DTZ Worldwide Limited v AIG Australia Limited

By a share sale agreement dated 14 June 2014 (the SSA), the plaintiff, DTZ Worldwide Limited (DTZ), agreed to buy from UGL Limited (later, UGL Pty Ltd), United Group Pty Ltd (later, MTCT Services Pty Ltd) and United Group Investment Partnership (a general partnership constituted under the laws of Delaware) (together, the United Group), a group of companies (the DTZ Group) that operated a property services business in 52 countries throughout the world (the DTZ Business) for a total price of $1.215 billion. The purchase price was subject to several adjustments on completion to reflect changes in working capital and any deviation in expected financial performance for the fourth quarter of the financial year ending 30 June 2014, as well as the retention for a period of time of an Escrow Amount to cover specific contingent liabilities of the group. The actual amount paid on completion was $1,179,506,172.84.

One of the companies in the DTZ Group was DTZ Facilities & Engineering (S) Limited (formerly, United Premas Limited) (Premas), which was the entity through which the United Group carried on business in Singapore, Thailand, Malaysia and the Philippines.

On 24 August 2010, Premas had entered into a facilities management agreement (the FM Contract) with Sports Hub Pte Ltd (SHPL) in respect of the Singapore Sports Hub Project (the Project). The Project involved the redevelopment through a public private partnership (PPP) between the Singaporean Government and SHPL of an existing indoor stadium and the construction of additional facilities comprising a national stadium, an aquatic centre, a multi-purpose indoor arena, a retail and commercial development, a sports museum, a sports medicine and visitors’ centre, offices and carparking. It also involved the provision of Facilities Management Services, including cleaning, security, estate management, helpdesk, utilities and carpark management, and “Life Cycle Management”, including planned and preventative maintenance services. Those services were provided by Premas to SHPL under the FM Contract. SHPL itself was a special purpose vehicle that had been established by a consortium consisting of HSBC Infrastructure Fund Management Limited (HSBC), Dragages Singapore Pte Limited (Dragages) (a subsidiary of Bouygues Construction, a multinational construction company based in France), Premas, and later Global Spectrum Asia Limited (Global Spectrum) (the Consortium). Premas had a 5% interest in SHPL. The balance was held by HSBC, Dragages and Global Spectrum. The Consortium had successfully tendered for the Project in 2007.

The United Group gave various warranties in the SSA about which more will be said shortly. Clause 11.4 of the SSA provides:

By cl 12.7 of the SSA, DTZ was required to obtain warranty and indemnity insurance in the form of a policy issued by the defendants on the date of the SSA (the W&I Policy). That policy took the form of an insurance tower consisting of an underlying policy issued by the first defendant, AIG Australia Limited (AIG), and eight excess policies. Annexure A to this judgment shows the structure of the tower including the insurers who provided cover in each layer and the maximum amount for which each is liable. As is apparent from Annexure A, some of the policies of insurance were entered into by the insurers through their agents, who were also joined as defendants in the proceedings. More will be said about the terms of the W&I Policy later in this judgment.

Under cl 12.7(b)(2) of the SSA, DTZ agreed, subject to certain irrelevant exceptions, that “it will not be entitled to make, will not make, and waives any right it may have to make, any Claim against a Seller arising out of a breach of Warranty…”. The effect of this provision is that, subject to irrelevant exceptions, any claim for breach of the warranties contained in the SSA must be made against the insurers, not the United Group.

In these proceedings, DTZ claims that the United Group breached several of the warranties contained in the SSA in three principal respects. Each relates to the FM Contract.

First, DTZ says that the United Group breached the warranties because it incorrectly accounted for payments totalling SGD11.4 million that were paid to Premas by SHPL and Dragages in the 2011, 2012 and 2013 financial years (FY11, FY12 and FY13 respectively) (the Side Letter Payments), which had the effect of inflating Premas’s revenue, gross margins, EBITDA and EBIT for those years and understating its liabilities. It is common ground that the payments were received by Premas in the years in which they were brought to account. However, it is DTZ’s contention that those amounts should only have been recognised as revenue in later years. The reasons for that contention are explained later in this judgment.

Second, DTZ says that the United Group breached the warranties because Premas had suffered a net loss of SGD4.15 million on “mobilisation costs” (that is, costs incurred in connection with entry into the FM Contract, such as the preparation of procedure manuals) which it wrongly accounted for as capitalised expenses in its balance sheet rather than as an expense in its profit and loss statement for FY14, with the result that the FY14 accounts overstated Premas’s and the United Group’s profits and gross margins for that year. DTZ also claims that the amount of those costs was inflated.

Third, DTZ submits that Premas should have concluded that the FM Contract was an onerous contract (that is, a contract that was expected to make a loss over the life of the contract) with the consequence that those losses should have been capitalised and recognised in the profit and loss statement and balance sheet for FY14. The FM Contract is said to have been loss-making once the adjustments referred to earlier and several other adjustments were made to the expected income and expenses arising from the FM Contract, including expected increases in labour costs, the imposition of performance penalties and an increase in plant and equipment lifecycle costs.

Relying on expert evidence given by Professor Gordon Klein (who is a faculty member of UCLA’s Anderson School of Management), DTZ submits that it is entitled to recover damages totalling approximately $234 million plus interest. Essentially that amount has two components. First, is an amount of $213 million that is said to arise principally from the application to the projected cashflows of the business of a higher discount rate to the ones said to have been used by DTZ in calculating the purchase price for the DTZ Business. According to Professor Klein, the use of a higher discount rate was appropriate to reflect the additional risk associated with the forecast earnings to which the discount rate was to be applied to arrive at a net present value for the earnings generated by the DTZ Business. That additional risk was said to arise from the accounting errors identified by DTZ. Second, is an amount of $21 million that is said to arise from the need to provide for the losses expected to be incurred on the FM Contract in FY2014. Following an expert conclave between the expert accounting witnesses who prepared reports for the purposes of the case, Professor Klein accepted that that amount should be reduced to $17.82 million.

In its final submissions, DTZ put an alternative case. According to that case, the United Group breached the warranties by failing to disclose a number of problems with the FM Contract (the problems that are said to make it an onerous contract). If those matters had been disclosed, DTZ and a reasonable hypothetical purchaser would have made further enquiries (described in DTZ’s submissions as a “deep dive”) into the facts relevant to the FM Contract. Armed with information that those enquiries would have revealed, DTZ and a hypothetical purchaser would have discounted the purchase price by $146.8 million, representing the net present value of what are said to be the likely future losses associated with the FM Contract and a further amount of $100 million. That further amount corresponds numerically to an amount DTZ had agreed to pay in addition to the offer price it had derived by applying a multiple to DTZ Group’s future maintainable earnings.

The third defendant, Liberty Specialist Markets Australia Pty Ltd, which acted as agent for the second and fourth excess layer insurers, has been deregistered. Consequently, it ceased to be a party to the proceedings. Shortly before the hearing, DTZ settled its claim against AIG on terms that involved an admission of liability by AIG. It also settled its claim against the fifteenth defendant, Zurich Insurance Plc. As is apparent from Annexure A, the fourth excess layer was provided under three separate contracts. During the hearing, DTZ also settled its claims against the insurers who provided cover under the first and second of those contracts, and with the fifth and sixth excess layer insurers and their respective agents. Annexure A sets out the insurers against whom the proceedings are maintained and the layers or the proportion of the layers in respect of which those insurers provided cover. It is apparent from Annexure A that the claims are pursued against the insurers who provided the first, second and third excess layers together with the insurers who provided a proportion of the fourth excess layer cover under the third fourth excess layer policy. They are the second and fourth to sixth defendants (together, the Joint Defendants) and the seventh defendant, which was separately represented.

In early 2006, the government in Singapore, acting through the Ministry of Community Development, Youth and Sports and through the Singapore Sports Council (later, Singapore Sport) (the SSC), invited private sector bidders to submit prequalification responses for the Project, which Premas, Dragages and HSBC did on 22 February 2006. Subsequently, on 9 February 2007, the three bidders entered into a memorandum of agreement (the Consortium Agreement) under which they formed the Consortium to bid for the Project. Later, Global Spectrum joined the Consortium, and on 20 November 2007, the Consortium Agreement was amended to reflect its participation. In the meantime, the Consortium lodged its final bid on or about 8 November 2007.

The Consortium Agreement contemplated that if the parties’ bid was successful, they would establish a special purpose company (which became SHPL) to contract with the SSC. It was also agreed that SHPL would contract with Dragages to undertake the construction work for the Project and with Premas to undertake the management of the facilities over the life of the Project, which was expected to be 25 years. Under cl 2.1.2, Premas was responsible for the preparation of the submissions relating to “the management, maintenance and the life cycle of the Project” and the risks relating to those matters were to be allocated to what became the FM Contract. Clause 6.2 stated that it was the intention of the parties that each contract entered into with the project company (that is, SHPL) would be “back-to-back” with the Project Agreement between SHPL and the SSC.

A side letter dated 21 December 2007 (the Sports Hub Side Letter) recorded that each party would bear “its own costs arising in connection with the preparation, submission and negotiation of the Bid up to Financial Close, except as provided for in this Side Letter…”. The Sports Hub Side Letter also provided that external bid costs and certain of Dragages’s costs would be shared in the following proportions:

Before the Consortium submitted its final bid, there were negotiations between its members on the terms of the bid. As part of those negotiations, on 3 October 2007, Premas provided Dragages and HSBC with a pricing model for the services it would be responsible for providing, and on 5 October 2007 it provided a summary of the key features of that model. Relevantly, the model and letter contemplated that there would be two ways in which Premas’s fees would increase over the life of the contract. One was by reference to market every five years (which was described by the parties as a “benchmarked period”). The other was an annual increase which in the case of Labour was stated to be “CPI + 2.5% up to 1st benchmarked period and CPI thereafter” and in the case of Material was stated to be “CPI + 1.0% up to 1st benchmarked period and CPI thereafter”.

In January 2008, the Consortium was appointed the preferred bidder. The terms of the Consortium’s final bid are not in evidence, but it seems clear from subsequent events that those terms did not include an increase beyond CPI for the annual increases in fees to be charged by Premas for the services it would provide. How that came about — that is, how it came about that the Consortium tendered on the basis that increases in the fees for services to be provided by Premas would be limited to increases in CPI in the first benchmarked period — is not explained by the evidence.

There was a substantial delay in finalising the terms of the contract between the SSC and SHPL, caused primarily by difficulties the Consortium was having in raising financing because of the global financial crisis that developed in 2008.

Two issues that came up between the Consortium members during the period from January 2008 to “financial close” (that is, the signing of a project agreement with the SSC), which occurred on 24 August 2010, were the recovery of bid costs and compensation that Premas sought because it would not be able to increase the fees for the services it provided in the first benchmarked period beyond increases in the CPI.

In relation to the compensation for bid costs, the SSC had agreed to make a contribution towards the bid costs at the time of financial close. However, it became apparent that the external bid costs to be shared between the members of the Consortium and Premas’s internal bid costs were and would be substantially more than budgeted for at the time the parties agreed the Sports Hub Side Letter and substantially more than the amount to be paid by the SSC in respect of them. The payment of the bid costs was the subject of discussion and correspondence between the members of the Consortium. As I have explained, it was originally anticipated that those costs would be reimbursed out of funding to be raised by the Consortium for the Project. However, the Consortium was successful in persuading the SSC to increase its contribution to the bid costs to the point where Premas thought that there might be a small surplus compared to budget, which would be shared by members of the Consortium in proportion to their contributions to external costs.

In relation to indexation, it is unclear how this topic came up. It appears to have been raised by Premas with the other members of the Consortium in negotiations concerning the financial adjustment that was to be made between the members of the Consortium at the time of financial close. It was Premas’s position that it had always sought indexation above CPI during the first benchmarked period, that because of the delay in financial close the amount it would forgo by giving up indexation on that basis had increased, and that it should be compensated by the other members of the Consortium for that loss.

