Supreme Court of WA|2014-05-02|Before: Mr J, Allsop J, Edelman J, Goudkamp J, Getzler J, Birks P, Glister J, Ridge P

AGRICULTURAL LAND MANAGEMENT LTD -v- JACKSON [No 2] [2014] WASC 102 (2 May 2014)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : AGRICULTURAL LAND MANAGEMENT LTD -v- JACKSON [No 2] [2014] WASC 102

HEARD : 27 NOVEMBER 2013, 2 DECEMBER 2013, 10 DECEMBER 2013, 16 DECEMBER 2013, 30 - 31 JANUARY 2014 & FINAL WRITTEN SUBMISSION ON 19 FEBRUARY 2014

Equity - Fiduciary duties - Whether mere existence of conflict is actionable - Whether a breach of conflict rule requires a fiduciary actually to act in a position of conflict and pursue or prefer a personal interest - Judgment pars [263] - [275]

Equity - Fiduciary duties - Whether a clause of a constitution of a trustee company can exclude all fiduciary duties - Consistency with s 601FC Corporations Act 2001 (Cth) - Effect on fiduciary duties owed by directors to the company - Judgment pars [276] - [284]

Equity - Equitable compensation - Where fiduciary duties owed by directors to a company - Whether the company can sue its directors for loss if contract entered into at an undervalue by trustee company on behalf of beneficiaries - Misleading to ask whether fiduciary duties are owed to the company 'in its own right' or 'as trustee' - Irrelevance to the award of compensation of whether the trustee will hold any recovery on trust for beneficiaries - Judgment pars [300] - [331]

Equity - Equitable compensation - Difference between substitutive compensation and reparative compensation - When substitutive compensation is available - Judgment pars [333] - [385]

Equity - Equitable compensation - Causation - 'Common sense' test of causation - Scope of liability for consequences - Need to identify precisely the scope of duty owed - Judgment pars [390] - [399]

Corporations - Meaning of 'compensation' and causation requirements in s 1317H of the Corporations Act - Judgment pars [434] - [452]

Corporations - Effect of deregistration of a registered scheme on 'compensation' in s 1317H of the Corporations Act - Judgment pars [453] - [461]

Corporations - Meaning of 'knowingly concerned in' in s 79(c) of the Corporations Act - Requirement of 'practical connection' with at least one element of the contravention - Judgment pars [285] - [298]

Limitation of actions - Application of limitation period by analogy - Limitation period for breach of equitable duty of care and skill by analogy with breach of common law duty of care and skill and by analogy with s 180 of Corporations Act - Judgment pars [206] - [213]

Claim dismissed in part; further consequential submissions required

Allsop J 'Causation in Commercial Law' in Degeling S, Edelman J and Goudkamp J (eds) Torts in Commercial Law (2011)

Blackstone W, The Commentaries on the laws of England, RM Kerr (ed) (7th edn, Book III, 1775)

Elliott S, 'Compensation Claims against Trustees' DPhil thesis, University of Oxford (2002)

Elliott, S & Mitchell, C 'Remedies for Dishonest Assistance' (2004) 67 MLR 16

Getzler J 'Duty of Care' in Birks P and Pretto A Breach of Trust (2002)

Glister J 'Equitable Compensation' in Glister J and Ridge P Fault Lines in Equity (2012)

Gummow W 'Compensation for Breach of Fiduciary Duty' in T G Youdan (ed) Equity, Fiduciaries and Trusts (1989)

Heydon J D 'Are the duties of company directors to exercise care and skill fiduciary?' in Degeling S and Edelman J, Equity in Commercial Law (2005)

Heydon J D, 'Causal relationships between a fiduciary's default and the principal's loss' (1994) 110 LQR 328

Hoffmann, L 'Causation' (2005) 121 LQR 592

Lewin T A Practical Treatise on the Law of Trusts and Trustees (1837)

Meagher R, Heydon J D, Leeming M, Meagher Gummow and Lehane's Equity Doctrines and Remedies (4th ed, 2002)

Millett P 'Equity's place in the law of commerce' (1998) 114 LQR 214

Mitchell C, 'Equitable Compensation for breach of fiduciary duty' (2013) 66 CLP 307

Rickett C, 'Equitable Compensation: Towards a Blueprint?' [2003] SydLawRw 3; (2003) 25 Sydney L Rev 31

Smith L, 'The measurement of compensation claims against trustees and fiduciaries' in Bant E and Harding M (eds) Exploring Private Law (2010)

Stapleton J, 'Reflections on Common Sense Causation in Australia' in Degeling S, Edelman J and Goudkamp J (eds) Torts in Commercial Law (2011)

1 This case involved a number of factual disputes and an array of legal issues. Some of the many legal issues raised in this case are as follows.

(i) The nature of duties owed by a director to a company which is a corporate trustee and responsible entity: [300] [331].

(ii) The scope of a claim for breach of fiduciary duty based on a potential conflict of duty and duty: [263] [275].

(iii) The exclusion of fiduciary duties: [276] [284].

(iv) The meanings of 'equitable compensation': [333] [359].

(v) Principles of substitutive compensation in relation to company directors: [363] [375].

(vi) The operation of principles of causation in equity: [390] [399].

(vii) The effect in equity of new intervening acts: [421] [430].

(viii) The meaning of 'concerned in' for the requirement of 'knowingly concerned in' in s 79(c) of the Corporations Act 2001 (Cth): [285] [298].

(ix) The operation of causation principles in relation to s 1317H of the Corporations Act: [439] [452].

