Brown & Ors v Hodgkinson & Ors

Brown & Ors v Hodgkinson & Ors - [2009] NSWSC 262 - NSWSC 2008 case summary — Zoe

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1 The First Plaintiff, Mr Brown, the First Defendant, Mr Hodgkinson, and the Fourth Defendant, Mr Hausman, were friends and property developers. Through their various companies, now parties to these proceedings, they entered into joint ventures to develop two large properties, one in Miller Street, Cammeray, and the other in St Kilda Road, Melbourne. The developments were worth many millions of dollars. 2 By late 2005, Mr Brown wished to sell out of the Cammeray joint venture. He, Mr Hodgkinson and Mr Hausman began discussing the terms of an agreement by which Mr Brown's interest would be purchased by the interests of the other two. The negotiations did not progress quickly enough for Mr Brown. By early August 2006, he was coming under considerable financial pressure for funds for other real estate developments. He became increasingly annoyed at the delay in resolving the terms of the agreement for the buy-out. 3 On the afternoon of Saturday, 12 August 2006, Mr Brown met Mr Hodgkinson and Mr Hausman at the Lord Dudley Hotel in Paddington to discuss the buy-out. A lengthy discussion ensued, over a number of drinks in the public bar. It covered not only Mr Brown's interest in the Cammeray development but also his interest in the St Kilda Road development. A document was produced in the course of the discussion. It was handwritten, mostly by Mr Brown, in a felt-tipped pen on a single sheet of A4 lined paper torn from a notebook. It was signed by the parties. It has come to be called "the Lord Dudley Agreement" and I will continue to use that term. 4 Mr Brown contends that the Lord Dudley Agreement evidences an immediately binding and enforceable agreement whereby Mr Hodgkinson and Mr Hausman or their respective nominees are obliged to buy out his interests in the Cammeray and St Kilda developments. By proceedings 2008 of 2008, he and companies controlled by him seek orders for specific performance, and damages. 5 By their Defence, Messrs Hodgkinson and Hausman contend that the Lord Dudley Agreement:

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it does not identify the interests in land to be sold. 15 Mr Coles' response is that Messrs Brown, Hodgkinson and Hausman were experienced businessmen who had been negotiating this "buy-out" for months. While the words in the Lord Dudley Agreement are meaningless to the uninformed reader, Messrs Brown, Hodgkinson and Hausman, he says, knew exactly what they meant, so that the terms of the agreement were clear to them and they intended by their signatures to indicate that their agreement should be immediately binding. The strongest evidence in his favour, says Mr Coles, is the fact that, prior to any formal agreement being executed, Messrs Hodgkinson and Hausman caused Abadeen and Mrs Brown to receive the payments and benefits provided for in the Lord Dudley Agreement. 16 The explanation for the payments to Abadeen and Mrs Brown given by Messrs Hodgkinson and Hausman in their affidavits seems unconvincing on a mere reading. Mr Hodgkinson said that after the Lord Dudley Agreement was signed, Mr Brown was very persistent in demanding that money be paid to him immediately because he needed it urgently for other transactions. Mr Hodgkinson said that he still regarded Mr Brown as a friend and wished to help him by making whatever payments he could, in the expectation that the terms of the Lord Dudley Agreement would be worked out properly and incorporated in a formal document. However, if that did not happen, Mr Hodgkinson said, he expected that Mr Brown would repay the money. Mr Hausman also said that he felt very pressured by Mr Brown's persistent demands for money after execution of the Lord Dudley Agreement. 17 Messrs Hodgkinson and Hausman are very experienced, large-scale real estate developers. It is hard to imagine them succumbing to no more than verbal pressure to pay large sums of money where there is no legally enforceable agreement to do so. However, having seen and heard Mr Brown at some length in the witness box, and having read the e-mails which he sent, I can appreciate the character of the pressure to which Messrs Hodgkinson and Hausman refer. In the light of that appreciation, their evidence takes on an entirely different complexion, as I shall explain shortly.

