Judgment
1This litigation arises out of a failed joint venture to develop land at Mount Panorama Raceway in Bathurst, New South Wales (the Land). It was hoped that the completed project, a five star hotel complex with conference, sporting and recreational facilities (the Project), would be attractive to motor racing enthusiasts with an interest in races such as the Bathurst 1000. The Project was planned to coincide with a $24 million upgrade of the Mount Panorama Raceway. However the joint venture failed (although the Project was completed by others) and one of the financiers called upon the joint venturers and their spouses under their personal guarantees of a Loan Facility. One of the guarantors paid out the loan and took an assignment of the Loan Facility and called upon the other guarantors to pay their proportion of the debt. These proceedings relate to the respective entitlements of the co-guarantors and whether the plaintiffs are entitled to contribution from the other guarantors.
2The joint venture was between a group of engineers and a group of architects who established and utilised corporate vehicles to progress the Project and to obtain finance from various sources to fund the Project. There were four engineers in the joint venture, Brian Gordon Parker, the first plaintiff, Orazio Alessi, the first defendant, Michael Donald Stephen Watts, the fourth defendant and Andrew Glen Wells, the fifth defendant. The engineers practiced together in the company Reverse Engineering Pty Ltd (RE). There were two architects in the joint venture, the late Laurence Chiarella, whose Estate is the third defendant, and Stephen Robert Fayle, the second defendant, who together practised in the company Woodhouse & Danks Pty Ltd (W&D). All the engineers and architects and their spouses provided their properties as securities for certain loans for the Project and they each provided personal guarantees in respect of those loans.
3Mr Parker and his wife, Jodie Ann Parker, the second plaintiff, seek a declaration that Mr Fayle's wife, Robyn Anne Fayle, the ninth defendant, as co-surety, is obliged to account to them for all sums received by her (pursuant to the assignment to her of the rights, title and interests of the lender of certain funds for the Project) from the enforcement of the securities. The plaintiffs also seek orders for the taking of accounts and payment of sums found to be due to them by Mrs Fayle. The plaintiffs bring a further and alternative claim against Mr and Mrs Fayle, the estate of the late Mr Chiarella and his widow, Elizabeth Mary Chiarella, the tenth defendant, as co-sureties, for contribution as may be found due by them on the taking of accounts.
4By way of defence to the plaintiffs' claims Mr and Mrs Fayle claim that when assessing contribution between co-sureties under the guarantees two matters need to be taken into account. The first is that approximately $600,000 of the funds advanced under the Loan Facility was used to the exclusive benefit of the engineers to pay off a pre-existing overdraft to another financier. There is no issue that such amount was used in paying off that overdraft. There is an issue as to whether that payment was to the exclusive benefit of the engineers. The second matter is a claim that in October 2005, prior to the entry into the Loan Facility, the engineers and the architects agreed that: (1) (subject to (2)) the burden of the debt would be shared equally, such that the engineers would be jointly and severally liable for their share to the architects and vice versa; and (2) to the extent that the funds advanced were used to the exclusive benefit of the engineers, the engineers would be jointly and severally liable to the architects for the repayment of that part of the debt.
5By Further Amended Cross Claim Mrs Fayle seeks entry of judgment against Mr Parker in the amount of $855,757.26 representing the total amount of the debt paid by Mrs Fayle to the lender for the assignment, less the amount received from the plaintiffs after the sale of their property of approximately $699,000. This claim was adjusted at trial to reflect a debt based on the amount paid to the engineers for payment out of their overdraft.
6The matter was heard on 18, 19 and 20 July 2011 when Mr A Fernon, of counsel, appeared for the plaintiffs, Mr Alessi, as first defendant, appeared unrepresented on 18 and 19 July 2011 (the case against him being dismissed by consent on 19 July 2011), Mr P Braham SC, leading Ms C Spruce, of counsel, appeared for the second and ninth defendants and Mr MK Meek SC appeared for the third and tenth defendants. The plaintiffs' cases against all the other defendants (except the fifth defendant who was not served with the process) were consensually discontinued before trial.
Heads of Agreement - 2003
7At the time the engineers and architects commenced negotiations to form the joint venture, W&D was the lessee of a 99 year lease of the Land of which Bathurst City Council was the lessor. RE and W&D entered into Heads of Agreement in April 2003 pursuant to which they agreed to form a joint venture company (later incorporated as Mount Panorama Resort Pty Ltd (MPR)) to complete the Project. W&D agreed to transfer the lease of the Land to the joint venture for which W&D was to receive $500,000 "from net profits, prior to distribution of the remainder profits on the joint venture ratio".
8W&D and RE also agreed that they would each be commissioned to provide architectural and structural and civil engineering services to the Project at 7% and 3% respectively of the construction costs plus GST. W&D agreed to undertake the architectural work including the initial design and Development Application (DA) submission for which it was to be paid $100,000 plus GST, in addition to the 7% referred to above, "at the time of achieving project funding". RE agreed to be commissioned to provide marketing services for the Project for which it was to be paid $100,000 plus GST, in addition to the 3% referred to above, "at the time of achieving project funding".
9W&D and RE agreed that the objective of the joint venture was that by mid 2003 there would be a new DA approved, marketing material prepared and contracts of sale drawn up, so that a marketing programme could be commenced prior to motor races in October and November 2003. The parties also agreed that the "equity in the joint venture will be W&D - 50% and RE - 50% and the net profit will be distributed on this basis after the payment of $500,000 to WD".
Supplementary Heads of Agreement - 2003
10W&D and RE signed supplementary Heads of Agreement later in 2003 as a consequence of the Bathurst City Council agreeing to convert the Land into freehold and to sell it to W&D or its nominee. The Supplementary Heads of Agreement varied the Heads of Agreement by providing that W&D would acquire the Land in its name or that of its nominee and that MPR was to pay the purchase price and the associated costs of purchase of the Land. It was once again noted that the parties agreed that notwithstanding the purchase price for the Land (which was not disclosed), an amount of $500,000 would be payable to W&D "from the net profits (prior to distribution of the remainder of profits on the development, in accordance with the shareholding in the Company), recognising W&D's contribution to the venture". It was also noted that W&D and RE each hold 50% of the shares in MPR.
2003 to 2005
11From 2003 until 2005 the Project proceeded with many preparatory steps being completed including concept drawings, drafting of pre-marketing drawings of the apartments, a pre-marketing campaign to the motor industry, negotiating with the V8 Supercars and the company which held the market rights to the race, obtaining DAs and other preliminary steps including retaining quantity surveyors and selecting the builders and arranging early work funding.
12There were a number of sales off the plan. However on 6 April 2004 the New South Wales Vendor Tax was introduced which had the effect of slowing the pre-sales. The joint venturers were concerned that confidence in the Project was waning and decided it was necessary to commence construction as soon as possible. The builder established a building site on the Land prior to the races in October 2004 for marketing purposes and earthworks commenced after October 2004.
Funding discussions - late 2005
13Although the joint venturers decided in August 2004 that the early works funding would be obtained from the Commonwealth Bank of Australia, it was not until June 2005 that such funding was in place. In the latter part of 2005 the joint venturers were making arrangements for further funding for the Project. Mr Parker claimed that there was a meeting on 7 September 2005 held in W&D's office in Pitt Street, Sydney that was attended by Messrs Fayle, Chiarella, Watts, Wells, Alessi and himself. Mr Parker's affidavit evidence was that the following conversation took place:
Fayle: The early works loan is coming due and will default to high interest rates. While we have talked to the CBA and arranged for a top up loan to $2.8M the interest rates are even more onerous. There is no guarantee that they will eventually provide construction funding.
We can source finance through Grey and Perkins from South Canterbury Finance. They will provide about $8M of funding that will pay out the CBA loan and will be the mezzanine finance for the project. This will have less onerous conditions than the CBA and lower overall costs. It will be secured against the project land value but also our homes and will have personal guarantees attached. When the primary debt facility is set we will be able to release the mortgages and guarantees on our homes. The liability for the loans will be 50% to the engineers and 50% to the architects.
Watts: The engineers' properties already have second mortgages against them that secure the Reverse Engineering Overdraft Facility that is approximately $550,000.
Fayle: The overdraft will have to be rolled into the project and settled out of the project profits along with those liabilities.
Parker: I will agree to mortgage my home and provide guarantees so that we can refinance the project on the condition that my mortgage will be released as soon as the full funding is put in place.
14Mr Parker claimed that all present at the meeting agreed to proceed with South Canterbury Finance (SCF) for the mezzanine funding for the Project. Mr Parker also gave affidavit evidence of a further meeting on 21 October 2005 once again at the offices of W&D attended by Messrs Fayle, Chiarella, Watts, Wells, Alessi and himself. Mr Parker claimed that the following conversation took place at that meeting:
Fayle: As you are all aware we need to raise construction and design funding to keep the project moving as we haven't been able to secure enough sales to enable full development funding of the project. To give us enough time to convert enough of the existing expressions of interest into completed sales and hopefully sell a few more we need to raise more than was originally anticipated. The only problem is that there isn't enough equity to raise the full amount against the project land and our residential properties. I believe that we need more security than we have proposed so far. I have an investment property that I can put in.
Alessi: I have other property that has equity in it that I can add to the mortgage pool but then I will have a disproportionate share of equity at risk so I will need to be compensated somehow.
Fayle: OK but based on that premise the architects are also putting in more equity than the engineers and should be compensated.
Wells: I won't agree to anything that reduces my share of the profits. I've put enough in already.
Fayle: We will have to come up with some reward system out of the profits. We should put some numbers together and put to the group for agreement.
Parker: That's fine. Currently each person is responsible for the debt in proportion to their shareholding in the project. Your bonus will be a reward out of the project profits for higher equity risk. The liability for the loans remains equal to our shareholdings but the higher equity risk is rewarded out of the potential profits.
Fayle: Yes, that's correct. I'll put a proposal together to the group.
15Mr Fayle claimed that in early October 2005 he and Mr Chiarella telephoned Miles Anderson of SCF with whom they had been dealing in relation to the loan. Mr Anderson advised them that there was a "problem" in that RE operated an overdraft facility and the directors of RE had mortgaged their properties to ANZ as security for that overdraft facility. Mr Anderson advised that SCF required that facility (approximately $550,000) to be paid out to discharge the ANZ mortgages and that until it was paid out, SCF could not advance the funds to MPR. Mr Fayle's affidavit evidence was that he attended a meeting with Mr Chiarella and the engineers in early October at which the following conversation took place:
Fayle: We have spoken to Miles Anderson at SCF. Apparently there is a problem with the funding. You guys have an overdraft of around $550,000.00 that has to be paid out before we can get the funds because your properties are already mortgaged to ANZ as security for the overdraft. We don't have any choice but to let you use some of the loan funds to pay out the overdraft. So we suggest that MPR loan you the money needed to pay out the overdraft and you pay it back at the completion of the Project.
Wells: Yeah, that's a good idea. There are some other amounts we will need to borrow from MPR as well, once it receives the funds. We need to pay some outstanding creditors - we have debts of about $15,000.00. We will also need to borrow a further $50,000.00 for ongoing cashflow.
Fayle: We are not happy about this. It would appear that we have no other alternative, so we will have to agree, but only on the basis that those monies are on loan to you and have to be paid back to MPR.
