Nexus Minerals (NL) v. Brutus Constructions Pty Ltd

BC 9506497

---

(Judgment by: Carr J)

Nexus Minerals N.L.
v Brutus Constructions Pty Ltd & Another

Court:

Judge:
Carr J

Judgment date: 1 September 1995

---

Judgment by:
Carr J

REASONS FOR JUDGMENT

Introduction

In this matter, the applicant Nexus Minerals N.L. (which at all material times was known as Dry Creek Mining NL and to which I shall refer as "Dry Creek") seeks damages from both respondents for a loss which it says it sustained when it sold its interest in a gold-mining venture. Dry Creek claims that the loss was caused by certain misleading and deceptive conduct on the part of the first respondent Brutus Constructions Pty Ltd ("Brutus") contrary to s.52 of the Trade Practices Act ("the Act") and that the second respondent, Mr Boleslaw William Kozyrski was knowingly concerned in and thus involved in such contravention. Alternatively, Dry Creek claims damages in the amount of that loss by reason of alleged breach of contract on the part of Brutus and the alleged breach by Mr Kozyrski of his duty to the applicant, under s.232(4) of the Corporations Law, to exercise his powers and to discharge his duties as Managing Director of Dry Creek with due care and diligence.

Factual Background

Dry Creek Mining is a company which once engaged in exploration for minerals (and possibly still does, although there was no evidence to that effect). In 1989 Dry Creek owned certain mining tenements near Eundynie in Western Australia ("the Tenements"). In that year Dry Creek entered into heads of agreement ("the Joint Venture Agreement") with Samantha Gold NL ("Samantha"). The material terms of that agreement provided that if Samantha expended a sum of $400,000 in exploration expenditure on the Tenements it would be entitled to an 80% interest in those tenements. The agreement provided that thereafter the Tenements would be further explored and developed as a joint venture between Dry Creek and Samantha ("the Joint Venture"). To that end there were provisions for each company to appoint two persons to what was described as an Operating Committee, for Samantha to manage the Joint Venture, for the Operating Committee to meet not less than every six months and for Dry Creek to reimburse Samantha to the extent of 20% of any expenditure outlaid by Samantha on the Tenements. The Joint Venture Agreement contained provisions whereby Samantha could dilute Dry Creek's interest in the Tenements in the event that Dry Creek did not pay its share of such expenditure.

By January 1991 Samantha claimed to have expended in excess of $400,000 on the Tenements and thereby to have earned an 80% interest in them. It would seem that Dry Creek did not dispute that claim. In late January 1991 a company called Tern Minerals NL, of which Mr Kozyrski was a director, subscribed for a substantial number of shares in Dry Creek and paid to that company subscription moneys totalling $163,200 in respect of those shares. At the same time, an oral agreement ("the Management Agreement") was made between Dry Creek and Brutus whereby Brutus would provide management and consulting services to Dry Creek and the personal services of Mr Kozyrski for the daily supervision, management and control of Dry Creek's field operations. Another term of that agreement was that Dry Creek would appoint Mr Kozyrski as its Managing Director and that Mr Kozyrski would accept that position. It was common ground between the parties to this application that, as Dry Creek's Managing Director, Mr Kozyrski's duties were to include:

•

supervision of all of Dry Creek's mining tenements and operations, including site inspections;

•

inspections and assessment of mining prospects and proposals for future investment by Dry Creek;

•

ensuring that all of Dry Creek's administrative responsibilities in relation to its mining assets were attended to promptly and properly; and

•

reporting to and advising Dry Creek's other directors on all aspects of the company's field operations.

The Management Agreement provided that Dry Creek would pay Brutus a fee of $8,000 per month, of which $4,000 was to be paid monthly and the balance as and when Dry Creek had surplus funds available.

On 20 February 1991 the Operating Committee of the Joint Venture held a meeting. Samantha proposed expenditure of $287,000 on the Tenements during the six month period ending 30 June 1991. Dry Creek subsequently approved that expenditure and thereby became liable under the terms of the Joint Venture Agreement to contribute 20% of that amount within a reasonable time after 30 June 1991.

There is an issue between the parties about whether in April 1991 Mr Kozyrski on behalf of Dry Creek authorised Samantha to undertake additional expenditure on the Tenements in the amount of approximately $200,000. Dry Creek contends that Mr Kozyrski did this but he and Brutus deny that he did.

On 23 July 1991 Samantha wrote to Dry Creek seeking payment of $18,546.20 as Dry Creek's share of the expenditure on the Tenements to 31 March 1991. Dry Creek did not pay that amount.

On 12 August 1991 Samantha wrote to Dry Creek in response to a request from Dry Creek for certain information which it required for audit purposes. In that letter Samantha advised Dry Creek that the latter's share of joint venture expenditure due as at 30 June 1991 was $45,582.40. On the same date Samantha sent Dry Creek another invoice (No. DCM 002) billing Dry Creek for a further $27,036.20 as its share of exploration expenditure on the Tenements for the period ended 30 June 1991. Attached to that invoice was a list of 20 items of expenditure showing a total of $627,912. Anyone checking the addition of those items would have found that their correct total was $849,528.00. The twentieth item on the list was "Operator's Overheads $110,808". On 16 August 1991 Samantha sent a letter to Mr Kozyrski as Managing Director of Dry Creek enclosing a draft joint venture agreement and raising a number of matters outstanding regarding the Joint Venture. The final paragraph of that letter read as follows:

"Cash Call

We have not received payment of our invoice No. DCM 001 for $18,546-20 and request that you forward your cheque as soon as possible. We have also billed you for your share of joint venture expenditure to 30 June 1991, a further $27,036-20."

On 23 August 1991 Samantha wrote to Mr Kozyrski as Managing Director of Dry Creek advising that it had made an error in its earlier calculations and that the total amount owing by Dry Creek to Samantha as at 30 June 1991 was $89,905.30 and not $45,582.40 as stated in its letter of 12 August 1991. On 26 August 1991 Mr Kozyrski on behalf of Dry Creek sent a letter to Samantha referring to the minutes of the Operating Committee meeting held on 20 February 1991 and stating "It is our recollection that we stated that Dry Creek Mining NL would not pay any overhead fees". No other item of expense was queried in that letter and it did not contain a request for verification of any of those other items. Samantha wrote two further letters on 12 and 25 September 1991 respectively to Dry Creek, each marked for the attention of Mr Kozyrski, demanding payment of the sum of $89,905.30.

On 25 September 1991 Samantha's solicitors wrote to Dry Creek advising that unless that company paid its client the sum of $89,905.30 by 2 October 1991 Samantha would, in reliance upon the Joint Venture Agreement, dilute Dry Creek's interest in the Tenements. In its own letter dated 25 September 1991 to Dry Creek, Samantha gave notice of a proposed meeting of the Operating Committee to be held on 2 October 1991. The letter also stated that if no representative of Dry Creek attended that meeting and "payment is not received in respect of the programme and budget" (a reference to the exploration programme and budget for the period 30 June 1992) within seven days thereafter Samantha would dilute Dry Creek's participating interest in the Joint Venture in accordance with the Joint Venture Agreement.

In the meantime, on 1 October 1991 Dry Creek's solicitors wrote to Samantha's solicitors seeking further time for Dry Creek to make payment and in which to verify the expenditure and also seeking access on its behalf to originating vouchers in respect of that expenditure. The letter also contained an accusation that Samantha had contravened the terms of the Joint Venture Agreement.

The meeting of the Operating Committee took place on 2 October 1991. It is not necessary to recite the detail of what took place save to note that Dry Creek sought from Samantha an extension of time to make payment of its contribution. Samantha asked Dry Creek to make that request in writing, which it did by letter delivered to Samantha on 3 October 1991. Samantha replied by letter dated 4 October 1991 stating that it was considering its position. On 7 October 1991 Samantha's solicitors wrote to Dry Creek enclosing a notice purporting to dilute Dry Creek's interest in the Tenements. The dilution was from 20% to 11.8%.

On 21 October 1991 Dry Creek sued Samantha in the Supreme Court of Western Australia seeking relief against the dilution of its interest in the Tenements. Those proceedings and the disputes between Dry Creek and Samantha were resolved in April 1992. The terms of the settlement were that Samantha acquired Dry Creek's interest in the Tenements for the sum of $1.6 million. It is part of Dry Creek's case that in the absence of any dispute about its entitlement to 20% of the Tenements, that interest would have been worth $3.1 million. It blames the respondents for putting it in a position where its entitlement had been diluted by Samantha and seeks damages quantified as the difference between those two figures, namely $1.5 million.