The issue was apparently discussed at meetings on 9 and 14 December 2009, following which Premas circulated a note titled “FM Fee Indexation” to the other members of the Consortium in which it claimed that its total loss on indexation if financial close occurred in April 2010 was SGD17.41 million. That amount comprised an amount of SGD11.02 million, which was calculated on the basis that the 5-year period over which indexation above CPI would have been applied, if Premas had got its way, commenced on the day of “Final Clarification” of Premas’s position (to use Premas’s terminology), which was the day Premas sent its letter dated 5 October 2007. It also included an amount of SGD6.39 million, which was calculated as the additional loss that would arise on the assumption that the 5-year period ran not from 5 October 2007 but from April 2010 (the expected date of financial close).

There is no direct evidence that other members of the Consortium accepted Premas’s claim. However, in a United Group board paper dated 18 April 2010 seeking formal approval to enter into the relevant agreements, including the FM Contract, there is a table showing projected cashflows for the first five years of the FM Contract which shows an inflow in each of the first three years of SGD4.0m that is described as “FM Indexation”. A note to that item records:

Financial close in fact occurred on 24 August 2010. As I have explained, for that purpose the Consortium established SHPL, which entered into a contract with the SSC (the Project Agreement) to construct the Project and to manage it for a period of 25 years. SHPL in turn entered into the FM Contract on 24 August 2010 with Premas to enable SHPL to discharge its obligations under the Project Agreement to manage the facilities over the life of that agreement.

The scope of the work to be undertaken by Premas was set out in a Services Specification: cl 20.1 of the FM Contract. Under cl 26.1, Premas was entitled to be paid a Monthly Payment for that work calculated in accordance with Schedule 19 together with an amount of SGD2,650,000 as a fee for equipment and an amount of SGD1,710,000 for set up costs. Both those amounts were payable in three equal monthly instalments immediately preceding the scheduled Project Operation Date (POD).

The monthly payment had several components including a Monthly Services Payment and a Monthly Lifecycle Payment (a payment in respect of Premas’s obligation to maintain and replace plant and equipment over the life of the FM Contract). The base annual service payment was stated to be SGD1,932,598 during the Transition Period (defined as the period between the date the conditions precedent to the FM Contract were satisfied and POD) and SGD14,891,449 thereafter. Schedule 19 to the FM Contract made provision for various deductions to be made from the monthly payment in respect of the unavailability of part of the facilities during the month or the failure of Premas to meet certain performance criteria set out in the FM Contract during that month. It also provided for annual increases in the monthly payment by reference to increases in the CPI.

Consistently with the basis on which the Consortium tendered for the Project, the FM Contract also contained a benchmarking regime in Schedule 17 which was to be applied every five years. The purpose of that regime was stated to be to determine whether Premas “is being paid a fair market price for the FM Benchmarked Services”: paragraph 2.2 of Sch 17. “FM Benchmarked Services” is defined to mean “the Car Park Management Services, Cleaning Services, Help Desk Services, Security Services, and any other Service or cost from time to time designated as such by the parties.” Paragraph 1 of Schedule 17 states that “[t]he parties agree that any Benchmarking shall be carried out in good faith and each party shall act reasonably in relation to any such Benchmarking.”

The benchmarking regime is complicated, but essentially it involves two stages. The first involves Premas comparing “the standards, specifications, scope and prices of the FM Benchmarked Services with the standards, specifications, scope and prices of the Comparable Services”: paragraph 2.3 of Sch 17. “Comparable Services” is defined to mean “(a) services delivered to the same or comparable standards as the FM Benchmarked Services; and/or (b) services carried out and performed under existing agreements between financially sound and reputable parties on comparable commercial terms to agreements made under or in accordance with the PPP or equivalent procedure.” Premas was then entitled to submit a proposal to SHPL for delivery of the Benchmarked Services “and the consequent adjustment of the Service Payment required to reflect” the results of the benchmarking. Under paragraph 3.2, SHPL is required to indicate which of Premas’s proposals in relation to the services the subject of benchmarking are acceptable to the SSC and which are to be “Market Tested”. In the case of the former, the Schedule provides a mechanism for amending the terms on which the services are provided. In the case of the latter, the Schedule provides a mechanism for the market tested services to be put out to tender and gives SHPL a right to accept a tender that is more favourable than the terms proposed by Premas based on benchmarking. In that event, the relevant services are excluded from the FM Contract and the fees payable under the FM Contract are adjusted accordingly. The Project Agreement contains corresponding provisions and, in practice of course, the outcome of benchmarking will be determined by the application of the provisions in that agreement.

On 24 August 2010, SHPL and Premas also entered into an agreement (the Sale Agreement) by which Premas agreed to transfer “all its rights and obligations in respect of the Development Works, including the right to enter into the Project Agreement and the legal and economic ownership for the rights to the Development Works”. The “Development Works” were defined in Recital A as “certain development works [undertaken by Premas] in relation to the Project and to facilitate the entering into of the Project Agreement”. By cl 2.2, SHPL agreed to pay Premas a Development Fee of SGD6,396,337. Clause 3.1 provided:

The day after financial close (that is, on 25 August 2010), Premas was sent two letters (the Side Letters). One was from SHPL (the SHPL Side Letter) by which SHPL acknowledged that Premas “is entitled to be paid an outstanding amount of S$1,000,000 being reimbursement of costs incurred during the bid development phase of the Singapore Sports Hub.” The letter stated that that amount would be paid on an invoice to be issued by Premas “thirty months after Condition Satisfaction Date” subject to Premas not being in default under the FM Contract.

The second letter was from Dragages (the Dragages Side Letter). It was countersigned by Premas, which accepted that by counter-signing the letter it agreed “to also comply with and be bound by its terms.” The letter was in the following terms:

The circumstances in which the Side Letters came to be sent are not entirely clear. It appears that the SHPL Side Letter was drafted by HSBC. As the Joint Defendants point out in their opening written submissions, there is a Premas Excel spreadsheet which indicates that Premas’s total expected bid costs up to financial close were SGD8.25 million of which it expected to recover SGD7.11 million at financial close, leaving a shortfall of SGD1.15 million, which may well explain the purpose of the letter. However, that explanation is not consistent with some of the correspondence in relation to the Dragages Side Letter.

As to the Dragages Side Letter, on 14 August 2010, Mr Zac Kerr, a senior associate with Freehills, the solicitors acting for Premas, sent an email to representatives of Dragages saying:

Mr Bruno Castaignet of Dragages responded that same day saying:

In response to that email, Mr Stewart Walters, an employee of the United Group (who had been copied in on the earlier emails) sent an email on 16 August 2010 saying:

Following correspondence between the parties, on 22 August 2010, Mr Ludwig Reichhold, managing director of Dragages, sent HSBC and Mr Walters a draft of the Dragages Side Letter, which recorded that:

An amended draft of the letter was circulated by Premas on 23 August 2010. That version simply recorded that:

Commenting on that draft, Mr Reichhold said in an email of the same date:

Mr Walters responded to that email saying that he had had a conversation with Mr Castaignet nearly a week ago in which Mr Castaignet had “articulated a concern as to the level of documentation in order to meet Bouygues governance rules” and that he understood Dragages would “put together draft wording that was more comprehensive and would meet DSPL needs.”

On the same day, Mr Walters raised the question “why don’t you move the $10M to a payment by PPP Co [that is, SHPL] to Premas rather than the long hand PPP Co to DSPL to Premas?” The response to that query from HSBC was “[t]he money is in the capex”. Mr Walters accepted that response and indicated that the revised wording would be sent “any second now”. It appears from this exchange that the parties had allowed for the payment to Premas as part of the capital costs of Dragages undertaking the construction work.

Following financial close, work commenced on the Project and continued throughout the period from 2011 to 2014.

In early 2011 there was internal correspondence within Premas concerning the accounting treatment of the payments due to it under the Side Letters. It is apparent from that correspondence that the matter was also discussed with Premas’s auditors, KPMG. In an email dated 21 February 2011 from Mr John Chng, the Commercial Director of Premas, to Mr Walters, Mr Chng said:

Mr Walters replied on the same day saying that “[t]his will make arguing a case for a different treatment with the auditors much harder.” In an email sent approximately one and a half hours later, Mr Walters said:

It appears that that position was put to, and was accepted by, KPMG. It was confirmed in August 2011 by Dragages in response to audit confirmation letters that KPMG sent it. In the meantime, in late February 2011, Premas sent Dragages an invoice for the first instalment of the amount payable under the Dragages Side Letter. The invoice was paid on or about 20 March 2011. The accounting ledgers are not available for the relevant years, but it is reasonable to infer that the Side Letter Payments were accounted for consistently with the terms of the Side Letters — that is, they were treated as income for services provided previously or in the relevant years.

Premas issued further invoices to Dragages on 24 February 2012 and 24 February 2013 for SGD4 million plus GST and SGD3 million plus GST respectively. The first of those invoices was paid on 7 March 2012, and the second was paid on 1 March 2013. On 24 February 2013, Premas also issued an invoice to SHPL for SGD1 million, which was paid on 22 March 2013.

DTZ was incorporated in the first half of 2014 by a consortium (the TPG Consortium) made up of TPG Global LLC (which, together with its affiliates including Asia VI SF Pte Ltd, is referred to as TPG), PAG Asia Capital (which, together with its affiliates including PAG Asia One LP, is referred to as PAG) and Ontario Teachers’ Pension Plan Board (OTPP) for the purpose of bidding for the shares in the DTZ Group with the intention of combining the DTZ Business with the business carried on by Cushman & Wakefield (C&W). C&W was a privately owned property services group which had a large operation in the United States and a smaller operation in Asia. TPG is a private investment firm and PAG is described as “alternative investment managers” with a focus on Asia. The project of seeking to acquire the DTZ Business was referred to by TPG and PAG as “Project Drone”.

TPG and PAG had made an unsolicited offer in November 2013 to acquire the DTZ Business, but that offer had been rejected. However, in February 2014, the United Group announced that it would conduct a sales process for the DTZ Business.

On 13 March 2014, Goldman Sachs, the United Group’s financial adviser, invited TPG and PAG to submit a non-binding indicative offer for the DTZ Business by 21 March 2014. The letter enclosed a slide deck recording financial information about the DTZ Business.

On 21 March 2014, TPG and PAG accepted that invitation and submitted a non-binding indicative offer for “A$1.325 billion to A$1.375 billion, or 12.0x to 12.5x normalized FY14E EBIT”. The reference to “normalised FY14E EBIT” was a reference to the normalised FY14 EBIT in the slide deck provided by Goldman Sachs, which was stated to be $110.1 million.

Between 31 March 2014 and 16 May 2014, TPG and PAG conducted due diligence on the DTZ Business. At that time, OTPP joined the TPG Consortium.

As part of the due diligence, the TPG Consortium was provided with access to a physical data room (consisting of 12 documents) and a virtual data room (consisting of many more). There was also a management presentation on 12 April 2014 in Los Angeles which was attended by several representatives of the TPG Consortium. The management presentation was accompanied by a 136-page slide deck titled “DTZ management presentation”. The slide deck contained some information in relation to the FM Contract. Included in the virtual data room was a financial and tax vendor due diligence report prepared by KPMG titled “Project Fission” dated 2 April 2014 (the KPMG Report). The KPMG Report contained a reconciliation of the reported EBIT and EBITDA for FY13 to normalised EBIT and EBITDA for that year to remove certain non‑recurring items and add standalone costs reflecting costs that would be incurred by DTZ after it ceased to be part of the United Group. The due diligence material also contained consolidated management accounts for FY11, FY12, FY13 and FY14 to 31 March 2014. The data room also included a long question and answer document.

On 16 May 2014, the TPG Consortium submitted its “final” offer to acquire the DTZ Business from the United Group on a debt and cash free basis for a price of $1.1 billion. The offer letter explained that that amount was calculated as 12.6 times the projected FY14 maintainable EBIT of $87.1 million. The figure of $87.1 million had been derived by PricewaterhouseCoopers (PwC), who had been retained as financial advisors to the TPG Consortium. The offer letter explained that that figure was arrived at by taking management’s projected normalised EBITDA for FY14 and making several specific adjustments (that had been recommended by PwC) to arrive at a projected EBITDA of $111.6 million and projected EBIT of $87.1 million. The specific adjustments are not relevant to the issues in this case.

