Canberra Residential Developments Pty Ltd v Brendas [2010] FCAFC 125 | Case summary

REASONS FOR JUDGMENT 1 The case the appellant (Canberra Residential Developments Pty Ltd (CRD)) pleaded in its fifth amended statement of claim was founded on the principle stated by Lord Cranworth in Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq 461, 471; (1854) 23 LT 315, 316 and by Lord Herschell in Bray v Ford [1896] AC 44, 51. The principle is that a director may not enter into a transaction in which his/her personal interest or duty conflicts with the interests of, or the duty he/she owes to, his/her company. 2 CRD's case was that in breach of duty, the first respondent (Mr Brendas) formed a joint venture vehicle, the third respondent (Canberra Land Developments Pty Ltd (CLD)), which acquired and developed broadacre land known as Horse Park 2 using information Mr Brendas acquired as a director of CRD. Mr Brendas and his company, the second respondent (Kenoss Pty Ltd (Kenoss)), were sued for an account of profits. Mr Brendas' wife was sued as an accessory. CLD was sued as constructive trustee of any unsold blocks and of the retained proceeds of sale of any blocks sold. CLD was also sued for an account of profits. The claim against all defendants failed because the judge found that, by reason of a joint venture agreement entered into on 19 November 2002 to which CRD was a party, CRD had bound itself not to purchase Horse Park 2 without the unanimous consent of the joint venturers, leaving its directors free to do so. In our opinion the judge misconstrued the agreement but nevertheless reached the right result. 3 The trial of the action lasted for eleven sitting days and a large volume of documents were tendered. Yet the material facts are within a relatively short compass and, for the most part, were uncontroversial. In mid 2001 a group of twenty or so successful Canberra property developers (mostly Croatian but including some Italians and Greeks) discussed the formation of a syndicate to purchase broadacre land that was being released by the Australian Capital Territory (ACT) government for the purpose of residential development. Mr Brendas was a member of the syndicate. 4 Representatives of the group consulted solicitors for advice about how the syndicate should be structured. The solicitors suggested that the syndicate establish a joint venture, the members of which would be the group members' respective private companies. The solicitors also advised that the syndicate should establish a trustee company (in due course CRD) to manage the venture and to hold all joint venture property. The idea was that there would be a specific joint venture for each development that was undertaken. One reason for the establishment of separate joint ventures was the likelihood that the members of the syndicate would change for each venture. 5 The group also retained an accountant. He explained to group members how a joint venture would operate with a company as its trustee. He said that the company would have a board of management and would undertake some activities on its own behalf such as employing the directors and paying group tax and some reimbursements. The company was not, however, to earn any profits. 6 CRD was incorporated on 19 October 2001. Its directors were drawn from the group: Andrija Glavinic, Robert Cobanov, Francesco Porreca, Danny Mihailidis and Mr Brendas. The company's paid up capital was $10.00 represented by ten shares: two shares were held by each of Messrs Glavinic, Cobanov, Porreca, Mihailidis and Brendas. 7 The group members met on 21 November 2001. They agreed to bid for a parcel of land at Gungahlin which it was anticipated could be subdivided into 407 blocks. The land was being offered for sale by the ACT government at a restricted auction to be held in December 2001. The auction was restricted in the sense that only persons the ACT government had determined were eligible could bid. Each group member was requested to put up $51,000 toward the purchase price. The balance was to be raised by loans. 8 Another group meeting (by this time there were 28 members) was held on 5 December 2001. There it was agreed that each group member would contribute an additional $50,000 toward the cost of the development. It was acknowledged that more members were needed. They would be asked to contribute $101,000 each. 9 On 13 December 2001 CRD purchased the Gungahlin land (which is also known as the Horse Park Estate) for $16.5 million. CRD purchased the land in anticipation of the group formulating their arrangements. 10 The group met again on 17 December 2001. Now their number had grown to 34. At the meeting the members were given a draft joint venture agreement that had been prepared by the solicitors. One of the solicitors was present at the meeting. He went over the contents of the agreement. Group members were advised that they should obtain their own legal and accounting advice in relation to the agreement. Whether any group member did obtain separate advice is not known. 