FEDERAL COURT OF AUSTRALIA

Optic Security Australia 2 Pty Limited v YC Investments (NT) Pty Ltd [2023] FCA 495

ORDERS

THE COURT DECLARES THAT:

1.    The cross-respondent was and remains bound by paragraph 3(d)(ii) of the Side Letter dated 1 February 2019 to pay the amount of $1,350,000.00 into the account nominated by the Sellers’ Representative in accordance with the Side Letter.

THE COURT ORDERS THAT:

1.    The originating application is dismissed.

2.    Subject to these orders, the applicant is to pay the respondent’s costs of and incidental to the originating application on a party-party basis.

3.    The cross-claim filed on 20 May 2021 by YC Investments (NT) Pty Ltd is to be treated for all purposes as an originating application commencing a cross-claim and YC Investments (NT) Pty Ltd shall pay the filing fee payable for the commencement of a cross-claim as at 20 May 2021.

4.    The cross-claim is allowed.

5.    The cross-respondent is to forthwith pay the cross-claimant the sum of $1,350.000.00.

6.    On or before 2 June 2023 the cross-respondent is to pay the cross-claimant:

(a)    pre-judgment interest in the amount of $160,150.74 calculated to 24 February 2022; and

(b)    a further sum of pre-judgment interest for the period 25 February 2022 to 19 May 2023 (further interest) determined in accordance with these orders.

7.    The further interest be determined as follows:

(a)    on or before 23 May 2023 the cross-claimant is to notify the cross-respondent of the amount of further interest sought and the method of its calculation;

(b)    on or before 29 May 2023 the cross-respondent is to notify the cross-claimant of any dispute with the sum proposed and the basis for the dispute;

(c)    if there be no dispute with respect to the further interest, on or before 31 May 2023 the cross-claimant is to provide to the Court a minute of order fixing the further interest in that amount;

(d)    otherwise, on or before 31 May 2023 the cross-respondent is to notify the Court of a dispute with the proposed sum and, in that event, there be a hearing for the determination of the further interest at 10.00am (ACST) on 2 June 2023.

8.    The amounts referred to in paragraphs 5 and 6 are to be paid into the account nominated by the cross-claimant in its capacity as the Sellers’ Representative for the purposes of the Side Letter dated 1 February 2019.

9.    Subject to these orders, the cross-respondent is to pay the cross-claimant’s costs of the cross-claim on a party-party basis.

10.    Any application for costs to be awarded other than on a party-party basis (costs application) is to be supported by an affidavit filed and served on or before 9 June 2023.

11.    In the event that a costs application is filed in accordance with paragraph 10:

(a)    assessment of costs be deferred until the costs application is decided;

(b)    on or before 23 June 2023 the applicant and cross-respondent is to file and serve any affidavit material upon which it relies in opposition;

(c)    the costs application be set down for hearing on a date to be fixed by the Court.

12.    The relief granted on the cross-claim is not conditional upon the payment by the cross-claimant of the filing fee referred to in paragraph 3 of these orders.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

CHARLESWORTH J

INTRODUCTION

1    This action concerns the purchase of shares in Security & Technology Services (NT) Pty Ltd (STS-NT) and five related entities together known as the STS Group. The applicant, Optic Security Australia 2 Pty Limited (Optic2), acquired all of the shares in the STS Group from the respondent, YC Investments (NT) Pty Ltd and other entities pursuant to a contract completed on 29 November 2018 (Transaction). The Transaction formed part of a large and complex acquisition project by which Optic2 and related entities acquired all of the shares in multiple companies operating security businesses in Australia and New Zealand. The project (named Project Malibu) was intended to create a large consolidated enterprise for the provision of physical and digital security services in both countries.

2    Optic2 is wholly owned by Optic Finance Limited which in turn is wholly owned by Optic Security Group Limited (OS Group), a New Zealand entity. It is one of a number of corporate entities brought into existence as a purchasing vehicle for all of the entities in the STS Group as one aspect of Project Malibu, all having OS Group as the ultimate parent company.

3    The purchase price for the shares in the STS Group was made up of 52% cash and 48% scrip. The scrip component involved the issue of shares in OS Group to individuals and entities who previously had an interest in the relevant sellers of the shares.

4    From 2 June 2017, and at the time of the Transaction, STS-NT was party to a subcontract with LendLease Building Pty Ltd for the construction of security-related communications facilities at the Royal Australian Air Force Base Tindal situated in the Northern Territory (Tindal Subcontract).

5    The consideration paid by Optic2 in the Transaction was the product of a calculation that depended upon a forecast of STS-NT’s earnings before interest, tax, depreciation and amortisation (EBITDA) for the financial year ending 30 June 2019 (FY19). Optic2’s claims are founded on an allegation that the forecast EBITDA was incorrect because it was based (in part) on an incorrect forecast of the “gross profit margin” of the Tindal Subcontract. It alleges that YC Investments made representations about the gross profit margin that were inaccurate, and that those representations in turn had the effect of overstating the forecast EBITDA thus inflating the purchase price. It alleges that YC Investments breached contractual warranties relating to the EBITDA and that it engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 18 of the Australian Consumer Law (ACL). It seeks:

(1)    a declaration that it is entitled to be indemnified by YC Investments for breach of contractual warranties;

(2)    damages for breach of contract;

(3)    alternatively, damages pursuant to s 236 of the ACL; and

(4)    alternatively, compensation pursuant to s 237 of the ACL.

6    YC Investments counterclaims for an amount alleged to be owed to it by Optic2 as part of the purchase price for the shares.

Outcome

7    Optic2 bears the onus of establishing its claims for relief to the civil standard of proof. For the reasons given below, it has not discharged its burden in connection with any of the causes of action relied upon. If I am wrong in that conclusion, I would in any event conclude that Optic2 has failed to prove the entitlement or measure of any award of damages or compensation to which it would otherwise have been entitled had liability been proven, including because on the ACL claim I am not satisfied that there is a causal connection between the conduct alleged against YC Investments and the particular loss and damage pleaded.

8    I have also concluded that Optic2’s claims founded in breach of contractual warranties are answered completely by an agreed time limit which operates as a bar to the action. My findings with respect to the time limitation are set out at the conclusion of these reasons. If my conclusion concerning the time bar is wrong, I would dismiss the claim founded in contract on the merits in any event.

9    The cross-claim should be allowed. There will be orders for the payment of the sum owing by Optic2 to YC Investments, together with pre-judgment interest and costs.

10    It is convenient to begin with some terminology and background facts so that the issues arising on the pleadings can be better understood.

TERMINOLOGY

11    Neither party called any expert witness to explain the meaning of accounting terms employed by them in their evidence and submissions. The limited meanings I give below are derived from uncontroversial aspects of the evidence or otherwise are used consistently by the parties in their written submissions.

12    Expressed in dollar terms, gross profit is the contract price minus direct costs for materials (ie: goods) and resources (ie: labour).

13    Net profit is the contract price minus direct and indirect costs and is therefore lower in dollar terms than gross profit. Indirect costs may include a portion of fixed overheads incurred in the conduct of a business generally that are not specifically related to the performance of a contract.

14    Profit margin is the profit expressed as a percentage of the contract price. Put simply, a $100.00 contract having actual costs of $70.00 may be said to have a profit of $30.00 and a profit margin of 30% over its life.

15    Consistent with those general meanings, the phrase gross profit margin was used in evidence as referring to a percentage figure to describe the proportion of the value of the Tindal Subcontract (that is, the price LendLease had contracted to pay) after deduction of actual direct costs incurred in its performance. Necessarily, a gross profit margin for the life of the Tindal Subcontract could not be known until performance of the contract was complete and all known costs and savings were known. A net profit margin is calculated on the basis of additional indirect costs and overheads and will therefore be lower than a gross profit margin. On the uncontroversial evidence the difference between gross and net profit margins is ordinarily about 3% – 4%.

16    The expressions forecast gross profit margin and forecast net profit margin refer to calculations performed at a point in time to predict what the gross or net profit margin will be over the life of a contract based on known information about past events and assumptions about future events. Prior to the commencement of work on a contract, a forecast gross profit margin must necessarily be based, at least in part, on an estimate of costs that have not yet been incurred and assumptions that revenue will in fact be received.

17    As stated above, EBITDA is an acronym for earnings before interest, tax, depreciation and amortisation. So much is uncontroversial. However, the word “earnings” and the appropriate method by which earnings or EBITDA may be calculated was not the subject of express agreement, nor was there evidence or agreement as to the proper method for making a forecast of EBITDA with respect to a financial year that is not complete at the time of the calculation. The appropriate method for predicting revenue with an ETITDA forecast has not been explained. It is Optic2’s case that the calculation of the correct EBITDA in this case is a mere matter of arithmetic. Later in these reasons I will explain why that submission cannot be wholly accepted. It was also asserted by Optic2’s witness, Mr Todd Stewart Strathdee, that “earnings are a proxy for revenue”. I am not satisfied that that broad statement may be accepted at face value although, as will become apparent, the outcome of Optic2’s case does not turn upon it.

WITNESSES AND EVIDENCE

18    The following affidavits were read, subject to rulings:

(1)    on Optic2’s case:

(a)    affidavits of Mr Stuart John Norton-Baker affirmed 19 October 2021 and 8 February 2022;

(b)    affidavit of Mr Mark David Ranyard affirmed on 21 October 2021; and

(c)    affidavits of Mr Strathdee affirmed on 22 October 2021, 8 February 2022 and 16 February 2022;

(2)    on YC Investments’ case:

(a)    affidavit of Mr Mark Brian Hurley affirmed on 10 January 2022;

(b)    affidavit of Mr Gregory Keith Ireland affirmed on 7 January 2022; and

(c)    affidavit of Mr George Rakkas affirmed on 3 January 2022.

19    Mr Norton-Baker was formerly employed as the Operations Manager for STS-NT. He remained an employee following the Transaction and is presently the Group Quality, Health, Safety and Environment Manager of OS Group. He was principally responsible for the project management of the Tindal Subcontract, including the ongoing monitoring of its budget and profitability.

20    Mr Ranyard is an accountant. He was the Chief Financial Officer of OS Group (including Optic2) from 19 February 2019 until 31 August 2021.

21    Mr Strathdee became a director of Optic Finance and OS Group shortly after completion of the Transaction. Prior to that time, Mr Strathdee was engaged by Arena Investors LP as an advisor. In his first affidavit Mr Strathdee states that “Arena is a registered investment advisor that originates investments (generally, on a single-case basis, below US$50 million) with borrowers and other counterparties who need access to financing and are otherwise not able to access conventional sources”. As discussed below, Arena extended finance to entities representing the interests of the proponents of Project Malibu pursuant to an agreement referred to as the “Terms Sheet”. At the time of a due diligence process leading up to the Transaction, Mr Strathdee was representing the interests of Arena vis a vis the purchasers with respect to the terms on which the finance would be provided to Optic2 as the purchasing vehicle or OS Group as the case may be. Arena was not a party to the Transaction.

22    Mr Ireland founded STS Group with Mr Rakkas in or around 2004. He was a director of YC Investments at the time of the Transaction and at all relevant times preceding it. He remained employed by STS-NT following the Transaction until the termination of his employment in April 2020, following a period of “gardening leave”.

23    Mr Rakkas was also a director of YC Investments at all relevant times before the Transaction. Following the Transaction, he too remained employed by STS-NT until the termination of his employment in mid 2020, also following a period of “gardening leave”.

24    Mr Hurley was employed as the Chief Financial Officer of the STS Group from 2013 until 31 October 2019. He holds a Bachelor of Business (Accounting) and a Graduate Diploma in Business. He has been a Fellow of CPA Australia since 1998. He was previously employed as the Financial Controller for Territory Insurance Office and has held senior accounting roles for private entities in Melbourne since 1983.

25    The documentary evidence is comprised of thousands of pages of documents, including the material garnered during a due diligence process in the months preceding the Transaction. Optic2’s case focused on select parts of select documents, reflecting the confined focus of its pleaded case on the forecast gross profit margin of the Tindal Subcontract and its implications for forecast EBITDA. The Tindal Subcontract was one of hundreds of contracts performed by numerous entities acquired under Project Malibu.

26    All of the witnesses gave their evidence by video link from places situated in Australia and overseas. Conducting the trial in that way did not impede the Court’s ability to form impressions based on seeing and hearing their testimony. To the extent that it is necessary, I will comment on those impressions in the course of summarising their evidence on particular issues.

27    In setting out my findings it is unnecessary to recite at length the full narrative of evidence given by each of the witnesses. Many of the objective facts are either admitted on the pleadings, if not in the course of closing submissions. The controversy is in large part one concerning the inferences that could or should be drawn from those facts especially regarding the critical question as to how the figure of 31% came to be included in the material provided in the due diligence process, the method by which it was calculated and the use to which it was put in calculating the forecast EBITDA for FY19.

BACKGROUND AND FACTS

28    Unless otherwise apparent, the narratives of fact contained in these reasons are based on admitted pleadings contained in the Further Amended Statement of Claim filed 25 February 2022 (FASOC) and the Third Amended Defence filed 24 February 2022 (AD) and on that part of the evidence that was not controversial (including affidavit evidence that was not subject to challenge).

29    YC Investments (formerly named Security & Technology Services Group Pty Ltd) owned all of the shares in STS-NT in its capacity as trustee of a trust known as the STS Unit Trust. The unit holders were entities representing the interests of individuals including Mr Ireland and Mr Rakkas.

30    Mr Rakkas and Mr Ireland were each directors of the various entities in the STS Group from time to time. As mentioned above, both were directors of YC Investments at the time of the Transaction.

The Tindal Subcontract and SimPRO

31    STS-NT entered into the Tindal Subcontract with LendLease on 2 June 2017. It originally defined the “subcontract price” as $6,996,490.00, although the contract price increased with later variations. In terms of both contract price and anticipated profit, it was the most valuable contract secured by any company in the STS Group between July 2017 and October 2018. Its terms included the description of stages of work as separately priced “Work Elements” and ascribed commencement and completion dates to each of them. It made provision for the payment of liquidated damages by one party to the other in specified events. In particular, it made provision for STS-NT to issue notices of delay to LendLease in the event that commencement dates were delayed through no fault of STS-NT, and for STS-NT to make monetary claims against LendLease for expenses associated with those delays. Such expenses might include the cost of accommodating personnel on the remote site for periods when work could not be undertaken.

32    STS-NT secured the Tindal Subcontract after submitting two tenders in January 2017. The tender price was the product of costings and estimates prepared by personnel within STS-NT’s business development team using a software platform known as SimPRO. The SimPRO software was described in the evidence as a budget and field management tool. It was used within the STS Group to perform calculations for the purpose of pricing and tendering for work. If a contract was secured on the basis of a tender, the tender information would be converted into a “job” within SimPRO. The software would then be utilised as a field management and budget tool to track the performance of works, and to record expenses and revenue as incurred and received over the life of the contract.

33    Subject to what is said below, within SimPRO, the work yet to be performed under a contract had both a “sell price” and a “cost price” ascribed to it:  the sell price being the price to be invoiced to the client under the terms of the contract and the cost price being an estimate or budget of the direct costs and expenses expected to be incurred in performing the work, including direct labour costs.

34    SimPRO was not intended to be used as sophisticated accounting software and it was not in fact utilised by STS-NT to perform any complex analytics. The financial accounting and reporting within the STS Group was undertaken in accounting software known as Xero. The two software programs were not fully integrated. However, information contained within SimPRO could be (and was) extracted for the purpose of undertaking analyses of matters relevant to the financial position of the STS Group and the preparation of its management accounts, including estimates of the “cost to complete” the performance of a contract at different points in time. Expenses and revenue recorded in SimPRO were separately recorded in Xero and invoices generated in SimPRO were also dealt with in Xero in the management of trade creditors and cash flow.

35    As I have mentioned, the tender for the Tindal Subcontract was broadly based on estimates of the direct costs of labour and materials attributable to each Work Element. That amount was recorded as a price (here used in the sense of a cost price) in a column bearing that title within each Work Element. A sell price was then ascribed against the same item, representing a rateable portion of the whole of the tendered contract price.