Chiarella: The overdraft will be paid out by MPR in order to release the mortgages for use by SCF and you guys must understand that this is a loan to Reverse from MPR.
Alessi: Yeah ok, well in order to release the mortgages we will agree.
Watts: Yes, that's a good idea. That will benefit us by us not having to pay interest on our overdraft.
Parker: Yes, I agree.
Wells: Yes, that's great, let's go ahead.
16Mr Fayle claimed that during this conversation he was annoyed and angry. He said there was no debate or disagreement from any of the directors of RE about whether the payment of the RE overdraft would be regarded as a loan. He also claimed that at no time during that meeting did any of the RE directors make any comment that the payment of the RE overdraft, the RE loan of $50,000 or any other funds paid on behalf of RE should be considered in any way other than a loan.
17Mr Parker filed an affidavit in reply to Mr Fayle's affidavit and disagreed that the conversation was in those terms. He claimed that there was a conversation to the following effect:
Fayle: We have spoken to Miles Anderson and Grey and Perkins. Apparently there is a problem with our funding. Your overdraft is a second mortgage and the bank won't lend us a third mortgage with the overdraft as a priority before their funds. We will have to take the overdraft in as part of a second mortgage.
Parker: That's not very sensible as the interest rates for our overdraft are half the rate that South Canterbury is going to charge us. The bank is just trying to gouge us.
Fayle: That's probably true but it's their money and this is the only way they will lend it to us.
Chiarella: They may be gouging us but they are the ones taking the risk so I guess they want to get a higher interest rate on the whole amount to justify it. We can sort out the higher interest rate at the end of the project it just becomes another project cost.
Alessi: Yeah ok, well in order to release the mortgages I will agree.
Watts: Yes, that's ok with me.
Parker: If that is the only way we can do it then I agree. We don't seem to have a choice.
Wells: Yes, that's great, let's go ahead.
18This version of the conversation is not consistent with the version Mr Parker propounded in his first affidavit. In that affidavit he claimed that Mr Watts informed Mr Fayle as early as 7 September 2005 that RE had an overdraft of $550,000 and that everyone agreed that the overdraft would have to be "rolled into" the Project and "settled out of" the Project profits. In the conversation propounded in his affidavit in reply Mr Parker objects to the taking in of the overdraft because of the high interest rate to be charged by SCF.
19When Mr Parker came to deal with Mr Fayle's suggestion that he was angry and annoyed at the October 2005 meeting he gave the following affidavit evidence (paragraph 10):
I say that Fayle and Chiarella did not display any anger at this meeting. There was no disagreement between us at this time in early October. The Engineers had acknowledged that they would need to pay the overdraft back to W & D when the project was finalised and before the profits were distributed.
20Mr Parker was cross-examined in relation to these portions of his reply affidavit. He said that he understood that Mr Chiarella was proposing that the difference between the interest rate on the overdraft of 8% and the interest rate of 15% on the SCF loan would become a project cost. He also agreed that there was no record in his affidavit in reply of anyone suggesting that the overdraft debt itself would become part of the project costs (tr 56). He was cross-examined as follows (tr 57-58):
Q. You don't seriously suggest, do you, that you thought a comment in this conversation to the effect that the overdraft facility debt was to become part of the project costs was not a relevant part of the conversation for the purposes of these proceedings, you don't make that suggestion do you?
A. I'm only suggesting that because it was already stated in the first affidavit.
Q. Paragraph 9 of your third affidavit responds to Mr Fayle's record of that conversation and then states "I say we had a conversation to the following effect" and it starts with Mr Fayle reporting the problem with the overdraft and it ends on your record of it with the parties reaching an agreement and in between the beginning and the end there is no reference to the overdraft becoming a project cost, correct?
A. That is what this says in 9 here, yes.
Q. And it is inconsistent with the version of this conversation you've set out in paragraph 9 that at anytime during that conversation anyone made such suggestion?
A. If they're read as two separate conversations it is, yes.
...
Q. Look at paragraph 9 of your third affidavit which sets out a record of a conversation. In what point in the course of that conversation do you say that there was a comment omitted from the record in which someone said something about the repayment of the overdraft being a project cost, and Mr Parker can I suggest to you that answering my question doesn't require you to read your earlier affidavit. I'm asking you about your recollection?
A. Oh, okay. My recollection is that somewhere in that conversation we did have that. I didn't write it down in that particular response.
Q. And you have no recollection now, I take it from your answer, of when in the course of the conversation the missing words were spoken?
A. No, I'd have to say I don't have a recollection.
21Mr Parker was then asked about paragraph 10 of his affidavit extracted above and in particular the section of it in which he claimed that there was no disagreement in early October and that the engineers had acknowledged that they would need to pay back the amount for the overdraft. He gave the following evidence (tr 59-60):
Q. What did you mean by that?
A. That the overdraft had been acknowledged. I mean this was all about the equity left in our houses and we had a business overdraft against the mortgages in the houses but we also had personal mortgages against our houses and the amount of overdraft - the amount of equity left in the houses they wouldn't have known how much was left anyway. The overdraft really didn't make a material difference in terms of the equity.
Q. Mr Parker, that's not what you meant I suggest with respect by the second sentence of paragraph 10. You were responding to Mr Fayle's account of the meeting which you record in paragraph 9 of that third affidavit which is about the fact you have an overdraft which is going to have to be repaid by money borrowed by the joint venture, correct?
A. Yes.
Q. And you are asserting in paragraph 10 that Mr Fayle and Mr Chiarella were not angry at that meeting because you say in the third sentence of paragraph 10 "The engineers had acknowledged that they would need to pay the overdraft back to the architects when the project was finalised and before profits were distributed". Do you see that?
A. Oh, yes.
Q. That reflects, doesn't it, your recollection of something that had occurred before this meeting which you've set out in paragraph 9 which had the effect that no-one was very upset because the engineers had given an acknowledgement, do you agree?
A. Yes.
Q. When was that acknowledgement given?
A. I think it was before we'd come into an email, the agreement we came into that email.
...
Q. And so this acknowledgement happened some time before the conversation which you record in paragraph 9 of your affidavit and which Mr Fayle records in paragraph 36 of his affidavit, correct?
A. Yes, that the overdraft would have to be paid back.
Q. So at some point the engineers said to the architects "We will repay the overdraft to the architects when the project is finalised and before profits are distributed", correct?
A. Yes, that's correct.
Q. You don't record in your affidavits that ever being said but it's your recollection that it was, correct?
A. Yes, that's my recollection, yes.
22Mr Parker was cross-examined further about Mr Fayle's account of the conversation in particular his reference to the monies being a loan that had to be paid back to MPR (tr 63). Mr Parker said that he would be more comfortable with a version that said something like "These monies have to be repaid by the engineers back to the architects when the project was finalised and before profits were distributed". He said that this would be a reflection of the conversation. However he said that he did not know if it was at the conclusion of the Project but rather "just that we owed them the money" (tr 63).
23Orazio Alessi gave affidavit evidence that in 2005 he recalled that there were conversations in relation to providing security to SCF for funding for the Project. He claimed that the architects and the engineers held discussions "concerning the need to repay the RE overdraft so that the existing mortgage to ANZ would be extinguished so the SCF would then accept a mortgage over the homes of [the engineers]". Mr Alessi said that unless this occurred the funding from SCF would not proceed and the development would not proceed. Mr Alessi denied that there was any conversation in relation to a provision of a loan from MPR to RE to repay the overdraft. He also gave affidavit evidence that there was no discussion concerning the need for those monies to be paid back by RE, the engineers or their wives. His recollection of the conversation was as follows:
Alessi: The overdraft has increased to this level because of the work that we have undertaken for this project. As everyone knows RE has been desperately trying to get this project over the line. In the meantime our overdraft has been ballooning. Before this project commenced, the RE overdraft was around $100,000. It has grown to this level because of this project. It needs to be included as part of the project cost. It needs to be adjusted at the end of the project out of the profits.
Watts: Of course it will.
Wells: I worked bloody hard on this project and I will not reduce my share of the profits in favour of anything.
Parker: If I agree to anything my main issue is that the mortgage on my home must be released when full Project funding is obtained.
Fayle: We must do it or the project is dead in the water.
Chiarella: Lets sort out the details later lets get it done. We must raise the money or terminate the project now and take the loss.
Alessi: This funding that is now required would not be possible if I and Stephen did not put in the extra property and now are contributing significantly more than our share holdings would warrant, we should somehow be compensated if and when there is a profit to be shared.
24Mr Alessi claimed that there was no agreement reached as to how the overdraft would be repaid and in particular there was no agreement that the overdraft amount would be repaid by RE or the engineers. Mr Alessi was cross-examined in relation to his affidavit evidence as follows (tr 95-97):
Q. Let me ask you this then: What did you mean by the word "it" when you made the affidavit? What did you intend to convey by "it"? What was "it"? What needed to be adjusted?
A. The overdraft.
Q. The overdraft. Would it be more correct to say the amount of the loan from SCF being used to discharge the overdraft?
A. Yes.
Q. And by adjusted, you meant that there would be an adjustment in favour of the architects against the engineers relating to that amount, didn't you?
A. My view - my views on that - -
Q. With great respect - -
A. Yeah.
Q. - - I am not asking you to describe your views but your recollection of what you said. Do you understand the difference?
A. Yes.
Q. You are not being asked now to describe what you think - -
A. No.
Q. - - or what your views are but what you recollect about what you said on a particular occasion you have described in your affidavit and in your affidavit, you have used the word "adjusted"?
A. And by adjusted, I meant that my opinion at the time or, well, what I said to the people at the time, not just my opinion, what I said in the meeting, was that I didn't think that the whole $550,000 of the overdraft should be paid to the architects out of the profit.
...
Q. Is it your best recollection that you used the word "adjusted"?
A. Dealt with, adjusted. There's no dispute that the overdraft was extinguished by South Canterbury Finance loan or would be. The issue was how to treat that and that's what we had a series of meetings to try to come to grips with.
Q. And your comment was first of all you don't remember there being any agreement at all between the parties about how to treat the overdraft, do you?
A. In this particular meeting there was no agreement came to.
Q. And you don't recall any other particular meeting, do you?
A. I do. There were other meetings that we had. There's been evidence dealt with in this court that give you the results of the discussions all the engineers and architects had.
Q. You haven't described those other meetings in your affidavit, have you?
A. No.
Q. So the one meeting that you decided to describe in your affidavit is not a meeting at which any agreement was reached, correct?
A. Correct.
Q. You remember there being other meetings on the same topic, correct?
A. Correct.
Q. Your recollection is that an agreement was reached at one or more of those other meetings, is that correct?
A. There is always a grey area when there's any agreement reached, specifically when there's no final document entered into and signed off so people - -
Q. Do you have a recollection of another meeting other than the one you've described at which an agreement was reached on how the overdraft would be treated? Do you have such a recollection or do you not have it?
A. How the overdraft would be treated, there was a meeting where - -
Q. No I've asked you whether you have a recollection or not of another meeting other than the one contained in paragraph 21 of your affidavit at which such an agreement was reached, you either do have a recollection or you don't?
A. Where all 6 people agreed to how the overdraft would be treated.
Q. Yes?
A. It was an answer to an email so I suppose it's not a meeting.
25Mr Alessi was not able to refer to any meeting at which an agreement was reached between all the engineers and all the architects. He gave further evidence as follows (tr 97-98):
Q. But you recollect saying something to the effect that the money being used to repay the engineer's overdraft would be subject to an adjustment at the end of the project, correct?
