DIF III – Global Co-Investment Fund L.P v DIF Capital Partners Limited

1. [1]

   BATHURST CJ: I agree with Bell P and the separate judgment of Meagher JA. The appeal should be dismissed with costs.

2. [2]

   BELL P: The appellant, DIF III - Global Co-Investment Fund L.P (DIF III), was a limited partnership established on 30 August 2007 under the laws of Delaware. Under its limited partnership structure, the affairs of the partnership were the sole responsibility of a general partner, a Cayman Islands corporation, DIF III GP Limited (the General Partner).

3. [3]

   In a Private Placement Memorandum (PPM) which led to the constitution of the fund of which DIF III was the investment vehicle, it was said that, “generally”, investments would only be considered in “transactions forecast to yield a pre-tax, gross unlevered IRR in excess of 23%”. IRR was a reference to “internal rate of return”.

4. [4]

   On 20 November 2007, the Directors of the General Partner resolved to invest US$25,000,000 in a transaction by which Babcock & Brown LP (BBLP) acquired control of Coinmach Services Corporation (Coinmach), a publicly listed Delaware corporation which was the leading provider of outsourced laundry equipment services for multi-family or multi-dwelling housing properties in the United States.

5. [5]

   DIF III’s investment was part of a much larger investment, by which a number of affiliates, including funds within the Babcock & Brown Group of companies, combined to provide the equity component for the Coinmach acquisition with the balance of the acquisition funded by syndicated debt.

6. [6]

   DIF III’s investment followed the receipt of a recommendation by DIF Capital Partners Limited, formerly known as Babcock & Brown Direct Investment Fund Limited (the Manager). DIF III had entered into a management agreement with the Manager on 6 September 2007 (the Management Agreement). The Manager had an investment committee whose role was to consider and approve investments presented to it by the Manager’s investment officers after they had undertaken due diligence (the Investment Committee). The Manager calculated that the investment in Coinmach would have an IRR of 24.6%.

7. [7]

   The investment, whose consummation more or less coincided with the Global Financial Crisis, was not a success. By 5 February 2009, an internal memorandum of the Manager recommended that the carrying value of the Coinmach asset be written down to nil. In late 2009, Coinmach’s debt was restructured with the consequence that existing shareholders’ interests in Coinmach were greatly reduced in exchange for a right to receive certain deferred profits. Ultimately, DIF III received US$1,338,805 in May 2013 and a further US$89,564 in August 2013 in respect of its investment.

8. [8]

   In proceedings commenced in the Commercial List of the Equity Division of this Court, DIF III pursued a number of causes of action against the Manager, including for damages for breach of the Management Agreement.

9. [9]

   DIF III also sued the individual members of the Investment Committee of the Manager (the Individuals) on a variety of causes of action, including in negligence and for misleading or deceptive conduct, it being alleged in substance that the Individuals lacked reasonable grounds for their recommendation to the General Partner of the suitability of the investment in Coinmach. In addition to the Manager and the Individuals, DIF III also sued Directors and Officers Insurers (the D&O Insurers), and the Manager’s professional indemnity insurers (PI Insurers).

10. [10]

    The Manager’s defence of DIF III’s claims against it was undertaken by the PI Insurers who had been sued directly by DIF III pursuant to s 4(1) of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW).

11. [11]

    The PI Insurers admitted that the Manager had breached the Management Agreement, but denied that DIF III had suffered any loss or damage by reason of that breach. The PI Insurers also denied that they were obliged to indemnify the Manager under the professional indemnity policy (the Policy), on the basis that the Manager’s management had not become aware of any “fact, circumstance or event which could reasonably be anticipated to give rise to a Claim” against the Manager at any time during the policy period, with the consequence that the Policy did not respond.

12. [12]

    The primary judge dismissed DIF III’s claims against all parties and, most relevantly for present purposes, held that DIF III had not established that the admitted breach of the Management Agreement had caused it any loss. His Honour also held that the Manager had not been put on notice of any potential claim within the policy period, with the consequence that the Policy did not respond.

13. [13]

    The primary judge also dismissed DIF III’s claims against the Individuals and the D&O Insurers. DIF III filed a notice of appeal against those parties, as well as against the PI Insurers. Shortly before the appeal came on for hearing, however, the appeals against the Individuals and the D&O Insurers were settled, although there may be some outstanding questions in relation to costs as between the settling parties and the PI Insurers who have reserved their position in that regard. (If such questions arise or are not able to be resolved, they can be dealt with by way of Notice of Motion).

14. [14]

    When the balance of the appeal came on for hearing, Mr Jackman SC, who appeared with Ms Ng for DIF III, confined his case against the PI Insurers to the claim for damages for breach of the Management Agreement and indemnity under the PI Policy. The PI Insurers also contracted their case on a Notice of Contention which had been filed, confining it to an argument that the primary judge was wrong to hold that cover under the Policy was not excluded by exclusion 28 relating to conflicts of interest.

15. [15]

    Accordingly, the three matters in issue on appeal were as follows:

    1. (1)

       whether the primary judge erred in finding that DIF III had failed to establish loss or damage for breach of contract. This was a question of causation;

    2. (2)

       whether the primary judge erred in finding that the Policy did not respond; and

    3. (3)

       whether the primary judge should have held that the conflict of interest exclusion under the Policy applied.

16. [16]

    DIF III must succeed on the first two of these issues and resist the PI Insurers’ Notice of Contention argument in order to succeed in its claim against the PI Insurers on this appeal. In relation to the second issue, I agree with Meagher JA for the reasons his Honour gives that the primary judge did not err in finding that the Policy did not respond. I also agree with Meagher JA that, in light of that conclusion and my own conclusion on the first issue which is addressed in the balance of these reasons, it is not necessary to decide the third issue.

17. [17]

    Before turning to consider the background to the establishment of DIF III, the Coinmach transaction and the due diligence undertaken with regard to that transaction, which is necessary to understand for the purposes of considering the appeal insofar as it relates to causation and the claim for damages for breach of the Management Agreement, it is first desirable to set out the manner in which this claim was pleaded, and how it was dealt with by the primary judge.

The breach of contract claim and the primary judgment

1. [18]

   Clause 3.1(g) of the Management Agreement provided that the Manager would “exercise all due diligence and vigilance in carrying out its functions, powers and duties” under the Management Agreement.

2. [19]

   DIF III pleaded that the Manager breached this term of the Agreement because it failed to undertake any, or any proper, due diligence or other investigations that a reasonable and prudent investment manager in the position of the Manager would have undertaken prior to making the recommendation on or about 8 November 2007 for DIF III to participate in the Coinmach transaction. Some ten particulars were subscribed to this allegation of breach. DIF III’s case was further refined in the course of the hearing at first instance in a way that is explained in the next part of this judgment.

3. [20]

   As already noted (at [11] above), the allegation of breach of the Management Agreement was admitted by the PI Insurers. DIF III contended that, but for this breach and had proper due diligence been performed, the Manager would not have recommended the investment to its Investment Committee, the Investment Committee would not have approved and recommended it to the General Partner and DIF III, in turn, would not have made the investment. In short, DIF III’s claim was what is sometimes described as a “no transaction” case.

4. [21]

   DIF III claimed as damages the difference between the US$25,000,000 it invested together with investment costs of US$1,109,771.89, less the two amounts that were recovered in 2013 and to which reference was made at [7] above. The total loss claimed was US$24,681,402.90 together with interest.

