Capital Finance Aust Ltd v Pella Properties Pty Ltd & Anor [2010] NSWSC 1262 | Case summary

Capital Finance Aust Ltd v Pella Properties Pty Ltd & Anor [2010] NSWSC 1262 | Case summary | Zoe

The Pleadings. 3 Capital Finance's right to possession of the units, apart from Lot 29, was not contested. The action against Pella Properties (in Liquidation) was therefore discontinued. The present action proceeds by an Amended Statement of Claim dated 22 May 2009 against Mr McHardy alone and relates only to Lot 29. Capital Finance advanced Pella Properties approximately $14.5 million in the course of the development. It has recovered all but approximately $4 million through the sale of the units. The second mortgagee, Knightbridge, advanced $2.75 million, which remains unpaid. 4 In substance, Mr McHardy relies upon the following in his defence: First, an oral agreement made in April 2003, which was later reduced to writing (6 September 2004) by which, inter alia, Mr McHardy had the right to Lot 29. Secondly, that in the period November 2003 to 10 May 2004 and before the registration of the mortgage in May 2004, Capital Finance was on notice of the agreement. Indeed, in the period May 2006 to 19 March 2009, it consented to Mr McHardy's occupation of the unit. Thirdly, that the agreement was subject to a requirement that Mr McHardy fulfil certain obligations in his role as Site Manager, which he duly fulfilled. Fourthly, and in the alternative, Mr McHardy spent money fitting out the unit, in reliance upon the agreement, such that Capital Finance is estopped from now seeking possession of it. Fifthly, that Capital Finance represented to Mr McHardy that it would not take steps inconsistent with his right, title and interest to Lot 29, such that the present proceedings amount to misleading or deceptive conduct, or alternatively, unconscionable conduct, in contravection of s 52(1) and s 51AA respectively, of the Trade Practices Act 1974 (Cth). 5 There were also two Cross Claims by Mr McHardy, each relying upon the same assertions as the Defence. The Cross Claims were directed against: Pella Properties (in Receivership) (in Liquidation) and Capital Finance (First Amended Cross Claim); and Knightbridge (Second Cross Claim). 6 Each Cross Claim sought the following orders: A declaration that Mr McHardy held the right, title and interest to Lot 29 free from encumbrance and orders compelling the Cross Defendants to sign instruments and documents which would enable the transfer of the unit; or Alternatively, damages and/or equitable compensation and/or restitution; or Alternatively, compensation pursuant to s 82 and s 87 of the Trade Practices Act (Cth). 7 Knightbridge, acknowledging the reality that Capital Finance's registered Mortgage has priority and that it cannot recover its outlay, filed a Submitting Appearance.

The issues. 8 When the matter proceeded, it was acknowledged that Pella Properties had appointed Mr McHardy as Site Manager and that he had fulfilled his obligations. The contest concerned: First, whether there was an oral agreement between Mr Filleul (on behalf of Pella Properties) and Mr McHardy in April 2003, or thereabouts, relating to Lot 29. Secondly, whether that agreement was subsequently reduced to writing (6 September 2004) and signed by Mr Filleul. Thirdly, whether Capital Finance was on notice of the agreements (written or oral), in circumstances that would make it unconscionable to insist upon the indefeasibility arising from its registered First Mortgage. Fourthly, whether Knightbridge was on notice of the agreements (written or oral), in circumstances that would make it unconscionable to insist upon the indefeasibility arising from its registered First Mortgage. 9 The case for Capital Finance may be summarised in the following propositions: First, there was no oral agreement between Pella Properties (through Mr Filleul) and Mr McHardy in the terms alleged. Secondly, there were discussions, which included a reference to an apartment that Mr McHardy may receive at the end of the project, subject always to the development yielding a profit. Since there was no profit, there was no right to an apartment. Thirdly, the alleged written agreement of 6 September 2004 was not signed by Mr Filleul. The document was a forgery. Fourthly, and in the alternative, if the written agreement were genuine, it would not, by its terms, entitle Mr McHardy to possession of the unit, absent a profit from the development. Fifthly, and in any event, Capital Finance had a Registered First Mortgage. Under s 42 of the Real Property Act 1900 (NSW), it had an indefeasible right to possession of the unit, absent fraud or circumstances which would make it unconscionable to assert that right. No such circumstances had been established. Sixthly, in particular, Capital Finance was not on notice of any alleged agreement, whether written or oral. Seventhly, Capital Finance was not on notice of Mr McHardy's occupation of Lot 29 and/or the improvements he made, in circumstances that would give rise to any right to damages or equitable compensation. Finally, Knightbridge, as Registered Second Mortgagee, was not on notice of any agreement, whether written or oral, or Robert McHardy's occupation of the unit. 10 In the week before the case was due to proceed, there was an application for an adjournment. Mr McHardy was represented. The adjournment was refused. On 12 October 2010, when the matter was listed for hearing, the lawyers who had appeared for Mr McHardy sought leave to withdraw. Leave was given. Mr McHardy then represented himself throughout the hearing. 11 Let me then turn to the evidence.