(x) The effect of deregistration of a registered scheme on a claim for compensation under s 1317 of the Corporations Act: [453] [461].

(xi) The operation of principles of limitation by analogy: [206] [213].

2 The plaintiff, Agricultural, is the responsible entity (and trustee) of a managed investment scheme. The first and second defendants, Messrs Jackson and Goff, are directors of Agricultural. The third defendant, Bunbury Centro, is a related party to Agricultural.

3 On 24 June 2002, Bunbury Centro sold a property in Kalgoorlie to Agricultural. That Contract, which I capitalise for clarity, was at the heart of the trial. The sale price was $2,250,000. An additional amount, based on calculation of various costs, but to a maximum of $1,665,051, was payable for a nonexclusive Licence (which I also capitalise for emphasis) to use 'all of the information and know how in the possession' of Bunbury Centro necessary for development of the property as a hotel.

4 Messrs Jackson and Goff signed the Contract on behalf of Bunbury Centro (as vendor). They also signed on behalf of Agricultural (as purchaser). As Messrs Jackson and Goff were aware, Agricultural planned to develop the Kalgoorlie Property into a hotel.

5 The development of the Kalgoorlie Property was a failure. Agricultural entered an allinclusive 'turnkey' contract, described as a Project Management Agreement, for the development of the Kalgoorlie Property at a cost of $18.5 million. But the hotel was sold on 21 June 2007 for $10.15 million.

6 There were years of delay before this action in relation to the 2002 Contract was brought on 4 June 2008. Further delay ensued before the matter was admitted to the Commercial and Managed Cases list in 2012. The pleadings were inherited by the current solicitors and counsel for Agricultural. Some of the amendments that they made to the pleadings involved matters which were timebarred. The timebarred matters included new allegations that Messrs Jackson and Goff breached their duties by entering into the 'turnkey' contract for the development which was alleged to have only marginal and speculative profitability.

7 A vast number of breaches were pleaded. The focus of many of them was upon the entry into the Contract and the value which Agricultural received in exchange for the purchase price and Licence fee. The process of analysing the statement of claim has been like battling the Lernaean Hydra. As soon as consideration of a breach is completed, another alleged breach, sometimes nearly identical, appears to rise from the same facts. A further difficulty is that many facts asserted in submissions relied upon documents which, by consent of the parties or by ruling, were not admitted for proof of the truth of their contents.[1]

8 My consideration of the myriad of alleged breaches by each of the defendants leads to the conclusion that Messrs Jackson and Goff, directors of Agricultural, breached the following duties:

(i) Duties under the Corporations Act ss 180, 601FD(1)(f)(i) and 601FD(1)(f)(iv) were breached by Messrs Jackson and Goff by their failure to take all steps that a reasonable person would take, if he or she were in the officer's position, to ensure that Agricultural complied with the Corporations Act related party provisions, and the scheme's compliance plan.

(ii) Messrs Jackson and Goff also breached their fiduciary duties to Agricultural to avoid placing themselves in a position in which their duties to Agricultural conflicted with duties to another principal (Bunbury Centro).

9 Bunbury Centro was knowingly concerned, within s 79(c) of the Corporations Act, in each of the contraventions of the Corporations Act by Messrs Jackson and Goff.

10 Despite these findings of breach, Agricultural's claim for compensation, either in equity or under the Corporations Act, must fail. Agricultural failed to prove that the purchase price or Licence fee under the Contract were at an undervalue. Rather, the expert evidence from the only expert to give evidence establishes that the purchase price paid by Agricultural was substantially less than the value of the Kalgoorlie Property. The significant gaps in the evidence mean that the value of the Licence is impossible to determine.

11 Agricultural has also failed to prove that any of the defendants profited from the transaction.

2.1 The plaintiff: Agricultural Land Management (as responsible entity)

12 The plaintiff in this case, Agricultural Land Management Ltd, was previously known as Westralia Property Management Ltd and Kareelya Investments Ltd.[2] For clarity, in these reasons I will refer to the plaintiff consistently as Agricultural even if, at various times, it had one of these other names.

(ii) the responsible entity of the Kalgoorlie Apartment Hotel Syndicate; and

(iii) the responsible entity of the Agricultural Land Trust (formerly the Westralia Property Trust).[3]

14 From May 2002 until early January 2004 Agricultural had four directors: Mr Jackson, Mr Goff, Mr Anderson, and Mr Hinton.[4]

15 Agricultural sues in its capacity as the Responsible Entity of the Kalgoorlie Apartment Hotel Syndicate. This 'Kalgoorlie Scheme' had only one unit holder. The unit holder was Agricultural in its capacity as Agricultural Land Trust.

2.2 The Kalgoorlie Apartment Hotel Syndicate (the Kalgoorlie Scheme)

16 From 7 September 2000 to 23 July 2006 the Kalgoorlie Apartment Hotel Syndicate was a registered managed investment scheme pursuant to Part 5C of the Corporations Act.[5]

2.3 The first and second defendants: Messrs Jackson and Goff

(i) from 15 February 1996 until 14 April 2005, was a director of Agricultural;

(ii) from 15 February 1996 to 11 December 2002, was company secretary of Agricultural; and

(iii) from at least 2001 onwards was, and is, a director of Bunbury Centro.

(i) from 16 February 1999 to 14 April 2005, was a director of Agricultural;

(ii) between September 2000 and April 2005, was the compliance officer of the Kalgoorlie Scheme; and

(iii) from at least 2001 onwards was, and is, the company secretary of Bunbury Centro.

