Brooker v Friend & Brooker & Anor

Issues 175 The issues, as presented by the Appellant were:

(1) Was there a contractual obligation on Mr Friend to contribute to the capital and interest payments required to be made by Mr Brooker to SMK arising out of: (a) a general oral agreement reached in 1977; (b) a specific oral agreement reached in or about November 1986 pursuant to which Mr Friend - (i) was a co-borrower from SMK, or (ii) agreed to pay half of the repayments on the loan?

(2) Absent a contractual obligation: (a) would equity require Mr Friend to contribute half of the repayments because the joint business had received the benefit of the funds; (b) if so, would such an obligation arise only where payment by Mr Brooker was imminent; (c) if so, was such payment imminent, and (d) should relief be otherwise refused because of laches on the part of Mr Brooker?

(1)(a) Oral agreement: 1977 176 The first basis upon which the Appellant sought to establish his entitlement to repayment of part of the loan from Mr Friend was the oral agreement between them as to the establishment of their joint venture, in about or prior to May 1977. 177 It may readily be accepted that there was an agreement to share equally the financial burden of running the business and thus to share equally the financial contributions to the company. However, there was no express agreement as to how the cost of any funds procured by each individual might be accounted for. Once the company was incorporated, it might have been expected that it would obtain funds by one of two means. The first and most direct means would have been for the company to borrow, possibly with the benefit of directors' guarantees, secured over assets of the directors or their families. To the extent that the directors thereby became co-guarantors, according to established principle, each would be obliged to meet a half-share of the obligation guaranteed so that, if more than half of the debt were recovered from one, he would be entitled to a contribution from the other. However, the major debt to SMK did not fall within those principles, because there was no borrowing by the company directly from SMK. 178 A second means by which the company might obtain financial contributions was by way of a loan from a director. To the extent that the directors provided financial resources unequally, he who provided greater than 50% of the financial accommodation could recoup half of the difference from the other director. The directors did provide loans, and that principle may be relevant. However, the dispute does not engage at that level. 179 What in fact seems to have happened was that the company obtained funds from a number of sources, including family and friends of each of the directors. There was a stage at which, as described by senior counsel for the appellant, to clear the balance sheet, "the creditors related to Mr Friend would be pooled into Mr Friend's loan account, while the creditors associated with Mr Brooker would pooled into Mr Brooker's loan account": Tcpt, C/A, 13 March 2006, p 16(45), and see [2005] NSWSC 395 at [14], set out at [RM 63] above. Whilst that may describe the result in colloquial terms, legally speaking there must have been a novation in each case pursuant to which the respective director was substituted as a borrower, in place of the company. What is not explained is whether there was interest payable on the loans to the company, and if so, whether interest remained payable under the novated arrangements and, if so, whether and to what extent the company became liable for those interest payments. One way of achieving liability on the part of the company for such interest payments would have been to make interest payable on the directors' loan accounts. That was sought to be done by a somewhat cryptic resolution passed at a directors' meeting on 8 December 1993, the minutes of which read: "1. Company Loans from Directors The interest brought to account in respect of certain loans raised by the Directors and applied for the benefit of the company. Further notes some interest had been paid for on behalf of the Company leading up to settlement and this had been accounted for and credited to Directors' Loan Accounts. Resolved to accept interest on loans raised by Directors and for which interest had not been paid but was legally accrued. Further resolved the rate to be applied would be the rate of interest applied in the NSW Supreme Court and would be calculated on all such loans from 1/7/1984." 180 If an overarching joint venture agreement were established, in 1977, which allocated equally the cost of funds required by the joint venture, one would have expected there to be some form of partnership accounts. Otherwise, it would not be possible for one partner to know what were the costs of funds which had been incurred by another partner in obtaining financial accommodation for the business. Nor would it be possible, without any documentation, to keep a running account over two or more decades. For the reasons given by McColl JA, the evidence failed to establish the existence of any relevant agreement to that effect in 1977.