36    Subject to what is said below, the expected gross profit for the life of the Tindal Subcontract at the time of tender was the difference between the cost price and the sell price or, to put it another way, the difference between the cost to STS-NT for performing the contract and the price to be paid by LendLease for that performance. Whether the projected profit would in fact be achieved depended on a multitude of factors, including whether each Work Element was delivered under or over budget. Budget overruns relating to a Work Element may be offset by savings in other areas, such that actual profit could not be identified with certainty until the contract was complete.

37    It was common ground that forecasts prepared after work on the Tindal Subcontract commenced should properly include consideration of costs that had actually been incurred or were actually the subject of invoices as yet unpaid at the time of the calculation, rather than purely on budgeted figures. Unsurprisingly, the actual costs of performing works may be more or less than that originally budgeted for. Forecasts will also be based on any variations to the sell price and the actual or expected cost of performing the additional work subject to those variations.

38    Completion of the works did not in fact occur until 2020 and the Tindal Subcontract therefore remained on foot at the time of completion of the Transaction and at the closure of FY19. The gross profit and gross profit margin in fact achieved over the course of the life of the Tindal Subcontract was not the subject of evidence and, of course, could not be known at the time of the events referred to in these reasons.

39    Optic2’s evidence and submissions refer repeatedly to a forecast gross profit margin for FY19. As discussed below, the concept of there being a gross profit margin in respect of a particular financial year when a contract remains only partly performed (and the appropriate method for calculating such a forecast) has not been adequately explained on Optic2’s case. The difficulty arises in part because Optic2 did not call any witness to give expert evidence concerning accounting terms and their meanings or concerning the methods that could or were employed to forecast the revenue expected from the Tindal Subcontract for a defined period such as a financial year. In the absence of express agreement or obvious consensus between the parties as to the meaning of accounting terms or methodology, the Court cannot, and has not, made assumptions about those topics for the purpose of making findings of fact or drawing inferences from those facts. They are not matters upon which a court may take notice in accordance with s 144 of the Evidence Act 1995 (Cth) and there is an obvious danger in the Court imparting its own understanding of accounting methods in the resolution of the dispute unmoored from the evidence adduced by the parties.

Contingencies

40    The tender for the Tindal Subcontract was principally prepared by STS-NT’s business development team led by Mr Hagen Bahnemann. The pricing was prepared in Excel spreadsheets which included “captured costs” and “labour costs”, as well as a sell price and a margin. The pricing process included a brief technical review by the operations team which Mr Norton-Baker described as being more in the nature of a “scan”.

41    At the time that STS-NT prepared the tender for the Tindal Subcontract, allowance was made for two contingencies.

42    The first contingency related to liquidated damages in an amount of $300,000.00. That contingency was entered into SimPRO with a “price” and an equivalent “sell price” and so did not affect the difference between the sell price and cost price for the project as a whole.

43    The second contingency was aptly referred to within STS-NT as the “Cover Your Arse” contingency. The Cover Your Arse contingency was a sum of $770,000.00, referred to at trial as the “Additional Amount”. I will reluctantly employ the more dignified term when referring to this contingency.

44    In January 2017 Mr Norton-Baker attended a meeting where the need to allow for a “general contingency” to the tender price was discussed. He described the purpose of the contingency as being for those components of the project that “could not accurately [be costed] at the time of preparing the tender response”. However, he had no recollection of how the amount of $770,000.00 was arrived at and could not say whether it was a percentage of the overall contract price or based on some other dollar calculation. He frankly acknowledged that the content of the quotation and the costing decisions made by others in respect of it were above his “pay grade”. In the circumstances just described I place little weight on the evidence of Mr Norton-Baker as to the purpose of the Additional Amount. On the evidence before me I find that it was considered prudent by others to quote for the contract at a price that provided STS-NT with a sufficient overall profit to guard against margin eroding events. That is consistent with Mr Norton-Baker’s evidence that it was a usual practice when pricing a tender to include a provision for unexpected events that are not otherwise expressly budgeted for.

45    The Additional Amount was applied across Work Elements in the “sell price” column rateably in proportion to the direct labour costs. The adjacent “price” column in each instance did not contain an equivalent amount. Mr Norton-Baker could not say why the Additional Amount was entered into SimPRO without a cost entry beside it.

46    Mr Rakkas, Mr Hurley and Mr Norton-Baker told the Court (and I accept) that it was common practice within the STS Group to incorporate a general contingency into each tender price and to enter the contingency into SimPRO without a cost price. Mr Rakkas’ evidence was to the effect that it was usual practice to “quarantine” the contingency by not ascribing any costs to it so that operations personnel would not assume that it was there to be spent. He said that it was “always treated as a profit reserve which could only be spent with the approval of directors or the executive management team”. I accept that evidence.

47    No witness expressed the view that at the time of the preparation of the tender it was known that the Additional Amount would certainly be spent to meet any known expense omitted from the budget at the time of tender.

48    In evidence is an email from Mr Bahnemann to Mr Norton-Baker (copied to others) dated 15 June 2017 in which Mr Bahnemann said he was providing a “breakdown of contingency”. The email was sent about two weeks after the Tindal Subcontract was awarded to STS-NT. An attached spreadsheet allocates all but $210,000.00 of the Additional Amount to specific line items including “training”, “seismic” and “local travel costs”. The remaining amount of $210,000.00 is described as “General Contingency” and has the words “Margin protection” beside it. Mr Ireland was copied in the email. He told the Court he had no recollection of opening or reading it but it was likely that he did so.

49    Mr Bahnemann was not called to give evidence. It may be inferred that he would not have given evidence to assist Optic2’s case in relation to the meaning of his email and the use to which he intended it to be put. In particular, I decline to draw the inference that Mr Bahnemann anticipated with any degree of certainty that the Additional Amount would or should be spent in the manner set out in his spreadsheet at the time of tender or shortly afterward. I prefer the direct evidence of Mr Rakkas concerning the purpose of the Additional Amount as at the time of the tender and the time that the tender was converted to a “job” in SimPRO. As discussed below, I have also accepted that Mr Norton-Baker identified other predicted costs that had not been budgeted for in the tender process, which he described as “estimated missed costs”. Mr Norton-Baker’s list of estimated missed costs is not the same as the list contained in the spreadsheet attached to Mr Bahnemann’s email of June 2018, reinforcing my view that little weight should be afforded to the attached spreadsheet in the absence of direct evidence of Mr Bahnemann as to his knowledge and intentions relating to it.

The Transaction

50    The documents defining the Transaction comprise a share purchase agreement dated 22 November 2018 (Final SPA) and a document referred to as a Side Letter dated 1 February 2019.

51    The Final SPA was preceded by earlier agreements that were varied, superseded then partially re-enlivened. It is largely unnecessary to refer to earlier iterations other than to say that there existed a prior agreement between the entities defined as the “Sellers” of the shares and a different “Buyer”, AIH No 2 Limited Partnership, otherwise known as Ascentro. As discussed below, the human proponents behind the Buyer in that agreement are the same as those behind Optic2 as the ultimate Buyer under the Final SPA.

52    On 13 October 2017, OS Group engaged the advisory firm KPMG to undertake financial due diligence relating to the earlier agreement with Ascentro.

53    The purchase price of the earlier iteration of the agreement was based on the actual financial performance of the STS Group at the end of 30 June 2018. Re-forecasts were later undertaken for the purposes of the due diligence process culminating in the Final SPA.

54    The Final SPA defines the word “Sellers” to include YC Investments and other entities that owned shares in the companies forming the STS Group. The “Buyer” is Optic2. Eight individuals are defined as “Guarantors” including Mr Ireland and Mr Rakkas.

55    YC Investments is the only respondent in this proceeding. The other Sellers are not joined, nor are any of the Guarantors.

56    The Final SPA contained contractual definitions for the expression “Data Room” and “Due Diligence Questionnaire”. The contractual expression “Disclosure Material” is defined (in Schedule 1, clause 1) to mean the written information in relation to the companies in the STS Group provided by the Sellers to the Buyer or their advisors as at a specified date in the Data Room and the Due Diligence Questionnaire.

57    By Schedule 5 to the Final SPA, the Sellers gave warranties to Optic2 relating to the accuracy of the “Disclosure Material” as that expression is defined in the Final SPA (Seller Warranties). They are set out in full later in these reasons. For present purposes it is enough to state that they include a warranty broadly to the effect that the information contained in the Disclosure Material was accurate.

58    The Final SPA provided for the transfer of all of the shares of all of the entities in the STS Group to Optic2 for a defined “Purchase Price” on the completion date. It was comprised of a “Cash Consideration Amount”, a “Loan Amount” and “Consideration Shares”. There was provision for an “Earn-out Payment” to be made following completion of the Final SPA.

59    The Consideration Shares were shares in OS Group to the value of $17,141,025.00 that were issued to the Sellers. The Loan Amount was $25,000,000.00. The Cash Consideration was defined as a sum to be determined in accordance with Schedule 13 of the Final SPA.

60    The total value of the Purchase Price was calculated by a formula providing for the re-forecast EBITDA for the whole of the STS Group to the end of FY19 to be multiplied by 5.5.

61    The Earn-out Payment was calculated by a formula explained later in these reasons. It was a means of withholding part of the Purchase Price until the actual trading figures for FY19 became known.

62    In addition to the Purchase Price incorporating the Earn-out figure, the Side Letter provided for the payment of an “Adjustment Amount” of $2,575,000.00 in two instalments. The first instalment has been paid. The second was due on 30 June 2019. It has not been paid and now forms the subject of the cross-claim.

Due diligence process

63    In the months prior to the Transaction, Optic2 in fact maintained an online Data Room containing information about the STS Group, and it made that information available to its representatives and its advisers. The documents contained in the Data Room include those listed at [12] of the FASOC, defined as the “Respondent’s Disclosure Materials”. It is not disputed that the Respondent’s Disclosure Materials were included in the Data Room for the purposes of informing Optic2 about the financial position of the STS Group, although there is some dispute on the pleadings about the dates on which some documents were provided.

64    As the various iterations of a share sale agreement evolved, KPMG prepared a spreadsheet referred to as KPMG Financial Databooks and two reports dated 19 September 2018 (KPMG September Report) and 31 October 2018 (KPMG October Report). The KPMG Financial Databooks and the KPMG October Report are referred to in the FASOC as “the KPMG Materials”.

65    The KPMG Materials were prepared on the basis of material provided by YC Investments, but YC Investments is not the author of them, nor did it have access to them before the Transaction. Optic2 did not call the author of the KPMG Materials to give evidence concerning the calculations and qualifications contained in them or otherwise concerning their content.

66    Some documents contained in the Respondent’s Disclosure Materials and the KPMG Materials contain representations about the forecast gross profit margin of the Tindal Subcontract. Subject to some qualifications, YC Investments admits that the representations were to the general effect that the total gross profit margin of the Tindal Subcontract was 31%. The qualifications include:

(1)    the gross profit margin was a statement only of YC Investments’ opinion as to what it expected the end of contract result of trading to be at the time that the representation was made; and

(2)    the representation as to the gross profit margin was known by Optic2 to be subject to qualifications set out in the KPMG September Report.

ALLEGED CONTRAVENTION OF THE ACL

67    Against that background, it is convenient to deal first with Optic2’s claims founded in contravention of s 18 of the ACL, contained in Ch 2 of Sch 2 to the Competition and Consumer Act 2010 (Cth) (CC Act).

68    Section 18 of the ACL provides that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or that is likely to mislead or deceive. It applies to corporations by virtue of s 131 of the CC Act.

69    There is no dispute that the conduct referred to in the FASOC occurred in trade or commerce.

70    Section 4 of the ACL concerns misrepresentations with respect to future matters. It provides:

(1)    If:

(a)    a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act); and

(b)    the person does not have reasonable grounds for making the representation;

the representation is taken, for the purposes of this Schedule, to be misleading.

(2)    For the purposes of applying subsection (1) in relation to a proceeding concerning a representation made with respect to a future matter by:

(a)    a party to the proceeding; or

(b)    any other person;

the party or other person is taken not to have had reasonable grounds for making the representation, unless evidence is adduced to the contrary.

(3)    To avoid doubt, subsection (2) does not:

(a)    have the effect that, merely because such evidence to the contrary is adduced, the person who made the representation is taken to have had reasonable grounds for making the representation; or

(b)    have the effect of placing on any person an onus of proving that the person who made the representation had reasonable grounds for making the representation.

(4)    Subsection (1) does not limit by implication the meaning of a reference in this Schedule to:

(a)    a misleading representation; or

(b)    a representation that is misleading in a material particular; or

(c)    conduct that is misleading or is likely or liable to mislead;

and, in particular, does not imply that a representation that a person makes with respect to any future matter is not misleading merely because the person has reasonable grounds for making the representation.

71    Section 236 of the ACL relevantly provides that if a claimant suffers loss or damage because of the conduct of another person, and the conduct contravenes (relevantly) s 18, the claimant may recover the amount of the loss or damage by an action against that other person.

72    Section 237 of the ACL relevantly provides:

(1)    A court may:

(a)    on application of a person (the injured person) who has suffered, or is likely to suffer, loss or damage because of the conduct of another person that:

(i)    was engaged in a contravention of a provision of Chapter 2, 3 or 4; or

…

make such order or orders as the court thinks appropriate against the person who engaged in the conduct, or a person involved in that conduct.

73    The orders the Court may make under s 237 include orders declaring the whole or part of any contract to be void, or orders varying the contract:  ACL, s 243.

The pleaded case

74    The allegations of misleading and deceptive conduct are based on representations made during the due diligence process culminating in the Transaction.

75    Three categories of representations are pleaded. They are referred to as Warranty Representations (FASOC, [73]), Disclosure Material Representations (FASOC, [31(a)], [31(b)], [31(i)]) and [31(j)]) and Financial Due Diligence Representations (FASOC, [32(a)], [32(d)] and [32(e)]). Each category of representation is alleged to have been misleading or deceptive or likely to mislead or deceive (FASOC, [84] – [86]). The Warranty Representations will be discussed later. The representations concerning profits and EBITDA are pleaded as follows:

31    The Respondent’s Disclosure Material conveyed the following representations:

(a)    the total gross profit margin of the Tindal Subcontract was 31%;

Particulars

This representation is express and is contained in the statement set out in Paragraph 26(a) of Schedule A to this statement of claim.

(b)    the total gross profit margin of all of STS NT’s work in progress projects was 30%;

Particulars

This representation is express and is contained in the statement set out in Paragraph 26(b) of Schedule A to this statement of claim.

(i)    for FY19:

(i)    STS NT’s gross profit would be $11,610,197;

Particulars

This representation is express and is contained in the statement set out in paragraph 12(b)(i) of Schedule A to this statement of claim.

(ii)    STS NT’s EBITDA would be $2,900,022;

Particulars

This representation is express and is contained in the statement set out in paragraphs 12(b)(ii) of Schedule A to this statement of claim.

(iii)    the STS Group’s gross profit would be $20,296,049;

Particulars

This representation is express and is contained in the statement set out in paragraphs 12(b)(iii) of Schedule A to this statement of claim.

(iv)    the STS Group’s EBITDA would be $6,006,897; and

Particulars

This representation is express and is contained in the statement set out in paragraphs 12(b)(iv) of Schedule A to this statement of claim.

(j)    the Sellers, including the respondent, and the Guarantors knew of no material matters concerning:

(i)    the profitability, performance or deliverability of the Tindal Subcontract;

(ii)    the profitability, operations or financial condition of the STS Group; or

(iii)    the profitability, operations or financial condition of STS NT,

which were not Disclosed in the Disclosure Material,

(the Disclosure Material Representations).

Particulars

As to the representations in sub-paragraph (j), the applicant further says that those representations were:

(A)    partly express by reason of Warranty 6(b)(i); and

(B)    partly implied by reason of:

    (1)    Warranty 7.1(a);

    (2)    the statements in paragraph 4 of Schedule A to this statement of claim; and

    (3)    the matters referred to in paragraph 9.