Q. Yes? A. On that basis I agreed that we could work together and I worked for him on that basis from that point on." 17 Mr McHardy, in his affidavit, recounted a further conversation, identifying the particular unit that he was willing to accept under this arrangement. He suggested the conversation was in March 2003, although it must have been later than the conversation set out above, which he said was in April 2003: (Ex 3 [64]) "64. During March 2003 there were a number of meetings between Vanovac (the architect), Filleul and myself about the location of the driveways and access to the Development. I had proposed reconfiguring the driveways to make access easier. Vanovac: 'If you alter the driveway and access you will lose a two bedroom apartment on ground floor. The underground driveway access will not work with the building height and allow a liveable area above it.' I said: 'I'll take it as part of my deal. I'll make something of it. What do you think Warwick?' Filleul said: 'That sounds plausible, I'll give it some thought.' (parenthesis added) 18 The unit so described is Lot 29. Mr Filleul, in responding to Mr McHardy's affidavit, did not take issue with this paragraph (Ex E [39]). 19 Mr Filleul acknowledged that he discussed with Mr McHardy his role and remuneration. According to his affidavit, their conversation was in these terms: (Ex E [16]) "' Rob, I'll employ you as site manager and coordinator. You will run the on-site aspects of the project.' The conversation turned to Rob's remuneration. I said: 'The deal is that once the project is completed I get my capital investment back plus 30% first. We will then share any profit 50/50.' He said: "What about my living expenses until the project is finished?' I said: 'You can take advances of $3,000 - $4,000 per month for living expenses as a loan, to be repaid from your 50% share of the profits. If there are no profits, then you won't have to repay anything. Pella will also pay for your out of pocket expenses for the development.' He said: 'Okay.' " 20 Mr McHardy cross examined Mr Filleul upon his version. The cross examination included the following: (T 138/9) "Q. ... I was to get a lesser income than what I would normally expect to get, but with a balloon payment being the apartment at the end and we had a discussion on - in early 2003, March/April 2003; do you agree with that or not? A. That always came out of the profit.

Financing the development. 22 Mr Filleul and Pella Properties were clients of Minett & Partners, Chartered Accountants. Mr Ross Jenkin was the Managing Director and had been involved in a previous successful development by Mr Filleul at Alexandria (Ex C [8]). In 2003, Mr Filleul again approached Mr Jenkin concerning finance for the proposed development at Dee Why. Mr Jenkin was also the director of an investment company, Knightbridge. On 1 February 2004, he established the Hawkesbury Unit Trust to invest through Knightbridge in the development. On 12 March 2004, Knightbridge executed a Deed whereby it advanced Pella Properties $1.7 million (Ex C, tab 2). The advance was secured by a Mortgage which was registered on 12 March 2004 (Ex C, tab 4). Knightbridge, on behalf of the Hawkesbury Unit Trust, ultimately advanced $2.75 million to Pella Properties. 23 It was recognised, when these advances were made, that the involvement of a bank or large financial institution would be necessary to fund the development. That would require the postponement of the Knightbridge Mortgage. Mr Filleul approached Mr Anthony Mizzi, then the Finance Property Consultant of Capital Finance, with a view to providing such finance (Ex D [7] cf Ex E [39(i)]). Capital Finance had also funded the successful Alexandria development. In November 2003, Mr Mizzi received approval to entertain the proposal (Ex D [8]). 24 On 18 November 2003, Mr Mizzi submitted a memorandum to his superior. The memorandum included the following words, referring to the proposed 33 units: (Ex B, tab 5) "The project will consist of 9 one bedroom and 24 two bedroom units to be built over three levels plus one level of basement parking. ..." 25 The memorandum also included the following figures, again clearly based upon the total development (that is, not excluding one unit from the security on offer): (Ex B, tab 5) Total Costs $17,416,940 Funding Proposed $15,407,000 (plus a $194,000 GST Provision) Term 24 months (interest provision based on this term) Presales Fourteen units being $9,870,000 inclusive of GST Gross Realisation $23,255,000 (Net $21,129,000)

The consent of the Mortgagees. 29 Fundamental to Mr McHardy's case was that Capital Finance, through Mr Mizzi, was on notice of the agreement between Mr Filleul (on behalf of Pella Properties) and himself concerning his entitlement to a unit within the development. It was also his case that Mr Jenkin (and therefore Knightbridge) was on notice. 30 Mr McHardy consulted lawyers in April 2009. On 8 April 2009, Ms Genevieve Staff, solicitor, wrote to Capital Finance setting out the basis of Mr McHardy's claim. The letter was annexed to Mr McHardy's first affidavit (Ex 1). He acknowledged it was sent on his instructions. He approved its terms before it was sent (T 174). It described the oral agreement which preceded the document of 6 September 2004 (a copy of which was enclosed): (Ex 1, annex B) "There is extant an agreement between our client and Warwick Filleul (Filleul) director of Pella, acting on behalf of Pella, to the following effect: 1. In return for a minimal income to cover our client's living expenses, our client would provide his expertise and services in overseeing the Development. 2. On completion of the Development, provided our client fulfilled his contractual obligations, Pella would provide title to the Apartment. 3. If there was profit upon completion of the Development, Pella would give our client a half share of that profit less the income already received by our client during the term of the Development. 4. In the event that the Development did not return a profit, our client would receive title to the Apartment, however the income received during the term of the Development would be a 'forgiven debt'." 31 The letter continued: (Ex 1, annex B) "This agreement is in writing and a copy is enclosed. The substance and effect of this agreement was known and approved by: Mr Tony Mizzi of Capital Finance Australia. This approval was given prior to the provision of construction finance to the Development. Additionally, Mr Mizzi arranged for Capital Finance to approve and consent to our client's occupation of the apartment. Mr Ross Jenkin of Minnett & Partners, Accountants, on behalf of Filleul, Pella and the mezzanine lender (being the Hawkesbury Trust, a contribution mortgage fund). This information was known to him prior to the provision of mezzanine funding. Mr Jenkin set up the fund and he and his family contributed funds to the Hawkesbury Trust. The various service providers to the Development, including the builder, Mr Jim Khalil and Mr Joe Khalil of Mid West Constructions Pty Limited, the architect, Mr Tom Vanovac of Vanovac Associates Limited, and the project manager, Mr Stephen Geissler of Fast-Track Construction Pty Limited." 32 Dealing first with the evidence relating to the consent of Capital Finance through Mr Mizzi, Mr McHardy said that he was aware that Mr Mizzi had been approached with a view to Capital Finance funding the development (Ex 3 [38]). He added: (Ex 3 [41]) "41. In late 2003 I was asked by Filleul to attend a meeting at the Plaintiff's premises with Filleul Mizzi and the builder, Jim Khalil (Khalil) from Mid West Construction Pty Ltd (Mid West Construction) to explain the concept of the development to Mizzi." 