5. [22]

   In relation to the breach of contract claim, the primary judge noted (at [314]) that:

6. [23]

   It will be necessary to explain, in due course, in the context of considering the causation component of the “no transaction” case, who the members of the Coinmach Deal Team were, what role they played and the significance of the financial model they developed, as referred to by the primary judge in the passage extracted at [22] above. As shall be seen, DIF III largely sought to establish its case by reference to historical information in relation to Coinmach that was contained in that very model.

7. [24]

   As has already been noted at [12] above, the primary judge rejected DIF III’s claim to have suffered loss and damage by reason of the admitted breach of the Management Agreement by the Manager. His Honour’s reasons for doing so were expressed in [315] of the primary judgment, as follows:

8. [25]

   The reasoning disclosed in the above paragraph is shorthand and, viewed in isolation, somewhat elliptical but it reflects the fact that, at the trial, DIF III pursued a number of causes of action in addition to the claim for breach of contract, most particularly a claim for misleading or deceptive conduct on the part of the Individuals in approving and recommending the investment in Coinmach to the General Partner (see [9] above), and there was an overlap between the reason why it was asserted that the Management Agreement was breached and the consequences flowing from that breach, and the contention that the Individuals lacked reasonable grounds (in the Global Sportsman sense) for the expression of opinion constituted by their recommendation to the General Partner: see Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82 at 88; [1984] FCA 167.

9. [26]

   The reference in [315] of the primary judgment to the “particulars of the absence of reasonable grounds” was a reference to the manner in which DIF III had refined its case at first instance to attack the financial model which had been constructed by the Coinmach Deal Team, and which it was alleged (and admitted) was uncritically analysed by the Manager (or not analysed at all). Those particulars which have continuing relevance for the purpose of this appeal were as follows:

10. [27]

    “Project Spin” was the code name for what became the Coinmach acquisition.

11. [28]

    As the primary judge explained, the breach of contract claim was to the effect that, had the Manager exercised proper due diligence, it would have appreciated that there were flaws in the financial model relied on by the Manager and the assumptions underlying it (as reflected in the six particulars identified above), and these meant that a lower IRR should have been indicated in respect of the Coinmach transaction which, in and of itself, or taken together with questionable growth assumptions in and tightness of cash flow indicated by the model, coupled with Coinmach’s most recent results, would have meant that the Manager would never have sought the approval of the Investment Committee, that Committee would never have recommended the investment to the General Partner, and DIF III would not have made the investment.

12. [29]

    In this regard, although he ultimately rejected the breach of contract claim, the primary judge said at [265], in a passage upon which Mr Jackman placed heavy reliance:

The focus of the appeal

1. [30]

   In the course of the appeal, principal albeit not exclusive focus was placed on the sixth of the particulars noted at [26] above. As it was put in oral argument, the model assumed that, with an annual increase in prices in Coinmach’s core business of 2.5%, the number of loads per washing machine would neither go up nor down. As Mr Jackman said:

2. [31]

   It was also submitted that, contrary to this assumption, even with an assumed price rise of 2.5%, there would have been a drop in the overall number of loads with the consequence that that, too, would have pushed the IRR below 23%, and the investment would never have been made.

3. [32]

   The primary judge held in relation to the sixth particular that it had not been established that an increase in prices of 2.5% would lead to a reduction in load volumes, contrary to one of the financial model’s important assumptions. His Honour pointed to evidence (see, for example, at [71] and [240]) that demonstrated that this was a topic on which extensive due diligence appeared to have been undertaken by the Coinmach Deal Team and pointed out that, whilst DIF III was critical of that analysis, “without full details of the analysis and expert evidence in relation to it”, he was not satisfied that the relevant assumptions in the financial model were wrong: at [230].

4. [33]

   Mr Jackman submitted that the primary judge erred in this respect, describing the matter as “critical” to his argument, and sought to demonstrate from historical information relating to Coinmach’s business that competent due diligence would have disclosed that a 2.5% increase in price would have a negative impact on load volumes, rather than the 0% impact that the financial model had assumed. This would in turn have reduced the projected IRR. He then embraced the primary judge’s finding at [265], extracted at [29] above, to establish causation.

5. [34]

   In addition to arguments relating to the sixth particular, Mr Jackman also submitted that, had regard been had to the quarterly financial results of Coinmach in June and September 2007, the growth assumptions in the model should have been re-assessed and revised downwards which, it was submitted, would also have led to the target IRR not being achieved.

6. [35]

   In relation to the June 2007 results, the primary judge held (at [231]) that:

7. [36]

   Interpolating at this point, there is no reason to doubt that, had the Manager independently made inquiries of Coinmach’s management, as due diligence would have recommended, it would have received the same assurance.

8. [37]

   Reliance was also placed on appeal on the tightness of the cashflow projected by the model which Mr Jackman described as being “wafer thin” for the first three years of the model, and the fact that it forecast losses in the years 2008-2010 and a very small profit in the years 2011 to 2013. Pointing out these matters, however, which pick up the third and fourth particulars set out at [26] above, neither demonstrated a want of due diligence on the part of the Manager nor assisted DIF III in establishing causation. Mr Jackman principally relied on these matters to show how finely balanced the model was in terms of projecting the outcome of any investment.

9. [38]

   It is necessary and desirable at this point to provide further background and greater detail relating to the establishment of DIF III and the course of events which led to its participation in the Coinmach transaction.

Background

1. [39]

   The Manager was a company in the Babcock & Brown group of companies and ran a fund management business. In early 2007, it sought to establish two funds for investment in United States assets. These funds (one of which became DIF III) were private investment vehicles in the form of Delaware limited partnerships and were said, in the PPM of March 2007 (see [3] above), to represent “an opportunity for investors to access Babcock & Brown’s significant global principal investment pipeline by co-investing alongside [Babcock & Brown] and its affiliates in investments worldwide”.

2. [40]

   The PPM noted that the Fund sought to generate a minimum net unlevered return for investors of 20%. More precisely, the Investment Objective of the Fund was “[t]o earn a minimum net unleveraged IRR of 20% by primarily co-investing with B&B and its affiliates in ‘event-driven’ private equity, developmental infrastructure, operating leasing and structured finance, and opportunistic real estate globally”. Annual management fees of 2% per annum of net invested capital meant, as was stated in the PPM, that the Manager expected that the Fund will “generally consider only those transactions forecast to yield a pre-tax, gross unlevered IRR in excess of 23%”. (This 23% IRR is the “target” that the primary judge referred to in the passage from his judgment set out at [29] above, and is of central importance to DIF III’s case on appeal. It was sometimes also referred to as the “hurdle” rate.)

3. [41]

   The PPM noted that the Fund would be “led by three senior professionals with significant private equity and principal investment experience”. These were Mr Fergus Neilson (the Fund’s Chief Executive Officer) and Messrs Harry Nicholson and Ted Dow (the Fund’s Investment Officers).

4. [42]

   The PPM described the investment process, stating that the “[i]nvestors in the Fund will benefit from DIF’s proven, stringent due diligence process”. Part of that process was said to include a screening/due diligence component. In this context, the PPM provided that:

5. [43]

   The PPM noted that once the Manager was satisfied with the results of its transaction due diligence and with an investment structure, it would then prepare a transaction recommendation addressed, in the first instance, to the Manager’s Compliance Committee, which was charged with responsibility for protecting investors from conflict of interest risk. Following a decision by the Compliance Committee that an investment did not pose any unresolved conflicts of interest, an investment recommendation was then to be prepared and addressed to the Manager’s Investment Committee which comprised two of BBLP’s executives, Mr Phillip Green and Mr Robert Topfer, together with Messrs Neilson and Nicholson, and an independent member, Emeritus Professor Robert Officer. The PPM noted that an investment required the unanimous approval of the Investment Committee.