The Pleadings

The Claim for Damages for Breach of the Management Contract Apart from the express terms of the Management Agreement set out above it was not seriously in dispute between the parties that the agreement contained certain implied terms. Those implied terms included terms to the effect that Brutus would exercise all due care and diligence in selecting and supplying persons to provide services to Dry Creek, that Mr Kozyrski possessed the necessary skills and expertise to be Dry Creek's Managing Director and in that capacity to take daily control of and responsibility for the proper and prompt conduct of Dry Creek's field operations.

Dry Creek complains that unknown to its other directors and in breach (by Brutus) of the Management Contract, Mr Kozyrski had:

(a)

promised at an Operating Committee meeting of the joint venture on 26 July 1991 to examine promptly and advise Samantha of Dry Creek's approval of joint venture expenditure for the period from 30 June 1991 and failed to do so and also failed to report to Dry Creek's other directors as to the reasonableness or otherwise of Samantha's proposed expenditure;

(b)

failed to locate funds for Dry Creek with which to pay already agreed expenditure for the period ended 30 June 1991;

(c)

failed to inspect Samantha's source documents and verify Samantha's additional claims for expenditure up to 30 June 1991; and

(d)

failed to inform Dry Creek's other directors of the results of his meetings and discussions with Samantha's directors between 12 August 1991 and 2 October 1991 and failed to record those discussions or meetings.

Furthermore, Dry Creek in its statement of claim, complains that Mr Kozyrski, "if and whenever asked by a Mr David Bay (another executive director of Dry Creek) and in particular from 24 August 1991 onwards" told Mr Bay that Dry Creek had no problem with Samantha and the Joint Venture or told Mr Bay that he (Mr Kozyrski) had matters under control and/or would "take care of things" or words to that effect. Dry Creek pleads that by reason of these matters, its other directors were denied full and complete information and thereby Brutus was in breach of the Management Agreement and Mr Kozyrski was in breach of his duties as a director of Dry Creek. Dry Creek claims that as a consequence of that breach of contract it suffered the loss and damage referred to above by reason of the dilution of its interest in the Tenements.

Claims under s.51A and 52 of the Trade Practices Act

It was common ground between the parties to these proceedings that Brutus was a company engaged in trade or commerce. Dry Creek, in its statement of claim pleads that Brutus by its director Mr Kozyrski made certain representations as to future matters within the meaning of s.51A of the Act. Those representations were pleaded as being that:

•

Brutus could provide to Dry Creek management and consultancy services required by Dry Creek;

•

all personnel supplied by Brutus to Dry Creek would possess the necessary skills and expertise to advise Dry Creek and to assume daily responsibility for Dry Creek's field operations;

•

Mr Kozyrski:

(i)

possessed all the necessary skills and expertise to manage and oversee Dry Creek's field operations and to act as its Managing Director; and

(ii)

would exercise all due care and diligence in the performance of his duties as Managing Director of Dry Creek.

These representations were said to have been made in January and early February 1991. Dry Creek says that, at the time when they were made, Brutus did not have reasonable grounds for making them and that the representations "were misleading pursuant to the provisions of section 51A of the Trade Practices Act 1974". Dry Creek pleads certain particulars of lack of reasonable grounds, namely, that Brutus did not have either the personnel to provide management and consultancy services required by Dry Creek or personnel with necessary skills and expertise to advise Dry Creek and to assume daily responsibility for its field operations.

Dry Creek further pleads that between February and October 1991 Brutus "remained silent in relation to and made representations about certain matters" concerning Dry Creek's affairs. This was particularised as Brutus, through Mr Kozyrski, representing that:

(a)

Dry Creek was not in breach of its obligations to Samantha;

(b)

Dry Creek had good and valid grounds for failing to pay Samantha's claims; and

(c)

Samantha would probably grant Dry Creek an extension of time to make payment of its obligations.

Dry Creek says that by Mr Kozyrski's silence Brutus represented to Dry Creek that there was no need for Dry Creek's other directors to undertake a detailed examination of his conduct prior to October 1991 or to make their own enquiries.

Dry Creek says that these representations amounted to misleading and deceptive conduct or conduct likely to mislead and deceive contrary to s.52 of the Act. This was particularised as follows:

(a)

As from 31 March 1991 or a reasonable time thereafter, Dry Creek was in breach of its obligations under the Joint Venture Agreement;

(b)

there were no good and valid grounds for Dry Creek failing to pay Samantha's claims and Mr Kozyrski had never examined the claims in sufficient detail to reasonably hold such opinion;

(c)

Samantha never indicated that it would grant Dry Creek an extension of time to make payment of its obligations and until 1 October 1991 was never requested to do so; and

(d)

there was a need by the other directors of Dry Creek to examine Mr Kozyrski's conduct to ensure that Dry Creek's interest in the Tenements would not be diluted under the Joint Venture Agreement.

Next, Dry Creek pleads that in reliance upon the representations constituted by Mr Kozyrski's silence about the matters referred to above, it failed to make any payment to Samantha as required under the provisions of the Joint Venture Agreement and as a consequence its 20% interest in the Tenements was diluted to an interest of 11.8%.

Dry Creek pleads that Mr Kozyrski was knowingly concerned in the misleading and deceptive conduct on the part of Brutus.

Section 232(4) of the Corporations Law

Mr Kozyrski concedes Dry Creek's claim that, from the date of his appointment as a director of Dry Creek, he owed a duty to that company to exercise his powers and discharge his duties as Managing Director with due care and diligence and that such duty arose under s.232(4) of the Corporations Law. In its statement of claim Dry Creek alleges that Mr Kozyrski was in breach of those duties by denying full and complete information to the other directors. That alleged breach is also particularised by reference to the matters complained of in respect of Brutus' alleged breach of the Management Contract. Dry Creek pleads that by those breaches of duty Mr Kozyrski has caused it loss and damage as particularised above.

In essence, the respondents deny liability and say that the initial Joint Venture expenditure budget was approved by the Dry Creek board of directors and that the board was kept fully informed either directly or through Mr Bay of all matters concerning the Joint Venture. In particular, the respondents assert that Mr Kozyrski promptly informed Mr Bay about a change proposed and executed by Samantha in the exploration drilling pattern which gave rise to the claim by that company for extra contributions from Dry Creek. The respondents deny any misleading or deceptive conduct and say that any representations as to future matters were made at a time when Brutus had reasonable grounds for making them. The respondents deny any breach of contract and any contravention of s.52 of the Act. Mr Kozyrski denies any breach of his duties as Managing Director. As to damages, the respondents plead that there was never a dilution of Dry Creek's interest in the Tenements, that as at 20 February 1991 its interest in those Tenements was worth approximately $100,000 and that when it sold its interest to Samantha for $1.6 million, Dry Creek suffered no loss or damage.

Brutus cross-claims for a balance of $62,500 which it says is owing under the Management Agreement. Dry Creek denies liability for any further payment under that agreement on the grounds that Brutus breached its terms, thereby disentitling it to any such payment. Until shortly before the conclusion of the hearing, Dry Creek also denied liability on the basis that there had been no proper demand for the full amount claimed. It was then conceded, in my opinion quite properly, that demand had been made by Brutus when, on 26 February 1993, it caused a writ to be issued against Dry Creek in the District Court of Western Australia, claiming that sum.

The Evidence

The applicant called three witnesses, namely one of its directors, Mr David Bay, Mr Gary Robert Hemming (a geologist) and the applicant's former secretary and receptionist Ms Sharon Hall.

Mr Bay is an accountant practising in partnership under the style Bay and Vidovich. He is also a geologist and for a time was employed by the Australian Stock Exchange in Perth as an Assistant Listing Manager. Mr Bay's firm specialises in corporate management advice, although also offering accountancy services. His clients included a corporate group which initially comprised four small public companies. I shall refer to that group as the "Tern Group" because two of those companies included "Tern" in their name. The Tern Group operated from an office suite in South Perth of which Tern Minerals NL was the lessee. The various companies in the Tern Group shared the rent, wages and other outgoings in respect of that office. Mr Bay provided company secretarial services to the Tern Group including arranging for the preparation of audits, preparing quarterly reports to the Australian Stock Exchange, convening company meetings and the filing of annual returns and other corporate documents. The office staff comprised Ms Hall who provided receptionist, typing and secretarial services to all of the companies. Ms Hall collected and distributed the mail, took messages and assisted with the computerised book-keeping system.

