Atlas Financial International Ltd v Nortbale Pty Ltd; Atlas Financial International Ltd v Nortbale Pty Ltd; Atlas Financial International Ltd v John Palasty

Commonwealth Bank of Australia v Shahen Serobian [2009] NSWSC 302 3The circumstances dictate that the Court accepts one version of the events over the other. Hammerschlag J in Commonwealth Bank of Australia v Shahen Serobian at [362] set out the approach that should be taken by the Court in such circumstances as follows : "Where a party seeks to rely upon spoken words as a foundation for a cause of action, including a cause of action based on a contract, the conversation must be proved to the reasonable satisfaction of the Court which means that the Court must feel an actual persuasion of its occurrence or its existence. Moreover, in the case of contract, the Court must be persuaded that any consensus reached was capable of forming a binding contract and was intended by the parties to be legally binding. In the absence of some reliable contemporaneous record or other satisfactory corroboration, a party may face serious difficulties of proof. Such reasonable satisfaction is not a state of mind that is obtained or established independently of the nature and consequences of the fact or facts to be proved. The seriousness of an allegation made, inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question of whether the issue has been proved to the reasonable satisfaction of the Court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony, or indirect inferences: see Briginshaw v Briginshaw (1938) 60 CLR 336 at 362; Helton v Allen (1940) 63 CLR 691 at 712; Rejfek v McElroy (1965) 112 CLR 517 at 521; Watson v Foxman (1995) 49 NSWLR 315 at 319." 4With respect to his Honour, I adopt this approach in full.

Issue 1: Terms of the oral agreement 5As indicated earlier, this is the gravamen of the dispute. It concerns the exact terms of the oral agreement between the parties and ultimately, turns on which version of events the Court deems more credible. 6It is not in dispute between the parties that there was an oral agreement consisting of the following arrangements: (1)Mr Lee received 25 shares in Darling Harbour Four Points [DHFP]; (2)Mr Lee was appointed director of DHFP; (3)Mr Lee was given sole responsibility for raising finance to purchase the Darling Harbour Four Points Sheraton; and (4)Mr Lee was paid a salary and given a motor vehicle by DHFP. 7However, the resulting quid pro quo received by the defendants is in issue.

The plaintiff's case 8It is the plaintiff's case that in exchange for these benefits, the defendants received: (1)A retirement of $2.5m in debt as "brokerage"; (2)The remaining $600 000 was to remain a debt of DHFP to L & S to be supported by a 25% shareholding in DHFP; (3)Upon payment of this debt, L & S' equity in DHFP was to be reduced to 10%.

The defendants' case 9It is the defendants' case that L & S retired all the debts in exchange for a 25% and later a 51% share in DHFP. 10There is no contemporaneous written document that objectively establishes the terms of the oral agreement. It therefore remains to be determined in the witness box, with the aid of other contemporaneous documents, whose version is more credible.

The remaining claims 11At the commencement of the hearing the defendants elected not to pursue the Contracts Review Act cross-claims and indicated that there was no longer any dispute about quantum. 12The abandonment of these claims means that if the Court is to accept the plaintiff's account of the oral agreement, then barring any finding of estoppel, the defendants are liable under the guarantees and all other issues fall away. 13Alternatively, if the Court accepts the defendant's account, the plaintiff submitted that there were further issues that the Court must address before relieving the defendants of their obligations under the guarantees. 14These remaining issues are set out in brief below.

Issue 2(a): Meaning of Dusit Thani's 1 April 2009 letter 15The plaintiff submitted that even if an oral contract is found in the terms the defendants contends for, an important pre-condition of the agreement alleged by the defendants did not materialise and therefore the oral contract could not have discharged the debt. 16The substance of this argument is that a pre-condition of the agreement was that Dusit Thani promised 3 years of income and on a proper construction of Dusit's letter this did not occur.

Issue 2(b): The oral agreement only discharged the principle debt, not the debt of the guarantor's 17The plaintiff submitted that even if John Palasty's alleged conversations are accepted as having occurred, the reference in the conversations is to "L&S' debts". There is no reference in any of the alleged conversations to a discharge of the guarantors' obligations, as opposed to a discharge of the borrowers' obligations. Accordingly, if there was an oral agreement, it was only that the borrowers' debts were extinguished; ie, the debts of Nortbale, and APID/Macquarie. 18Mr Dubler pointed the Court to various authorities, including Hancock v Williams (1942) 42 SR (NSW) 252 which he submitted refuted this contention.

Issues 3 to 8: Estoppel defence 19The defendants submitted that if the Court was uncertain as to the terms of the agreement, it should find the plaintiff is estopped from asserting there was no agreement to extinguish the debt on the basis of detrimental reliance by Mr Palasty. 20The plaintiff responded by arguing: (1)If there was detriment, it was suffered by corporate entities and not Mr Palasty; (2)The detriment is purely speculative as it is uncertain if DHFP would have succeeded in purchasing the hotel; and (3)Clauses in the guarantees exclude estoppel.

Issues 9 and 10: Trade practices defence 21The defendants also alleged that L & S acted as agent for Atlas and made a misleading representation as to the discharge of the debt. 22The plaintiff denied there was an agency arrangement and if there was, claims this is not a case to exercise the Court's discretion to deny the guarantees. The agreements were commercial arrangements involving sophisticated parties. 23The remaining issues concerning the Contracts Review Act and quantum claims were not pressed.

The loans 24The basis for this dispute was three loans made by L&S to Palasty entities. The details of these loans are set out below.

