Agushi & Anor v Spiteri [2008] VSCA 89

Court of Appeal (Vic)|2008-05-29|Before: NEAVE and DODDS-STREETON JJA and OSBORN AJA

CONTRACT - Property development - Joint venture agreement - Advanced monies - Whether the joint venture agreement rendered the loan repayable in the circumstances of failure of the project; meaning of 'completion of the project' - Personal guarantees - Construction of the agreement in the circumstances of the case.

1 For the reasons given by Osborn AJA I would dismiss the appeal.

2 I have had the benefit of reading in draft the reasons prepared by Osborn AJA. I agree that the appeal should be dismissed for the reasons his Honour gives.

**3 In 2003 the first appellant ('Agushi') met the respondent ('Spiteri') at a school reunion and encouraged him to join in a property development venture.

4 Agushi pursued Spiteri after the meeting and a joint venture agreement was entered into on 31 July 2003 ('the JVA') between Spiteri, Maribyrnong Road Developments Pty Ltd ('MRD'), Agushi, and the second appellant ('Calabro'). Prior to the execution of the JVA, a draft had been drawn up by Calabro and subjected to modification at the request of Spiteri after he had received advice from an independent solicitor.

5 The JVA contemplated the construction of a 20 unit residential development in Maribyrnong Road, Ascot Vale. It was intended that MRD would obtain finance for the project, obtain planning approval for the development and manage the construction, subdivision and sale of the development.

6 Spiteri agreed to advance MRD $350,000 for the purposes of the project.

7 Agushi and Calabro agreed to guarantee payment of the moneys payable by MRD to Spiteri under the JVA.**

8 A planning permit was obtained for the proposed development following an appeal to the Victorian Civil and Administrative Tribunal (VCAT), but before it

could proceed, MRD defaulted with respect to borrowing obligations secured by a second mortgage over the project land. In consequence, the second mortgagees sold the land, aborting the project.

**9 MRD then became insolvent and Spiteri sued in the County Court upon the guarantee given by Agushi and Calabro, seeking the repayment of the moneys he had advanced, together with interest pursuant to the terms of the JVA.

10 The matter came on for trial in September 2007, and the plaintiff succeeded in obtaining judgment in respect of his claim.

11 The principal contention advanced on behalf of Agushi and Calabro at trial before the County Court, was that the arrangements between Spiteri and MRD were not to be characterised as involving a loan. It was submitted that on the proper construction of the JVA, Spiteri was an equity partner in the proposal and had assumed part of the risk of the project.

12 The learned trial judge held that the JVA did evidence a loan arrangement between Spiteri and MRD. That finding is not challenged on appeal to this Court, and in my view it was not open to challenge.

13 The issue pursued on appeal to this Court is, simply, whether the JVA rendered the loan repayable in the circumstances of failure of the project.

14 The appellants contend that it did not because cl 10 of the agreement provided that the date for repayment of the moneys advanced 'shall be on the completion of the project'.

15 The appellants' core submission is that the project has not been completed in the relevant sense. A corollary of this contention is that it will never be completed and the loan will never be repayable.

16 Conversely, Spiteri contends that the project has been completed and that he was entitled to recover the moneys advanced, together with interest pursuant to the agreement.**

The parties hereto have agreed to jointly develop the subject land upon the terms and conditions hereinafter contained.
[Agushi and Calabro] have agreed to guarantee the whole of the advance interest and profit due to [Spiteri] (Schedule E - Deed of Guarantee).

[MRD] and [Spiteri] hereto agree to construct on the subject land twenty (20) residential apartments in accordance with plans and specifications to be prepared by Omiros Architect and presently at VCAT pending appeal (Schedule C "the plans").

**19 It was contended by the appellants that this description should be regarded as defining the minimum content of the project.

(a) Subject to obtaining Mortgage funding within thirty (30) days of the date hereof, [Spiteri] shall advance to [MRD] within the periods and timeframe set out in Schedule "A" the sums there referred to ("the capital sum").

(b) [Spiteri] shall be paid by [MRD] a premium of Ten Percentum (10%) per annum calculated by reference to the capital sum ("the premium") to be paid on completion of "the project".