The letter also explained that the offer had assumed that the maintainable EBITDA for the quarter ended 30 June 2014 was $47.7 million and that, to the extent that that was not achieved, “the purchase price would be adjusted in the SPA [that is, the SSA]”. The letter also made it clear that the price would need to be adjusted for “movements in working capital against a target working capital and target retained cash at completion pursuant to a completion accounts process”.

Following negotiations between the parties, the bid price was increased by $15 million and then, in discussions on 24 May 2014 and the morning of 25 May 2014 involving Mr Trevor Rowe, the Chairman of UGL Limited, and Mr Ed Wittig, the managing director of Goldman Sachs, among others, by a further amount of $100 million. Following those discussions, Mr Ben Gray, who at the time was the joint Head of Asia at TPG, sent an email on 25 May 2014 in response to an email he had received from Mr Wittig confirming that a price of $1,215 million was acceptable to the United Group. There is no suggestion that the additional amount had a logical foundation, other than that it was a price that the TPG Consortium was willing to pay and the United Group was willing to accept if the details of the agreement could be sorted out, although as internal TPG Consortium documents reveal, that price represents 10.9 times the projected maintainable EBITDA for FY14 of $111.6 million.

The SSA was signed on 14 June 2014.

By cl 10.1 of the SSA, completion was to occur on the later of 30 June 2014 or five business days after satisfaction or waiver of the conditions in cl 2.1. Completion, in fact, occurred on 5 November 2014.

Clause 11.1 provides:

Clause 12.1 states that “[t]he Buyer acknowledges and agrees that … the Buyer is aware of, and will be treated as having actual knowledge of, all facts, matters and circumstances that … are fairly disclosed in the Disclosure Materials or fairly disclosed in the Disclosure Letter”. “Disclosure Materials” is defined to include the material contained in the physical and virtual data rooms and all written answers to written questions submitted by DTZ.

Under cl 12.1(c), “the Buyer must not make a Claim under the Warranties … and the Sellers will not be in breach of a Warranty … if the facts, matters or circumstances giving rise to such Claim are disclosed or are deemed to have been disclosed under clause 12.1(a).”

Clause 12.2 provides:

Clause 12.4 provides:

Clause 12.5 states that “[t]he Sellers are not liable under a Claim arising from a breach of Warranty … unless the amount finally agreed or adjudicated to be payable in respect of that Claim … exceeds $500,000 … and either alone or together with [other amounts] exceeds the retention under the W&I Policy”.

Clause 9 requires the parties to cause “Q4 2014 EBITDA Accounts” to be prepared in accordance with Schedule 19 to the SSA and “Completion Accounts” to be prepared in accordance with Schedule 20. The SSA and Schedules contain provisions for adjustment to the purchase price to be made depending on the final EBITDA for the fourth quarter of FY14 (compared to the projected EBITDA for that quarter), the extent to which the Completion Accounts Working Capital is different from the Target Working Capital (as defined), and whether Retained Cash (as defined) is less than or greater than zero. Schedules 19 and 20 set out how the two sets of accounts are to be prepared, including relevant materiality limits. Both schedules provide a mechanism for either party to challenge the accounts, and both provide that neither party may challenge an individual line item where the amount of the dispute is less than $200,000.

The warranties given by the United Group under the SSA are set out in Schedule 2. They include the following:

“Accounts” is defined in the SSA to mean “the consolidated management balance sheet of the Target Group Entities as at the Accounts Date [31 March 2014] and the consolidated management profit and loss account of the Target Group Entities for the period ended on [31 March 2014]”. “Historical Accounts” is defined to mean “the consolidated management balance sheets of the Target Group Entities as at 30 June 2012 and 30 June 2013, and the consolidated management profit and loss accounts of the Target Group Entities for the period ended on 30 June 2012 and 30 June 2013.”

“Material Adverse Effect” is relevantly defined to mean “… any event, change, circumstance or effect that, either alone or in combination with other such events, changes, circumstances or effects, has a material adverse effect on the business, operations, prospects, assets, liabilities, financial condition or results of operations of the Target Group Entities taken as a whole…”.

The substantive terms of the W&I Policy are set out in the primary policy dated 14 June 2014 between AIG and DTZ (which is referred to in the policy as “Drone Bidco Limited”).

Under the term of the W&I Policy, the insurers agreed to “indemnify the Insured for, or pay on its behalf, any Loss”: cl 2.1. “Loss” is relevantly defined in cl 4.1(a) of the policy to mean:

The effect of these provisions is that the insurers are liable, subject to a deductible of $12.5 million and to their respective policy limits, to pay the amount that DTZ would, but for the limitations contained in cl 12 of the SSA, have been entitled to recover under the SSA from the United Group provided the amount claimed under the W&I Policy exceeds $500,000.

“Breach” is defined to mean:

POD for the Project was expected to occur in March 2014, but it was delayed for several months and did not in fact occur until 2 July 2014, shortly after the SSA was signed.

In anticipation of POD in March 2014, Premas, in the second half of 2012, put together a senior management team “to provide an interface with Dragages over the design and construction of the facilities, as well as, [sic] develop operating policies and procedures” (to quote from a memo dated 16 July 2013 prepared by Mr Vivienne Selzer, who at the time was the Executive General Manager, Finance, Australia, New Zealand and South East Asia of UGL Pty Limited). According to Mr Selzer’s memo, KPMG Singapore had advised Premas that the costs incurred in developing policies and procedures should be capitalised, on the basis that their purpose was “to mitigate abatements that DTZ may potentially suffer”. Mr Selzer’s memo says that, for the purposes of estimating those costs, the “Sports Hub team” had been asked to estimate the time spent developing and documenting policies and procedures. The estimate was they had spent SGD503,000 worth of time between October 2012 and June 2013 “purely on documenting Procedures & Policies”. In addition, members of the team estimated that for every hour they spent documenting policies and procedures, they spent a further hour in “reading operating manuals & building plans, interacting with stakeholders and researching best practice”. On that basis, Mr Selzer sought approval to capitalise SGD1,006,000 of total staff costs of SGD1,932,000 in the period October 2012 to June 2013 in the FY13 accounts (with the rest to be “booked in FY2013 P&L”). In addition, Premas expected to be reimbursed an amount of SGD1,710,000 for its mobilisation costs under the FM Contract of which SGD926,000 was brought to account in FY13. Mr Seltzer’s memo also indicated that Premas expected to incur total staff costs between October 2012 and March 2014 of SGD5,069,000, of which it was proposed to capitalise SGD2,639,000.

In fact, according to extracts of a general ledger balance, by 31 March 2014 Premas had capitalised a total amount of SGD3,226,390.94 described as “Sportshub mobilisation”. It capitalised a further amount of SGD23,835.09 in April 2014.

Another issue that had to be addressed in advance of the commencement of operations was cleaning. At some stage in 2013 the cleaning work was put out to tender. On that topic, Mr Jun Sochi, who was the Chief Executive of Premas between mid-December 2012 and early 2020 and who gave evidence for DTZ (he is still employed by DTZ’s now parent, C&W), sent an email to Mr Arundel dated 17 December 2013 in which he said:

What, however, became of this issue is not entirely clear from the evidence. A cleaning contract was signed. It appears that costs were reduced substantially so that they were close to budget by reducing the number of cleaners from a budgeted 81 to 48. However, on 2 October 2014 Mr Sochi sent Mr Arundel an email in which he said:

Cleaning continued to be an issue at least up until the time of completion of the SSA on 5 November 2014. So, for example, a presentation dated 31 October 2014 for the “DTZ PPP Australia Team”, which outlined a strategy to improve performance in relation to the FM Contract, stated: “DTZ Supervision to be implemented of the cleaning contractor, a review of the resourcing model to be undertaken…”.

A third issue was the preparation of an assets register. That register was important to enable Premas to track the assets comprising the Project and to plan maintenance and replacement schedules, which were also important for budgeting. According to Mr Sochi, he was involved in establishing the TAM [Total Asset Management] Singapore Sports Hub Steering Committee in or around February 2013, which met monthly and was responsible for overseeing the creation of a database to track and manage the Sports Hub assets for which Premas was responsible. Mr Sochi points to presentations to the committee in October 2013 and March 2014 which indicate that there were delays in undertaking that work. For example, the report for March indicated that Premas was still waiting to receive (from Dragages) information concerning the ELV System (which included the CCTV and card access systems), the plumbing system and what is referred to as Venue Specified Equipment. According to evidence given by Mr Sochi, the absence of an asset list from the Dragages team “throughout 2014 and into 2015” meant that he could not be confident that the budget for lifecycle costs was adequate, which was a matter that he discussed informally with Mr Arundel from time to time.

A fourth issue that arose was the poor quality of the pitch in the main stadium. The pitch was delivered late, the quality of the grass was poor, as was its maintenance, which, to quote from an email Mr Sochi sent to Mr Arundel on 19 October 2014, included the use of “the wrong concentration of paint to mark the lines for rugby and football, damaging the grass at the line markings; rolling grass cutting machinery that left tire marks in the pitch; an errant water irrigation spout that damaged the pitch; etc”.

The problems with the pitch came to the attention of TPG in September 2014 when Mr Gray was told of them by Mr Richard Seow, the then Chairman of the SSC and, according to Mr Gray, “a long-term advisor to TPG”. Mr Gray raised the issue with Mr Richard Leupen, the Managing Director and CEO of UGL, following which TPG was provided with a substantial amount of information by Premas concerning the problems with the pitch and the steps Premas was taking to address them. It appears that TPG raised the question whether the problems with the pitch gave rise to a breach of warranty claim under the SSA. Mr Simon Harle, a partner of TPG at the time, gives evidence that the issue “was resolved post-completion without a warranty claim”, although he says that he does not know the details. One step Premas did take to resolve the problems with the pitch about which the TPG Consortium was not informed was to buy a number of ventilation fans, which had not been budgeted for.

A fifth issue, which was connected to some of the others, was that SHPL imposed performance penalties on Premas under the FM Contract, reflecting penalties that had been imposed on SHPL by the SSC. However, the significance of this issue is unclear. As Mr Sochi points out in his affidavit evidence, the most significant deduction before completion of the SSA was a deduction of SGD805,000 that SSC had notified SHPL in October 2014 that it proposed to deduct from the July payment because there were delays in answering questions it had raised. But the email chain notifying Mr Sochi of the deduction suggests that the amount was withheld pending answers to the questions. It was not a permanent deduction because of a failure to achieve a benchmark. The formal notice dated 4 November 2014 that was issued by SHPL to Premas notified it of a deduction from the July fee of SGD81,925.40 (excl GST). It is apparent from Mr Sochi’s email to Mr Arundel dated 2 October 2014 (quoted above) that Premas thought that it was likely that some deduction would be made from the monthly fees for August and September 2014 because of issues with the cleaning, but there was no reason to think that other deductions would be continuing.

Premas continued to experience problems with the FM Contract following completion of the SSA. On 15 January 2015, SHPL sent Premas a letter stating that SGD113,549.29 would be withheld in deductions from the October “Monthly Unitary Payment”. On 27 February 2015, it sent Premas a letter stating that the deduction for November would be SGD109,313.35.

In mid-January, Premas prepared a 2015 calendar year forecast for the FM Contract, which forecast revenues of SGD19.452 million, total costs of SGD25.211 million (compared to an estimate of SGD17.517 million at financial close), and a total gross loss of SGD4.137 million (compared to an estimate of a profit of SGD2.893 million at financial close). The forecast also forecast losses of a similar order in 2016, 2017 and 2018 and a loss of SGD1.196 in 2019.

In January and February 2015, Mr Selzer and Mr Arundel developed a five-year plan (the Five Year Plan) to improve the performance of the FM Contract. Their final views were set out in a document dated 9 February 2015. The Executive Summary of that document relevantly recorded the following:

In September 2015, DTZ was acquired by C&W.