Nortbale # 1 Loan 25By letter dated 14 December 2007 (PX1 49-51), L&S approved a private loan facility to Nortbale in the sum of $1,050,000. 26The letter indicated the purpose of the loan as follows: "Assist purchase investment properties: (1)109 Mort Street, Balmain NSW 2041 (109 Mort Street) (2)3/23 Thames Street, Balmain NSW 2041 (3/23 Thames Street) 27The term of the proposed loan was 2 months. 28The loan was to be secured by unlimited guarantees by Ms Judith Palasty and Mr John Palasty, and by registered second mortgages over 109 Mort Street, 3/23 Thames Street and a property at 17 Sagars Road, Dural NSW 2158 ( 17 Sagars Road). 29The loan was evidenced by a mortgage dated 19 December 2007 by Nortbale in favour of L&S Finance over 17 Sagars Road. A copy of the mortgage is at PX1 76-81. 30The terms of the mortgage (PX1 78) replicated the letter of offer, namely: Borrower: Nortbale Mortgagee: L&S Term of loan: 2 months Guarantors: Judith Palasty and John Palasty Amount of loan: $1,050,000.00 31The 17 Sagars Road mortgage also expressly included Memorandum No X004943 (PX1 146-182). 32The Nortbale # 1 loan was also evidenced by a similar second mortgage by Judith Palasty to L&S over 109 Mort Street and 3/23 Thames Street (the 109 Mort Street and 3/23 Thames Street mortgage). 33A copy of that mortgage is at PX1 82-87. 34Ms Judith Palasty and Mr John Palasty also executed a guarantee dated 19 December 2007 (PX1 89-100) whereby they undertook to guarantee to L&S the Nortbale # 1 loan, and also to indemnify L&S Finance against any loss in relation to the Nortbale # 1 loan.

Nortbale # 2 Loan 35By letter dated 22 April 2008 (PX1 120-123), L&S offered to Nortbale a further loan of $800,000. 36The purpose of the loan was as follows: "Assist completion of investment property improvements at 17 Sagars Road, Dural NSW 2158." 37The proposed loan had a term of 2 months. 38The proposed loan was to be secured by unlimited guarantees by Ms Judith Palasty, Mr John Palasty and Ms Ilona Horvat, a director of Billabong Hotels (St Marys) Pty Ltd (Billabong Hotels), together with registered mortgages over 109 Mort Street, 3/23 Thames Street, 17 Sagars Road and a property owned by Billabong Hotels at 516-524 Great Western Highway, St Marys NSW (516-524 Great Western Highway). 39The Nortbale # 2 loan is evidenced by an unregistered third mortgage dated 24 April 2008 by Nortbale in favour of L&S over 17 Sagars Road. 40The mortgage repeated the terms of the letter of offer, as follows: Borrower: Nortbale Mortgagee: L&S Term of loan: 2 months Guarantors: Judith Palasty, John Palasty, Ilona Horvat and Billabong Hotel Loan amount: $800,000 41The mortgage was signed by Ms Judith Palasty (in her capacity as a director of Nortbale, and in her personal capacity), Ilona Horvat (in her capacity as director of Billabong Hotels, and in her personal capacity), and Mr John Palasty. 42Similar mortgages were given over 109 Mort Street and 3/23 Thames Street (PX1 183-188) and over 516-524 Great Western Highway (PX1 189-194). 43Ms Judith Palasty, Mr John Palasty, Ms Ilona Horvat and Billabong Hotel also signed a guarantee dated 24 April 2008 (PX1 195-212) guaranteeing the Nortbale # 2 loan, and indemnifying L&S Finance in relation to loss caused in relation to it. 44The guarantee was in the same terms as the guarantee for the Nortbale #1 loan.

The APID/Macquarie loan 45By letter dated 29 October 2008 (PX1 313-316) L&S offered a facility of $2,100,000 to APID/Macquarie. 46The term of the loan was 6 months. 47The APID/Macquarie loan was to be guaranteed by John Palasty and Mycorp Projects Pty Ltd (a company under the control of John Palasty). 48The APID/Macquarie Arcade loan was to be secured by an unlimited guarantee by John Palasty, registered third mortgages over property located at 22-24 Hunter Street, Parramatta (22-24 Hunter Street), 180 Hume Street, Goulburn (180 Hume Street) and 302 Hume Street, Goulburn (302 Hume Street), together with a fixed and floating charge over Mycorp Projects. 49The APID/Macquarie Arcade loan is evidenced by a Loan Agreement dated 31 October 2008 ( the APID/Macquarie Loan Agreement ) (PX1 329-351). 50The APID/Macquarie Arcade Loan Agreement provides as follows (PX1 330-331): Borrower: APID/ Macquarie Guarantor: John Palasty Loan amount: $2.1 million Term of loan: 6 months Purpose of facility: Refinance current loans Security: Third mortgages over 22-24 Hunter Street, 180 Hume Street and 134 Lillkar Road, Goulburn, together with a fixed and floating charge over the assets and undertakings of Mycorp Projects, and a guarantee an indemnity from John Palasty. 51John Palasty also executed a document titled Deed of Guarantee and Indemnity dated 31 October 2008 ( the APID/Macquarie Guarantee and Indemnity ), a copy of which is at PX1 352-389, in which John Palasty guaranteed to L&S the APID/Macquarie loan, and indemnified L&S in relation to loss in relation thereto. 52The APID/Macquarie loan was drawn down on 31 October 2008 (PX1 320), and in large measure re-financed previous loans made to APID/Macquarie.