6. [44]

   Following this process, recommendations were to be made by the Manager to the General Partner in relation to particular investments.

Coinmach and the Coinmach Transaction

1. [45]

   At about the same time as the PPM was issued, BBLP was approached by Deutsche Bank, one of Coinmach’s financial advisors, concerning the possibility of acquiring Coinmach. To consider this possible acquisition, the Coinmach Deal Team (the Deal Team) comprising Ms Berry Talintyre, Mr Jake Haines, Ms Sridhara Ramachandran and Mr Justin Levi was formed. Ms Ramachandran was an employee of BBLP, whilst the other three members of the Deal Team were seconded to BBLP from another BBLP subsidiary. The Deal Team was supervised by Mr Topfer. As outlined at [27] above, the potential acquisition was given the code name “Project Spin”.

2. [46]

   As has been noted at [4] above, Coinmach was the leading provider of outsourced laundry equipment services for multi-family or multi-dwelling housing properties in the United States.

3. [47]

   There were a number of dimensions to Coinmach’s business. By far the most important of these was its core “Route” business which involved leasing laundry rooms from building owners and property management companies, installing and servicing laundry equipment and collecting revenues generated from the use of laundry machines by building occupants. As was subsequently stated in an information memorandum prepared by the Deal Team (the Information Memorandum), the Route business was “characteri[s]ed by long-term customer contracts, low net customer attrition and consistent inflation-related price increases that generate stable and predictable cash flows that are largely insulated from economic cycles”.

4. [48]

   The Route business was identified in the Information Memorandum as having provided approximately 88.7% of Coinmach’s 2007 financial year revenue. It was noted that the Route business was resilient to economic cycles, as was demonstrated by “stable revenues throughout recent periods of heightened vacancy in multi-family housing and a proven ability to successfully increase prices through the vacancy cycle”.

5. [49]

   The revenue derived from the Route business was a function of a number of variables, including the number of machines in the market, the proximity of competition to the multi-family or multi-dwelling buildings from which the Route business operated, the level of occupancy or vacancy rates in each such building, their amenity including the extent of the provision of shared laundry facilities, their geographic locality, the number of laundry loads per machine and the average price, described as the “vend price”, per load of laundry. Some of these variables and, in particular, occupancy or vacancy rates of multi-family or multi-dwelling buildings, were in turn the function of broader macro-economic factors such as interest rates, the sub-prime mortgage market and tolerance for mortgage delinquencies.

6. [50]

   As will emerge, the interaction of these integers or variables is of central relevance to the outcome of this appeal. For present purposes, it suffices to note that the number of laundry loads processed in Coinmach’s Route business was not simply a function of the price of those loads. It appears to have been far more complex than that.

7. [51]

   In respect of loads per machine, the Information Memorandum noted that:

8. [52]

   In relation to vend prices, the Information Memorandum noted that:

9. [53]

   Under the “Key Risks/Issues and Mitigants” section of the Information Memorandum, the following entries are of significance:

10. [54]

    A preliminary non-binding indication of interest in acquiring Coinmach was submitted by BBLP to Deutsche Bank on 21 March 2007.

11. [55]

    On 2 April 2007, the Deal Team sought an upcoming capital approval to incur up to US$1,000,000 in due diligence expenses following BBLP’s shortlisting to provide a binding bid to acquire Coinmach. In its memorandum in support of this expenditure request, which was addressed to Mr Topfer, the Deal Team identified some six reasons why it believed that Coinmach was an attractive acquisition. These were:

12. [56]

    In this memorandum, DIF III was identified as a potential source of US$50,000,000 in respect of the transactions.

13. [57]

    During April 2007, the Deal Team prepared the Information Memorandum, to which reference has already been made, for delivery to a limited number of institutional and other sophisticated investors on a confidential basis, solely for their use in considering whether to purchase the debt instruments described in the memorandum.

14. [58]

    The Information Memorandum provided a set of projected financials, described as the “base case”, for a five year period. The Deal Team had constructed a financial model by reference to which the investment in Coinmach could be assessed and projections computed based on a range of assumptions.

15. [59]

    Early versions of the financial model constructed by the Deal Team in April 2007 were not in evidence before the primary judge, but other documents, such as the Information Memorandum together with a report in relation to the transaction by KPMG dated 27 April 2007 (the KPMG report) indicated that, at that time at least, the financial model assumed a 2% increase in vend pricing per annum.

16. [60]

    A detailed email of 14 April 2007 from Mr Haines to Ms Ramachandran (with her response integrated into the email) sheds some light on the process by which the model was developed, and the assumptions it contained were questioned and debated by the Deal Team. One aspect of this email which is of note is the following observation by Mr Haines:

17. [61]

    This observation picks up on those features of the Information Memorandum which have been highlighted above.

18. [62]

    On 15 April 2007, Ms Talintyre reported to Mr Topfer as follows:

19. [63]

    A number of points should be made about this email.

20. [64]

    First, as at 15 April 2007, the forecast IRR was 21.9%.

21. [65]

    Second, the base case by reference to which this IRR was calculated excluded a number of specific business plan initiatives that the current management of Coinmach was looking at which, if brought to fruition, carried a potential upside.

22. [66]

    Third, the reference to EBB is a reference to Everest Babcock & Brown which was a separate fund which the Deal Team was targeting to participate in the transaction.

23. [67]

    Fourth, the statement “as long as DIF III get up and not delayed & agree to deal” is a reference to the fact that DIF III had not yet, at that stage, been established although, as has been noted, the PPM had been issued.

24. [68]

    Fifth, the reference to “Harry” in this email is plainly a reference to Mr Harry Nicholson, one of the Manager’s two Investment Officers, as outlined at [41] above.

25. [69]

    In the KPMG report to which reference has been made at [59] above, KPMG stated that management was “confident that it will be able to continue to raise vendor prices in the near future.” The report also noted that management had indicated that “its pricing policy varies by geographic area and that price increases largely depend, among other micro-economic factors, on the pricing developments of nearby laundromats.” The report also noted that it “is not uncommon that price increases are rolled back if the price increase has a negative impact on the revenue obtained per machine”.

26. [70]

    Implicit in this statement is that that would not invariably be the case and that revenue could be affected by other micro-economic factors, such as proximate competition. To this factor, one could further add vacancy rates in multi-dwelling units which may in turn be a function of larger macro-economic considerations such as mortgage rates. The KPMG report also recorded that there was a significant variance in price levels charged by Coinmach across different regions.

27. [71]

    On 2 May 2007, the Deal Team prepared an internal Capital Approval Request (CAR) seeking approval for US$85,000,000 of equity funding from BBLP, subject to BBLP being selected as the preferred bidder to acquire Coinmach and ultimately securing a positive vote from shareholders so as to facilitate a 100% acquisition, satisfactory documentation, satisfactory confirmatory due diligence and the implementation of satisfactory management equity/incentive arrangements. The CAR replicated much of the information that was contained in the Information Memorandum to which reference has already been made. Of particular note, the CAR identified the likely fees and returns on the equity investment as being approximately 22% post company level tax and pre-management fee. The pre-management fee was identified as a 2% fee.