19 The third defendant is Bunbury Centro Pty Ltd. Its previous names were Kalgoorlie Chambers Pty Ltd and also National Hospitality Solutions Pty Ltd. For convenience, I will refer to the third defendant at all times as Bunbury Centro.

20 At all material times, Bunbury Centro was a related party of Agricultural and the Kalgoorlie Scheme pursuant to s 208 of the Corporations Act as modified by s 601CA of the Corporations Act.[8] The relationship between the parties can be seen in the diagram at Appendix 1.

21 Appendix 1 to these reasons is an aide memoire produced by Agricultural which shows the relationship between Bunbury Centro and Agricultural. This appendix was common ground between the parties.[9] In broad summary, Bunbury Centro and Agricultural have the same parent company, Kareelya Ltd.[10] Mr Jackson and Mr Goff are both directors of Bunbury Centro and also of Agricultural. And Mr Jackson is also a director of Broadwater Hospitality Pty Ltd which was the proposed operator of the hotel.[11]

3. The facts: acquisition and development of the Kalgoorlie Property

22 The trial was almost entirely documentary. The only oral evidence was given by a valuer, Mr Catlin. Additional affidavit evidence, which added little to Agricultural's case, was given by Mr Nuttall.

23 The following are my findings of the essential facts relevant to the matter in issue.

24 In 1999, Bunbury Centro purchased the Kalgoorlie Property at Lot 4, 21 Davidson Street, Kalgoorlie.[12] In closing written submissions,[13] Agricultural referred to a statement in a report on 29 April 2002 by Mr Catlin of Ray White & Co that '[w]e are aware that the proponents purchased the subject site for $750,000 in July 1999'.[14] This was not an admitted fact, nor does this 'awareness' amount to evidence of the purchase price.

25 On 22 August 2000 (with a typographical error on the document of 2002),[15] Agricultural adopted a Constitution which established it as a Syndicate for a principal purpose which was 'acquiring, developing and holding the Kalgoorlie Property'.[16] Unless otherwise provided in the Constitution, the Syndicate was to endure for 10 years from the date of acquisition of the Kalgoorlie Property.[17]

26 On 31 January 2002, a meeting of the directors of Agricultural was held. Mr Jackson was in the chair and Mr Goff attended as a director and compliance officer.

27 Mr Jackson advised the meeting that the success of the Syndicate was dependent upon construction of the hotel as a whole.[18]

28 Mr Jackson explained that the introduction of the Goods and Services Tax in June 2000 effectively increased the purchase price by 10% which made it difficult to achieve the yield required to attract strata titled investors. Mr Jackson tabled an alternative proposal by which the Syndicate would become a Managed Investment Scheme to acquire the hotel which would have Goods and Services Tax advantages.

29 Mr Jackson advised that if the land and work in progress could be transferred into the Syndicate prior to construction, and the Syndicate undertook the construction, then a significant saving in stamp duty could be achieved.

30 On 29 March 2002, a further meeting of Agricultural was held with Mr Jackson and Mr Goff in attendance.[19] Mr Goff advised the meeting that an offer of mezzanine funding had been received. The lender would be Hawaiian Investments Ltd with terms of an annual interest rate of 16% and a $90,000 application fee. Mr Jackson said that although this was expensive, it would see the project started and the project was costing more while it was sitting idle. He said that it was the developer's profit which would be reduced.

31 On 19 April 2002, Mr Gary Catlin of Ray White & Co provided a valuation of the Kalgoorlie Property under instructions from the Kalgoorlie Scheme.[20] Mr Catlin's report and his oral evidence are considered in detail separately below.

32 On 20 May 2002, Agricultural established, by its deed poll, a constitution for the Kalgoorlie Apartments Hotel Syndicate Managed Investment Scheme.[21] On the same day Agricultural also established a replacement compliance plan for the Kalgoorlie Apartment Hotel Syndicate.[22] Both the constitution and the replacement compliance plan were adopted at a meeting of the directors of Agricultural, including Messrs Jackson and Goff, on 22 May 2002.[23]

33 The constitution for the Managed Investment Scheme again provided that the Syndicate was established for purposes including 'acquiring, developing and holding the Kalgoorlie Property'.[24] It was to continue in operation for 10 years after the date of acquisition of the Kalgoorlie Property.[25]

34 The constitution provided that Agricultural, as responsible entity, was entitled to receive a fee of up to 5% of the on completion value of the Kalgoorlie Property at the date that Agricultural acquires the Kalgoorlie Property.[26]

35 The replacement compliance plan established various compliance procedures including the following:[27]

(i) The responsible entity must conduct due diligence on any proposal to buy or sell any real property of the Syndicate during the term of the Syndicate.

(ii) Any proposal to buy or sell any real property at any time during the term of the Syndicate must be tabled at a directors' meeting with a due diligence report prepared by the Trust Manager.

(iii) The due diligence report must also be tabled at a compliance committee meeting for review. The compliance committee is to report to the responsible entity on any objections to the purchase or sale.

(iv) Notwithstanding the above procedure, if the responsible entity determines that it would be in the best interests of the investors to proceed with the purchase or sale then it may do so without receiving the compliance committee report.

(v) All investments made must be Authorised Investments in accordance with the Constitution.

36 The replacement compliance plan also required compliance with various procedures in relation to related parties:[28]

(i) All Disclosure Documents must disclose all actual or contemplated transactions with related parties of the responsible entity, whether or not the transactions are on normal commercial terms.

(ii) The Compliance Officer is to provide to the compliance committee the details of any proposed transaction with a related party for review.