Evidence on the critical issue - The terms of the oral agreement 53Counsel accepted that the critical issue in this case is the terms of the oral agreement. I have already set out in detail the differences between the witnesses' accounts and do not intend to do so again. However, at the most basic level I understand the difference to be that Mr Palasty says that in exchange for equity in DHFP, L & S forgave all of his companies' debts. Conversely Mr Lee contends that he was given equity in DHFP only for the purposes of securing the outstanding debt to L & S. This debt was not extinguished but was to be repaid through brokerage and commission at which point his equity was to be reduced from 25% to 10%. Due to the importance of this issue, it is appropriate to rule on it first.

The critical documents 54The plaintiff relied on two critical contemporaneous documents, which it submitted would assist the Court in assessing the truthfulness of the witnesses' competing evidence. They were: (1)The 29 June email exchange; and (2)The September 2009 proposal. 55For the reasons set out below, the September 2009 proposal is inadmissible and the Court's consideration was constrained to only the June 29 email exchange.

The 29 June 2009 email exchange 56Despite no written evidence of the actual terms agreed between Mr Palasty and Mr Lee, it was accepted that there was an agreement sometime between February and May 2009. Therefore the meaning of the June 2009 email exchange between Mr Palasty and Mr Lee (an exchange which immediately followed the agreement) was an area of particular contention between counsel. The relevant emails are as follows: From: John Date: Mon, 29 Jun 2009 14:29:51 + 1000 To: dml1@bigpond.net.au Subject: RE: Hi Dean What is going on! Nothing has changed where is the equity changed it is all coming from finance or are you tipping in the extra $20 - $30 M. There is substantial cash flow associated with the income let alone the large fees you all get on your side. Why at the last minute do you wish to change as nothing has changed? I will not change any share structure and am disappointed I have spend at least $100,000 plus let alone the time so far since October last year on things we have all agreed on and note it was me that had put the transaction together With all Via Darling Harbour Four Points Pty Ltd Please confirm we are still proceeding with the transaction as is Please ensure that only you and Collin are in attendance and I will have myself and Tony there I suggest we meet at 2.15pm downstairs. John From:dml1@bigpond.net.au Sent: Monday, 29 June 2009 2:32PM To: John Subject: Re John, It's a pity you can't see anything form a different prospective This deal was originally put to me at $170M purchase price that was LVR of less than 80% against val $224M You also said via email that you had agreed to terms and that you were under exclusivity agreement Due to there being no such exclusivity agreement the PP has increased by $30M, which means the project has to be funded at 100% finance There is no equity left AS for the substantial income/s I don't call $200k per year substantial enough to justify a loan of $200M plus vendor finance of $20M That is not a very good return The substantial commissions are all going to pay off APID and Mac debts!!! Please demonstrate the benefit in this transaction to me And yes our solicitors will be attending Dean

From: John Date: Mon, 29 Jun 2009 16:11:42 +1000 To: dml1@bigpond.net.au Subject: RE: Please provide a copy of the cash flows showing $00,000 so as I can pass it to Tony for his review! It is GPT that do not want everyone to attend do not forget they are the Vendors and I am not going to blow the deal no By not doing what they want! In respect to paying of the debts of APID and MAC ARCADE I will get Derek to draft up a deed that this is happening You also said that all you wanted was to get back the money on these and then you will no longer be a party yet you now want majority I agree with you that it is 100% finance exactly as per my previous email I am in a meeting and will ring latter Thanks John 57Mr Dubler submitted that the meaning of these emails is ambiguous, in particular he argued that "it is splitting at hairs to try and tease from a casual email" the true meaning of the words "In respect to paying of the debts of APID and MAC ARCADE I will get Derek to draft up a deed that this is happening" 58Mr Neal countered that when the emails are considered as a whole, there meaning is plain. I agree with this submission. 59Mr Lee's email clearly establishes his view that a debt is outstanding: "As for the substantial income/s I don't call $200k per year substantial enough to justify a loan of $200M plus vendor finance of $20M That is not a very good return The substantial commissions are all going to pay off APID and Mac debts!!!" 60Mr Palasty replied to this claim with the following: " In respect to paying of the debts of APID and MAC ARCADE I will get Derek to draft up a deed that this is happening You also said that all you wanted was to get back the money on these and then you will no longer be a party yet you now want majority" 61Rather than deny the debt was outstanding or remind Mr Lee of the terms of the agreement, which on his evidence extinguished the debt, Mr Palasty admitted that there was a debt owing. Read as a whole, there is no ambiguity as to whose version of events is truthful and supported by the evidence. 62This view was only reinforced by Mr Neal's cross examination of Mr Palasty: Q. Can I just please ask you to look at the bottom email, do you accept that's sent on 29 June 2009? A. Yes. Q. You see there Mr Palasty, three lines up from the bottom "These substantial commissions are all going to pay off APID and Mac debts". Do you say that? A. Yes. Q. And what you say in response is "In respect to paying off the debts of APID and Mac Arcade, I will get Derrick to draft up a deed that this is happening". Do you see that? A. Yes. Q. Now Derrick was Derrick Zeman your solicitor, correct? A. That's correct, yes. Q. And what you were saying in this email is that you would get Derrick to draft up a deed that the debts of APID and Mac Arcade would be paid off, correct? A. No that's not correct. That's not what I was saying there. Q. Isn't that email entirely inconsistent with your proposition that in May 2009 you had an alleged oral agreement whereby the Mac Arcade APID debts were already extinguished? A. No. Look, that's not what that email - that's, you know in hindsight I should have maybe worded it slightly different but that's not what that email says. Q. You understood Mr Lee's reference in that email to the proposition that the debts were going to be repaid in the future if and when the commissions were earned. That was how you understood it, wasn't it? A. It was - yes but it was up to Mr Lee how he wanted to deal with it. I had no control on that. Q. So you accept that you understood what Mr Lee was putting to you in this email was that in the event that the Darling Harbour Four Points project went ahead, the substantial commissions to be earned in the future were to pay off the APID and Macquarie debts. That's how you understood it, wasn't it? A. Yes. Q. And you accept that that is entirely inconsistent with your proposition that in May 2009 you had an oral agreement with Mr Lee extinguishing the APID and Macquarie debts, isn't it? A. No. Q. Why then in your email the next day, didn't you write to Mr Lee saying "Look, what are you talking about the commissions being used to pay off the debts, they've already been discharged", why didn't you say that? A. No. Q. Pardon? A. Sorry? Q. Why didn't you say in your email the next day "That's not the position Mr Lee-- A. I'd-- Q. "We have already discharged those debts"? A. I didn't need to. He knew that, he knew that and he knew that and those debts were discharged at an earlier stage. Q. Why didn't you tell him that in your email? A. Well, I didn't need to, I don't feel