33 When giving evidence, Mr McHardy corrected the date of that meeting. It was late 2004, not 2003 (T 201). His account continued in these words: (Ex 3 [42]/[43]) "42. At that meeting there was a discussion to the following effect: Filleul said: 'Rob is my General Manager and will run the project. He will get a small monthly payment for your (sic) services. I have also agreed to him receiving Lot 29 on the plan free of costs but Rob will be responsible for the fit out and any extra costs.' Mizzi said: 'All invoices for the fit out must be provided to Rob as the bank is not paying for this.' I said: 'Yeah. That's fine.' Filleul said: 'I am putting all my available funds into the project and if the remuneration for McHardy isn't consented to by the bank then I can't employ him myself. All payments relating to the development except for Rob's unit will be paid by Capital Finance. I have to have the bank's agreement on that.' Mizzi said: 'Well that's settled we can move on.' ... 43. Filleul said words to the effect: 'Rob it is important that the bank accepts my agreement with you and pays you direct as I won't have the funds.' " 34 More than once, when giving evidence, Mr McHardy said that he was uncertain about dates (T 202). The adjusted timing of the meeting (late 2004), does not sit comfortably with the remainder of his case, that there was an oral agreement in about April 2003, which was reduced to writing on 6 September 2004. 35 To add to the confusion, Mr McHardy also said this (incorrectly referring to the Loan Proposal as December 2004, whereas the offer was made on 10 May 2004) (supra [27]): (Ex 3 [75]) "75. In or about December 2004 we received a loan proposal from the Plaintiff. The fact that Lot 29 was my unit was openly discussed with Mizzi, Filleul, Khalil, Geissler, McGettigan and Jenkin. My conversations with each of the abovenamed parties was to the effect that: 'Warwick and I have done a deal. I'm getting Lot 29 in lieu of the remuneration I am entitled to.' " 36 The Project Manager, Mr Geissler, was not called, nor was Mr McGettigan. Messrs Filleul (Ex E [39(y)]), Mizzi (Ex D [19]), and Jenkin (Ex C [16(f)]) each denied Mr McHardy's assertion. I will shortly refer to the evidence of the builder, Mr Khalil. 37 Returning to the account of Mr McHardy, he said this in cross examination, concerning the consent of Capital Finance through Mr Mizzi: (T 176) "Q. ... you as an experienced businessman knew ... you needed to deal directly and preferably in writing with the lenders to get their consent to this supposed deal, that's true, isn't it? A. I had Mizzi's consent and Mizzi was the first mortgagee. The way I structured the deal for remuneration and this apartment was such that the Bank were bound by it and the Bank paid me money because Filleul didn't pay me money, he didn't have money to pay me." 38 There followed an elaboration. The transcript was in these terms: (T 176) "HIS HONOUR

Q. No, no, sorry I would just like the conversation as you remember it? A. Warwick said to Mr Mizzi "Robert's remuneration I have got to give him $2,500 a month and at the end of the project he is getting the apartment", do you agree with that? And Mr Mizzi said "Yes, that's fine". Warwick said "how am I going to pay him out of the project? There is no facility in the project to pay him, draw down to pay him". Mr Mizzi said "when you get the GST moneys you can take the money out of that for your living expenses and his living expenses", and on that basis we said thank you and left and I continued employment with Warwick Filleul because I knew I was going to be paid because I was being paid by the Bank." 39 The builder, Mr James Khalil of Mid West Constructions, provided an affidavit, read as part of the defendants' case, which, relevantly, included the following: (Ex 7 [8]/[9]) "8. In late 2003, I attended a meeting at offices of Capital Finance with Warwick Filleul ('Filleul'), McHardy and Tony Mizzi ('Mizzi'), the Capital Finance representative. 9. At the meeting I had a conversation to the following effect with Mizzi: ... Mizzi: 'Please make sure that the Bank does not pay for Rob's fit out or any design costs. Please tell your tradesman that all invoices are to go to Rob direct in respect to Rob's unit.' Filleul said: 'Yes. All invoices for fit out must go to Rob.' " 40 When cross examined, Mr Khalil said that he and the architect were invited to meet the banker, which was unusual. He attended the city office of Mr Mizzi (T 210). However, in paragraph [8] above, where he recalled those present at the meeting, he did not include the architect (Vanovac). In cross examination it was suggested he did not like Mr Mizzi, which he denied (T 208). Nonetheless, he did say that Mr Mizzi made some "boo boos" (T 211). For instance, he promised payment for the demolition but the builders remained unpaid for months (T 211). The following was put: (T 211) "Q. Sir, you resent Mr Mizzi despite denying to the Court that you don't feel resentment towards him you do, don't you? You feel that at least a sum of $500,000 is being suggested in this Court case already by Mr McHardy that $500,000 hadn't been paid to you out of the some retention fund by Capital Finance? A. That is correct sir." 41 Mr Filleul, in his affidavit, recalled the meeting with Mr Mizzi and the builder. He gave the following account, responding to the paragraphs of Mr McHardy's affidavit, to which reference has been made: (Ex E [39(l) and (m)] "39(l) With respect to paragraphs 41 and 42, I say that I arranged a meeting between myself, Tony Mizzi (Capital Finance), Jim Khalil (builder) and John Portelli (quantity surveyor). Mr McHardy attended the meeting. The meeting was called because Mr Mizzi wanted to meet with the builder. It was a condition of the loan from Capital Finance that Capital Finance approved the builder. I deny that any such conversation as alleged in paragraph 42 took place. I say that at no time did I ever tell Mr Mizzi that I had agreed with Mr McHardy that Mr McHardy would receive lot 29 free of costs or at all. (m) With respect to paragraph 43, I deny ever saying the words attributed to me by Mr McHardy." 42 Mr Filleul, however, did make the following concession: (Ex E [33]) (cf Ex E [44]) "33. I accept that during the Ce Vu Development there were various occasions when a unit was referred to as 'Rob's Unit'. During the early stages of the Ce Vu Development that would have been a reference to Unit 32, for which Mr McHardy had entered into the Pull & Call option ... After Mr McHardy and I had the discussion set out above about Lot 29, references to 'Rob's Unit' referred to Lot 29. However, any reference to me to 'Rob's Unit' was in the context of our agreement that Rob would purchase a unit at the Ce Vu Development from his 50% share of the profit." 43 Mr Filleul was cross examined by Mr McHardy. He said he had no recollection of a meeting at Mr Mizzi's office where Mr McHardy's remuneration, or Lot 29, were discussed. He asserted that his affidavit was correct (T 110/111). 44 It was put to Mr Filleul by Mr McHardy that there was a site meeting in early 2005, at the commencement of the construction, that was attended by the builder (Mr Khalil), the project manager (Mr Geissler), Tony Mizzi, as well as Mr Filleul and Mr McHardy himself. Mr Filleul agreed that there probably was such a meeting, since Mr Mizzi would "pop in from time to time" (T 111). The following was then put by Mr McHardy: (T 111/12) "Q. Do you recall, Mizzi giving instructions to those present. This was at an initial meeting on site. To those present re apartment 29? A. No.