On 21 March 2017, Ms Jodi Swinburne, the then Chief Financial Officer of Asia Pacific at C&W, prepared a paper dealing with the purchase accounting implications of the acquisition of DTZ so far as the FM Contract was concerned. Ms Swinburne describes the purpose of the paper in these terms:

Ms Swinburne concludes that “an unfavorable [sic] contract existed as of the acquisition date”. She gives a number of reasons, including that “[i]n the 3 years leading up to the acquisition (2011-2013) SSH’s [that is Singapore Sports Hub’s] annual gross margin was positive only after taking into account the upfront recognition of [a] $12.4m (SGD) fee payment received in three installments [sic] from Dragages ($11.4m SGD) and SHPL ($1m SGD)”; the FM Contract had made a loss of SGD1.9m in 2014 and SGD2.55 m in 2015; the imposition of performance penalties demonstrated that staff levels were insufficient and would need to be increased and budgeted for, thus increasing the costs of the FM Contract; the introduction of the Singapore Progressive Wage Scheme in 2012 was known and would have caused “[a] market participant [to have] included the statutorily mandated increases in wages in the pricing to service the contract”; the Lifecycle Fund was deficient “due to insufficient cost projections for the maintenance and replacement costs for fixed assets”, which failed to account for “construction quality, design changes and early equipment failures”, about which information was available to management before and at the acquisition date.

In calculating the figure for future operating losses, Ms Swinburne then considers three scenarios, which she describes as a base case and scenario 1 and scenario 2 for future losses. She assigns a probability weighting to each to come up with a probability weighted estimate of future losses of SGD179.4m. Applying a discount rate of 5.2%, she concludes that the present value of those losses was SGD92.7m. In reaching that conclusion, Ms Swinburne considers the price adjustment mechanism in the FM Contract by reference to benchmarking every five years. In relation to that, she says:

Ms Swinburne also concluded that there was a shortfall in the Lifecycle Fund of SGD45.9 million and adds to that SGD92.7 million for “future operating losses” and SGD21.1 million for “a market participant 8% profit margin” to arrive at a total liability of SGD159.7 million or USD110.5 million.

However, Ms Swinburne’s conclusion was that it was unnecessary to restate the earlier accounts to reflect that liability:

On 7 July 2017, DTZ issued a preliminary notification of claim under the W&I Policy. It served a formal claims notice on 3 November 2017.

In early 2019, Ms Swinburne (it appears) prepared a note as at 31 December 2018 addressing the question whether any change needed to be made in the accounting for the FM Contract in the financial statements for the year ended 31 December 2018. The note deals with the question whether any adjustment was necessary to take account of benchmarking under the FM Contract. It points out that Premas had taken steps ahead of time to achieve an increase in fees through the benchmarking provisions of the contract. It states that, if Premas’s benchmarking submission were accepted, “this would return the FM contract to profitability”. However, the note identifies two difficulties with benchmarking. One was the scope of the services the subject of the benchmarking regime. The other was “methodology”, which is a reference to the fact that the SSC was not obliged to accept benchmarking and was likely, instead of market testing, to pursue “a more commercial negotiation of the benchmarking submission to reach a negotiated outcome”. The note concludes:

The final recommendation in the note included the following:

Ms Swinburne does not say what the final outcome of benchmarking was. She does give evidence that every year the onerous contract provision is re-assessed and any changes to the onerous contract provision are taken up in the balance sheet and gives some examples. She points out that in 2020 the onerous contract provision for the remainder of the contract was reduced by SGD8,310,000. DTZ did not lead evidence of more recent developments with the FM Contract. It commenced these proceedings on 12 June 2020.

As I have explained, DTZ’s case on breach of warranty has two main aspects. First, it submits that Premas and therefore the United Group (1) incorrectly accounted for the Side Letter Payments; (2) wrongly capitalised mobilisation costs in the FY12 and FY13 accounts; and (3) failed to recognise the FM Contract as an onerous contract and make provision for it in the FY14 accounts. Each of those accounting errors is said to have breached several of the warranties in the SSA. The most obvious ones are the warranties contained in Schedule 2, paragraph 3.1 (that the Accounts have been prepared with due care and attention and there is no material misstatement in the financial position and state of affairs of the Target Group Entities at 31 March 2014 or the financial performance of those entities in the period from 1 July 2013 to 31 March 2014) and paragraph 3.5 (which contains similar warranties in relation to the Historical Accounts — that is, the FY12 and FY13 accounts).

Second, DTZ submits that the United Group failed to disclose problems with the FM Contract on the date the SSA was signed and the date that completion occurred. When taken with what was disclosed, that failure is also said to have breached several of the warranties. The main warranties are those contained in Schedule 2, paragraph 3.2 (that since 30 June 2014, so far as the United Group is aware, there has been no Material Adverse Effect upon the Target Group Entities or the Business), paragraph 3.3(b) and (c) (that the United Group has reviewed the contents of the KPMG Reports for any factual inaccuracies or the omission of any material facts of information and the reports are true and accurate) and paragraph 13.1(b) and (d) (that so far as the United Group is aware, no information has been omitted from the Disclosure Materials that would render those materials misleading in any material respect and that the United Group has not knowingly withheld material information from the Disclosure Materials).

DTZ submits that the correct characterisation of the Side Letter Payments is that they were payments made in consideration for Premas foregoing the indexation of the fees payable to it under the FM Contract above increases in the CPI in the first 5 years of that contract (that is, from 2014 to 2019). On that basis, it submits that the amounts paid were not earned until the relevant increases were foregone and should only have been recognised as income at that time, rather than at the time they were paid. Recognising them at the time they were paid had the effect of significantly increasing Premas’s profits for the relevant years.

One argument advanced by the defendants in relation to this aspect of the case is that DTZ has not established precisely how the relevant amounts were accounted for. As Ms Swinburne points out at the time she prepared her paper dated 21 March 2017, the accounting system used by Premas in 2010-2013 had been replaced, with the result that full transaction details are no longer available. According to Mr John McGuiness, an expert accountant called by the Joint Defendants, and Mr Tony Samuel, an expert accountant called by the seventh defendant, the information that is no longer available includes journal entries, subsidiary ledgers, a general ledger, trial balances, consolidation work papers and schedules for the management accounts. Mr McGuiness expressed the view that, in the absence of that material, it was not possible to express a concluded view on the accounting for the payments.

I do not accept that opinion. It is reasonable to infer that the Side Letter Payments were accounted for in the way described in the documents that are available and that discuss the accounting treatment of those payments. As I have explained, the issue was given some attention in 2011. The conclusion that was reached at that time was that the payments were made for services provided to Dragages. It is not plausible that having reached that conclusion, Premas accounted for them in some different way. Nor is it plausible that on consolidation those amounts would have been treated differently in the consolidated accounts.

A second issue raised by the defendants is that the warranties are given in relation to the group management accounts, not general purpose financial statements of Premas. That raises at least two questions. One concerns the materiality of the Side Letter Payments in the context of the group accounts. The other concerns the fact that no records now exist which state clearly what accounting policies were applied in preparing the management accounts.

In my opinion, however, neither of these points is an answer to DTZ’s case. Materiality is not an issue, since (oddly) “Breach” in relation to warranties contained in the SSA is defined in the W&I Policy so that “the Warranties … shall be construed without regard to any … materiality or Material Adverse Effect qualifiers contained therein”. The precise effect of this clause may be open to some doubt. However (and this appears to be common ground), the effect in the present context is to eliminate any requirement of materiality in relation to misstatements in the Accounts or Historical Accounts (as those terms are defined in the SSA). Any misstatement in the consolidated financial statements amounts to a breach of the warranties contained in paragraphs 3.1 and 3.5 of Schedule 2 of the SSA for the purposes of the W&I Policy. It must follow that any misstatement in the management accounts of Premas that is carried through to the consolidated accounts is sufficient for the warranties to be breached, even if the misstatement was not material in the context of the consolidated accounts.

As to the second point, although it may be true that there is no evidence concerning the precise accounting policies that were applied by the United Group, it is apparent from the correspondence between Mr Chng and Mr Walters in 2011 that Premas (or, at least Mr Walters) recognised that the correct characterisation of the payments would affect their accounting treatment. As Professor Klein explains, it is a general principle of accounting that revenue is only recognised at the time that the goods and services in respect of which it is paid are supplied. Absent any evidence to the contrary, it is reasonable to conclude that the United Group applied that accounting principle in preparing its management accounts. Neither Mr McGuiness nor Mr Samuel gave any reason for thinking that the United Group applied a different accounting policy. Moreover, if it had, that is something that might have been expected to be the subject of comment by KPMG in the KPMG Report and, in particular, its calculation of normalised EBIT and EBITDA for FY13.

However, that still leaves open the correct characterisation of the Side Letter Payments. The SHPL Side Letter states that the payment of the SGD1 million was for “reimbursement of costs incurred during the bid development phase of the Singapore Sports Hub.” The Dragages Side Letter states that the payment of SGD10.4 million was for “assistance to [Dragages] in reaching financial close for the Singapore Sports Hub Project.” DTZ’s case must be that those letters falsely recorded the purposes of the payments and in that sense were shams. That is a serious allegation. In my opinion, it is not one made out by the evidence.

Premas obviously wanted the fee payable to it under the FM Contract to increase annually by more than increases in the CPI during the first benchmark period. However, it seems plain that neither the SSC nor the other Consortium members agreed to that proposal. How and when the parties reached a resolution of that issue is not explained by the evidence, other than that Premas agreed to a contract that provided for increases in line with increases in the CPI only.

At the time the members of the Consortium were negotiating the final division of costs between them, following an unexpected increase in those costs which was caused at least in part by the delays in the Project, Premas raised the issue of increases above CPI again and claimed that it should be compensated for the fact that it had foregone increases of that type (presumably in order to secure the contract with the SSC). But in making that claim Premas could not be understood as making a claim for a payment of what was then said to be SGD17 million in exchange for giving up a right to increases above CPI. Premas never had any such right. Rather, all that can be said is that Premas raised its decision not to insist on increases above CPI as a reason why the other Consortium members should pay it an additional sum of money as part of the finalisation of the accounting between them, and eventually HSBC and Dragages agreed to pay Premas an additional SGD12 million (which was subsequently reduced because of an error in the original calculations that was picked up by HSBC) on the basis that that amount would be shared between Dragages and SHPL and would be paid for the services that were identified in the Side Letters. Again, how that came about is not explained by the evidence.

However, two points can be made about the ultimate resolution of the issue.

First, as the defendants point out, there is evidence that Premas did provide services to Dragages, such as reviewing the design documents and providing comments on them. Moreover, Premas’s costs did increase very substantially. Consequently, the description in the Side Letters of what the payments were for corresponds with what actually happened.

Second, and following on from the first point, the agreement to the payments in recognition of those matters does not involve a sham or any other type of dishonesty. Indeed, the opposite might be said to be the case. Premas had no entitlement to increases above CPI, so it is difficult to see why it should have been paid a sum of money for giving up a right it did not have. It did, however, provide assistance to Dragages and its costs had increased, and eventually the other Consortium members agreed to compensate it for those matters.

DTZ places considerable weight on Mr Reichhold’s email dated 23 August 2010, where he says in relation to a draft of the Dragages Side Letter that a payment for “assistance” was not something that could be credibly justified and that “[w]e have to put more meat into it. I don’t want to go to jail at my age”. DTZ submits that Mr Reichhold’s concern was that the draft letter does not reveal the true purpose of the payment. I do not accept that submission. It is apparent from what Mr Reichhold says and the context that his concern was that the draft letter did not give sufficient details of the “assistance”. That concern was remedied by the final form of the letter.

DTZ also places emphasis on how the Side Letter Payments were characterised by Premas subsequently. The clearest example is in the Five Year Plan. After setting out the projected revenue and costs for 2015 compared to the 2010 model which was prepared at the time of financial close (the 2010 Model), which showed a variance in EBITDA of minus USD4,042,000, the Five Year Plan states:

In my opinion, no weight can be attached to opinions expressed after the event based on an interpretation of the documents that were created at the time. At the time the Five Year Plan was prepared, the authors were looking for ways of softening the financial blow arising from the large variance between what had been projected in 2010 as the EBITDA arising from the FM Contract and what was then projected. In my opinion, it was misleading of them to point to the Side Letter Payments, when the Side Letters made it clear that the amounts were paid on a different basis.

