Consideration
115It is not entirely clear what significance the defendants seek to attach to the fact that the indemnity provisions were part of a complicated agricultural investment scheme. The defendants were, to a greater or lesser degree, sophisticated investors, some of whom had financial advice concerning the investment and others of whom gave financial advice themselves. The only person who may not fall into that description is Mrs Wallace. However, she gave no evidence; and her husband, on whom she relied, was clearly an intelligent and sophisticated investor. Each of the persons who invested was no doubt attracted to the investment because of the tax advantages it offered.
116The Indemnity Agreements were part of a scheme regulated by the Corporations Law. An aspect of that regulation was that investors had to be treated in the same way. Consequently, a necessary feature of the investment was that individual investors could not negotiate different terms on which they would invest. Investors chose to invest or not based on information contained in the prospectuses. The defendants must have understood that that was the case. The prospectuses made it clear that the investment was a speculative one.
117There was some complexity in the structure of the investment. In part, that complexity was driven by tax considerations and, in particular, the need to convince the ATO that each individual investor was carrying on a business as a primary producer. One aspect of that was the need to convince the ATO that each investor took on some business risk in relation to the project. The Loan Agreement and the Indemnity Agreement were structured in a way that was designed to minimise the business risks to investors but, at the same time, to maximise the prospects that the ATO would accept that each individual investor was carrying on a business. It is not to the point to seek to reach a final conclusion on the significance of limits on the indemnity to the tax deductibility of the defendants' investment in the projects. The point is that those limits were one of the matters that investors would be able to point to in order to convince the ATO that they were carrying on a business. That is why Mr Lloyd chose to structure the indemnity in the way that he did; and one of the matters he relied on when the scheme was investigated by the ATO was the fact that investors had to comply with their obligations under the Loan Agreement in order to obtain the benefit of the indemnity.
118The prospectus accurately described the Loan Agreement and the Indemnity Agreement. Both agreements were attached to the prospectus. Neither agreement was long. The text of the Loan Agreement took up three pages of the prospectus. The text of the Indemnity Agreement took up a little more than a page. The language of the agreements was not particularly complicated. The indemnity was only available if investors paid amounts due under the Loan Agreement "punctually". If investors had read the Indemnity Agreement, there could have been no real doubt in their minds that they needed to make their payments on time in order to obtain the benefit of the indemnity.
119Investors were not obliged to enter into the Indemnity Agreement. If they wanted the benefits of the indemnity, they had to pay a modest fee of $250. It is to be expected, in those circumstances, that they would have looked at the terms of the indemnity to determine in what circumstances it would be available if that was a matter that was important to their decision to take up the investment.
120None of the defendants gave evidence to the effect that they did not have adequate time to consider the prospectus or the terms of the agreements. Many investors invested on the last day of the financial year or shortly before then. But any pressure to invest came from their desire to obtain a tax deduction in the relevant year, not from OAL, let alone ARF.
121Having regard to those matters, I do not accept that there was any procedural injustice in connection with the defendants' entry into the Indemnity Agreement.
122The defendants plead that cls 2(a) and (b) of the Indemnity Agreement were unjust because of the failure to describe in the prospectus the financial arrangements between OAL and ARF and, in particular, the round robin arrangements. There is a suggestion in some of their submissions that the unjustness arises from, or is contributed to by, the fact that the defendants were misled into investing in the projects by the failure to disclose the nature of the round robin arrangements. However, to the extent that the complaint depends on the defendants being misled, as I have pointed out, that complaint cannot be maintained in relation to Project No 2 in light of the findings made by Handley AJA in the Gardiner Test Case.
123The defendants do not seek to prove that, because of the round robin arrangements, they did not at the time the agreements were entered into get what they paid for or could not reasonably have expected at that time to get what they paid for. As I have said, the land was prepared, trees were planted and harvested, and some oil was produced. There is no suggestion that the quantities of trees that were expected to be planted were not, or that the trees were inadequately cared for or that the project was carried out in some other way that was deficient. It is pleaded that, as a result of the round robin arrangements, the funds available to OAL from investors were not sufficient to meet all the estimated expenses. However, the defendants produce no analysis or evidence that makes good that allegation. In addition, the allegation does not take account of the income that was expected to be generated by the project.
