submission relating to the Foreign Acquisitions and Takeovers Act is of any assistance to JP Morgan.
The Incentive Fee
67 The Incentive Fee for which Clause 3(b)(ii) provided was a percentage "of any increase in the Offer price ... above the initial Offer price". It was common ground between the parties that the former price was the price of the Offer that was ultimately successful, that is, Palmary's cash offer of $5 per share. The parties however disagreed as to what was "the initial Offer price". JP Morgan contended that it was the value of the first Pallinghurst offer ($2.08 or $2.24 per share depending upon whether the closing market price for Consolidated Minerals shares was taken to be that of 12 or 23 October 2006). On the other hand Consolidated Minerals contended that "the initial Offer price" was the price first offered by Palmary, that is, $3.95 per share. 68 The opening words of Clause 3(b) postulated an Offer that either led to a completed takeover (or the like) or was "successfully defended" by Consolidated Minerals. JP Morgan did not contend that the Incentive Fee for which Clause 3(b)(ii) provided was payable where an Offer was "successfully defended". Accordingly its argument proceeded (as did that of Consolidated Minerals) upon the basis that the foundation for an Incentive Fee was the identification, in accordance with the commencing words of Clause 3(b), of an Offer which resulted in a completed takeover (or the like). As I have said, both parties accepted that in the events that occurred this was the final, and successful, offer of Palmary. 69 If the first sentence of Clause 3(b)(ii) (commencing "[t]he Incentive Fee will recognise the achievement of additional value ...") is left aside, the manner of calculation of the Incentive Fee appears to me to be tolerably clear. 70 As I have indicated above, the "Offer price" is that of the successful offer made by Palmary. The use of the capital "O" confirms that the word "Offer" is used in the manner defined in the opening words of Clause 3(b). The other reference point in the calculation is "the initial Offer price". The use of the capital "O" indicates that it is the same Offer, as defined, to which reference is made. 71 The adjective "initial" indicates a contemplation that the price of the Offer will, or at least may, have changed over time. Nevertheless it is the same "Offer" to which reference was made in each instance. The Clause thus contemplated that an Offer might retain its identity notwithstanding that its price changed. This occurred in relation to the offer that Palmary made on 31 August 2007. The price was increased three times but in substance it remained the same offer. 72 In some circumstances it might have been difficult to determine whether changes that were made were to offers that were in substance the one offer or whether in substance different offers were made. For example the latter might have been the case where a long period of time intervened between changes or the changes radically altered what was first offered. Such circumstances did not however occur in the present case. 73 The view referred to in [71] above is reinforced by the fact that the Incentive Fee provision spoke of an " increase in the Offer price" (emphasis added). Thus the provision did not invite a comparison between different offers but rather between variations of the one offer. If it had, JP Morgan's argument that the comparison could be between the prices of offers made by different entities would have had more force. However the relevant notion was one of an increase in the same offer, that is, the "Offer" as defined by the commencing words of Clause 3(b) and identified for the purpose of considering the operation of the Incentive Fee provision. This required the offeror to be the same. It could not have been the same Offer if the offeror were different. 74 I turn then to the opening sentence of Clause 3(b)(ii). In argument JP Morgan placed particular emphasis on the use of the indefinite articles ("an" and "a") in this sentence and suggested that this indicated that "the initial Offer price" was not necessarily the first version of the Offer made by the successful bidder. It submitted that, instead, the "additional value" achieved during JP Morgan's engagement needed to be identified and this should be done by taking as the starting point the first offer made for Consolidated Minerals, irrespective of who made that offer. 75 I do not agree with this submission. To my mind the latter part of the sentence is designed to make it clear (for the financial benefit of JP Morgan) that if a "friendly" offer is made after earlier discussions, the price first proposed by the friendly intending bidder in these discussions is to be taken as the base for calculation of the Incentive Fee even if the directors of Consolidated Minerals have, through the discussions, managed to persuade the intending bidder to announce a higher price. The indefinite articles "an" and "a" are of necessity used because " the initial Offer price" is broken down into the two relevant types of "initial Offer price" that the definition of Offer contemplates: an unsolicited Offer and a friendly (or, in effect, solicited) Offer. 