When, in late January 1991, Tern Minerals NL acquired its shareholding in Dry Creek it would appear that this was regarded by all concerned as equivalent to a take-over of the latter company and its inclusion in the Tern Group. Mr Kozyrski became a director and Managing Director of Dry Creek and Mr Bay joined the board at the same time. Prior to this the Dry Creek board had three directors. One of those directors resigned shortly prior to and in anticipation of Mr Bay and Mr Kozyrski's appointments as directors. Upon such appointments the other two directors agreed to act as non-executive directors without authority to commit the company. The former Chairman of Directors of Dry Creek also resigned as Chairman and Mr Kozyrski was appointed Chairman in his place. Accordingly, from 6 February 1991 onwards Mr Kozyrski was Chairman and Managing Director of Dry Creek, Mr Bay was the only other executive director and there were two non-executive directors. By 24 May 1991 those two non-executive directors had resigned and on that date Mr Bay's partner in his accountancy practice, Mr M. Vidovich, was appointed to the Dry Creek board. Dry Creek moved its registered office to the Tern Group's office suite in South Perth where Mr Kozyrski and Mr Bay also each had an office. A Mr Anton Billis shared those premises. Mr Billis was a director of Tern Minerals Ltd.

Mr Bay's evidence was that all the companies in the Tern Group were companies engaged in exploration for minerals, mainly with different shareholders, although there were some common shareholders. Each company was expected to function on its own, raising its own finance. Usually this was achieved by shareholding investment in the form of further shares or loans but on occasion by means of loans from or the issue of shares to other companies in the Tern Group. Mr Bay said that he spent about half a day per week on average at the Tern Group's premises rendering services to the companies in that group, including Dry Creek.

Mr Bay said that his executive duties as a director of Dry Creek were limited to secretarial, administrative and accounting duties. The accounting duties were confined to record keeping. In February 1991 he and Mr Kozyrski were appointed as Dry Creek's representatives on the Operating Committee constituted pursuant to the Joint Venture Agreement. However, Mr Bay's evidence was that apart from attending a meeting of the Operating Committee in February 1991, he did not attend any further meetings until October 1991 by which time the problems referred to above had arisen. His only contact with Samantha had been a couple of telephone calls to obtain an accurate figure for Samantha's claims upon Dry Creek for the purposes of the audit of Dry Creek, but not to verify Samantha's entitlement to that amount. Mr Bay said that, as far as he was concerned, Mr Kozyrski represented Dry Creek on the Operating Committee and he regarded Mr Kozyrski as having power to bind Dry Creek to Operating Committee resolutions without reference to the Dry Creek board. Mr Bay said that during the period February 1991 to July 1991 he asked Mr Kozyrski frequently about Dry Creek's funding and Mr Kozyrski invariably told him that he (Mr Kozyrski) had everything under control. Although there were regular board meetings of Dry Creek during that period, none had been called to discuss fund raising. As a result of attending the February 1991 Operating Committee meeting Mr Bay said that he knew that Dry Creek had agreed to pay about $50,000 to Samantha in June or July 1991 and that until mid to late October 1991 he had no reason to doubt that Mr Kozyrski had matters in hand.

Mr Bay explained that the Tern Group operated on an understanding that where a director introduced a prospect such as the investment in Dry Creek and the investment was successful, the Tern Group would sell out its interest to that director on a basis profitable to that director. I took that to mean a mutually profitable basis. Mr Kozyrski had been a director of Tern Minerals NL since before 1989 and, so Mr Bay said, was familiar with the methods and customs of operation of the companies in the Tern Group. As Mr Kozyrski had introduced Dry Creek to the Tern Group, Mr Bay expected that if the investment proved successful, Mr Kozyrski would within a period of about 12 months "take control" (as he put it) of Dry Creek.

The essence of Mr Bay's evidence was that his involvement with the affairs of Dry Creek was confined to the secretarial functions referred to above including arranging for the preparation of audits, preparing quarterly reports to the Australian Stock Exchange, convening company meetings and the filing of annual returns and other corporate documents. Mr Bay said that Mr Kozyrski's duty as Managing Director was to do or direct the doing of everything else which had to be done for Dry Creek. This included, among other matters, supervising all of Dry Creek's mining tenements and operations and ensuring that the company complied with the terms of the Joint Venture Agreement. By May 1991, the Joint Venture had become the most important of Dry Creek's field operations. Mr Kozyrski's duties in that respect included detailed examination of regular progress reports from Samantha and copies of Samantha's reports to the Australian Stock Exchange.

Mr Bay said that Mr Kozyrski told him that he had attended an Operating Committee meeting in April 1991 and had also told him that Samantha intended changing its drilling pattern on the Tenements to a tighter pattern i.e. the drilling holes would be closer together than previously contemplated. Mr Bay said that he asked Mr Kozyrski about extra cost and Mr Kozyrski told him that he should not worry about it and leave it to him.

Mr Bay's evidence was that if Mr Kozyrski had told him that Dry Creek had to pay moneys to Samantha by a certain date and that there was no money available, he would have done something about it and in all probability he would have approached Tern Minerals NL for financial assistance. However, Mr Bay said that Mr Kozyrski never told him about such a requirement or lack of funds. He (Mr Bay) first became aware of invoices and related letters from Samantha in late August 1991. He discussed these invoices with Mr Kozyrski not in respect of how or when Dry Creek would pay them but rather to verify the liability for providing information to the auditors. He recalled asking Mr Kozyrski what he was going to do about payment and being advised by Mr Kozyrski that he had that under control and would be talking to Samantha. Mr Kozyrski had said nothing to him about any need for urgency. In particular, Mr Kozyrski had not asked him to approach Mr Anton Billis to arrange an advance. Mr Bay said that had Mr Kozyrski made him fully aware of the deteriorating situation with Samantha, he would have viewed Samantha's demand for payment on 25 September 1991 far more seriously. When he attended the Operating Committee on 1 October 1991 he still did not realise that Dry Creek was in a serious position. If he had known how serious Samantha was, he would not have been a party to asking Samantha to extend to Dry Creek time to pay its share. He would have arranged payment through Tern Minerals and checked the invoices later. He had relied on Mr Kozyrski's assurances that no agreement as to extra payment had been agreed upon in April 1991 and he had seen Samantha's two invoices which suggested some sort of mistake in its calculations rather than agreements by Dry Creek to pay more.

I was favourably impressed by Mr Bay as a witness. He gave his evidence in a straightforward manner and was not shaken in cross-examination. He did not seek to overstate Dry Creek's position and I formed the impression that he was a careful and businesslike professional accountant. In my view, had Mr Kozyrski informed Mr Bay of the additional drilling work and associated exploration expense which had been incurred and had drawn his attention to the pressing demands for payment rather than fobbing him off with assurances (as I believe he did), then Mr Bay would have assisted to do whatever was necessary to rectify the position. This would have included approaching the Tern Group for financial assistance.

Mr Kozyrski's evidence was that he shared the day-to-day management of Dry Creek with Mr Bay. He said that Mr Bay was involved more heavily in the financial management of the company and he (Mr Kozyrski) was involved primarily in the mining and prospecting operations. Mr Kozyrski swore that Mr Bay received all accounts for Dry Creek's expenses including those associated with Samantha. He said that he would consult with Mr Bay with respect to any items of substantial expenditure, and that Mr Bay would prepare cheques for payment of the company's expenses and present them to him at the end of each month for signing.

Mr Kozyrski gave his recollection of what took place at the Operating Committee meeting with Samantha on 20 February 1991. He said that he told Samantha's representative that he was prepared to acknowledge that Samantha had earned an 80% interest by expending $480,608 on exploration, subject to an audit being taken by Dry Creek of that expenditure. Mr Young of Samantha had agreed to make the necessary books and documents available for that purpose. I pause here to note that Mr Kozyrski did not press for the production of those books or documents until October 1991 by which time Samantha had warned Dry Creek of possible dilution. Mr Kozyrski said that at the meeting on 20 February 1991 he agreed to the budget subject to further quotes being obtained for drilling and assaying costs and further consideration being given to Samantha's 15% overhead charge. Again, there is no evidence of Mr Kozyrski following up those matters apart from the letter dated 26 August 1991 (referred to above) in which Mr Kozyrski stated his recollection that Dry Creek had said that it would not pay any overhead fees. I infer from the sending of this letter that Mr Kozyrski had either not read the Joint Venture Agreement or had forgotten that clause 2.15 of that agreement expressly provided that an overhead of 15% of all operating costs would be charged to the Joint Venture. Neither circumstance reflects favourably on the manner in which Mr Kozyrski was carrying out his duties as Managing Director of Dry Creek.

