Reference no: EM133620830

Assignment:

The background facts - the business deal

The Victorian government made a decision to upgrade the infrastructure for the electricity supply throughout the state. The towers and wires carrying the electricity from the power generation suppliers in regional Victoria to all of the households and businesses throughout Victoria was old and there were a lot of problems resulting in interruptions to the electricity supply.

The Victorian government called for tenders from companies to first build new towers and wires and then maintain the towers and wires for the next 10 years. The Victorian governmentwould award the contract to the company who tendered at the lowest price.

Neville Landers, the managing director of Electricity Suppliers Australia Limited (ESA), became aware of the call for tenders and thought that it would be a good opportunity for the company.

The tender required complex financial calculations and projections, including the cost of building the network of towers and wires, the amortisation of the cost of building the network over the 10 years of the contract life, and the cost of maintaining the network including allowances for inflation and provision for risk events such as bushfires or floods impacting the network.

Neville told the board of ESA that the tender documents were very complex and the financial projections were beyond the skills of the company's in house accounting team and he suggested that ESA engage a professional business consultancy firm to prepare the tender documents.

Conduct of business advisers Young Waterhouse Lynch

After meeting with a number of consultancy firms, the board agreed that Young Waterhouse Lynch (YWL) had the appropriate expertise in both the electricity industry and dealing with the Victorian government. ESA and YWL entered into a contract for professional services to prepare the tender documents. Roderrick Stodden-Jones, Senior Partner at YWL, produced the tender document and organised for his junior, Michelle Yeoh, to send it to Neville for his review. Neville told Roderrick that "based on your financial documents, the profitability looks excellent, better than I expected". This prompts Roderrick to double check his figures. He realises there are some mistakes but he is too embarrassed to admit this to Neville or to his colleagues at YWL. Roderrick also wants ESA to win the tender, partly because the firm will be paid a bonus of $2m and he, Roderrick will receive a bonus of $500,000 under his remuneration package with YWL. Roderrick replies to Neville saying "I am sure you will be successful on this tender".

ESA won the tender. The board of ESA and the senior partners of YWL had a celebratory dinner at which the champagne flowed.

Conduct of bank Goldman Macquarie Chase

As the project was so large, ESA required a business loan to fund the purchase of equipment and supplies. Roderrick introduced Neville to Beatrice Stewart, a senior account and relationship manager at Goldman Macquarie Chase (GMC), a large investment bank. Beatrice was an old friend of Roderrick however Roderrick did not tell Neville about this.

GMC discussed providing a loan to ESA of $50m. The proposed terms of the loan included an interest rate of 5.5% pa (which was market rate), and also additional fees including 'monthly account monitoring fee of $10,000' and 'monthly review fee of $5,000' (which were not standard market terms for such loans and in fact were far higher than market terms).

Roderrick suggested to Beatrice that she include the fees in the documentation for the loan, but not specifically discuss them with Neville.

He said "Neville will rely on my guidance to assess the loan. If he doesn't read the detail then I won't mention the fees to him. I will just tell him what a good deal the loan is. I won't update the project financials to include these fees." When Neville asked Roderrick for his professional opinion on the loan terms Roderrick said "It's a great deal, I recommend you jump on it quick before they withdraw it or put up the rates". ESA signed the loan contract on the above terms with GMC.

Beatrice would earn a bonus of $500,000 as part of her remuneration package with GMC for getting the loan contract with ESA although she did not tell Neville about this. Beatrice and Roderrick agreed that Beatrice would give him 30% of her bonus as a 'thank you'.

Subsequent events

Work started on the design and build of the electricity network almost immediately as ESA was aware that there was a tight time frame in the contract with the Victorian government to complete the work.

ESA completed the first stage of the project which was to supply the engineering drawings for the grid to the Victorian government. The Victorian government made the corresponding first stage payment required under the contract to ESA. The project appeared to be progressing well at this point.

All the staff at ESA worked efficiently and built the first stage of the towers as required under the contract. The Victorian government inspected the towers and after deciding that they were satisfactory made the required second stage payment as required under the contract.

After processing the income and expenditure on the first stage of the build, Harshi, the accountant at ESA, noted that the first build stage seemed to result in a net loss. Harshi's first thoughts were that she must have made an error in her data entry and so she began to review the data. In the meantime, the team at ESA were busy working on the second stage of the build. The second stage was completed, and the Victorian government made the payment for that stage as required under the contract. Harshi processed the income and expenses for the second stage of the build and the result indicated a net loss on that stage also. After checking the data entry for the first stage, Harshi confirmed that both the first and second stages of the build resulted in a net loss to ESA.

Harshi delved deeper into the data underlying the tender and she discovered that the tender prepared by Roderrick Stodden-Jones at YWL contained a serious error. Roderick had amortized the costs over 100 years instead of 10 years with the consequence that the tender price and thus the payments for each stage were well below the price required for the contract to be profitable for ESA. The monthly bank fees charged by GMC have also contributed to the net loss.

Harshi spoke to the manager at ESA's usual bank, WestComm Bank, and the manager advised that it would have lent ESA the money at the same interest rate (or perhaps even better rates) and with no account fees whatsoever. The manager commented that she had never seen such high bank fees on a loan.

Part A

Advise ESA whether it is likely to be successful in an action for deceit against each of the following people:

• Roderrick Stodden-Jones,

• Beatrice Stewart,

• Michelle Yeoh.

Explain your reasoning and give relevant case examples.

Part B

Advise ESA what types of damages it could seek on the given facts. Also advise how each type of relevant damages is calculated. Explain your reasoning and give relevant case examples.

Part C

Explain the concept of exemplary damages. Include discussion of the purposes of such an award and the factors the court will consider in making such an award.

Do you agree that exemplary damages are available for a civil action?