76 Some doubt exists as to the meaning of the reference to the value "beyond that contemplated" at the announcement of the Offer. It may, as suggested during the hearing of the appeal, have been designed to exclude from consideration bids that were ridiculously low and thus far below what the directors contemplated might be attractive to shareholders. As determination of the meaning of the reference would not in my view provide any significant assistance to the argument of either party, no more need be said about it. 77 JP Morgan further submitted that the Incentive Fee provision could produce outcomes that were "capricious, arbitrary, unreasonable and contrary to business sense" if the primary judge's construction of it were correct (Written Submissions [34]). Certainly JP Morgan demonstrated that the operation of the provision could on this interpretation be arbitrary, but its operation could also be arbitrary on JP Morgan's interpretation. 78 To illustrate its point, JP Morgan correctly submitted that on the primary judge's interpretation no Incentive Fee would be payable where there had been a number of escalating bids by one bidder but a new bidder subsequently came in to make a single successful bid. As Consolidated Minerals however pointed out (and JP Morgan recognised), JP Morgan's overall fees might in this situation be higher than if the new bidder had not come in because the new bidder might have come in at such a high price that the increase in the Base Defence Response Fee would have more than compensated for the absence of an Incentive Fee (i.e. because the Transaction Value would have increased). 79 To illustrate its position Consolidated Minerals submitted that whichever interpretation was correct, a very substantial Incentive Fee would be payable when the price that the bidder offered for Consolidated Minerals' shares rose significantly as a result of a factor unrelated to any services provided by JP Morgan. This could have occurred if there had been a substantial increase in the market price of minerals that were the subject of Consolidated Minerals' business. Indeed the primary judge said that at least one of the reasons for a significant increase in the bid prices in the present case was "an increase (described by one of [JP Morgan's] analysts as a massive spike) in the price of manganese" (Judgment [40]). 80 Examples of the arbitrary operation of the provision could be multiplied. This would not however be a useful exercise as the Incentive Fee provision is plainly an arbitrary formula that does not seek to achieve what would in any event be a difficult if not impossible goal to achieve, that is, identifying the value of the benefit to Consolidated Minerals' shareholders resulting from the supply of services by JP Morgan. The provision does not for example require an identification of what, if any, proportion of the increase in the relevant period in the market capitalisation of Consolidated Minerals from $495 million to $1.3 billion (orange appeal book at 33) was attributable to the efforts of JP Morgan. Instead the provision effectively and arbitrarily gives JP Morgan the benefit of the whole of that increase despite the substantial manganese price increase in the relevant period, an increase in relation to which JP Morgan had no influence. 81 The arbitrariness of the provision might also have worked against JP Morgan as its fee entitlement would have been prejudiced if, despite it having provided valuable services to Consolidated Minerals, the share price (and therefore the prices takeover bidders were prepared to offer) fell due to factors over which JP Morgan had no control. 82 The meaning of the words used in the Incentive Fee provision is in my view tolerably clear. As a result I do not consider that it avails JP Morgan to show that in some circumstances (not being those of the present case) the provision (that it drafted) will not fairly reflect its efforts if that meaning is accepted. This is not a case in which it could be said that the interpretation adopted by the primary judge gives rise to a result that is plainly unreasonable or uncommercial in the circumstances of the present case. On the basis of the spreadsheet calculations of JP Morgan (see [30] - [31] above), the fee of $20 million that Consolidated Minerals paid to it included as a component an Incentive Fee in the order of $7 - 8 million before GST, quite apart from the Initial Advisory Fee, Ongoing Retainer Fee and Base Defence Response Fee that were payable. There is no basis on the evidence for concluding that this was obviously an unreasonably low Incentive Fee. In any event the fact that the words were formulated by JP Morgan itself for the purpose of defining its fee entitlement would weigh against the Court taking such a course (see [54] - [56] above as to the contra proferentem rule). 83 I add that if (contrary to my view) it is appropriate to regard an offer by Pallinghurst as the relevant "initial Offer price", I would regard that offer as being contained in Pallinghurst's letter of 23, rather than that of 12, October 2006. The offer of 12 October 2006 would not in my view have been relevant because it did not specify a price (see [17] above).