(c) [MRD] shall pay to [Spiteri] twenty percent of the net profits of the project in accordance with the Feasibility Report in Schedule D or such other net profit derived from the project after an independent audit of the profit and expenses of the project.

(d) The capital sum premium and profit shall be paid and received in full and final satisfaction of all or any remuneration otherwise payable to [Spiteri] and shall be payable in one lump sum without any deductions on completion of the project.

**21 Schedule A of the JVA provided for the advance of $100,000 within 7 days and $250,000 within 30 days.

22 It can be seen it was envisaged that Spiteri would be repaid the amount advanced together with interest and a share of profits.

23 Despite the reference to profit sharing, cl 1 of the JVA provided:**

(a) Nothing in this Agreement shall be construed to constitute a partnership and no party shall without the consent of the other assign charge or mortgage its share in the joint venture.

(b) Save as hereinbefore provided no Investor [Spiteri] shall be entitled to claim or receive any other sum or remuneration arising out of or incidental to the undertaking of the project.

24 Clauses 3 and 4 of the JVA vested the conduct of the joint venture in MRD.

(a) Project finance other than the advance by [Spiteri] of the capital sum shall be procured by [MRD] from any major Australian lending institution or from any other source upon such terms as it shall in its absolute discretion think fit from time-to-time but subject always to the normal trading terms applicable to a like advance ("the principal advance").

(b) The principal advance shall rank as a first advance and shall take priority for payment as to capital profit interest and costs over the capital sum advanced by [Spiteri].

(a) [MRD] shall have full and unrestricted control of all matters relating to and incidental upon the building, marketing and sales of the project subject always to the requirements of any applicable permit, regulation or rule of the Body Corporate.

(b) [MRD] shall provide [Spiteri] with monthly update reports on the progress of the project.

(c) [Spiteri] shall not (subject to the provisions of Clause 2(a) hereof) be required to do any other act matter or thing or advance any further sum in respect of the project.

25 Clause 7 dealt with the consequences of the determination of the then outstanding application for planning approval:

In the event that [MRD] is not successful in obtaining a permit for the development of the property on 26 September 2003 or another adjourned date by VCAT, [Spiteri] shall give [MRD] ninety (90) days notice to repay the Total Amount Advanced.

In the event that [Spiteri] gives notice for the repayment of the Capital Sum, it shall be repayed [sic] together with interest at the rate of 10% per annum pro rata the number of days that [MRD] has use of the Total Amount Advanced, and [Spiteri] shall forfeit any right to a share in the profits.

If [Spiteri] exercises his right to seek repayment of Total Amount Advanced for non-issue of permit by VCAT, Vince Roccisano shall simultaneously with the repayment of funds to [Spiteri] deliver to [Agushi and Calabro] the signed transfer of shares.

In the event that [MRD] is granted a Town Planning Permit by VCAT, then [Spiteri] shall leave the Total Amount Advanced with [MRD] for the life of the project and in accordance with the terms of this agreement. (My emphasis.)

**26 Clause 9 gave Spiteri the option to purchase residential apartments within the proposed development and the further option to obtain the transfer of one of the proposed apartments in lieu of the monetary entitlements he would otherwise have under the JVA.

The date for repayment of the capital sum and premium shall be on the completion of the project.

28 The schedules to the JVA included the town planning application drawings then the subject of appeal to VCAT. They also contained a deed of guarantee executed by Agushi and Calabro. Lastly, they contained a feasibility report prepared by a company controlled by Calabro and Agushi.

29 I accept the submission by counsel for Spiteri that the Court is entitled to consider not only the text of the JVA but also the surrounding circumstances known to the parties and the purpose and object of the transaction. The relevant principles were stated by the High Court in Toll (FCGT) Pty Ltd v Alphapharm Pty Ltd:[1]

This Court, in Pacific Carriers Ltd v BNP Paribas,[2] has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.

**30 Further, the law will generally imply into a loan agreement an obligation on the part of the borrower to repay the loan.[3]

31 This implication may be displaced by agreement making the obligation to repay dependent upon an outcome relating to the purpose of the loan. Thus the parties may restrict the lender to a particular source of repayment.