Professor Klein suggested when giving evidence that some significance should be attached to the fact that the Dragages Side Letter provided that if the FM Contract was terminated before the “first Testing Date” (the end of the first benchmark period), then a proportion of the payments made to Premas under that letter had to be returned, since that demonstrated, in Professor Klein’s view, that the payments were for services to be provided in the future, not services that had been provided at the time of payment. However, the repayment obligation does not affect the character of the original payments. Dragages was a shareholder in SHPL and therefore had an interest in Premas complying with its obligations under the FM Contract. The FM Contract could only be terminated as a result of a default by Premas. The imposition of an obligation on Premas to repay part of the benefit it received under the letter if the FM Contract was terminated early (as a result of a default by it) was consistent with the interest Dragages had. It is properly characterised as an independent obligation that formed part of the agreement embodied in the letter that was designed to secure Premas’s obligations under the FM Contract. No doubt, it is also consistent with a recognition that Premas had claimed that the fees paid to it should be increased by more than CPI in the first benchmark period. But that is not sufficient to change the character of the payment.

Accepting that the proper characterisation of the Side Letter Payments was as set out in the Side Letters, the accounting treatment of the payments was correct.

Consistently with International Accounting Standard (IAS) 38 and the equivalent Australian Accounting Standard (AASB 138), DTZ accepts that expenses that are incurred in producing an intangible asset that is likely to assist a business in producing income in the future and that can be reliably estimated are properly capitalised and amortised over the period the expenses are likely to benefit the business. DTZ also accepts that a proportion of the mobilisation costs were incurred in preparing policy and procedure manuals. (Professor Klein in his first report had said that Premas “is not able to identify or produce any hard or soft copies of any policies or procedures for the operation of the FM Contract that were written or documented in 2010 – 2014”, which at that time supplied an important foundation for his opinion that no mobilisation costs should have been capitalised.) Indeed, in its final written submissions, DTZ accepts that in FY14, 58 policy and procedure documents, totalling 671 pages, were generated and approved, although it points out that a number of those were largely based on DTZ’s business organisation policies or on Singaporean law. DTZ also appears to accept that the costs of preparing the policy and procedure manuals meet the requirements set out in IAS 38 provided those costs can be reliably estimated. Indeed, in his reply report, Professor Klein is willing to accept that 50% of the costs could be capitalised. However, DTZ submits Premas’s estimates of the total costs were not reliable and therefore now appears to say that not all of them should have been capitalised, with the result that the FY13 and FY14 financial statements were misleading.

In making that submission, DTZ points out that the decision to double the time spent documenting policies and procedures was “arbitrary”. It also submits (relying on evidence given by Professor Klein) that the estimates of time spent documenting policies and procedures were “dubious and unreliable” because hours were allocated in whole multiples of ten each month, with the same number of hours for an employee repeating across multiple months. In addition, it points out that it would have been impossible for some employees to have worked double the recorded hours documenting policies and procedures. Lastly, it points to the fact that SGD1,006,000 were recorded as labour costs for the development of policies and procedures in FY13, although only eight manuals were approved in that year, some of which were inconsequential.

I do not accept DTZ’s submissions for several reasons.

First, it is unclear from the evidence that Premas or the United Group adopted IAS 38 in preparing its management accounts. It is reasonable to assume that Premas and the United Group adopted the general principle behind IAS 38 — that is, that expenses could be capitalised and amortised but only if they were incurred in producing relevantly an intangible asset that was likely to assist the business in generating income in the future. But it is less clear how strictly they applied the requirement that the estimate be “reliable”; and, in any event, the question whether an estimate is reliable is very much a matter of judgement that depends on all the facts known to the person making the estimate.

Second, and related to the first point, although the evidence discloses the general approach that Premas took to identifying what proportion of mobilisation costs should be capitalised, the evidentiary record is far from complete. Consequently, it is unclear to what extent and how Premas satisfied itself that the estimate was reliable. However, both management and KPMG were satisfied with the conclusions that were reached at the time.

Third, based on the information that is available, the approach taken by Premas appears to have been reasonable. In preparing the management accounts it was reasonable for Premas to seek to identify what time was taken in preparing the manuals so that that time could be accounted for correctly. In the absence of precise information, it was reasonable for Premas to seek to estimate the time. According to Mr Seltzer’s 16 July 2013 memo, the estimates of the time spent on the task of drafting the manuals and the estimate that for each hour undertaking that task a further hour was spent doing ancillary work were taken from estimates given by the persons doing the work. Contrary to DTZ’s submissions, the fact that the hours were doubled to reach an estimate of the total time spent by “the team” does not involve an implied assertion that each member of the team spent an hour “reading operating manuals & building plans, interacting with stakeholders and researching best practice” for every hour that member spent drafting the manuals. And the fact that only eight manuals were signed off at the end of FY13 does not mean that they were the only manuals that were worked on in that year.

Fourth, DTZ’s complaint is not that a reliable estimate could not be made. Rather, the complaint is that the estimate actually made by Premas was not reliable. But understood in that way, it was for DTZ to prove that the estimate was unreliable. It is not sufficient for it to point to matters that mean it may have been unreliable. The purpose of the management accounts was to give management an accurate picture of the financial position of the group. The management accounts would have been misleading if they failed to do that. Consequently, it was for DTZ to prove that the actual figures used by Premas (which were consolidated in the group accounts) were inaccurate. It has not done that. At most, it has pointed to matters that suggest that the figures may have been inaccurate.

Paragraph 66 of AASB 137 provides (emphasis in original):

Those paragraphs must be read together with paragraphs 14, 23, 36 and 38 of AASB 137, which provide:

It appears that the United Group did account for onerous contracts in its management accounts.

Reading the paragraphs from AASB 137 quoted above together, it is apparent that a provision should have been made for the FM Contract as an onerous contract if (and only if) it was more probable than not that Premas’s unavoidable costs of discharging its obligations under the contract exceeded the economic benefits that Premas expected to receive under the contract and the amount by which the costs exceeded the benefits could be reliably estimated. The amount of the provision is the best estimate of the amount required to settle the present obligation at the end of the reporting period. That estimate is to be made largely by the judgement of management, possibly with the assistance of independent experts. Although the standard requires post balance date events to be taken into account, that requirement must be understood in the context of general purpose financial statements, which are prepared and finalised after the balance date. The reference to “additional evidence provided by events after the reporting period” must be understood as a reference to the period after the balance date and before the financial statements are finalised. It has no significant application to management accounts which are prepared at or near the end of the period to which they relate.

In their joint report, the experts agree that the relevant dates for determining whether the FM Contract was an onerous contract were the date the SSA was signed (14 June 2014) and the date of completion (5 November 2014) — that is, the dates specified in cl 11.1 of the SSA as the dates at which the warranties contained in the SSA are given.

That, however, is not correct. The question whether the Accounts (as defined) were misleading or contained a misstatement (that need not be material) so as to have breached the warranty contained in paragraph 3.1 of Schedule 2 of the SSA is to be judged as at the date the Accounts were prepared (that is, as at 31 March 2014). The warranty is not breached because the Accounts do not reflect the true financial position of the United Group at some later date. Obviously, they only purport to reflect the position as at 31 March 2014.

It could not plausibly be suggested that the FM Contract should have been recognised as an onerous contract in the Accounts (as defined). No attempt has been made by DTZ to identify with any degree of precision the information available to management on (or before) 31 March 2014 that ought to have caused management to conclude that it was more likely than not that the FM Contract would be loss making over the following 25 years or that would have enabled management to reach a reliable estimate of the amount of the loss expressed as a present day value. More will be said about what management did know about the FM Contract shortly. But as at 31 March 2014, POD had not occurred. Although the cleaning contract had been put out to tender and the revised bids were substantially higher than expected, it is unclear whether a cleaning contract had been signed. At that time, management had had no experience at all of how many cleaners would actually be required to clean the site effectively. It appears that none of the other issues which DTZ point to as indicative of an onerous contract had emerged by that stage.

The warranty contained in paragraph 3.2 of Schedule 2 of the SSA is a warranty relevantly that, “[s]ince the Accounts Date … so far as the Sellers are aware, there has been no event, occurrence, fact or circumstance affecting the … assets [or] liabilities … of the Target Group Entities which may have a Material Adverse Effect upon the Target Group Entities”. “Material Adverse Effect” is defined in the SSA with a certain degree of circularity to mean “any event … that … has a material adverse effect on the business, operations, prospects, assets, liabilities, financial condition or results of operations of the Target Group Entities taken as a whole…”. There is a question of what effect the definition of “Breach” in the W&I Policy has on the requirement of materiality in the definition of “Material Adverse Effect”. But leaving that point aside, the effect of the warranty is that it is breached if the United Group became aware after 31 March 2014 that the FM Contract had become an onerous contract. Relevantly, the test after 31 March 2014 is not an objective one. It depends on whether the United Group became aware that the FM Contract at some time before completion (5 November 2014) had become an onerous one.

In its written submissions, DTZ identifies various named executives who are alleged to have become aware of matters where the awareness of the Sellers is an ingredient of the breach of warranty. However, it is only necessary in the present context to focus on Mr Arundel, since there appears to be no suggestion that other relevant executives were aware of matters concerning the FM Contract that he was not. He was the Chief Executive – Asia Pacific and it is apparent that any difficulties with the FM Contract were reported to him.

Clause 12.2 of the SSA requires that for the relevant warranty to be breached the Specified Executive must have been “actually aware” of the “facts, matters or circumstances” giving rise to a breach of warranty at the date on which the warranty is given or would have been aware of those “facts, matters or circumstances” if the executive had made reasonable enquiries. In the present context, that must mean that it was necessary for Mr Arundel actually to have been aware that the FM Contract had become an onerous contract or that he would have become aware of that matter if he had made reasonable enquiries.

There is no evidence that Mr Arundel was actually aware that the FM Contract had become an onerous contract. Actual awareness on the part of Mr Arundel would require either that he had formed the view that the FM Contract was an onerous contract or that he was aware that Premas’s management had formed that view. There is no suggestion that at any time before 5 November 2014 Mr Arundel or any other employee of the United Group had formed such a view. It is noteworthy in this context that Mr Sochi gave evidence but gave no evidence to the effect that he formed the view at any time, let alone before 5 November 2014, that the FM Contract was an onerous one or that anyone else within Premas’s management had communicated that view to him. It is to be expected that if he could have given evidence to that effect, he would have: see Commercial Union Insurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418-419 (Handley JA).

DTZ appears to interpret the second limb of the requirement (awareness if he had made reasonable enquiries) as being satisfied if Mr Arundel was aware of facts from which a reasonable person would have concluded that the FM Contract was an onerous one. Its pleaded case is that the FM Contract was an onerous one, that Mr Arundel (among others) knew the facts which are said to support that conclusion and that that is sufficient for the warranty contained in Schedule 2, paragraph 3.2 to have been breached.

I do not accept that that is a correct construction of the warranty when read together with cl 12.2 of the SSA. The starting point must be the identification of the respect in which it is said there has been a Material Adverse Effect upon the Target Group Entities or the Business (that is, the DTZ Business). In the present context, the Material Adverse Effect is the existence of a liability arising from the classification of the FM Contract as an onerous contract. The question, then, is whether Mr Arundel knew of that liability or would have known of it if he had made reasonable enquiries. The liability, if there was one, would have arisen principally because management had formed the requisite view. So, the question must be whether Mr Arundel knew of that fact. Plainly he did not. Clause 12.2 of the SSA is concerned with identifying what counts as the knowledge of the United Group. It does that by providing that the knowledge of the group is limited to the knowledge of certain individuals provided those individuals make reasonable enquiries of others in the group. The purpose of the clause is not to make the United Group liable for opinions that no employee formed but ought to have formed if they had applied the accounting standards correctly.

Professor Klein expresses the opinion that it was necessary for management to undertake an assessment of whether the FM Contract was an onerous one, although he does not explain how or when that obligation arose. It can readily be accepted that for the purposes of preparing general purpose financial statements, such as the end of year statutory accounts, the directors had an obligation to identify (or ensure others identified) apparently loss-making material contracts and consider whether those contracts should properly be classified as onerous contracts in respect of which a provision should be made. But what that has to do with the warranties contained in the SSA was never made apparent.