11 The joint venture agreement was executed by the group members' private companies, the members themselves and CRD on (at least it is dated) 12 February 2002. The agreement records that the purpose of the joint venture was to develop the Gungahlin land: see the definition of "Project" and "Land" in cl 1.1. The venturers appointed CRD to manage the joint venture: see recital E and cl 2.3. The deed provides that CRD is to hold the land "as bare trustee and agent" for the members (cl 4.2) with the beneficial ownership to lie with the members in proportion to their capital contributions (cl 4.1). 12 Two clauses of the agreement (cls 2.5 and 3.2) are particularly important. They were relied upon by the judge to conclude that CRD "had no authority to purchase any land … without the unanimous approval of all 34 syndicate or joint venture members". In particular, the judge held that by reason of those provisions it was not open to CRD "to purchase Horse Park 2 for itself or on behalf of others without breaching its fiduciary and other duties to such syndicate or joint venture members". For that reason, according to the judge, there "was no possibility of Mr Brendas securing an advantage in respect of Horse Park 2 for himself at the expense of [CRD]". 13 With respect, we do not agree with the judge's construction of the deed. The two clauses upon which he based his conclusions when read in isolation, as well as when considered in context, stand for a different proposition. To explain why, it is necessary to set out the relevant provisions: 2.1 The purposes and objectives of the Joint Venture are firstly; ratification of the acquisition of the Land by the Manager on behalf of the Joint Venture Members; secondly, undertaking the Project in stages; and the then division of the Residential Blocks to issue on completion of each stage, equally as between the Joint Venture Members in proportion to the respective Portfolio Share of such Member to the total Portfolio Share. 2.2 … 2.3 The Manager is expressly empowered by this Deed to carry out the purposes and objectives of the Joint Venture and all matters ancillary thereto and to exercise any of its powers whatsoever in its absolute discretion without the requirement for any consent, endorsement, approval or ratification whatsoever from any Joint Venture Member. 2.4 The expansion and widening of the purposes and objectives of the Joint Venture described in 2.1 and 2.2 shall require the consent of a Simple Majority of Joint Venture Members. 2.5 The acquisition of any other investments or additional real estate whether broadacre land, residential land or redevelopment land etc. and whether in the ACT or elsewhere, or the engaging in any other projects or ventures not contemplated or required as ancillary to the undertaking of the Project shall require the unanimous consent of all Joint Venture Members. … 3.2 The Joint Venture may be extended for other developments and projects if so resolved by all of the Joint Venture Members. 14 It is also necessary to refer to the powers conferred on CRD. They are contained in cl 22. There CRD is given wide powers of management. The management powers include: 22.2 The Manager shall act as the manager and bare trustee of the Joint Venture and all Joint Venture Assets and as agent for the Joint Venture Members. The Manager may enter into legally binding arrangements and transactions in that capacity and may enter into binding arrangements and transactions and execute all documents and agreements as the Manager shall in its absolute discretion deem appropriate. 22.3 The Joint Members acknowledge that the Manager shall have sole and exclusive powers and discretions in the undertaking of the Project the progressing of the works as required under the Deed and in the management of the Joint Venture and the Joint Venture Assets. The express intentions of the parties is that those powers and discretions should be interpreted in as broad a way as possible. The Manager hereby covenants to exercise such discretions and powers in and for the best interests of the Joint Venture Members collectively. 15 Finally, reference should be made to cl 39, which reads: 39.1 The Manager hereby accepts and confirms its appointment as sole and exclusive Manager for the Joint Venture on the terms and conditions as provided for in this Deed and acknowledges it has acquired the Land for and on behalf of the Joint Venture Members for the purposes of undertaking the Project. 16 When one has regard to these provisions it becomes clear that the restrictions imposed on CRD by cls 2.5 and 3.2 relate to its activities as manager of the joint venture project. In that capacity, apart from the acquisition and development of the Gungahlin land, CRD is not permitted to make any investment or undertake any project on behalf of, or for the benefit of, the joint venturers without their unanimous consent. On no view do these provisions bind CRD in its activities other than as the manager of the joint venture project and agent of the venturers. To be precise, the provisions do not, as the judge would have it, preclude CRD from purchasing land either on its own account or on behalf of another syndicate. 