In his evidence-in-chief Mr Kozyrski gave his recollection of a meeting at Samantha's offices in Kalgoorlie on 11 April 1991. He said that this resulted from his "dropping in" at Samantha's office to review data and obtain a progress report. I set out below certain paragraphs concerning that meeting from Mr Kozyrski's statement of evidence which he swore as being true:

"49. I do not recall any discussions regarding budgets or any increase in joint venture expenditure.

50. Further, I do not recall any discussion regarding the drilling patterns.

51. Pursuant to the original approved programme, approved in February 1991, 9,750 metres of air core drilling and 1500 metres of reverse circulation drilling was to be carried out over an area of 80 by 40 metres.

52. The planned exploration programme and budget for the period to June 1991 was for 6750 metres of air core drilling on an 80 by 40 metre grid. Five hundred metres and 1000 metres of reverse circulation drilling were to be carried out."

Paragraph 17 of the respondents' defence, which was filed on 24 June 1993 and not amended until the first day of the hearing, pleaded as follows:

"17.1 on or about 11 April 1991 the second respondent [Mr Kozyrski] met with directors of Samantha who put a proposal that Samantha undertake additional drilling and other work in and around Eundynie at an approximate additional cost of $200,000 ("the Proposal");

17.2 the Proposal was referred by the second respondent to Bay as a director of the applicant and member of the Joint Venture Management Committee;

17.3 a decision was made on or about 12 April 1991 by Bay and the second respondent [Mr Kozyrski] as directors of the applicant for and on behalf of the applicant to accept the Proposal; and

17.4 pursuant to the matters pleaded in paragraph 17.3 above the applicant became liable to contribute to the Joint Venture the further sum of $44,000, in addition to the $57,400 agreed to in March 1991."

Mr Bay's statement of the substance of his evidence-in-chief was filed on 8 June 1995 and it included his evidence (which I have summarised above) concerning what Mr Kozyrski told him about the April 1991 meeting with Samantha representatives in Kalgoorlie. On the first day of the hearing the respondents were granted leave to amend paragraph 17 of their defence to read as follows:

"17.1 on or about 11 April 1991 the Second Respondent met with directors of Samantha;

17.2 at the meeting referred to in paragraph 17.1 herein, the directors of Samantha advised the Second Respondent that Samantha intended to proceed with an altered drilling pattern in and around Eundynie;

17.3 on or about 12 April 1991 the Second Respondent orally informed Bay of Samantha's intention to proceed with an altered drilling pattern in and around Eundynie."

There is further inconsistency. At paragraph 55 of his statement Mr Kozyrski says:

"I do not recall any discussion as regards drilling patterns, that being something which would normally be left to Samantha to determine. If however they had informed me of an intention to drill on a 40 by 40 metre grid then I would not have expected that to have any bearing on the budget. I would simply have thought that they would be doing the same amount of drilling, i.e. 6750 metres of air core drilling and 1500 metres of reverse circulation drilling though over a different pattern."

I simply do not accept and I do not believe that Mr Kozyrski was unaware of Samantha's proposal to expend considerably greater amounts on the exploration of the Tenements during the six month period ended 30 June 1991 than had been agreed at the 20 February 1991 meeting. On 29 April 1991 Samantha sent a fax to Dry Creek setting out a revised extract from Samantha's quarterly report to the Australian Stock Exchange. That detailed the air core drilling carried out in the March quarter and stated that drilling would continue in the June quarter to reduce the grid spacing to 80m x 40m and 40m x 40m. In his evidence prepared by Dry Creek's solicitors for the purposes of the Supreme Court proceedings, Mr Kozyrski referred to that document in the following terms:

"I note that the report from Samantha to the Stock Exchange on 26 April refers on page 5 to a reduction in the grid spacing at Eundynie to 80 x 40 metres and 40 x 40 metres.

Bearing in mind that it is Samantha's decision as to how it does the drilling and in particular as to the drilling pattern, the reference to 40 x 40 metre grid spacing would not have been significant."

Furthermore, on 24 May 1991 Samantha sent a fax addressed to Mr Kozyrski which, omitting formal parts read as follows:

"Dear Mr Kozyrski,

Samantha Gold NL's Challenge and Conglomerate April results are appended. As previously discussed, the accelerated Challenge exploration programme is continuing."

The reference to "Challenge" is a reference to the Tenements which were the subject of the Joint Venture. On 12 June 1991 Samantha sent a fax to Dry Creek dealing with the Joint Venture drilling programme. This showed that there had been 11,969 metres of drilling in the period March to May 1991 with an additional 6300 metres of air core drilling being required in June "to complete 40m x 40m coverage over most of the known mineralised deep leads." On the third page of that fax there was the following paragraph:

"2.1.3 EXPENDITURE

Since the commencement of the current phase of exploration in March 1991, cummulative (sic) March to May 1991 expenditure is estimated to be approximately $302,000. It is envisaged that an additional $120,000 will be spent within the Joint Venture tenements in June 1991. This compares with the original estimate of $281,000 and reflects the doubling of the anticipated drill metreage."

Mr Kozyrski's evidence (paragraph 63 of his statement) was that he did not recall being aware of the reference to the increase in the expenditure.

Again on 17 July 1991, by fax addressed to Mr Kozyrski at Dry Creek, Samantha disclosed a further 4697 metres of drilling in June 1991 and included the statement:

"Unfortunately, due to wet weather and drill rig breakdowns, 40m x 40m infill drilling was not completed in June. An additional 80 holes remain to be drilled. This phase of exploration will now be completed in the first week of July."

In cross-examination Mr Kozyrski admitted that at the Operating Committee meeting held on 26 July 1991, Mr Evans (a Samantha representative on that committee) may have tabled an estimated cost summary for the period February to July 1991 and may have provided a copy of that document to him.

On 31 July 1991 Mr Kozyrski signed Dry Creek's quarterly report to the Australian Stock Exchange for the period ended 30 June 1991. In the first paragraph of that document there is a sentence referring to exploration work on the Tenements which reads:

"Drilling continued to infill on a 40m x 40m grid and 351 air core holes were drilled for 15,710 metres".

The letter confirmed that ore reserve calculations indicated a proved and probable mineable open-pit ore reserve of 175,000 ounces of gold.

I do not believe Mr Kozyrski's evidence concerning this increased expenditure and the extent of his awareness of it. In my view, the strong likelihood is (as I so find) that what was described in paragraph 17 of the respondents' defence, before it was amended, in fact took place.

Even if that finding is wrong, all the evidence points to Mr Kozyrski being informed by Samantha in Kalgoorlie on or about 11 April 1991 that a more intensive drilling programme was proposed. I think that when Mr Kozyrski, on that occasion, was told by Mr Giorgetta of Samantha that the area might have a potential of seven million tonnes of ore, he agreed on behalf of Dry Creek with the proposed more intensive drilling. Mr Kozyrski's evidence was to the effect that the potential delineation of such a resource and, at the same time, a drilling result showing an intersection of 11 grammes of gold per tonne over about 10 metres were exciting and beneficial occurrences for Dry Creek. I accept Mr Bay's evidence that Mr Kozyrski told him about the tighter drilling pattern with holes closer together and that they discussed the matter of extra cost. In any event, it is evident that Samantha, in the reports which it sent to Dry Creek, made it quite clear that extra drilling was being carried out and extra expense was being incurred on the Tenements. In all probability, Mr Kozyrski saw those reports and appreciated what was happening. As Managing Director of Dry Creek he was under an obligation to keep himself informed about these matters and if he did not do so, then in my view he was not carrying out his duties properly.