Q. The pool wasn't in the contract? A. Your Honour, the pool was a change of where a retaining wall went and I guess to this day the pool being finished was just, it was a restraining wall restraining a garage and Rob wanted it moved out to form to a pool so instead of going down there it went out here. So it wasn't a big deal." 45 Mr Mizzi provided an affidavit (Ex D). The project ran for approximately 20 months. Mr Filleul was his point of contact. Mr Mizzi spoke to him regularly by phone. They occasionally met, usually at his office (T 28). He visited the site perhaps eight or ten times. Occasionally he walked around the site (T 33). He met Mr McHardy on the site at least once (T 33). He remembered Mr McHardy entered a Put and Call Option in respect of unit 32 (Ex D, annex A). Responding to Mr McHardy's affidavit he denied knowledge of any agreement in relation to Lot 29. He said this: (Ex D [15]-[18]) "15. In his affidavit dated 30 April 2010 Mr McHardy suggests that I was present on a number of occasions when reference was made to Mr McHardy receiving a unit at the Ce Vu Development for free, or as part of his remuneration. I deny that I was ever present when any such comment was made. Further, I deny that during the course of the Ce Vu Development that I ever heard the expression 'Rob's Unit' from anyone involved in the Ce Vu Development. 16. I have read Mr McHardy's affidavits and understand that he alleges that he had an agreement with Mr Filleul to the effect that Mr McHardy would receive a unit at the Ce Vu Development free of charge in return for his services. I had never heard of the alleged arrangement prior to reading Mr McHardy's affidavits. 17. It follows that I deny ever having any conversation with Mr McHardy or Mr Filleul (or any other person) to the effect alleged in paragraph 42 of Mr McHardy's 30 April 2010 affidavit. 18. Further, I deny that at any time did I say to anyone that Mr McHardy was to be responsible for paying for the fit out of ' his' unit. Rather, I recall having a number of conversations during the course of the project with Jim Khalil of Mid West Constructions Pty Ltd (the licensed builder) and Terry Compton (an associate of Mr Khalil's) where I said: 'Make sure that any Developer variations are approved by Capital before you commence any works, as there is no provision for payment of such in the facility.' " 46 Mr Mizzi denied speaking to Mr Filleul about any "deal" with Mr McHardy (as asserted in Ex 3 [78]). He added: "I would never have agreed to permit the use of that part of the loan allocated for GST payments ... " (Ex D [20]). He did not retreat from that account in cross examination. He was asked about improvements to Lot 29, and specifically the swimming pool. He said that he could not recall the terms of the original DA approval and whether a swimming pool was part of the original plan (T 31). If it was a variation, the developer was required to pay for it (T 31). He had no recollection of giving the project manager (Mr Geissler) instructions concerning the swimming pool (T 31). 47 Let me move from Capital Finance, to the suggestion that Mr Jenkin (on behalf of Knightbridge) also knew and approved of the agreement between Pella Properties and Mr McHardy, whereby he should receive the Lot 29 apartment for his services to the development. In Mr McHardy's affidavit, Ex 3, there are two references to Mr Jenkin which are relevant. The first was his inclusion in the list of those said to have witnessed conversations acknowledging that Lot 29 was Mr McHardy's unit (Ex 3 [75]) (supra [35]). The second was a conversation in these terms: (Ex 3 [36]) "36. In April 2003, Filleul and I met with Ross Jenkin (Jenkin), a director, secretary and shareholder of Knightbridge, at the offices of Minett and Partners and had a conversation with words to the following effect: Filleul said: ' Ross, this is Rob, my general manager. He is helping me on the development. He's found me a site of 6 houses together and is working on the plans for the development.' Jenkin said: ' Nice to meet you Rob. It's good that you are assisting with the development. Let's get on with it.' Filleul said: 'Well that's good, we can move on.' " 48 When Mr McHardy was cross examined, the following was put: (T 175) "Q. You don't give any evidence at all of a conversation with Mr Jenkin when you gave notice of this arrangement, do you? A. I was told by Mr Filleul that he had spoken to Mr Jenkin about it. Mr Filleul was Knightbridge's client, not me. I am not their client, I can't tell them.