76    Schedule A to the FASOC is titled “Information and statements contained in the Respondent’s Disclosure Material”. Paragraph 26 states:

26    The following statements were made in the First WIP & Forecast Model and the Second WIP & Forecast Models:

(a)    the gross profit margin of the Tindal Subcontract was 31% (‘NT’ Sheet, column I row 16); and

(b)    STS NT’s gross profit margin for all its work in progress projects was 30% (‘NT’ Sheet, column H row 156; ‘Consolidated’ Sheet, column I row 16).

77    Paragraph 12 of Schedule A to the FASOC states:

12    The STS Group Management Accounts – FY18 and FY19 Summary included the following statements:

(a)    for FY18:

(i)    STS NT’s gross profit was approximately $9,767,715;

(ii)    STS NT’s EBITDA was approximately $2,168,503;

(iii)    the STS Group’s gross profit was approximately $18,178,880; and

(iv)    the STS Group’s EBITDA was approximately $5,158,439; and

(b)    for FY19:

(i)    STS NT’s gross profit would be approximately $11,610,197;

(ii)    STS NT’s EBITDA would be approximately $2,900,022;

(iii)    the STS Group’s gross profit would be approximately $20,296,049; and

(iv)    the STS Group’s EBITDA would be approximately $6,006,897.

78    Paragraph 89 of the FASOC makes the following allegation:

89    Further, to the extent that the Disclosure Material Representations or the Financial Due Diligence Representations were representations as to future matters, those representations were:

(a)    made without reasonable basis; and

(b)    misleading or deceptive, or likely to mislead or deceive.

Particulars

The applicant relies on section 4 of the Australian Consumer Law.

79    The “extent” to which Optic2 says that the representations were as to future matters is not pleaded.

80    As can be seen, alleged representations relate to the predicted gross profit margin of the Tindal Subcontract and other works in progress, the predicted gross profit and EBITDA for STS-NT and the predicted gross profit and EBITDA of the STS Group.

81    In addition, it is alleged that YC Investments failed to make disclosure of matters referred to as “Undisclosed Margin Matters” (FASOC, [58A] – [58K]), which failure is alleged to have been a separate instance of misleading and deceptive conduct (FASOC, [87]). The pleadings at FASOC [58A] – [58K] particularise the reasons why the representation as to the gross profit margin of the Tindal Subcontract are said to be misleading or deceptive.

82    Part I.4 of the FASOC is titled “Reliance”. It alternatively pleads that Optic2 relied on the Warranty Representations, Disclosure Material Representations and the Financial Due Diligence Representations when it entered into the Final SPA, paid the Purchase Price and otherwise completed the purchase of shares in the entities comprising the STS Group. Alternatively it is alleged that had the Undisclosed Margin Matters been disclosed, then Optic2 “would have offered to pay less and would have paid less” than the Purchase Price or (alternatively) would not have entered into the Final SPA.

83    The pleading as to loss and damage founded on contravention of the ACL is expressed as follows:

J.2 Misleading or deceptive conduct

93    By the contraventions of section 18 of the Australian Consumer Law referred to in paragraph 90 above, the applicant has suffered loss and damage.

Particulars

The loss suffered is:

(A)    the difference between the Purchase Price and the true value of the STS Business; or

(B)    alternatively to (A), the difference between the Purchase Price and the price that the applicant would have paid under the Final Share Purchase Agreement if the respondent:

(1)    had not breached the Warranties;

(2)    further or alternatively, had disclosed one some or both all of the Undisclosed Margin Matters;

(3)    further or alternatively, had not made the Warranty Representations and engaged in the Warranty Conduct;

(4)    further or alternatively, had not made the Disclosure Material Representations; and

(5)    further or alternatively, had not made the Financial Due Diligence Representations,

alternatively the loss of opportunity paying that price.

The calculation of the applicant’s loss and damage will be the subject of expert evidence.

Issues arising at the trial

84    A number of observations may be made as to the manner in which Optic2 presented its case based on s 18 of the ACL.

85    The first is that it did not rely on any independent expert report for the purpose of assessing the quantum of the loss or damage pleaded at FASOC [93], notwithstanding the closing words of the plea.

86    The second is that Optic2 did not call any witnesses to make good the plea that if the various instances of misleading and deceptive conduct had not occurred, there would have been no agreement at all for the purchase of all of the shares in the STS Group. In closing submissions, Counsel for Optic2 confirmed that this is not a “no-transaction” case. In the absence of evidence to support such a plea I take it to have been abandoned.

87    Third, a good part of the evidence consisted of spreadsheets prepared in Excel. Whilst the formulas employed in the software could be viewed by the Court, any accounting methodology behind those formulae are not matters in relation to which a judge may take judicial notice. The Court may of course comprehend arithmetic formulas embedded in the spreadsheets. However, contrary to Optic2’s submissions, the manner in which figures may then be employed to identify or forecast the financial position of STS-NT and the STS Group at the end of a particular financial year is not a mere matter of arithmetic.

88    The final preliminary observation relates to the manner in which Optic2 set out to prove that the 31% represented gross profit margin forecast was misleading or deceptive or likely to mislead or deceive. Its case in that respect depended upon a finding that the figure of 31% was “taken from SimPRO”, “drawn from SimPRO” or “derived from SimPRO”. It is important to explain what Optic2 meant by those phrases.

89    Optic2 alleged that a person (unidentified in its evidence) had rounded down a 31.42% original budgeted gross profit margin figure contained in SimPRO (or at least calculable by reference to data contained in it) as it stood in June 2017, being the percentage of the contract price expected to be achieved as profit after costs and expenses budgeted for in the system at that time. It is alleged that the person then manually entered the rounded down figure of 31% in spreadsheets included among the Respondent’s Disclosure Materials. It was alleged that the figure “taken from SimPRO” in that way was erroneous because it treated the whole of the Additional Amount as revenue without allowing for any costs attached to it. It was alleged that some of the contingencies that the Additional Amount was intended to cover, as well as other unbudgeted expenses, had in fact occurred by the time of the due diligence deadline, resulting in expenses defined as “Additional Costs” and “Margin Eroding Costs”, which had not been allowed for as “costs” when the 31.42% gross profit margin was first calculated in SimPRO. Accordingly, it was submitted, the 31% figure as “taken from SimPRO” was false because it wrongly inflated the profit by the Additional Amount of $770,000.00 by treating it as “100% revenue”.

90    YC Investments accepts that at the time of the due diligence process in mid-late 2018 it would have been wrong to forecast the gross profit margin of the Tindal Subcontract for FY19 based only on information contained in SimPRO at the time that the Tindal Subcontract was awarded and converted into a “job” within the software in June 2017. It accepts that in mid 2018 it would also have been wrong to forecast the gross profit margin without having regard to costs known to have been incurred at that time. However, it denies that the figure of 31% was “taken from SimPRO” in the manner alleged. The question of whether the 31% was taken from SimPRO in the alleged manner therefore assumes critical importance.

Spreadsheets

91    The manner in which spreadsheets created in Excel operate is not disputed. A single Excel file may contain a number of spreadsheets divided under “Tabs”. Each spreadsheet takes the form of a grid of cells arranged in rows and columns. A cell within the spreadsheet may be located by the coordinates of one or more letters (identifying a column) and a number (identifying a row).

92    Information may be entered into a cell in different ways. The author may “hard code” the content by entering a figure or words into the cell. A cell may also be populated as an automatically generated answer to a formula embedded in the cell. The formula may include factors drawn from any number of other cells which in turn may be populated with formulas. Changing the information in one or more of those other cells will change the information in the cell populated by the formula.

93    A whole number may appear in a spreadsheet as a result of an embedded formula rounding another number up or down. Whether a number has been rounded in that way can be identified by clicking on the cell. A whole number may also be hard coded into the cell after manual rounding by the author.

94    The witnesses referred to a number of documents forming a small fraction of the totality of the information contained in the Respondent’s Disclosure Materials. The figure of 31% appears in two spreadsheets referred to in the evidence as follows:

(1)    First WIP & Forecast Model (being a spreadsheet within a workbook named “2AU.4.8.01 Forecast STS – 20180705”) (NT Sheet, I, 16)

(2)    Second WIP & Forecast Model (being a spreadsheet within a workbook named “2AU.4.8.02 Forecast STS – 20180706 with Probability”) (NT Sheet, I, 16).

95    I will refer to those two documents together as the WIP Forecasts. They were included in the Data Room and formed part of the Disclosure Material as defined in the Final SPA. They were created on 5 July 2018 and 6 July 2018 respectively and are two versions of the same thing. In each of them, the figure 31% appears in a Tab titled “NT Sheet” under a heading “Revenue” and a subheading “Work in progress”. It is a hard coded figure in the sense described above; that is, it is not the product of a formula embedded in the spreadsheets themselves but has been entered manually as a whole number, 31. The precise figure 31.42 is not otherwise contained in the spreadsheet.

96    The relevant table contains a list of all of the contracts then in progress by STS-NT, with columns identifying the Client, Site, Product, Project Value and Gross Margin, in each case represented by a hard coded whole number.

97    There is no statement on the face of the document as to whether the expression “gross margin” (abbreviated as GM) is intended to refer to the expected gross profit margin over the whole of the life of the Tindal Subcontract, rather than the expected profit to be achieved in a particular period of time. From column P onward (in the same row) there is a distribution of the whole of the revenue by small percentages on a monthly spanning beyond any particular financial year (namely from July 2017 to November 2019). The small percentage numbers vary, suggesting that income earned under the Tindal Subcontract had not previously been regular and was not forecast to be so in the future. That appears to be confirmed by a note reading “Revenue is based on the % of completion approach”, although the meaning of that phrase was not explained in the evidence. In row 158 there appear amounts representing the relevant percentage of the contract price in dollar terms allocated on a monthly basis apparently for the life of the contract.

98    Another sheet titled “Consolidated” deals with “COGS” at lines 54 to 74. It is common ground that COGS is an abbreviation for “costs of goods sold”. It therefore appears that the actual and/or anticipated costs of performing the Tindal Subcontract may be the subject of discrete calculations within the workbook, however, at the conclusion of the trial it remained unclear how (if at all) the COGS impacted on any other formula or figure contained in the spreadsheets. The consequences of these ambiguities will be discussed elsewhere in these reasons.

Practical operation of SimPRO

99    It is not disputed that a calculation of a forecast gross profit margin performed in June 2017 based only upon the cost price and sell price contained in SimPRO at that time would result in a figure of 31.42%. Relevantly:

(1)    the estimated cost of materials was $4,169,784.04;

(2)    the estimated cost of resources (being the combination of estimated labour costs with an added overhead) was $879,830.00;

(3)    the estimated total of revenue (excluding GST) was $6,996,490.08; and

(4)    the estimated gross profit was $2,198,256.04.

100    Based on those figures, I accept that the estimated gross profit expressed as a percentage of the revenue is 31.42% and that 31.42 rounded to the nearest whole number is 31.

101    However, whether the figure appearing in the WIP Forecasts is in fact a carrying forward of 31.42 after rounding is a question to be resolved having regard to the totality of the evidence. In that regard, it is important to remain focussed on the particular inference the Court is invited to draw. The inference is that at the time that the WIP Forecasts were prepared, a figure of 31% was taken from SimPRO as the gross profit margin that would be reported by the software at the time that the Tindal Subcontract was converted to a “job” more than 12 months earlier. It is by that means that Optic2 seeks to establish that the Additional Amount was wrongly treated as 100% revenue.

102    The evidence of Mr Hurley and Mr Norton-Baker was to the effect that as a contract is performed, new information concerning actual costs, actual savings and actual variations is contemporaneously entered into the software. That evidence was not subject to effective challenge and I accept it. Mr Norton-Baker told the Court that by November 2017 there had been an increase in the contract price from about $6.9m to about $7.4m. That change was entered into SimPRO at the time that the variation was agreed.

103    The Court was not taken to an operational version of SimPRO to explain how a gross profit margin figure could be “derived” or “taken from” the system in a practical sense, based on information that might previously have been contained in it at an earlier point in time.

104    Mr Norton-Baker frankly acknowledged that at various points in time during the life of a contract, the forecast profit margin will change as anticipated costs become actual costs (or not as the case may be) and as assumptions as to future events giving rise to additional costs or additional savings change.

105    In the absence of evidence to the contrary, I consider it more likely that any calculation of a projected gross profit margin performed in mid 2018 based only on information contained in SimPRO would be the product of information contained in the system as updated to that point in time: it would be a product of the total updated cost price subtracted from the updated sell price, expressed as a percentage.

106    That is consistent with the evidence about the purpose that SimPRO was intended to serve in Optic2’s business as confirmed by Mr Norton-Baker, namely to assist in monitoring the performance of contracts in real time, specifically to track their profitability.

107    As at July 2018, the calculation of a gross profit margin based on information then contained in SimPRO would not have yielded the answer 31.42% other than by startling coincidence. I am satisfied that the information contained in SimPRO by that time had changed to record costs that had actually been incurred as at that date, as well as the increased contract price. It has not been shown that in mid 2018 SimPRO could practically operate so as to produce the figure of 31.42%.

108    As explained in the next section of these reasons, there were in fact calculations actually performed by personnel within the STS Group relating to the forecast gross profit margin of the Tindal Subcontract with different results depending on the time at which the calculations were performed and the information that was taken into account. The information extracted from SimPRO (particularly concerning the actual costs of performance to date) formed the starting point for those calculations, but not the end point. The very fact that the calculations were performed outside of SimPRO tells against an inference that the 31% figure was arrived at using the crude method of taking a 31.42% figure that would have been yielded by SimPRO in June 2017 when the actual costs for the year to come were not known.

109    Moreover, on the basis of the evidence of Mr Norton-Baker and Mr Hurley, I conclude that there existed a more sophisticated methodology for estimating the costs to compete the Tindal Subcontract at any particular point in time, and that those calculations were in fact performed by Mr Hurley for the purposes of calculating “work in progress” (WIP) for incorporating into the management accounts for the STS Group. Other calculations were performed by Mr Norton-Baker in response to requests during the due diligence period and otherwise for operational purposes. Whilst those types of calculations served different purposes from the WIP Forecasts, the fact and nature of that work, and the role played by Mr Norton-Baker in it, tells against an inference that a person within STS-NT turned to information contained in SimPRO in June 2017 as the basis for forecasting a gross profit margin for the Tindal Subcontract in mid 2018.

Costs and savings associated with “the ABR dispute”

110    Sometime after September 2017 a dispute arose between STS-NT and one of its subcontractors ABR Group Pty Ltd when STS-NT expressed concerns that ABR was over claiming on its invoices. STS-NT terminated the subcontract resulting in a claim by ABR against it. That claim was the subject of litigation and alternative dispute resolution. In the period before the dispute was resolved, the preparation of forecasts concerning the gross profit margin depended on (among other things) whether STS-NT would be required to pay any sum in liquidated damages to ABR. I have previously mentioned that the tender price for the Tindal Subcontract included a contingency of $300,000.00 to allow for such an expense. The question was whether it might become necessary to spend it.

111    The ABR dispute also made it necessary to engage a replacement subcontractor for the works ABR had originally been contracted to perform, giving rise to additional costs relating to the mobilisation of the new subcontractor and the remediation of some of the works previously performed.

112    However, the ABR contract was also one that generated savings against the budget (as entered into SimPRO in 2017) because the quote for the job originally included the price of an alternate subcontractor. The work was subcontracted to ABR at a significant saving on the original budgeted price.

Calculations performed by Mr Norton-Baker

113    In November 2017 Mr Norton-Baker performed some calculations to estimate the gross profit margin of the Tindal Subcontract based on information contained in SimPRO or otherwise known or assumed by him at that time (November 2017 calculations). That information included $881,716.00 of costs Mr Norton-Baker considered had been missed at the time of the tender. The calculations are contained in a worksheet and are conveniently summarised in YC Investments’ closing submissions as follows:

80.    The [cost to complete] worksheet contained information of anticipated missed costs in relation to the project of $881,716 and also factored into the various calculations contained in the worksheet, some initial savings which had already been identified in relation to the project, along with the contingency and [liquidated damages] contingency allowance.