Ms Hall gave evidence concerning the office arrangements and the distribution of mail within the office suite occupied by the Tern Group. Her evidence corroborated Mr Bay's evidence. Ms Hall said that she looked to Mr Kozyrski for instructions about Dry Creek matters except for such things as lodgment of corporate documents including reports to the Australian Stock Exchange, audit information and annual reports, which were Mr Bay's responsibility. Ms Hall said that she remembered receiving invoices regularly from Samantha in respect of the Joint Venture and giving to Mr Kozyrski those invoices and letters from Samantha demanding payment from July 1991 onwards. Ms Hall recalled asking Mr Kozyrski about paying the Samantha invoices, and in particular one for about $20,000. She said that Mr Kozyrski told her not to draw a cheque for signature since he was checking the invoice.

I accept Ms Hall's evidence not only because of the manner in which she gave it, but also because it is consistent with how one would expect these matters to be dealt with in the circumstances of a corporate group of relatively small companies such as that described above.

Another example of Mr Kozyrski's unreliability emerges from a comparison of paragraph 19.4 of the defence and a proof of evidence prepared for Mr Kozyrski in relation to the Supreme Court proceedings. Paragraph 19.4 of the defence contains an assertion that at the meeting with the Samantha representatives on 2 October 1991, Mr Simon Lee on behalf of Samantha informed Mr Bay that credit would be forthcoming on receipt by Samantha that day of a written request for such credit. In Mr Kozyrski's proof of evidence prepared for the purpose of the Supreme Court proceedings (see p.311 of the agreed documents) Mr Kozyrski acknowledged that Samantha had not indicated at the meeting that it would approve an extension of time to Dry Creek for payment of its contribution to the Joint Venture expenditure.

I accept that the terms of the Management Agreement between Brutus and Dry Creek were as pleaded in paragraphs 5 and 6 of the statement of claim. In my opinion, to fulfil that agreement it was Mr Kozyrski's responsibility to familiarise himself with all aspects of the Joint Venture. This would also form, in my view, a very large part of his obligations as Managing Director of Dry Creek, a subject to which I return below. As part of those responsibilities, at the very least, Mr Kozyrski should have made sure that he was familiar with all exploration activity and expenditure incurred and being incurred in relation to the Tenements. Dry Creek was obliged to reimburse Samantha to the extent of 20 per cent of such expenditure if it had been approved. If expenditure were being made in excess of approved levels this was also something which Mr Kozyrski should have been monitoring and raising with Samantha. When Samantha submitted its invoices Mr Kozyrski should have promptly either personally verified the expenditure and Dry Creek's concomitant obligation to contribute or have set in train a system for that purpose. If necessary, he could have retained an accountant to check the originating vouchers. At the Operating Committee meeting on 26 July 1991 Mr Kozyrski undertook to respond to Samantha in respect of the budget proposed for the year ended 30 June 1992. He should have done so promptly. When Samantha pressed him on that matter and also in respect of the draft Joint Venture Agreement and payment of invoices he should have followed those matters up or made sure that they were followed up. He was the chief executive and to the extent that he was not able or prepared to carry out these tasks personally, then in my opinion he should have instituted a system whereby those matters received prompt attention.

It was also Mr Kozyrski's responsibility to ensure that Dry Creek had sufficient funds to meet its financial obligations. I accept that he shared this responsibility with his fellow directors including Mr Bay who was an executive director. However, it was for Mr Kozyrski to bring to Mr Bay's attention any urgent need for funds and to work with Mr Bay in raising those moneys. I accept Mr Bay's evidence that Mr Kozyrski did not (as Mr Kozyrski alleged) ask him to approach Mr Billis of Tern Minerals for funds so that Dry Creek could pay its contribution to the Joint Venture expenditure. I reject Mr Kozyrski's evidence in that regard and his allegation that prior to the Joint Venture meeting of 2 October 1991 Mr Bay told him that Mr Billis had refused to release the required funds. It is significant that the proof of evidence which Mr Kozyrski provided to Dry Creek's solicitors for the purposes of the Supreme Court proceedings made no reference to any approach to the Tern Group for financial assistance being rebuffed. On the contrary, the whole tenor of the relevant portions in that proof of evidence was to the effect that the Tern Group would have advanced the funds required by Dry Creek to meet its Joint Venture obligations.

Furthermore, I accept Mr Bay's evidence that he was not kept informed by Mr Kozyrski of essential matters relating to the Joint Venture. These included the likelihood of increased expenditure and the ever-increasing pressure arising out of demands for payment of Dry Creek's proportion of Joint Venture expenditure. I reject the assertion made in paragraph 21 of the defence that Messrs Bay, Billis and Vidovich had full knowledge of Dry Creek's dealings with and promises to Samantha in relation to the Joint Venture.

In my view, by not attending to these matters Mr Kozyrski caused Brutus to be in breach of its obligations under the Management Agreement.

The Claim Under s.232(4) of the Corporations Law

The minutes of the meeting of Dry Creek directors of 6 February 1991 at which Mr Kozyrski was appointed Managing Director of the company contain the following paragraph:

"Authority of Noted that Mr Sas and Mr Marshall were now Directors non-executive directors and as such do not have the authority to commit the company. All queries concerning Dry Creek Mining NL were to be directed to the Managing Director".

Section 232(4) of the Corporations Law, upon which Dry Creek relies, provided at the relevant time:

"232 (4) [Reasonable care and diligence] An officer of a corporation shall at all times exercise a reasonable degree of care and diligence in the exercise of his or her powers and the discharge of his or her duties."

Section 232(8) provided that where a person contravenes a provision of s.232, the corporation may if it has suffered loss or damage as a result of that contravention, recover from the person as a debt due to it an amount equal to that loss or damage. It is not necessary for the person to have been convicted of an offence in relation to the contravention.

In Vrisakis v. Australian Securities Commission (1993) 11 ACSR 162 at p.172 Malcolm C.J. expressed the view in relation to the predecessor of this section [s.229(2) of the Companies Code] that the duties imposed by the section reflected the general concept of negligence at common law. This view was cited with approval by the majority of the New South Wales Court of Appeal in Daniels v. Anderson (1995) 16 ACSR 606 at p.667 where the following passage can be found:

"This means conduct ordinarily measured by reference to what the reasonable man of ordinary prudence would do in the circumstances. Skill is that special confidence which is not part of the ordinary equipment of the reasonable man but the result of aptitude developed by special training and experience which requires those who undertake work calling for special skill not only to exercise reasonable care but measure up to the standard of proficiency that can be expected from persons undertaking such work: Voli v. Inglewood Shire Council at 84 per Windeyer J. A director may be appointed because of a particular or special skill and may take up the appointment on the basis that he or she will bring that skill to the performance of the office."

As Rogers C.J. said in Daniels at first instance (1992) 10 ACLC 933 at p.1012-1013:

"What constitutes the proper performance of the duties of a director of a particular company is considered to be dependent:-

(a)

upon the actual knowledge and experience of the individual director;

(b)

the nature and extent of the corporation's business; and

(c)

on the distribution of responsibilities in the particular corporation."

and at p.1014:

"Generally a Chief Executive is a director to whom the board of directors had delegated its powers of management of the corporation's business. Usually the Chief Executive is employed under a contract of service which will either include an express term or, in the absence of an express term, an implied term, that the Chief Executive will exercise the care and skill to be expected of a person in that position. The degree of skill required of an executive director is measured objectively. In contrast to the managing director, non- executive directors are not bound to give continuous attention to the affairs of the corporation."

Although the test is an objective one, the authorities show that the abovementioned factors may affect the standard required of a particular director.

In the present matter Mr Kozyrski undertook the duties of being Managing Director of Dry Creek. In other words, he undertook to become its chief executive officer. In that capacity it was, in my opinion, his obligation to institute systems and procedures whereby everything that was reasonably necessary to be done to advance the company's interests was in fact done. The company was a very small company and accordingly much of the work which might in a larger company be carried out by middle management had to be done by him personally. To the extent that he was not able personally to carry out such work he should have made arrangements for others to do the work. Furthermore, the nature of the work was to monitor and look after the company's interests in mining exploration and in particular the Joint Venture. In my view that required him to exercise reasonable care which would measure up to the standard of proficiency that can be expected from persons undertaking such work in comparable mining exploration companies, in particular companies involved in farming-out their tenements.