(iii) Any transaction with a related party must be in a written agreement between the responsible entity and the related party.

(iv) The compliance committee is to provide a signoff to the Compliance Officer on all proposed transactions with a related party.

37 On 24 May 2002, a further meeting was held of the directors of Agricultural, including Messrs Jackson and Goff. Mr Jackson advised that the purpose of the meeting was to provide an update on the progress of the Syndicate and funding.[29]

38 The meeting was informed that the reason for the transaction was for Agricultural (as trustee of the Westralia Property Trust) to acquire the investment at a wholesale price and to receive a 20% bonus issue, to be funded from the developer's profit, prior to the introduction of other investors.

39 The meeting was also informed about the 'on completion' valuation from Mr Catlin at Ray White Valuers which valued the completed hotel at $19.5 million. Mr Goff advised that finance applications had been lodged.

40 On 13 June 2002, an internal memorandum was sent to people including Mr Jackson and Mr Goff which included an information paper on the Kalgoorlie Hotel Apartments Syndicate. The memorandum was authored by Mr Turner. It was admitted only as a matter relevant to the state of mind of Messrs Jackson and Goff. In it, Mr Turner made observations as follows:[30]

(i) The manager of the Kareelya Group considered that it was preferable for the Kalgoorlie Property not to be strata titled and for the property to be developed on a single lot by a syndicate.

(ii) For stamp duty and taxation purposes the manager of the Kareelya Group considered that it was preferable for Bunbury Centro to transfer the Kalgoorlie Property to the Syndicate at its current market value prior to construction commencing.

41 To obtain finance for the project the options included (a) raising equity in either Bunbury Centro or Agricultural before construction, or (b) introducing a new investor immediately. The new investor was Westralia Property Trust which has significant assets. Westralia Property Trust had arranged borrowings from Hawaiian Developments Pty Ltd. From the point of view of investors the rate of return on the initial cash investment of $2.55 million must exceed the relatively high cost of debt (16%) during the construction phase (emphasis added).

42 Some time prior to 24 June 2002, Agricultural prepared an application for finance for the construction of the 'Broadwater Resort Apartments Hotel'.[31]

43 The application, which was only admitted for the state of mind of Mr Jackson and Mr Goff, said that the estimated construction funding required was $11.250 million.[32] The application said that the directors 'believe the Hotel will be valued in the range of $19.5 to $21.5 million'.[33] It appears from the finance application that the intention was for the hotel to be managed by Broadwater Hospitality, a related company.[34]

44 The application also proposed that the Kalgoorlie Property and work in progress would be purchased from Bunbury Centro for $3,637,000.[35]

45 On 22 and 23 June 2002, Agricultural (as responsible entity of the Westralia Property Trust) agreed to invest $2,250,000 in the Kalgoorlie Apartment Hotel Syndicate and was issued with 3,600,000 syndicate lots.[36]

46 The money was paid on 25 June 2002. It was recorded in the accounts of Bunbury Centro as an unsecured loan to the Westralia Property Trust.[37]

47 On 24 June 2002, Bunbury Centro entered into the Contract to sell the Kalgoorlie Property to Agricultural, as Responsible Entity for the Kalgoorlie Scheme.[38]

48 The Contract was a standard REIWA offer and acceptance, with the Joint Form of General Conditions for the Sale of Land and various special conditions.

49 The Contract was signed by Mr Goff and Mr Jackson on behalf of the vendor. It was also signed by Mr Goff and Mr Jackson on behalf of the purchaser. The purchase price of this Kalgoorlie Property was $2,250,000.[39]

50 The Contract included the following Special Conditions.[40] Although submissions were made (based on exhibit 41 which was not admitted for the truth of its contents and is discussed at [115] - [120]) that the Special Conditions were agreed and backdated some time after 29 July 2002, neither counsel suggested that anything turned on this.

The Vendor grants to the Purchaser a nonexclusive licence to use all of the information and know how in the possession of the Vendor at settlement necessary for the continued project development of the Property as the Broadwater Resort Apartments Kalgoorlie including, without limitation, development approvals issued by the City of KalgoorlieBoulder, architect's plans, subdivisional approvals of the Western Australian Planning Commission, finance applications, marketing and prospectus documentation, project feasibilities, draft building contracts, tenders received from builders, reports from quantity surveyors and other consultants, project costings, liquor licence applications, and original site plans and demolition approvals.
The licence conferred under clause 7 is personal only and is not capable of assignment. The Purchaser agrees to maintain confidentiality in any of the information that the licence permits the Purchaser to use and which the Purchaser knows or ought to know is of a confidential nature.
In consideration for the grant of the licence in clause 7, on 2 January 2004, the Purchaser will pay to the Vendor a licence fee of an amount equal to the costs, expenses and fees incurred by the Vendor in relation to the holding, development and management of the Property and the development of the information and know how since the acquisition of the Property by the Vendor including, without limitation, bank interest and management fees, up to a maximum amount of $1,665,051.

51 An undated register of related party transactions for the Kalgoorlie Apartment Hotel Syndicate provided that the acquisition of the Kalgoorlie Property by Agricultural from Bunbury Centro was a related party transaction.[41]

52 On 24 June 2002, the same day as the Contract, Agricultural (as borrower) entered a loan facility with Hawaiian Developments Pty Ltd (as lender) as well as Bunbury Centro (as 'Developer') and Kareelya Investments Ltd (as 'Project Developer').[42] The interest rate was 16% per annum.[43] The facility permitted a drawdown of $2,300,000 for Agricultural to pay Bunbury Centro which Bunbury Centro must use to discharge a mortgage on the Kalgoorlie Property and reimburse costs,[44] and to pay 'Funded Non Building Costs' of $250,000.[45] The latter are costs payable by either Agricultural or Bunbury Centro in connection with the construction and development of the Project.