Multiple Base Defence Response Fees
84 JP Morgan submitted that if the primary judge's interpretation of the Incentive Fee provision is correct, it is entitled to a Base Defence Response Fee not only in relation to the successful Palmary offer (0.75 per cent of the Transaction Value), but also in relation to each offer that was "successfully defended" by Consolidated Minerals (the fee being in each case 1 per cent of the proposed Transaction Value). It submitted that the Pallinghurst and Territory offers were ones that were "successfully defended". 85 In my view neither of these offers was "successfully defended". I agree with the reasons that the primary judge gave for reaching that same conclusion (see [37] above). An offer cannot in my view be regarded as having been "successfully defended by the Company" where the outcome of a bidding war of which the offer formed part was that the Company was taken over. As the primary judge said, the concept of "successfully defending" an offer did not extend to "the rejection of or non-acceptance by the shareholders of an Offer where a better one is accepted" (Judgment [132] quoted in [37] above). His Honour's description of what occurred in relation to the Pallinghurst and Territory offers (Judgment [133] - [134] also quoted in [37] above) demonstrates that these offers were not "successfully defended" according to any commonsense meaning of that expression. Rather, they were overtaken by the course that the bidding war took. 86 In its letter of 23 October 2006 Pallinghurst conveyed a proposal that it said envisaged a "friendly transaction" (Judgment [8]). On 23 February 2007 Consolidated Minerals announced to the public that its board of directors unanimously recommended a revised proposal that Pallinghurst had submitted on 15 February 2007 (Judgment [10]). It is hardly appropriate in these circumstances to describe Consolidated Minerals as "defending" these proposals or indeed the ones (further improved from Consolidated Minerals' shareholders' point of view) that Pallinghurst subsequently made. 87 The Territory offer of 17 July 2007 was made at a time when Consolidated Minerals had indicated by the announcement of 23 February 2007 that its directors were receptive to a takeover offer (made by Pallinghurst) for the company's shares at a price significantly lower than that offered by Territory (see [19], [21] above). In this context the issue for Consolidated Minerals was not how to defend Territory's offer but how to obtain an increased offer price from it or another bidder. 88 As the primary judge found, the construction for which JP Morgan contended "would result in an outcome which would be capricious, unreasonable and unjust" (Judgment [136] quoted in [37] above). If JP Morgan's construction were correct, it would be able to apply that part of Clause 3(b) which concerns Base Defence Response Fees separately in relation to each element of what was in substance a single set of circumstances, in this case a takeover battle involving a number of bidders and culminating in a successful offer that was recommended by the board of directors of the target company. 89 Arguably it could even claim not only a Base Defence Response Fee but also an Incentive Fee in relation to each bidder. The primary judge opined that the first sentence of Clause 3(b)(ii) would preclude the charging of an Incentive Fee in respect of an offer that had been "successfully defended" (by reason of the reference to a recognition of "the achievement of additional value") (Judgment [106]) but it is not clear to my mind that that is necessarily so (see discussion at [76] above as to the doubts surrounding the proper construction of this sentence). Furthermore, Base Defence Response Fees at least (if not also Incentive Fees) would be payable more than once in respect of the same bidder if it could be demonstrated that different bids made by that bidder constituted in substance separate offers rather than variations to the one offer. 90 JP Morgan did not in my view provide any persuasive reason based upon the text of Clause 3(b) to suggest why its approach to the Base Defence Response Fee provision would not enable the recovery of multiple Base Defence Response Fees even if JP Morgan's interpretation of the Incentive Fee equal provision were correct. If these were recoverable, JP Morgan would be entitled to an Incentive Fee equal to at least 3 per cent of the value of the Company (as determined in respect of the successful bid), a Base Defence Response Fee equivalent to 0.75 per cent of the value of the Company (also as determined in respect of the successful bid) and further Base Defence Response Fees each equal to 1 per cent of amounts probably near to the value of the Company (depending upon the amounts of the unsuccessful bids). 91 It was probably prudent for JP Morgan not to claim entitlement to all of these amounts as such a claim would in my view have tended to emphasise that its construction of the Base Defence Response Fee provision was an unreasonable one. This was the point made by the primary judge at Judgment [137] (see [37] above). 92 The view that it was not intended that Clause 3(b) have multiple operations, as JP Morgan contended it did, derives some support from the fact that Clause 13 of the Engagement Letter provided that it was to expire automatically on the Completion Date. This was defined as the "date on which the transaction the subject of the Offer is completed in accordance with its terms or the date on which an Offer is withdrawn or successfully defended, as applicable". If JP Morgan's construction of Clause 3(b) were correct, the Engagement would have come to an end as soon as one offer was repelled even though the offer was made in the context of a continuous takeover battle. It seems to me that it is unlikely that this was intended. 93 JP Morgan further submitted that if the Incentive Fee is to be calculated in the manner found by the primary judge and if JP Morgan is not entitled to the multiple Base Defence Response Fees for which it claims entitlement, it would have done "an enormous amount of work defending [Consolidated Minerals] from numerous bids which it did not consider were acceptable, without being remunerated for any of that work" (Written Submissions [73]). 94 I do not accept this argument. The Base Defence Response Fee provision remunerates JP Morgan differently depending upon whether or not the company is taken over but in each case the fee calculation is to be done by reference to the Transaction Value of the Offer (whether that be the actual or proposed value). The provision does not attempt to identify particular services rendered by JP Morgan, and to remunerate JP Morgan for them. Remuneration is calculated on a much more generalised, robust basis. To this extent it has to it an element of arbitrariness, which reflects the arbitrariness embodied more starkly in the Incentive Fee provision. It is not to the point for JP Morgan to assert that it may in some circumstances provide services for which it is not remunerated. As I have indicated, the provision does not attempt to relate remuneration to services considered at the level of particularity the subject of JP Morgan's contention. 95 I should indicate why examination of the reasonableness of the operation of the Base Defence Response Fee has greater impact on my views than did JP Morgan's argument as to the arbitrary operation of the Incentive Fee (see [82] above). First, I do not consider the relevant aspect of the Incentive Fee provision to be ambiguous, whereas I do consider that the Base Defence Response Fee provision is ambiguous. Secondly, as I indicated above (see [77]), I consider that the Incentive Fee provision has an arbitrary operation whichever interpretation is adopted. I do not consider that to be the case in respect of the Base Defence Response Fee provision, which appears to operate sensibly on Consolidated Minerals' interpretation but not on that of JP Morgan. 96 In these circumstances Consolidated Minerals' construction is to be preferred because "if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust ..." ( Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109 per Gibbs J). The fact that the provision is one for the benefit of JP Morgan and that the Engagement Letter was drafted by it points in the same direction (see [53] - [56] above).
Notice of Contention - Accord and Satisfaction
97 In case the Court considered that on the true construction of the Engagement Letter JP Morgan was entitled to the balance of its invoiced fees, Consolidated Minerals contended on appeal, as it had at first instance, that JP Morgan was nevertheless precluded from recovering that balance as a result of the parties having reached an accord and satisfaction. 98 To establish the existence of an accord and satisfaction it was necessary for Consolidated Minerals to show as a first and essential step in its argument that JP Morgan agreed to forego the unpaid balance. Consolidated Minerals said that this had occurred by reason of JP Morgan's acceptance of an offer made by Consolidated Minerals in its letter of 6 February 2008 (see [26] above) to pay JP Morgan $20,000,000 (by means of the cheque enclosed with that letter) if JP Morgan agreed to give up its claim for the balance of the invoiced fees. 99 I agree with the conclusion of the primary judge that on its proper construction the letter of 6 February 2008 did not make that offer. As a result, JP Morgan's banking of the cheque enclosed with that letter did not result in it foregoing the balance of its claim. 100 In the second paragraph of the letter of 6 February 2008 Consolidated Minerals stated its disagreement with JP Morgan's claim. In the third paragraph it stated its view about the level of JP Morgan's entitlement. That paragraph was not expressed in terms of an offer of compromise of a claim but as an assertion of a view. The word "[a]ccordingly" indicated that the enclosed cheque there referred to was designed to give effect to that view about what was owed. The words "in full and final settlement of this matter" would in my view have been regarded by a reasonable reader of the letter as indicating that Consolidated Minerals was paying the full amount to which it considered JP Morgan was entitled and that JP Morgan should understand that Consolidated Minerals would not pay any more. The final paragraph reinforced this interpretation of what went earlier as I consider that the effect of what it said was that Consolidated Minerals hoped (and perhaps, anticipated) that in light of the view that Consolidated Minerals had expressed and its payment of $20,000,000 JP Morgan would not attempt to pursue its claim for the balance of its invoiced fees. 101 I see nothing in the letter to indicate that Consolidated Minerals was expressly or impliedly asserting that if JP Morgan banked the cheque it would be taken to have agreed not to pursue the balance of its claim or that Consolidated Minerals was offering to pay $20,000,000 in return for JP Morgan agreeing not to pursue its claim. 102 Consolidated Minerals submitted that the fact that the letter was marked "WITHOUT PREJUDICE" indicated that the letter should be construed as one whereby an offer was made by Consolidated Minerals to settle a dispute between the parties as to JP Morgan's entitlement. 103 Such a marking is of course frequently made in the context of settlement negotiations to preclude correspondence being used as an admission in the event the dispute the subject of the negotiations fails to settle. It may have been able to be used here to preclude the letter being used as an admission but that does not mean that it converted the letter into one conveying a settlement offer when the words of the letter do not otherwise support such an interpretation. 104 In any event the marking of the letter was an equivocal act, particularly as the author (Mr Baxter, described in the letter as Consolidated Minerals' Managing Director) appears, so far as the evidence goes, to have been a lay person. The placing of the marking on the letter may simply have resulted from an unthinking repetition of the same marking that was on Mr Baxter's letter of 24 December 2007 (see [27] above). That letter contained statements by Consolidated Minerals, which were capable of amounting to admissions, concerning JP Morgan's entitlement to its invoiced fees, JP Morgan's invoice being at that time completely unpaid. There may therefore have been good reason to mark that letter "WITHOUT PREJUDICE" even though clearly no settlement offer was made by it. 105 Consolidated Minerals further submitted that the letter of 6 February 2008 should be construed against the background of its letter of 24 December 2007. The latter letter however simply stated reasons why JP Morgan's fee entitlement was less than what JP Morgan had claimed. It was a precursor to the definitive view put in the letter of 6 February 2008 about JP Morgan's entitlement and does not assist Consolidated Minerals in its attempt to characterise the letter of 6 February 2008 as one containing an offer. 106 The letter of 24 December 2007 concluded with the statement that "[w]e would be pleased to discuss these matters with you and look forward to reaching an amicable agreement". The only evidence of a subsequent discussion to which the Court's attention was directed was one between Mr Abbott of Consolidated Minerals and Mr Gidney of JP Morgan that took place on 5 February 2008 (see [25] above). Neither party suggested on the appeal that any agreement was reached in this discussion. That final statement in the letter of 24 December 2007 cannot be regarded as giving to the letter of 6 February 2008 a meaning which its text does not bear. The terms of the letter of 6 February 2008 indicate that that letter was not an attempt to procure an agreement but a statement of Consolidated Minerals' position, no doubt intended to be supported by its apparent reasonableness in paying the whole of what it considered to be due. 107 Consolidated Minerals relied upon the decision of the English Court of Appeal in Rustenburg Platinum Mines Ltd v South African Airways [1979] 1 Lloyd's Rep 19 in which the defendant sent to the plaintiffs a cheque for less than the full amount to which the plaintiffs had claimed they were entitled. The plaintiffs banked the cheque after signing the form of receipt on the reverse side of the cheque. This form said "[r]eceived with thanks from SA Airways [the defendant] ... in payment of claim TC 1546/70". The Court of Appeal unanimously held that there had been no accord and satisfaction precluding the plaintiffs pursuing the balance of their claim. 108 Denning MR said:
"... the mere offer of payment of a sum which is received is not in itself an accord and satisfaction. There must be sufficient material in the documents to be seen that it is paid and accepted in full and final settlement. There is nothing here, it seems to me, to come up to that standard at all" (at 22).
He went on to say that the signature of the form of receipt was "not sufficient to be a settlement of the case" (at 22 - 3).
109 Eveleigh LJ said that he did not consider that the banking of the cheque and the signing of the form of receipt indicated "an acceptance on the basis of full and final satisfaction". He went on to say:
"If necessary, I would be prepared to hold that the payment into the bank was explicable on the basis that the parties recognised that at least that sum of money was recoverable. In other words, that that would be the minimum as to which part there was no dispute between the parties" (at 24).
110 The view expressed by the third member of the court, Sir David Cairns, was to the same effect. He said that the letter enclosing the cheque "did not make it at all plain that the [sum of money] was offered in full and final settlement" (at 25). 111 These views are in my opinion consistent with those that I have earlier expressed in relation to the facts of the present case. To adopt the words of Sir David Cairns, Consolidated Minerals' letter of 6 February 2008 "did not make it at all plain that [the sum of $20,000,000] was offered in full and final settlement". 112 Consolidated Minerals emphasised in its submissions that its letter of 6 February 2008 used the expression "in full and final settlement" and submitted that the judgment of Denning MR (and I add, that of Sir David Cairns) contemplated that use of that expression would indicate that an accord and satisfaction had been achieved, or at least intended. However the situation that the English Court of Appeal contemplated would need to exist if an accord and satisfaction were to be found (but which was not in fact found to exist in that case) was one where on its true construction the relevant communication offered to make a part payment upon the basis that, if accepted, it would be received "in full and final settlement" of the claim in question. As I have sought to demonstrate, the expression "in full and final settlement" was here used in a different fashion. Here it was used as an adamant statement that Consolidated Minerals would pay no more than the amount of the cheque enclosed with the letter. 113 JP Morgan raised other points in response to Consolidated Minerals' contention that there had been an accord and satisfaction. It is unnecessary to deal with these other points in any detail, as JP Morgan is in my view entitled to succeed on its first point on this issue, that is, that the letter of 6 February 2008 did not contain any offer of settlement. 114 As to JP Morgan's contention that there was no acceptance by it of an offer, it is sufficient for me to say first that whether JP Morgan's banking of the cheque constituted an acceptance of an offer contained in the letter of 6 February 2008 would of course depend upon the terms of the offer and what (if anything) was said in the letter, expressly or by implication, about the means of accepting it. If on its true construction the letter had contained an offer indicated in the letter to be capable of acceptance by the banking of the cheque without the need for any further communication with Consolidated Minerals, that banking would have completed the formation of the contract (subject to the question of consideration to which I refer below). In these circumstances JP Morgan's letter of 12 February 2008 (see [29] above) stating that the payment left an unpaid balance to which it was entitled, arriving as it did on the day after the cheque was banked, would not have affected the formation of the contract. 