In my opinion, Mr Kozyrski failed to carry out his duties as Managing Director of Dry Creek and, in particular, did not exercise a reasonable degree of care and diligence in the exercise of his powers and the discharge of his duties. In so conducting himself, not only did he contravene s.232(4) of the Corporations Law but he caused Brutus to be in breach of the Management Agreement. More particularly, Mr Kozyrski's defaults were as follows:

(a)

failing to arrange finance so that Dry Creek could pay its share of the expenditure agreed to at the meeting of 20 February 1991 and invoiced in the manner to which I have referred above. If he was unable to arrange such finance personally then he should have referred the problem to the Dry Creek board;

(b)

not keeping his fellow directors aware of the likelihood that Dry Creek would be exposed to an increased expenditure obligation in respect of the Joint Venture expenditure which had been incurred during the period ending 30 June 1991 so that sufficient funds could be raised to pay Dry Creek's share and thus maintain its percentage interest in the Tenements;

(c)

failing to verify Samantha's expenditure by inspecting source documents or arranging for their inspection until after Samantha had moved to dilute Dry Creek's percentage interest in the Tenements;

(d)

failing to arrange timely payment of the invoices raised by Samantha;

(e)

failing promptly to examine and advise Samantha in relation to the question of approval of Joint Venture expenditure for the period 1 July 1991 to 30 June 1992;

(f)

failing to report to Dry Creek's board in respect of the proposed programme of exploration and the proposed expenditure for the period 1 July 1991 to 30 June 1992;

(g)

failing to attend to the matter of a formal Joint Venture agreement as requested by Samantha;

(h)

failing to attend to various Joint Venture matters as requested by Samantha, for example conditional surrenders of portions of the tenements so that new mining titles could be registered; and

(i)

failing to report to the Dry Creek directors generally as to the worsening relationship between Samantha and the company, particularly during the period 23 August 1991 to 25 September 1991.

Whether the First Respondent's Breach of Contract or the Second Respondent's Breach of Duty Caused the Applicant to Suffer any Loss?

The next question is whether Brutus' breach of contract or Mr Kozyrski's breach of duty (which in my view arise out of identical factual circumstances) caused Dry Creek actual damage. If the evidence establishes damage as a result of the respondents' conduct, the next stage is to assess the quantum of that damage: Enzed Holdings v. Wynthea (1984) 57 ALR 167 .

Mr M.J. Hawkins, counsel for Dry Creek, submitted that his client had suffered damage because its 20% interest in the Joint Venture became vulnerable to a claim of dilution and the actual service by Samantha of a notice diluting that interest. As a consequence of that notice of dilution, so Mr Hawkins submitted, Dry Creek had to incur the expense of Supreme Court proceedings and the risks associated with such proceedings in an attempt to have its interest reinstated. He submitted that Dry Creek had lost its chance to prevent dilution taking place. There was, as he put it, a probability that if Mr Kozyrski had kept the Dry Creek board informed, steps could have been taken to avoid the risk of dilution of its interest.

In my view the evidence establishes, and I so find, that it was Dry Creek's failure to pay Samantha the sum of $89,905.40 as its share of Joint Venture expenditure which caused Samantha to serve notice of dilution. I further find that Mr Kozyrski had not kept Mr Bay properly informed about the recent (since February 1991) history of the relationship between the two joint venturers, Dry Creek and Samantha. In my opinion, if he had done so, Mr Bay would have regarded the situation as being as serious as it was. He would have immediately approached the Tern Group for funds and the letter of 3 October 1991 would have been delivered the previous day and would have been more sensibly worded. I consider that there was a direct causal link between Mr Kozyrski's defaults of omission, summarised above, and the service by Samantha of the dilution notice. That led to Dry Creek suing Samantha in the Supreme Court of Western Australia for relief against that dilution of its interest. The matter of settlement of those proceedings arose in early 1992 following a telephone call from a Samantha representative to Mr Kozyrski suggesting that Samantha might purchase Dry Creek's interest in the Joint Venture.

Mr Bay's evidence was that he had lost confidence in Dry Creek succeeding in the Supreme Court action and that even if Dry Creek had succeeded in those proceedings, there was a "high likelihood" of a very expensive appeal. He said that he formed the view that it would be best for Dry Creek to settle the matter to stop the flow of funds in legal costs. He said that had there been no dilution, Dry Creek's directors were keen to stay in the Joint Venture. Mr Bay said that he had been advised by Mr Simon Dixon of Messrs Majteles & Salmon, Dry Creek's solicitors, that the delay in seeking verification of Samantha's expenditure would reduce Dry Creek's chances of success in the Supreme Court action. In view of the uncertainty of the outcome of those proceedings and the fact that Dry Creek would be left with a hostile venture partner in any event, the board of Dry Creek decided to settle those proceedings.

There was no attempt by Dry Creek to prove the expense of the Supreme Court proceedings and its claim for damages was put on a different basis. Dry Creek's claim for damages, as pleaded, was based on the following propositions:

(a)

as at 7 October 1991 Dry Creek was the beneficial owner of a 20% interest in the Joint Venture, an interest worth $3.1 million;

(b)

by reason of the dilution of its interest Dry Creek was left with an 11.8% interest in the Joint Venture which in 1992 it sold to Samantha for $1.6 million; and

(c)

the respondents caused that dilution which resulted in the loss of $1.5 million.

Dry Creek called Mr Hemming to establish this loss.

Mr Hemming is a geologist. His qualifications comprise a Bachelor of Applied Science in geology and membership of the Australian Institute of Mining and Metallurgy. He has no formal qualifications as a valuer but said that he had carried out many valuations for prospectuses and "public documents" over the past fifteen years.

It emerged from Mr Bay's evidence principally but also, eventually, from Mr Hemming's evidence that Mr Hemming had been called upon to value Dry Creek's interest in the Joint Venture at two different stages.

At the first stage, which was probably in mid-February 1992 (see p.341 of Exhibit B2) Mr Hemming was retained by Dry Creek to provide a valuation of its 20% interest in the Joint Venture. This was to be part of the evidence to be presented to the Supreme Court in the proceedings against Samantha. Mr Hemming prepared a first draft valuation at some time prior to 19 March 1992 ("the First Hemming Draft"). That draft contained the following statement:

"The 20% interest is calculated to currently be worth a cash value of $1.44m based on the current state of knowledge of the Challenge/Swordsman Deep lead ore body ..."

Mr Hemming suggested in oral evidence that this draft valuation was based on a figure of 1,542,000 tonnes of gold bearing ore. That is not correct. It can be seen from paragraph 8.2 of the First Hemming Draft that Mr Hemming's initial calculations were based on a figure of 2 million tonnes of gold-bearing ore. Mr Hemming's initial calculations were that Dry Creek would earn a minimum of $4.8 million from the Joint Venture. The period over which this would be earned was expressed variously in the First Hemming Draft as being four years (see paragraph 1 and the first line of Calculation 1) and three years (see the last line of Calculation 1).

The First Hemming Draft also contained a statement that very few companies exchange assets for cash (I took this to be a reference to mining companies and mining assets) but that a cash equivalent can be established based on a net present value of positive cash flow over the mine life. In the First Hemming Draft Mr Hemming referred to an alternative "industry standard" for buying a deposit as being approximately 10-30% of profit discounted for the project life. On this basis Mr Hemming calculated that Dry Creek's interest would fall within the range $410,000 to $1,230,000. He referred to other possible bases for valuing the project. Mr Hemming reached a figure of $1.44 million as being the cash value of Dry Creek's 20% interest in the Joint Venture by taking what he regarded as the median of the range of values namely $1.2 million and adding 20% for exploration potential due to encouraging results.

In cross-examination it was put to Mr Hemming that Mr Kozyrski had asked him to arrive at a higher figure. It was also put to him that he was asked to alter his initial valuation at the request of Dry Creek's directors. Instead of denying these suggestions, Mr Hemming said that he did not remember any such conversation or request respectively. However, the First Hemming Draft was subsequently amended by him during March 1992. The amended draft report ("the Second Hemming Draft") concluded:

"If Dry Creek Mining NL chose to sell the 20% interest in the deposit now a reasonable selling price would be $4.4m 80% of the $5.5m NPV plus a royalty on any additional reserves located calculated on a formula of 50 cents per gram per tonne."