The September 2009 Proposal 63The second document relied on by the plaintiff was the September 2009 proposal. It was headed "Without prejudice" and accepted on a voir dire basis. 64The salient parts of the document read: Proposal This document is private and confidential and is for the use and reference only of L&S Investments Pty Ltd. This is a proposal presented by john Palasty ("Palasty") to L&S Investments Pty Ltd ("L&S"). This proposal is made without prejudice to the rights of either party and is for the purposes of settling all existing claims, disputes or differences and for the conduct of their future relationship. Brief History... Proposal Broadly the proposal is that: (1)Palasty and Mycorp settle all outstanding claims and disputes with Suncorp and L&S. (2)L&S make available further funds for the payment to Suncorp of sufficient funds to sell or transfer 180 to a newly created Special Purpose vehicle ("SPV1") for the continuation of its development. SPV1 which will be 100% owned and controlled by L&S will own 180. It is anticipated that the price to be paid by L&S to Suncorp is $2.2m. (4)SPV1 will enter into a building contract with Mycorp identical to that one dated 18 June 2008 referred to above. (5)L&S will pay the sum of $800,000.00 to Suncorp in reduction of the indebtedness secured by the mortgage in favour of Suncorp over 302. (6)Suncorp will sell or transfer 302 to another Special Purpose Vehicle ("SPV2") which will be 100% owned and controlled by Palasty. The purchase price for 302 will be the then outstanding balance owing to Suncorp less the payment of $800,000.00. If this is not reflected as the purchase price it will be the amount to be secured to Suncorp by way of a mortgage over 302. (7)Palasty will (over 302) grant to Suncorp a first mortgage for the balance then owing to Suncorp by APID and a second mortgage to L&S for the performance by Mycorp of its obligations under the building contract. (8)L&S will discharge this mortgage (over 302) on the payment of $6m as envisaged in this proposal. (9)L&S and Mycorp will enter into what the parties have referred to as a "Waterfall Scenario" in terms of which monies will be paid to certain parties on the happening of certain events: From the refinance or sale of the development upon its completion the following payments are to be made: (a)The repayment of all construction finance facilities to the financier, (b)$3m to L&S being the refund of their investment under this proposal, (c)$3m to L&S being the premium payable to L&S in consideration for their arranging of finance for the completion of the development, (d)The balance to John Palasty. Undertakings: (10)Mycorp will undertake to complete the building contract for the contract sum and Mycorp's obligations will be guaranteed by Palasty. (11)L&S undertake to procure the construction finance for the completion of the development of 180. (12)L&S undertake to release all the securities imposed upon any property of Palasty or any person related to Palasty upon the completion of the payments referred to in 8(b) and (c) above and Palasty in turn will release L&S from all claims suits etc. 65The plaintiff submitted that this document directly contradicts Mr Palasty's evidence, as the document was drafted "for the purposes of settling all existing claims, disputes or differences and for the conduct of their future relationship". Mr Neal argued that if it had already been agreed that the debts were retired, there would have been no claims, disputes or differences to settle.

The voir dire issue 66Shortly after Mr Neal commenced his opening address and introduced the proposal, Mr Dubler took an objection under section 131(1) of the Evidence Act 1995 (NSW) to its admissibility. 67The parties accepted that the most efficient way of dealing with this issue was by way of voir dire. I indicated that the parties would be given an opportunity in final address to revegetate the matter and that a determination would be made in the final judgement. 68The plaintiff accepted that, prima facie, the proposal was excluded under section 131(1) of the Evidence Act 1995 (NSW) as evidence of either: (a)a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute, or (b)a document (whether delivered or not) that has been prepared in connection with an attempt to negotiate a settlement of a dispute 69However, the plaintiff relied on subsections 2(e), (f) and (g) which renders the exclusion in s131 (1) inoperative where: (e) The evidence tends to contradict or to qualify evidence that has already been admitted about the course of an attempt to settle the dispute; (f) The proceeding in which it is sought to adduce the evidence is a proceeding to enforce an agreement between the persons in dispute to settle the dispute, would a proceeding in which the making of such an agreement is in issue (g) Evidence that has been adduced in the proceeding, or an inference from evidence that has been adduced in the proceeding, is likely to mislead the court unless evidence of the communication or document is adduced to contradict all to qualify that evidence.