A. In this meeting, yes.
Q. And that's the best recollection you can give of what you said on that occasion on that topic, correct?
A. In this particular meeting but there were numerous other meetings where I expanded on that view.
Q. But you haven't described those other meetings in this affidavit, have you?
A. No.
26Mr Alessi resisted any suggestion in cross-examination that Mr Fayle referred to a "loan" from MPR. However he agreed that there was discussion of an adjustment and how to treat "it". The only recollection he had was that he said that it needed to be adjusted at the end of the Project (tr 101).
27Mr Watts gave affidavit evidence that he recalled that prior to signing the first loan agreement with SCF there was a discussion between the engineers and the architects concerning the need to clear RE's overdraft facilities with the ANZ bank. He recalled that either Mr Fayle or Mr Chiarella said that SCF needed to have the RE overdraft repaid because they would not take a third mortgage of the properties that secured the overdraft. Mr Watts claimed that there was never any discussion to which he was a party about the amount paid towards clearing the overdraft being a loan by MPR to RE or it being any other internal loan to RE or the engineers. Mr Watts recalled that there was discussion between Mr Fayle and himself about the overdraft being taken into account in dividing any profit. He recalled that he said to Mr Fayle that the amount of the overdraft would be paid out of RE's profit share. He recalled Mr Fayle saying:
Whilst the loans are being shared 50/50 between Reverse and Woodhouse, I am putting more equity at risk than any of the rest of you if the loans aren't repaid. Therefore, there needs to be compensation to me and those that are putting more at risk by receiving a greater profit share. I will send you a note recording my proposal.
28In cross-examination Mr Watts emphasised that at the time of the SCF facility things were going through "at a rapid pace" and that it was generally "shoot, then ask questions later" (tr 110). Mr Watts said he knew with certainty that the engineers would not have said to the architects that they would repay the amount in respect of the overdraft because he believed firmly that it was always desired to be a "split at the end out of RE's profit share" and that the architects would take the $650,000 first and the engineers would take their share thereafter (tr 111).
29Mr Fayle was cross-examined in relation to his understanding of the agreement reached between the engineers and the architects about the repayment of the overdraft. He entered into a Deed of Settlement with Mrs Fayle (referred to later in this judgment) in which he transferred to her a 95% interest in the family home. Mrs Fayle claimed that she was not aware of the amount of the overdraft that was paid out by the use of the SCF loan funds and also claimed that she had been misled by a failure to inform her of that detail when entering into the guarantee. Mr Fayle gave the following evidence in cross-examination (tr 137):
Q. And it was because your wife hadn't been told of this at the time and because of the fact that her guarantee made her ultimately responsible for the $600,000 that you in the deed agreed to transfer the vast majority of your interest in your family home to her; that's correct, isn't it?
A. The settlement, yes.
Q. Because that was to compensate your wife, wasn't it, for the responsibility that she bore under the guarantee, correct?
A. Yes, it was compensation for losing her family home.
Q. It was compensation for the fact that she had signed a guarantee and was liable in respect of the $600,000 portion of the debt relating to the overdraft, correct?
A. That she was liable for the 2.2 million - -
Q. Yes?
A. - - debt.
Q. And that included ultimate responsibility in respect of the $600,000, correct?
A. That would necessarily flow, yes.
Q. And you decided that she needed to be compensated for the fact that she was ultimately responsible for that portion of the debt, correct?
A. Yes.
Q. And that was because, I suggest to you, sir, that there was in fact, as you understood it, an agreement between you and the engineers that the guarantors were liable equally in relation to the entirety of the South Canterbury Finance loan; that's correct, isn't it?
A. That's correct.
30At this point in the cross-examination it appeared that Mr Fayle agreed with the proposition that there was an agreement that the engineers and the architects were to be equally liable for the entirety of the SCF loan. However the cross-examiner continued to question Mr Fayle in respect of the effect of Mr Alessi paying out an amount to reduce the total loan. That evidence included the following (tr 137-138):
Q. Mr Fayle, when it became apparent that the $2.2 million loan was not going to be repaid within the term of the facility, there were discussions, were there not, between you and the engineers as to what to do in relation to it, correct?
A. Yes.
Q. And Mr Parker informed you words to the effect that, "Since Reverse Engineering owes $300,000 after Orazio paid in his 800,000, I would be happy to pay out this amount to release my mortgage if you and Laurie can pay the architects' amount", do you recall that being said?
A. Yes.
Q. And you agreed, did you not, sir, that the effect of Mr Alessi paying the amount of 750,000 in essence reduced the total loan by about $800,000, given the effect it had on the capitalised interest in the loan?
A. Yes.
Q. Do you agree with that?
A. Yes.
Q. And you responded to the effect that that sounds like a good idea, correct?
A. That's incorrect.
Q. And I suggest to you, sir, that you said that because you recognised that the ultimate responsibility for the entirety of the $2.2 million loan was shared equally between the engineers and the architects, correct?
A. No, that's incorrect.
Email proposal - 23 October 2005
31On 23 October 2005 Mr Fayle wrote to each of the engineers and Mr Chiarella by email in the following terms:-
What an interesting meeting on Friday, I believe that a lot was revealed regarding personalities and issues within the JV group and accordingly both Laurie and I think the best and ONLY acceptable method of working out any sharing arrangement for Capital Input and resulting "reward" for that input is to simply share the percentages between the two companies (REV/LC+SF) as follows:-
Spreadsheet below shows equity contributions as:-
Reverse 35% nett contribution
LC/SF 65% nett contribution
Orazio argues that (for some reason) Reverse should be entitled to a greater reward for their equity contribution.
In the interest of the JV Group both Laurie and I will offer a compromise of the following sharing of the allocated "reward" amount:-
Reverse 45% of "reward" amount
LC/SF 55% of "reward" amount
We do not care what the reward amount is agreed at, be it $1m or $3m as long as it is shared proportionately as above. Whatever happens internally within the separate companies to distribute their share of the "reward" amount is entirely a matter for each Company and we will not be involved with your internal discussions on this issue.
Trust you find this a "more than fair" offer and we would be pleased to receive your acknowledged acceptance and confirmation of what amount you nominate as the Total Shared Reward for additional Equity Input, by return email.
32The Schedule attached to that email was as follows:
Share of Project Approx Eqty Contribution less Rev Eng O/D $600k nett contribution Percentge contrb nett/nett by Reverse Eng Share of $3m project contrib payment Revised share based on $13m profit + paymt $16,000,000 Difference in profit share
REVERSE OA 12.50% $800,000 $150,000 $650,000 31.65% 27% $817,817 $2,442,817 $2,000,000 $ 442,817
MW 12.50% $40,000 $150,000 $ (110,000) -5.36% $1,625,000 $2,000,000 $ (375,000)
BP 12.50% $405,000 $150,000 $255,000 12.41% 8% $240,894 $1,865,894 $2,000,000 $ (134,106)
AW 12.50% $80,000 $150,000 $ (70,000) -3.41% $1,625,000 $2,000,000 $ (375,000)
$600,000
TOD/TOD SF 30% $1,075,000 $1,075,000 52.34% 52% $1,570,107 $5,470,107 $4,800,000 $ 670,107
LC 20% $254,000 $254,000 12.37% 12% $370,983 $2,970,983 $3,200,000 $ (229,017)
Notes:- 1. Above schedule is based on a project profit of $16m less $3m contribution to partners introducing additional capital to the scheme
2. The scenario above is based on the premise that Rev/"W&D" should be providing equal contributions (50/50) for the additional funds required and accordingly each Firm sharing the contribution payment based on effective amount of their contribution
3. Equity contributions noted above are based on Gray & Perkins lending request to S.C. Finance
Acceptance email - 24 October 2005
33On 24 October 2005 Mr Alessi wrote by email to Mr Fayle in the following terms:
Thanks Stephen.
We accept.
The split as I understand it will be ...
W&D 55% Reverse Eng 45% Of $1,000,000 (reward amount)
Reverse would like the $450,000 To go directly to Orazio Alessi.
As I understand it, the distribution will take precedence over all other distributions including W&D's $500,000 land contribution reward.
Jack Gray to write the deed.
Life Insurance on Orazio Alessi in favour of Barbara Alessi to the value of $1,000,000. (Barbara said I was priceless and when pushed for a number suggested $10,000,000) For the period that the mortgages are at risk.
I think it is a reasonable offer on your behalf considering your views.
I hope you think our acceptance is also fair considering our views.....
At this moment in time W&D stand to lose Approx $750,000 more than Reverse Eng if the project terminated. (e.g land input and fees payable)
W&D stand to receive Approx $1,000,000 more than Reverse Eng if the project reaches a successful conclusion. (e.g full fees, land reward, profits etc)
W&D started with a higher equity base underpinning their personnel ( sic ) guarantees than Reverse Eng and now seek to redress the imbalance by changing the distribution.
And No this is not quite like going to the market to raise further funds at a cost. No one in the market place would enter into this project to give us finance for the sole aim of borrowing more money from someone else, unsecured and certainly not under the risk to reward ratio I am embarking on. Financiers do not take very big risks by design in fact I don't think they take any risk.
Therefore I did argue for the above reasons and not quite as you put it.
"Orazio argues that (for some reason) Reverse should be entitled to a greater reward for their equity contribution."
Exactly how much more reward for our equity contributions is not quantifiable.
Still I think we have for the good of the project (and all of us) agreed on something reasonable an ( sic ) overcome another obstacle and I hope there are not to ( sic ) many more.
Further email - 25 October 2005
34Mr Fayle responded to Mr Alessi's email the following day, 25 October 2005, in the following terms:
In spite of all of the crappy, misinformed, ill conceived arguments contained in your email, both Laurie and I are prepared to accept your acceptance of the percentage split and the "reward" amount sharing of $1m as noted below.
I will have to consult Laurie (he's away today) with regard to the timing of the payment in relation to wether ( sic ) it comes out before or after the $500,000 payment to SF/LC for the land contribution payment, which was agreed as being paid "before profit". I will advise asap.
Your other email is noted and the $450,000 can be made out in favour of your "Bottom of the Harbour Trust" (I think that's what you called it!) as may be relevant and at the appropriate time.
Glad to have this sorted and I will arrange quotations for the additional Insurances as well as a deed from Jack for all to sign.
Regards
Steve
Ps. As noted in my opening remarks I did not appreciate any of your explanations and/or arguments and/or attempt of justifications, but it is best if we let all that slide-by without further comment as it would certainly be counterproductive to a positive result, and my "ulcer".
35Mr Alessi was also cross-examined in relation to the October 2005 emails and in particular his response to Mr Fayle's email. Mr Alessi agreed that although the email referred to Mr Fayle obtaining Mr Chiarella's consent to the postponement of the payment of $500,000 as provided for in the Heads of Agreement, Mr Fayle did not get back to him in relation to that question. At no time was Mr Alessi advised that Mr Chiarella had agreed to such a postponement.