(1)(b) Specific oral agreement: November 1986 181 There were several loans obtained from SMK, two preceding the $350,000 loan obtained in December 1986, and two succeeding it. The later loans are not in dispute, because Mr Brooker appears to have accepted that they were not obtained on account of the joint venture. The two earlier loans are not in issue because they were paid out. The question is then whether there was any specific agreement in relation to responsibility for the $350,000 loan. 182 Mr Brooker gave evidence of a conversation he had with Mr Graham Peterson (on behalf of SMK) with respect to a possible advance of $350,000, whilst the dispute between the company and the Council was being resolved, being for a period which he hoped would not exceed 12 months: affidavit, 25/11/02, par 159. Two or three days later he had a conversation with Mr Friend which was said to include the following exchange (at par 160): "I said: 'Graham and Sue Peterson have offered to loan us $350,000 to take the pressure off until we finalise the claim against the Council.' He said: 'What do you think?' I said: 'We do not have a choice. If we do not accept there is no way we can repay Alcon or the De Bakkers or maintain the Trade Credits loan.' He said: 'Well then, we should do it.'" 183 There are two objective circumstances surrounding the SMK loan. The first is that the proceeds of the loan were almost entirely (if not entirely) expended in meeting financial obligations of the company. Secondly, the documentation in relation to the loan was limited to the execution of a mortgage by Mr Brooker and two members of his family who were joint owners of the property over which the loan was secured. 184 According to the epitome of mortgage, interest was payable on the loan at the rate of 19.5%, reducible to 18.5% on prompt payment. Most of the quarterly payments of interest, however, were not made within the prescribed period and unpaid interest was capitalised. Mr Peterson gave evidence that he had later agreed to a variable interest rate: affidavit, 15 November 2004, par 13. 185 The primary case made by Mr Brooker was that Mr Friend was a co-borrower from SMK. Although it may be said that Mr Friend knew that a loan was being taken out and agreed to that course, there is no evidence that he knew of the interest rate or other terms of the loan. Put on that basis, the Appellant's case failed at trial: see [2005] NSWSC 395 at [32] and [75]. In my view, the challenge to his Honour's conclusions on this issue should be rejected. 186 Put more broadly, and assuming there was some overarching agreement in relation to financial accommodation, there is no significant evidence that, in any other case, the cost of funds incurred by one of the directors was brought into account. If the SMK loan were a special case, there is no evidence upon which to found an express agreement by Mr Friend to be responsible for half of the cost of the funds. 187 The final contractual possibility which appeared to derive some limited support from Mr Peterson's evidence, was that the loan was made to the company, at least as a co-borrower, if not the sole borrower. In that event, the interest payable on the loan should have been recorded as an expense in the company's accounts. There is no financial accounting by the company showing such an expense, from 1986 until the date of trial. But even if there were, that would undoubtedly render the company insolvent and the lender would be entitled to look to Mr Brooker, and the provision of security by him and his family, for payment of the outstanding debt. Again, Mr Brooker's interests will only be served if he can demonstrate liability on the part of Mr Friend personally. 188 A final problem with respect to the claim by Mr Brooker is that the contractual liability sought to be established is to meet one-half of the actual cost of the loan obtained by the other director. The amount sought is, however, an unpaid debt. If Mr Friend's contractual obligation is to account to Mr Brooker, it would seem to be a precondition to a payment by Mr Friend that Mr Brooker had in fact paid the outstanding debt to SMK. That has not happened. 189 It follows that the Appellant cannot succeed on his contractual claims, however formulated.

(2) Equitable contribution 190 Alternatively, the Appellant asserted that he and Mr Friend had a fiduciary relationship which required the one to make good half of any costs or expenses incurred by the other in obtaining financial accommodation for the joint venture. This claim raises three issues on which Mr Brooker must succeed, namely that:

(1) the equitable obligation extends to cover contribution to pay interest on funds raised by personal loans to a director;

(2) an equitable right of contribution has crystallized where the primary debtor has not repaid his share of the loan, and

(3) relief should be granted, absent proof that payment of more than the share payable by the primary debtor is imminent.

(a) Existence of fiduciary obligation 191 For the reasons given by McColl JA, it was open to the trial judge to conclude that there was no partnership, in the legal sense, between Messrs Brooker and Friend after the incorporation of the company: see [141] above. However, the conclusion reached by the primary judge that, following incorporation, their relationship was purely one of co-directors of the company, understates the true nature of the relationship: see [2005] NSWSC 395 at [77]. Furthermore, his Honour's comment at [79] that "Mr Brooker has utterly failed to prove any agreement pursuant to which the existence of a fiduciary relationship with Mr Friend was established after the incorporation of the company" places, with respect, too much emphasis on the notion of agreement. As explained by McColl JA, the conduct of the parties over the years demonstrated the existence of a fiduciary relationship, in the nature of a joint venture, which was not confined to the management of the company. That follows from the fact that it was Messrs Brooker and Friend who arranged funding for the company from their own resources. 192 The legal principles upon which the Appellant relied were stated by Warren J (as her Honour then was) in Mathieson v Booth [2000] VSC 385 at [105]-[108]. In particular, her Honour stated: "[105] It is well established that persons who combine in a joint business undertaking may owe each other fiduciary duties irrespective of the legal form of the undertaking: United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1; Hill v Rose [1990] VR 129. It does not matter that they have not formed a partnership: United Dominions at 10. Nor does the use of a company structure preclude the existence of a relationship among the investors in the company of a fiduciary nature: Re Yenidje Tobacco Co Ltd [1916] 12 Ch 426; Re Wondoflex Textiles Pty Ltd [1951] VLR 458; Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. In United Dominions the High Court considered the nature of joint ventures and the duties that may flow therefrom. In the joint judgment of Mason, Brennan and Deane JJ (at 10-11) it was held that the terms "joint venture" is not a technical term and connotes an association of persons for a variety of purposes including a financial undertaking with a view to profit.