Even if, contrary to the conclusions I have reached, DTZ’s claim raises the question whether at any time prior to 5 November 2014 the FM Contract should properly have been classified as a loss-making contract, in my view the answer to that question is that it should not have been. On the material before the Court, there is insufficient evidence to justify the conclusion that management should properly have formed the opinion that it was more likely than not that the FM Contract would be loss-making over its 25-year life.

At the time the assessment was to be made, the FM Contract was in its infancy. As might have been expected with a contract of that complexity, there were teething problems. Without more evidence, including expert evidence from someone with experience in managing facilities of the type in question, it is not possible to conclude that those problems meant that the contract would not be profitable over the long-term.

DTZ essentially points to three problems with the FM Contract. The first is cleaning costs. The second, which is related to the first, is performance penalties. The third is the costs of replacing plant and equipment over the life of the contract (referred to as “lifecycle costs”).

As to the first and second of these, it is apparent from Mr Sochi’s email dated 2 October 2014 to Mr Arundel that the strategy at the time was to increase the number of cleaners and then reduce them over time when the venues and precincts had reached an acceptable cleaning standard. In the meantime, it was proposed to renew Premas’s claim that the increase in cleaning costs had resulted from a “Relevant Change in Law”. But if that failed, it would have been reasonable for Premas to believe that it would be able to recover its cleaning costs on expiration of a period of five years as part of the first benchmarking process. Cleaning was one of the services the subject of benchmarking. The benchmarking mechanism is complicated, but it seems to me reasonable for Premas to have believed in November 2014 that, if all else failed, it would eventually be able to recover its cleaning costs through benchmarking. DTZ offers no reason for thinking otherwise in November 2014.

As to lifecycle costs, it is Mr Sochi’s evidence that the assets register was not complete until some time in 2015. Consequently, it would not have been possible to estimate those costs reliably before that time.

As I have explained, it was forecast in the Five Year Plan that the FM Contract would break even in 2016 and steadily improve after that time. Professor Klein expresses the opinion that the projections contained in the Five Year Plan were “fatally flawed” due to two perceived issues.

First, Professor Klein says that “one of the main drivers of projected EBITDA growth was a revenue increase of USD1.16 million related to a benchmarking test to be performed in 2019”. He had been instructed that there was no obligation “on SportsHub to agree to any price increase for the FM Benchmarked Services”. Accordingly, he excludes the effect of benchmarking. Although the assumption given to Professor Klein is literally true, it ignores the requirement of market testing if agreement is not reached. As I have explained, it was reasonable of Premas to believe that if there had been increases in cleaning costs above CPI (which there had been) that would ultimately be reflected in the benchmarking process.

Second, Professor Klein says that another main driver of projected EBITDA growth was a projected increase in revenue of USD2.04 million due to expected increases in CPI. He says that he has “not seen evidence that the majority of expenses were similarly increased in the projections to account for expected CPI increases.” But the fact that Professor Klein has not seen evidence of something does not provide a proper foundation for the conclusion that the authors of the Five Year Plan could not reasonably have reached the conclusions they did.

Professor Klein performs his own calculation to establish that the FM Contract was loss-making over the 25 years. He does that by taking the 2010 Model and making several adjustments to it. One adjustment was to increase cleaning costs without making any allowance for benchmarking. I have already explained why I do not think that was a reasonable approach to take.

Another adjustment was for lifecycle costs. It is not entirely clear how Professor Klein made that adjustment. In Appendix I to his reply report, which contains his onerous contract calculations and assumptions, he says that he assumes “lifecycle costs would exceed revenues [sic] by S$40.0 million from November 2014 through the end of the contract” and that “this deficit will be distributed proportionately to the indexed lifecycle revenue for each year of the contract from November 2014 forwards”. However, it is not clear where that assumption comes from. In his reply report, Professor Klein says this (at paragraph 90):

It follows that there was no breach of the warranties contained in the SSA arising from the failure to classify the FM Contract as an onerous one.

In essence, DTZ’s alternative case is that the information that was disclosed in relation to the FM Contract was misleading either because of what it said or did not say. That is said to have involved a breach primarily of the warranties contained in Schedule 2, paragraph 3.3(b) and (c) (that so far as the Sellers are aware the KPMG Reports are true and accurate in all material respects) and paragraph 13.1 (that so far as the Sellers are aware the information contained in the Disclosure Materials is accurate in all material respects, that no information has been omitted from the Disclosure Materials that would cause those materials to be misleading in any material respect and that the Sellers have not knowingly withheld material information from the Disclosure Materials).

DTZ identifies a significant amount of material in the Disclosure Materials that is said to be relevant to the claim for a breach of the warranty contained in paragraph 13.1 (and in paragraph 3.3(b) and (c)). Of most significance is the following:

Relevantly to this aspect of the case, the warranties contained in paragraph 3.3(b) and (c) (relating to the KPMG Report) are said to have been breached in two respects. First, it is said that the representation concerning an increase in EBIT in 2015 was inaccurate because, based on information available to management in April 2014, the FM Contract would become loss-making in FY15. Second, it is said that the statement that the FM Contract would contribute incremental revenue in FY15 of $16 million, in the absence of any statement to the contrary, conveyed the impression that the contract would contribute significantly to EBIT.

I do not accept either of those submissions. The warranties in paragraph 3.3(b) and (c) concern the factual content of the KPMG Report. The only statement of fact concerning an increase in EBIT in 2015 contained in the KPMG Report is a statement that management had forecast an increase in EBIT. It is not suggested that that statement was inaccurate — that is, it is not suggested that management had not made such a forecast. Rather, what is said to be inaccurate is the forecast itself. However, no warranty is given in relation to the forecast. Indeed, cl 12.4 of the SSA makes it clear that the United Group was not giving any warranties in relation to forecasts.

Similar points can be made in relation to the statement concerning an incremental increase in revenue of $16 million in 2015. That statement is a forecast. It is not a statement of fact to which the warranty applies. Moreover, a statement about revenue does not carry with it any implied statement about earnings. DTZ was a sophisticated purchaser and plainly would have understood the distinction between revenue and earnings and would have understood that an increase in revenue would not necessarily lead to an increase in EBIT.

On the other hand, I accept that there has been a breach of the warranty contained in paragraph 13.1.

The warranty in paragraph 13.1(b) has two limbs. First, there is a warranty that the United Group is not aware of anything misleading in a material respect in the Disclosure Materials. Second, there is a warranty that so far as the United Group is aware, no information has been omitted from the Disclosure Materials that would render those materials misleading in a material respect. Both limbs have a requirement of awareness which raises the question whether relevantly Mr Arundel was aware of the fact in question.

In this context, the relevant fact in the case of the first limb is that misleading information has been included in the Disclosure Materials. In the case of the second limb, the relevant fact is that, having regard to what is in the Disclosure Materials, information has been omitted that would render the Disclosure Materials misleading. Consequently, for there to be a breach of the warranty, both limbs require Mr Arundel relevantly to know what was in the Disclosure Materials and to know that that information was misleading (in the case of the first limb) or to know that the Disclosure Materials were misleading because of the omission of information (in the case of the second limb). Unless Mr Arundel knew what was in the Disclosure Materials (or the relevant part of them) he would not be in a position to know (that is, be aware of the fact) that the Disclosure Materials were misleading. Moreover, what is required is that Mr Arundel be aware of the fact that the Disclosure Materials were misleading. It would not be sufficient for Mr Arundel to be aware of information that would render the Disclosure Materials misleading if it was included in or excluded from those materials. Mr Arundel himself must have appreciated that the information’s inclusion or exclusion was misleading.

Although the warranty contained in paragraph 13.1(b) contains requirements of materiality, the effect of the definition of “Breach” in the W&I Policy is to dispense with that requirement. Consequently, the question must be whether the Disclosure Materials were misleading and whether Mr Arundel appreciated that fact. It is irrelevant whether Mr Arundel believed the inclusion or exclusion of a particular matter was material or not.

Although there is no direct evidence of the fact, I think it should be inferred that Mr Arundel knew what information was included in the Disclosure Materials relating to his areas of responsibility, which included the FM Contract. It would make no sense for the parties to agree that the warranties in relation to the Disclosure Materials were to be given in relation to the knowledge of particular individuals if those individuals did not know what was included in the Disclosure Materials. Moreover, Mr Arundel’s position in the United Group made it likely that he would be consulted on what material should be included in the Disclosure Materials in relation to that part of the business for which he was responsible.

The next question is whether Mr Arundel knew that the Disclosure Materials were misleading either because of what they contained or because of what they omitted. That itself raises two questions. The first is whether the materials were misleading. The second is whether, if they were, Mr Arundel was aware of that fact.

In my opinion, the Disclosure Materials were misleading in three respects.

First, the Disclosure Materials included information relating to the FM Contract. By disclosing general information in relation to the FM Contract, such as its size and significance to the Singapore business and dealing with one problem with the contract (the pitch), the Disclosure Materials gave the impression that all the significant issues with the contract had been disclosed. That, however, was not the case. By 5 November 2014, there were significant issues with the cleaning of the facilities which had a substantial impact on costs and on Premas’s ability to meet the performance benchmarks in the FM Contract. It was misleading not to have disclosed those problems because taken together with what was disclosed it was likely to lead DTZ to form the conclusion that the FM Contract was likely to perform in accordance with the forecasts it had been given.

Second, and connected to the first point, it was misleading not to correct the answer to question 1081 that was included in the Disclosure Materials. That answer was “[y]es, latest forecast (9+3) confirms the revenue forecast”. That answer must be understood in the context of the question, which relevantly asked whether “the upside in …. Singapore FM [contract is] coming to fruition”. Taking the question and answer together, the United Group must be understood as saying that Premas’s management believed the expected benefits of the FM Contract would be achieved. Accepting that the then current forecast for the full financial year confirmed management’s belief (that the upside in the FM Contract was coming to fruition), it was apparent that by 5 November 2014 Mr Sochi and Mr Arundel could no longer have believed that that was the case in light of what Mr Sochi had told Mr Arundel in his email dated 2 October 2014. In circumstances where the warranties were given both at the date of signing and the date of completion, it was misleading not to tell DTZ that the position had changed from the time the question was answered. Or, to put the point slightly differently, in context, the answer to question 1081 ought fairly to be understood as a continuing representation up until 5 November 2014. Consequently, the failure to disclose that things had changed also was a breach of the warranty contained in paragraph 13.1(b).

It is no answer to the point made in the previous paragraph to say that the response to question 1081 concerned a forecast in respect of which no warranty was given. The question essentially concerned what management believed. Alternatively, it was a question about the actual performance of the FM Contract and whether it could reasonably be inferred from that performance that the expected benefits were coming to fruition, which were questions of fact or mixed fact and opinion. The United Group could not change the nature of the question by answering it by reference to a forecast.

Third, in my opinion, the response given on 30 October 2014 to the question concerning the “SportsHub” was misleading. At the time that that answer was given, Mr Sochi and Mr Arundel could not have believed that the proposed allocations of deductions to Premas were incorrect. They must have understood that part of the deduction related to cleaning that was properly attributable to Premas.

The question remains whether Mr Arundel knew that the Disclosure Materials were misleading in the ways that I have identified.

I am not satisfied that Mr Arundel appreciated that the Disclosure Materials were misleading in the first respect I have identified. There is no material at all to suggest that Mr Arundel appreciated that by providing some information in relation to the FM Contract, the United Group was required to disclose other information in relation to that contract. There are no documents which shed light on what consideration Mr Arundel did or did not give to the United Group’s disclosure obligations. And no inference can be drawn either way from the fact that Mr Arundel did not give evidence. He could not fairly be said to have been either in DTZ’s or the defendants’ camp. In the absence of anything more, I am not prepared to infer that Mr Arundel appreciated that further disclosure was required in order to make the Disclosure Materials not misleading.

The position, however, is different in the case of the answers to the specific questions included in the Disclosure Materials. So much is implicit in the findings I have already made. It is reasonable to infer that Mr Arundel was involved in preparing the answers to those questions or was at least aware of the answers. Given what he had been told by Mr Sochi, he must have appreciated that those answers were misleading because they suggested that there was not an issue with the FM Contract whereas there was an issue with the costs of cleaning which meant that the upside of the contract could not be expected to come to fruition (at least immediately) and which meant that Premas was and would be liable to at least some performance deductions relating to inadequate cleaning. He may have thought that the respects in which the answers were misleading were immaterial. But that is irrelevant.