The alleged written agreement. 57 The Facility Agreement between Capital Finance and Pella Properties was executed by Pella Properties on 11 May 2004 (Ex B, tab 1). Mortgages in respect of each property were executed at the same time. They were registered on 14 May 2004 (Ex B, tab 8). The written agreement relied upon by Mr McHardy was, on his evidence, entered some months later, 6 September 2004. In the context of an indefeasible title arising from the registration of Capital Finance's mortgages, the relevance of the later agreement is said to be its embodiment of the terms of the earlier oral agreement, of which Capital Finance (and Knightbridge) had notice. 58 Mr McHardy said that he drafted the agreement (T 171). He signed it, as did Mr Filleul, on or about the date it bears, 6 September 2004 (Ex 3 [66]). He had not previously put the agreement in writing "because he trusted Mr Filleul" (Ex 3 [67]). The agreement was in these terms: (Ex 6) "This deed witnesseth that the following is agreed between the parties hereto: That Warwick Filleul acting in his own right and on behalf of his family trust and a development company has engaged the services of Mr Robert McHardy for the purposes of developing a site at Hawkesbury Ave and Clarence Ave, Dee Why. The development is for residential apartments. The basis of the engagement is one of a 50/50 profit share at the completion of settlement of the development, subject to some issues as described herein. Firstly Warwick and or his company will advance Robert funds on a monthly basis as required and only at the end of the development will these are to be repaid from his profits. Robert is to take an apartment namely apt 29, free of cost, for his services as long as he performs his obligations until completion of construction, any monies due by him from the aforementioned advance will be returned to Warrick on settlement of the same. The value of this transaction for profit purposes will settled by valuation, the value of the same transaction for taxation purposes will be done on a cost basis. Robert will have no financial obligations for either the development or the repayment of funds if the development shall fail but shall have all those rights of a secured creditor for the retail value of apartment 29 in any such event but no obligation to repay any advances. All obligations are on Warrick in all respects. On settlement of this then neither party shall have a claim against the other. We trust this explains and clarifies the situation.

Q. But you never sent this document to Mizzi, you never said here's an email attached, I've got an email, here's an attachment, here's this document I've entered into with Filleul, please send me back a letter agreeing Capital is bound by it, did you? A. No, I didn't." 60 Mr Filleul emphatically denied that he had signed the document. On his evidence, he first saw it when he read Mr McHardy's affidavit (Ex E [34]). It was, he said, his practice to read documents before he signed them. His name is misspelled on the document ("Warrick" instead of "Warwick" (twice) and "Filluel" instead of "Filleul"). He would have refused to sign any document presented to him unless his name were corrected (Ex E [36]). Moreover, he would have refused to sign this document for the following two reasons: (Ex E [37]/[38]) "37. Further, there is another significant reason why I would have refused to sign the Alleged Deed. I would not have agreed to Mr McHardy taking a unit free of cost without payment of any money by him in return for his services, because I would have seen that as preferring Mr McHardy's interests over those of my friends who had invested in the project. As mentioned above, Pella Properties obtained a loan from Knightbridge Nominees. I knew and believed that Knightbridge Nominees was the trustee of the 'Hawkesbury Unit Trust', and that a number of my friends were investors in the Hawkesbury Unit Trust, including Ross Jenkin, Mark Granger, and David Kimpton. I considered it a personal favour to me that my friends, via their investment vehicle, were investing in the Ce Vu Development. Ross Jenkin, who was a director of Knightbridge Nominees at the time, was both a personal friend and also Pella Properties accountant. 38. Finally, I would never have signed the Alleged Deed (or any such agreement to the effect alleged) because I knew that all of the lots in the Ce Vu Development were subject to 1st registered mortgages in favour of Capital Finance (and also a mortgage to Knightbridge Nominees) and that to do so would mean that Pella Properties and I would have been breaching the mortgagee's rights." 61 I should interpolate that the mortgages of Capital Finance included the standard provision prohibiting dealing with the mortgage land by the mortgagor (Ex B, tab 8, para 1.8). 62 There is no handwriting evidence. Mr Filleul identified documents that he had signed (Ex E [27]). There are variations in his signature. To my eye there are differences between the authenticated signatures of Mr Filleul and the document of 6 September 2004 (Ex 6). However, such differences are not so marked that one could use them as the basis for an inference. I therefore put that aspect to one side. 63 When Mr Filleul gave evidence, he was cross examined by Mr McHardy. The following exchange occurred, in the context of the document of 6 September 2004 having been shown to him: (T 129) "Q. I understand from your affidavit you have seen that document (shown)? A. When it was sent by your solicitor is the first time I saw it.

Q. Have you finished? A. No. McGrath had another 32 apartments to sell. Rob was living in apartment 29. I didn't think one apartment out of 32 would make much difference to the sales at that time." 74 Mr McHardy gave evidence that, during the course of the development, he leased an apartment at Dee Why and that the lease expired in April or May 2006 (T 182). He added: (T 182) "A. And in August as a reference date Mr Filleul was living on site, in fact Mr Filleul left in August, he had been living there for three months and I had been living there for as long as him if not longer on site, okay?" 75 I accept that, from about May 2006, Mr McHardy occupied Lot 29. The suggestion by Mr Khalil that Lot 29 did not reach the lock-up stage until approximately October 2006 is, I believe, inaccurate (cf Ex 7 [13]). 