[106] In my view it is clear from the evidence that the business relationship between Mathieson and Booth was such that they owed each other fiduciary duties. They were involved in a number of joint investments over many years. Indeed, the very terms and effect of the restructure agreement were indicative of a relationship of mutual trust and confidence. In fact, a relationship of mutual trust and confidence was conceded by Booth in cross-examination. Booth said he expected Mathieson to do the fair thing by him and that, in turn, he expected Mathieson to be interested in Booth's financial well-being. Consideration of the authorities and commentaries in relation to the topic of joint ventures reveals that a fundamental [indicium] of a joint venture is the matter of trust: see United Dominions , supra; Biala Pty Ltd v Mallina Holdings Ltd (No. 4) (1993) 13 WAR 11, 57-8; also, Lehane, "Fiduciaries in a Commercial Context", in Finn, Equity and Commercial Relationships , pp.95-108. Furthermore, there was a constant usage by Booth of the expressions "partner" and "partnership" at various times in various documents. In my view this manner of expression conveyed the real nature of the relationship between Mathieson and Booth, that of a business partnership giving rise to mutual obligations. On these bases, therefore, I am satisfied that Mathieson and Booth mutually owed one another a fiduciary duty." 193 It follows that an equitable right to equality of contributions will apply, although the content of the obligation will depend on the circumstances of the case. Support for this approach may be obtained more generally from the principles of unjust enrichment explained by Deane J, Mason J agreeing, in Muschinski v Dodds (1986) 160 CLR 583 at 621-623. That case involved a couple in a de facto relationship who purchased a property for both residential and commercial use. The funds to purchase the property were provided by Mrs Muschinski, although Mr Dodds was expected to provide further funds and labour in due course. That did not eventuate: both the personal relationship and the commercial venture collapsed. As stated by Mason J at p 599: "The circumstances of the case, viewed in the light of the common intention that Mr Dodds was to take an immediate and unconditional interest in the property, did not make it inequitable that he should retain that interest, notwithstanding the failure of the projected development. But it would be inequitable for him to retain his interest without crediting to Mrs Muschinski the contributions which she made to the acquisition and improvement of the property. … I agree with Deane J that the general principle underlying the proportionate repayment of capital contributions to joint venturers on the failure of a joint venture is wide enough to support this aspect of the constructive trust." 194 At p 621, Deane J stated: "If the venture between Mrs Muschinski and Mr Dodds had been merely a commercial one involving the purchase, development, partial realization and use of the Picton land, there would be little room for argument about the appropriate characterisation, for the purposes of the relevant principle of equity, of Mr Dodds' conduct in seeking to assert and retain the full benefit derived by him from Mrs Muschinski's contribution without making any allowance to compensate her for the disproportion between those contributions and his own. The basis upon which Mrs Muschinski made her contributions was that Mr Dodds would, in due course, contribute, both in money and by labour, to the subsequent development. Their planned endeavour collapsed at a time when Mrs Muschinski had made all or almost all of her expected contribution to the overall venture, but Mr Dodds had made almost none of his. The parties had neither adverted to nor made special provision to deal with that situation. If no more than the commercial relationship had been involved, Mr Dodds' conduct in seeking to catch and retain the unfair advantage of unforeseen circumstances by asserting his legal entitlement of a one-half interest in the property without assenting to any adjustment to compensate Mrs Muschinski for the unintended gross disproportion between their respective contributions would plainly be unconscionable for the purposes of the relevant principle of equity." 195 The principles, affirmed in Baumgartner v Baumgartner (1987) 164 CLR 137 by all members of the Court, provide that, in general, equity will grant relief to equalise the contributions to a joint venture where the venture has failed, or prematurely ceased to operate, in circumstances for which the parties did not expressly provide. In the present case, that cannot be done by way of a constructive trust, because there is no valuable property in which the parties can share, the company being virtually insolvent. 