124The defendants submit that the round robin arrangements had a considerable negative impact on the possibility of the venture obtaining commercial success. But again, they do not explain why that is the case. Relying on findings made by Handley AJA (at [461]), they point to the fact that the budget in the prospectus setting out the expenditure to be incurred by OAL does not refer to the round robin arrangements and that the budget would have been different if the round robin arrangements had been disclosed. However, they do not explain what expenditures could have been made that were not that would have affected the viability of the venture. As I have said, the finding of Young CJ in Eq which was not overturned on appeal was that the venture failed because of the collapse of the price of tea tree oil. That had nothing to do with the amount that was spent or was available to be spent on the project.
125The defendants do not explain the connection between the round robin arrangements and the unjustness they say arises from cls 2(a) and (b) of the Indemnity Agreement. The injustice must take its character from the orders that are sought to relieve it. Here, the injustice is said to be relieved by orders that mean that the defendants are able to make claims on the indemnity even though they did not make payments due under the Loan Agreement punctually. But it is not clear how any injustice associated with the lateness of the payment and its consequences is affected by the round robin arrangements. What is it about the fact that OAL lent money it received from investors to ARF so that ARF could advance money to other investors that affects the injustice said to arise from the consequences of late payment under the Loan Agreement on OAL's obligation to indemnify?
126As a result of the round robin arrangements, another way of looking at the indemnity is that its effect was that investors did not have to make future payments (indirectly) to OAL in respect of the project if they have made past payments on time. But why is that arrangement any more or less unjust than an arrangement where the true beneficiary of the payments is ARF and an investor is relieved of future payments to ARF (because OAL agrees to make them) if earlier ones are made on time? The only answer that the defendants seem to make to these points is to say that the loans from ARF were an illusion "as a matter of financial substance" and that, as a result, the projects were entirely dependent on the actual funds provided by investors from their own resources. This submission overlooks the fact that no investor was required to borrow money from ARF and that the investors were free to invest their own money or to borrow money from another source, as some did. More significantly, it does not explain the connection between what is alleged and the unjustness of the relevant clauses in the Indemnity Agreement. The suggestion seems to be that, because the loans from ARF were an illusion, the defendants should not have to pay the balance owing in respect of them, and that amount should be paid by OAL. But there are a number of problems with that submission. First, as I have explained, there is no evidence to suggest that the round robin arrangements affected the commercial viability of the projects. The investors were told that they were investing in a speculative venture of producing tea tree oil. They were told what they had to pay to make that investment. The project was established and operated substantially in the way that the investors were led to expect. Those who visited the project were impressed by what they saw. Second, it was essential for the tax deductibility of a large proportion of the investment that the management fee be paid by the investors. The Loan Agreement enabled investors to do that without having to pay a substantial amount from their own pockets at the time of the investment. That, no doubt, was part of the attraction of the scheme. To put these points another way, the investors, and the defendants in particular, got the investment they thought they were getting and largely got the tax benefits they sought. Why, in those circumstances, would it be unjust to require them to pay the amount that they were told they had to pay to get those benefits? Third, there is a disconnect between the relief they seek and the injustice they identify. If the injustice really arises from the fact that the loans from ARF were in substance an illusion, it might have been expected that they would seek to be relieved of the obligation to repay the balance of those loans or seek to have the indemnity varied so that they were entitled to an indemnity from OAL come what may. But they do not seek relief in those terms. Instead, they seek an order that the indemnity be varied to avoid what is said to be the harsh consequences of the failure to pay on time.
127For these reasons, in my opinion, the round robin arrangements add nothing to the injustice said to arise from cls 2(a) and (b) of the Indemnity Agreement.
128The heart of the defendants' complaint is that it is unjust that, even if they were only a day late through no fault of their own in making a single payment due under the Loan Agreement of however small an amount, they no longer have the benefit of the indemnity, which in events that could and have happened, will have a dramatic effect on their obligations arising from their investment in the scheme and, in particular, under the Loan Agreement.
129Once again, the relief they seek is not directed, or at least is not limited, to curing apparent injustice of that sort.
130However, leaving that point aside, the effect is one that can, and often does, arise from all essential time stipulations in contracts. Not all essential time stipulations are unjust. The question must be: what is it about this time stipulation that makes it unjust?