17 This is not to suggest that the members of the joint venture had no means of controlling the activities of CRD. The joint venture agreement provides, in the definition of "Directors", although not in its operative part, that the directors of CRD are to be elected by the joint venture members. Such a provision has no legal effect: see Shears v Phosphate Co-operative Co of Australia Ltd (1989) 14 ACLR 747, 759, where it was decided that only members of a corporation can appoint and remove its directors. Nonetheless what the parties had in mind was something commonly found in a shareholders agreement to the effect that the members will vote on directors in accordance with the wishes of the majority. However that may be, there is no doubt the joint venture members wanted to control CRD's activities outside the joint venture via control of the composition of its board. 18 In view of the foregoing, the basis upon which the judge found against CRD cannot be supported. It remains to be seen whether there is some other basis upon which CRD can succeed in its claims against the respondents. 19 To answer that question it is necessary to return to the facts and examine, first, what involvement CRD had in the possible acquisition of Horse Park 2 and, second, what duties Mr Brendas owed the company in connection with that involvement. 20 To begin with it is appropriate to explain, albeit briefly, the breakdown of the relationship between Mr Brendas and his co-venturers. The reason for this breakdown is quite straightforward. To undertake the task of developing the Horse Park Estate, CRD retained the services of several contractors. A significant part of the development involved civil engineering works. The engineering contract was awarded to Petra Civil Pty Ltd, a company controlled by Mr Brendas. The civil engineering works fell behind schedule. During December 2002, correspondence passed between CRD and Petra Civil discussing the cause of the delay. CRD maintained that Petra Civil was in breach of its agreement. Petra Civil, on the other hand, said there were good reasons for the delay. Things could not be sorted out so the dispute was referred to arbitration. The immediate consequence of this dispute was that CRD's directors came to the view that Mr Brendas should not be involved in discussions about the dispute between CRD and Petra Civil. Another consequence was that the joint venturers decided not to include Mr Brendas in any new joint venture. 21 We should pause here to make some observations about what we have referred to as "board meetings" of CRD. All the individuals involved in the joint venture seem to be successful businessmen. They know a great deal about property development. On the other hand, they know little about legal structures, such as corporations and joint venture associations. 22 Thus one finds throughout the course of the development of the Horse Park Estate, as well as in relation to other possible developments, meetings where the attendees seem to be indifferent to the type of meeting being held. The meetings could be company meetings (eg of directors or members) or meetings of the joint venturers or prospective joint venturers. At a practical level it made no difference to the individuals what precisely was the nature of any particular meeting. What was important was the subject matter discussed and agreed. 23 As a result, one cannot easily characterise any particular meeting by reference to how it is described in notes or minutes that were kept by one or more of the attendees. Various attendees did keep notes. Sometimes the attendee styled a meeting as a "Committee Meeting", or as a "Canberra Residential Developments Meeting" or simply as a "Meeting". On occasion some meetings were styled as "Directors Meetings". 24 If necessary to do so, it is best to characterise a meeting by reference to those in attendance. For example, if a meeting is described as a Directors Meeting of CRD and it was attended only by the directors, it is safe to treat that meeting as a meeting of the directors. If, however, more persons than the directors were in attendance, it is likely that the meeting was simply a meeting of the joint venture or prospective joint venture parties. 25 On 28 January 2003, at what may have been a directors meeting at which Mr Brendas was in attendance, there was a discussion about three forthcoming auctions of government owned land. One property that was to be put up for sale was Horse Park 2, a parcel of land adjacent to the Horse Park Estate. One of the attendees, Mr Glavinic, recorded that it was "agreed that we should look at what exactly is going to auction, and we need to find more members". 26 The possibility of purchasing land (at the forthcoming auction) was discussed again at a meeting on 12 February 2003. This meeting has been variously described as a meeting of the "Residential Advisory Group", a "general meeting", and a meeting of "Canberra Residential Developments". There were approximately 10 attendees, including Mr Brendas. The parties present indicated that they were interested in purchasing one of the parcels of land. The minutes prepared by one attendee state that "all want to proceed". 