Subsection 2(e) 70There is little if any relevant case law that expands upon the meaning of subsection 2(e). Odgers, S. Uniform Evidence Law (9 th ed) is notably silent on this subsection. In these circumstances, it is for this Court to give effect to the plain meaning of the words of the provision. 71Subsection (2)(e) reads, subsection (1) does not apply if: the evidence tends to contradict or to qualify evidence that has already been admitted about the course of an attempt to settle the dispute 72The purpose for which the plaintiff sought to rely on the proposal was not to contradict or qualify evidence "about the course of an attempt to settle the dispute", but rather was intended to contradict Mr Palasty's version of the final terms of the dispute. In these circumstances, plainly the subsection does not apply.

Subsection (2)(f) 73Section 131(2)(f) creates two exceptions to the general exclusionary rule in s131 (1), they are: (e) the proceeding in which it is sought to adduce the evidence is a proceeding to enforce an agreement between the persons in dispute to settle the dispute; or (f) the proceeding in which it is sought to adduce the evidence is a proceeding in which the making of an agreement between persons in dispute to settle the dispute is in issue. 74In SWV Ltd v Spiroc Pty Ltd [2006] NSWSC 668 Barrett J provided useful guidance in interpreting this subsection. 75That matter involved a dispute over whether a binding agreement was made through the course of a series of correspondence. The plaintiff sought to admit into evidence not only the final letters but also preliminary correspondence. 76At [42] his Honour explained the effect of this provision: "Section 131(2)(f), referring to "an agreement between the persons in dispute to settle the dispute", has in contemplation, obviously enough, the dispute referred to in s 131(1) and the persons who are the parties to that dispute. The link between, on the one hand, ss 131(1)(a) and 131(1)(b) and, on the other, and s 131(2)(f) is the "dispute", so that s 131(2)(f) is concerned with an acknowledged or alleged agreement representing success (or alleged success) in an attempt to settle that dispute" 77Barrett J continued at [44]: the particular "dispute" and its settlement are at the heart of the overall "attempt" or each separate "attempt", with the result that, where there are proceedings to enforce (or as to the making of) an agreement to settle that "dispute", the section allows the introduction of evidence of all or any communications made in the course of any one or more of such attempts as have been made to settle that dispute. 78Unlike SWV Ltd v Spiroc Pty Ltd , this matter did not involve a dispute over whether a contract exists, but rather its terms. Further, the evidence sought to be adduced was not evidence to establish the course of the negotiation, but rather was evidence to establish the implausibility of Mr Palasty's evidence. The proposal is not capable of shedding light on either of the exceptions listed in a or b above, namely whether an agreement exists or whether it should be enforced. It was merely for the purpose of undermining Mr Palasty's evidence. This is not the proper scope of this subsection. 79My view in this regard accords with that expressed by Tamberlin J in KC & Ors v Shiley Inc & Anor [1997] FCA 617 who in dealing with whether access should be granted to a series of documents that established liability for costs arising out of a settlement, his Honour said: In my view par (f) does not apply because the making of the settlement agreement is not in issue in the present proceedings. There is an agreement. It has been made. There is no issue on this question.