81.    The first series of calculations entitled ‘On Target Total’ undertaken by Mr Norton-Baker as at November 2017 merely calculated the gross and net profit applicable to the project based purely on information contained in SimPRO without adjustment. They indicate that at November 2017, the unadjusted gross profit margin (inclusive of variations) was estimated in SimPRO to be 28.05%.

82.    The second series of calculations entitled ‘Estimated Errors’ adjusted the SimPRO figures by reducing the profit to take into account the estimated missed costs amount of $881,716. This has the effect of reducing the estimated gross profit margin (inclusive of variations) to 16.13%. This series of calculations did not, however, take into account any estimated project savings or contingency amounts.

83.    The third series of calculations entitled ‘Estimated Forecast’ reduced the gross profit margin from SimPRO by an amount equal to the estimated missed costs of $881,716 and then added back into gross profit an amount equal to the identified savings (being Civil Costs of $342,735.63 and Nurse Call of $100,000) and the contingency allowance of $772,646.52. The liquidated damages contingency, however, was not taken into account when making these estimates. A gross profit margin percentage of 32.56% was calculated.

114    In cross-examination, Mr Norton-Baker acknowledged that the methodology employed in the second series of calculations was incorrect because it did not factor in the Additional Amount “sell price”. The third series of calculations illustrates how unbudgeted costs may be offset against actual savings in the performance of the Tindal Subcontract so as to modify the gross profit margin over time. The figures show that even if the original budget did not provide for the costs Mr Norton-Baker later identified as “missed”, the costs could be offset by savings resulting in an estimated gross profit of 32.56%.

115    More fundamentally, the November 2017 calculations show that when Mr Norton-Baker sought to obtain an estimate of the gross profit margin for the Tindal Subcontract at that point in time, he did not assume that the figure would be the same as that contained in SimPRO at the time that the job was created some six months earlier. Rather, he factored in actual or predicted events as at the time of his own calculations, including the “missed” costs he considered should be included.

116    In May 2018, Mr Norton-Baker prepared a further spreadsheet (May 2018 spreadsheet) based on different information contained in SimPRO at that time. That calculation contained no forecast savings or costs. He described it as a “snapshot” in time to benchmark what the project looked like and the ultimate outcome if the works had continued on their current trajectory. Based on up-to-date information taken directly from SimPRO, the spreadsheet prepared by Mr Norton-Baker at that time produced a net margin of 28.05%. Mr Norton-Baker accepted that figure could be extrapolated as a gross profit of between 31% and 32%. The May 2018 spreadsheet is not a “cost to complete” of the kind discussed below and there is no direct evidence that the spreadsheet was provided to anyone else within the STS Group. However, it does demonstrate the knowledge and practices of Mr Norton-Baker as at May 2018 relating to the continued monitoring of the forecast gross profit margin. The May 2018 spreadsheet reinforces the point that the gross profit margin figure is a product of ever-changing information and may be a product of (among other things) unbudgeted actual costs that may be offset by unbudgeted actual savings. Those swings and roundabouts produced similar gross profit margin figures on Mr Norton-Baker’s calculations in November 2017 and May 2018, notwithstanding that the costs and revenue components might have differed in each analysis, and notwithstanding the factoring of the “missed costs”.

117    This aspect of the evidence shows that Mr Norton-Baker continued to monitor the profitability of the Tindal Subcontract and that when he did so he did not merely adopt the original gross profit margin figure of 31.42% that might have been calculated on the basis of information contained in SimPRO about a year earlier. His processes were more considered and conscientious than that. The evidence shows that as at May 2018, SimPRO was capable of reporting a gross profit margin of between 31% and 32% based on different information to that originally entered into the system at the time that the Tindal Subcontract was awarded. That evidence shows that there exists an alternate reason why the 31% appears in the WIP Forecasts to that pleaded by Optic2. It tends against an inference that the 31% was “taken from SimPRO” in the erroneous way Optic2 contends for.

Alleged “Margin Eroding Costs”

118    It is generally not disputed that around the time of the due diligence process STS-NT incurred higher costs for material, labour and overheads than it had estimated in relation to some Work Elements at the time of preparing the tender. They are the alleged Margin Eroding Costs and are particularised at [58F(B)] of the FASOC as follows:

(1)    $81,617.70 (excluding GST) more than what was expected for ducting material and associated labour, which costs were incurred between June 2017 and around June 2018;

(2)    $150,000.00 (excluding GST) more than what was expected for ducting ceiling supports, which costs were incurred between June 2017 and around June 2018;

(3)    $100,098.00 (excluding GST) more than what was expected for acoustic seals material and associated labour, which costs were incurred between June 2017 and around June 2018;

(4)    $12,945.26 (excluding GST) more than what was expected for seismic rack footings and associated labour, which costs were incurred between June 2017 and around June 2018;

(5)    $159,318.72 more than what was expected to store materials and to accommodate its employees due to delays in commencing each Stage of the Subcontract Works and progressing the Subcontract Works;

(6)    $199,200.00 for additional labour hire services as a result of delays in commencing each Stage of the Subcontract Works and progressing the Subcontract Works, which costs were incurred since June 2017;

(7)    $215,500.00 (excluding GST) for unexpected demobilisation and remobilisation of STS NT’s workforce due to delays in commencing each Stage of the Subcontract Works and progressing the Subcontract Works, which costs were incurred between December 2017 and February 2018; and

(8)    $388,449.99 for works required after the termination of a subcontractor (ABR Group Pty Ltd), including surveying the works completed by that subcontractor and engaging another subcontractor to complete those works, which costs were incurred since 7 March 2018.

119    The specific amount of the costs and the factual events giving rise to them are the subject of a dispute that is largely unnecessary to resolve.

120    Optic2’s case originally involved an allegation that the Margin Eroding Costs had not been included in the preparation of STS-NT’s management accounts. That significant plea was later withdrawn, as were claims for damages in respect of it. As expressly confirmed in Optic2’s closing submissions (and consistent with the evidence of Mr Norton-Baker) the Margin Eroding Costs were largely incurred before June 2018, save for some of the costs attributable to securing an alternative subcontractor to remediate and perform the works previously commenced by ABR. The closing submissions confirm that it is no longer in issue that the Margin Eroding Costs were brought to account and inputted into Xero for the purposes of STS-NT’s financial accounts as and when they were incurred.

121    Importantly, Optic2 also accepts that the Margin Eroding Costs were entered into SimPRO as and when they were incurred. That, too, is consistent with evidence given by Mr Norton-Baker on that topic. Optic2 has not identified any cost actually incurred that was not entered into SimPRO and/or Xero at or around the time of the actual expenditure.

122    Optic2 nonetheless maintains its allegation that there was a failure on YC Investments’ part to identify that the gross profit margin of 31% “did not reflect any margin erosion that had occurred because of the incurring of the margin erosion costs”. That allegation could only proceed from an assumption that the 31% figure was “taken from SimPRO” in the sense that it was based on information that had been entered into the software in June 2017 but not afterward.

123    Such a finding is not supported by the evidence, considered as a whole. As to that part of the Margin Eroding Costs that were yet to be incurred at the time of the due diligence process relating to the remediation and performance of the ABR works by a new subcontractor, Optic2 did not articulate what portion of the Margin Eroding Costs was attributable to that particular event or base an alternative case founded only on a portion of the Margin Eroding Costs incurred after the due diligence reports were prepared. The “costs to complete” analyses referred to below included calculations based on costs associated with the re-contracting of the ABR works, and it is not disputed that the “cost to complete” analyses were performed to value the WIP relating to the Tindal Subcontract for the purposes of preparing the management accounts informing the due diligence process.

Margin Review Paper

124    The pleaded Margin Eroding Costs are set out in an internal Optic2 document titled “Margin Review Paper” first drafted in May 2019, completed on 27 June 2019 (some six months after completion of the Transaction) and later revised in November 2019. The Margin Review Paper was prepared by Mr Norton-Baker on instructions from Optic2’s then board of directors. Neither Mr Ireland nor Mr Rakkas were substantively involved in its preparation. Its purpose was to analyse the cost to complete the Tindal Subcontract on the information known at the time in 2019, and to compare that analysis with the budgeted costs contained in SimPRO at the time of the tender.

125    Other issues raised in the Margin Review Paper are related to the costs of the delayed commencement or continuation of works on the site that were not the fault of STS-NT. They are evidenced by multiple notices of delay issued under the Tindal Subcontract. The uncontested evidence is that costs associated with delays that were not the fault of STS-NT could be the subject of claims by STS-NT against LendLease. Whilst the Margin Review Paper makes reference to costs associated with delays, it does not make reference to amounts that might be received on claims made against LendLease, nor does it indicate whether any such claims had already been made, and if so when. Mr Norton-Baker acknowledged that about 70% of the notices of delay was issued in 2019, after the due diligence for the Transaction was complete.

126    Mr Hurley prepared accounts for the period 1 July 2018 to 30 September 2018 (that is, for the first quarter of FY19) based on actual income and actual expenditure. Those accounts were included in the due diligence material. Again, it has not been suggested that those accounts do not give proper treatment to the so called Margin Eroding Costs or any other cost referred to in the Margin Review Paper that may have been incurred at the time that those accounts were prepared. An earlier pleaded allegation to that effect was withdrawn.

127    Mr Hurley gave unchallenged evidence to the effect that when he performed calculations to be provided in the due diligence process he relied on information provided to him by Mr Norton-Baker concerning the actual costs of performing the works which he understood had been entered into SimPRO as and when they were in fact incurred. His understanding in that regard has not been shown to be wrong. The Court was not taken to iterations of SimPRO to show its actual content at any point in time and it has not been demonstrated that costs in fact incurred were not properly entered into the software.

128    All of that is important context when examining the work performed by Mr Hurley for the purpose of providing information to Optic2 during the due diligence process and the information upon which his calculations were based. It also explains why I do not consider it necessary to make findings as to whether, how and why all or some of the alleged Margin Eroding Costs were incurred.

129    It will be necessary to return to the Margin Review Paper when addressing Optic2’s submissions as to what the forecast gross profit margin ought to have been.

The WIP Forecasts

130    I have mentioned that the WIP Forecasts were prepared on 4 July 2018 and 5 July 2018. They are contained in different iterations of the same Excel workbook. They are the only iterations of that workbook provided to KPMG in the due diligence process. However, they are not the only iterations in evidence. The first iteration in evidence is dated 8 June 2018, and the last is dated 16 August 2018. The 8 June 2018 spreadsheet is already heavily populated with figures. It may reasonably be inferred that work on its preparation commenced some time prior to that day. It is proximate in time to the May 2018 calculations done by Mr Norton-Baker and to calculations undertaken in July 2018, discussed below.

131    In relation to the Tindal Subcontract, all iterations of the workbook contain the same contract price of $7.4m and the same gross profit margin of 31%. It was submitted by Optic2 that the persistence of those figures throughout the iterations requires an inference to be drawn that the 31% figure was based on information taken from SimPRO as it stood in 2017. I decline to draw that inference for multiple reasons.

132    First, I repeat what I said about the paucity of evidence as to how SimPRO worked at a practical level and its ability to produce the 31.42% figure as at mid 2018.

133    Second, the contract price of $7.4m was not the contract price in June 2017. It should not readily be supposed that the person responsible for the relevant entries took care to extract from SimPRO an updated contract price of $7.4m, whilst at the same time extracting from SimPRO outdated information about estimated costs or gross profit margin (assuming that could be done).

134    Third, as I have mentioned, Mr Norton-Baker continually monitored the progress and profitability of the Tindal Subcontract as work on the project proceeded. I have already observed that he produced figures in May 2018 that yielded a projected gross profit margin of 31% based on updated information then contained in SimPRO, including information about actual costs that had by that time been incurred as well as savings that were known to have been achieved at that point in time.

135    Fourth, considering the evidence as a whole, I find that when senior personnel and officers of STS-NT sought information about the progress and profitability of the Tindal Subcontract they did not personally and directly use SimPRO as their source. Rather, they sought the information from Mr Norton-Baker. Mr Norton-Baker did not have a complete recollection of all of the calculations he performed and all of the information he provided. I am satisfied that he was nonetheless a conscientious employee who understood the importance of preparing calculations based on up-to-date information and reasonable assumptions available at the time that the calculations are made. The evidence is such that if any person extracted information from SimPRO to prepare or assist in preparing a forecast of the gross profit margin, that person was Mr Norton-Baker. At the time when all of the iterations of the workbooks came into existence in mid 2018, it is unlikely that Mr Norton-Baker would have responded to requests for information by giving the 31.42% figure based on figures in SimPRO as they existed in June 2017.

136    Furthermore, the email correspondence accompanying the various iterations of the workbook show that Mr Bahnemann was responsible for inputting data into the iterations of the WIP Forecasts. The first iteration is attached to an email from Mr Bahnemann to Mr Norton-Baker on 8 June 2018 by which Mr Bahnemann requested Mr Norton-Baker’s assistance for additional information. However, Mr Bahnemann was not called to give evidence. To the extent that Optic2 invited the Court to speculate that he personally calculated the 31% by the faulty method specified in the pleading, I decline to do so. Mr Bahnemann was the addressee of a subpoena but a decision was made by Optic2 not to call him to give evidence. It may reasonably be inferred that if called, his evidence would not have supported this or any other aspect of Optic2’s case about how the 31% figure came to be included in the WIP Forecasts.

137    In conjunction with other evidence discussed below, that enables me to draw an inference with more confidence that the most likely person to have supplied the figure of 31% for inclusion in the workbooks was Mr Norton-Baker. That is not to make an adverse credit finding against Mr Norton-Baker. To the contrary, I consider him to be an honest and forthright witness, including in his acknowledgment that he did not have a complete recollection of all of the calculations he performed and all of the information he provided.

Cost to complete analyses

138    Mr Hurley prepared management accounts for the STS Group for the financial year ending 30 June 2018 (FY18) as well as for the quarter ending 30 September 2018 and again in October 2018. For that purpose he performed calculations to value the WIP for inclusion as an asset in its balance sheet. To perform those calculations, Mr Hurley requested that Mr Norton-Baker provide information to him about the progress of the works, specifically directed to predicting the likely cost to complete the project. The “cost to complete” analyses were then utilised by Mr Hurley to forecast a net profit margin. It will be recalled that a net profit margin was typically between 3% and 4% lower than a gross profit margin.

139    The cost to complete analyses and the accounts prepared by Mr Hurley are not the same as the WIP Forecasts relied upon by Optic2. However, they do prove some important factual context in determining whether the 31% figure contained in the WIP Forecasts was “taken from SimPRO” as alleged by Optic2.

140    To assist Mr Hurley, Mr Norton-Baker drew information from SimPRO at various points in time which he included in a “cost to complete” spreadsheet. That information included the expenses actually incurred, expenses to be paid on issued purchase orders, the current budgeted revenue (including variations), and a balance of the costs remaining to be incurred. Mr Norton-Baker also provided Mr Hurley with additional information based on his knowledge of the project, including as to where unbudgeted costs might be incurred and where savings might be made.

141    By way of an example of then future events, in mid 2018 the dispute with ABR had not yet resolved and it was necessary to predict the likely cost (if any) of that dispute having regard to best and worst case scenarios. It was also necessary to factor in the savings arising from the original subcontract to ABR. Mr Norton-Baker did not profess to have any expertise in making a judgment about the financial outcome of the ABR dispute. His evidence was to the effect that he prepared rough calculations based on alternative scenarios and that it was for Mr Hurley or the directors of STS-NT to decide among them based on their prediction of the most likely outcome. The ABR dispute affected the liquidated damages contingency, such that if it was resolved at no cost to STS-NT it could reasonably be predicted that the $300,000.00 set aside for that contingency could not be counted as revenue without an anticipated expense associated with it.

142    Neither Mr Hurley nor Mr Norton-Baker said that the gross or net profit margins were calculated by drawing from SimPRO the figure of 31.42% as it originally stood in June 2017 or from calculations based solely on information contained in SimPRO at all. The calculations were more sophisticated than that. They were based on up-to-date information contained in SimPRO at the time that the calculations were performed as well as additional information known to Mr Norton-Baker and conveyed to Mr Hurley.