28. [72]

    This forecast base case return on equity investment was said to be based upon an exit at a multiple equal to the entry multiple in approximately four years’ time, and an achievement of the underlying base case financial projections.

29. [73]

    On 3 May 2007, Mr Haines received an email from Mr Will Peterson, Portfolio Manager of the Everest Babcock & Brown Income Fund, which had been identified in Ms Talintyre’s 15 April 2007 email, extracted at [62] above, as a potential equity investor. Mr Peterson’s email was as follows:

30. [74]

    Mr Haines responded on the same day as follows:

31. [75]

    Following this exchange, Mr Peterson prepared a report for the EBB Income Fund investment committee. Its relevance for present purposes lies in the following observations which were no doubt informed by Mr Haines’ email referred to immediately above:

32. [76]

    On 3 May 2007, a document headed CAR Supplement was prepared by the Deal Team to be read in conjunction with the CAR of 2 May 2007, referred to at [71] above. This document contained a series of slides addressing the communal laundry market profile, historical performance and outlook. The summary slide was in the following terms (with emphasis added):

33. [77]

    In relation to “historical performance”, each of the slides contained a headline proposition accompanied by illustrative charts and graphs purporting to support the respective headline propositions. The headline propositions were as follows:

34. [78]

    The last of these slides included the following graph:

35. [79]

    The CAR and Supplement were circulated/distributed on or about 4 May 2007.

36. [80]

    Final bids were lodged on 7 May 2007 and Babcock & Brown was subsequently appointed preferred bidder. A merger agreement was executed on 15 June 2007 with closing, following completion of due diligence, then estimated to take approximately 4 months.

37. [81]

    By June 2007, the Deal Team had progressed with its due diligence and produced a set of slides entitled “Project Spin Summary Materials” (the Summary Materials). These were sent to Mr Neilson and Mr Nicholson by the Coinmach Deal Team on 6 July 2007.

38. [82]

    The Executive Summary included the following two bullet points:

39. [83]

    Under the heading “Investment Thesis”, the Summary Materials noted that Coinmach had been “successful in consistently raising prices during a period of heightened vacancy rates”. Under the section “Communal Laundry Market Profile”, Coinmach’s historical performance and projections were described as follows:

40. [84]

    Under the heading “Valuation” in the Summary Slide, the Deal Team stated that:

41. [85]

    The summary conclusions set out in the preceding paragraphs were in turn supported by detailed slides which both graphed past performance and described various key assumptions in the model. Of particular significance was a slide entitled “Load volume and price increase assumptions also reconcile with history”. This slide contained the following text:

42. [86]

    This slide was followed by a slide entitled “Price growth of 2-3% is consistent with historical data which suggests load volumes are insulated from price increases of 3% or less.” This slide contained the same information as the slide contained in the CAR supplement referred to at [78] above. Mr Jackman submitted that “the [M]anager couldn’t simply accept that headline without looking at the data and questioning whether the data supported it and indeed the model itself shows that in that five year recent period one couldn’t support that proposition.”

43. [87]

    On 31 July 2007, Mr Haines sent an email to Messrs Steven Flyer and Greg Pratan of Columbus Nova which, it may be inferred, was a potential investor or financier, attaching a spreadsheet entitled “City by city analysis”. This email included the following observation:

44. [88]

    It may be inferred that this was part of or the same analysis that Mr Haines had referred to in his email to Mr Peterson of 3 May 2007, referred to in [74] above, in which he said:

45. [89]

    The record of evidence before the Court discloses very little material in relation to what transpired in August 2007 in relation to the Coinmach acquisition, although an email from Ms Talintyre to Mr Topfer and others of 14 August 2007 suggests that various discussions had been initiated with other players in the market with whom potential synergies were being explored. It is not necessary for present purposes to enter into the detail of such discussions.

46. [90]

    In September 2007, a further information memorandum, on this occasion described as an “Equity Placement Memorandum”, was issued. The Information Memorandum of April 2007 had been a Debt Placement Memorandum. Although dated 6 months apart, their content was very similar.

47. [91]

    By 6 September 2007, when an amended limited partnership agreement was entered into between the General Partner and the limited partners of DIF III, three limited patners had made capital commitments to DIF III of US$71,500,000. It is evident that, by this time, the Deal Team was keen to secure DIF III’s participation in the Coinmach Transaction.

48. [92]

    On 19 September 2007, Mr Nicholson emailed Mr Tony Wilmore, an administrative support executive for the Babcock & Brown corporate finance group, copying in Ms Talintyre, Mr Michael Lyttle, Mr Topfer and Mr Neilson, in response to a request for confirmation that DIF III would be in a position to fund a US$35,000,000 commitment for the Coinmach Transaction by the end of October 2007. In his email, Mr Nicholson said:

49. [93]

    The evidence before the Court casts little light on what work Mr Nicholson did on behalf of the Manager in assessing the merits of the Coinmach transaction after his email of 19 September 2007. Approvals were certainly not in place by “early October”, as he had foreshadowed in that email.

50. [94]

    On 22 October 2007, Mr Nicholson contacted the New York-based Mr Haines of the Deal Team seeking to set up a phone call “to take me through the latest model & IM [Information Memorandum]”. This was arranged to occur on the morning of 25 October 2007 (AEST).

51. [95]

    On 26 October 2007, Mr Haines sent Mr Nicholson an updated model under cover of the following email:

52. [96]

    This email, together with the updated financial model which it attached, was of central forensic significance in Mr Jackman’s argument on appeal. The email evidenced a request by Mr Nicholson (who was not called as a witness) to Mr Haines who was a member of the Deal Team to adjust the price growth variable in the model from the base case of a 2% increase per annum (which, from the documents reviewed above, it appears to have been set at for the life of the model) to 2.5%.

53. [97]

    Mr Haines’s email also showed, by implication, that as at 26 October 2007, the IRR produced on the base case of the model was 22% which, critically for Mr Jackman’s argument, was 1% below DIF III’s target IRR of 23% (see [3] and [30]-[31] above). On the figures referred to by Mr Haines, adjusting the price by 0.5% per annum resulted in a 2.6% increase of the IRR to 24.6%, which obviously exceeded the target rate.

54. [98]

    The updated financial model attached to this email (which was the only version of the model in evidence before the primary judge) also contained a cell which set out historical data for the years 2002-2006, an extract of which is reproduced below:

55. [99]

    In his oral submissions, Mr Jackman, having pointed out the negative impact on loads per machine in the context of price rises of 4.3%, 3.1% and 2.7% for 2002, 2003 and 2004 respectively, said in relation to the data for 2005:

56. [100]

    By way of contrast with this historical data for 2002-2006, in terms of projections for 10 years from 2008, the model as sent to Mr Nicholson on 26 October 2007 assumed a price increase of 3.6% for 2008, and then regular price rises of 2.5% for each year to 2017, but with no growth or diminution in the % impact on loads per machine.

57. [101]

    Mr Jackman attacked the 0% figure attributed to growth in loads per machine as an unjustified assumption which he submitted, almost wholly by reference to the historical data for the previous five years referred to above, a competent and independent due diligence would have discerned.

58. [102]

    In this context, he also pointed to a sensitivity table contained in the model which showed that, consistent with Mr Haines’ email of 26 October 2007 (see [95] above), an assumed annual price rise of 2% rather than 2.5% with a 0% assumed impact load growth would have dropped the IRR from 24.6% to 22%. The same sensitivity table illustrated that an assumed annual price rise of 2.5% with a 1% drop in load volumes would have yielded IRR of 21.9%.