53 On 1 July 2002, Agricultural entered a Project Management Agreement with Kareelya Property Group Pty Ltd. The purpose of the Project Management Agreement was for Kareelya Property Group to be responsible for matters including the construction of the hotel on the Kalgoorlie Property, selling or leasing any part of the proposed apartments and hotel premises, and managing the development.[46]

54 Clauses 4.5, 4.6 and 4.7 of the Project Management Agreement have the effect of fixing the price payable for the Project Costs at $18.5 million.

55 The Project Management Agreement defines 'Project Costs' as the costs of acquiring and developing the Kalgoorlie Property including:

(ii) the amount of stamp duty payable on the purchase of the Kalgoorlie Property;

(iii) the property acquisition fee payable to Agricultural;

Hence, all of these items are included in the $18.5 million price.

56 The Works is, in summary, all the work to be done under the Project Management Agreement for the purposes of undertaking and completing the Project.

57 Although the Project Management Agreement post-dated Agricultural's acquisition of the Kalgoorlie Property by six days, the general terms of this Project Management Agreement must have been in the contemplation of Messrs Jackson and Goff at the time the Kalgoorlie Property was acquired on 24 June 2002.

58 On 5 July 2002, there was a meeting of the directors of Agricultural. Mr Jackson and Mr Goff were present.[47] This was the first board meeting after the Contract. No board meeting before the Contract had approved the entry by Agricultural into the Contract.

59 Mr Jackson said that funds had been advanced to Agricultural by Hawaiian Investments Ltd on 24 June 2002.

60 Mr Jackson also explained that a report had been commissioned on market demand. The report was undertaken by Mr Alan Boys and it was seen as a 'worst case scenario for the operations of the hotel'. He said that the report did highlight that there would be a greater risk in managing the food and beverage operations and that the Syndicate would be better off if those operations were leased to an external operator on a turnover rent.

61 Mr Goff said that feasibility studies had been prepared for investors on the basis of the greater risk advised and that although there was a reduction in the estimated cash returns for investors, it still 'stacked up'.

62 The meeting also discussed building tenders which had been received. The lowest tender was from Devaugh Pty Ltd. A review by Ashton Associates recommended the appointment of Devaugh Pty Ltd. The contract price tendered by Devaugh Pty Ltd was $9,014,533.

63 The Devaugh contract documents were tendered as an exhibit.[48] They contain a 5 July 2002 letter of acceptance of the offer by Devaugh to build the hotel for $9,915,986 (inclusive of GST). Exclusive of GST this amount was $9,014,533. The contract price included an amount for Kitchen Fit Out, Bar Equipment, Coolrooms, and Laundry Equipment. That amount was $253,800.

64 On 16 July 2002, in a company record made by Mr Turner, he recites the progress of the development and observes that the 'service contract between [Bunbury Centro] and Kareelya Property Group Pty Ltd will need to be assigned by [Bunbury Centro] to KAHS [and Agricultural as responsible entity]'.

65 On 26 July 2002,[49] the minutes of a meeting of the directors of Agricultural, attended by Mr Jackson and Mr Goff, record that the Westralia Property Trust had invested $2.55 million in purchasing a $3.6 million Syndicate interest in the Kalgoorlie Apartment Hotel Syndicate. The funds for the investment were described as having been borrowed from Hawaiian Developments Pty Ltd at an interest rate of 16%, repayable on or before 30 June 2003.

66 On 29 August 2002, a further meeting of the directors of Agricultural was held with Mr Jackson (as chairman) and Mr Goff in attendance.[50] A report was attached to the minutes including detail of a related party transaction. The related party transaction record explains that Agricultural and Bunbury Centro are related parties. It records the issue to Westralia Property Trust (for which Agricultural is the responsible entity) of a $3.6 million interest in the Kalgoorlie Apartment Hotel Syndicate for $2.55 million. It records that Agricultural, as responsible entity, had entered a loan agreement, borrowing $3 million from Hawaiian Developments Pty Ltd to enable Westralia Property Trust to invest in the Kalgoorlie Apartment Hotel Syndicate.

67 An unsigned lease dated 23 September 2002 was also tendered as an exhibit. That unsigned lease provided for the Kalgoorlie Property to be leased by Agricultural to Dunsborough Hotel Management Ltd.[51] The lease was conditional upon a grant of a liquor licence before 31 December 2003. The annual rent was $800,000 per annum plus an additional amount which was based on operating profit.

68 On 26 September 2002,[52] the minutes of a meeting of directors of Agricultural attended by Mr Jackson and Mr Goff record that Agricultural entered a lease of the completed hotel to Dunsborough Hotel Management Pty Ltd. The lease was conditional upon the grant of a liquor licence. Annual rent would be $800,000 per annum plus an amount of 'Additional Rent' based upon net operating profits. The period of the unsigned lease was five years with two further options of five years.

69 The meeting was also advised of the fixed price contract with Devaugh Pty Ltd for construction of the hotel and a variation of the loan agreement with Hawaiian Developments Pty Ltd.

70 From 1 October 2002 to 31 October 2002,[53] Ashton and Associates reported that work completed to date on the hotel was $1,031,480 excluding GST. The Commonwealth Bank had provided a Bill Facility of $10 million at 5.82% with first drawdown on 30 June 2003 and maturing on 30 June 2006.