First SCF loan
36On 28 October 2005 SCF, as lender, and MPR, as borrower, entered into a Facility Agreement for the loan of $NZ7.85 million for a period of 12 months. The security provided was a first registered mortgage over the Land, a second registered mortgage over two of Mr Alessi's properties, Mr and Mrs Fayle's home, another property jointly owned by Mr Fayle and the late Mr Chiarella, Mr and Mrs Chiarella's home, Mr Watts' home, Mr and Mrs Parker's home and a third registered mortgage over Mr Wells' home. MPR agreed to procure guarantees relevantly from Messrs Alessi, Fayle, Watts, Parker, Wells and the late Mr Chiarella, Mrs Alessi, Mrs Fayle, Mrs Chiarella, Mrs Watts and Mrs Parker. On 28 October 2005 each of those persons executed a Deed of Guarantee and Indemnity.
Guarantees
37Each of the guarantees provided ((1)(a)(vi)):
Where more than one person is the Guarantor this Deed shall bind those persons jointly and each of them severally and each Guarantor who has executed this Deed is bound.
38The Deed of Guarantee and Indemnity signed by Mrs Alessi, Mrs Fayle, Mrs Chiarella, Mrs Watts and Mrs Parker contained the following clause:
LIMITATION OF LIABILITY
The liability of a Guarantor under this Deed is limited to an amount equal to any amount which the Lender is able to recover by enforcing its mortgage over each Guarantor's Property, and upon payment of this amount a Guarantor will have no further liability or obligations to the Lender under this Deed.
The Lender agrees not to seek to recover any moneys it is owed by a Guarantor under this Deed other than by seeking to enforce its mortgage over that Guarantor's Property.
39Mrs Fayle gave affidavit evidence that she had a conversation with Mr Fayle in September 2005 in which he advised her that more money needed to be borrowed to finance the Project. Mrs Fayle claimed that the following conversation took place:
Mr Fayle: ...To get the loan we will have to put in our house as a guarantee. Everyone will have to put in their house as a guarantee, it won't be just us, are you happy with this?
Mrs Fayle: I'm happy to do that because I have faith in the Project and you have put so much into it.
40Mrs Fayle gave affidavit evidence that at the time of executing the guarantee the solicitor said: "You are all in it together and if there is a default SCF can proceed against any and/or all of you to recover the debt". Mrs Fayle also gave affidavit evidence that on the day the Guarantee was signed, Mr Fayle informed her that the RE overdraft had to be paid out from the loan to release the engineers' guarantees and that the loan could not go ahead until that was done. Mrs Fayle said that at no time prior to signing the Guarantee was she advised of the amount of the loan funds to be paid out to discharge RE's indebtedness to the ANZ bank.
41Mrs Fayle claimed that some time after signing the Guarantee she commenced doing MPR's bookkeeping and saw from bank statements that $549,551.68 of the loan from SCF had been used to pay out RE's then existing overdraft facility. Mrs Fayle claimed that this was the first time she became aware of the amount of the overdraft and that she was very concerned about it. She spoke with Mr Fayle and the late Mr Chiarella to ask why that amount was used to pay the RE debt. Mr Fayle informed her that before the loan was granted RE had ANZ guarantees that had to be paid out and that the loan from SCF was not available unless those guarantees were paid out. Mr Fayle informed Mrs Fayle that it was "ok" because RE was responsible for repaying that part of the loan because the funds were used to pay out a pre-existing debt belonging to RE which was unrelated to the Project.
42In cross-examination Mrs Fayle accepted that she was aware prior to signing the Guarantee that some monies from the SCF loan would have been used to pay out the RE overdraft. However Mrs Fayle said that she had no idea how much it was and thought that it was a "minimal amount" (tr 140). She gave the following evidence (tr 140-141):
Q. It was your understanding when you signed the guarantee that you, as guarantor, bore some ultimate responsibility in relation to that overdraft facility, is that right?
A. As much as everybody else.
Q. So it was to be shared equally between all the guarantors?
A. Yes.
Other funding
43On 19 January 2006 Babcock & Brown approved in principle a $5.38 million mezzanine funding facility for MPR. On 24 January 2006 the Bank of Scotland International (BOSI) approved a facility for $31.8 million for MPR for the construction costs of the Project. These facilities were to be used in part to pay out the SCF facility of $NZ7.85 million. These funds were to be used only for the "Approved Purpose" of assisting with the development of the Land. It excluded the use of the funds to pay out the SCF facility for that portion of the loan funds that were used to discharge RE's overdraft. That is in part why a second SCF loan was also obtained at this time.
Second SCF loan
44On 24 February 2006 a further Facility Agreement was entered into with SCF, this time for $2.2 million, but on this occasion the borrower was another company controlled by the architects and engineers, Australasian Properties Pty Limited (Australasian). That facility was in the same terms as the facility between SCF and MPR except that the securities provided excluded the Land and the mortgage over Mr Wells' property was changed to a second mortgage. All of the parties who had guaranteed the first SCF facility to MPR signed Deeds of Guarantee and Indemnity in relation to this facility on 24 February 2006. Those Deeds of Guarantee and Indemnity were in the same terms as the previous Deeds of Guarantee.
45The funds from this facility were in part applied to pay that part of the loan funds from the first SCF facility that paid out RE's overdraft. It was described in the settlement sheet as "repayment of loan" from SCF to MPR.
46Mrs Fayle's affidavit evidence included reference to her understanding from conversations that she had with Mr Fayle in January or February 2006 when he advised her that a further loan was obtained from Babcock & Brown. She understood that Babcock & Brown took over part of the first SCF loan and as a result, it was partially discharged. Mrs Fayle had a conversation with Mr Fayle in relation to further financing required to complete the Project in which Mr Fayle advised her that SCF was to provide a further loan of approximately $2 million. Mr Fayle asked Mrs Fayle whether she was happy to guarantee that loan "along with everybody else" and put the house up as security. On 24 February 2006 Mrs Fayle received independent legal advice from the same solicitor that had provided the advice to her in respect of the first SCF loan. On this occasion the solicitor advised: "You are all liable for the loan amount but only for the amount of equity that each of you have in your houses".
Difficulties
47The Project experienced difficulties and the loans went into arrears. On 31 March 2007 Mr and Mrs Alessi paid $749,427.40 to reduce the SCF facility. At this time Mrs Alessi was released from her Guarantee.
48On 17 August 2007 MPR was placed into receivership.
Meeting 20 August 2007
49On 20 August 2007 at a meeting at W&D's offices Mr Parker claimed that the following conversation took place:
Parker: The South Canterbury Loan is due in the next few days. It will go to the default interest which is very high and onerous. I want to eliminate the mortgages as soon as possible before this gets out of control. Since Reverse Engineering owes $300,000 after Orazio paid in his $800,000 I would be happy to pay this amount to release my mortgage if you and Laurie can pay the Architects amount.
Fayle: That sounds like a good idea we will arrange to pay our bit to release the interest bill and release the mortgages.
Parker: That's terrific I'll go talk to my bank to cover the loan. My LVR will still only be about 70%
Chiarella: Yes let's get that done as soon as possible to get it out of the way.
50Mr Fayle's evidence in respect of the meeting on 20 August 2007 was that the following conversation took place:
Fayle: We need a meeting with all of the group to discuss how we can address the repayment of the SCF loan that expires on 24 th August and goes into default interest at 25% pa. I have spoken to Miles Anderson at SCF and I need to let him know what action we are taking to repay the loan ASAP.
Parker: I am talking to my bank to extend my loan to get an extra $300,000 to contribute so I can pay my share. This would mean that with Orazio's payment the engineers' side of the loan will be paid and you can pay the other half.
Chiarella: Brian that's not right, you must account for the overdraft funds advanced to Reverse when the loan was taken out as well as the other amounts paid by the loan to assist Reverse Engineering. I also want to know when am I getting my superfund loan repayment and you also need to pay the outstanding rent you owe.
Parker: That's not the way I see it.
Fayle: We need a meeting with all of the group to resolve and agree how we can address this.
51On 21 August 2007 Mr Parker sent an email to Messrs Fayle, Chiarella, Alessi and Watts in the following terms:
Subject: South Canterbury Finance Payout
Dear Steve
As agreed the payout of this facility of $2.2M is as follows.
Woodhouse & Danks $1.1M
Reverse Engineering $1.1M
By 24 August 2007 - 08 - 21 ( sic )
Reverse Engineering has already paid in $0.8M and owes $0.3M.
I am looking to finance the $0.3M personally as discussed to get rid of the facility and release the joint and several guarantees. I have had the house valued by the bank but have had no feedback yet.
Letter 4 September 2007
52Mr Fayle said that after he received Mr Parker's email of 21 August 2007 he had a conversation with Mr Chiarella in which Mr Chiarella agreed to prepare a detailed response setting out the liabilities of RE and to clarify the position. On 4 September 2007 Mr Fayle and the late Mr Chiarella sent the following letter to the engineers:
4 September 2007
Hello Mike, Orazio, Brian and Andrew,
RE CLARIFICATION OF DEBT
Further to the recent proceedings with both MPR & SCF, Laurie and I wish to confirm the loans and debt arrangements between ourselves and all of the partners, shareholders and spouses involved in, or related to, Reverse Engineering.
Our understanding of the loans and debt situation is as follows :-
MPR
Personal guarantees have been provided to both BOS International and Babcock and Brown and this situation is yet to be resolved in the light of the company going into "Receivership and Management".
Laurie Chiarella (Superfund)
A loan of $17500 plus accrued interest at 12.5% since 25 July 2005 was provided by Laurie's Superfund to the partners of Reverse Engineering being Orazio Alessi, Brian Parker, Andrew Wells, Mike Watts for the shared payment of a loan application fee. LC & SF paid their corresponding share of the loan application fee from their own (personal) sources. This loan was not a project cost and must be repaid directly to Laurie's superfund by the above personnel in accordance with the signed loan agreement.
As at 25 August 2007 the amount owing is - (approx) $22,057.29
Australasian Properties Pty Ltd / South Canterbury Finance
A loan of approximately $2.2m was taken out by AP P/L for the following :-
[4]
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: 25 August 2011
Pay out the, Reverse Engineering P/L overdraft facility to ANZ bank of approximately $550,000.00.
Obtain the balance of the loan amount, being some $1.65m from SCF to AP P/L to enable AP P/L to lend those monies to MPR to cover funding shortfalls on behalf of the directors / shareholders of MPR.
Accordingly the SCF loan is to be repaid by the directors / shareholders of AP P/L generally in accordance with the following principle :-
a) Orazio Alessi, Brian Parker, Andrew Wells, Mike Watts repay SCF their overdraft loan amount -
(approx) $550,000.00
b) Orazio Alessi, Brian Parker, Andrew Wells, Mike Watts repay their 50% share of the balance of the loan funds -
(approx) $825,000.00
TOTAL - (approx) $1,375,000.00
c) SF, LC repay SCF their 50% share of the balance of the Loan funds -
(approx) $825,000.00
Reverse Engineering Pty Ltd
The directors and shareholders of R.E. P/L brings up to date and repays F&C Investments Pty Ltd their unpaid rental amount of currently accrued and continuing in accordance with the lease for premises being Suite 2, Level 4, 70 Pitt Street, Sydney. F&C are currently negotiating with a prospective lessee to occupy Suite 2 which if successfully leased will assist R.E. P/L by offsetting the balance of the lease due and payable to the termination date.
Current Rental arrears to date (approx) $49,656.72
Payment to Solicitor for
preparation of lease agreement $ 935.00
TOTAL (approx) $50,591.72
Please review addressing these issues and advise when payment can be expected.