Subsection 2(g) 80Subsection 2(g) reads, subsection (1) does not apply if: evidence that has been adduced in the proceeding, or an inference from evidence that has been adduced in the proceeding, is likely to mislead the court unless evidence of the communication or document is adduced to contradict or to qualify that evidence 81As I indicated to the parties during the hearing, this exception has been the subject of much judicial discussion, see: Lohar Corp Pty Ltd v Dibu Pty Ltd (1976) 1 BPR 9177, Pitts v Adney [1961] NSWR 535 and McFadden v Snow [1952] 69 WN (NSW) 8. 82The bounds of the exception are difficult to define, as any ruling inevitably results in the Court having to balance two competing public policy aims. This was set out clearly by Walsh J in Pitts v Adney (1961) 78 WN (NSW) 866 at 889: "it is of importance that the rule protecting from disclosure, discussions taking place in an endeavour to put an end to pending litigation should, in general, be applied. But it is, after all, a rule based upon public policy. It cannot be permitted to put a party into the position of being able to cause a Court to be deceived as to the facts..." 83In this regard, Bromberg J's comments in Barrett Property Group Pty Ltd v Dennis Family Homes Pty Ltd (No 2) [2011] FCA 276 are of assistance. That decision involved a dispute over the admissibility of communications made between the parties concerning an attempt to resolve a copyright dispute. The applicants contended, in much the same way as the present case, that the communications proved an alternative course of events to that led in evidence and on this basis the correspondence should be admissible. 84Addressing this question Bromberg J said at [45] -[47]: "It is apparent that the applicants seek to use the disputed evidence to show that agents of the respondent have made prior inconsistent statements to those to be relied upon at trial. The applicants contend that without reference to the disputed evidence the Court will likely be misled into accepting the accounts as to the derivation of the Grange designs given by Ms Wilson or Mr Rowley. The difficulty for the applicants is that the construction of s 131(2)(g) contended for by them pays insufficient regard to the context in which the words utilised in s 131(2)(g) are found and fails to properly take into account the origin of the provision and its intended purpose. It is of particular importance in the context of a qualification or exception, such as that contained in s 131(2)(g), to identify the mischief, which the provision is concerned to address. Section 131(2)(g) identifies a number of limited qualifications to an exclusionary rule which protects privileged settlement communications from being used at trial. In that context, paragraph (g) should be understood to be dealing with the non-applicability of the privilege or protection provided by s 131(1) because, unless that is done, the court is likely to be mislead. That suggests that paragraph (g) is addressing the need to ensure that reliance upon the privilege or protection is not the source of or reason for the court being misled. In other words, the privilege afforded by s 131(1) is not to be abused by allowing a party that has adduced evidence to use the privilege to hide the truth and mislead the court. That is the mischief to which the paragraph is directed. 85Critically at [50] - [53] his Honour explains that: "As is apparent from that passage, the limitation upon the exclusionary privilege at common law is based upon a causal connection between a party's reliance upon the privilege and the court being misled. In Austotel Management v Jamieson (1995) 57 FCR 411, Burchett J at 415-416 referred to the principle in Pitts v Adney and to its affirmation by the Court of Appeal of New South Wales in Lohar Corporation Pty Ltd v Dibu Pty Ltd (1976) [1] BPR 97,00014. In Brown v Commissioner of Taxation [2001] FCA 596; (2001) 187 ALR 714, Emmett J explained that the source of exceptions to the general law exclusionary principle recognised under the general law are concerned with reprehensible behaviour and impropriety. His Honour observed that it is appropriate to consider the exceptions listed in s 131(2) in the light of the general law: at [183]. Emmett J also acknowledged the link between the principle in Pitts v Adney and s 131(2)(g) in the following passage at [184]-[185]: I consider that s 131(2)(g) is designed to deal with the sort of circumstances that arose in Pitts v Adney (1961) 78 WN (NSW) 886. Evidence of a "without prejudice" communication was admitted in that case in order to prove the fact of and the nature of the communication. It was not tendered in order to contradict evidence as to the matters in issue, or as an admission. It is not appropriate to attempt an exhaustive exposition of the effect of s 131(2)(g). However, I consider that it will not be attracted simply because evidence to which s 131(1) applies contradicts or qualifies evidence that has already been adduced. Section 131(2)(g) will apply where the court would be likely to be misled as to the existence or contents of an excluded communication or document, where those matters are in issue in the proceeding. The construction of s 131(2)(g) applied by Emmett J in Brown was adopted by Hamilton J in Bloss Holdings Pty Ltd v Brackley Industries Pty Ltd [2005] NSWSC 756. In Korean Airlines , Jacobson J referred to Brown at [78] without apparent dissent. 86In this case, there is no justification for departing from Bromberg J's position that section 131(2)(g) is not attracted simply because evidence to which section 131(1) applies, contradicts or qualifies evidence that has already been adduced. The provision is only attracted where the exclusionary rule would operate to allow a party, which has adduced evidence, to use the exclusionary rule as an instrument for misleading the Court. In this case, the exclusionary rule is not being employed as a tool to mislead the Court; the exclusionary rule is properly being relied upon to protect privileged communication. This privilege should not be displaced simply because the communication contains evidence which may contradict or qualify evidence that has otherwise been adduced. Should this not be the case, parties may be hesitant to make any admissions or concessions in settlement negotiations less it prejudice them in litigation. This would clearly undermine the policy objectives of the "without prejudice" rule. 87Finally, I note comments made by Bromberg J at [54] that a number of New South Wales decisions have adopted a broader construction of s131(2)(g). On reviewing the case law indicated by his Honour, I can find no persuasive statement that s131(2)(g) should be given a broader interpretation than reached in this case. It is true that in the decisions cited by his Honour that privilege has been waived, but the reasons upon which these decisions were found do not undermine the approach taken in this case. 88In these circumstances, the proposal sought to be tendered as part of Exhibit # Px1 is inadmissible and is not relied upon as part of the Court's reasons for judgment.

Mr Palasty's credibility 89Aside from the Court's findings on the critical issue, in my view Mr Palasty was generally an untruthful witness whose oral evidence contradicted the limited documentary evidence available. 90He swore two affidavits in these proceedings. The first was dated 9 March 2011 and the second 12 July 2011. 91The thrust of his evidence as set out in his affidavits is as follows: (1)Between 6 February and May 2009, John Palasty says he had a conversation with Dean Lee to the following effect: Dean Lee: "You currently owe [the figure owed at the time in respect of all of the borrowers in the proceedings before this Court was mentioned by Mr Lee which was in the order of $3.1 million]. I am going to speak to my South African investors to see if they are interested in forgiving this debt in order to take shares in your project. I have investors and contacts who can supply the necessary equity. What if I am given 25% equity in your Sheraton project in return for forgiving the debts?" John Palasty: "That might be possible. Why don't you see if your lenders are willing to agree to that proposal?" (2)John Palasty alleges a further conversation with Mr Lee to the following effect: Dean Lee: "I have spoken to Strauss my partner in L&S [Mr Lee's fellow investor from South Africa in L&S]. We can confirm that we are willing to retire all the L&S debts of over $3,000,000 in return for a 25% shareholding in DHFP. But this is subject to you confirming that Dusit will guarantee the income by way of a formal Letter of Offer and them giving us guarantees or letters of credit. This needs to be around $16 million per year over 3 years, according to my numbers. Once that happens, the deal is easily fundable, and if it needs further equity, Strauss and I have agreed that we will put more money in." John Palasty: "This is acceptable. I agree." (3)In para 14 of his affidavit sworn 9 March 2011, John Palasty also deposes to a further conversation about this time as follows: Dean Lee: "As part of the deal to retire these debts, you know I have paid some interest on your behalf. I would like you to renovate my backyard, swimming pool, driveways and verandahs." John Palasty: "All right, I'm prepared to do that. I'll get Ahmed at my office in Mycorp to project manage this process and he will organise the tradesmen." (4)Dean Lee denies these conversations. He says there were conversations to the effect that if the Sheraton purchase was completed, commissions from the transaction could be used to pay off the L & S debts. (5)The alleged oral agreement was not committed to writing, nor are there any contemporaneous documents between February and May 2009 supporting it. 92For the reasons given above, this account was not accepted. However, other important issues of credit arose in cross-examination that warrant discussion.