76 Mr Filleul stated that, in early September 2006, Mr McHardy approached him with a document headed: "Deed of Acknowledgement", which he asked him to sign (T 130). His recollection was that the document ran for several pages. He had only been able to locate the first page, which he annexed to his affidavit (Ex E, annex E). The first page is a typed agreement between Pella Properties, Robert McHardy and Warwick Filleul, the last name being crossed out. There are handwritten alterations in the body of the document, which Mr Filleul said were in the handwriting of Mr McHardy. The deed then included the following recitals (incorporating corrections which have been made): (Ex E, annex E) "B. On 6 September 2004 an agreement was entered into ( 2004 agreement ) which provided among other things that Filleul and (.......) engaged the services of McHardy for the purposes of developing the Site by constructing the Complex ( Services ). C. (crossed out) D. As at the date of this Deed the development of the Complex at the Site is substantially completed (.......). E. As consideration for McHardy providing the Services to them, Pella and Filleul agreed to transfer to McHardy ownership of Apartment 29 being the apartment identified as lot 29 in the strata plan proposed to be registered in relation to the Complex on the Site and having as its street address 2/24 Clarence Place, Dee Why ( Lot 29 ). F. McHardy has provided the Services to the satisfaction of Pella and Filluel." 77 Recital G recorded that "McHardy currently occupies Lot 29". The words "currently occupies Lot 29" have been crossed out and there appears in handwriting the following words: "will be given the right to carry out improvements and occupy Lot 29 when it is ready to be occupied". 78 The deed then provided the following: (Ex E, Annex E) " IT IS AGREED 1. Transfer of title 1.1 The parties agree that McHardy is entitled to ownership of Lot 29. ..." 79 Mr Filleul said that, at the time he was asked to sign the document, it was clear to him that the development was unlikely to make a profit. On his account, the exchange between them, on this issue, was as follows: (Ex E [48(e)]) "48(e) ... He said: 'If this development fails, I need to get something out of it. I want you to agree that we have an arrangement so that I will get Unit 2, rather than Capital Finance or Knightbridge Nominees.' I said: 'No. There is no arrangement like that and I won't sign it.'" 80 When cross examined by Mr McHardy, Mr Filleul elaborated. He said: (T 134) "Q. Did I explain to you that I had this drawn up because of the ambiguity in the other, in the previous agreement? A. No. You explained to me you were drawing, drawing this up because you wanted me to commit fraud and take half the apartment with you as value of it because it was going down the gurgler." 81 Mr Filleul added: (T 134) "A. ... I strongly objected to it because a lot of those second mortgagees lent me millions of dollars and are my friends. I'm still friends with them and I was not going to let them down and I said to Rob: "This is taking money away from people that I know and trust me with their money and there's no way I'm signing that". As emailed to me is his reaction when he got angry when I told him there's no way I'm signing it (witness indicated)." 82 A short time later, Mr McHardy sent Mr Filleul an email in the following terms: (Ex E, annex E) "Subsequent to our last discussion today on the steps of 9 Hunter Street Sydney, which I found most dissapointing, and you now know my intentions, I have decided to make the following offer. For me to continue as General Manager for Pella Properties Pty Ltd and as the last two monthly payments have been short, I require these to be bought up to date imediately, so to satisfy that a bank transfer of $2000 into my account tonite will suffice. If this doesn't happen then my services will stop imediately and may only be available on a consultancy basis of $200 per hour with an upfront Fee of $5,000. Further any sales that may be effected with my input shall attract a fee of 2.5% plus gst directed to an entity of my choice. I also need agreement of this by return before any more details or enquiries will be answered, responded to, passed onto you, or any further action will be proceeded with with any of the transactions presently on the table. Please confirm your position as soon as practical, as at this point my position has now been disclosed. Rob McHardy" (typographical and spelling errors in original) 83 It was put to Mr Filleul that the reason for Mr McHardy's anger was that Mr Filleul proposed to abandon a group of investors from New Zealand who had entered Put and Call options saying: "If they had to drown, they could drown" (T 136). Mr Filleul rejected that suggestion. 84 Mr Filleul gave evidence of a further conversation at about the same time, which was in these terms: (Ex E [39(o)]) "39(o) ... He said: 'Warwick, as you know I am paying rent where I am living at the moment - how about once apartment 29 is basically finished I move in rent free in return for me living on site, providing security and maintaining the grounds - is that okay?' I said: 'Yes, that sounds okay. I'll prepare a letter to that effect.'" 85 A letter was prepared on the letterhead of Pella Properties, addressed to Mr McHardy and signed by Mr Filleul, which was in these terms: (Ex M) "Pella Properties agrees to let you live in Apartment 29 free of rent for providing security for the building, maintenance of the grounds including lawn mowing and cleaning of the common entry areas of the complex." 86 Mr McHardy did not accept Mr Filleul's account of the circumstances in which that letter was written (T 181). He said his concern was insurance, absent such a letter (T 182). He denied counsel's suggestion that the letter was "utterly inconsistent with his case" that he had the right to apartment 29 (T 181). Mr McHardy acknowledged that he did not provide a copy of the letter to Capital Finance (T 183). 87 Mr Khalil (the builder) said that he was obliged to obtain the consent of Pella Properties and Capital Finances before he could allow Mr McHardy to occupy apartment 29. He said he was handed a copy of the letter (Ex 7 [13]). He added: (Ex 7 [14]) "14. Around October 2006 I had a conversation with Mizzi with words to the following effect: I said: 'Is it okey if Rob McHardy moves into unit 2 [lot 29]?' Mizzi: 'You're the builder. McHardy can occupy the unit if the unit has reached lock up stage.'" 88 Mr McHardy gave evidence of the fit-out in Lot 29. It was, he said, different to other apartments and unique in that it had a pool. He said that he had spent approximately $100,000 on the improvements (Ex 3, vol 2, tab 17). His figures were challenged by Mr Filleul. Certain expenses, according to Mr Filleul, had been paid by Pella Properties (Ex E [42]). The only real difference from other units was the pool, a different toilet and cistern and a different cook top. I accept that there were differences and that they improved the unit. There is no evidence before me as to the difference in value arising from such improvements.