71 From 1 November 2002 to 31 December 2002,[54] work to date on the hotel was $2,695,823 and the estimated cost to complete was $8,685,536.

72 By 31 May 2003, the value of work in progress on the hotel had increased to $9,343,271.[55]

73 By 30 June 2003, the value of work in progress on the hotel had increased to $11,754,060.[56]

74 Prior to August 2003, the construction of the hotel on the Kalgoorlie Property was completed. The hotel opened for business on 1 August 2003.[57]

75 On 2 January 2004, Agricultural paid to Bunbury Centro:

(ii) at least $1,665,051 in respect of the Licence fee.[58]

76 Although Agricultural pleaded that $1,763,260 was paid for the Licence fee there was no clear evidence led about the amount of payment by Agricultural.

77 Counsel for Agricultural submitted, contrary to the Agreed Facts,[59] that payments for the Licence fee were made in the year ended 30 June 2003.[60] He submitted that the payments made exceeded the maximum possible amount due for the Licence under cl 9 of the Contract which was $1,665,051. Counsel relied upon the notes to Agricultural's Financial Statements for that year. Those notes refer to a cost of acquisition of the Kalgoorlie Property of $3,250,000.[61] Counsel apparently assumed that this amount included $1 million for the Licence fee. He then referred to a note which said that at 30 June 2003, the total value of the land and work in progress purchased was $3,915,051 (which appears to be the purchase price of $2,250,000 plus the maximum Licence fee of $1,665,051) and that $1,599,700 remains unpaid.[62] Counsel never explained how these figures somehow meant that more than $1,665,051 had been paid for the Licence.

78 The case can only proceed on the basis of the agreed fact that 'at least' $1,665,051 was paid.

79 Even if $1,763,260 had been paid for the Licence fee on 2 January 2004, the effect of this would be that Agricultural had paid $98,204 more than the contractual maximum for the Licence fee. But there was no evidence of any demand or claim for restitution of that allegedly overpaid amount being made by Agricultural against Bunbury Centro. Nor was there any allegation that Messrs Jackson and Goff caused loss to Agricultural by making any overpayment in breach of duty and failing to ensure that Agricultural reclaimed the money or litigated within the limitation period to recover the alleged overpayment.

80 On 23 July 2006, the Kalgoorlie Scheme for which Agricultural is the responsible entity was deregistered on Agricultural's own application.[63]

81 On 21 June 2007, Agricultural (acting for the Westralia Property Trust) sold the Kalgoorlie Property including the hotel. The sale price was $10.15 million.[64]

82 On 5 September 2007, the settlement occurred for Agricultural's sale of the Kalgoorlie Property.[65]

83 On 4 June 2008, these proceedings were commenced by writ with indorsed statement of claim.[66]

84 Mr Catlin was the only person to give oral evidence. Affidavit evidence was given by Mr Nuttall.

85 Mr Catlin has been a licensed valuer since 1987.[67] Although he no longer practises as a valuer, he has had many years of experience, including having conducted valuations of more than 20 to 30 accommodation hotels.[68] He was called to give evidence by Agricultural, solely for the purpose of tendering his 29 April 2002 valuation.[69] Subsequently, he was crossexamined and reexamined in detail in relation to matters relating to that valuation.

4.1 Mr Catlin's 29 April 2002 valuation of the Kalgoorlie Property 'as if complete'

86 Mr Catlin's 29 April 2002 valuation,[70] was conducted on the basis of an 'as if complete' development of the Kalgoorlie Property. He was instructed to, and did, value the Kalgoorlie Property on a 'hypothetical development' approach. That approach led to an assessment that if the Kalgoorlie Property were completely developed on 29 April 2002 it would have a value of $19.5 million, net of GST.

87 It must be reiterated that the focus of Mr Catlin's valuation was upon determining the 'as if complete' value of the Kalgoorlie Property. In determining the 'as if complete' value of the Kalgoorlie Property, Mr Catlin used two valuation methods:

(i) a capitalisation approach which assessed fair occupancy rates and capitalised the net returns;[71] and

(ii) direct comparison to recently recorded sales of quality hotels and resorts.

88 Mr Catlin's 'as if complete' valuation was 58 pages long. In the course of that valuation, Mr Catlin also considered the fair market value of the 'land component' of the Kalgoorlie Property. That land component was assessed as a 'final check to value' for the assessment of the $19.5 million 'as if complete' valuation.[72] It involved a process by which Mr Catlin started with the $19.5 million figure for gross realisation and then deducted an allowance for selling expenses, legal expenses, advertising, profit and risk, loss of interest over the development and selling period, development costs, construction costs, rates and taxes and initial expenses. The end figure was then considered to be a realistic guide to the market value of the Kalgoorlie Property.[73]

89 In the crucial paragraphs of his 29 April 2002 valuation, Mr Catlin explained the following matters.

(i) Using the hypothetical development approach, and working backwards from the 'as complete' assessment of $19.5 million, he reached a conclusion of $2,250,000 land value for the Kalgoorlie Property.

(ii) The $2,250,000 assessment included[74]

costs incurred to date [emphasis added] in relation to demolition fees and site costs together with architectural drawings required to obtain approval for the subject development in accordance with the proposed development ...

[and including] approvals as obtained and pending ... [and] the costs associated with obtaining such approvals in relation to fees incurred regarding working drawings, engineers' costs and other preliminaries.