59. [103]

    An extract from the sensitivity table is set out below:

60. [104]

    Given the way in which Mr Jackman put his argument, it is relevant to observe that the sensitivity table also showed that if one assumed a 2.5% annual price increase but a negative 0.5% load growth, the IRR would be 23.3%, which was above DIF III’s targeted IRR.

61. [105]

    On 1 November 2007, Mr Nicholson distributed a proposal to the Manager’s Investment Committee to “co-invest with B&B in Coinmach”, noting that the Manager’s Compliance Committee approval had been obtained earlier in the week. In this document, Mr Nicholson noted “[t]he equity returns, on base case projections, target an IRR of 24.6%” and incorporated the sensitivity tables from the model which I have referred to above. The proposal also noted that “[t]he various value accretion projects, such as industry consolidation, could increase IRR to 50%+”.

62. [106]

    Mr Nicholson stated in the proposal that:

63. [107]

    He also noted that:

64. [108]

    Mr Nicholson further noted that:

65. [109]

    The following further extracts from Mr Nicholson’s proposal are also of relevance to this appeal. First, he noted that:

66. [110]

    He later said, in language that plainly derived from the Key Risks section of the Information Memorandum, as follows:

67. [111]

    By 6 November 2007, all members of the Investment Committee had approved the transaction.

68. [112]

    On 7 November 2007, Coinmach’s half yearly accounts for the six months ending 30 September 2007 were published. These were summarised by the primary judge (at [232]) as follows:

69. [113]

    On 8 November 2007, the Board of the General Partner was notified that the Investment Committee of the Manager had approved the transaction and recommended it to the Board.

70. [114]

    On 9 November 2007, the Board of the General Partner (two of whose members, Messrs Topfer and Neilson, were also on the Investment Committee of the Manager) resolved that entry into the Coinmach transaction would be in DIF III’s “long term commercial benefit and [in its] commercial interests”.

Consideration

1. [115]

   Under the heading “The focus of the appeal” (see [30]-[38] above), the gist of Mr Jackman’s argument on appeal was set out. In summary, it involved the following steps:

   1. (1)

      DIF III targeted investments with an IRR of 23% or more (see [3] and [30]-[31] and [40] above);

   2. (2)

      as originally presented to Mr Nicholson by the Deal Team, the base case in the financial model only indicated a rate of return of 22% (see [64], [71] and [97] above);

   3. (3)

      Underpinning the projected 22% IRR was a key assumption that vend prices would increase by 2% for each year of the model’s operation from 2009 (with an increase of 3.6% for 2008), with no negative impact on the average number of washing machine loads on account of this assumed price increase (see [59], [74] and [85] above);

   4. (4)

      in order to achieve an IRR exceeding 23%, the assumed price rises in the model were increased at Mr Nicholson’s request from 2.0% to 2.5% per annum (see [95]-[96] above);

   5. (5)

      the increase in the annual price rise by 0.5% from that in the base case was not accompanied by any decrease in the load volumes built into the model, that is, the model continued to assume a nil impact on washing machine loads notwithstanding the (increased) assumed price rise;

   6. (6)

      historical data for Coinmach suggested that there should have been a corresponding decrease in load volumes, as this had historically been the case when vend prices were increased (see [98] above);

   7. (7)

      this historical data was available to Mr Nicholson, as it was contained in the updated financial model he was sent on 26 October 2007 (see [95] above);

   8. (8)

      had proper due diligence been undertaken, the assumption that a price increase of 2.0% or 2.5% would have no impact on load volumes would not have been accepted, and it should have been appreciated that there would be a negative impact on load volume which would, in turn, have driven the IRR down to less than 23%;

   9. (9)

      by reference to the primary judge’s unchallenged finding set out in [265] of the judgment (see [29] above), the transaction would not, in the circumstances, have been one that DIF III would have entered into.

2. [116]

   In oral address, Mr Jackman succinctly summarised this submission as follows:

3. [117]

   I did not understand Mr Jackman to rest his case on the two considerations set out in the final sentence of his submission extracted above. Rather, I understood his reference to, and arguments in respect of, those two matters to reinforce how “tight” the model and its assumptions were. The considerations of losses for the first three years and the tightness of cashflows were not suggested, either individually or collectively, to have demonstrated a want of competence on the part of the Manager.

4. [118]

   In any event, on the question of losses and tightness of cash flow, the primary judge held (at [236]) as follows:

5. [119]

   The principal focus of DIF III’s argument was on the suggested negative correlation, not reflected in the financial model, between price increases and load volumes.

6. [120]

   Mr Jackman’s argument had a superficial force and attraction, but that attraction overlooked the fact that the relationship between price rises and load volumes was, on the materials before the Court, highly complex, non-linear and a function of, or influenced by, many factors including geography, the size of any price increase, the rate of inflation, the general state of the economy and, in particular, its effect on the vacancy rates in multi-dwelling housing in which Coinmach’s Route business operated (see [39]-[53] and [70] above).

7. [121]

   That the relationship between price rises and vends loads was non-linear may be illustrated by the table setting out historical data for the years 2002-2006, an extract of which is reproduced at [98] above, and upon which heavy reliance was placed in argument.

8. [122]

   Whilst the price increase for each of the years 2002-2006 shown in the table produced negative growth in loads per machine (which was essentially Mr Jackman’s argument), the table reveals that micro-economic factors other than just price must have influenced the figures for load growth. This is illustrated by the fact that, for example, there was a greater negative impact on growth in 2004 following a 2.7% rise in price, compared to 2006, when the price rise was double that amount.

9. [123]

   Further and not insignificantly for Mr Jackman’s argument, all the price rises shown in the table extracted at [98] above, other than that for 2005, exceeded 2.5%. In other words, given the assumption made in the model as to a 2.0% or 2.5% price increase, the only historical data evidencing a price increase of less than either of those two figures was that for a single year, being 2005. The commentary in the materials produced by or emanating from the Deal Team acknowledged that there would be, or there would likely be, drops in load volumes for price increases of greater than 2.5% (see, for example, at [78], [85] and [88] above). The forensic significance of the figures in the table reproduced at [98] above was therefore much diminished.

10. [124]

    Next, I turn to the graph reproduced at [78] above which was headed “Historical data suggests load volumes are insulated from price increases of less than 3% but are negatively impacted by price increases above those levels”, and which lent apparent support to the critical assumption in the financial model which was the subject of Mr Jackman’s attack. It was submitted that this graph showed no data at all for a price increase less than 3%, with the consequence that “it doesn’t give support for the first part of the headline that the data suggests load volumes are insulated from price increases of less than 3%. There’s just no data at all on that.” It may be that the headline would be substantiated if the linear regression line on the graph were extended to 3%, but there was no evidence presented to the Court that would allow that conclusion to be reached one way or the other.

11. [125]

    As the primary judge observed at [241], “the conclusion stated in the heading [to the graph] was based on an analysis which went beyond the figures for 2005”, that is, those figures from the table upon which Mr Jackman relied as to historical experience (see [98] and [123] above).

12. [126]

    Furthermore, this graph at [78] also illustrated, amongst other matters, that there was no linear relationship between a price increase and a diminution of load volumes, and evidenced the significance of geography for the purposes of analysing the impact between price increases and load volumes. Thus, in at least the cases of New York and Louisville, the graph suggested an increase in load volume notwithstanding respective price increases of over 4.0% and 5.0% in those locations. The graph plotted average 2006 and 2007 “vend price changes” excluding Data Outliers, which were identified as Atlanta and Columbus.