There is evidence that on 10 April 1992 Mr Bay told Mr Dixon (the solicitor handling Dry Creek's case in the Supreme Court) that Mr Hemming had virtually completed his valuation, that Dry Creek's 20% interest in the Joint Venture was worth in excess of $1.5 million and that the value of the 8% in dispute with Samantha was in the range of $600,000 to $700,000. In a letter (dated 15 April 1992) of instructions to counsel, Dry Creek's solicitors referred to the value of the interest lost by Dry Creek as being in excess of $600,000 and stated that they had written to Samantha's solicitors asking them to agree with that figure. If the 8.32% dilution of interest were worth $600,000 (ignoring for the moment the reference to "in excess") this would mean that Dry Creek's 20% interest was worth $1.442 million, a figure which corresponds remarkably with the figure contained in the First Hemming Draft.

By 21 April 1992 Mr Hemming had prepared a further draft of his valuation report. This draft report ("the Third Hemming Draft") showed gross anticipated receipts from gold to be mined on the Tenements reduced by a net amount of $7 million and mining treatment and transport costs increased by $17 million. The former provision (in the First Hemming draft and the Second Hemming Draft) for tax of $20 million was removed. Mr Hemming expressed the conclusion that if Dry Creek chose to sell their 20% interest in the deposit, a reasonable selling price would be $3.8 million plus a royalty on any additional reserves.

On 24 April 1992 Dry Creek and Samantha agreed on the price of $1.5 million plus a royalty of 12 cents per gram per tonne for additional ore reserves mined outside the known reserves. On the same date there was a meeting of the board of directors of Tern Minerals Ltd. Among those present were Mr Bay and Mr Kozyrski. The meeting resolved to communicate to the Dry Creek board of directors that it had the support of Tern Minerals Ltd, as a major shareholder, to proceed to finalise the sale of the interest to Samantha. The minutes of that meeting were signed by Mr Bay and contained the following:

"Policy of Tern in Dry Creek Investment

It was noted that the original objective of Tern in making the investment in Dry Creek of $160,000 was with a view of realising a profit of $1m. Events did not transpire such that Tern's costs was now some $400,000.

It was considered that after the sale of the project, Dry Creek's value to the group as a whole was considerably enhanced."

Mr Hemming conceded that Mr Bay had told him the settlement figure agreed with Samantha and that either Mr Bay or Mr Kozyrski had then asked him to prepare a report to Dry Creek's shareholders which would justify that price. Mr Hemming then prepared a further draft valuation report ("the Fourth Hemming Draft") which concluded:

"Based on the above calculation the offer by Samantha Gold NL of $1.5 million plus reimbursement of approximately $145,000 plus 12 cents per gramme per tonne royalty is fair and reasonable."

This copy report appeared between pages 415 and 421 of the agreed bundle of documents. It was an unsigned copy and Mr Hemming in cross-examination said that he did not know whether it was his final report or not. Mr Hemming agreed that the two sets of his reports were prepared for quite different purposes and consequently reached different conclusions. It is evident from the copy of Mr Hemming's last draft report that he applied a discount or capitalisation rate of 15%. In cross-examination he agreed that in the mining industry one could use a discount rate of between 10% and 25%. Messrs Judge Constable, Chartered Accountants, prepared a report dated 10 June 1992 in respect of the proposed sale to Samantha in which they applied a capitalisation rate of 20%. On that basis, Messrs Judge Constable estimated the Net Present Value of Dry Creek's proportion of net profit [ranging from 11.38% of $17 million to 20% of $22 million] as falling within the range of $1.1 million to $2.4 million. As Judge Constable point out at p.10 of their report the immediate cash flow benefit of the sale was $1,635,859, after taking into account reimbursement of contributions made and release from an obligation to make further contributions amounting in total to $135,859. The evidence was that under the terms of the settlement agreement Dry Creek became entitled to receive a further amount of $63,460. The total thus received by Dry Creek was $1,699,319.

In his statement of evidence, which comprised the bulk of his evidence-in-chief, Mr Hemming (see paragraph 7) apparently forgot that he had made valuations prior to being asked to give an opinion whether the purchase price offered by Samantha was fair and reasonable. In the same statement Mr Hemming said that he concluded that as at May 1992 the net present value of the whole Eundynie tenements was $22 million and that the value of Dry Creek's interest was then worth between $1.5 and $2.9 million. He said that he could only give a range of values because of the uncertain percentage interest of Dry Creek. He further stated that if Dry Creek's interest had only been 11.38% then the sale at a price of $1.5 million plus the royalty was reasonable in the light of other circumstances. He then described those other circumstances as including the future difficulties for Dry Creek continuing in association with a large and hostile Joint Venture partner, limited funding then available to Dry Creek to meet its share of extraction/exploration costs which could result in future dilution of Dry Creek's interest and indications that mining would not occur in the near future. Mr Hemming said that had those other factors not been present he would have assessed a fair price for the 11.38% interest as closer to $2 million than $1.5 million. It will be apparent that not all of the "other factors" referred to above are attributable to the default of the respondents.

A question which I had to decide is whether it has been established on the balance of probabilities that, if there had been no dispute over whether Dry Creek had a 20% interest in the Joint Venture, that company could have obtained more than in fact it did obtain for that interest. In other words, would a willing but not over-anxious purchaser (including Samantha) be prepared to have paid more than the amount received by Dry Creek for its interest?

It might reasonably be thought that an undisputed entitlement to 20% in the Joint Venture would clearly be worth more than an interest which was the subject of litigation.

However, no evidence was called from Samantha on this point. It might well have been that the history of the Joint Venture and the litigation itself caused Samantha to decide to buy out its Joint Venture partner on generous terms rather than face continuing conflict. I note also the evidence that Samantha made a "Without Prejudice" offer shortly before the Supreme Court proceedings were instituted, one of the terms of which was to re-instate Dry Creek's interest in the Joint Venture at 20 per cent.

Dry Creek placed some reliance on the fact that Mr Kozyrski himself had expressed the opinion that the company's interest in the Joint Venture was worth considerably more than $1.5 million. (I appreciate that the total amount received by Dry Creek was virtually $1.7 million) and had given much higher estimates of that value. I have chosen not to accept Mr Kozyrski's opinions on that matter. First, he was not shown to be an expert in valuing gold-mining tenements. Secondly, I refer to my general reservations, expressed above, concerning Mr Kozyrski's reliability.

That leaves the status of Mr Hemming's opinions.

I decided that it was unsafe to rely on Mr Hemming's opinions. He conceded that they were prepared for quite different purposes and thus reached different conclusions. Mr Hemming was not entirely independent of Dry Creek. He had previously been engaged to provide services to Dry Creek in connection with the preparation of its annual report for the year ended 30 June 1991. He did not deny altering his calculations at the request of either Mr Kozyrski or the Dry Creek directors generally. In my view, when a suggestion is put to a truly independent valuer that he has altered his valuation at the request of the client such a valuer would respond in terms not only of not remembering whether that had occurred but would vehemently deny such a proposition. Although there is reference in what may or may not have been Mr Hemming's final report to the dispute over Dry Creek's interest in the Joint Venture, nowhere in that report does he state that his valuation was based on an 11.8% interest. Furthermore, nowhere in any of his reports does Mr Hemming refer to any comparable sales. By contrast, Mr Maynard, a consulting geologist commissioned by Dry Creek in July 1991 to value certain other gold-mining tenements expressly referred to having taken into account current market values for properties in similar or analogous locations. It is almost invariable for a valuer to have a list of "comparables" to back his opinion. There may have been no such mining properties comparable to the Tenements. However, one could have had more faith in Mr Hemming's evidence if he had dealt with this point somewhat more adequately than simply noting that very few companies exchange assets for cash.

There is some evidence which, in my view, justifies the inference which I have drawn that Dry Creek has not suffered any loss. In a circular undated letter sent on an unspecified date in June 1992 under the signature of Mr Bay, Dry Creek stated that it was pleased to announce the terms of the agreement reached with Samantha. It stated that the position of the company was as follows:

"a) It was a very junior partner in the project;

b) To maintain its equity in the project the Company had to contribute further substantial funds to the end of June 1992 and further significant funds to continue exploration beyond that time;

c) In the event of a mine being commissioned, and bearing in mind no date for mining had yet been set, then the Company would have to borrow for its share of capital costs."

The letter also stated that all of the above would have been "completed under a situation" where two parties had been litigating since December 1991. The letter continued to the effect that the settlement "... positions Dry Creek well for the future as it will have ample cash now for several years of operation and can consider projects of a substantial nature." The general tone of the letter can fairly be described as favourable to the settlement and there was no mention of Dry Creek being forced to settle proceedings on unfavourable terms.