(iii) The $2,250,000 assessment did not include additional costs which meant that the Kalgoorlie Property could potentially be sold to the Syndicate for a value higher than this assessed value. Those additional costs were matters such as:

Interest and finance costs, sales and marketing costs, responsible entity fees and other scheme costs included.

(iv) The land value of $2,250,000 reflected a rate of $258 per square metre and $24,457 per hotel room.

90 During crossexamination of Mr Catlin by senior counsel for the defendants, a page of his calculations used was tendered which explained the process described and the conclusion in those four paragraphs.[75]

91 One immediate point is that Mr Catlin's $2,250,000 valuation of the Kalgoorlie Property was dependent upon his assessment of his $19.5 million 'as complete valuation'. In opening submissions, some attacks were made by counsel for Agricultural upon the $19.5 million estimate based upon Mr Catlin's estimates of capitalised income.

92 There are four reasons why I reject counsel for Agricultural's submission that the $19.5 million assessment was inaccurate.

93 First, Mr Catlin was called to give evidence by Agricultural in order to tender his 29 April 2002 valuation. He was cross-examined by senior counsel for the defendants about his calculations in that valuation. He iterated, and re-iterated, his starting point in his calculations as the $19.5 million figure. But counsel for Agricultural asked no questions of Mr Catlin in examination or re-examination to suggest that any doubt should be cast upon the $19.5 million figure.

94 Secondly, counsel for Agricultural submitted that the reason why the $19.5 million figure was not accurate, and could not have been relied upon by any reasonable director, was because Mr Catlin had assumed a net operating profit from the hotel of $1.64 million for its first year of operations.[76] Counsel for Agricultural submitted that this figure was not justifiable because Agricultural's income from the hotel, based on an unsigned and unstamped lease, was limited to rent received from the operator. He submitted that Agricultural had entered a lease of the hotel to Dunsborough Hotel Management Ltd which had fixed the rent at $800,000.[77]

95 This submission is incorrect. The unsigned and unstamped lease agreement tendered provided for a rent of $800,000 per annum in addition to an 'Additional Rent'. The Additional Rent was to be calculated by a formula of the excess of Net Operating Profit over a Base fee (a nominal $50,000 adjusted for inflation). So, if the hotel had a net operating profit of $1.6 million then the rent received by Agricultural would be around $750,000 more than the $1.6 million which Mr Catlin estimated. However, other costs to take into account are $400,000 promised under the lease from Agricultural to Dunsborough Hotel Management Ltd for marketing, fit out costs, and working capital.[78]

96 Thirdly, as Mr Catlin explained in his written valuation, the capitalised income basis of assessing the value of the Kalgoorlie Property indicated an average room rate of $211,936. Using a direct comparison approach with other completed hotels the value was $200,000 to $225,000 per room.[79]

97 Fourthly, counsel for Agricultural also relied upon criticisms and queries about Mr Catlin's 29 April 2002 valuation.[80] The criticisms and queries were made by Mr Boys.[81]

98 The documents containing those queries and criticisms were admitted only for the state of mind of Mr Jackson and Mr Goff. As for Mr Goff, there was no evidence that Mr Goff saw the documents at the date of the Contract. As for Mr Jackson, his knowledge of the criticisms[82] does not make them true or false. It does not make them likely.

99 Mr Jackson's knowledge of the criticisms also does not establish any bad faith or recklessness on his part. Mr Jackson's conclusion was that the trading figures provided by Mr Boys were a 'worst case scenario'.[83] Those trading figures involved cash flow from operations for 2004 of $1.115 million rising to $1.331 in 2006.[84] No submissions were made, and no evidence led, which compared these figures with those used by Mr Catlin which were concerned with forecast returns and assessed surpluses. The latter figures, before adjustments, were $762,362 rising to $964,850. But there was no evidence or submissions concerning the relationship between these amounts and the cash flow figures of Mr Boys.

100 In opening submissions, counsel for Agricultural also made reference[85] to criticisms made by Mr Boys of a 43page market demand study into the hotel by Mr Bird and Associates[86] upon which Mr Catlin may have relied.[87] Once again, none of these criticisms was raised with Mr Catlin in his oral evidence. Further, there was no evidence that Mr Goff saw the market demand study by Mr Bird.

101 For these four reasons I reject the attack by counsel for Agricultural on Mr Catlin's $19.5 million, 'as complete' valuation. I also reject the submission, and the associated pleading,[88] that Messrs Jackson and Goff were aware, at the later date of Contract (24 June 2002), that the cost to completion of the hotel would substantially exceed the costs in Mr Catlin's valuation. As I explain in section 4.4 below, the Project Management Agreement contemplated by Messrs Jackson and Goff on 24 June 2002 was a 'turnkey' deal. It fixed the total costs to completion at $18.5 million. Messrs Jackson and Goff could reasonably have expected that the project would result in approximately $1 million profit to Agricultural. The submission by counsel for Agricultural that a profit in the region of this amount was too marginal or speculative to justify a reasonable director engaging in the project was not the subject of any expert evidence. It is sufficient to say that it was reasonable for Messrs Jackson and Goff to cause Agricultural to proceed with the project on the basis of an apparently detailed and comprehensive opinion from a qualified valuer.