131In my opinion, there is nothing. The time stipulation was included in contracts that it is to be expected, as was the case, would be entered into by sophisticated investors. The time stipulation was clearly spelt out in the relevant contract, which was made available to investors in advance as part of the prospectus. The prospectus itself alerted investors to the fact that they had to comply with the terms of the Loan Agreement if they wanted the benefit of the indemnity.
132The time stipulation was not difficult to comply with. It simply required payment of money by a particular date. The time stipulation served a commercial purpose. The indemnity was part of a scheme that was designed to provide substantial tax deductions to investors in the year in which the investment was made; and it was thought, not unreasonably, that the risk of losing the benefit of the indemnity if amounts due under the Loan Agreement were not paid punctually would assist in convincing the ATO that investors were carrying on a business if it became necessary to do so, which it did. It also provided an incentive to investors to pay amounts payable by them to ARF on time. OAL had an interest in providing that incentive because the money paid to ARF would be paid by ARF to OAL in discharge of the loans that formed part of round robin arrangements and, as the defendants accept, was the principal source of funds available to OAL to enable it to carry on the venture. If a substantial number of investors were late in repaying amounts owing to ARF, that could have had a dramatic effect on OAL's ability to comply with its obligations under the Licence and Management Agreements.
133In view of the conclusions I have reached, it is unnecessary to consider the question whether relief should be granted and, if so, the nature of that relief. It is also unnecessary to deal with the argument raised by ARF based on s 16 of the CRA. However, I should say something about those three questions.
134As to ARF's defence to the defendants' cross-claims based on s 16 of the CRA, in my view the defence cannot succeed. The relief that is sought under the CRA is relief in relation to the Indemnity Agreements. In my opinion, proceedings to recover amounts due under the Loan Agreements are proceedings arising "in relation to" the Indemnity Agreements since the ability of ARF to recover amounts due under the Loan Agreements from investors depends, in part, on the investors' rights under the Indemnity Agreements. The claims under the CRA were brought while the proceedings by ARF to recover moneys under the Loan Agreements were on foot. It follows that the claims under the CRA fall within s 16(c) of that Act.
135As to the question whether relief should be granted, the court may have regard to the defendants' conduct since they entered into the relevant contracts. Had I found the essential time stipulation unjust, I would have granted relief to those defendants who, despite a genuine attempt to comply with the time stipulation, failed to do so.
136The defendants who fall into that category are Mr Fredericksen, Mr Rowe, Ms Russo, Mr Wardle (in respect of his first investment), Mrs Wallace and Mr Long (in respect of his first investment). It seems to me that, in each of those cases, the investor, or in the case of Mr Wardle, Mr Giannuzzi on his behalf, took reasonable steps to pay the amounts payable by them on time. Each posted a cheque or, in the case of Mr Giannuzzi on behalf of Mr Wardle, arranged to transfer funds at a time when they might have expected the cheque to arrive or the funds to be transferred within time. The same cannot be said in respect of Mr Giannuzzi or the second investments of Mr Wardle and Mr Long. In each of those cases, it appears that no attempt was made to make the payment until after the date for payment fell due. If the time limits were unjust because of the consequences of failing to comply with them strictly, then it seems to me appropriate to grant relief to those who reasonably sought to comply with them.
137ARF submits that there is a difficulty in granting relief because there is no allegation that cl 7 of the Loan Agreements is unjust and no relief is sought in respect of that clause. However, it is not clear why that is a bar to granting relief in respect of the Indemnity Agreements. The Loan Agreements and Indemnity Agreements must be read together. Part of the circumstances in which the Indemnity Agreements operate includes the effect of cl 7 of the Loan Agreements. If the Indemnity Agreements are unjust because they impose an unjust time stipulation, it is difficult to see why that time stipulation cannot be varied under the CRA with the result that the variation will have consequences for the operation of cl 7 of the Loan Agreements. Having regard to the conclusions I have reached, it is not necessary to formulate the precise form of order that I would have made. It is sufficient to indicate that I would have varied the relevant Indemnity Agreements so that the indemnity that was provided under them was available notwithstanding the late payment that occurred in cases where I have concluded that it would be appropriate to grant relief.