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18 There is no dispute about the following facts and circumstances. 19 Mr Brown, then Managing Director of Colliers Residential Australasia, met Mr Hodgkinson in 2001. Mr Hodgkinson was a property developer and consultant to the building and finance industry. They formed a professional and personal relationship. 20 Between 2001 and 2003, Mr Brown and Mr Hodgkinson worked together on the development of three properties, 213 Palmer Street Darlinghurst, 230 Palmer Street East Sydney, and 282 Oxford Street, Bondi Junction. 213 Palmer Street was sold in 2006. 21 230 Palmer Street is a mixed residential and commercial development. Mr Brown and Mr Hodgkinson each had a 50% interest in the development through Sharlotte Pty Ltd ("Sharlotte" - Mr Brown's company and the Second Plaintiff), and Bluestone Property Services Pty Ltd ("Bluestone" - Mr Hodgkinson's company and the Second Defendant). 230 Palmer Street Pty Ltd (a joint venture company and the Third Defendant) borrowed $4,448,000 to finance the development. 22 Mr Brown and Mr Hodgkinson also each had a 50% interest in 282 Oxford Street through a unit trust. Bluestone holds 50% of the units and Abadeen (Mr Brown's company and the Third Plaintiff) holds 50%. 23 In 2003, Mr Hodgkinson and Mr Hausman acquired a property in Crown Street, Darlinghurst, for redevelopment. It was acquired through a company called Crown Street Developments Pty Ltd ("Crown Street Developments" - the Fifth Defendant). By August 2006, Crown Street Developments had borrowed $6.1M to finance the development. 24 From 2003 onwards, Mr Brown, Mr Hodgkinson and Mr Hausman worked together on two large developments called the "Cammeray Development" and the "Chevron Development". As at August 2006, the position was as follows. 25 The Chevron Development comprises some three hundred residential units in St Kilda Road, Melbourne. The property is held by 519 St Kilda Road Developments Pty Ltd ("SKR"). The shareholders of SKR are Bluestone and Mr Hausman's company, Emily Nominees Pty Ltd ("Emily Nominees"). The directors of SKR are Mr Hodgkinson and Mr Hausman. 26 However, Mr Brown is a "silent partner" in the Chevron Development through a company called Greenberg Investments Development Ltd ("Greenberg"). Greenberg is incorporated in the British Virgin Islands but apparently it is administered in, and carries on business in, Hong Kong. Mr Brown is neither a director nor a shareholder, but he controls the company, although how and to what extent is not clear from the evidence. Greenberg is said to control one-third of the equity in the Chevron Development. Greenberg is the Fifth Plaintiff. 27 SKR had borrowed more than $127M for the Chevron Development from a number of financiers, including Capital Finance. Bluestone and Emily Nominees had given supporting guarantees and charges. As at August 2006, sixty-eight of the residential units were nearing completion and about one-third of the units had been sold. Results of the sales effort had been poor. 28 SKR had entered into contracts for sale of seventeen of the units in the Chevron Development to Lighter Quay Investments Ltd ("LQI"). LQI is a company incorporated in New Zealand and is controlled by Mr Brown. It is the Fourth Plaintiff. The contracts were called by the parties the "Lighter Quay Renounceables" because they provided that SKR could terminate them without penalty within a certain period. 29 SKR had also entered into a contract to sell Unit 728 in the Chevron Development to Abadeen and another unit in the development to Mrs Brown for $425,000. 30 The Cammeray Development comprises thirty-nine residential units and five thousand square metres of retail space. It is held by Gorcha Pty Ltd ("Gorcha" - the Seventh Defendant). As at 12 August 2006, the shares in Gorcha were held as to 40% by Greenberg and as to 30% each by Bluestone and Emily Nominees. The directors were Messrs Brown, Hodgkinson and Hausman. 31 Gorcha had borrowed about $17M for the Cammeray Development from financiers, including Capital Finance. Messrs Brown, Hodgkinson and Hausman, Bluestone, Emily Nominees and Greenberg had given supporting guarantees and the companies had given charges over their shares in Gorcha. 32 As at 12 August 2006, construction of the Cammeray Development was expected to commence in early 2007.