143    Cost to complete spreadsheets were prepared by Mr Norton-Baker on or around 14 June 2018, 30 July 2018 and 31 July 2018. Both Mr Hurley and Mr Norton-Baker said that the first draft spreadsheets prepared by Mr Norton-Baker were not wholly accepted by Mr Hurley. I accept Mr Hurley’s evidence that he applied his own judgment in respect of the correct methodology for calculating the cost to complete, the net profit margin and the value of the WIP in the management accounts. It is unnecessary to describe that methodology here. It is sufficient to observe that the underlying methodology was not the subject of effective challenge in cross-examination. The controversy surrounded the amounts input into the calculations, particularly in relation to actual and anticipated expenses.

144    Both Mr Norton-Baker and Mr Hurley described the cost to complete process for the Tindal Subcontract as complex. The effect of their evidence was that information drawn from SimPRO was the starting point in the process, not the end point, and that it was then necessary to exercise careful judgment as to what adjustments should then be made. Those judgments included the quantification of expected costs and expenses known or predicted at the times that the relevant forecasts were made. It was plain on their evidence that alternative forecasts may be made depending on the various predictions that could reasonably be made about future events.

145    Mr Norton-Baker was cross-examined on the spreadsheets he prepared or participated in preparing in June, July and August 2018. In each case, the calculations included actual expenses to date incurred as well as expected additional costs that he personally anticipated. It has not been suggested that Mr Norton-Baker withheld from Mr Hurley anticipated costs within his knowledge at the time that the calculations were prepared.

146    There was evidence that both Mr Norton-Baker and Mr Hurley worked very long hours during the due diligence process, that for a short time Mr Hurley was situated overseas and that for another period his wife was very unwell in hospital. Counsel for Optic2 submitted that the circumstances created an environment where errors were likely to occur. The cross-examination did not identify significant error in fact occurring, but I have nonetheless had regard to surrounding pressures when asking whether this aspect of Optic2’s case was established.

147    Two spreadsheets prepared on 30 July 2018 and 31 July 2018 were the subject of particularly detailed cross-examination. The first of them contained an admitted error and so is of limited relevance in its results. However, it demonstrates that Mr Norton-Baker and Mr Hurley continued to assess the cost to complete by a complex process involving known and predicted costs as well as known and predicted savings. Neither of them considered it appropriate to draw the figure of 31.42% directly from SimPRO (again assuming that could feasibly be done).

148    In the spreadsheet dated 31 July 2018, Mr Norton-Baker prepared estimates of the net profit margin in three scenarios, with results of 20.75%, 24.47% and 29.98%. It is not disputed that a net profit margin of 29.98% may approximate a gross profit margin of between 33% and 35%.

149    Mr Norton-Baker acknowledged that the identification of the most reasonable of those scenarios was not for him to make. When pressed, he could not identify a reason why the assessment of the net profit margin at 29.98% would not be reasonable. That figure was based on a scenario that the ABR dispute would cost $100,000.00 to resolve. Later events proved that amount to be too generous as the payment to ABR was ultimately nil. But that is not the point. The point is that at the end of July 2018 there existed a reasonable basis to forecast the net profit margin at 29.98% and, accordingly, the gross profit margin at between 33% and 35%. Importantly, that figure includes allowance for significant extra costs Mr Norton-Baker had identified as having been incurred or that would be incurred, as well as known and anticipated savings.

150    A forecast net profit margin of 29.98% and a forecast gross profit margin of 33.77% were utilised by Mr Hurley to calculate “normalised EBITDA” for FY18 for the purposes of calculating a purchase price in an earlier iteration of a share price agreement. Optic2’s case is not founded on an allegation that those figures were unreasonable or misleading. It did not otherwise attempt to prove that they were wrong as part of its case challenging the forecast for FY19 contained in the WIP Forecasts as at early July 2018.

Other evidence

151    Mr Ireland recalled being involved in the preparation of the First WIP & Forecast Model in early July 2018. On 4 July 2018 he sent an email to Mr Hurley stating:

That leaves the forecast detail - I have offered them our revenue info and our forecast EBITDA numbers as previously sent, stating we will need more time to fully populate. They are happy with that for now. I have finalised all [entities] except NT & SQ and Hagen has sent me (us) the forecast update but I am still waiting for Stuart to finalise the WIP which I would hope will be done by mid-morning tomorrow, I propose that I send the basic forecast to them tomorrow with a copy to you to continue to flesh out.

152    Mr Ireland said (and I accept) that the email confirms his understanding that Mr Norton-Baker was responsible for providing information concerning the WIP in relation to contracts then in progress. The email also supports the inference (and I find) that Mr Ireland himself did not perform calculations for the WIP referred to in the email nor did he prepare the “forecast update”. The email confirms Mr Ireland’s understanding that that task was to be undertaken by Mr Norton-Baker.

153    Mr Ireland said that he had no recollection of making any changes to those entries and does not believe that he did. He said that if he had had any concerns about them, he would have referred his concerns back to (relevantly) Mr Hurley or Mr Norton-Baker. He said that he had no reason to think that any of the entries concerning the gross profit margin of the Tindal Subcontract had not been prepared properly by (relevantly) Mr Norton-Baker. Mr Ireland’s views in that respect are supported by the circumstance that early versions of the spreadsheets that later became the WIP Forecasts had already included the 31% figure from as early as 6 June 2018, as discussed above.

154    In relation to the 31% figure appearing in the Second WIP & Forecast Model, Mr Ireland’s affidavit evidence as to his subjective understanding was that:

The entries in the ‘work in progress’ section on this page would I expect have been populated by Stuart using data from SimPRO and costs to complete discussions with project managers based on previous costs to complete estimates for STS NT’s various projects. I have no particular recollection of reviewing the 31% figure for gross margin shown for the Tindal contract. I understood from internal discussions prior to 5 July 2018 that the projected gross margin for Tindal which had been ‘booked’ for the job (i.e., which was shown in SimPRO initially) was 31%. I expected that, from the revision of costs to complete over the course of the contract, which was Stuart’s responsibility, if circumstances had changed in relation to the Tindal contract which required the gross margin to be reconsidered (whether up or down), I expected Stuart to adjust the gross margin accordingly. I was aware that events had happened on the Tindal project after it had been booked which were likely to affect gross margin, e.g., in relation to ABR, demobilisation and remobilization, and project delays generally. I had no reason to believe that Mark and Stuart had not taken these into account in the regular updating of the costs to complete calculations and therefore no reason to believe that the entries into this spreadsheet were not up to date in this respect.

155    On the basis of that evidence and on the basis of the contemporaneous email correspondence, I am satisfied that Mr Ireland did not insert the 31% figure into the WIP Forecasts nor did he personally perform any underlying calculations to arrive at that figure. I am not satisfied that Optic2 has established a case that Mr Ireland took the figure from SimPRO, let alone that he took it from SimPRO on the basis of information dating back to June 2017, if that is what it intended to allege.

156    The latest iteration of the WIP Forecasts in evidence is attached to an email chain ending on 11 October 2018. It contains a gross margin figure of 32.56% rounded up to 33%. Whilst that spreadsheet is not sued upon, it reinforces my conclusion that there existed a reasonable basis to predict a gross profit margin of between 31% and 33% over several months in 2018, notwithstanding the ever changing circumstances affecting the performance of the Tindal Subcontract.

157    The KPMG September Report contains statements reflecting an understanding about the limitations in SimPRO and the need to utilise more sophisticated methods for analytical reporting. The following extracts from the KPMG September Report are illustrative:

STS use the Simpro System (‘Simpro’) as their job costing program which Management has indicated is not conducive to accounting cut-offs (as it is job completion based) and not useful for drilling down to provide analytical reporting. Management has described the tool as reliable for project management but using the system to provide reporting information can be problematic.

…

...  Accordingly, the gross margin on a job may not be correct.

However, Management indicate that the Xero general ledger system is accurate and correct and is therefore the interface of materials purchase invoices and customer invoicing management.

158    Mr Ireland’s evidence was to the effect that he was aware of the limitations of SimPRO and that he specifically informed representatives of KPMG about those limitations. That is reinforced by KPMG’s statement that “[d]ue to the difficulty in extracting accurate gross margin percentage utilising Simpro, Management has provided each entities’ GM% information for the top 10 projects by revenue for FY17 and FY18”. That supports the inference that the information for the top 10 projects was not sourced from SimPRO (at least not in the particular manner contended for by Optic2), but rather was the outcome of discrete calculations of the same kind that informed the regular cost to complete analyses. The limitations of SimPRO were known to all of those who might have had access to the information in it for the purposes of inputting data into the due diligence process. It is unlikely that any one of those persons would have employed the crude method of calculation upon which Optic2’s claims are based.

159    As I have said, Mr Norton-Baker acknowledged that he did not have a complete recollection of all of the calculations he had performed and all of the communications he had with more senior executives or officers relating to the Tindal Subcontract during the due diligence period. That is not surprising given the volume of work and material he was tasked with and the number of communications passing between the participants at the time. He acknowledged that he regularly completed his own careful analysis of the profitability of the Tindal Subcontract and it has not been suggested that the documents before the Court are exhaustive of those calculations.

160    I am satisfied that when it was necessary to calculate or provide estimates depending upon or including the gross profit margin of the Tindal Subcontract, personnel within STS Group drew on information concerning the progress of the works provided by Mr Norton-Baker. I am satisfied that Mr Norton-Baker prepared (or participated in preparing) his own calculations with care, having regard to his role and level of expertise. It is extremely unlikely that if asked to provide a calculation of the gross profit margin at any point in time he would draw the figure directly from SimPRO as it stood in June 2017, even assuming it was feasible for him to do so. It is more likely that he would have supplied information of the kind he supplied to Mr Hurley for the purposes of the cost to complete analysis, that is, on the basis of up-to-date and complete information concerning the actual past costs and anticipated future costs and not on superseded predictions (reliable or otherwise) made in 2017. That is also consistent with the manner in which he monitored the profitability of the Tindal Subcontract for his own operational purposes from time to time.

161    Mr Strathdee’s evidence on this topic amounted to little more than an assertion that costs and expenses in fact incurred in the performance of the Tindal Subcontract were not in fact entered into SimPRO or indeed in the financial accounts for STS-NT more generally as and when they were incurred. In cross-examination Mr Strathdee could not substantiate that assertion with facts or circumstances personally known to him. It was plain that he had not personally accessed SimPRO or the management accounts for information that would substantiate his broad and serious allegations.

162    In his affidavit (at [108] – [110]) Mr Strathdee deposed to matters that he said had become apparent to him after receiving the Margin Review Paper. His responses in cross-examination on that aspect of his evidence-in-chief proceeded as follows:

Counsel:    Are you able to give any, a single example of something of which you weren’t aware which you say wasn’t disclosed to KPMG in 2018 of which you became aware in 2019?

Mr Strathdee    Not personally aware, no, because I didn’t conduct the diligence.

Counsel:    See, would it surprise you to know that the margin eroding events in 108 all of that, all of those costs insofar as they were incurred in the financial year or in fact as far as they were incurred even up to the first quarter of 2019. So we’re talking up until the 1st of October, 30th of September 2018. All of those costs have been imputed into simPRO?

Mr Strathdee    I don’t believe that they were.

Counsel:    Well, you are, you have simPRO in your possession, Mr Strathdee?

Mr Strathdee:    The company - - -

Counsel:    Why don’t?

Mr Strathdee:    … has it, I don’t.

Counsel:    Mr Strathdee, are you saying to her Honour that you don’t have the capacity now to cause or didn’t have the – most importantly, didn’t have the capacity as part of preparing your case to produce simPRO to prove it. Are you suggesting that to her Honour?

Mr Strathdee    No. Not at all. No, what I’m – when you’re asking me of my knowledge what I’m saying to you in a roundabout way is I don’t get into the level of detail of studying simPRO. I don’t see that as my job. That’s the job of the financing team.

Counsel:    Mr …?

Mr Strathdee:    On whom …

Counsel:    Mr Strathdee?

Mr Strathdee:    … we rely to assess the margin and the costs.

Counsel:    Mr Strathdee, you’ve just given evidence to her Honour about the contents of simPRO, you said, ‘Margin eroding costs were not put into simPRO.’ Do you remember that evidence you gave to her Honour?

Mr Strathdee:    …Mmm.

Counsel:    Well, I’m saying to you that that’s false, there’s positive evidence from your own witness to say that’s false, and that you have the capacity to prove it and you choose not to?

Mr Strathdee:    …I’m sorry, I’m not following your reasoning.

Counsel:    Let me make it very clear to you because I will be putting quite serious matters about this to you, Mr Strathdee. I’m putting to you that you have, within your capacity, the ability to know immediately whether or not any of those margin eroding costs were inserted into simPRO and you either know they are and are holding that back from the court or you have deliberately turned a blind eye to discovering the truth. That’s what I’m suggesting to you?

Mr Strathdee:    …Well, you suggest it, but I disagree with that entirely.

Counsel:    Well, can you give her Honour an explanation as to why her Honour shouldn’t accept a submission to that effect from me?

Mr Strathdee:    …Well, what I know and what I would adduce here is that costs that should have been disposed were not disclosed in simPRO. It’s not a question of whether simPRO is a vestibule and repository of all of those facts, it was in our view that those costs were not properly entered that caused the margin erosion.

163    The impression I formed from that aspect of the evidence was that Mr Strathdee’s testimony was given with a view to supporting a case theory, rather than on the basis of matters personally known to him. The allegations involving the withholding of financial information from management accounts in a due diligence context were particularly serious. However, it was apparent that Mr Strathdee had not reviewed the accounts upon which he relied to satisfy himself that there was a proper factual foundation for the serious allegations he advanced purportedly of his own knowledge in his affidavit. His responses amount to the repetition of a belief having no proper foundation in facts personally known to him.

164    The pleaded allegation that costs and expenses were not entered into the management accounts or into SimPRO as and when they occurred was ultimately abandoned. But it remains a feature of Mr Strathdee’s evidence that he made serious allegations that were factually unsubstantiated. I consider him (at least) to be a careless witness. He ought not to have made bald assertions as to what was or was not recorded in SimPRO or Xero without being able to point to the evidence that could support it. I place no weight on his evidence to the extent that it would otherwise inform the question of whether the 31% figure was taken from SimPRO or as to whether the Additional Amount was wrongly treated as “100% revenue” for the purposes of the 31% figure contained in the WIP Forecasts.

165    The allegation that the 31% figure contained in the WIP Forecasts was “taken from SimPRO” has inadequate support in the evidence, considered as a whole. That conclusion is dispositive of the whole of Optic2’s action against YC Investments, given the confined manner in which it pleaded its case founded on contraventions of the ACL. I will nonetheless deal with the evidence bearing on the remaining pleaded allegations relating to both breach and remedy.

Alleged inaccuracy

166    Apart from the application of s 4 of the ACL, Optic2’s case as to inaccuracy was founded on the asserted failure to factor in known but unbudgeted costs that were said to erode all or most of the Additional Amount, with the result that the $770,000.00 (or most of it) was wrongly treated as “100% revenue”. I have readily accepted that that methodology would have been wrong, had it been deployed. The alleged deployment of that erroneous methodology was the path of reasoning urged by Optic2 in support of its assertion that the 31% figure was misleading or deceptive.

167    Optic2 relied on the Margin Review Paper as evidence of what it claims the gross profit margin “should have been”. The written submissions with respect to that topic state in part:

62    The Margin Review Paper was prepared with the benefit of hindsight and provides an indication as to the appropriate gross margin of the Tindal Project for FY19 (noting that it has been prepared on the basis of work invoiced as at 31 May 2019). It is reflective of the Margin Eroding Costs and / or the Estimated Missed Costs which ought to have been allocated to the Additional Amount / ‘contingency allowance’.

63    The Margin Review Paper reveals that:

(a)    the gross margin on work done as at 31 May 2019 was 20.99%;

(b)    the gross margin on work invoiced as at 31 May 2019 was 21.02%;

(c)    the gross margin on work to complete the Tindal Subcontract was 20.51%; and

(d)    the then total current forecast gross margin for the ‘whole job’ was 20.90%.