Steve and Laurie.
53SCF served demands on the architects and engineers in respect of the outstanding debt at that time, being to October 2007, in the amount of $1,413,031.19.
54On 18 October 2007 Mr Fayle advised Mr Parker that the Letter of Demand had been sent to him for payment back of RE's debts to the architects. Mr Parker advised Mr Fayle that he had already offered to pay $300,000 before the loan was due. Mr Fayle advised Mr Parker that he still owed the architects the overdraft and other monies and that if he did not sell his house and pay everything as demanded they would move to bankrupt him. Mr Parker informed Mr Fayle that "Even if I did owe you the overdraft I would only owe a quarter of the debt". Mr Parker claimed that he informed Mr Fayle that the overdraft had been locked into the project and therefore did not exist. The conversation deteriorated after that and the parties then communicated through their lawyers.
Deed of Settlement
55On 10 January 2008 Mr and Mrs Fayle entered into a Deed of Settlement pursuant to which Mr Fayle assigned 95% of their property that was secured under the SCF facility. The Recitals to that Deed recorded that the circumstances surrounding the execution of the Deed of Guarantee and Indemnity by Mrs Fayle were fully set out in the Statutory Declaration sworn by her on 10 January 2008. That Statutory Declaration included claims that Mrs Fayle had become aware that there were problems with the Project in late 2005 and early 2006 and that in order to provide the funds for the development to be completed, it would be necessary for the directors to guarantee additional borrowings and to support those guarantees with mortgages over their private properties. It included the following:
I understood from discussions with my husband that the project was proceeding to a profitable conclusion, that all the guarantors would be equally liable to repay their portion of the debt, and that the money being borrowed should be sufficient to get the project up and running.
56It also included reference to Mrs Fayle attending the offices of Grey & Perkins together with all the other guarantors to execute the Guarantee on 24 February 2006. It included claims that Mrs Fayle did not read any of the documents in full as there was little time to do so but that she trusted her husband and his partners to have ensured that the arrangement made good commercial sense and that the documents reflected the transaction that had been outlined to her. It also included the claim that the wives of the architects and engineers were taken into a separate room for the provision of independent legal advice. It also included the following:
6 ... The general advice was to the effect that we were all in this together and that if there was a default, the lender could proceed against all of us or any of us to recover the debt and if necessary execute a power of sale under the mortgages etc. At no time was I told that the guarantee document excluded any right of subrogation and that, in the event of our matrimonial home being taken under the guarantee, we would not have access to the securities given by the other guarantors.
7 I did not at this time understand the financial complexities of the project and the funding of the project nor was I aware of what stage the construction had reached, cost to completion, value on completion, total debt etc I was simply told that the $2.2 million would see the project finished. At no time was it suggested that I should seek independent financial advice nor was there any opportunity provided for such advice to be given.
8 Subsequently when I began to help my husband with the book-keeping for MPR, I became aware that the funds which had been advanced by South Canterbury Finance were in fact used, firstly to discharge mortgages on the private property of the engineering partners in MPR, Reverse Engineering Pty Ltd, so as to enable South Canterbury Finance to obtain a mortgage and secondly to pay various outstanding accounts on behalf of Reverse Engineering Pty Ltd, a company owned by the other partners of MPR. These outstanding accounts amounted to some $650,000 of the borrowed amount. The balance of the loan went to the project.
9 In the circumstances I feel that I have been unduly influenced to sign a mortgage and guarantee the effect and purpose of which was misrepresented to me, that I was given inadequate independent legal advice and that I was neither recommended to obtain independent financial advice nor given the opportunity to do so. In the result I am about to lose my home which must be sold to meet the claim of South Canterbury Finance under the guarantee and I am advised that I have a viable cause of action against my husband arising out of the facts stated above and possibility of a legal claim that the guarantee should be set aside as against myself. I have communicated my position to my husband and I understand that he is seeking legal advice with a view to avoiding legal proceedings and reaching a settlement of my claims with me through my solicitors.
57Mr Fayle acknowledged in the Deed of Settlement that Mrs Fayle obtained no benefit from the entry into the Guarantee and the Mortgage and that Mrs Fayle had a number of claims against him as a result of his role in procuring her entry into the Guarantee and Mortgage. Mr Fayle irrevocably and unconditionally assigned to Mrs Fayle 95% of his interest in the property and any proceeds on completion of any sale including any reasonable costs associated with the sale. He also agreed to meet the entirety of any costs associated with the maintenance of rental accommodation by Mrs Fayle following completion of any sale for a period of not less than six months from the date of completion of the sale.
58Mrs Fayle was cross-examined in relation to the Deed of Settlement and gave the following evidence (tr 141-143):
Q. You were concerned that you had been induced to enter into the $2.2 million guarantee in February 2006 by undue influence, correct?
A. No
Q. That wasn't a concern of yours?
A. Not particularly. I was concerned at a slightly later date when I saw how much the engineers owed.
...
Q. And so you accept, don't you, that you were claiming at this time that you had been induced to execute the guarantee and mortgage by undue influence?
A. I don't think it was properly explained
HER HONOUR
Q. What, the deed or the guarantee?
A. The actual guarantee.
Q. Mr Fernon has just asked you do you accept that you were in fact claiming that you had entered into it, been induced by undue influence?
A. Yes, I would agree.
FERNON
Q. And equally you were claiming that the purpose of the loan and its intended application was misrepresented to you by, amongst others, your husband; that's right?
A. Yes.
Q. And you say that the misrepresentation that was made to you in respect of the purpose of the loan was the non-disclosure that the funds were going to be utilised to pay out a Reverse Engineering debt?
A. I - one, I didn't expect that I would have to sell my house to pay for the whole loan and, secondly, I didn't know that I was to pay - it was part of the - to pay out the debt of the other engineers.
Q. But you knew that you provided a mortgage in relation to your guarantee, correct, over your family home?
A. Yes, but I didn't think I would have to sell my house to pay out the whole debt.
Q. And so you accepted at this time that the guarantee that you had signed made you equally responsible with all of the other guarantors in respect of the whole of the South Canterbury loan?
A. I thought everybody would step up to the plate and contribute.
Q. In relation to the entirety of the loan?
A. Yeah.
59Mrs Fayle accepted that the guarantee and mortgage could be called upon in relation to any part of the $2.2 million debt to SCF (tr 143). However she maintained that she was not advised at the time of signing the guarantees of the amount of the RE overdraft (tr 144).
60Although it was initially suggested that the entry into the Deed of Settlement between Mr and Mrs Fayle evidenced some impropriety, ultimately such submission was abandoned (tr 224).
Deed of Assignment
61On 16 January 2008 Mrs Fayle, as assignee, and SCF, as assignor, entered into a Deed of Assignment pursuant to which SCF assigned and transferred to Mrs Fayle any present and future right, title and interest in and to the "Loan Rights" and each "Transaction Document". Those expressions were defined as follows:
" Loan Rights " means each of the following items (together with all rights, title and interest in each of those items):
(a)the Loan;
(b)all moneys, present and future, actual or contingent, owing at any time in respect of or in connection with the Loan under the Facility Agreement and any other corresponding loan documents, including all principal, interest and fees and any other amounts payable by the Borrower, the Guarantor, the Senior Financier or any other person in connection with the Loan; and
(c)each other document which documents any of the terms of the Loan and any other document held by the Assignor in respect of the Loan.
" Transaction Documents " means:
(a)the Facility Agreement;
(b)each Security;
(c)the Guarantees; and
(d)the Priority Deed
62The condition precedent to the assignment was that Mrs Fayle would pay to SCF the amount of $1,524,167.99. Mr and Mrs Fayles' property was sold and settlement occurred on 16 January 2008. Mrs Fayle used the funds from the sale to pay $1,524,167.99 to SCF pursuant to the Deed of Assignment.
Sale of secured properties
63On 8 September 2008 the plaintiffs' property was sold and the surplus funds of $699,703.44 were paid to Mrs Fayle.
64On 7 October 2008 Mrs Fayle entered into a Deed of Release with Mrs Chiarelli releasing her and the estate of her late husband from their obligations under the guarantee in consideration for payments and releases to the value of $509,507.
Proceedings
65On 6 January 2009 the plaintiffs commenced these proceedings.
Consideration
66The plaintiffs' claim for contribution is based on a contention that they "overpaid" their just proportion of the SCF debt. The case for the plaintiffs was conducted on a basis that did not differentiate between Mr Parker and Mrs Parker. In particular Mrs Parker did not claim that she was unaware that part of the SCF funds had been used to discharge the RE overdraft. Although there are a number of issues for determination, it is agreed that if I find that the engineers had the obligation to repay the overdraft amount, or put another way, the architects were not to be burdened with any obligation to SCF in respect of the overdraft amount, the plaintiffs' claim for contribution must fail (tr 220). There is also no issue that if that conclusion is reached, Mrs Fayle's Cross-Claim should succeed and schedules have been prepared in respect of quantum.
67The first issue for determination is whether an agreement was reached between the architects/W&D and the engineers/RE in October 2005 and, if so, what were the terms of that agreement.
October 2005 Agreement
68The plaintiffs claim that a concluded agreement was reached in October 2005, evidenced by the emails of 23 to 25 October 2005, that: (1) the engineers would only be required to repay the overdraft amount from the profits of the Project at the conclusion of the Project and only if there were profits from the Project; and (2) the engineers and the architects would be equally liable to repay the whole of the SCF debt.
69The defendants contend that there was no concluded agreement in those terms or at all because it was subject to two events that never occurred: (a) a deed being prepared by Mr Gray and executed by the engineers and the architects; and (b) the late Mr Chiarella agreeing to the payment of the reward amount taking priority over the payment of the $500,000 to W&D for the Land.
70Mr Fayle's email of 23 October 2005 referred to the meeting the previous Friday when, as he put it, "a lot was revealed regarding personalities and issues within the JV group". Although there is no elaboration of those "issues" in the email, I am satisfied that this was a reference to the discussions at the meeting on 21 October 2005 regarding the need to use $600,000 of the SCF loan funds, $550,000 of which was used to discharge the RE overdraft and free up the engineers' properties to make them available as security for the first SCF loan and $50,000 of which was provided to the engineers to meet other financial commitments (for convenience I will refer to the $600,000 as the overdraft amount even though $50,000 of that amount was paid to engineers/RE to assist them in meeting other financial commitments).
71Mr Fayle proposed what he described as the "ONLY acceptable method of working out any sharing arrangement for Capital Input and resulting 'reward' for that input". He proposed that the two companies, RE and W&D, "simply share the percentages" between them, leaving it to them "entirely" as to how they dealt with their respective shares internally. Mr Fayle noted that RE had made a 35% nett contribution and W&D had made a 65% nett contribution and suggested that an appropriate "compromise" for sharing an allocated "reward" amount was that RE should have 45% of the "reward" and W&D should have 55% of the "reward".
72The spreadsheet attached to the email brought to account the amount for payment out of the overdraft to ascertain the nett contribution of each of the engineers and RE. For instance, Mr Alessi's $800,000 equity contribution was reduced by $150,000 to $650,000. Mr Parker's equity contribution of $405,000 was reduced in the same way to $255,000. Messrs Watts and Wells equity contributions were converted to negative $110,000 and $70,000 respectively. These contributions, as adjusted, were then converted into RE's nett contribution for the purpose of working out a share in the reward amount of $3 million, referred to in the spreadsheet as a "project contrib payment", and the "revised share" of the total profits of the Project.