The appointment of a Liquidator and Receivers. 89 Pella Properties went into liquidation on 25 July 2008. Receivers were appointed on 30 July 2008. However, before that occurred, Mr McHardy made several attempts to salvage a return for his work. The first attempt was in November 2006, which he described in these words: (Ex 3 [103]) "103. In November 2006, I started working on a proposal to refinance the Development. I proposed that all the creditors turn the debt into equity. The proposal required a 'white knight' to inject $1.5 million into the Development. ..." 90 However, the proposal was rejected by Knightbridge (Ex 3 [103]) (cf Ex 5). 91 A second attempt was made only weeks before the company went into liquidation. Mr McHardy sent an email to Capital Finance on 16 July 2008, foreshadowing an offer to purchase "all residual apts" (Ex G(1), annex). There were, at that time, ten unsold apartments, including Lot 29 (Ex G(1) [10]). On 17 July 2008, a letter was sent to Capital Finance by Mr McHardy's solicitor, Ms Genevieve Staff, seeking finance to fund the purchase ($4.3 m) (Ex G(1), annex). Mr McHardy sent a further email to Mr Fiatarone at 12.06 pm the same day (Mr Fiatarone being the replacement for Mr Mizzi at Capital Finance), explaining what he had in mind in these terms: (Ex G(1), annex) "Luke, you have an email from my solicitors in the city who have missed the beat a little. I am prepared to purchase the remaining 10 apartments at CeVu for $4,300,000. I require funding from Capital Finance for the total amount for a maximum period to 1/02/09 I am prepared to pay interest to make this a performing loan. There are no sale fee's included in this offer so no cost to Pella. Any transaction needs to be completed by Thursday the 24/07/08 so as to remove Capitals future GST component. I intend to take the responsibility and sell down at reduced sale figures apartments and satisfy the debt. There are some parties whom are prepared to purchase at reduced figures at this point that will make the transaction viable." (emphasis added) 92 At 4.06 pm Mr Fiatarone responded by email, stating that Capital Finance would not discount the current debt. He invited Mr McHardy to get back to him if his investors "could do $4.7 m" (Ex G(1), annex). In the result, nothing could be done and Receivers were appointed. 93 Mr McHardy was cross examined about why he had made an offer on ten unsold units (including Lot 29 which he occupied). The exchange was as follows: (T 204) "Q. But you knew the vendor, that is, the receivers, when they were considering your offer would be considering the reasonability of the offer by reference to the value of 10 units, not nine, unless you told them that you already owned one? A. No. What I did--

Q. Isn't that true? A. No, that's not true. What I did know was that the receivers had told me that their debt was $4.3 million and I made them an offer of $4.3 million, a total of their debt to take out the rest of the product. That's what I do know and that's how the deal was structured." 94 Mr McHardy, in his sworn Defence, asserted that Capital Finance knew of and consented to the agreement (oral and written) between himself and Pella Properties, and likewise his occupation of Lot 29 (Defence para 5.7). The Particulars accompanying that paragraph identified the relevant officers of Capital Finance as "Mr Mizzi (before 30.6.07), Mr Nicodemou and Mr Fiatarone". 95 Mr Mizzi denied any such knowledge and denied having given consent. Mr Nicodemou said that he first became aware of the alleged agreement in March 2009 through his colleague, Mr Fiatarone (Ex F [6]). He had gone through the Capital Finance file. There was no reference to an agreement (T 149). Had he been made aware of an agreement, he would immediately have recognised its effect upon the security of Capital Finance. It would be unusual, such that he would have investigated, had he known of it (Ex F [6(b)]). Mr Nicodemou added that he was also unaware, before March 2009, that Mr McHardy was in occupation. He knew Mr McHardy. However, he assumed he was a handyman and employed as a commission agent in selling the apartments, as indeed he was. 96 Mr Fiatarone gave evidence to the same effect (Ex G(1)). His first knowledge of the alleged agreement was through an email he received from Mr McHardy on 24 March 2009, in these terms: (Ex G(1), annex) "Luke I tried to ring you late yesterday but the phones were switched over, although I did leave a message for you to call me back. Yesterday afternoon Ryan Spooner rang and discussed amongst other things the balance of the works required at apartment 29 that will allow the final occupation certificate to be issued, in order that it may be sold. I was a bit shocked at this and explained as best as I could what was outstanding and the estimated cost of satisfying the same. I have in place an agreement with Pella that allows me apt 29 in CeVu, this has been in place since 2004 and was done with Tony Mizzi's (the banker at Capital who provided and managed the funding at CeVu for Capital Finance) consent and agreement. Obviously I had to meet certain conditions, and I have more than fulfilled those so now I wish to take this further. I have been slow in getting back to you yesterday as I needed to talk with my solicitor about the matter first, however that has now been done and I have asked that she contacts you directly to progress things." 97 When Mr Fiatarone had not heard from Mr McHardy's solicitor, he sent a further email to Mr McHardy at 7.50 am at 25 March 2009, which included these words: (Ex G(1), annex) "I'll wait to hear from Genevieve by the end of the week, but I would like to discuss with you when you are free/better. I have never known about such an agreement being in place, so I would like to get a bit of background as to how it came about, and how it was documented. We should also talk about the additional works required as well in order to get final OC." 98 The solicitor, Ms Genevieve Staff, ultimately sent the Letter of Demand of 8 April 2009, to which reference has been made (supra [30]). 99 The issue was taken up with Mr McHardy in cross examination, as follows: (T 175) "Q. Why did you not, to protect your position in 2008 in June and July when the Liquidator and receivers were appointed and in particular my client appointed receivers, why didn't you at that point of time write a letter or perhaps have your firm of solicitors write a letter asserting your rights under this supposed agreement with Pella? A. I was only being guided by my solicitors. I don't know, I can't tell you that.