27 Mr Brendas was also interested in purchasing Horse Park 2. The judge held that Mr Brendas did not acquire his knowledge of the sale of Horse Park 2 as a director of CRD. Mr Brendas had canvassed with a real estate agent the possibility of acquiring Horse Park 2 from mid January 2003, prior to CRD discussing the issue. Mr Brendas began discussions with BDB Property Consulting to establish a joint venture with Kenoss from February 2003. On 26 February 2003 CLD was established to bid at the auction on behalf of a joint venture between Kenoss and BDB Property Consulting. On 27 February CLD lodged an application with the Canberra Development Authority for the right to bid at the restricted auction of the property, which was to be held on 27 March 2003. 28 On 12 March 2003 there was a "CRD committee" meeting. In attendance were Messrs Mihailidis, Porreca, Cobanov, Glavinic and Brendas. One of the topics for discussion was CRD's dispute with Petra Civil. Mr Brendas was asked to leave after the meeting became heated. It was decided that Mr Brendas would be excluded from all further discussions concerning Petra Civil. After Mr Brendas left, it was also decided that he should be excluded from future joint ventures. 29 There was an important meeting on 18 March 2003 relating to the purchase of one of the properties that was to be put up for auction. The attendees were most (but not all) joint venturers in Horse Park No 1 together with persons who were described as "potential new members". Plainly this was not a meeting of CRD. It may best be described as a meeting of persons interested in establishing a new joint venture to purchase Horse Park 2. The view expressed at the meeting was that around 50 joint venturers would be needed to go ahead with the purchase, with each venturer contributing between $50,000 and $60,000 towards the development. It was decided that all prospective joint venturers would pay this money at the site office on 25 March 2003. 30 A further meeting, which likely was a directors meeting, was held on 26 March 2003. Messrs Glavinic, Cobanov, Porreca and Mihailidis attended. It was agreed that in respect of Horse Park 2 CRD would bid up to a maximum of $19 million. 31 The auction took place as advertised on 27 March 2003. Mr Mihailidis attended and bid on behalf of CRD. Mr Brendas represented CLD. Altogether there were 11 registered bidders. CLD was the successful bidder for Horse Park 2, purchasing it for $25.3 million. 32 Shortly after the auction Mr Brendas resigned as a director of CRD. Thereafter CLD developed Horse Park 2 at a cost (including cost of acquisition) which exceeded $75 million. More than three years later, when the development was all but completed and almost all of the land had been sold, CRD commenced this action. It seeks to obtain the benefit of what has turned out to be a very profitable venture without bearing any of the risk. 33 The principal basis upon which CRD builds its claim is set out in paragraphs 10 and 11 of the fifth further amended statement of claim. Those paragraphs allege: 10. At a meeting of Joint Venture Members on 12 February 2003, everyone present, including Mr Brendas (representing Kenoss), voted for CRD to pursue an opportunity to bid at a restricted auction to take place on 27 March 2003, to purchase one of three parcels of government land to be released in Canberra for residential subdivision and development, known respectively as: 10.1 Dunlop 4 West Estate … 10.2 Conder 4 Estate … 10.3 Horse Park 2 Estate … 11. Subsequently, at all material times from about mid February 2003 until 26 March 2003, CRD was engaged in pursuing the opportunity and making arrangements for CRD to bid at the auction to purchase either Dunlop, Conder or Horse Park 2 Estate. 34 The first point to note is that CRD could not prove what it alleged in paragraph 10. No final decision to bid for Horse Park 2 was taken on 12 February 2003. Further, and more importantly, the decision to bid for the land was not taken by the original joint venture members but by a new group, only some of whom were drawn from the original joint venturers. The next point is that, on any view, paragraph 11 overstates CRD's role to a significant extent. A group of investors had decided to bid at the auction. The vehicle they appointed to place bids was CRD. CRD was not, as is alleged, "engaged in pursuing the opportunity and making arrangements … to bid at the auction". The new group was engaged in those activities. CRD's only task was to act as the new group's agent and on its instructions. And, if its bid was successful, CRD would purchase the property in its capacity as agent on behalf of the new group. 35 These are the circumstances in which it is necessary to assess CRD's claims. In this connection it is not in dispute that Mr Brendas, as a director of CRD, was in a fiduciary relationship. This is one of the accepted categories of a fiduciary relationship. It is a fiduciary relationship because of the trust and confidence that is reposed by the company in its directors: Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41, 96-97. 