73The spreadsheet included a proposal that the negative equity of Messrs Watts (5.36%) and Wells (3.41%), recorded as "8.76%", was to be shared between Messrs Alessi and Parker thus reducing their nett equity contributions by 4.38%, resulting in contributions of 27% rounded (31.65% less 4.38%) and 8% rounded (12.41% less 4.38%) respectively. This resulted in the 35% nett contribution for RE as referred to in the covering email. The spreadsheet then calculated 35% of a reward of $3 million for RE as $1,058,711 ($817,817 to Mr Alessi and $240,894 to Mr Parker). This provided W&D with $1,941,289, or 65% of the $3 million reward ($1,570,107 to Mr Fayle and $370,983 to Mr Chiarella) being $882,578 greater than RE's share of the reward payment.
74The last three columns of the spreadsheet adjusted the profits by reducing them from $16 million to $13 million. That amount was shared equally between the two groups on a 50/50 basis with $6.5 million being allocated to the engineers and $6.5 million being allocated to the architects. That amount was equally divided between the four engineers with $1.625 million being allocated to each. It was allocated on 60/40 split to the architects with $3.9 million being allocated to Mr Fayle and $2.6 million being allocated to the late Mr Chiarella. The figure of the reward payment in the fourth last column was then added to each of those amounts; for instance Mr Alessi's share of $1,625,000 was increased by his share of the reward payment of $817,817 to reach a figure of $2,442,817. Similarly Mr Fayle's reward payment was added to his share of $3,900,000 to reach a figure of $5,470,107. The last column of the spreadsheet records the difference in profit share as against the original share of $16 million. The only two members of the joint venture who increased their profit share on that "scenario" were Mr Alessi and Mr Fayle.
75Note 1 to the spreadsheet referred to the $3 million as a "contribution to partners introducing additional capital to the scheme".
76Note 2 of the spreadsheet recorded that the "scenario" is based on "the premise" that RE and W&D "should be providing equal contributions (50/50) for the additional funds required and accordingly each Firm sharing the contribution payment based on effective amount of their contribution". The first concept in Note 2 is that RE and W&D should be contributing equally to the additional funds. Although this is expressed as an equal contribution to the funds, I am satisfied that what Mr Fayle intended to convey was that the parties should provide equal security for the loan and be equally liable for the repayment of the loan. The use of the expression "should be providing equal contributions" was in recognition of the terms of the Heads of Agreement pursuant to which the parties agreed that the "equity in the joint venture" was to be equal as was the distribution of the "net profit" after the payment of $500,000 to W&D for the Land contribution. That expression was also in recognition of the fact that the parties were not contributing equally because $600,000 of the SCF loan funds was to be provided to RE to discharge the overdraft.
77The second concept in Note 2 is the proposal that there be a "contribution payment" (referred to in the email as the "reward"). The amount proposed in the spreadsheet was $3 million. However in the covering email Mr Fayle indicated that this amount may be different - for instance $1 million - and he did not "care" as long as it was shared "proportionately". The third concept in Note 2 is the sharing of the contribution payment. The proposal was that it be shared by RE and W&D "based on effective amount of their contribution". The word "effective" was used to reflect the fact that the equity contribution of the engineers and thus RE had been reduced by the amount of $600,000 that was to be paid from the SCF funds. This resulted in the "effective" contribution as adjusted by this process.
78On 24 October 2005 Mr Alessi, on behalf of RE, accepted Mr Fayle's offer of "compromise" at 55% (W&D) and 45% (RE) with a proposal that the reward amount be $1 million with a request that RE's $450,000 go directly to Mr Alessi. That acceptance was said to be on the understanding that the distribution of the reward amount would occur before the distribution to W&D of the agreed amount of $500,00 for the provision of the Land to the joint venture. Mr Alessi's email also referred to Mr Gray producing a deed and the need for additional insurance for Mr Alessi. The email included Mr Alessi's claims as to why the acceptance of Mr Fayle's offer should be seen as "fair". One of those claims was that W&D stood to lose approximately $750,000 more than RE "if the project terminated (e.g land input and fees payable)". Another was that W&D stood to receive approximately $1 million more than RE if the "project reaches a successful conclusion. (e.g full fees, land reward, profits etc)".
79Mr Fayle's email response of 25 October 2005 suggested that Mr Alessi's observations were, inter alia, ill conceived. However he advised that W&D was prepared to "accept your acceptance of the percentage split and the "reward" amount sharing of $1m as noted below". What was "noted below" included that Mr Fayle would have to consult Mr Chiarella, who was away that day, in relation to whether the reward amount was to be paid before or after the $500,000 payment to W&D for the Land contribution which had been agreed to be paid "before profit". That was no doubt a reference to the Heads of Agreement that provided for the timing of such payment. Mr Fayle informed Mr Alessi that he would "advise asap" in respect of this matter. He agreed that the $450,000 could be paid as requested and advised that he would arrange for quotations for the additional insurances "as well as a deed from Jack for all to sign". He concluded that he was "glad to have this sorted".
80The joint venture was a commercial arrangement evidenced by the Heads of Agreement and the Supplementary Heads of Agreement. The arrangements for funding from SCF for the Project were made pursuant to that commercial arrangement. The emails of 23, 24 ad 25 October 2005 should be given a business like interpretation and should be construed having regard to the surrounding circumstances at the time of the exchange of emails, the language used by the parties, and the commercial circumstances that the emails address in particular the imperatives of obtaining the funding at the time: McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 at 589 [22] per Gleeson CJ.
81The commercial purpose of the proposal for the reward payment was to accommodate the circumstance that it was necessary to use part of the SCF loan funds to discharge RE's overdraft and free up the engineer's properties so they could be offered to SCF as security for its loan.
82The plaintiffs submitted that Note 2 to the spreadsheet clearly states that the funding for the Project was to be provided on an equal (50/50) basis and the intent was to record the "final deal to equalise the risk taking into account the overdraft portion of the SCF loan". The plaintiffs contended that the overdraft became a project cost and RE or the engineers did not have to repay the amount advanced from the SCF loan funds to pay off its overdraft unless the Project was successful. It was not submitted that the way in which it would "repay" that liability was to allow W&D a greater share of the reward payment. Rather it was submitted that the engineers would repay the overdraft out of the profits of the Project. The plaintiff contended that if the Project was not successful then the total debt to SCF would be shared equally between the guarantors in accordance with the 50/50 division between RE and W&D and within those groups equally in accordance with their shareholding.
83The defendants submitted that the emails and the spreadsheet did not evidence an agreement that the amount paid to discharge RE's overdraft would not have to be repaid separately by RE to W&D if the Project was terminated. The defendants submitted that it would be absurd to suggest that the architects would have agreed that instead of receiving the $550,000 (or $600,000) from the engineers, they were willing to receive only $50,000 more of the reward amount of $1 million (ie $550,000 instead of $500,000).
84The defendant submitted that a concluded agreement was not reached in the emails because there was no agreement reached as to whether the reward payment was to be made before or after the $500,000 was paid to W&D for the Land contribution. If the $500,000 was to be paid to W&D before the reward payment was to be paid, the amount of the reward payment would not be affected unless the remaining profits were less than $1 million. The SCF facility was signed on 28 October 2005, three days after Mr Fayle's email advising that he was "glad to have this sorted". The failure to reach express agreement on whether the W&D amount for Land contribution was to be paid before the reward payment does not mean that no binding agreement was reached in the emails in respect of the share of the reward payment and what adjustments were to be made to accommodate the payment of $600,000 to engineers/RE out of the SCF loan.
85The first facility agreement with SCF was signed on 28 October 2005. That facility was for $NZ7.85 million for a period of 12 months. The conduct of the parties after the emails is able to be reviewed for the purpose of deciding whether a contract was formed: Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 164 [26] per Heydon JA. It is also important to have regard to the commercial circumstances surrounding the conduct and communications of the parties at this time: Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540.
86In this regard when it came to payment out of the first SCF facility and the obtaining of the second SCF facility, there was no adjustment to the arrangement. When the second facility was obtained from SCF the parties submitted the same securities (excluding the Land) and each of the parties who had signed guarantees in respect of the first SCF loan signed guarantees in the same terms in respect of the second SCF loan.
87The parties' use of the language "we accept" and "glad to have this sorted", in the context of their conduct in proceeding with the first loan from SCF soon after these emails, persuades me that they were content to be bound immediately by the terms they had agreed even though the formalisation of the contract by deed (which they both anticipated) was yet to occur: Masters v Cameron (1954) 91 CLR 353. I am also satisfied that the parties intended to be bound by the agreement as to the percentage share 45% RE/55% W&D of the reward payment with the prospect that there may be a further term agreed if W&D were willing to allow the reward payment to take priority over the Land contribution payment to W&D: Sinclair, Scott & Company Limited v Naughton (1929) 43 CLR 310 at 317.
88The plaintiff submitted that once this agreement was reached the parties intended that RE and W&D would be equally liable for the SCF debt and the co-guarantors would be equally liable for the SCF debt.
89The terms of the agreement reached in October 2005 did not deal expressly with what was to occur if the Project failed. The plaintiffs contend that the inclusion of the overdraft amounts in the spreadsheet supports their submission that the parties' intentions were to include the overdraft as a cost of the Project and that the parties would be equally liable for the whole of the SCF debt. The defendants submitted that the inclusion of the amounts in respect of the payment out of the overdraft in the spreadsheet should be understood as being merely for the purpose of the calculation of the amount of the reward payment without affecting the engineers'/RE's liability to the architects/W&D to repay the amount for the discharge of the overdraft whether it be out of the profits or otherwise.
90When Mr Alessi outlined his arguments in his email of 24 October 2005 as to why RE's acceptance of W&D's offer was "fair", he referred to an outcome "at this moment" if the project "terminated". He suggested that W&D stood to lose approximately $750,000 more than RE with reference to "land input and fees payable". No mention was made of the overdraft. The absence of any mention of the overdraft amount may be seen to support the construction that the parties intended that the overdraft was to be a cost of the Project, the burden of which was to be shared equally between RE and W&D. On the other hand the absence of any mention of the overdraft amount may be seen as support for the proposition that this amount was always the engineers'/RE's responsibility otherwise W&D's loss "at this moment" would have been increased to include the overdraft amount. Mr Fayle clearly disagreed with Mr Alessi's observations in relation to why the acceptance of the compromise was "fair", but chose to let those disagreements "slide-by", as he put it in the post script to his email of 25 October 2005. The fact that the overdraft was not mentioned in this part of Mr Alessi's email is not decisive but is a matter to be taken into account in determining whether an agreement was reached in the terms propounded by the plaintiffs that liability for the repayment of the overdraft was limited to the Project being successful and there being enough profits out of which to repay the overdraft amount.
91The terms of the emails, in particular the spreadsheet, are ambiguous as to what was to occur in relation to the overdraft amount if the Project was terminated or there was no reward payment or profits. Extrinsic evidence was called by each of the parties of discussions at the time consistently with the principle that such evidence is admissible if that conduct casts light on the genesis of the contract, its objective aim or the meaning of any descriptive term: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347-352; Brambles Holdings Ltd v Bathurst City Council at 163 [24].