102 It is important to observe that there was no pleaded case that the Licence was a sham, involving deliberate deception,[89] or that it was disguised goodwill. Senior counsel for the defendants also made it clear that the defendants did not apprehend any pleading of sham against them.[90]

103 Counsel for Agricultural made it clear that his case was that the Licence was either worthless to Agricultural or worth substantially less than the amount paid.[91] The submission that the Licence was worthless was based upon a proposition that the items of value in the Licence had already been accounted for in the assessment of the $2.25 million purchase price for the Kalgoorlie Property.[92]

104 Nevertheless, two matters asserted by counsel for Agricultural might be perceived as raising allegations of sham. The remainder of this section deals with two issues raised by Agricultural involving

4.2.1 The method for calculation of the Licence fee

105 Agricultural alleged that the 'intention of [the defendants] in a related party transaction was to reimburse the costs of the land and the work in progress for [Bunbury Centro]'.[93]

106 I accept that the manner of calculation of the Licence fee concerned various costs incurred by Bunbury Centro. In that sense, the Licence fee was intended to recoup costs up to the maximum amount provided. Clause 9 of the Contract set the fee for the Licence by reference to Bunbury Centro's costs, expenses and fees of holding, development and management of the Kalgoorlie Property and the development of the information and know how since its acquisition (up to a maximum amount of $1,665,051). But this intention to recoup costs does not assist Agricultural's case for three independent reasons.

107 First, merely because the manner of calculation of the Licence fee showed a concern to recoup costs does not mean that the amount charged for the Licence fee was more than it was worth, or that the Licence was a sham. The elements of cost used to calculate the Licence fee are not the same as the rights conferred by the Licence. Hence, they are not the same as the value of the Licence. The value of the Licence is independent of the manner in which the fee was calculated. The Licence could have been much more valuable or much less valuable.

108 Secondly, in assessing breaches by Messrs Jackson and Goff in relation to the entry by Agricultural into the Contract, the focus must be on the Licence fee which was due to be paid. This was the amount of the various costs and expenses in cl 9 of the Contract up to a maximum amount of $1,665,051.

109 If the amount of the Licence fee which was actually paid on 2 January 2004 by Agricultural to Bunbury Centro exceeded the amount which was due under the Contract then this overpayment was not a consequence of any breach by Agricultural in entering the Contract. For instance, an excess payment might have involved a miscalculation by Agricultural. Or it might have involved a mistaken assumption about various costs by officers of Bunbury Centro or Agricultural. None of these matters were issues in this litigation.

110 If Agricultural's payment of the Licence fee exceeded the amount properly due then a loss would not necessarily arise even if the payment somehow amounted to a breach of duty by some person who procured it. A loss from that excess payment would only arise if restitution were not possible from Bunbury Centro. Whether restitution was (or is) possible would depend on matters which were not the subject of evidence. For instance there was no evidence concerning any demand from Agricultural from Bunbury Centro for restitution of any overpayment based upon any overpayment of the Licence fee. There was no evidence concerning whether any action had been commenced by Agricultural against Bunbury Centro for restitution of any overpayment. And there were no submissions made concerning whether such an action, if brought now, would be timebarred. That question might itself depend on whether an action for restitution of unjust enrichment accrues at the date of payment or at a later date of inequitable retention.[94]

111 Thirdly, and in any event, on the evidence before the Court it cannot be concluded that, on 24 June 2002, the costs incurred by Bunbury Centro under cl 9 of the Contract would necessarily be less than the maximum amount payable for the Licence fee.

112 Some of the costs relating to the calculation of the Licence fee appear from a document, on plain paper without letterhead, entitled '[Bunbury Centro] Allocation of Transfer Costs as at 8 April 2002'.[95] The document contains costs in five categories, each of which is broken into sub-categories. The five main categories, and the total, are:

(i) Land and Holding Costs $1,992,760

(ii) Finance Costs $428,695

(iii) Construction and Design Preliminaries $821,190

(iv) Syndication Expenditure $243,347

(v) Marketing Expenditure $154,715

113 Counsel for Agricultural observed that when the purchase price for the Kalgoorlie Property is added to the Licence fee then the total ($3,915,051) exceeds these 'transfer costs' (which include 'Land' the price for which is not a component of the Licence fee). But the evidence did not establish the total costs of Bunbury Centro at the date of the Contract on 24 June 2002. The 'transfer costs' concerned only those costs at 8 April 2002.

114 Further there was no evidence which related the transfer costs document directly to a calculation of all elements of the Licence fee. For instance, I am not satisfied that the five categories of 'transfer cost' in April 2002 exhaust all the costs incurred by Bunbury Centro by 24 June 2002 in relation to the 'holding, development and management of the Property and the development of the information and know how since the acquisition of the Property by [Bunbury Centro] including, without limitation, bank interest and management fees'.

115 Another matter relied upon by counsel for Agricultural, apparently to cast suspicion upon the Licence, was a document which was admitted on the basis that it was evidence of matters which might be known to Mr Jackson or Mr Goff. It is a handwritten memorandum from 'Paul' (Turner) to 'Ray' (Anderson), and a response from Mr Anderson. Mr Anderson is one of the directors of Agricultural.

116 The memorandum and response are as follows:[96]

Ray,

Could you please consider the special conditions. Are you comfortable that the sale of land and the licence in condition 7 constitute a supply of a business.

I want to express clause 7 as a licence to try to keep it away from being a sale of goodwill that would attract duty at conveyance rates.

The licence in clause 7 should attract duty at mortgage rates (40c/$100)

Regards,

Paul

AGRICULTURAL LAND MANAGEMENT LTD -v- JACKSON [No 2] [2014] WASC 102 (28 March 2014)

At a glance

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Judgment (1233 paragraphs)

AGRICULTURAL LAND MANAGEMENT LTD -v- JACKSON [No 2] [2014] WASC 102 (2 May 2014)

Legislation Cited (5)

Cases Cited (61)