36 But the mere existence of a fiduciary relationship does not define the nature of the duties that arise for three reasons. First, it is wrong to assume that the duty owed by a fiduciary attaches to every aspect of the fiduciary's conduct, however irrelevant that conduct is to the relationship that is the source of the duty: In re Coomber [1911] 1 Ch 723, 728-729. Second, the scope of the duty is very much dependent upon the facts of the particular case: Hospital Products, 69, 73 per Gibbs CJ and 102 per Mason J. See also Henderson, Hallam-Eames & Hughes v Merrett Syndicates Limited [1995] 2 AC 145, 206. In most cases the duty will be determined in large part by reference to the nature of the activities of the principal: Birtchnell v Equity Trustees, Executors and Agency Company Limited (1929) 42 CLR 384, 407-408, referring to the need to identify the principal's "venture or undertaking". Third, defining the scope of the duty must be approached with commonsense and with an appreciation of the sort of circumstances in which it has been applied in the past. It should only be applied to a state of affairs which discloses a real conflict of duty and interest and not just some theoretical or rhetorical conflict: Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606, 637-638. 37 How is Mr Brendas' conduct to be considered in light of these rules? The starting point is that none of the joint venturers (including Mr Brendas or his company) was precluded from purchasing Horse Park 2 by reason of him (or it) being a joint venturer. CRD does not suggest otherwise. The way it puts its claim is only on the basis that Mr Brendas was one of its directors. 38 We think this contention cannot be sustained. It must be remembered that CRD was not in the business of investing in or developing real estate. Its only activity had been to manage the development of the Horse Park Estate. That was done as manager (ie agent) for others. It is true that CRD had been requested to attend the auction (through one of its directors) to bid for Horse Park 2. But attending at the auction at the behest of the new group is not the activity described in paragraph 11 of the amended statement of claim. In reality CRD played no active role on its own account in seeking out new ventures. It acted as agent and then only when instructed to do so. It is for this reason that, in our view, the judge arrived at the correct decision, but, as will by now be apparent, for the wrong reason. 39 That finding does not dispose of the appeal. There is another point that must be considered. 40 This point arises in the following circumstances. At trial CRD was represented by senior and junior counsel. On the morning of the sixth day of the trial the judge was told that CRD would thereafter be represented only by junior counsel. By itself that is not unusual. There was, however, a problem. At the time Mr Brendas was being cross-examined and it was senior counsel who had the conduct of the cross-examination. If the cross-examination was to continue it would be by junior counsel. 41 Junior counsel asked the judge for leave to continue the cross-examination. He undertook not to ask questions on any topic that his leader had dealt with. 42 In a surprising ruling the judge refused leave. He said it was necessary to show "special circumstances justifying the grant of leave to [junior counsel] to continue with the cross-examination" and no special circumstances had been shown. The judge understood the problem to be that senior counsel's fees had not been paid and for that reason he had withdrawn from the case. The judge refused leave because CRD led no evidence explaining why neither the joint venturers nor CRD had put up further funds to pay senior counsel to remain in the case at least until he had completed his cross-examination. The judge was also of the view that if neither CRD nor those who stood to benefit from the action provided funds, the litigation funder which was meeting CRD's costs should have done so. 43 The criteria by which a judge's exercise of discretion (eg a decision not to allow cross-examination to continue) may be challenged are well known. The leading case is House v King (1936) 55 CLR 499, 504-5. In this case the judge's discretion miscarried. The reason is that he misunderstood the task at hand. For one thing he failed properly to appreciate the basis for the longstanding practice that only one counsel should question a witness. For another, he seems to have been of the view that if a party begins a case with two counsel and has the funds to continue with both, their retainer must not be terminated, at least until a convenient point in the trial is reached. 