196 Adopting that approach, the substantive issue is whether the business relationship extended to sharing the costs of any financial accommodation obtained for the purposes of the business, to the extent they were not met by the company, or whether those costs were to be met by the partner making the contribution. The fiduciary obligations imposed in accordance with equitable principles regarding unconscionable behaviour depend upon the existence of a relationship, and its scope, objectively determined, having regard to the intentions of the parties. 197 According to the Appellant's pleading, the relationship between the parties terminated in January 1995, when he sought an accounting with Mr Friend as to their respective entitlements, a request which Mr Friend refused. For the reasons given by McColl JA, I accept that the relationship between parties required an equality of contributions in relation to the financial accommodation provided to the company. However, two problems remain. 198 First, it is common ground that, between 24 August 1995 and 3 March 1998, Mr Brooker received from the company an amount of $345,000. This was described by the trial judge as a payment "by way of loans": [2005] NSWSC 395 at [59] and see [75] above. The fact that Mr Brooker did not use the funds to repay SMK, as noted at [132] above, is beside the point. It is unclear why the payments were said to be by way of "loans" from the company, presumably leaving Mr Brooker as a debtor of the company, rather than a payment in reduction of the directors' loan account in Mr Brooker's name. In any event, the relevant question for present purposes, is whether Mr Brooker, in his claim for equitable relief, should bring this payment into account in reduction of his claim for reimbursement by Mr Friend. If that were done, and subject to the question of liability for interest, it seems that the financial accommodation supplied by Mr Brooker, and ultimately sourced to SMK, has been repaid in full, or as to all but $5,000. 199 The second issue concerns the obligation to meet the cost of the loan to Mr Brooker. In my view, there are four factors which, taken together, militate against that being part of the mutual fiduciary obligations. First, the decision, taken in about August 1984, to consolidate all loans sourced to third parties who were family members or friends of one or other of the directors, into the directors' loan accounts demonstrates that the directors gave express consideration to the method of accounting for these funds. Secondly, the directors had decided on 8 December 1993, that the company would pay interest at Supreme Court rates on the directors' loan accounts. Thus, the company was required to pay a director interest on funds obtained by that director from any source, and regardless of whether interest was payable to the ultimate lender, and without regard to the rate of such interest. Thirdly, if there were an understanding that the directors would account, as between each other, not only for the capital element of any financial accommodation provided to the company, but also for the cost of funds to them, individually, such accounting would have required the preparation of separate and possibly quite complex accounts, so that the individual circumstances of each director could be known from time to time, and an attempt could be made to reconcile the different interest rates which might have applied to the loans from third parties to the directors and the directors' loan accounts with the company. There is no evidence that any such contemporaneous accounts were kept. The fact that Mr Brooker provided material which constituted a reconstruction of such accounts provides no evidence that there was ever an understanding that such accounts should be kept. Nor was there a shred of evidence that any note had been taken of the cost of funds to a director with respect to the numerous other loans obtained from third parties for the business. 200 Fourthly, there is direct evidence of the intentions in the evidence of Mr Brooker. In his affidavit of 25 November 2002, Mr Brooker gave evidence of conversations with Mr Friend in October 1994 and on 25 January 1995. These conversations related to the expenditure of the third payment received from the Eurobodalla Shire Council, in the amount of $900,000. At a meeting stated to be in or about October 1994, at his home, Mr Brooker said he had explained that the amount would not pay "all the debts" and that "the debt to the Petersons [the SMK directors] is nearly a million dollars". Mr Friend stated that he did not accept liability for the debt to the Petersons. However, at the meeting on 25 January 1995, Mr Brooker gave a somewhat different account of his own position, recording (affidavit, par 120), that he had said to Mr Friend: "My calculations show that my contribution exceeds yours by approximately $900,000. Therefore, after payment of the ANZ Bank and other small creditors, the balance of the money held in trust by [the solicitor] should go to Mr and Mrs Peterson. To ensure that we contribute equally you will have contribute $276,000 and I will have contribute $92,000. We will then have enough to completely pay out the Petersons, the ANZ Bank and the other remaining creditors."