32 In R v New Queensland Copper Co Ltd[4] the Queensland Government claimed moneys advanced to a mining company. Clause 6 of the agreement governing the advance provided:**

... the amount so advanced ... shall be repaid to the Government out of the profits which shall hereafter be derived by or accrue to the Company from the working of the said mines ...[5]

**33 The mining venture for which the advance was made failed. The High Court construed the agreement as meaning the loan was to be repaid out of profits only. The express terms of cl 6 of the agreement read in the context of the agreement as a whole were inconsistent with the obligation to repay which would ordinarily be implied.[6]

34 In NZI Capital Corporation Pty Ltd & Ors v Child[7] Rogers CJ Comm D applied these principles to a contract in which there was no express term inconsistent with the ordinarily implied obligation. Nevertheless, evidence established that the parties had refused to include a provision in the contract which would give effect to the ordinary presumption. In these circumstances the deliberate deletion of such a provision was held to displace the usually implied term.

35 In so deciding, his Honour confronted what Lord Diplock has referred to as 'a pleasant diversity of authority'[8] relating to the question whether, in construing a contractual document, regard may be had to what has been deleted from that document.[9] That issue does not arise in this case, but the decision confirms that the contract must demonstrate an objective intention to rebut the ordinary presumption, if that presumption is not to be given effect.

36 In the present case, the critical question is whether the wording of cl 10, construed in the context of the JVA as a whole, and having regard to its purpose and context, displaces the obligation to repay the loan made by Spiteri, effectively postponing it indefinitely as a result of the demise of the project.**

**37 In my view the terms of cl 10 do not displace the obligation to repay the loan and should be construed as requiring its repayment in the circumstances of this case.

38 First, cl 10 is, in terms, concerned with the date of repayment of the loan and does not purport to specify a contingency governing liability for the loan.

39 Secondly, the date for repayment is not expressed by reference to the 'successful' completion of the project but simply its 'completion'.

40 Thirdly, I accept the learned trial judge's equation of the ordinary meaning of 'project' with a 'planned undertaking'. I further accept the submission made on behalf of Spiteri that a project is by its nature capable of description as a 'proposal'.[10]

41 I do not accept that the undertaking or venture here in issue is simply to be equated with the physical product (that is the building development) which forms a component of it. It follows, in turn, that it is the completion of the undertaking which is critical, not the completion of the building development.

42 I agree with the learned trial judge that this construction gives effect to the ordinary meaning of the language used in cl 10.

43 Fourthly, the obligation to repay upon such date is consequent upon the obligation stated in cl 7, which is to leave the money in the project during its life.**

... [Spiteri] shall leave the total amount advanced with [MRD] for the life of the project and in accordance with the terms of this agreement.

**44 This terminology strongly supports the conclusion that the project should be regarded as completed in the sense contemplated by Cl 10 when it is, on the evidence, dead.

45 The appellants submit that the obligation to leave the advance with MRD during the life of the project is subject to the further requirement 'and in accordance with the terms of the agreement'. In my view, the second phrase governs the manner in which the moneys advanced are to be left with MRD, but the obligation to do so terminated with the death of the project.

46 Fifthly, it is to be observed that in the present case the project foundered when MRD breached its obligation to procure the funds necessary for it.

47 It was submitted on behalf of the appellants that the mortgagee's sale frustrated the JVA, but it is a necessary inference from the evidence as a whole, that the mortgagee's sale was effected because MRD procured finance upon terms and in circumstances which led to such sale. In so doing, it did not procure the finance reasonably necessary for the project. It is a further necessary inference from the evidence as a whole that MRD so acted as a result of the actions of the appellants, who were at the relevant time its directors and active agents.