13. [127]

    It is also noteworthy that the Y axis on the graph was entitled “Vacancy Adjusted Loads Per Machine Growth”. The reference to “Vacancy Adjusted” highlights that one very important integer or factor affecting the relationship between price increases and load volumes was the vacancy rates in multi-dwelling buildings. The higher the vacancy rate, the less occupants in a multi-dwelling building and therefore a correspondingly lower number of people to use and, inferentially, a lower use of washing machines in such buildings. The position would be converse with lower vacancy rates.

14. [128]

    In this context, whether or not the assumed neutral impact of price rises on vend loads for the 10 years covered in the financial model’s projections was valid or reasonable would be influenced, in part at least, by an assessment of the multi-dwelling housing market for that period, and the level of vacancy rates. There were a number of statements made in the due diligence materials predicting a fall in vacancy rates, because of the predicted collapse of the sub-prime lending market which was expected to drive people back to multi-dwelling buildings in which Coinmach’s core business was centred (see, for example, [51], [53], [74], [76], [85], [106], [108] and [110] above).

15. [129]

    Subject to one qualification, neither the primary judge nor this Court had any material to question the validity of these statements, or to model or assess the impact of the macro-economic judgement that there would be a fall in multi-dwelling vacancy rates on projected vend loads, notwithstanding a posited 2.0% or 2.5% price rise. The one qualification was the following statement in the September quarterly report for Coinmach issued on 7 November 2007, after the Investment Committee of the Manager had made its recommendation and very shortly before the General Partner made its decision to proceed. That statement was:

16. [130]

    A number of points may be made.

17. [131]

    First, the report makes clear that this reference was confined to “certain geographical areas”. It was not across the board.

18. [132]

    Second, the extent of the increase was not identified, other than that the statement was made in the context of a very small relative drop in revenue.

19. [133]

    Third, the statements in the due diligence materials referred to above in relation to decreases in vacancy rates were mid to longer term projections. As Mr Peterson of EBB said in his report for the EBB Income Fund Investment Committee, referred to at [75] above:

20. [134]

    Fourth, vacancy rates were linked to the sub-prime market. In this context, Mr Jones, appearing for the PI Insurers, submitted that the period to which the reports related (being the quarters ending 30 June 2007 and 30 September 2007) were prior to the effects of the Global Financial Crisis and the collapse of credit markets impacting the market. In this respect, he noted that the primary judge recorded at [88] that the collapse of credit markets followed the collapse of Lehman Brothers in mid-September 2007. As such, it was suggested that there would or may have been some time lag in those economic events working themselves through the housing market. This was supported by the evidence of Mr Topfer.

21. [135]

    It will be recalled that the primary judge was not satisfied that it had been established that the relevant assumptions in the financial model were invalid or unreasonable or otherwise shown to be wrong. In essence, his Honour held that DIF III had failed to discharge its burden of proving that competent due diligence would have demonstrated the invalidity or unreasonableness of such assumptions.

22. [136]

    His Honour was evidently not satisfied that one could reason from the fact of the historical experience of price increases which, on one view, was relevantly confined to one year, namely 2005 (because in other years for which data was available, price increases exceeded 2.5%) to a conclusion that the projections based on price rises of 2.0% to 2.5% would have a downward impact on load volumes with a corresponding downward impact on IRR. His Honour observed that he was left “without full details of the analysis and expert evidence in relation to it” (at [230]). In this context, he was also cognisant of the fact that the Coinmach Deal Team had had discussions with Coinmach’s management, and that “the model and the assumptions it contained were prepared on the basis of the information the team had obtained”: at [229].

23. [137]

    It is in this context that Mr Haines’ email of 31 July 2007 to Messrs Flyer and Pratan (see [87] above), and his earlier statement to Mr Peterson around the analysis that had been done in relation to the impact of price rises on load volumes (see [74] above) assumed particular significance. It will be recalled that it was in his 31 July 2007 email, at [87] above, that Mr Haines referred to an excel workbook containing a “supplemental vend price and loads analysis” which he said was used “to assess the relationship between vend price increases and load declines and to get comfortable that increases of 2-3% were achievable with no material impact on load volumes.”

24. [138]

    Mr Jones placed considerable significance on this 31 July 2007 email and the workbook to which it referred and to which it attached. He submitted that the reference in this email to the Excel workbook was significant as, on the face of the email, the analysis contained in it was the source of the critical conclusion stated in the last sentence of the email, namely that:

25. [139]

    It was telling, in my opinion, that DIF III undertook no analysis, or at the very least, both at first instance and on appeal, presented no analysis of the data in the workbook attached to Mr Haines’ email of 31 July 2007. If the conclusion in Mr Haines’ email was justified by the workbook analysis, it would not, in my opinion, have been open to conclude that the assumption contained in the financial model as to the neutral impact on load volumes of price increases of 2.5% or less, by reference to which the Manager made its investment recommendation to the General Partner, was flawed or invalid. This is plainly the view which the primary judge took (see [136] above).

26. [140]

    Whilst expert evidence may not have been required to establish causation (cf Fernandez v Tubemakers of Australia Ltd [1975] 2 NSWLR 190 at 197), the lack of analysis or engagement by DIF III with this material was even more conspicuous because, although DIF III did lead expert evidence in the form of an extensive report by a chartered accountant, Mr Angus Ross, that report did not interrogate the workbook or test Mr Haines’ conclusion by reference to it. More fundamentally, it did not address the validity of the assumption that a price increase of 2.5% would not have a negative or downward impact on load volumes.

27. [141]

    In Commercial Union Assurance Company of Australia v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418 (Ferrcom), Handley JA observed that, consistent with Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8 (Jones v Dunkel), there is:

28. [142]

    Although not argued in the present case and although not necessary to presently decide, an interesting question arises as to whether a Ferrcom inference may be drawn when an expert witness does not address a particular topic otherwise within their expertise. Whilst there are cases, including a decision of Handley JA, where such an inference has been drawn in relation to an expert (Ta Ho Ma Pty Ltd v Allen (1999) 47 NSWLR 1 at 4; [1999] NSWCA 202; see also Gordon Martin Pty Limited v State Rail Authority of New South Wales [2008] NSWSC 343 at [322]; Aristocrat Technologies Australia Pty Ltd v Global Gaming Supplies Pty Ltd [2009] FCA 1495 at [417]; cf Sigma Pharmaceuticals (Australia) Pty Ltd v Wyeth [2010] FCA 1211 at [462]) and cases where it was assumed that such an inference could be drawn but that it was not appropriate to do so in the circumstances (see, for example, Australian Securities and Investments Commission (ASIC) v Rich (2009) 236 FLR 1; [2009] NSWSC 1229 at [478]-[480]; Harris v Bellemore [2010] NSWSC 176 at [136]), the question has not, so far as I am aware, been considered at the level of principle.

29. [143]

    It is sufficient to note that, in the present case, there was relevantly an absence of expert evidence on the subject of the reasonableness or validity of the assumption that was at the fulcrum of DIF III’s case. Whether or not Mr Ross would have been appropriately qualified to provide that particular evidence is another question.