Messrs Judge Constable, in their report dated 10 June 1992 recommended the settlement to Dry Creek's shareholders. They noted that:

•

the sale to Samantha would result in a $1,017,948 profit in the company's books of account with no tax liability arising on the sale of the asset; and

•

Mr Hemming's calculation of Dry Creek's share of the cash flow from the Tenements was calculated without deducting further exploration costs to which Dry Creek would have been obliged to contribute.

I accept that reference to such a substantial profit does not exclude the possibility that the profit might, in other circumstances, have been even greater. I accept also that the later Hemming valuations and Messrs Judge Constable's report refer to the uncertainty of the respective Joint Venture interests. However, the impression I formed from the evidence overall was that Dry Creek would not have obtained any more for its interest in the Joint Venture whether from Samantha or any other willing but not over- anxious purchaser even in the absence of any argument that it held a 20% interest.

There are two other relatively minor factors which to some extent suggest that Dry Creek did not suffer any loss. First, the agreement between Dry Creek and Samantha dated 9 June 1992 recites that the parties agreed for the purposes of that agreement that Dry Creek's beneficial interest in the Tenements was 20%. Secondly, by letters each dated 27 August 1992, Dry Creek's solicitors wrote to Brutus and Mr Kozyrski reserving Dry Creek's rights in respect of the respondents' respective breaches of contract and obligations as a Managing Director. However, it was not until after Brutus issued its District Court writ on 26 February 1993 that the present proceedings were instituted. It may have been that Dry Creek considered that the respondents were financially not worth pursuing. Mr Bay said that it was Mr Vidovich who made the decision to initiate these proceedings. Although Mr Vidovich was a director of Dry Creek from 24 May 1991 to 15 April 1994, he was not called to give evidence. Furthermore, there was no evidence from anyone at Samantha.

Mr Bay agreed that between October 1991 and April 1992 there was no certainty that Dry Creek would receive any income from the Tenements. He described the advantages from Dry Creek's point of view of receiving $1.5 million cash in terms of being able to find a project which could be 100% owned by Dry Creek. The receipt of such an amount also meant that Dry Creek would be able to meet its commitment to repay advances from the Tern Group.

While Mr Hemming was being cross-examined, the respondents tendered a certified copy of the findings of Warden V.J. French SM in certain forfeiture proceedings in the Wardens' Court. In a portion of those reasons the Warden rejected certain evidence given by Mr Hemming on behalf of the defendant. The reasons were tendered in evidence on the basis that they went to Mr Hemming's credibility and also to the question of his independence as an expert valuer. I admitted the evidence under s.103 of the Evidence Act 1995 (Cth) on the basis that it tended to prove that Mr Hemming made a false representation when under an obligation to tell the truth. Mr Hemming was given an opportunity (which he took) to give his explanation about the evidence which he gave in those proceedings. I have decided not to place any weight on the findings in that case. The manner in which the findings were expressed and Mr Hemming's explanation were such that in my view it would be inappropriate and unfair to disbelieve Mr Hemming on the basis of the Warden's findings in that case. The requisite tendency was too slight in all the circumstances.

I reject those of Mr Hemming's valuations which put the value of Dry Creek's 20% interest in the Joint Venture as being greater than $1.5 million and I find that Dry Creek has not established on a balance of probabilities that it suffered any loss when it sold its interest in the Joint Venture to Samantha.

I do not consider that Dry Creek has established that by reason of Mr Kozyrski's defaults which gave rise to Brutus' breach of the Management Agreement (being the same conduct which constituted his breach of duty to Dry Creek), it lost a chance which was compensable within the principles outlined in Sellars v. Adelaide Petroleum NL (1994) 120 ALR 16 . If anything, the evidence disclosed that Mr Kozyrski's defaults presented an opportunity for Dry Creek to sell its interest in the joint venture for a substantial cash payment. There was some evidence that Mr Kozyrski had floated the idea of such a sale at an Operating Committee meeting before the dispute with Samantha, but nothing transpired at that stage.

It follows that as damage is an essential element of each of the causes of action upon which it relies, Dry Creek's application must be dismissed. There is no need to deal separately with the claims under the Trade Practices Act.

The Cross-Claim by Brutus against Dry Creek

Brutus claims the sum of $62,500 from Dry Creek as the balance said to be owing to it pursuant to the Management Agreement. The amount is calculated by reference to the period of fifteen months between 5 February 1992 and 30 April 1992 being the period during which Mr Kozyrski was the Managing Director of Dry Creek. The gross amount said to have fallen due was $120,000 (15 months @ $8,000 per month) of which it is common ground the sum of $57,500 has been paid.

As there did not appear to be any evidence of the circumstances in which the Management Agreement came to an end, I asked Mr S.R. Sirett, counsel for the respondents, during closing address, what those circumstances were. Mr Sirett told me that the contract was what he described as a "self-terminating contract" in that Mr Kozyrski's services were to be provided whilst he was a director or, so he thought, the Managing Director of Dry Creek. If the former were the case then I have difficulty understanding the reference to 30 April 1992 as being the end of the relevant period. The evidence was (see p.636 of Exhibit B3) that Mr Kozyrski was a director of Dry Creek from 5 February 1991 to 10 August 1992. The evidence is somewhat deficient on the point. From the pleadings it is possible to infer that the term of the Management Agreement was co-extensive with the term of Mr Kozyrski's appointment as Managing Director of the company.

The only evidence of the circumstances of the termination of the Management Agreement is contained in the minutes of a meeting of the directors of Dry Creek on 30 April 1992 at which Messrs Bay, Vidovich and Kozyrski were present. The relevant part reads as follows:

"Other tenements

Discussed the Company's other tenements and resolved that no further activity would be required until a review with recommendations was carried out. Noted that S.T.T. Pty Ltd intended hiring a Geologist and resolved to use that person's services.

Mr Kozyrski offered to resign as Managing Director which was accepted. Mr Bay was appointed Managing Director in his stead.

Resolved to terminate the services of Brutus Constructions Pty Ltd effective immediately. Mr Kozyrski was required to render an invoice for actual work due for consideration."

From this rather scant evidence I infer that the Management Agreement was terminated by mutual agreement on 30 April 1992.

It would appear that on 24 June 1992 Messrs Judge Constable wrote on behalf of Brutus to Dry Creek seeking payment of the amount for which Brutus now cross-claims. That provoked the following response from Dry Creek by letter dated 20 July 1992 which, omitting formal parts reads as follows:

"We refer to your letter of 24 June 1992 where an amount of $62,000 (sic) is claimed as being owing at 30 April 1992.

Dry Creek Mining NL considers that no amount is payable to Brutus Constructions Pty Ltd and reserves its rights to seek a refund on fees already paid as it considers that the services provided were not provided in a professional manner. The company is compiling information regarding damages caused and may be seeking legal advice in the near future."

There were similar letters each dated 27 August 1992 from Dry Creek's solicitors to Brutus and Mr Kozyrski to which I have referred above.

The essence of Dry Creek's defence to Brutus' cross-claim is that by reason of the factual circumstances giving rise to the complaints made by Dry Creek in the statement of claim, Brutus was in breach of the Management Agreement and thus not entitled to any further payment under that agreement. Dry Creek pleads that it was an implied term of the Management Agreement that payment was conditional upon Brutus complying with the terms and conditions of the Management Agreement, that it did not so comply and was therefore not entitled to any further payment for its services.

In my view, the quality of service which Brutus caused to be provided to Dry Creek fell well below the level required by the Management Agreement. I refer to the findings above to the effect that Mr Kozyrski's omissions constituted a breach of duty on his part and also resulted in Brutus being in breach of contract. Put another way, for Brutus to succeed in its cross-claim against Dry Creek it must, in my view, show that it substantially performed its contract. For the same reasons as I have just outlined, it has failed to prove substantial performance. See Phillips v. Ellinson Brothers Pty Ltd (1941) 65 CLR 221 at pp.233-234 per Starke J. I do not think it is necessary to characterise the Management Agreement as being an entire contract for the purposes of reaching this conclusion. The situation, as I see it, is simply that for Brutus to have become entitled to the moneys payable under the Management Agreement it was required substantially to have complied with its terms and it did not do so.

For those reasons the cross-claim will be dismissed with costs.

I certify that this and the preceding forty-nine (49) pages are a true copy of the Reasons for Judgment of Justice Carr.

Associate:

Date: 1 September 1995