64    Given that the relevant financial year for forecasting was FY19, the Margin Review Paper captures almost precisely that year. Accordingly, the best estimate the Applicant can give in respect of what the gross profit margin was in FY19 is approximately 20%.

168    The language of that submission focuses on what Optic2 says the gross profit margin “was” in FY19, presumably based on works completed or in fact invoiced as at May 2019 (encompassing most of the 2019 financial year).

169    There are three difficulties with the submission.

170    First, proof of what the gross profit margin was in fact at a point in time does not of itself demonstrate what a forecast calculated at an earlier point of time should have been.

171    Second, the submissions proceed from the faulty factual assumption that the Additional Amount was treated as “100% revenue” for the purposes of calculating the 31% figure as it appeared in the WIP Forecasts. I have already explained why that factual proposition has not been established.

172    The third difficulty with the submission is that it presupposes that YC Investments made any representation as to what the gross profit margin of the Tindal Subcontract would be in FY19. Optic2’s claim with respect to the gross profit margin was founded (relevantly for present purposes) on an allegation that the WIP Forecasts conveyed a representation that “the total gross profit margin of the Tindal Subcontract was 31%”:  FASOC, [31]. Such a representation says nothing about the timing of expenses and payments in any particular financial year or which part of the profit might be realised in a particular financial year.

173    The 31% figure in the WIP Forecasts is to be understood as a representation as to what was forecast to be the gross profit margin at the completion of the Tindal Subcontract. I am not satisfied that the 31% figure was a representation that in each financial year STS-NT would uniformly receive payments from LendLease, nor was the figure itself a representation that in the 12 month period constituting FY19, there would be profits in fact earned on the Tindal Subcontract equivalent to 69% of the revenue in fact received in that particular financial year. To forecast what the gross profit margin over the life of the contract might be is one thing. To predict how much of the total profit would be realised in a particular financial year is quite another (whether approached in dollar terms or expressed as a percentage of the total contract price). To the extent that there was any unqualified representation of uniformity in the receipt of revenue and the achievement of profits across financial years, that representation was not the subject of Optic2’s suit. To the extent that the submission is based on calculations referring to work invoiced or completed as at May 2019, I do not consider them to be at all helpful in determining what the forecast gross profit margin “should have been” as at September 2018 when the due diligence process was completed.

174    The danger in proceeding on calculations based on invoices actually issued as at May 2019 is illustrated by the uncontroversial fact that the timing of payments from LendLease was dependent upon the completion of works in each Work Element. As such, there were costs associated with the works to be incurred at an early stage of a Work Element that would not be offset by revenue until the work was complete and invoices were issued and paid.

175    It was common ground that payments from LendLease in 2019 were delayed for reasons including Optic2’s inability to commence Work Elements within contracted periods through no fault of its own. Most of those delays are the subject of “Delay Notices” issued after the due diligence period and in most cases after the Transaction itself. I have mentioned that those delays also caused STS-NT to incur costs resulting from the accommodation of personnel on site without work to engage them. It has not been shown that at the time of the due diligence process, costs associated with those delays and any related disruption to revenue were matters that ought reasonably to have been anticipated at the time of the due diligence process. If any such costs had already been incurred as at September 2018, Optic2’s submissions do not grapple with the circumstance that on the evidence of its own witness, Mr Norton-Baker, they were entered into SimPRO as and when they were incurred.

176    I find that the calculation of gross profit margin contained in the Margin Review Paper was one prepared with the benefit of hindsight and after events affecting the profitability of the Tindal Subcontract connected with delays in the performance of the work affecting both expenses and revenue. It was not intended to reconstruct a forecast of the gross profit margin on the basis of information that was known in mid 2018.

177    I have not overlooked that Mr Ireland and Mr Hurley both acknowledged in cross-examination that they did not raise any issue with respect to the Margin Review Paper at the time that it was prepared in May 2019 and later reviewed. However, I place little weight on that acknowledgement because it was not suggested to them at that time that the Margin Review Paper was intended to establish that the gross profit margin could not have been reasonably forecast at 31% on the basis of information known at the earlier time of the due diligence process.

178    To the extent that the parties adduced evidence suggesting reasons why expected revenue or “profits” were not achieved in FY19, I consider that evidence to be of little utility except to the extent that it informs the enquiry about whether events occurred after the Transaction that ought to have been anticipated and factored into calculations at the due diligence stage. Mr Norton-Baker did not state that the significant delays forming the subject of delay notices to LendLease (mostly occurring in 2019) were matters that were known to him at the time of the due diligence process. As the project manager, he was the person with responsibility for tracking the progress and profitability of the Tindal Subcontract and for reporting such matters to (at least) Mr Hurley. I am satisfied that if there were future costs associated with delays in the commencement and invoicing for works in 2018 they were not reasonably able to be predicted by Mr Norton-Baker himself at the time of the calculations discussed below. I am satisfied that if Mr Norton-Baker was able to anticipate the 2019 delays in 2018 he would have diligently brought them to Mr Hurley’s attention as he had done with the anticipated missed costs in fact included in the calculations he performed in mid 2018.

179    Optic2 submitted in the alternative that the forecast gross profit margin figure should have been 16.13%. That figure is selectively drawn from one of the early calculations performed by Mr Norton-Baker in November 2017 discussed earlier. It was submitted that was the “only calculation as to what the gross margin was shaping up to be prior to the FY19 financial year that takes into account both the uncosted contingency and the estimated missed costs”. That submission must be rejected for all of the reasons I have given with respect to Mr Norton-Baker’s methodology and in light of the abandonment of claims that costs incurred during the course of the performance of the contract were not recorded in SimPRO or in Xero. It also cannot be reconciled with Mr Norton-Baker’s own calculations in the May 2018 spreadsheet and his acknowledgment that in late July 2018 there existed a reasonable basis to forecast the gross profit margin in the manner ultimately calculated by Mr Hurley in the cost to complete analysis at between 33% and 35%. Nor can it be reconciled with his acknowledgment that his 16.13% calculation omitted important information.

Other representations

180    My conclusion that the 31% figure was not taken from SimPRO in the particular manner alleged by Optic2 has implications for other representations said to be misleading and deceptive. With respect to the representations concerning the forecast FY19 EBITDA for STS-NT and the STS Group, the case as to inaccuracy proceeded from the assumption that the 31% figure was wrong and that the EBITDA ought to have been calculated by reference to a lower percentage. That is the only positive basis put forward by Optic2 for alleging that the forecast EBITDA representation was misleading and deceptive. Optic2 submitted that the correct EBITDA could be calculated by a process of mere arithmetic by reducing the revenue predicted to be received by STS-NT in FY19 by the difference between the incorrect percentage and the correct percentage. Even if the 31% figure was incorrect, I do not consider the evidence adduced by Optic2 to be sufficient to enable the Court to perform a mere arithmetic task in order to determine what the EBITDA ought to have been. That is because the evidence does not enable the Court to understand the correct methodology for forecasting EBITDA for a particular financial year and the role that a forecast gross profit margin for the life of a particular contract (continuing beyond that financial year forward and backward in time) has to play in the calculation. The ambiguity in this aspect of the case is exacerbated by Optic2’s failure to explain what assumptions as to the timing of revenue ought to have been made with respect to FY19, given that the timing of revenue earned under the Tindal Subcontract was not uniform.

181    The answer to these questions is not apparent on the face of the KPMG September Report or the KPMG October Report. Whilst the 31% figure appears in the KPMG September Report, it does so in the context of several pages of summarised calculations, the methodology for which is not explained on the evidence before me. No witness from KPMG was called in Optic2’s case to explain what assumptions were made as to the timing and receipt of revenue in FY19 referrable to the Tindal Subcontract and how a change in the gross profit margin for the life of the contract might impact on the forecast EBITDA for FY19 as a whole.

182    The consequence of these findings is that Optic2 has not discharged its burden of proof with respect to the allegations that the remaining pleaded representations were misleading or deceptive or likely to mislead and deceive.

183    All that I have said thus far addresses the case presented at trial by Optic2 without reference to the operation of s 4 of the ACL. I will now explain why s 4 does not have the consequence that any one of the pleaded representations must be “taken to be” misleading or deceptive.

Section 4 of the ACL

184    The ACL applies by virtue of Subdiv A of Div 2 of Part XI of the CC Act.

185    Section 4 is extracted at [70] of these reasons. It has a predecessor in s 51A of the Trade Practices Act 1974 (Cth) (TPA), although there was no equivalent of s 4(3) in the superseded provision. The background and intent behind the introduction of s 51A was discussed by Allsop J (as his Honour then was) in McGrath v Australian Naturalcare Products Pty Ltd (2008) 165 FCR 230 (at [165] – [176]).

186    In Ting v Blanche [1993] FCA 781; 118 ALR 543, Hill J identified the relationship between a future representation and the state of mind of the person making it (at 552 – 553):

It will be readily apparent that a representation as to future conduct or a future event will generally imply (and sometimes explicitly state) that the maker of the representation was of a particular state of mind as to the future conduct or event as at the time the representation was made. A representation that a particular occupancy rate for a hotel might in the future be achieved, or, as alleged here, that a particular rent for nominated premises could be achieved in a future letting, impliedly involves a representation that the maker of the representation believed that the occupancy rate or rental could be achieved. It would be no less a representation as to the future by virtue of this implication. If the actual term of the representation is that the maker of the representation is of the view at the time that the occupancy rate or rental nominated could be achieved in the future, does that express statement turn a representation as to the future into a representation as to existing fact?

…

Whatever may be the case where there is an express representation as to the maker’s state of mind concerning a future matter, it is not, in my opinion, correct to treat a representation as to an event or conduct in the future, be that in the form of a prediction or otherwise, as not being a representation with respect to a future matter merely because it implies a representation as to the maker’s present state of mind. The language of s 51A is very wide and the words ‘with respect to’ are, like the words ‘in respect of’ discussed by Dickson J, delivering the judgment of the Supreme Court of Canada in Nowegijick v R (1983) 144 DLR (3d) 193 at 200, (a discussion cited with approval by Toohey J in Smith v FCT (1987) 164 CLR 513 at 533; 74 ALR 411 at 424):

... words of the widest possible scope. They import such meanings as ‘in relation to’, ‘with reference to’ or ‘in connection with’. The phrase ‘in respect of’ is probably the widest of any expression intended to convey some connection between two related subject-matters.

A representation as to future rental, for example, will be a representation with respect to a future matter, even if also, impliedly, a representation as to the existing state of mind of the maker.

187    As to the counterpart of s 4(2) of the ACL, in North East Equity Pty Ltd (ACN 009 248 819) v Proud Nominees Pty Ltd (ACN 074 270 938) [2012] FCAFC 1; 285 ALR 217, Mansfield, Greenwood and Barker JJ said that s 51A(2) of the TPA imposed an “evidential burden” on the respondents to adduce evidence on the issue of whether there was reasonable grounds for making the representations there under consideration. Their Honours continued:

28    … No persuasive burden (onus) falls upon the respondents to prove that they had reasonable grounds:  Australian Competition and Consumer Commission v Universal Sports Challenge [2002] FCA 1276; Fubilian Catering Services Ltd v Compass Group (Aust) Pty Ltd [2007] FCA 1205; McGrath v Australian Naturalcare Products Pty Ltd (2008) 165 FCR 230; 246 ALR 514; [2008] FCAFC 2.

…

30    However, the question of whether a respondent had, at the time of making the representation as to the future matter, reasonable grounds for making it, is particularly illuminated by the knowledge, understanding, or reasoning of the respondent. Section 51A(2) therefore casts an evidential burden on the respondent to adduce evidence on that issue, that is, some evidence ([33], first Full Court decision) of reasonable grounds for making the representation, failing which the deeming effect of s 51A(2) is engaged thus making it unnecessary for the applicant to prove the second integer under s 51A(1) in order to establish a contravention of s 52. Once evidence is adduced by a respondent in discharge of the evidential burden, the applicant must satisfy the dispositive burden of showing that the respondent did not have reasonable grounds for making the representation.

188    The nature and sufficiency of the evidence to be adduced in a particular case must of course depend on the meaning conveyed by the representation and the facts and circumstances said by the respondent party to support it. In Sykes v Reserve Bank (1998) 88 FCR 511, Heerey J said (at 513):

If there was a representation as to a future matter, s 51A requires the representor to show:

•    some facts or circumstances

•    existing at the time of the representation

•    on which the representor in fact relied

•    which are objectively reasonable and

•    which support the representation made

189    I do not consider his Honour to there be making an exhaustive statement of the law applicable to all class of cases, nor should the list in Sykes be applied as if it were a substitute for the words of the statute. His Honour’s checklist does not account for a case in which the respondent party reasonably relies on the expertise of another person who in turn has based his or her opinion on existing facts or circumstances or facts and circumstances reasonably predicted to occur in the future.

190    More recently, in Australian Competition and Consumer Commission v Woolworths Group Ltd (2020) 281 FCR 108 (Foster, Wigney and Jackson JJ) the Australian Competition and Consumer Commission (ACCC) alleged that the respondent (Woolworths) made representations as to future matters with respect to products in the nature of disposable cutlery and crockery. The product packaging featured the statements “Biodegradable and Compostable” and “Made from a renewable resource”. Woolworths denied that the statements in question were statements about future matters. It alleged that the statements were about the inherent features of the products, namely that they presently had the characteristics of being biodegradable and compostable. At first instance, the trial judge concluded that the ACCC had not established that the pleaded representations with respect to future matters were made. Her Honour found that the statements on the product packaging were statements of present fact, namely that they were biodegradable and compostable. They were not representations as to future matters, nor were they proven to be untrue.

191    On appeal, the ACCC argued that the trial judge ought to have concluded that the representations made by Woolworths as found by her Honour were representations as to future matters, that Woolworths did not have reasonable grounds for making the representations as found, and that accordingly the representations as found should be taken to be misleading and deceptive because of the operation of s 4 of the ACL.

192    The Full Court extracted at length the reasons of the trial judge as to the meaning of the phrase “with respect to a future matter” and other critical aspects of s 4 of the ACL. That analysis included a discussion of matters to be demonstrated by the respondent party, as identified by Heerey J in Sykes. The Full Court emphasised (at [75]) that it did not want to be understood as accepting that everything Heerey J said was correct.

193    In the result, the Full Court concluded that the words “biodegradable” and “compostable” did not convey any meaning that related to a future matter and so dismissed the appeal.

Representation with respect to a future matter

194    YC Investments denies that the representations subject to this claim were with respect to any future matter within the meaning of s 4:  AD, [89]. In closing submissions it contended that the representation of 31% “was not a representation as to a future matter as it was a representation as to ‘the nature, quality, character or capability’ of the Tindal Subcontract which was capable of being proven to be true or false when made’” of the kind discussed by the Full Court in Woolworths (at [132]). It also submitted that the representation concerning the 31% gross profit margin was in the nature of an opinion.

195    The judgment in Woolworths does not support YC Investments’ contentions. As to general principle, the Full Court (at [129]) accepted without qualification the following extract from Woolworths’ written submissions:

There is therefore an unusually clear indication of the mischief which s 51A was designed to address — the difficulty of establishing the state of mind of a representor in relation to a prediction, promise or similar statement about the future. What s 51A was not designed to do was to reverse the onus in relation to conventional representations of fact already actionable under the existing provisions. Such representations did not, and do not, give rise to difficulties of proving a state of mind. They were, and are, either true or false — and capable of being demonstrated to be so — at the time that they are made, and irrespective of the state of mind of the person making them. As the trial judge observed (at [103]), that construction is also consistent with the concept of ‘reasonable grounds’, the purpose of which ‘is to require an appropriate basis for the state of mind (being the opinion or prediction) disclosed by the representation’.

Section 4(1) is in near identical terms to s 51A(1). There is nothing in either the language or context of s 4 to suggest that it was intended to depart in any relevant sense from its predecessor (as to which, see the Explanatory Memorandum to the Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010 at [2.22]-[2.27]). The mischief to which the provision was addressed remained that of proving that statements not presently capable of being true or false were nevertheless misleading.

That history also accords with the natural meaning of the term ‘future Matter’ — as something occurring in the future, the accuracy of which is thus not presently ascertainable. It is also consistent with a stated object of the CCA— the protection of consumers. In line with that object, s 4 does not apply to representations which are true when made because, in such circumstances, no consumer will be misled, nor in need of protection.