30. [144]

    As with the primary judge, on a matter which was undoubtedly of real complexity, being affected as it was by the interplay of a range of factors and dependent upon an understanding of a particular industry and market in a foreign jurisdiction, this Court was essentially left to speculate as to:

31. [145]

    As Dixon CJ observed in Jones v Dunkel at 304, in an action for negligence, the action must fail unless evidence is offered “to the reasonable satisfaction of a judicial mind”, supporting some positive inference implying negligence. In this context, competing inferences of equal degrees of probability are inadequate, and the choice between them must not be “a mere matter of conjecture”: at 304-305. The court is not authorised “to choose between guesses … on the ground that one guess seems more likely than another or the others”: at 305. The Chief Justice continued (at 305):

32. [146]

    The inadequacy of conjecture in the context of satisfactory proof of causation was discussed by Spigelman CJ in Seltsam Pty Ltd v McGuiness; James Hardie & Coy Pty Ltd v McGuiness (2000) 49 NSWLR 262; [2000] NSWCA 29 at [84]-[86] (Seltsam) as follows:

33. [147]

    The fact that, in the present case, it was possible that the assumption made in the financial model - that there would be a neutral impact on load volumes notwithstanding an annual price rise of 2.0% or 2.5% - was flawed, is insufficient to establish causation on the balance of probabilities: Seltsam at [80]-[81], citing St George Club Ltd v Hines (1961) 35 ALJR 106 at 107; Bonnington Castings Ltd v Wardlaw [1956] UKHL 1; [1956] AC 613; Tubemakers of Australia Ltd v Fernandez (1976) 50 ALJR 720.

34. [148]

    For all of the above reasons, DIF III has failed to demonstrate that the primary judge erred in his conclusion that there had been a failure to establish that the investment in Coinmach would not have proceeded had the Manager exercised due diligence. The “prior question” that his Honour had identified in [314] of his judgment, extracted at [21] above, namely:

35. [149]

    DIF III’s failure to demonstrate that the primary judge erred in finding that it had failed to establish loss or damage means that its appeal to this Court must be dismissed with costs.

36. [150]

    MEAGHER JA: This judgment adopts the abbreviations and terms used in the judgment of Bell P. I have had the benefit of reading his Honour’s judgment and agree with his reasons for concluding that the first issue identified at [15] should be resolved in favour of the Manager, a subsidiary of Babcock & Brown Ltd, and the PI Insurers. That issue arose under grounds 14 and 15 of DIF III’s amended notice of appeal.

37. [151]

    The PI Insurers undertook the defence of DIF III’s claim against the Manager, and were also sued directly by DIF III pursuant to Civil Liability (Third Party Claims against Insurers) Act 2017 (NSW), s 4(1). The remaining two issues in the appeal concern whether the Manager would have been entitled to an indemnity for its alleged liability to DIF III.

38. [152]

    The first of those issues, raised by ground 18 of the amended notice of appeal, is whether the primary judge erred in rejecting DIF III’s contention that its claim made in the proceedings against the Manager was a third party Claim covered by the PI Policy.

39. [153]

    The remaining issue, raised by ground 1 of the PI Insurers’ amended notice of contention, is whether the “conflicts” exclusion in cl 7 of the policy would have been engaged. The application of that exclusion depends on whether any insured “liability” arises out of or is based upon or attributable to “directly or indirectly, any conflicts of interest arising out of, based upon, relating to or in connection with investment banking activities or any research report”.

40. [154]

    Although these remaining issues are not dispositive, I propose to deal with the first, but not the second which depends on a close analysis of the scenarios in which DIF III’s claim might have succeeded. Those scenarios were not the subject of findings by the primary judge (J [362]).

Was DIF III’s claim to be considered as first made during the policy period?

1. [155]

   The relevant provisions of the underlying policy are extracted by the primary judge at J [319]-[327]. They are not repeated in these reasons, which instead summarise the effect of those provisions.

2. [156]

   The alleged liability of the Manager is for breach of cl 3.1(g) of the Management Agreement, involving a failure to “exercise all due diligence and vigilance in carrying out its functions, powers and duties”. In particular, it is alleged the Manager breached its duty in not conducting appropriate financial due diligence by undertaking its own modelling that challenged the growth assumptions made by the Coinmach Deal Team. Those assumptions resulted in the modelling of price per load growth in the base model being increased from 2% to 2.5% without any adjustment to the load volumes, raising the modelled IRR by 2.6% to 24.6%.

3. [157]

   The policy indemnified against third party liability arising out of claims “first made during the Policy Period”. That period was from 1 September 2008 to 1 September 2009. Any written or oral demand alleging an actionable breach of duty is a Claim under the policy. Clause 7 provided that a third party Claim “is considered to be made” when the insured’s management, including directors, the managing director, and members of executive committees established by the board, become “aware of any fact, circumstance or event which could reasonably be anticipated to give rise to a Claim at any future time”.

4. [158]

   That clause also provided that it was a condition precedent to coverage in respect of any Claim that written notice be given to the insurers “at the earliest practical moment, but in any event within 30 days after the expiration” of the policy. Such a notice, whether of an actual or potential third party Claim, was required to include “full particulars of such actual or potential Claim, including the identity of the actual or potential claimants, the location where such actual or potential Claim has been or is likely to be made... the specific allegations made or anticipated to be made, and the facts, circumstances and events giving rise to such actual or potential Claim.”

5. [159]

   If such a written notice was given, any “subsequent legal proceedings for damages brought against the Assured... as a direct result of any matter or matters for which written notice has been given... whether such proceedings are brought during or after the expiration of the Policy Period, is considered to be a third party Claim first made” at the time the written notice of such matter or matters was first given.

6. [160]

   DIF III commenced the underlying proceedings against the Manager in 2018. No notice, either of that claim or of any “fact, circumstance or event” which could reasonably be anticipated to give rise to a Claim under the policy, was notified to the PI Insurers by Babcock & Brown or the Manager before those proceedings were commenced.

7. [161]

   It was contended that the pleaded claim was a third party Claim first made during the policy period by the following process of reasoning. During that period, the Manager, here relevantly Mr Nicholson, became aware of circumstances “which could reasonably be anticipated” to give rise to a claim at some future time. The Manager omitted to give written notice of that matter to the insurers within 30 days of the expiry of the policy. The proceedings, insofar as they include the claim for breach of cl 3.1(g), were brought in 2018 “as a direct result” of the matters of which notice would have been given, but for that omission. Had that notice been given the pleaded claim would have been “considered to be” a third party Claim first made at the time that written notice would have been given. Finally, the effect of Insurance Contracts Act 1984 (Cth), s 54 was that the PI Insurers could not “refuse to pay” the Manager’s claim to an indemnity by reason only of its omission to give written notice of its having become aware of the relevant matters during the Policy Period. That possible outcome of the application of s 54 is not contested between the parties, on the basis that it accords with the decision in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38.

8. [162]

   As formulated by the primary judge, the relevant questions included whether the Manager first became aware of such circumstances during the Policy Period and whether the Claim as made was a “direct result” of those circumstances as they would have been notified (J [339]). The primary judge dealt with the first of these questions at J [343]-[348]. He concluded that the evidence did not establish that any director or member of the senior management of the Manager became aware of such circumstances during the policy period (J [344]-[347]). His Honour noted that neither Mr Topfer nor Mr Green gave evidence of any facts from which it might be concluded that they became aware of circumstances that could reasonably be anticipated to give rise to a claim; and that Mr Nicholson and Mr Neilson were not called to give any such evidence. The primary judge also found that none of the nine communications relied on (J [328]-[336]) suggested that DIF III might make any claim against the Manager or members of the Investment Committee (J [348]).