Mr Palasty's failure to discover 93In cross-examination I formed the impression that Mr Palasty took a selective approach to his discovery obligations. Mr Neal emphasised this in relation to two important documents, which were clearly contrary to Mr Palasty's case. These documents related to the 29 June email exchange and documents concerning the timing of the landscaping at Mr Lee's house. Mr Palasty's explanation for his failure to discover these documents was unconvincing, particularly since he discovered a plethora of other material. Q. Now weren't you concerned, Mr Palasty, at the time you swore this affidavit to ensure that it was correct in every particular? A. Yes, that's correct. Q. Did you turn your mind to whether you may have had in your possession documents that related to the renovations on Mr Lee's house? A. Yes, I was searching around for documents all over the place. Q. You would have regarded them as important documents, wouldn't you? A. Yes. Q. In the course of your usual practice you would have had hard copies of those documents. Correct? A. Yes. Q. Can I ask you, please to turn back to the first volume in the court book. HIS HONOUR: Which? NEAL: That's court book 1, your Honour. Q. Page 305, please, Mr Palasty. You have that, Mr Palasty? A. Yes, I do. Q. Can I just ask you this: you knew, didn't you, when you swore your first affidavit that it was important for your case that the landscaping works took place after February 2009? Correct? A. Yes. Q. Now, do you see the document at page 305? A. Yes. Q. That's a quote that relates to the landscaping works to be carried out at xx xxxxx xxxxxx, Concord. Correct? A. Yes. Q. That's Mr Lee's address? A. Yes. Q. That was sent by RJD Brothers to you at MiCorp Projects? A. To Ahmed, I'd say, yes, that's correct. Yes. Q. It's dated 21 September 2008, isn't it? A. Yes. Q. Mr Palasty, you would have had a hard copy of that document in your possession when you came to give discovery, wouldn't you? A. No. Q. Why? A. Because Michael was in - again, I've explained that position: I don't have any documents. I handed everything over to receivers and liquidators as I'm obliged to do. Mr Ziman has other documents there. Whatever I found I produced. Q. But, Mr Palasty, you did give discovery of a number of emails, for example, that you said were in hard copy? A. Yes. Q. And they were signed by John from MiCorp, weren't they? A. Yes. Q. So if you had those emails, why wouldn't have had a document in your possession from Michael - this document that I'm referring you to at page 305? How do you explain that? A. Look, again, I didn't have any of those documents. They all - I had some that I found looking at home. I'd moved houses twice. I've handed documents over to receivers, to liquidators, to all over the place. I've given over documents that I had. Q. Do you accept that this document is adverse to your interests in this case? A. No, I - I don't. Q. Don't you agree that the issue about when the landscaping works took place was important? A. Look, it was important. The first time I saw this document was in the bundle provided by Holman Webb. Q. But this document indicates that there was a quote given for this work in September 2008, doesn't it? A. Yes. Q. That document to your knowledge as you sit there in the witness box is a document that was contrary to your interests in this litigation, wasn't it? A. I don't see where they were contrary to my interests but no, they weren't contrary to my interests. Q. The first thing is does is falsify the evidence that you gave in your first affidavit, doesn't it? A. I corrected that with my new affidavit. I found these documents and I then sat down and tried to recall everything in my mind; everything. Q. What enquiries did you make when you came to swear your first affidavit about the timing of when the landscaping works were carried out? A. There's nothing I could enquire about; I had no - again, I had no documents, there was no one I can enquire about. Q. Mr Palasty, please listen to my question: what enquiries did you make to satisfy yourself about the timing of the landscaping works? A. I don't know who I could have enquired about, other than - other than - I don't know, I - it was rushed. The case was rushed towards the end. I made no enquiries on that and I don't know what my solicitors made enquiries on but-- Q. You expected your solicitors to make enquiries, did you? A. Look, I made no enquiries on it. Q. Did you make any enquiries of Ahmed who was the fellow who worked for you at MiCorp-- A. No. No, I've tried to track down Ahmed; I did try to track down Ahmed in this.

The building issue 94Another related issue was Mr Palasty's false evidence in his first affidavit that part of the agreement with L & S involved building renovations to Mr Lee's house. As indicated by Mr Neal, the documentary evidence, which should have been available to Mr Palasty at the time of drafting his affidavit, indicates that the building works took place well before the oral agreement was said to have materialised. This was a point accepted by Mr Palasty and later resulted in a correction in his second affidavit. 95Of its own this error is not sufficient to undermine the witnesses' credibility. However, when considered in light of the other omissions, this mistake furthers the Court's reluctance to accept Mr Palasty's evidence as accurate and reliable. It is difficult for the Court to accept that Mr Palasty could honestly assert that renovations formed part of the terms agreed between he and Mr Lee when they were undertaken before any agreement was in the contemplation of either party.