The calculation of contributions to the SMK debt was apparently made on a 25:75 basis, in Mr Brooker's favour. However, significantly, he seemed to be suggesting that the debt would be paid out with an amount of $368,000. Given the size of the debt with interest at that time, that statement appears to be inconsistent with an intention to recoup from the company (or Mr Friend) outstanding interest on the debt, at least at the rate claimed by SMK. 201 Taking this material as a whole, it should be accepted that each director was subject to a fiduciary obligation to meet an equal share of capital contributions. If such accounts were to be taken, they should make allowance for the personal use by Mr Brooker of the $345,000 paid by the company, which was not used by him in immediate reduction of the SMK loan.

(2)(b) and (c) Payment not imminent 202 Even if the Appellant and Mr Friend were to be treated as liable to equitable principles of contribution of the kind applicable to co-sureties, absent an imminent threat by the creditor (SMK) to recover from Mr Brooker, with a real possibility that he would be required and able to pay more than 50% of the liability, Mr Brooker would have no right of contribution from Mr Friend: see Harpley Nominees Pty Ltd v Jeans [2006] NSWCA 176 at [36]-[44] and see Mason and Carter, Restitution Law in Australia (1995) at [637]-[639]. Even if this conclusion were wrong, absent imminent recovery, relief should be refused on discretionary grounds: see again, Harpley Nominees at [36]-[47]. 203 Mr Brooker did not establish that recovery of the moneys payable by him to SMK was imminent, or even reasonably foreseeable. The loan was incurred 20 years ago, in December 1986. The Court was taken to no evidence which suggested that the directors of SMK had threatened to take steps against Mr Brooker to enforce the outstanding obligations to repay capital and interest. Mr Brooker did not say in his affidavits that it had. Furthermore, he filed an affidavit sworn by Mr Peterson, dated 15 November 2004, in which no hint was given that Mr Peterson intended to take steps to have SMK enforce its legal entitlements against Mr Brooker. In giving oral evidence, Mr Brooker was cross-examined to the following effect (Tcpt, 6 December 2004, p 54): "Q. Mr Peterson, your friend, has done nothing to try and recover the money from you, has he? A. No." 204 If it be necessary for Mr Brooker to establish that payment or loss by him was "imminent", in accordance with the authorities referred to in Harpley Nominees, one is entitled to ask when it became imminent? It could hardly be said that there was pressure on Mr Brooker to pay SMK in October 1994, when he was asserting that Mr Friend had an obligation to contribute, or he would surely have told Mr Friend that. If it had been imminent at any stage prior to the trial of the proceedings, one might have hoped for a pleading to that effect at least by the stage of the fifth amended statement of claim filed on 3 December 2004. None is to be found. The last opportunity to establish that point was the evidence of Mr Peterson, given on 7 December 2004. No question was asked of him in chief to that effect. In cross-examination he agreed that Mr Brooker was a long-time friend. It was put to him that, to the extent that his evidence suggested he had lent to Mr Brooker and Mr Friend jointly, that was untrue. Cross-examination continued (Tcpt, 7 December 2004, p 125-128): Q. Why haven't you gone after him [Mr Brooker] for the money Mr Peterson? A. I suppose because he's a friend and (b) he's not in a position to repay it at the moment. … Q. You're not going to go after him for that money, you know he isn't worth a row of beans? A. Well, he's not worth a great deal of money but he does have some assets, yes. Q. Well why aren't you going after them? A. Well as pointed out he's an old friend, I'm not particularly interested in throwing him out of his house at this stage, or any future stage. Q. The fact of the matter is you have effectively abandoned your claim against Mr Brooker because you know he's got nothing and you're not going to execute against him are you? A. I'm not planning to execute against him at the moment, no. … Q. Now is this the position Mr Peterson, that you're not going to sue Mr Brooker for any money or turf him out of his house, but you're here because you think you might get some money if Mr Brooker gets some money out of Mr Friend? A. Well put it this way, and I will answer the question … because I see that in two parts. The first part is, well, he is at the moment looking at putting his house on the market, as I understand it, it is on the market, and when that house is sold I will expect to get some of the proceeds from that house. That's half the point. The second half of the point is yes, it is certainly true that the more assets he has the more money that he has, the greater it's going to be his capacity to service the loan and that's obvious. … Q. And at the end of the day apart from any security you hold for Mr Brooker you're content to look at [the corporate vehicle] as the borrower of the money is that right? A. I can't say it's 'content' but yes that's what I'd have to do."

There was no re-examination. 205 No finding was made by the trial judge as to whether recovery against Mr Brooker was "imminent" or not. In my view, the authorities establish that Mr Brooker is not entitled to relief against Mr Friend unless he can show that he is subject to imminent enforcement of his legal obligation. I am not satisfied that enforcement of any obligation to pay an amount in excess of 50% of the outstanding debt is imminent. Indeed, the evidence persuades me that Mr Peterson had no such intention. The authorities referred to in Harpley Nominees are either inconsistent with an entitlement to equitable relief in these circumstances or would indicate that such relief should be refused on discretionary grounds. There is no need to consider the issues of laches. In these circumstances, the appeal should be dismissed with costs. **********

30/11/2007 - typographical error - Paragraph(s) 198

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