9. [163]

   In this Court, DIF III relied on only three of those communications, being those which came to the attention of Mr Nicholson, but not on their face to the attention of any other member of the Investment Committee. That correspondence is dated 13 November 2008, 17 November 2008 and 5 February 2009, and summarised by the primary judge at J [329], [331] and [335] respectively. It is to be recalled that the transaction was concluded on 20 November 2007 in the context of the global financial crisis which proceeded between mid to late 2007 and early 2009.

10. [164]

    The first of those communications, dated 13 November 2008, recorded views of Mr Stahel of BBGP concerning the “distressed” position of the Coinmach investment. BBGP had separately invested approximately USD 70 million through a wholly owned subsidiary. Mr Stahel’s view was that the prospect of holding “the investment long term to realise value through EBITDA growth” was at that time “impossible”. The email contains no suggestion that the funding or capital deficiencies which the company faced were not a consequence of the global financial crisis or that they, or the reason for their arising, should have been discovered or appreciated at some earlier time by the Manager or its Investment Committee. Nor does it suggest that the company’s “distressed” position was in any way related to or a consequence of over-ambitious growth assumptions in the final version of the Coinmach revenue model. Finally, the email contains no suggestion that the Manager might be held responsible for third party losses if the investment ultimately failed.

11. [165]

    The second communication is an email of Mr Stahel to Mr Nicholson dated 27 November 2008. That email refers to an earlier email exchange between Ms Talintyre and Mr Cumming of RBS in November 2007 in which, as Mr Cumming later recalled, Ms Talintyre “stated that the Coinmach deal should go ahead – although agreeing it being un-commercial – purely for the reason of collecting a substantial fee from BBGP and other satellite fund investors”. From Mr Nicholson’s perspective at that time, as disclosed in his response to Mr Stahel dated 1 December 2008, before taking the matter any further he was “interested in seeing the email trail”.

12. [166]

    The relationship between Babcock & Brown and RBS with respect to the Coinmach transaction is dealt with at some length by the primary judge. In June 2007, RBS agreed to take USD 136 million of equity in Coinmach with the intention of selling down that interest with the assistance of Babcock & Brown (J [58], [71]). Following the Lehman Brothers collapse in mid-September 2007, RBS sought to withdraw from that underwriting commitment (J [88], [94]). By early November 2007, RBS considered that the likely equity loss it would suffer in the event that it complied with its funding commitment was more than the break fee it would incur in not meeting that obligation (J [129]). In that context there were email exchanges between Ms Talintyre and Mr Cumming (J [132]-[134]). In particular, Ms Talintyre’s email of 8 November 2007 pointed out that should RBS default on its funding commitment, and B&B not find a replacement equity provider, there would be significant expenses incurred, including a termination fee to Coinmach, B&B’s loss of its own fees, and significant legal, accounting and related expenses, all of which might be claimed from RBS.

13. [167]

    The evidence does not indicate whether Mr Nicholson received copies of the email exchanges referred to above, or whether there were any further email exchanges which might be those recalled by Mr Cumming in his conversation with Mr Stahel. In that uncertain state of affairs, Mr Stahel’s report did not of itself provide a sufficient or sound basis for thinking that a claim of some kind might be brought against the Manager because of conduct of Ms Talintyre, who was the leader of the Coinmach Deal Team.

14. [168]

    The final email is dated 5 February 2009 and attaches a memo from Mr Nicholson to the DIF Compliance Committee attaching a draft valuation of Coinmach as at 1 October 2008 undertaken by KPMG LLP. That valuation concludes that Coinmach’s interest-bearing debt exceeded its enterprise value, with the consequence that the value of Coinmach’s equity was nil. In the memo, Mr Nicholson stated:

15. [169]

    It was submitted on behalf of DIF III that these three communications were to be considered together, and in the context of the Manager’s subsequent admission in the legal proceedings that it had breached its obligation to undertake due diligence by not conducting its own modelling that challenged the growth assumptions made by the Coinmach Deal Team. The communications were said to indicate that in late 2008, the investment was “distressed” and that the original investment strategy to hold the equity interest to realise value through EBITDA growth was no longer feasible; that in November 2007, Ms Talintyre had regarded the Coinmach deal as “un-commercial”; and that by October 2008, as assessed in early February 2009, the value of Coinmach’s equity, and accordingly DIF III’s investment, was nil.

16. [170]

    Reference was made to the Court of Appeal decision in Euro Pools Plc v Royal & Sun Alliance Insurance Plc [2019] EWCA Civ 808; Lloyd’s Rep IR 595 at [39], where Dame Elizabeth Gloster, with whom Hamblen and Males LJJ agreed, summarises the approaches taken to the construction and application of clauses such as cl 7; that is, provisions which deem claims subsequently made, that arise out of circumstances of which the assured first became aware during the policy period, to have been made during that period.

17. [171]

    Those principles include: first, that the provision should be construed with a view to its commercial purpose, being to provide an extension of cover “for all claims in the future which flow from the notified circumstances”; secondly, that consistently with that purpose, a provision which refers to circumstances that “may” give rise to claims sets a “deliberately undemanding test”; thirdly, that a notification need not be limited to particular events and may be to a “problem” described in general terms if that problem of itself may give rise to a claim, and notwithstanding that the quantum and character of such claims, or the identity of claimants, may not be known at the date of notification; and fourthly, that whilst the insured necessarily has to be aware of circumstances which might reasonably be expected to produce a claim (or in this case, could reasonably be anticipated to give rise to a claim), that does not “predicate that the insured needs to know or appreciate the cause, or all the causes, of the problems which have arisen, or the consequences, or the details of the consequences, which may flow from them.”

18. [172]

    Finally, and accepting that these principles must necessarily give way to the language of the particular clause in question, the position remains, as Toulson LJ said in HLB Kidsons (a firm) v Lloyd’s Underwriters [2008] EWCA Civ 1206; [2009] Bus LR 759 at [142], that the notifiable circumstance must be such that it “may reasonably be regarded in itself as a matter which may give rise to a claim” (or in the language of the clause here, it must be a circumstance that “could reasonably be anticipated to give rise to a claim”).

19. [173]

    Turning to the matters relied on by DIF III, it is not contended that the fact of the Manager’s admission that it did not undertake due diligence to test the growth assumptions in the model was of itself a matter that could reasonably be anticipated to give rise to a claim. That would depend on whether there were other circumstances which, taken with that circumstance, indicated or suggested that there was a “problem” which might of itself result in claims.

20. [174]

    For the reasons given above, the second of the communications relied on did not provide any basis for thinking a claim of some sort might be brought against the Manager. The remaining two communications concern Coinmach’s financial position in October and November 2008. Whilst the fact of its distressed financial position made it likely that there were persons or entities, including DIF III, who would suffer losses as a result of its failure, that was not of itself a matter which could reasonably be anticipated to give rise to a claim against the Manager. And as the primary judge concluded at J [348], there was nothing in any of those communications which suggested that DIF III or any other party had a basis for making a claim arising out of conduct of the Manager in relation to the DIF III investment.

21. [175]

    It follows that ground 18 of the amended notice of appeal is not made out. It was not established that during the policy period the Manager became aware of any circumstances that could give rise to a claim, let alone that the 2018 claim was brought as a direct result of such circumstances.