Mr Palasty's involvement with GPT 96Another claim made in paragraph 48(e) of the defendant's first affidavit was that in reliance on the oral agreement, Mr Palasty acted to his detriment by declining to be actively involved in furthering the relationship with GPT to ensure that Darling Harbour Four Points became the purchaser. In light of the numerous emails sent by Mr Palasty to Mr Whitaker concerning the sale of the hotel, including those of 26 June 2009 and 10 July 2009 this claim is untenable. 97Other issues raised by the plaintiff concerning Mr Palasty's credibility include : (1)His evidence was unreliable and inherently unlikely, for example: (a)he could not recall that in October 2008 his companies borrowed $2.1 million from L & S; (b)he would not accept that by February 2009, one of the reasons why he was continually meeting Mr Lee was because his companies were indebted to L & S for about $3.1 million yet soon after in the cross examination he effectively admitted as much; (c)he was absolutely 100% certain that the alleged conversations took place yet could not say where the conversations took place or at what time of the day; (d)he was 'not necessarily' concerned to make sure that matters of importance in relation to his relationship with L & S were recorded in writing; (e)he would only write to Mr Lee when Mr Lee frustrated him; (f)he initially said that the conversation in para 13 of his first affidavit took place in around the latter part of February 2009; but (after a lengthy pause) then said it took place between February and May 2009; (g)he never wrote asking for the mortgages to be discharged, or had any discussions with Mr Lee about discharging them, despite the fact that, on his version, Mr Lee had told him a deed was being prepared, which never eventuated; (2)He refused to make basic concessions, for example that: (a)a prudent businessman would have taken a file note of the alleged conversations, or confirmed them in an email; (b)the important emails at PX1 633-634 were inconsistent with the alleged conversations; (c)the emails at PX1 633-634 were hurtful to his case; (d)the documents about the timing of the landscaping works (see eg PX1 305) were hurtful to his case. (3)He at times gave non-responsive answers, eg, about enquiries he made in relation to documents for the purposes of discovery. 98For these reasons, the Court does not accept Mr Palasty as a reliable and accurate witness. The limited documentary evidence in this case contradicts much of the witnesses' oral evidence. From the documentary evidence put before the witness, the clear inference to be drawn is that there was no oral agreement in the terms propounded by Mr Palasty and the other defendants.

The evidence of Mr Lee 99In contrast, Mr Lee presented as a man who was willing to give accurate and reliable evidence, even when such evidence cast him in an unfavourable light. In my view the most Mr Dubler was able to prove was that Mr Lee put his personal interests ahead of investors in L & S. While this evidence goes to his overall credit, it does not undermine the reliability of his evidence on the all important question of the terms of the oral agreement. Mr Lee's version is the only one supported by the documentary evidence. 100This is not to belittle the seriousness of the conflicts between Mr Lee and his company. The conflict was particularly severe in reference to Mr Lee paying for his personal renovations out of company funds. This was a point laboured in cross examination: Q. Well could I suggest the answer's at least this, Mr Lee, that you did use L & S to pay your personal creditors but you accounted for it by putting monies back into L & S, is that what you say? A. Yes, that. Q. And could it be that in fact it was part of the loan to APID at that time? A. Some of it was. Q. Could this have been part of it? A. It could've been. Q. Could I take you to page 320 - and I think you'll have to go back to volume 1? Just close up volume 2 for the moment. A. Yes. Q. In the middle of the page do you see the references to RJD Brothers $33,000? A. Yes. Q. That was for the renovations of your home? A. Yes. Q. Did you tell your investors that $33,000 of their money was going to renovate your home? A. No. Q. Don't you think you owed it to them to tell them that? A. No. Q. Don't you think in fact you should be repaying the lenders that amount of money because it went to your benefit, not Mr Palasty's companies? A. No. Q. Did you tell your co-director, Mr Tiann Strauss, that $33,000 of the money lent by L & S went to renovate your home? A. No. Q. Don't you think you ought to have told him that? A. I had a discussion with him that Mr Palasty was renovating my house. Q. Don't you think you should have told him that $33,000 of the loan from L & S went to renovate your house? A. No. Q. Didn't you stop to think, Mr Lee, so far as your relationship with your lenders, that having your home renovated by Mr Palasty's companies and lending him the money to do so was compromising your position? A. No. 101Other serious questions of character were raised in relation to Mr Lee's purposeful breach of contract by allowing Atlas to be trumped by other creditors on mortgages to Mr Palasty. It was suggested that the majority of these conflicts were driven by Mr Lee's admiration for Mr Palasty and his desire to get a "piece of the action". This was an assertion denied by Mr Lee. 102Whatever the root causes of the conflicts, Mr Lee was candid about them and did not attempt to resile or downplay their seriousness. This honesty was notable throughout the entirety of Mr Lee's evidence. Thus the conflict issue must be taken into consideration in the Court's overall assessment of Mr Lee's character, but on the important question of whose evidence in relation to the oral agreement is more credible, the documentary evidence and responses of Mr Lee in cross examination, strongly support Mr Lee's version of the facts. In no area was Mr Dubler able to highlight any serious inconsistencies in Mr Lee's evidence. Indeed, the cross examination only served to further reinforce the apparent truthfulness of Mr Lee's evidence. 103Ultimately, Mr Lee's evidence about the matters of importance in the case, namely: (1)his denial of the conversations alleged by Mr Palasty; (2)his evidence that the loans were to be repaid from commissions from the purchase of the Sheraton, if the transaction went ahead; (3)his explanation as to how L & S acquired the 25% (and later 51%) shareholding in DHFP: was not undermined despite detailed cross-examination, and is consistent with the contemporaneous documents. 104At the end of the day the e-mail exchange put by Mr Neal in cross-examining Mr Palasty satisfies the Court that the documentary evidence contained in the e-mails is only consistent with Mr Lee's evidence.

Outstanding matters 105The two final matters that must be addressed are the estoppel and trade practices defences. 106As indicated by the plaintiff, if its version of the oral agreement is accepted, then these defences fall away. I accept this submission. Finding for the plaintiff on the critical issue necessarily means the Court does not accept the defendant's contentions that L & S to represented to Mr Palasty that the debt was forgiven.

Orders 107The Court orders that: (1)The defendants are liable to pay the plaintiff the amounts claimed under the loans in accordance with their obligations as guarantors; (2)The parties are to bring in short minutes of order to reflect these reasons at which time they may address on costs

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 August 2011