92I am of the view that Mr Parker's recollection that Mr Watts informed Mr Fayle on 7 September 2005 that RE had an overdraft of approximately $550,000 secured by second mortgages over the engineers' properties is inaccurate. I am satisfied that Mr Fayle and Mr Chiarella were alerted to the existence of the RE overdraft by Mr Anderson of SCF at the time the funding was being finalised. Mr Parker gave evidence in his affidavit in reply that the "engineers had acknowledged that they would need to pay the overdraft back to W & D when the project was finalised and before the profits were distributed". Mr Parker agreed that this acknowledgment was something that had been given before the meeting of 21 October 2005. He agreed that someone said to the architects "we will repay the overdraft to the architects when the project is finalised and before profits are distributed".
93Mr Fayle's version of the conversation was that the payment of the SCF loan funds to discharge RE's overdraft was to be a loan from MPR and that the engineers were to pay it back at the end of the Project.
94Mr Alessi did not recall any mention of a "loan" from MPR and denied that there was any conversation about a need for RE to repay the amount of the SCF loan that was used to repay the overdraft. However when he was cross-examined about what he meant by his claim in his affidavit that the overdraft needed to be "adjusted", he claimed that he had said to the architects that he "didn't think that the whole $550,000 of the overdraft should be paid to the architects out of the profits". He agreed that the overdraft needed to be adjusted at the end of the Project but was unable to provide any clear explanation as to how this would occur. Although he claimed it was to be included as "part of the project cost" he was unable to identify any conversation that amounted to an agreement to such an express term and suggested that this term was included in the emails.
95Mr Watts gave evidence that there was no discussion about "a loan". His evidence was that the architects were to take the amount for the overdraft out of the profits and then the two groups would take their shares of the remaining profits. Mr Watts did not give evidence, nor was he cross-examined as to whether the payment to the architects of the overdraft amount was to take priority over the reward payments.
96Mr Fayle's evidence was unsatisfactory in that he agreed that he had an understanding that the engineers and architects were equally liable for the SCF debt and then denied that understanding a few answers later.
97There was a pressing need for funding for the Project in October 2005. I am satisfied that there was late notice to W&D of the RE overdraft and the joint venturers had to move "at a rapid pace" to ensure that funding was secured from SCF for the continuing viability of the Project. There is no doubt that each of the joint venturers were anticipating a profitable outcome of the Project. I am satisfied that Messrs Fayle and the late Mr Chiarella did what they could to produce what they described as an acceptable method of working out the sharing arrangement for the capital input and resulting reward payment for that input.
98These parties had proceeded with a very large joint venture Project on the basis of two very short documents, the Heads of Agreement and the Supplementary Heads of Agreement. They had operated pursuant to those two documents for two years prior to the funding need arising in late October 2005. I am satisfied that when Mr Fayle was met with the fait accompli that the RE overdraft had to be paid out, the method that he devised was one to compensate those of the joint venturers who had put more equity into the venture than the other joint venturers. It is accepted that the two people that were to be compensated by this arrangement were Mr Alessi and Mr Fayle. There was no discussion as to what was to happen in respect of the overdraft amount if there were no profits from the joint venture or the Project terminated.
99Although the plaintiffs originally relied upon the emails of 23 to 25 October 2005 to contend that agreement was reached that the engineers would repay the overdraft at the end of the Project out of the profits of the Project, there is nothing within those emails referring to such an obligation. The narrative parts of the emails are silent as to the existence of the overdraft and the spreadsheet refers to the overdraft to adjust the "effective" equity contributions to determine the reward payment. It is curious therefore that the plaintiffs contended that such an agreement could be gleaned from those emails.
100However during submissions Mr Fernon submitted that the evidence in support of the contract propounded by the plaintiffs was found in the acknowledgement referred to in paragraph 10 of Mr Parker's affidavit in reply. On the plaintiffs' case therefore that acknowledgment read with the emails evidence an agreement that not only would a reward payment be made to the engineers and architects in the percentages of 45%/55% ($450,000/$550,000) but also that at the end of the Project the engineers would pay $600,000 to the architects out of the profits of the Project. There was no mention of whether such payment was to be made out of the profits of the Project prior to or after the payment to the architects for the Land contribution. The plaintiffs contend that this agreement included a term that if there were no profits the engineers would not be liable for the overdraft amount.
101I do not accept that the arrangement in relation to the reward payment was a "final deal to equalise the risk", as claimed by the plaintiffs. Rather it was for the purpose of providing some benefit at the end of the Project to those who had made greater equity contributions into the Project by the establishment of a reward payment. I am not satisfied that the "compromise" reached whereby the architects were to receive $50,000 more than the engineers in that reward payment included a term that the engineers would not be responsible for the repayment of the overdraft amount at all if the Project failed.
102I am satisfied that the engineers/RE and the architects/W&D agreed in October 2005 that MPR would proceed to obtain the loan from SCF for NZ$7.85million on the following basis:
The amount of $600,000 would be paid from the SCF loan funds, as to $550,000 to pay off the RE overdraft and as to $50,000 to provide the engineers with funds to meet financial commitments;
The projected profits of the Project would be reduced to $15 million to be shared 50/50 between architects/W&D and engineers/RE and a reward payment of $1 million would be paid before profits were distributed as to 55% ($550,000) to architects/W&D and 45% ($450,000) to engineers/RE; and
That each of the engineers and architects and their spouses would provide personal guarantees and the equity in their homes as security for the SCF loan.
103Although it is not documented I am satisfied from the evidence referred to earlier that the engineers and the architects agreed that the engineers would repay the overdraft amount out of the profits of the Project at the end of the Project. I am also satisfied that the parties did not expressly address or agree what was to happen to that overdraft amount if there were no profits of the Project.
Contribution
104The fact that the parties reached the agreement as found above without reaching final agreement as to how the overdraft amount was to be repaid or what was to occur if there were no profits from the Project does not mean the parties are restrained or constrained from seeking contribution from each of their co-sureties. The question is whether the Court would take into account the fact that the overdraft was paid to the benefit of the engineers.
105The plaintiffs submitted that the liability for the repayment of the SCF loan should be shared equally between the engineers and their wives and the architects and their wives without any regard to the overdraft amount.
106The doctrine of contribution is based on the principle of natural justice that those with a common obligation should contribute proportionately in satisfaction of that obligation: Mahoney v McManus (1981) 36 ALR 545 per Gibbs CJ at 551; Wilson J at 557; and Brennan J at 559. A party who has provided more than a "just proportion" in satisfaction of the obligation is entitled to contribution from the others with the common obligation: McLean v Discount and Finance Ltd (1939) 64 CLR 312 per Starke J at 347 .
107Lang v Le Boursicot (1993) 5 BPR 97,406 was a case in which the plaintiffs sought contribution from co-guarantors who had guaranteed the obligations of a lessee (BFR Meat Exports Pty Limited (BFR)) under two commercial leases between BFR and Permanent Holdings Pty Limited. One lease was for equipment and furniture for a meat boning and export business to be carried on by BFR in premises of which one of the plaintiffs, Ravenscar Pty Limited (Ravenscar), was the owner and who also occupied part of the premises. The other lease was in respect of existing plant and new plant purchased for the expansion of the business. The business ran into financial difficulties fairly quickly and a liquidator was appointed to BFR. The leased items remained in the premises and the liquidator surrendered possession of those premises to Ravenscar and treated BFR's interest in the leases as of no value. Ravenscar purported to assume full ownership of the items the subject of the leases. One of the defences to the claim for contribution brought by the plaintiffs was that a benefit had been derived by Ravenscar by reason of the retention of the leased equipment and that benefit should be brought to account in any assessment of contribution.
108McLelland J referred (at 11,788) to "benefits" arising from the guarantees in question enuring to the guarantor claiming contribution "in a manner not contemplated by the parties at the time the guarantees were given". His Honour observed that the "benefit" of the guarantees accrued in the manner contemplated when they were given, being the provision of funds resulting in BFR having the benefit of plant and equipment and enhanced premises. His Honour said that what was perhaps "not contemplated" was how short a duration the business would have. His Honour rejected the defence and said at 11,788:
If it could be affirmatively demonstrated that Ravenscar derived some quantifiable realised financial gain from the leased items remaining in its possession during the period from the cessation of business by BFR to 22 November 1985 it might be proper to debit the amount of that gain against amounts paid by Ravenscar in respect of which it might otherwise be entitled to claim contribution.
109In the present case the "benefit" of the guarantees accrued in a manner contemplated when SCF provided the funds for the Project.
110Trotter v Franklin [1991] 2 NZLR 92 was a case in which a firm of solicitors and a share broker combined forces to establish a company to take a head lease over a building. The firm of solicitors comprised three partners at the time of the entry into the head lease and the share brokers' practice comprised two partners (although at the time the parties agreed to obtain the lease there was only one partner of the share broking practice). The parties via the corporate vehicle they had incorporated obtained a loan from the Bank of New Zealand to refurbish the building. Each of the solicitors and the original partner of the share broking practice signed guarantees. The share broking practice was sold and by reason of the failure of the original share broker to continue repayments of the loan funds, the solicitors paid out the total debt. The solicitors then sued the share broker for contribution. Tipping J referred to the following principles gleaned from the authorities at 97:
An action between co-sureties is founded on equitable principles rather than on contract;
The right to contribution is firmly founded upon natural justice and equitable principles; and
The right to contribution and the proportionate obligations that are prima facie equal may be varied by contract.
111One of the questions that arose for determination in that case was what, if any, effect the plaintiffs' use of the fixtures, fittings and chattels in the premises and the use of the premises themselves should have on the quantum of any contribution. Tipping J rejected the submission that the rule of equal sharing between co-sureties could only be displaced by express agreement to the contrary in favour of the approach consistently with equitable principles of just apportionment between co-sureties. His Honour said at 98:
Ordinarily the justice of the matter will require equality of sharing. Obviously if the parties have expressly provided to the contrary then justice will require such contrary arrangement to be enforced. It seems to me however that equity may well require unequal sharing if the Court can discern by clear implication either that this is what the parties must have intended or that such unequal sharing is necessary to do justice in the particular case.
112In that case his Honour was satisfied that there was a clear and necessary implication that the parties had agreed to vary the prima facie rule so that the share broker would carry 50% of the liabilities under the guarantee and the three solicitors would carry the other 50% between them. On the question of whether the share broker was entitled to a credit as an equitable condition of the plaintiffs' right to contribution, his Honour held that the plaintiffs had received no relevant benefit because of their obligation to account to the corporate vehicle if such benefit had been obtained.
113Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116 was a case in which parents (Mr and Mrs Panebianco) had provided a mortgage over their home at Fairfield as security for a supplementary loan to their son and his wife from Citibank. Funds were advanced to assist the running of the son's business through a corporate vehicle. There was default under the loan arrangement and the son and his wife were declared bankrupt. The Official Trustee sold the son's and his wife's home and used the proceeds of sale to pay out the total indebtedness to Citibank. The Official Trustee then pursued the parents on behalf of their son and his wife for contribution for one half of the amount paid to Citibank and in so doing relied upon Citibank's mortgage over their Fairfield house.