The general principle for the assessment of damages for breach of contract is that the award of damages should, so far as money can do it, place the injured party in the position it would have been in if the contract had been performed according to its terms: Robinson v Harman (1848) 1 Exch 850 at 855; 154 ER 363 at 365; Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54 (Amann Aviation) at 80 (Mason CJ and Dawson J); at 98 (Brennan J); at 116-117 (Deane J); at 134 (Toohey J); at 148 (Gaudron J); at 161 (McHugh J).

Where the relevant contractual promise relates to the existence of a fact or state of affairs which is relevant to the value of what is being sold or provided under the contract, the usual measure of damages is the difference between the true value of what is being sold or provided if the representation was true and its actual value as at the date of breach: Lion Nathan Ltd v C-C Bottlers Ltd [1996] 1 WLR 1438 at 1441. Where what is being sold are shares in a company (as in this case), that requires the Court to make an assessment of the true value of the shares on the hypothetical basis (that is, on the basis that the representation was true) and an assessment of the actual value of the shares: McGregor on Damages (22nd ed, 2024, Sweet & Maxwell) at [30-008]; Dylan Mann & Co Pty Ltd as trustee for the Mann Family Trust v Tiejag Pty Limited as trustee for the Skeihy Khoury Family Trust [2018] NSWSC 1334 at [90]; Davis v Perry O’Brien Engineering Pty Ltd [2023] QSC 243 (Davis) at [447]. Contrary to some of the submissions made by DTZ, damages are not assessed by comparing the true value of the shares with the price paid. That involves a confusion between the assessment of damages for breach of contract and the assessment of damages for misrepresentation, where the measure of damages is the difference between the actual value of the shares and the price paid: Potts v Miller (1940) 64 CLR 282 (Potts) at 289 (Starke J); at 297-298 (Dixon J); at 307 (Williams J); [1940] HCA 43; see also HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54 (HTW Valuers) at 656-657 [35]. That said, the actual price paid may be and is often used as a proxy for the value of what is being sold or provided, on the basis that it is reasonable to infer that the price paid represents fair value assuming the contractual representations were true: Davis at [458]-[459]; see also Ivy Technology Ltd v Martin [2022] EWHC 1218 (Comm) at [561] and Millbrook Health Care Bidco Ltd v Croll [2023] EWHC 290 (Comm) at [143]. As Applegarth J explained in Davis at [458]ff:

The assessment of value is an objective exercise undertaken for the purpose of ascertaining “[t]he estimated amount for which an asset … should exchange on the valuation date between a willing buyer and a willing seller in [an] arm's length transaction, after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion”: The Hut Group Ltd v Nobahar-Cookson [2014] EWHC 3842 (QB) at [180(2)]. The method of valuation adopted by the parties is not necessarily determinative, but where the parties have agreed a basis of valuation (such as an agreed multiple of future maintainable earnings or the net present value of the expected future cashflows of the company), the Court may use that methodology in calculating the value of the shares on the two required bases: Decision Inc Holdings Proprietary Ltd v Garbett [2023] EWHC 588 (Ch) at [200(iii)-(iv)]. In other cases, it will be necessary for the Court to select an appropriate basis of valuation. Although value is to be determined as at the date of breach, the Court will have regard to all matters known at the trial that shed light on value as at that date, giving due consideration to possible causes of the decline in value of what has been bought that are “independent”, “extrinsic”, “supervening”, or “accidental”: Potts at 298-299 (Dixon J); HTW Valuers at 658-659 [39]-[40].

There is one other principle relevant to the assessment of damages for breach of contract on which DTZ placed particular reliance in this case. That is that where there has been actual loss, mere difficulty in estimating that loss in monetary terms does not defeat an award of damages: Fink v Fink (1946) 74 CLR 127 at 143 (Dixon and McTiernan JJ); [1946] HCA 54; see also Lifehealthcare Distribution Pty Ltd v Nicholas [2011] NSWSC 661 at [164]. The Court must do the best it can on the evidence before it and award damages that are appropriate in the circumstances, even where no precise evidence is available: Amann Aviation at 83 (Mason CJ and Dawson J). However, where damages are susceptible of evidentiary proof, but there is an absence of raw material to which good sense may be applied, “[j]ustice does not dictate that … a figure should be plucked out of the air”: Troulis v Vamvoukakis [1998] NSWCA 237 (Gleeson CJ, with whom Mason P and Stein JA agreed); see also In the matter of Hair Industrie Penrith Pty Ltd, Hair Industrie Merrylands Pty Ltd [2015] NSWSC 1578 at [20].

It is convenient to consider the application of these principles first to DTZ’s pleaded case (which has largely failed) and then to consider what damages if any DTZ is entitled to recover in respect of that part of the case on which it has succeeded.

As I have said, DTZ puts its claim for damages in two ways. First, relying on expert evidence given by Professor Klein, it claims the present value (at the time of breach) of the losses which are said will arise from the FM Contract. In addition, it claims what in effect is said to be the difference between the value of the DTZ Business on the assumption that the warranties were true and the actual value of the business. The value of the DTZ Business on the assumption that the warranties were true is taken to be the price paid for the business. The actual value of the business is taken to be the present value (as at the time of breach) of the projected cashflows of the business which is obtained by the application of a discount rate which is said to reflect the risks associated with those cashflows arising from the breaches of warranty. Professor Klein also makes adjustments to the expected cashflows to take account of the accounting errors identified by him.

In the alternative, DTZ submits that its loss should be calculated as the difference between the amount DTZ paid for the DTZ Group and the amount that DTZ or a hypothetical reasonable purchaser (there is no difference between the two, according to DTZ) would have paid for the DTZ Group if it had known the true facts relating to the FM Contract. According to DTZ, the difference between those amounts is the net present value (at the time of breach) of the losses associated with FM Contract, which are said to be $146.8 million, together with the additional $100 million that DTZ agreed to pay as part of the final negotiation of the purchase price.

The first element of the damages calculated in accordance with the approach adopted by Professor Klein is relatively uncontroversial. It is common ground that an appropriate way of calculating the value of the DTZ Group was by using a discounted cash flow (DCF) analysis — that is, by estimating future cashflows and applying an appropriate discount rate to arrive at a present-day value of those cashflows. If the future cashflows from the FM Contract, and therefore the future cashflows of the DTZ Group, were less than they would have been if the warranties had been true, then DTZ is entitled to recover as damages the present-day value (as at the date of breach) of the difference between those amounts.

For the purpose of determining what provision should have been made in the FY2014 accounts in respect of the FM Contract (because it was an onerous contract), Professor Klein understandably only seeks to calculate the present-day value of losses arising from the FM Contract. His calculations make no allowance for any profit that could have been expected to be earned from the FM Contract if the warranties were true. But in that respect, using Professor Klein’s calculations of the provision as an estimate of the damages arising from the failure to disclose the loss-making nature of the FM Contract is a conservative estimate of those damages, since it assumes that in the counterfactual world in which the warranties were not breached, the FM Contract would have broken even. That is clearly a conservative assumption. There is no suggestion that the FM Contract would have been loss-making even if the warranties had been true. The analyses performed by Premas at the time, including the analysis contained in the Five Year Plan, suggest the opposite.

The final conclusion reached by Professor Klein was that the net present value of the losses arising from the FM Contract were $17.82 million. On the assumption that there was a breach of warranty because of the failure to recognise the FM Contract as an onerous one, there does not appear to be a serious dispute that that amount at least would be recoverable as damages for the breach of warranty. Obviously, however, it is not an amount that would be recoverable from any of the remaining defendants.

The second element of Professor Klein’s calculation of damages takes as its starting point the financial analyses undertaken by TPG and PAG, which sought to determine an offer price by the application of a multiple to future maintainable earnings of the DTZ Group. Using those analyses, Professor Klein derives the discount rate to be applied to estimated cashflows to arrive at the same known purchase price of $1,215 million. As Professor Klein explained in his original report at paragraph 201:

Applying that approach, Professor Klein calculates that the assumed cost of equity derived from TPG and PAG’s models was 24.86% and that the assumed discount rate was 12.46%. Professor Klein then makes two adjustments to his model. First, and more significantly, he adjusts the discount rate to take account of what are said to be the additional risks associated with the cashflows to be discounted. That adjustment is based on academic research which investigates the effect on the share price of publicly listed companies of restatements of their accounts. As Professor Klein explains in paragraph 196 of his first report:

Based on those studies, Professor Klein concludes that in calculating the true value of the DTZ Business, the cost of equity in his model must be adjusted by the “midpoint” of 12% derived from the research he refers to to reflect the increase in risk arising from the accounting errors to arrive at a cost of equity of 27.85%, which on his calculations produces a discount rate of 13.54%. He also says that the cost of debt must be adjusted because a lender would charge a higher interest rate (for the same reason a shareholder would discount the value of the shares). The result is that Professor Klein expresses the opinion that the discount rate must be adjusted from the implied rate of 12.46% derived from TPG and PAG’s models to 13.76%. The effect of that adjustment when applied to the expected cashflows is to reduce the value of the DTZ Group from $1,215 million to $1,024.73 million, producing a claim for damages of $190.27 million.

Second, Professor Klein also expresses the opinion that the cashflows derived from TPG and PAG’s models must themselves be adjusted to take account of the accounting errors arising from the treatment of the Side Letter Payments and the capitalisation of mobilisation costs. The actual adjustments made by Professor Klein are contained in Excel spreadsheets attached to his report and are not easy to follow. They largely arise from the fact that mobilisation costs were capitalised rather than expensed at the time they were incurred (with the result that expenses were reduced and profit was increased in FY14) and, in Professor Klein’s view, it was appropriate to carry forward adjustments made in the FY14 accounts to future years because, absent any other material, the past was the best guide to what would happen in the future. Professor Klein concludes by saying that, after taking into account the necessary adjustments, he estimates the “fair value” of the DTZ Business was $1,015 million, which was $200 million less than the amount paid. Adding that figure to the figure of $17.82 million gives a total damages claim of $217.82 million.

There was a great deal of debate between the experts on the approach taken by Professor Klein and on some of the details of his analysis which caused Professor Klein to make some adjustments in his reply report and in his oral evidence, which explains why the figures attributed to DTZ’s damages claim in this judgment are not always the same. However, it is not necessary to deal with many of the issues raised by Mr Samuel and Mr McGuiness. In my opinion, Professor Klein’s approach suffers from several basic flaws which make it unnecessary to consider the details of his approach.

In considering the approach taken by Professor Klein, and at the risk of some repetition, it is important to bear in mind the issue he was required to address (as opposed to the issues he was asked to address). That issue was what damages were recoverable as a consequence of the breaches of warranty identified by him. Professor Klein identified three accounting errors that were said to give rise to breaches of various warranties in the SSA. They were (1) the incorrect accounting for the Side Letter Payments, (2) the incorrect accounting for what Professor Klein ultimately accepted was half the costs of preparing policy and procedure manuals, which according to Professor Klein had the effect that EBITDA and EBIT were overstated in the accounts for the nine months ending 31 March 2014 by SGD647,195 and in the FY14 accounts by SGD659,113, and (3) the failure to include a provision in the FY14 accounts of $17.82 million in respect of the FM Contract. Consequently, damages are to be assessed by assessing the true value of the DTZ Group assuming the accounting for those matters was correct and comparing that amount with the value of the DTZ Group after making those accounting adjustments.

Professor Klein does not attempt the first task. Rather, he assumes that the actual price paid is an appropriate proxy for true value on the assumption that there has been no breach of warranty. Although that approach was criticised by the defendants, as I have explained it is consistent with the approach taken and accepted in many cases, and I do not think that the conclusions reached by Professor Klein are flawed for that reason.

In relation to the second task, Professor Klein says that it is necessary to adjust the expected cashflows of the DTZ Group to take account of those errors. More importantly, he also says that the accounting errors were so egregious that it is necessary to adjust the discount rate to be applied to those cashflows because the risks associated with those cash flows would be regarded as greater by a hypothetical purchaser than would otherwise be the case. Professor Klein has no expertise himself in assessing that risk. Instead, he relies on the academic literature referred to earlier.