44 To understand how we have arrived at the view that the judge erred it is necessary to examine the rationale for the rule of practice preventing two counsel from cross-examining one witness. It can be traced back to the decision of Doe v Roe (1809) 2 Camp 280; 170 ER 1155. As Lord Ellenborough made clear, the rule is for the protection of the witness. He said (at 1156): "If this rule were not adhered to, a witness might be subject to the examination or cross-examination of as many barristers as were retained for the plaintiff or defendant, much time would be wasted, and great confusion would be introduced into proceedings at Nisi Prius". Put another way, the common law frowns upon cross-examination by multiple counsel because of the possibility of oppression: JD Heydon, Cross on Evidence, 8th ed at p 627. 45 Naturally the common law rule is subject to reasonable exceptions. One exception arises from the changing nature of litigation. A common feature of modern commercial litigation is for counsel on one side of the record to split their trial preparation on a topic by topic basis. The conduct of the trial often follows this split with the judge permitting both cross-examination and submissions to be divided so that counsel can deal with his/her assigned topic: see for eg Eva Pty Ltd v Charles Davis Ltd [1982] VR 515. This can be an extremely efficient way in which to conduct complex litigation. All the judge need do in such circumstances is ensure there is no unfairness to the witness: GPI Leisure Corp Ltd v Herdsman Investments Pty Ltd (No 3) (1990) 20 NSWLR 15, 22-23. 46 In this case, junior counsel said he would not ask questions on any topic already dealt with. That was sufficient to ensure that Mr Brendas was not burdened by unfair cross-examination. Indeed, at the trial the respondents conceded that if junior counsel were to continue the cross-examination it would cause no injustice. 47 It may be that the judge fell into error because at trial CRD appeared to accept the need for it to establish special circumstances to justify a departure from the general rule. On the appeal, however, CRD submitted that the primary judge applied the wrong test and should have determined the question having regard to the interests of justice and the need to ensure a fair trial. We agree. We would add that, ordinarily, a party will not be permitted to argue on appeal a point not raised in the court below. But "[w]here all the facts have been established beyond controversy or where the point is one of construction or of law, then a court of appeal may find it expedient and in the interests of justice to entertain the point, but otherwise the rule is strictly applied": Water Board v Moustakas (1988) 180 CLR 491, 497. Here the only issue is a point of law, and an important one at that. For this reason we thought it appropriate to address the point. 48 One final point should be noted. Neither at trial nor on the appeal did the parties consider the cross-examination issue by reference to the Evidence Act 1995 (Cth). This was a mistake. The Evidence Act makes provision for cross-examination and imposes restrictions on the ability of a party to cross-examine an opposing party's witnesses. 49 Section 27 provides that a party may question any witness, except as provided by the Act. There are several restrictions on the right to cross-examine. For example, s 29(1) assumes that the court can direct a witness not to answer a question put in chief or under cross-examination. Further, s 41 relevantly provides in subsection (1)(b) that the court must disallow a question if it is unduly annoying, harassing, intimidating, offensive, oppressive, humiliating or repetitive. Presumably the common law rule we have been discussing would fall under this head. 50 If the question whether junior counsel should be permitted to continue with the cross-examination of Mr Brendas had been argued by reference to the statute rather than the common law rules, it is possible that a different approach would have been called for. Under either s 29(1) or s 41 it may be that the party calling the witness bears the onus of showing that cross-examination is unfair or otherwise should not be allowed, which is in contrast to the common law where the onus is the other way. However, that is not an issue which need be disposed of in this appeal. 51 In this case, if the judge's error could reasonably be supposed to have affected the result of the trial, the appeal would be allowed and a new trial ordered: Conway v R (2002) 209 CLR 203, [29], [36]. As it turns out, a new trial will be unnecessary. In our opinion Mr Brendas's testimony could not have affected the conclusion about the scope of the duties he owed to CRD. 52 Several other issues (eg the defences of laches and unclean hands and whether CRD was operating an unregistered managed investment scheme) were argued on the appeal. They were raised in case the appellant was successful on its liability claim. As that has not turned out to be so, it is not necessary for us to consider those issues. 53 The appeal will be dismissed with costs.

Canberra Residential Developments Pty Ltd v Brendas

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Judgment (14 paragraphs)

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Cases Cited (12)

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