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33 Discussion between Messrs Brown, Hodgkinson and Hausman about a buy-out of Mr Brown's interests began in about September 2005. The discussions concerned Mr Brown's interest, through Greenberg, in the Cammeray Development. Mr Hodgkinson and Mr Hausman needed to obtain additional finance to fund the buy-out. They applied to Investec Bank (Australia) Ltd ("Investec") in the names of Bluestone and Mr Hausman's company, Namsauh Holdings Pty Ltd ("Namsauh"). 34 On 4 July 2006, Investec offered a facility of $2.5M. The purpose was "to fund buy-out of third partner's interest in [the Cammeray Development], working capital and capitalised interest for nine months" . The securities included the 230 Palmer Street property, specific units in the 282 Oxford Street property and in the Crown Street property and two other properties. Also required were fixed and floating charges over the assets of Bluestone and Emily Nominees. The assets of those companies included their shares in SKR and Gorcha and thereby their interests in the Chevron and Cammeray Developments. Capital Finance already held charges over those shares as security for funding those developments and its consent would be required for the further charges in favour of Investec. 35 Shortly after 4 July, Mr Hausman had a conversation with Mr Brown in which Mr Hausman told him of the Investec offer but said that it was $500,000 less than they had sought because Investec had reduced the Loan to Valuation Ratios offered as security. Mr Brown's response - and it was typical of his attitude throughout the whole of the negotiations - was that how Messrs Hausman and Hodgkinson financed the buy-out was their problem - all he wanted was his money and he wanted it immediately. 36 The parties carried out a great deal of their negotiations for the buy-out by e-mail, so that there is a contemporaneous record of the progress of the discussion. It is not necessary to recount in detail each step backwards and forwards. A summary will suffice. 37 On 14 July 2006, Mr Brown sent an e-mail to Mr Hausman proposing certain terms in six points. Even with the background knowledge which I have recounted above, the reader would find the terms cryptic to the point of obscurity. However, one can glean that Mr Brown proposed a cash payment of $1.2M out of the proceeds of the Investec loan within a month. Amongst the terms was a proposal concerning the purchase of Mrs Brown's apartment in the Chevron Development. 38 Mr Hausman responded by e-mail later that day. He said: "I agree all 6 points are integral elements of our deal, the specifics of which still need to be agreed by both Lance and myself.

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Q. Yes? A. Thank you. That's my recollection. You are making my life very difficult without letting me refer to the affidavit." 50 Mr Brown, however, repeatedly insisted that he had a commercially binding agreement when he left the hotel with the Lord Dudley Agreement. 51 I am satisfied, not only from what Mr Brown said in his cross examination but also from the way that he said it, that he has very little actual recollection of what was said in the discussions at the Lord Dudley Hotel. The detailed account of the conversation given in his first affidavit is very largely, if not entirely, a reconstruction, based upon the words in the Lord Dudley Agreement and coloured by his own very strong view that what was said and done amounted to a legally binding agreement. 52 Mr Hodgkinson and Mr Hausman deny any words attributed to them in the Lord Dudley Hotel meeting which would indicate an express agreement of all parties to be immediately and legally bound by the Lord Dudley Agreement, without qualification or condition. They say that it was agreed that the parties would refer the terms to their solicitor, Mr David Baxter, and that a formal legal document would be prepared. 53 In my opinion, it is inherently improbable that Mr Hodgkinson and Mr Hausman would have said anything to indicate an intention to be immediately and unconditionally bound by the terms of the Lord Dudley Agreement. First, they were clearly having difficulty raising the finance for the buy-out of Mr Brown's interest in the Cammeray Development and they had earlier made known those difficulties to Mr Brown. Those difficulties had not been resolved by 12 August. 54 Second, and more importantly, the buy-out of Mr Brown's interest in the Chevron Development was raised for the first time as an afterthought at the tail end of the discussion. It was a complex and very large development and Mr Brown's interest in it, held through Greenberg, was far from transparent. Yet, Mr Brown asserts that, notwithstanding the other parties' difficulties in securing finance for the buy-out of his interest in the Cammeray Development, they agreed almost on the spur of the moment to bind themselves unconditionally and immediately to buy out Mr Brown's interest in the Chevron Development as well. 55 For these reasons, I am not satisfied that the parties during the discussion at the Lord Dudley Hotel said or did anything which evinced a common intention that what they had written in the Lord Dudley Agreement should be immediately and unconditionally binding.

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Other items a. Abadeen will be able to use the Cammeray and Chevron project for marketing purposes as an acknowledged involvement b. Justin Brown acknowledges he owes Lance Hodgkinson $18,333.00 c. Bluestone currently owes Colliers $50,000 from the 2EB project d. Justin Brown and Lance Hodgkinson agree a fee in total of $70,000 is owed to Bluestone. A reconciliation of any part of this outstanding amount and any other consultants costs for the 387 Alfred Street project paid by Bluestone e. Points 3a, 3b, 3c and 3d above, to be reconciled, then Justin Brown will pay outstanding amount to Colliers. This is to occur prior to 18 August 2006." 57 The first and most obvious point to note is that Mr Brown refers at the outset to tidying up the Lord Dudley Agreement so that David Baxter, the parties' solicitor, can "establish a Heads of Agreement" . Mr Brown, as an experienced property developer, uses "Heads of Agreement" as a term of art: a preliminary document which will contain the main points of an agreement and may, or may not, be expressed to be legally binding: see e.g. LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2001] NSWSC 886, at [23] per Barrett J. If Mr Brown intended Mr Baxter to prepare a preliminary agreement in the form of "Heads of Agreement", it suggests that what he had obtained in the form of the Lord Dudley Agreement was no more than a note containing points which the parties had signed to acknowledge that, at least thus far, they were in agreement. 58 Mr Brown's memorandum of 14 August supports the evidence of Messrs Hodgkinson and Hausman that at the meeting at the Lord Dudley Hotel there was an express statement by Mr Hodgkinson that he wished Mr Baxter to draft an agreement properly. When asked in cross examination whether there was any reference to Mr Baxter at the meeting, Mr Brown at first evaded the question and then repeated his stock answer "I refer to my affidavit" : T116.3-.9. 59 The next point to note is that in Mr Brown's 'tidied up' version of the Lord Dudley Agreement, he adds some terms not agreed in the Lord Dudley Agreement. For example:

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what special conditions, if any, applied to the transfer of interests in land; 63 These questions, and many more, would require a great deal of discussion and careful instructions before a prudent lawyer could prepare a Heads of Agreement which he or she could confidently advise the parties to acknowledge as legally binding. It should be noted, incidentally, that Mr Baxter was called by neither party. 64 Thus far, the evidence overwhelmingly suggests that the parties manifested no common intention to be bound legally unless and until their agreement had been cast into proper legal form by Mr Baxter. Mr Coles says, however, that such a conclusion is negated by the fact that Messrs Hodgkinson and Hausman actually went ahead with performance of the Lord Dudley Agreement notwithstanding that no formal agreement had been executed. 65 It is necessary to have regard to what was done by Messrs Hodgkinson and Hausman, when and why. 66 On 23 August 2006, Mr Hodgkinson caused Bluestone to pay $400,000 to Abadeen. The payment of that amount was not in accordance with any express term of the Lord Dudley Agreement or of the 14 August memorandum. The payment was not expressly attributed to any part of the consideration which was to flow from Mr Brown or his interests under the Lord Dudley Agreement. There was nothing in the Lord Dudley Agreement or the 14 August memorandum which required payment to Abadeen rather than to Greenberg, which held Mr Brown's interests in the Cammeray and Chevron Developments. 67 Mr Hodgkinson says that he arranged the payment in response to pressure from Mr Brown, both in telephone messages and in e-mails. He says that Mr Brown said that he was desperate for money for his other real estate transactions. He said that he still regarded Mr Brown as a friend and believed that he really needed money. He believed that the buy-out of Mr Brown's interests was still being worked out and that if it could not be implemented Mr Brown would repay the money. 68 The e-mails which Mr Brown sent to Mr Hodgkinson at this time support Mr Hodgkinson's evidence, at least as to the pressure being exerted by Mr Brown. On 22 August, Mr Brown sent the following e-mail to Mr Hodgkinson: "Lance,