114Bryson J (as his Honour then was) was satisfied that the parents had accepted the role of surety for the son and wife without consideration and were entitled to an indemnity from them on the principle stated in Israel v Foreshore Properties Pty Ltd (1980) 54 ALJR 421 at 423-424. On this basis alone his Honour was satisfied that the Official Trustee's proceedings against the parents should be dismissed. However because the plaintiff's case was presented and argued as if equity were the sole source of applicable principles his Honour addressed the application on that basis. In doing so his Honour said at 119-120:
Equity is Equality. The right to contribution:
When persons fall under common liability such as a liability as joint debtors, or joint and several debtors, or as sureties of the debt of another person, the creditor may enforce the remedies available to him to his own advantage, but if a disproportionate burden falls on one of them, that one has an entitlement in equity to contribution by the others so that overall the burden is distributed fairly, and he has an entitlement to be subrogated to rights which the creditor has not exercised, such as securities over property of others who are under the common liability. This is an application of the equitable principle "Equity is Equality".
If consideration of the relationship among the parties were limited to the terms of the documents which create obligations to Citibank it would be clear that the mortgagors referred to in the deed of supplementary loan fell under a common liability so that there would be an entitlement to contribution. However, their characterisation as co-sureties with a common liability is only established prima facie by the terms of the documents, and, as ever with equitable relief, relief must be based on the substance of transactions, which is not established solely by the terms of those documents. It is a commonplace of cases relating to contribution that, although persons appear on the face of a document to have entered into a liability as sureties on the same basis, agreements or understandings among them or the circumstances in which they acted may establish that their true relationship is otherwise. In particular it may be established that as between them, one has primary liability and another has a liability to be resorted to only if resort to the first is insufficient.
The remedy sought in this case is wholly equitable. There is no express or implied contractual undertaking that the second defendants [the parents] would pay contribution. Underlying any decision to order contribution as an equitable remedy is a characterisation by the Court of the parties as in positions of equality so that equality of outcome is appropriate. The relationship among the persons concerned may of itself show that it is just that the primary liability should fall on one of them, so that remedies securing equality of outcome are not appropriate; or it may show that it is just that if the liability fall wholly on one of them that person should be indemnified, or it may show that he should have no remedy. The Court is not enforcing contractual or other legal rights of the parties, but is intervening, as a court of conscience, to secure a just outcome. Ordinarily equality produces a just outcome, but circumstances may show otherwise.
115After dealing with authorities that demonstrated that the equitable doctrine and not the actual or imputed agreement of co-sureties is the basis on which contribution is awarded, his Honour said at 123:
Where equality is departed from, reasons based on agreement or intention established by declarations or inferred from circumstances predominate, but there is no renunciation of the ground on which the earlier authorities proceed, in which it is the view of the court administering equity and not the contractual relationship among the co-sureties which is the basis on which contribution is awarded.
Equitable doctrine and not contract was regarded as the basis of the right of contribution: see Ward v National Bank of New Zealand (1883) 8 App Cas 755 at 765; and see Hodgson J in AGC (Advances) Ltd v West at first instance (1984) 5 NSWLR 590 at 604-605.
116His Honour then dealt with the contention that the prima facie right to contribution could only be rebutted if a common intention to the contrary was clearly proved by evidence of some agreement or arrangement. His Honour said at 128-129:
No doubt it is very usual that rebuttal takes that form, but in my opinion it is not necessary that there should be a common intention or a bilateral arrangement, and it is not necessary that there should be any expression of an intention or arrangement, as circumstances can occur in which an intended outcome is so clear and obvious that it must be imputed to the parties that they intended it. Quite apart from any intention held by the parties or imputed to them, circumstances can occur in which, without there being any expression of intention or actual advertence to the subject of contribution, it is clear that equity does not require that an obligation to make contribution should be imposed on a party. The court should not lose sight of the origin of the right of contribution in the equitable principle that equity is equality, or forget that facts may exist in which it is not appropriate to treat parties under a common liability as in an equal position, or in which some other equitable principle ought to be given effect.
117Bryson J then referred (at 129) to the passage from Trotter v Franklin extracted above in which Tipping J said that "equity may well require unequal sharing if the Court can discern by clear implication either that this is what the parties must have intended or that such unequal sharing is necessary to do justice in the particular case" and said that this conclusion was "the same as my own". His Honour observed that Tipping J did not cite authority "but spoke from the standpoint of the application of principle". His Honour also observed that Tipping J's observations were obiter because he awarded contribution on the basis of equality.
118These observations in Trotter v Franklin were the subject of comment in Hampton v Minns [2002] 1 WLR 1 where Kevin Garnett QC (sitting as a deputy High Court Judge) suggested (at [66]) that the second limb of Tipping J's conclusion "that the right of contribution as between co-sureties may be modified if the justice of the case demands it" did not represent a correct statement of the English law "in the absence, for example, of something in the nature of an estoppel". It is apparent that in that case the Court did not refer to Official Trustee in Bankruptcy v Citibank Savings Ltd.
119I am not sure that the observations in Trotter v Franklin and/or Official Trustee in Bankruptcy v Citibank Savings Ltd equate to the proposition that there is a general discretion to depart from equality of contribution. Rather they seem to me to be consistent with what was said in Mahoney v McManus and McLean v Discount and Finance Ltd that if a party has provided more than their just proportion (to be gleaned from the intention of the parties that may or may not amount to an express or implied agreement) then they are entitled to contribution.
120Steel v Dixon (1881) 17 Ch 825 involved sureties jointly and severally guaranteeing a borrowing from the bank. In that case two of the sureties had secured a bill of sale from the borrower the terms of which were that any proceeds arising from the exercise of the power of sale would be applied first in satisfaction of the liability which those two sureties had incurred and secondly against the liability of the other two sureties. The borrower defaulted and the co-sureties paid the debt due to the bank. The two sureties exercised the power of sale and the proceeds were sufficient to recoup their outlay in full but did not cover the liability of the other two sureties. The other two sureties then sought a declaration that the proceeds from the sale should be shared equally between them. Fry J held that they were entitled to such a declaration and said at 830:
I hold, therefore, that the result of Dering v Earl Winchelsea is to require that the ultimate burden, whatever it may be, is, as between the co-sureties, to be born by them in proportion to the share of the debt for which they have made themselves responsible.
If that be the case, it follows that each surety must bring into hotchpotch every benefit which he has received in respect of the suretyship which he undertook...
121In Bond v Larobi Pty Ltd (1992) 6 WAR 489, Owen J said at 495:
In my opinion, Steel v Dixon (supra) is not authority for the proposition that only an express agreement between co-sureties can affect the right to contribution. The case recognises that the underlying equity may be altered by agreement. What it says is that an agreement by which one surety receives a benefit which is not available to the co-sureties is offensive and equity will require the surety to share that benefit with others with whom he has a proportional burden.
122In Leigh-Mardon Pty Limited v Wawn (1995) 17 ACSR 741 Hodgson J (as his Honour then was) departed from the "usual rule" and awarded contribution equivalent to the proportions of the loans the joint venturers had received which reflected their percentage interest in the joint venture.
123In this case the defendants raise the equitable defence that the plaintiffs derived a financial gain from the payment of the overdraft amount. It is clear that the engineers were equally liable for the overdraft of RE. The $550,000 discharged that liability and the engineers obtained the benefit of the guarantees from the architects in respect of the loan that paid out their overdraft and if the architects are required to contribute to the SCF loan equally with the engineers the architects will be providing more than their just proportion.
124The architects and the engineers agreed to create a reward payment and reached a "compromise" on the percentage share of the reward amount on the basis that the engineers did not have an obligation to repay the amount utilised from the SCF loans to pay out the overdraft until the end of the Project. However I am not satisfied that the parties intended that if the Project was not successful and the parties were called upon under their guarantees that such benefit that enured to the engineers by repayment from the SCF funds to discharge their overdraft would not be brought to account.
125The plaintiffs sought to argue that the payment out of the overdraft was not merely a benefit to the engineers but also to the architects. It was submitted that the benefit that flowed to the architects was the capacity to obtain the funding for the Project, because if the overdraft had not been paid out, no such funding would have been obtained. It is true that the Project funding was obtained because the engineers' properties were made available as security and the overdraft was paid out, a condition imposed by SCF for its willingness to fund the Project. However this was a debt owed by the engineers/RE for which the architects had no responsibility and in respect of which the architects received no benefit. The joint venture did not receive any benefit because none of that fund was available for use in pursuit of the Project.
126At the time the loan was being contemplated all of the individuals involved recognised that in one way or another, the engineers would bear a particular responsibility for the overdraft amount. All of the joint venturers agreed that the architects were to be repaid the amount the engineers received to discharge their overdraft. The manner in which they dealt with it in the Project as a going concern does not in my view mean that they agreed that they would have no obligation to be responsible for the repayment of the overdraft amount of the SCF debt if the Project failed.
127The fact that the joint venturers agreed to adjust their entitlements by the adoption of the reward payment does not mean that they agreed to restrict their entitlement to claim contribution under their guarantees. Nor does it mean that they intended that if they were called upon under their guarantees the architects would have to bear the burden equally with the engineers for the whole of the amount that was paid to the engineers to discharge their overdraft. It was never intended that the architects would bear that burden. All the joint venturers were attempting to adjust the position to ensure that this burden stayed with the engineers. The net effect of the adjustment after the provision of the $600,000 to the engineers was that the architects' nett equity contribution in the joint venture was 65% and the engineers' nett equity contribution was 35%. The architects compromised and accepted 55% of the reward payment, providing an extra 10% to the engineers. Irrespective of the compromise that was reached, it is clear that the parties intended that there should be some adjustment by reason of the payment of the engineers' overdraft. Far from there being an intention to burden the architects with the responsibility of the overdraft amount, the parties' conduct demonstrates an intention that they would not be so burdened, even though their intentions were poorly documented. However the pace at which the arrangements were made contributed to this circumstance.
128The defendants submitted that the circumstances of this case are closely analogous to those with which Bryson J was dealing in Official Trustee in Bankruptcy v Citibank Savings Ltd. The plaintiffs submitted that this case is distinguishable on the basis that there was clearly discussion about the repayment of the overdraft and the parties were in a joint venture arrangement, whereas in Official Trustee in Bankruptcy v Citibank Savings Ltd the parents had no interest in the company that was the vehicle for the operation of their son's business and there was no discussion or agreement about the repayment of the loans. I agree with the plaintiffs' submission.
129The defendants submitted that the fact that the records of MPR and RE recorded debt from RE to MPR is of no consequence to the position in equity. The transaction could not have been recorded in any other way in the books of the two companies. In form and substance as between corporate entities the transaction was entered into for the benefit of the engineers and not for the benefit of the architects or the joint venture. I agree with those submissions.
130Although the parties did not reach final agreement as to what was to happen in relation to the repayment of the overdraft if there were no profits from the Project, I am satisfied that their conduct indicates a clear intention that the burden for the repayment of the overdraft amount was never to be with the architects and was always to be the responsibility of the engineers.
131I am satisfied that equality in this case means bringing to account the benefit received by the engineers of the overdraft amount of $600,000. The parties reached agreement on the "mathematics" of this outcome. I am satisfied that the schedule prepared by Mr Braham SC in which the lower interest rate is reflected is that which should be adopted. However I am of the view that the better course is to allow the parties to prepare Short Minutes of Order reflecting the outcome on the basis of these findings. The matter is listed for this purpose at 10.00 am on 1 September 2011. If the parties are unable to reach agreement on costs I will hear argument on that occasion or on some other date as arranged with my Associate.