48 I note by way of amplification of the facts that cl 3 of the JVA envisaged that apart from the moneys advanced by Spiteri, the project would otherwise be financed by way of funds procured from lenders by MRD. At the same time, the project feasibility study annexed to the JVA envisaged that 80% of funds would be borrowed. Land costs were estimated at $1,814,000, construction costs at $3,302,000, consultants' fees at $532,000, rates and taxes at $115,000, marketing and commission at $222,460. Interest costs were formulated as follows:**

(a) On land cost 24 months @ 9% (assume 80% borrowing)

(b) Interest on building costs, consultants, rates & taxes, fees (10 months) (assume 80% borrowing on construction)

**49 The appellants' evidence further disclosed that the $350,000 advanced by Spiteri was applied by Calabro and Agushi, in the first instance, in the sum of $200,000 to buy out the one third interest of a previous shareholder in MRD. The further sum of $150,000 was paid to a project management company controlled by Calabro and Agushi.

50 On 11 August 2005 Calabro prepared, certified and lodged with the Australian Securities and Investments Commission ('ASIC') a form 507 Report as to the Affairs of the company. This disclosed:**

The sole asset of MRD was the land valued at $1.9 million with an estimated realisation value of $1.7 million;
The land was subject to first, second and third mortgages in the sums of $950,000, $300,000 and $500,000 respectively;
The company was indebted to Spiteri in the sum of $425,000.[11]

**51 Accordingly, it appears the point had been reached where the land was the sole asset available to MRD and the financing assumptions contained in the feasibility study had collapsed. There were no residual funds to provide 20% of the land acquisition costs nor to provide 20% of the balance of construction costs as envisaged by the feasibility study. The evidence further discloses that the only works which had actually been undertaken were demolition works.

52 Not surprisingly, MRD was unable to prevent sale of the land by the second mortgagee, and the project thus ended in financial collapse as a result of the actions of the party charged by the terms of the JVA with implementing it. MRD did not procure the finance necessary to implement the project in accordance with its obligations.

53 In my view the words 'completion of the project' would be understood by the reasonable person to be intended to embrace the completion of the project caused by MRD whether successful or not.

54 If it were not so, then the parties must be taken to have contemplated that in the event the project finished by reason of MRD's breach of its obligations to implement the project, Spiteri would be left with no recourse other than a claim for damages against MRD, in circumstances where the appellants guaranteed repayment of the loan but did not guarantee performance of the agreement. This would both defeat the ordinary implication of the obligation to repay the loan and shut out Spiteri from effective recourse against the guarantors. It is not a construction which could be regarded as leading to an objectively reasonable resolution of the mutual obligations of the parties having regard to the other primary obligations which they assumed with respect to implementation of the project.

55 In Australian Broadcasting Commission v Australasian Performing Right Association Ltd[12] Gibbs J stated that in construing a written agreement:**

... if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust "even though the construction adopted is not the most obvious, or the most grammatically accurate" ...

**56 In my view the construction adopted by the learned trial judge was in this case the most obvious. But it is also plain that if, contrary to this construction, the guarantor directors of MRD could bring about avoidance of their obligations under the guarantee, by conducting the affairs of MRD in a manner which breached the JVA and in consequence terminated the project, this would not be a just outcome.

57 Sixthly, I do not accept the appellant's submission that the evidence demonstrates that the return on the funds invested by Spiteri, as contemplated by the JVA was excessively generous, and such as to warrant a commensurately narrow interpretation of the obligation to repay as was submitted on behalf of the appellants.**

(a) Spiteri accepted that he would rank behind the principal lenders of project finance contemplated by cl 3, and by the project feasibility analysis annexed to the JVA. He was relegated by the JVA to the effective status of lender of last resort.

(b) The appellants' own evidence does not support the view that the terms were unduly generous. Notably, Calabro gave evidence in chief:

... It was explained to Spiteri that Spiteri had the option of purchasing the shares of the outgoing director and shareholder and also receive 10% on his money and a 20% of the net profits of the project or, alternatively, Spiteri could loan MRD $350,000 and be paid 20% interest on his loan of $350,000.

(c) The crude feasibility study annexed to the JVA should not be regarded as evidence of likely returns. Subsequent events proved it to be manifestly inadequate, if only with respect to interest costs.

**58 Seventhly, I do not accept that the description of the scope of the project in cl 1 of the JVA resolves the meaning of 'completion of the project' in cl 10. Clause 1 refers to the construction of 20 residential units, but it is clear from the documentation as a whole that the project contemplated financing the purchase of the land, the construction, the subdivision, and sale of the units, together with the procurement of the finance reasonably necessary to effect these steps.