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That's not a friendship, and if this is not sorted out as detailed above, I will treat our friendship in the same manner I perceive you too … non existent." 69 From my observation of Mr Brown in the witness box, he is blunt, assertive and forceful, often to the point of being aggressive. I accept that he used all of his powers of persuasion to induce Mr Hodgkinson and Mr Hausman to make payments to him as quickly as possible in anticipation that the buy-out would eventually be fully worked out and documented. 70 I conclude that the payment of $400,000 by Bluestone to Abadeen on 23 August was not made pursuant to a specific term of the Lord Dudley Agreement and did not evidence a common intention of the parties that the Lord Dudley Agreement was immediately binding and enforceable. It was an attempt by Mr Hodgkinson to appease Mr Brown by making a payment on account of a transaction yet to be fully negotiated and concluded. 71 On 30 August 2006, Mr Hausman arranged payment of $150,000 from Namsauh to Abadeen. Again, there was no term in the Lord Dudley Agreement referring to this payment. On 15 September 2006, a payment of $250,000 was made to Abadeen, comprising $200,000 from Bluestone and $50,000 from Namsauh. Mr Hausman says that the reasons for these payments were that he believed that Mr Brown needed the money and that the parties had a framework for the proposed buy-out. Further, he says, Bluestone and Namsauh had received $800,000 from Investec which was to be used for the buy-out, when it occurred. 72 I am satisfied that in August 2006 both Mr Hodgkinson and Mr Hausman were endeavouring to make payment of the amount $800,000 referred in the Lord Dudley Agreement. However, they were not doing so in recognition that a concluded agreement existed but, rather, were making the payments in a spirit of co-operation with Mr Brown and at his forceful insistence. 73 On 14 September 2006, 230 Palmer Street and Sharlotte entered into a contract, fully documented in the usual way, for the sale to Abadeen of specific lots in the 230 Palmer Street development for $5.1M. There was no deposit. The completion date is specified as 15 December 2006, which reflects paragraph 1.5 of the Lord Dudley Agreement 74 In his opening submission, Mr Coles QC explained how this contract was made in performance of paragraph 1.5 the Lord Dudley Agreement. He said that the 230 Palmer Street property had been valued at $5.1M. It was mortgaged to St George Bank for $4.5M, leaving an equity of $600,000. The property was to be transferred to Mr Brown's interests (ultimately Sharlotte) subject to the mortgage and for no consideration, so that by the transfer Sharlotte would receive property with an equity of $600,000. That sum was part of the consideration for the buy-out. 75 However, the contract for the sale to Sharlotte is inconsistent with this explanation of paragraph 1.5 of the Lord Dudley Agreement. The contract provides for a consideration of $5.1M to be paid and the property is not sold subject to the existing mortgage to St George Bank. As far as the terms of the contract disclose, the title to the property is to be transferred to Sharlotte free of encumbrances. That would mean that Sharlotte would have to find $5.1M to settle the purchase. 230 Palmer Street would have to discharge the mortgage to St George Bank on settlement, keeping for itself the equity of $600,000. Mr Coles conceded that the contract for sale does not "fully" reflect the Lord Dudley Agreement. I would go further to remark that it is inconsistent with the Lord Dudley Agreement, at least as it is explained by Mr Coles. However, Mr Coles says that the apparent inconsistency is "a matter of performance" and "part of the machinery" : T35.43-36.33. 76 It is quite possible to speculate as to what the parties might have agreed and done in order to accommodate the 230 Palmer Street contract for sale to Sharlotte with the terms which they had written in the Lord Dudley Agreement. Mr Coles engaged in some speculation along these lines for some time: T36.49-39.1. However, the question is not what the parties might have done but, rather, whether the 230 Palmer Street contract is in accordance with what they had agreed in the Lord Dudley Agreement. 77 The 230 Palmer Street contract is put forward as performance of a term of the Lord Dudley Agreement, thereby manifesting a clear common intention of the parties to be bound by that agreement immediately. However, I cannot see, on the face of the contract for sale, how it reconciles with paragraph 1.5 of the Lord Dudley Agreement, as explained by Mr Coles. There is no evidence to explain why the contract for sale is inconsistent with Mr Coles' explanation of paragraph 1.5 or as to how that contract could be performed consistently with paragraph 1.5. Accordingly, I cannot accept that the 230 Palmer Street contract supports Mr Brown's case. 78 Exactly the same problem arises with paragraph 1.6 of the Lord Dudley Agreement and a contract for sale which was entered into between Crown Street Developments and Abadeen on 14 September 2006. The contract price is $8M. The property is subject to a mortgage to the Bank of Western Australia for about $6.1M. Mr Coles says that by paragraph 1.6 of the Lord Dudley Agreement Mr Brown was to be transferred, in effect, Crown Street Developments' equity in the property of $1.9. However, the contract does not transfer the title to the property subject to the mortgage and for no consideration. As far as the terms of the contract show, Abadeen is required to pay $8M on settlement and Crown Street Developments, after discharging the mortgage, is entitled to keep the equity of $1.9M. 79 There is no evidence to the effect that the terms of the Crown Street Developments contract, or those of the 230 Palmer Street contract, were mistaken or that there is a 'side agreement' between the parties which conforms those contracts with the Lord Dudley Agreement. Mr Brown does not seek an order that the contracts for sale be rectified to accord with the Lord Dudley Agreement. 80 The 230 Palmer Street and Crown Street Developments contracts have purportedly been terminated by the vendors for non-performance by Sharlotte and Abadeen. Mr Brown, Sharlotte and Abadeen seek orders for the specific performance of both the Lord Dudley Agreement and the 230 Palmer Street and Crown Street Developments contracts for sale. Mr Coles does not explain in his submissions how the Court could order performance by the same parties of inconsistent contracts. 81 On 12 December 2006, SKR settled the contract for sale of a unit in the Chevron Development to Mrs Brown. The contract price was $425,000 but SKR accepted on settlement $275,000, i.e. it allowed a reduction of $150,000 in accordance with paragraph 1.7 of the Lord Dudley Agreement.

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