(Emphasis in original.)

196    In applying those principles, the Full Court made it plain that the phrase “representation with respect to any future matter” may encompass a representation taking the form of an opinion or prediction that an event will occur in the future. The reasoning at [134] puts beyond doubt that an opinion as to the future profitability of an enterprise may fall within the expression:

It may be possible for a representor to make a double-barrelled representation or more than one representation in more or less the same breath. For example, a vendor of a business might state to a prospective purchaser of that business that the business had earned $1 million profit in each of the last five years and that, in his opinion, based upon that experience, the business would be likely to earn at least $1 million profit on average for the next five years. In that example, the first statement is a representation of an existing fact and the second is a representation with respect to a future matter viz the likely future profit of the business. We interpolate that there are probably two distinct representations in this example.

197    I accept that an opinion or prediction as to the profitability of a contract may be based in part on facts that are capable of being shown to be true or false at the time that the prediction is made. But a prediction that is based in part on present or past facts nonetheless remains a prediction, that is, an opinion about what will happen in the future. In a case of that kind, it remains open to a respondent party to adduce evidence that there existed a reasonable factual basis for the opinion, which may include facts that were true or reasonably assumed to be true at the time that the prediction based on them was made, and which may also be based in part upon events that might reasonably be expected to occur at a later time.

198    As to its inherent qualities, the Tindal Subcontract was an agreement creating legal relations in the nature of contractual rights and obligations between STS-NT and LendLease. STS-NT’s right to be paid was contingent upon it performing its contractual obligations. Whether the performance of those obligations would or might result in a profit to STS-NT was not a characteristic of the contract but an expectation on the part of STS-NT that the revenue it was legally entitled to receive would exceed, by a specific margin, the cost of its performance. The existence of a difference between costs and revenue is not an inherent characteristic of the Tindal Subcontract, but an expectation based on matters external to it:  the expense of performing the works.

199    The representation as to the gross profit margin was one relating at least in part to a future event, namely the total profit to be enjoyed by STS-NT (expressed as a percentage of the payments from LendLease) as at the date of its completion. In accordance with s 4(1) of the ACL, the representation will therefore be taken to be misleading if the person making the representation did not have a reasonable basis for making it.

200    It is now necessary to identify whether s 4(2) of the ACL has the deeming effect contended for by Optic2.

The 31% figure: application of s 4(2) of the ACL

201    I have already explained why I am not satisfied that the 31% figure was based on data contained in SimPRO as at June 2017. Had I found otherwise, it might have been difficult for YC Investments to show that there was a reasonable basis for forecasting the gross profit margin in mid 2018 by such means, especially if actual costs were not recorded in SimPRO and if there were future costs that could reasonably be anticipated that were not taken into account. YC Investments accepts that a prediction based on that data could not properly be done in mid 2018. It did not seek to meet Optic2’s case by asserting that it would have reasonable grounds to predict a 31% profit margin by relying solely on information contained in SimPRO in June 2017.

202    In determining whether YC Investments has adduced evidence sufficient to meet the requirements of s 4(2) it is necessary to identify the natural persons whose states of mind are relevant.

203    The allegation of contravention of the ACL is made against YC Investments as a corporation. It is the only respondent joined in the proceeding. It is the “person” against which the allegation of misleading and deceptive conduct is made, and the FASOC pleads the case in terms that attribute the representations to YC Investments.

204    The proceedings are brought under Pt XI of the CC Act, which also contains s 139B. It provides:

(1)    If, in a proceeding under this Part or the Australian Consumer Law in respect of conduct that is engaged in by a body corporate and to which this Part or the Australian Consumer Law applies, it is necessary to establish the state of mind of the body corporate, it is sufficient to show:

(a)    that a director, employee or agent of the body corporate engaged in that conduct within the scope of the actual or apparent authority of the director, employee or agent; and

(b)    that the director, employee or agent had that state of mind.

(2)    Any conduct engaged in on behalf of a body corporate:

(a)    by a director, employee or agent of the body corporate within the scope of the actual or apparent authority of the director, employee or agent; or

(b)    by any other person:

(i)    at the direction of a director, employee or agent of the body corporate; or

(ii)    with the consent or agreement (whether express or implied) of such a director, employee or agent;

if the giving of the direction, consent or agreement is within the scope of the actual or apparent authority of the director, employee or agent;

is taken, for the purposes of this Part or the Australian Consumer Law, to have been engaged in also by the body corporate.

205    Section 4(2) of the ACL requires an examination of the state of mind of YC Investments in connection with conduct in the form of a representation. The relevant state of mind is that of the director, employee or agent whose conduct relating to that representation is attributable to YC Investments. I have already concluded that the 31% gross profit margin was mostly likely calculated by Mr Norton-Baker. It was then conveyed to KPMG (and hence Optic2) by an email from Mr Ireland attaching the WIP Forecasts.

206    It is not at all unusual for a company (often by a director) to rely upon the expertise of suitably qualified employees. When that occurs, the director may be understood to have adopted and conveyed the opinion as that of the company and so cause the company to assume responsibility for it. In the circumstances, the question of whether YC Investments had reasonable grounds for making the representation may be answered by scrutinising the state of mind of those persons responsible for providing the information to Mr Ireland for supply to KPMG. If those persons had no reasonable basis for the 31% figure then it seems to me that YC Investments’ state of mind should be adjudged accordingly and the evidentiary onus under s 4(2) would not be fulfilled.

207    At [89] of its AD, YC Investments particularised the evidence it adduced for the purposes of s 4 of the ACL, being particular parts of the affidavits of Mr Ireland, Mr Rakkas and Mr Hurley. Some of that evidence was subject to rulings with respect to its use under s 136 of the Evidence Act. The evidence was not otherwise subject to effective challenge with respect to the asserted facts. Subject to my rulings, I accept the evidence and make findings to the effect stated in the particularised portions of the affidavits. YC Investments also adduced evidence from Mr Norton-Baker in cross-examination and that evidence has already formed the basis of my findings as to the source of the 31% figure. Some of the particularised evidence has only marginal relevance but it is necessary to summarise its effect for the complete context.

208    Mr Hurley was employed as the Chief Financial Officer of STS-NT by Mr Rakkas and Mr Ireland in 2013.

209    Both Mr Rakkas and Mr Ireland worked closely with Mr Hurley from that time and (relevantly) until the Transaction. Both directors held the view that Mr Hurley was committed to his work, that he was knowledgeable and that his work was particularly detailed. Both of them considered Mr Hurley to be extremely capable and they trusted him in the performance of his duties.

210    Mr Hurley’s qualifications and experience were set out in his affidavit. It is unnecessary to recite them here. It has not been suggested nor shown by Optic2 that Mr Hurley performed calculations or other work that he was not suitably qualified or experienced to perform. I find that he was so qualified. Given Mr Hurley’s experience and qualifications it was not unreasonable for Mr Rakkas and Mr Ireland to employ Mr Hurley in the role of Chief Financial Officer and to entrust him with the performance of duties in that capacity.

211    Mr Norton-Baker was employed as the Operations Manager for STS-NT in or around late 2014. He reported to Mr Ireland, Mr Rakkas and Mr Hurley with respect to budgets and other financial matters. Mr Norton-Baker was called as part of Optic2’s case and it has not been suggested that he lacked the experience or qualifications to perform the duties of Operations Manager including in respect of budgetary and financial matters. I have already recorded my observation of Mr Norton-Baker as an earnest witness and my finding that he was a conscientious employee.

212    Mr Bahnemann was employed in 2015 as head of sales and business development. He was given full authority to tender for projects within certain parameters.

213    Mr Ireland said that his email to Mr Hurley of 4 July 2018 regarding the WIP Forecasts reflected that the principal responsibility for completing STS-NT’s section of the forecasts rested with Mr Norton-Baker. He said that he understood that Mr Norton-Baker would base the forecasts on data from SimPRO as well as cost to complete discussions. He said that if the gross profit margin changed it was Mr Norton-Baker’s responsibility to bring that to his attention. He said that he had no reason to believe that Mr Norton-Baker and Mr Hurley would not take into account matters affecting the gross profit margin in regularly updating the cost to complete calculations. It was on that basis that he said that he had no reason to believe that the calculations had not been prepared properly, and that if he had any concerns about them he would have raised them with Mr Hurley, Mr Norton-Baker or Mr Bahnemann.

214    Mr Ireland said that he was aware of later forecasts undertaken in October 2018 relating to the quarter ending 30 September 2018 showing a gross profit margin of 33%. He said that nothing about that change struck him as unusual and that he had no reason to believe that the information was incorrect or not properly prepared. He said that in his experience margins of the kind referred to in the spreadsheet were not unusual.

215    Mr Rakkas had little to do with providing due diligence information directly to KPMG and Optic2. He said that Mr Hurley informed him in mid 2018 of the calculations he was preparing and had discussions with him about his assumptions and opinions. Mr Rakkas went on to say (at [46]):

…

b.    I did not keep track of what was being told to KPMG or Optic about the gross margin on Tindal by my staff. I knew it was more than 26% (as per my understanding of margin as above) because they would have required my authority to go below that. I was paying Mark, Stuart and Hagen to deal with due diligence and forecasting. I had hand-picked the three of them and hired them, paid them well and trusted them implicitly and still do. I have never had any reason to doubt their competence and honesty. I was not aware of whether and if so what figures had been given for the gross margin for the Tindal subcontract or for the gross margin for the variation works for work element 15 for the purposes of the transaction. I relied on Mark, Stuart and Hagen to work up details like that.

c.    On work like the Tindal subcontract, I would expect the gross margin to be between 30% and 40%. A 31% gross margin for Tindal (as per my understanding of gross margin as above) does not surprise me at all;

216    I have already made findings with respect to the calculations performed by Mr Hurley in 2018 relating to the gross profit margin and specifically for the purposes of preparing management accounts for STS-NT. In his affidavit, Mr Hurley set out in some detail the methodology employed in performing his calculations. It is not necessary to set out that evidence here. Optic2’s singular attack was an accusation that the material upon which Mr Hurley relied did not include data about costs that had in fact been incurred or that were expected to be incurred. That aspect of its case has failed and Optic2 erected no other compelling basis upon which the competency of Mr Hurley or the correctness of his work could be called into question.

217    Mr Hurley nonetheless said that he did not input the figure of 31% into the WIP Forecasts nor did he review that figure at the time and I accept that evidence. He said that Mr Norton-Baker as Operations Manager was responsible for the inclusion of that information because he was the person who had firsthand knowledge of the progress of the Tindal Subcontract. Mr Hurley said that having worked with Mr Norton-Baker for several years he considered him to be a capable professional who could be relied upon to perform his functions competently. He said the same of Mr Bahnemann. The email from Mr Ireland to Mr Hurley on 4 July 2018 states that Mr Ireland was awaiting calculations from Mr Norton-Baker and I have accepted that was in fact the case.

218    I have emphasised that Mr Norton-Baker was conscientious in his work. I have found he is unlikely to have performed calculations based on outdated information contained in SimPRO as at June 2017 when considering a forecast gross profit margin in mid 2018.

219    In short I consider that the trust vested by Mr Ireland, Mr Rakkas and Mr Hurley in the diligence and competency of Mr Norton-Baker was not displaced. Nor was the trust placed in Mr Hurley by the two directors.

220    On the basis of the whole of the evidence, I find that YC Investments had within its employ suitably qualified and experienced personnel to carry out tasks for which it was responsible in the due diligence process. Those personnel (particularly Mr Norton-Baker) had in place a method of monitoring the gross profit margin of a major contract over the course of its life that involved regular reviews based on information that was continually updated and the reasonable prediction of future events. As to whether YC Investments had a reasonable basis for making the representation with respect to the 31% gross profit margin, that reasonable basis is to be found in the aggregate of knowledge, beliefs and systems within the organisation, but particularly in the practices of Mr Norton-Baker. I am positively satisfied that if he was aware of costs that ought to be included in his calculations (whether or not budgeted for) he would have made provision for them, as he did with the significant “missed costs” amount. As I have said, Mr Norton-Baker acknowledged that in a number of months over mid 2018 the gross profit margin varied, but in proximate times before and after the provision of the WIP Forecasts to KPMG the figures were generally in the order of 31%, sometimes a little less, sometimes a little more. There was an objectively reasonable basis for those proximate calculations and therefore a reasonable basis for the representation in the WIP Forecasts.

221    To the extent that Mr Ireland was the single individual who transmitted the WIP Forecasts to KPMG and Optic2, I find that he reasonably relied upon the proper performance of tasks by personnel who were qualified to perform them and that there was a reasonable basis for those persons to perform their tasks in the way that they did. Contrary to Optic2’s submissions with respect to the ACL claim, I do not consider it was necessary for Mr Ireland to personally scrutinise the calculations resulting in the 31% figure contained in the WIP Forecasts and to satisfy himself of the existence of every underling existing fact or circumstance or the reasonableness of every future assumption embodied within it. The impugned representation is not the result merely of the conduct of Mr Ireland but the conduct of a number of personnel working in conjunction with each other under an appropriate system of delegation and deputisation. Considered in the aggregate, there was a reasonable basis for making the forecast of a 31% profit margin for the whole of the life of the Tindal Subcontract as at the date that the representation was made.

222    I am accordingly satisfied that YC Investments has discharged the burden under s 4(2) of the ACL, by adducing “evidence to the contrary” with the result that YC Investments cannot be deemed not to have had a reasonable basis to make the representation as to the forecast gross profit margin.

223    I am positively satisfied that there existed a reasonable basis for YC Investments to make the representation, such that the representation will not be taken to be misleading because of the operation of s 4(1). It may be that it is not necessary to go so far given that s 4 places no burden of proof on YC Investments:  ACL, s 4(3)(b).

224    I have otherwise rejected Optic2’s case that the representation was inaccurate and so conclude that the alleged contravention of the ACL has not been proven with respect to the forecast gross profit margin.

Section 4 and other representations

225    The pleaded representations concerning the FY19 forecast profit and EBITDA are also representations with respect to future matters. As made in mid 2018, they were predictions about a financial outcome anticipated to occur at a later time, namely the end of FY19.

226    The evidence adduced by YC Investments for the purpose of s 4(2) of the ACL in relation to the remaining representations is that summarised above.

227    The forecasts as to profit are contained in a document titled “STS Group Management Accounts – FY18 and FY19 Summary”. The representations therein must be taken to be subject to a number of qualifications. I am satisfied that the provision of forecasts to KPMG was subject to qualifications in terms set out in the KPMG September Report which emphasise, among other things, that they are in the nature of opinions.

228    Optic2 has not established a positive case that there was no reasonable basis for the making of the forecasts contained in the Management Accounts document as so qualified. It relies on the deeming effect of s 4(2) of the ACL. In respect of the remaining future representations, YC Investments adduced the same evidence summarised above, including evidence as to the cost to complete analyses conducted within its business by qualified personnel. The evidence otherwise shows that up-to-date information with respect to the ongoing costs of the Tindal Subcontract was recorded in Xero, the accounting software from which information for the Management Accounts was drawn. My findings with respect to the responsible process of deputisation and oversight within the STS Group apply equally to the preparation of the Management Accounts and EBITDA forecasts. YC Investments has satisfied the evidentiary onus under s 4(2) of the ACL in relation to them. For completeness, I am positively satisfied that the FY19 EBITDA forecasts were not based on calculations that wrongly treated the Additional Amount as 100% revenue.

229    The remaining representations should not be “taken to be” misleading and deceptive because of the operation of s 4(1) of the ACL.

Reliance, causation and loss

230    The plea for damages founded on alleged contraventions of the ACL was in the following terms:

93    By the contraventions of section 18 of the Australian Consumer Law referred to in paragraph 90 above, the applicant has suffered loss and damage.