Professor Klein does not give a satisfactory explanation for why the accounting errors he identifies would have any effect on the DTZ Group’s cashflows. Both the Side Letter Payments and the capitalisation of mobilisation costs may have affected the historical accounts. However, as Mr Samuel and Mr McGuiness pointed out in their evidence, they had no effect on future cashflows. When giving oral evidence, Professor Klein sought to answer that criticism in this way:

Professor Klein appears to be accepting in this passage that historical accounting errors are not relevant to future cashflows, only the discount rate that is to be applied to future cashflows. In any event, in my opinion, the point made by Mr Samuel and Mr McGuiness is correct.

Of course, acceptance that the FM Contract is an onerous contract says something about the future cashflows associated with that contract. However, those losses are already covered by the first limb of the claim for damages based on Professor Klein’s evidence.

An underlying assumption of Professor Klein’s methodology is that Premas’s conduct was fraudulent or at least suggestive of fraud. It was that fact which was said to justify the use of a higher discount rate in calculating the present day value of future cashflows on the assumption that the warranties were breached. In his evidence, Professor Klein frequently suggested that the accounting errors were fraudulent or egregious and pointed to facts which he said supported that conclusion. However, that was not an assumption that could be proved through the evidence of Professor Klein and it was not an assumption otherwise proved by the evidence led by DTZ. In my opinion, there is no basis for suggesting that the accounting errors were fraudulent. Even if I am wrong in my conclusions that the accounting errors did not exist, the reasons for those conclusions stand as reasons for rejecting the view that the errors were fraudulent or indicative of fraud.

A further problem with Professor Klein’s view is that the academic literature he points to is not relevant in determining an appropriate discount rate to be applied to the expected cashflows of the DTZ Group. The analyses relied on by Professor Klein were concerned with identifying the discount minority shareholders in publicly listed companies applied where the companies in which they held shares were forced to restate their accounts, often as a consequence of the fact that the initial accounts contained errors resulting from fraud or reckless conduct. The analyses demonstrate that a broad range of discounts are applied depending on the particular circumstances of the case. The figures relied on by Professor Klein are averages taken from each of the studies he refers to. The figure he uses (a discount of 12%) is an average of those averages. In fact, the articles demonstrate that in some cases, the misstatements have no effect on share price at all. For example, according to the study undertaken by Akhigbe et al (A Akhigbe, R Kudla and J Madura, “Why are some corporate earnings restatements more damaging?” (2005) 15 Applied Financial Economics 327), of the 542 announcements considered by them, 40% had no negative effect on share price, although the average effect (used by Professor Klein) was negative 4.23%.

The studies are irrelevant to the discount rate that should be used in this case. At most, they reflect risks looked at from the point of view of a minority shareholder whose information is limited to what is publicly available and who has no control over the future operations of the company. Those risks are of two main types. The first is the risk that not all problems with the company were identified at the time the accounts were restated. The second is the risk that similar problems will occur in the future. Neither of those risks exists in this case, or at least not to the same extent. DTZ and any hypothetical purchaser had or would have had extensive information concerning the DTZ Group besides the accounts and was in a much better position to assess the first type of risk than a shareholder in a listed company. As to the second risk, DTZ obtained complete control of the DTZ Group in 2014. Consequently, it was in a position to control any future risk.

At most, the studies relevantly demonstrate that it is necessary to consider the particular circumstances of the individual company to determine whether any adjustment should be made to the discount rate in valuing the company to take account of accounting errors. So much seems to be common sense. In contrast, Professor Klein’s approach appears to be akin to a valuer of a particular property in Sydney valuing the property by reference to the median price of all houses in Sydney. Plainly, such an approach to valuation is not an assessment of value at all.

There was a suggestion in some of DTZ’s submissions that the Court could make its own determination of an appropriate adjustment to the discount rate. However, in my opinion, the Court could not do so unless it was provided with a proper foundation for the adjustment. No such foundation has been provided in this case. The evidence, however, suggests that no adjustment is appropriate. The relevant accounting errors are small compared to the size of the DTZ Business. Despite the passage of a number of years, no further accounting errors have been identified. The original accounting errors were confined to the accounts of Premas. All of those matters suggest that, in calculating damages, the same discount rate should be used in determining the present value of DTZ Group’s cashflows assuming that the warranties were true and assuming they were incorrect in the ways alleged.

The alternative damages claim advanced by DTZ, which appears to be put as its primary claim in its final written submissions, is said to have five steps. First, it is said to be necessary to ask what information ought to have been disclosed to make the warranties true. The second step is to ask what additional information the deal team or a hypothetical reasonable purchaser (according to DTZ, the former serves as a proxy for the latter) would have sought. The third step is to identify what a hypothetical purchaser would have paid for the DTZ Business knowing that information. The fourth step is to identify what the United Group or a hypothetical reasonable seller (again, the former is said to serve as a proxy for the latter) would have been prepared to accept in light of the disclosure. The fifth step is to identify whether the “true value” or “inherent” value of the DTZ Business at the time of purchasing was in fact any different from the price worked out using steps one to four.

DTZ submits that the Court should find that the price offered (and presumably accepted) would have been reduced by an amount “in the order of”:

This approach seems to be somewhat convoluted and to confuse the assessment of damages for breach of warranty and the assessment of damages for misleading and deceptive conduct.

Plainly, to the extent that it is alleged that the United Group breached a relevant warranty concerning the disclosure of information, it is necessary to ask what information ought to have been disclosed in order to comply with the warranty. It is then necessary to compare the value of the DTZ Business on the basis that the relevant warranty was complied with and the actual value of the business. Where the warranty is a warranty concerning the knowledge of particular persons concerning the disclosure of information, it is necessary to compare the true value of the business taking into account the facts that ought to have been disclosed but weren’t with the actual value of the business on the assumption that those facts did not exist. That comparison involves an objective assessment of the value of the business on two hypotheses. It does not invite an enquiry into what the parties would or might have done.

Moreover, it is unclear what purpose the five-step process advanced by DTZ is intended to achieve. The reference to the “deep dive” that DTZ (or, more accurately, the TPG Consortium members) would have undertaken appears to be an attempt to expand the information that ought to be taken into account in assessing the true value of the FM Contract beyond what was actually known to Mr Arundel (and other named executives). But ultimately those details do not appear to matter. DTZ’s case is that the true value of the DTZ Business must reflect the fact that the FM Contract was a loss-making contract whereas the effect of what was promised was that the contract would at least break even. It claims as damages the net present value of those losses. Its alternative case involves a submission that in assessing the net present value of those losses, the Court should accept the assessment carried out by Ms Swinburne.

DTZ also submits that it suffered other losses, which it characterises Delphically in the summary of its claim as “adjustments to the multiple/normalised earnings and/or uplift”. The written submissions do not elaborate on what those losses are in the context of the alternative claim. But it seems apparent from DTZ’s oral submissions what they are. In oral submissions, Dr Collins KC, who appeared for DTZ, described them as “other risks, risks not related to the FM Contract, but about which any hypothetical purchaser or this plaintiff would have been concerned having regard to the extent of the nondisclosures”. That, in essence, is a reference to the matters that caused Professor Klein to apply a higher discount rate. The suggestion appears to be that even if the Court does not accept Professor Klein’s calculations, the Court should accept the logic behind them and make some allowance for itself.

I do not accept the alternative approach advanced by DTZ. Ms Swinburne’s conclusions appear to be inconsistent with those reached by Professor Klein, DTZ’s own expert. DTZ relies on Ms Swinburne’s evidence as if it were expert opinion evidence. However, although she gave evidence, DTZ neither sought to qualify her as an expert nor to comply with rules 31.21 and 31.23 of the Uniform Civil Procedure Rules 2005 (NSW). Moreover, there appear to be difficulties with a number of her assumptions (such as the operation of the benchmarking provisions of the FM Contract). For those reasons, even though I was prepared to admit Ms Swinburne’s analysis, no weight can be placed on it in this context.

Nor is there any basis for awarding the additional damages claimed by DTZ or some other amount to take account of other risks. On the conclusions I have reached, even assuming the warranties were breached, no such adjustments are necessary. Moreover, apart from the analysis given by Professor Klein there is no logical basis for making any such adjustment. This is not a case where the Court should do the best it can to assess damages which have been proved. Rather, it is a case where the Court is being asked to pluck a figure out of the air.

On the conclusions I have reached, there was a breach of the warranties contained in the SSA arising from the failure to disclose the fact that the costs of cleaning were substantially more than budgeted and were likely to mean that, contrary to expectations, the FM Contract was likely to be loss-making at least for the first two or more years of its operation. DTZ is entitled to recover damages consequent on that breach. A reasonable method of assessing those damages would be to determine the present day (as at the date of breach) value of the difference between the profits originally forecast to be earned under the FM Contract up until the end of the first benchmarked period with the profit or loss during that period arising from the increase in cleaning costs.

Plainly, DTZ has not undertaken that task, and it is not a task that the Court could undertake unassisted by expert evidence. What is apparent, however, from the Five Year Plan is that any amount calculated in that way would be substantially less than the threshold for the cover provided by the first excess policy ($42,150,001). It is unnecessary, therefore, to reach a final conclusion on whether the Court should do the best it can to assess the amount of damages consistently with that approach and in the absence of evidence, since whatever the results of that assessment, no damages will be recoverable against the remaining defendants.

It follows from what I have said that, if contrary to the conclusions I have reached, DTZ had been able to establish that the Accounts (as defined in the SSA) had contained the errors identified by DTZ, DTZ would not have recovered any damages in respect of the incorrect treatment of the Side Letter Payments and the incorrect capitalisation of mobilisation costs because those errors had no effect on future cashflows and therefore no effect on the value of the DTZ Business. It would have been entitled to damages for the failure to make a provision for the FM Contract as an onerous contract. However, those damages would have been limited to an amount of $17.82 million.

DTZ may have been entitled to claim damages for breach of the warranty I have identified. However, those damages are clearly less than the threshold at which the first excess policy attaches. Consequently, none of the remaining defendants have any liability to DTZ in respect of that breach.

Having regard to the conclusions I have reached, it is unnecessary to deal with the question of interest. However, I should say something about that issue in the event that my conclusions are wrong.

DTZ claims interest under s 57 of the Insurance Contracts Act 1984 (Cth) (the Insurance Contracts Act), which requires an insurer to pay interest from the date on which it was unreasonable for the insurer to withhold payment to the date of payment at a rate or rates prescribed by regulations. DTZ submits that it was entitled to be paid interest from a date no later than six months after the date it provided the defendants with a formal claims notice — that is, no later than six months after 3 November 2017.

The defendants take objection to that claim on two principal grounds.

First, the seventh defendant submits that the defendants were not liable to pay any amount under their policies until the insurers under the underlying policies had paid or agreed to pay or been found liable to pay under their policies. That did not occur until shortly before the hearing.

Second, the Joint Defendants and the seventh defendant submit that interest should only run from the time that DTZ properly quantified its claim. The earliest that occurred was when DTZ served the report of Professor Klein of 29 November 2022.

I accept the second of these submissions in substance, but not the first.

As to the first submission, in my opinion it would be unreasonable for excess insurers to withhold payment in circumstances where, on the material before them, it was apparent that they were liable. For the purposes of s 57 of the Insurance Contracts Act, it would not be reasonable for them to rely on the unreasonable conduct of the underlying insurers as a basis for refusing to pay amounts due under their own policies.

As to the second point, I accept the submission of the Joint Defendants that in order to determine the question of interest, it is necessary to ask two questions. The first is when did the insured first make the claim that succeeded. The second is when did the insured provide adequate information in support of that claim.

Until it is known on what basis DTZ succeeds, it is not possible to answer those two questions. Moreover, the length of time the insurers would reasonably need to consider that claim would depend on the claim and when it was first made. Accordingly, it is not possible to express any view on when interest should run.

It follows from the conclusions I have reached that DTZ’s claim against the second, fourth, fifth, sixth and seventh defendants under the First Excess Policy, the Second Excess Policy, the Third Excess Policy and the Third Fourth Excess Policy must be dismissed. There is no reason why DTZ should not pay the costs of those claims.

Accordingly, the orders of the Court are: