Arris Investments Pty Ltd v Fahd & Anor [2010] NSWSC 309 | Case summary

1 This is an application to set aside a Statutory Demand under s 459G of the Corporations Act 2001 (Cth), on the grounds that there is a genuine dispute as to the existence of the debt for the purposes of s 459H, and that there is "some other reason why the demand should be set aside" for the purposes of s 459J(1)(b). 2 The Statutory Demand is dated 8 December 2009 and was served on 14 December 2009. There is no issue that the originating process and the affidavit in support were filed and served within the time prescribed by s 459G(3). 3 The Statutory Demand claims the sum of $591,639.69 as due pursuant to clause 12 of a Development Agreement dated 22 December 2005 between the parties. By that Agreement the Defendants, who are the owners of certain land at Baulkham Hills, agreed with the Plaintiff, a developer, for the construction and sale of a commercial building on the property. Clause 12 of the Agreement, which has been varied by two subsequent deeds, provides for the manner in which the profits of the venture are to be distributed between the parties. 4 For the purposes of this application it is not necessary to go into great detail as to the history of the development project and the circumstances giving rise to this application. The following will be sufficient. 5 Clause 12 in its present form provides that the Defendants - described in the Development Agreement as the Owner - are to receive part of the profits from the venture by retention of certain units in the completed project. These units were identified and called "Retained Units". It was the Plaintiff's obligation under the Development Agreement to sell all units in the project except the Retained Units. The Development Agreement provides in clause 2.7 that if total sale prices of all non-Retained Units is less than $27.5 million, certain designated units out of the Retained Units are to be taken out of that category and are then available for sale on the open market by the Plaintiff. These units were called Released Units. 6 It is not in dispute that total sales in the project did not achieve $27.5 million. The Plaintiff thereupon set about selling Released Units. 7 In November 2008 the Plaintiff had agreed with a third party purchaser for the sale of Unit 307 for a stipulated price. That unit was neither a Retained Unit nor a Released Unit, as defined. The Development Agreement provided that the Defendants, as owners of the property, had to sign the contract for sale and a contract was submitted to them for signature. They declined to do so, saying in a succession of emails to the Plaintiff that they wished to retain Unit 307 for themselves, and the purchase price, which had been agreed with the third party purchaser, should be taken as the value of the unit for the purpose of an accounting of profits in accordance with clause 12 of the Development Agreement. 8 As a result of the position taken by the Defendants, the third party purchaser withdrew its offer to purchase Unit 307. The Plaintiff says that it accepted and acted upon these statements of intention by the Defendants. It says that there is a legally binding agreement between the parties, the result of which is that, notwithstanding the terms of clause 12 and the present definition of "Retained Units" in the Development Agreement, the value of Unit 307 is to be accounted for to the Defendants as distribution of profit. 9 On the basis of that accounting the Plaintiff withdrew $591,639 from the project account as money to which it says it is entitled under clause 12. 10 The Defendants say that there is no binding agreement whereby Unit 307 was to be retained by them and its value taken into account for the purpose of a distribution of profits under clause 12. 11 It is not necessary to traverse in any detail the chain of correspondence between the parties and their solicitors which is said by the Plaintiff to be evidence of a legally enforceable agreement by the parties, and by the Defendants to negate such an agreement. I may merely state my conclusion that in view of the unequivocal and repeated assurances given to the Plaintiff by the Defendants in their emails, that they intended to retain Unit 307 and did not consent to it being sold to a third party, there is sufficient evidence to find the existence of a genuine dispute. Whether the Plaintiff will ultimately succeed in its assertion will depend upon findings as to contested fact, the interpretation of the relevant correspondence and the application of legal principle to the facts so found. 12 If the Defendants are correct in their assertion that no binding agreement for the retention of Unit 307 was made, the result would be that the Plaintiff is in breach of the Development Agreement in withdrawing $591,639 from the project account. The Plaintiff would have to repay that money into the project account, and a re-calculation of the profits distributable under clause 12 would have to be made. In other words, it would not automatically follow that the Defendants would be entitled to payment out of the project account of $591,639 being the amount claimed in the Statutory Demand. The parties are in disagreement as to what a re-calculation of profits under clause 12 would produce. 13 The Plaintiff says that the Defendants would owe it a substantial sum while the Defendants say that the Plaintiff would owe them at least $295,819. This is precisely the sort of disagreement which the parties expressly stipulated in the Development Agreement was to be decided by mediation or, if mediation failed, by arbitration. Clause 21.1 of the Development Agreement provides: "In the event of dispute between the parties in relation to any matter arising under this agreement, the parties must first seek to resolve such dispute by mediation, but should mediation fail to resolve the dispute, then the matter will be resolved by arbitration pursuant to the Commercial Arbitration Act 1984." 14 The Defendants say that re-calculation of the distributable profits is an easy matter when one has regard to the calculations of the Plaintiff set out in the letter dated 12 November 2009 from its solicitors to the Defendants' solicitors. On the other hand, the Plaintiff says that those calculations contain a substantial error in favour of the Defendants. 15 In these circumstances, the presence of a mediation and arbitration clause in the Development Agreement is of considerable significance in the exercise of discretion under s 459J(1)(b), upon which the Plaintiff relies. That subsection allows the Court to set aside a Statutory Demand if it is satisfied that there is "some other reason" to do so which is independent of the question of whether a genuine dispute or offsetting claim exists: see, for example, Faji (Aust) Constructions Pty Ltd v AC Professional Accounting Pty Limited [2009] NSWSC 180, at [31] per Barrett J; Joe Mangraviti Pty Limited v Lumley Finance Limited (2010) NSWSC 61, at [14]. 16 It has been said in obiter dicta that it is unlikely that a Court would set aside a Statutory Demand: "… on the bare ground that the service of the demand or the commencement of winding up proceedings in consequence of it, violated an arbitration clause. The question is a little artificial, because the application of the arbitration clause is likely to arise for consideration only if there is a dispute between the parties, and once there is a genuine dispute the court will set aside the statutory demand on that ground."

Per Austin J in SMEC International Pty Limited v CEMS Engineering Inc (2001) 38 ACSR 595, at [36]. 17 On the other hand it has been said, in a slightly different context and for a slightly different purpose, that if a mediation or arbitration clause in an agreement would arguably found an application for a stay of proceedings for recovery of the alleged debt, a dispute between the parties as to whether a stay of proceedings should be granted would be a genuine dispute for the purposes of setting aside a Statutory Demand: National Telecoms Group Ltd v Bulldogs Rugby League Club Ltd [2003] NSWSC 654, at [15] per Gzell J. 18 I agree that the existence of a mediation or arbitration clause in an agreement between parties will not automatically preclude one of them from serving a Statutory Demand on the other for a debt said to arise under the agreement. This is so because the Court retains its discretion under s 459J(1)(b) as to what significance to attach to such a contractual term in the circumstances of the case. A dispute between the parties might have to be resolved by compulsory arbitration before one party can enforce the result by judgment against the other, but the Court may see the position taken by one of the disputants is so transparently untenable that it can conclude for the purposes of s 459J(1)(b) that that party is invoking the arbitration clause in bad faith. Again, the Court might give no discretionary weight under s 459J(1)(b) to a compulsory arbitration clause where a plaintiff seeking to set aside the Statutory Demand has continually frustrated the endeavours of the defendant to have the dispute resolved in accordance with the arbitration clause. 19 However, where a dispute is not resolvable by the Court virtually at a glance because the position taken by one of them is transparently untenable, or where there is no conduct making it unconscionable for one party to invoke an arbitration clause, then an express agreement that the parties' disputes must be determined by arbitration rather than by any other form of litigious proceeding should carry great discretionary weight in considering whether a Statutory Demand should be set aside under s 459J(1)(b). 20 There are often good commercial reasons for parties to agree to air their disputes only in the privacy of an arbitration. There are considerations also of savings in time and legal expense in such proceeding. If the dispute is fairly and squarely within the purview of a compulsory arbitration clause, the Court should not lightly permit one party to ignore the clause and precipitate legal proceedings by the issue of a Statutory Demand. In short, the Court should not encourage parties to breach their contracts. 21 In the present case the calculation of distributable profits of the project account under clause 12 of the Development Agreement is fairly and squarely within the provisions of clause 21.1. The position taken by the Plaintiff as to the proper calculation of distributable amounts is not transparently untenable. 22 The Plaintiff invoked the arbitration clause prior to the defendant seeking to rely upon a Statutory Demand. The Defendants have declined to engage in mediation or arbitration and resist this application. In these circumstances, even if I had not been satisfied as to the existence of a genuine dispute whether a binding variation of the Development Agreement was made, I would set aside the Statutory Demand under s 459J(1)(b) on the ground that the proper calculation of distributable profits is a matter in dispute falling fairly and squarely within the arbitration clause, and the parties should engage in arbitration before either is entitled to serve a Statutory Demand. 23 I have taken into account the Defendants' submission that the subject matter of the dispute in the present case was not fairly raised within the affidavit in support of the Originating Process. I do not accept that submission. The affidavit in support set out voluminously correspondence between the parties in which their contentions were argued back and forward. Amongst those contentions the Plaintiff raises both grounds upon which it now seeks to set aside the Statutory Demand. Accordingly, the submission fails. 24 For these reasons the Statutory Demand is set aside. 25 The Plaintiff seeks indemnity costs from commencement of proceedings. I do not think that the Defendants' conduct in the proceedings up to the date of an Offer of Compromise was so unreasonable as to justify an indemnity costs order against them. However on 8 February 2010 the Plaintiff's solicitors wrote to the Defendants' solicitors offering a compromise in terms which are more favourable than the result which the Defendants now face. The letter expressly advised that an application for indemnity costs would be made if that offer was refused. 26 It seems to me that, bearing in mind the terms of the offer and the circumstances generally as they emerged at that time, the refusal of that offer was not reasonable and the Defendants should pay the Plaintiff's costs on an indemnity basis as from 11 February 2010 onwards.

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Arris Investments Pty Ltd v Fahd & Anor

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