Particulars

The loss suffered is:

(A)    the difference between the Purchase Price and the true value of the STS Business; or

(B)    alternatively to (A), the difference between the Purchase Price and the price that the applicant would have paid under the Final Share Purchase Agreement if the respondent:

(1)    had not breached the Warranties;

(2)    further or alternatively, had disclosed one or both of the Undisclosed Margin Matters;

(3)    further or alternatively, had not made the Warranty Representations;

(4)    further or alternatively, had not made the Disclosure Material Representations; and

(5)    further or alternatively, had not made the Financial Due Diligence Representations,

alternatively the loss of opportunity paying that price.

The calculation of the applicant’s loss and damage will be the subject of expert evidence.

231    Despite the closing words, no expert was called to give evidence concerning the calculation of the alleged loss.

232    In light of the findings made thus far, the occasion to assess loss and damages does not arise.

233    I will nonetheless make some findings on those topics to explain why I would have otherwise dismissed the originating application had any contravention of the ACL been established.

234    Optic2 did not press the allegation that there would have been no transaction at all were it not for the contraventions it alleged. In light of that abandonment, the case as to reliance and loss fails at a number of levels. In summary:

    As identified above, the evidence fails to address and explain the connection between the alleged misrepresentation of 31% and the manner in which EBITDA was calculated so as to demonstrate for the purposes of quantifying damages what the forecast EBITDA (properly assessed) ought to have been. At the very least, the Court does not know how revenue is to be treated in the calculation of EBITDA for a particular financial year and how the 31% figure factors into the forecast.

    Optic2’s closing submissions fail to grapple with terms of the Final SPA that make express provision for there to be an adjustment in the consideration paid for the shares in the event that the forecast FY19 EBITDA for STS Group was not reached.

    It has not been established that the natural persons responsible for causing Optic2 to enter into the Final SPA placed any reliance at all on the pleaded representations. Moreover, to the extent that Optic2 relied on a counter-factual involving an alternate transaction, it has not been shown that the alternate transaction is one that Optic2 would and could have entered into, nor has it been shown that YC Investments would have sold the shares to Optic2 on the alternate terms.

    Relatedly, to the extent that Optic2 relied on a counter-factual involving an alternate transaction, the terms of the alternate transaction remain unclear to the Court and, accordingly, the value of that alternative is not able to be quantified.

    The evidence was inadequate to support other bases for an award of damages asserted in the course of closing submissions.

235    It is unnecessary to say anything further on the first topic.

The Earn-out Payment

236    The consequence of the actual EBITDA for FY19 being greater or lesser than the forecast figure was the subject of express agreement between the parties.

237    By clause 2 of the Final SPA, each Seller agreed to sell the Seller’s shares to Optic2, and Optic2 agreed to buy the shares from the Sellers for the Purchase Price on the completion date. Clause 2.2 of the Final SPA provided that the total amount to be paid for the shares included the “Earn-out Payment”.

238    Clause 8 is titled “Earn-out Payment”. It provides a detailed regime concerning the calculation of the actual EBITDA for FY19 and sets out the consequences that would follow should the actual EBITDA be more or less than the forecast EBITDA on which the Purchase Price was based.

239    The parties agreed that the Earn-out Payment was to be calculated in accordance with a formula specified in Schedule 14 to the Final SPA. For the purposes of that formula “T” is the “target EBITDA” of $6,007,450.00 (representing the forecast EBITDA of all target companies in the acquisition of the whole of the STS Group including but not limited to STS-NT). “A” is the actual FY19 EBITDA calculated in accordance with the detailed regime provided for in clause 8. The formula is to the effect that:

    If A equals T, the Earn-out Payment is $2,300,000.00.

    If A exceeds T then then the Earn-out Payment is $2,300.000.00 plus double the difference.

    If A is less than T, then the Earn-out Payment is $2,300.000.00 less double the difference.

240    There is an agreed cap on the Earn-out Payment of $3,450,000.00.

241    The figure of $2,300.00.00 forms a part of the Purchase Price, with the intention that there be a deferral in payment of that part until the actual trading outcome was known.

242    These provisions present formidable difficulties for Optic2’s case founded in reliance on the forecast FY19 EBITDA, particularly insofar as it advances a claim that it would have paid less for the shares had the alleged inflated EBITDA forecast not been made. In the circumstances of a contract making express provision for a payment in the event that the forecast was for any reason inaccurate, I am not prepared to draw an inference that Optic2 relied on any misrepresented forecast to its detriment. The amount of the alleged detriment would in any event need to be calculated having proper regard to the actual outcome of the formula provided for in Schedule 14 to the Final SPA having regard to all of the known facts. Optic2 did not adduce evidence to show what the actual FY19 EBITDA was, nor to show how the Earn-out Payment would alter if the target EBITDA “T” was reduced. Had T been lower, Optic2 would have been required to pay a higher Earn-out amount. That circumstance cannot be ignored in the assessment of damages, but the Court has been provided with no assistance in respect of it.

Absence of critical witnesses

243    There is then the issue of witness testimony (or more precisely the lack of it) going to Optic2’s alleged inducement into the Final SPA in any event.

244    Optic2 called no witness to explain how he or she relied upon the forecast FY19 EBITDA at all in deciding whether to cause the company to enter into the Final SPA. Its only witness on the topic of alleged reliance and loss was Mr Strathdee. As a current director of Optic2’s holding company it may be accepted that Mr Strathdee is authorised to give evidence in the proceeding on Optic2’s behalf. However, at the time of the Transaction he was not a director, officer or employee of any company in the OS Group and cannot speak of his own knowledge as to Optic2’s state of mind in the period preceding the Final SPA. As at mid July 2018, the natural persons acting as key decision-makers and proponents of Project Malibu on behalf of OS Group included at least Mr Jason Cherrington (OS Group Chief Executive Officer), Mr Chris Giufre (a director) and Mr Jan-Paul Mowat (also a director). Mr Strathdee told the Court that the acquisitions were led by Mr Giufre and described him as a central promoter.

245    In accordance with Jones v Dunkel (1959) 101 CLR 298 it may be inferred that had Mr Giufre, Mr Cherrington or Mr Mowat been called, their evidence would not have supported Optic2’s case as to causation. But my findings with respect to the questions of causation and reliance do not depend on an inference of that kind. It is sufficient to observe that Optic2 did not adduce evidence from persons who could depose to the company’s state of mind from their own knowledge resulting in a lack of evidence sufficient to support its claimed entitlement to reliance-based remedies.

246    I accept that Mr Strathdee was influential in decisions made by Arena in determining the terms of finance to be offered to the proponents of Project Malibu to finance the multiple acquisitions. I also accept Mr Strathdee’s evidence that the re-forecasts performed in the due diligence period were in part intended to enable Optic2 to provide financial information to Arena concerning the financial position of STS Group to inform Arena’s decisions on its finance offering.

247    However, Mr Strathdee’s role at that time was to advance and protect the interests of Arena as a creditor in its dealings with OS Group. To the extent that Mr Strathdee referred to Arena’s appetite for risk, that appetite relates to that of the financier of the Buyer in the Transaction, not the Buyer itself. Even if I were to accept that Arena’s terms of finance were conditioned upon the Final SPA between Optic2 and YC Investments being in different terms, there is no evidence from any decision-maker within Optic2 to the effect that it would have been agreeable to such terms of finance at the relevant time. There is evidence that Arena had an exclusivity arrangement with the relevant entities that prohibited them from seeking finance elsewhere for a period, but that is insufficient to support an inference that those who controlled the purchasing entity (ultimately Optic2) would have acceded to different terms of finance of a kind that altered the amount or structure of the consideration to be paid under the Final SPA.

248    Finally on this topic, Mr Strathdee said that if the alleged misrepresentations were not made, the risk associated with the purchase would have been assessed differently by Arena causing it to insist on the purchase price being calculated by reference to a different multiple other than the multiple of 5.5 as recorded in the Final SPA. However, the alternate multiple and the methodology for arriving at it was not clearly articulated, and an alternate transaction based on such a multiple was not shown to be one that YC Investments would have entertained.

Unpleaded alternate transaction

249    Mr Strathdee asserted that had he known the true position with respect to the forecast FY19 EBITDA he would have been alerted to volatility in the cash flows of the STS-NT business and assessed Arena’s investment at a higher risk. He asserted that the volatility would have caused Arena to require (as a condition of providing finance) that the purchase price for the shares be structured in such a way as to require a different ratio of cash and scrip. However, he did not specify what that ratio of cash to scrip might be. Whether Optic2 would have acceded to such a condition in the provision of finance is not established on the evidence.

250    Optic2 has made no application under the ACL for any variation to the Final SPA, nor has it adduced evidence to enable the Court to assess the quantum of any claimed damages or compensation under s 236 or s 237 of the ACL by reference to an alleged alternate contract involving a different ratio of cash and scrip. Moreover, on the unproven assumption that YC Investments would have agreed to the alternate ratio of cash and scrip, it seems to me that in the assessment of remedies, those persons who received the “scrip” would and should be entitled to a greater quantity of shares than that which they received. There is no form of order proposed on Optic2’s case that articulates how the current positions between the parties to the proceeding could or should be altered. It is unclear how that could be done without affecting the interests of other parties to the Final SPA who are not joined as parties in this proceeding.

251    In the absence of a clear articulation of what an alternative share purchase agreement would have looked like, it cannot be shown that YC Investments and all other parties to the Final SPA could and would have entered into it, and the Court has had no assistance in the formulation or quantification of any relief based on the alternate scenario in any event.

Other asserted bases for an award of damages

252    To the extent that Optic2 based its claim for damages on an assertion that the Purchase Price for the shares ought to have been a reflection of the true value of the STS Group, there is no evidence as to what the true value of the shares was at the time that the Transaction was entered into, nor is there evidence to assist the Court to identify the proper method for performing any such valuation.

No time bar

253    YC Investments submitted that clause 13.5 of the Final SPA (discussed below) operated as a contractual bar to the commencement of a claim alleging contravention of the ACL. It maintained and reserved that position in closing submissions, but acknowledged that it was inconsistent with the decision or Riordan J in Brighton Australia Pty Ltd v Multiplex Constructions Pty Ltd (2019) 56 VR 557. In that case, his Honour concluded at [129] – [130] that any contractual provision that temporally limited an applicant’s remedy under the ACL would be contrary to public policy and therefore void. YC Investments submitted that the judgment in Brighton Australia was wrong. However, it acknowledged that the decision was not “plainly wrong” and so should be followed by a single justice of this Court. I accept the submission that the decision of Riordan J is not plainly wrong. In accordance with the principles stated by the High Court in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492 the decision should be followed. On that basis, I reject the submission that clause 13.5 of the Final SPA precludes the commencement of this proceeding to the extent that it includes allegations of contraventions of the ACL.

ALLEGED BREACH OF CONTRACTUAL WARRANTIES

254    Schedule 5 to the Final SPA contains “Seller Warranties” including the following:

7    Information

7.1    Information

The information in the Disclosure Material:

(a)    so far as the Sellers are aware, is true, complete and not misleading or deceptive whether by omission or otherwise; and

(b)    where consisting of opinions, expectations or beliefs, is honestly held and has been arrived at on a reasonable basis after full enquiry.

255    They will be referred to respectively as Warranty 7.1(a) and Warranty 7.1(b). Claims for breach of other warranties contained in Schedule 5 to the Final SPA have been abandoned.

256    Clause 13 has the heading “Seller Warranties and limitations of Claims”. Sub-clause 13.1 and 13.2 of the Final SPA relevantly state:

13.1    Giving of Seller Warranties

(a)    Each Seller severally;

(i)    represents and warrants to the Buyer that each of the Seller Warranties applicable to that Seller or any Group Company in which that Seller holds Shares:

…

(C)    in the case of the Seller Warranties at paragraphs 6(d) and 7.1 of Schedule 5 (Seller Warranties), will be true, accurate and not misleading at the Finance Date, and;

(D)    will be true, accurate and not misleading as at the Completion Date;

(ii)    acknowledged that it has given the Seller Warranties with the intention of inducing the Buyer to enter into this agreement and that the Buyer has entered into this agreement in reliance on the Seller Warranties; and

(iii)    subject to the limitations in this clause 13, indemnifies the Buyer in respect of Loss suffered by the Buyer or a Group Company arising directly from a break of a Seller Warranty made pursuant to clause 13.1(a)(i) or a breach by that Seller of this agreement.

(b)    Each Seller Warranty must be construed independently and is not limited by reference to another Seller Warranty.

(c)    The Seller Warranties survive Completion of this agreement.

(d)    Each Seller must immediately disclose to the Buyer any information which it becomes aware of in the period between the date of this agreement and the Completion Date which may cause a breach of a Seller Warranty.

13.2     Sellers’ knowledge and enquiries

Where a Seller Warranty is qualified by the expression ‘so far as the Sellers are aware’ or any similar expression, that knowledge includes the knowledge of each of the Guarantors and that Seller Warranty is deemed to include a statement that it has been made after the Sellers and the Guarantors have made all reasonable enquiries to ensure that the Seller Warranty is true, accurate and not misleading.

257    The Guarantors are defined to include Mr Ireland and Mr Rakkas.

258    Optic2 alleges that at all relevant times YC Investments knew that the representation concerning the 31% gross profit margin had been made. That is the same representation forming the basis of the ACL claim. It also alleges that YC Investments knew of the matters pleaded at [58A] – [58Q] of the FASOC. Those paragraphs concern the alleged treatment of the Additional Amount as 100% revenue at the time that the Tindal Subcontract was converted to a job in SimPRO, the alleged overstatement of gross profit margin in SimPRO at that time, and the existence and non-disclosure of Undisclosed Margin Matters. The allegation of breach of Warranty 7.1(a) and Warranty 7.1(b) is then pleaded as follows:

H.4    Warranty 7.1(a) and Warranty 7.1(b)

68    The Disclosure Material as defined in the Final Share Purchase Agreement (and referred to in paragraph 21 above):

(a)    included the Respondent’s Disclosure Material, save for the STS NT Management Accounts – October 2018 P&L and the STS NT Management Accounts – October 2018 Balance Sheet;

(b)    included the statements and information set out in Schedule A, save for those under the headings ‘STS NT Management Accounts – October 2018 P&L’ and ‘STS NT Management Accounts – October 2018 Balance Sheet’; and

(c)    omitted and failed to disclose the Undisclosed Margin Matters.

69    By reason of the matters referred to in paragraphs 58G to 58K and 68 above, the Disclosure Material contained inaccuracies and omissions in respect of:

(a)    the gross profit of the Tindal Subcontract;

(aa)    the gross profit margin of STS NT’s work in progress projects;

(b)    the financial position of STS NT; and

(c)    the financial position of the STS Group.

Particulars

(A)    As to inaccuracies, the applicant repeats paragraphs 58J and 58P above and their particulars (insofar as they relate to the Disclosure Material).

(B)    As to omissions, the applicant repeats paragraph 68(c) above.

70    In the premises referred to in paragraphs 59, 68 and 69 above, in breach of Warranty 7.1(a), the respondent was aware that the Disclosure Material was not true, was incomplete, or was misleading or deceptive.

71    Further, each of the statements set out in paragraphs 6, 8, 8B, 10, 12, 14, 14B, 16, 16B, 18, 18B, 18D, 20, 22 and 26 of Schedule A, was an opinion, expectation or belief:

(a)    contained in the Disclosure Material; and

(b)    which was held by the respondent.

72    In the premises referred to in paragraphs 68 to 71 above, in breach of Warranty 7.1(b), the respondent:

(a)    did not honestly hold those opinions, expectations or beliefs; and

(b)    further or alternatively, did not arrive at those opinions, expectations or beliefs on a reasonable basis after full enquiry.

259    The plea for loss and damage states:

91    By reason of the breach of the Warranties referred to in paragraphs 70 and 72 above, the, the applicant has suffered loss and damage.

Particulars

The loss suffered is:

(A)    the difference between the Purchase Price and the true value of the STS Business; or

(B)    alternatively to (A), the difference between the Purchase Price and the price that the applicant would have paid under the Final Share Purchase Agreement if the respondent had not breached the Warranties, or any of them, alternatively the loss of opportunity of paying that price.

The calculation of the applicant’s loss and damage will be the subject of expert evidence.

260    Alternatively, it is alleged that YC Investments is liable to indemnify Optic2 in relation to that loss:  FASOC, [92].