59 Eighthly, I do not accept that the terms of cl 2(d) require cl 10 to be construed as requiring successful completion of the project. That clause deals with the joint payment of the capital sum, interest and a share of profits upon the successful completion of the project, but it does not delimit the sense in which the phrase 'completion of the project' is used in cl 10. It does not require that a profit be made before the loan is repayable.

60 The agreement as a whole is to be read as providing, following cl 2, for a sequence of obligations including that under cl 7, which informs cl 10. Clause 10 itself is in turn to be given its natural meaning as to the date of repayment for the reasons I have set out above.

61 Ninthly, I reject the appellants' submission that the use of the phrase 'completion of the project' in cl 9 of the JVA assists with the construction of cl 10.[13] Clause 9 is relevantly concerned with Spiteri's right to take a constructed and subdivided residential unit in lieu of monetary entitlements. It self-evidently presupposes a constructed and subdivided unit exists in order to give effect to the right. That this is so does not bear on the proper construction of cl 10.**

62 The notice of appeal attacked the relevance of the Court's findings with respect to the Report as to Affairs which were as follows.

... On 11 August 2005, after the appointment of a controller to the company, Mr Calabro completed a Report as to Affairs setting out the company's indebtedness to the plaintiff for the sum of $420,000 as an unsecured creditor. I do not accept Mr Calabro's evidence that this entry, which he certified as "true to the best of my knowledge and belief", was falsely made at the insistence of Mr Agushi to reflect a "moral obligation" only on the part of the company to repay the plaintiff.

63 Upon the hearing of the appeal it was accepted, however, that such finding was not necessary to the learned trial judge's decision. In the circumstances I will say no more about it.

**64 It follows from the above reasons that the appeal should be dismissed.

[3] NZI Capital Corporation Pty Ltd & Ors v Child (1991) 23 NSWLR 481.

[6] Ibid 499 (Barton J), 501 (Isaacs J).

[8] Louis Dreyfus and CIE v Parnaso CIE Naviera SA (1959) 1 QB 498 at 513.

[9] His Honour resolved this question by reference to the statement of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337, 352-53.

[10] The Oxford English Dictionary, 2nd ed, gives as a definition of the relevant meaning of the word 'project':

Something projected or proposed for execution; a plan, scheme, purpose; a proposal.

The Macquarie Dictionary, 2nd revision, gives as the first meaning for 'project':

Something that is contemplated, devised or planned; a plan; a scheme; an undertaking.

[11] At trial, Calabro was questioned concerning the ASIC form 507. When counsel asked Calabro whether as a solicitor he appreciated the significance of certifying a document to be true and correct, Calabro replied that he was not a solicitor, that he had not been practising as a solicitor for 20 years and that he was a property developer. Calabro then agreed that he was the solicitor on record in the proceeding.

[12] [1973] HCA 36; (1973) 129 CLR 99, 109; and see in like terms to this dictum Lewis Construction (Engineering) Pty Ltd v Southern Electric Authority of Queensland (1976) 50 ALJR 769, 775; Australian Casualty Co Ltd v Federico (1986) 160 LR 513, 520.

(a) The Investor shall have the first option to enter into a contract to purchase one or more of the proposed residential apartments, at published market price or a price to be mutually agreed upon between the parties.

(c) In lieu of repayment of the capital sum and premium as hereinbefore provided [MRD] and the Investor shall mutually agree that [MRD] makes a distribution in specie of the apartment/s chosen by the Investor subject to:

(i) completion of the project and the issue of certificates of occupancy;

(ii) the registration by the Registrar of Titles of the proposed plan of subdivision, which shall operate to fully discharge the obligations by [MRD] as borrower under the terms of this Agreement which operates to fully discharge the obligations by [MRD] as borrower under the terms of this Agreement and the Investor shall provide to [MRD] a full Release in respect of the security provided to it by [MRD], and the Investor hereby agrees to transfer to [MRD] and or its nominee the Twenty percent (20%) shareholding, held by the Investor.

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