115 The second alternative submission of JP Morgan was that there was no consideration for the alleged accord and satisfaction. On this issue each party drew attention to an internal document of the other party. JP Morgan submitted that Mr Abbott's memorandum of 1 February 2008 (see [24] above) showed that Consolidated Minerals thought that its liability exceeded $20,000,000 and that the alleged offer of 6 February 2008 did not therefore involve any element of compromise by Consolidated Minerals. That is, it did not involve an offer, made in an attempt to dispose of the dispute, to pay more than the amount for which it considered itself to be liable. 116 On the other hand Consolidated Minerals pointed to the fact that one of the alternative calculations in JP Morgan's spreadsheet (see [30] - [31] above) showed a liability of less than $20,000,000, suggesting, so Consolidated Minerals said, that Consolidated Minerals' payment of $20,000,000 involved an element of compromise because it included an amount for which it may not have been liable. 117 In my view these internal documents are irrelevant to the issue at hand. The question of consideration, like that of offer and acceptance, is to be determined upon an objective basis. As Allsop P pointed out in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 264 ALR 15 at [4], the High Court made it clear in Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 that "contract formation [is] to be objectively assessed". The requirement of consideration is an aspect of contract formation. 118 In Ermogenous , Gaudron, McHugh, Hayne and Callinan JJ distinguished, in the context of considering the contract formation element of intention to create legal relations, between the necessary "objective assessment of the state of affairs between the parties" and the irrelevant "identification of any uncommunicated subjective reservation or intention that either may harbour" (at [25]). Equally the reliance by the parties in the present case, in the context of the issue of consideration, on internal documents that were not communicated between them and did not evidence the communication between them of any relevant facts or views conflicts with the need to undertake an "objective assessment of the state of affairs between the parties" and is therefore impermissible. 119 The position would have been otherwise if there had been evidence that both parties knew and accepted, and semble communicated to each other, the same view about whether JP Morgan was entitled to either more or less than $20,000,000 (compare Codelfa Constructions Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352 per Mason J). As it was, the evidence of the uncommunicated internal documents of the parties did not suggest that they had the same view about the minimum fee entitlement of JP Morgan. At best it may have indicated that Consolidated Minerals thought it was more than $20,000,000 and JP Morgan thought it was less. 120 What an objective bystander would have observed concerning the communications between the parties was that, first, JP Morgan submitted an invoice for a large amount, secondly, that by its letter of 24 December 2007 Consolidated Minerals disputed that JP Morgan was entitled to the whole of that amount and gave reasons for that assertion, and thirdly, that by its letter of 6 February 2008 Consolidated Minerals offered (the existence of an offer and an acceptance are to be assumed for the purpose of examining the issue of consideration) to compromise JP Morgan's claim by paying it a lesser sum in satisfaction of the whole. Bearing in mind that the Court is not concerned with the adequacy of the consideration, my view is that, determined on this objective basis, there was consideration for the assumed agreement by way of accord and satisfaction in that an existing dispute was settled by one party paying part of the amount claimed and, in return, the other agreeing to forego its claim for the balance.
Conclusions and Orders
121 For the reasons that I have given, my view is that the primary judge's conclusions on the three aspects of JP Morgan's claimed fees that were in issue on appeal were correct. I also consider that the primary judge was correct in finding that Consolidated Minerals was not entitled to support its rejection of JP Morgan's claim for the balance of its fees on the basis of an accord and satisfaction. 122 The parties agreed during the hearing of the appeal that if the Court reached the conclusions that I have just described, it was appropriate that there be no order for the costs of the appeal. 123 In the circumstances I propose that the appeal be dismissed with no order as to costs. 124 YOUNG JA : I agree with Macfarlan JA.
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