Legal framework. 102 The plaintiff, in written submissions, helpfully summarised the legal principles relevant to the determination of the issues in this trial. The title to the properties, constituting the development site, was under the Real Property Act 1900 ("the Act"). It is the Torrens system. The principle of indefeasibility is fundamental to that system. Section 42 of the Act is in these terms: "42 Estate of registered proprietor paramount (1) Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud , hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded except: (a) the estate or interest recorded in a prior folio of the Register by reason of which another proprietor claims the same land, (a1) in the case of the omission or misdescription of an easement subsisting immediately before the land was brought under the provisions of this Act or validly created at or after that time under this or any other Act or a Commonwealth Act, (b) in the case of the omission or misdescription of any profit à prendre created in or existing upon any land, (c) as to any portion of land that may by wrong description of parcels or of boundaries be included in the folio of the Register or registered dealing evidencing the title of such registered proprietor, not being a purchaser or mortgagee thereof for value, or deriving from or through a purchaser or mortgagee thereof for value, and (d) a tenancy whereunder the tenant is in possession or entitled to immediate possession, and an agreement or option for the acquisition by such a tenant of a further term to commence at the expiration of such a tenancy, of which in either case the registered proprietor before he or she became registered as proprietor had notice against which he or she was not protected: Provided that: (i) The term for which the tenancy was created does not exceed three years, and (ii) in the case of such an agreement or option, the additional term for which it provides would not, when added to the original term, exceed three years. (iii) (Repealed) (2) In subsection (1), a reference to an estate or interest in land recorded in a folio of the Register includes a reference to an estate or interest recorded in a registered mortgage, charge or lease that may be directly or indirectly identified from a distinctive reference in that folio." (emphasis added) 103 "Proprietor" is defined in s 3(1)(a) of the Act to mean "any person seised or possessed of any freehold or other estate or interest in land". Accordingly, s 42(1) bestows indefeasibility of title, not only on the registered holder of the fee simple, but also the registered holder of any lesser or derivative interest in the land, such as a mortgagee. 104 The principle of indefeasibility, which is the foundation of the Torrens system of title, was described by the Privy Council in Gibbs v Messer [1891] AC 248, in these words: (at 254) "The object is to save persons dealing with registered proprietors from the trouble and expense of going behind the register, in order to investigate the history of their author's title, and to satisfy themselves of its validity." 105 In Leros Pty Ltd v Terara Pty Ltd (1992) 174 CLR 407, Mason CJ, Dawson and McHugh JJ said this: (at 418) "The Torrens system is, as Barwick CJ noted in Breskvar [27] 'not a system of registration of title but a system of title by registration. That which the certificate of title describes is not the title which the registered proprietor formerly had, or which but for registration would have had. The title certifies is not historical or derivative. It is the title which registration itself has vested in the proprietor.' Torrens, in his A Handy Book on the Real Property Act of South Australia (1862), p 11, in a passage quoted by Windeyer J in Breskvar (1971) 126 CLR, described the operation of the legislation as 'cutting off the retrospective or derivative character of the title upon each transfer or transmission, so as that each freeholder is in the same position as a grantee direct from the Crown.' This passage supports the view that the effect of the registration of a subsequent dealing bringing about the registration of proprietorship of an estate or interest in land is to extinguish all prior unregistered estates or interests which, but for that registration, would have conflicted with the proprietor's estate or interest or encumbered that estate or interest, unless the prior unregistered estate or interest falls within the exceptions to indefeasibility of title mentioned in s 68. In other words, a person seeking to preserve an unregistered interest not falling within those exceptions must register that interest in advance of the registration of a subsequent inconsistent dealing or prevent such registration by caveat or otherwise, and thereby enable registration of the unregistered interest. Once that interest is defeated by [registration of a subsequent inconsistent dealing bringing about the registration of a new proprietor, the first interest is extinguished for all purposes and cannot be asserted against any later proprietor. The first interest does not become an inchoate interest capable of being asserted against a later proprietor or an interest which remains in suspension so that it is capable of subsequent revival against such a proprietor. We adopt the comment of Franklyn J in Osborne Park Co-operative Society Ltd v Wilden Pty Ltd with respect to the impact of s 68 on an option of renewal in a prior unregistered lease not exceeding five years, namely, that 'no ... proprietary right exists as from the date of acquisition of title by the subsequent registered proprietor'." 106 It follows that an interest that a person may have in land, which has not been registered, cannot, absent fraud, prevail against a person registered on the title, in this case, the mortgagee. Fraud, in this context, means "actual fraud" (Bahr v Nicolay (No 2) [1988] 164 CLR 604 at 630) or "actual fraud, moral turpitude" (Butler v Fairclough (1917) 23 CLR 78 per Isaacs J at 97) or "personal dishonesty or moral turpitude" (Butler v Fairclough (supra) per Griffith CJ at 90) or "something more than mere disregard of rights of which the persons sought to be affected had notice" (Wicks v Bennett (1921) 30 CLR 80 per Knox CJ and Rich J at 91). 107 In Stuart v Kingston (1923) 32 CLR 309, Starke J said this: (at 359) "Fraud will no longer be imputed to a proprietor registered under the [ Real Property Act ] unless some consciously dishonest act can be brought home to him. The imputation of fraud based upon the refinements of the doctrine of notice has gone." 108 In Bahr v Nicolay (No 2) (supra), Mason CJ and Dawson J said: (at 613) "There is no fraud on the part of a registered proprietor in merely acquiring title with notice of an existing unregistered interest or in taking a transfer with knowledge that its registration will defeat such an interest: Mills v Stokman (1967) 116 CLR 61 at 78; Waimiha Sawmilling Co Ltd (in liq) v Waione Timber Co Ltd [1926] AC 101." 109 The plaintiff, in submissions, drew attention to two examples which illustrate the concept, namely: " Wicks v Bennett (supra) where it was held not to be fraud for a registered proprietor to assert that he held title free of an unregistered lease held by a partnership notwithstanding that prior to his purchase he was told orally by one of the partners that he could not purchase the land because it was held by the partnership under the unregistered lease. Bahr v Nicolay (No 2) (supra) where it was held to be fraud for registered proprietors to assert they held title free of an antecedent equitable interest where the registered proprietors had purchased the land having previously acknowledged and recognized in writing the antecedent agreement giving the right to a third party to purchase the property and then further after registration confirming in writing that they would honour and comply with the antecedent agreement." 110 Here, the memorandum of 6 September 2004, if authentic, is a document that came into existence after the mortgages of Capital Finance had been registered in May 2004. It cannot therefore prevail against the interests of Capital Finance registered on the title. The plaintiff, in submissions, said this, which I accept: "3. ... Such alleged interest post-dates the Plaintiff's mortgages but Mr McHardy's supposed interest has never been registered and he would therefore merely be the holder of a subsequent unregistered equitable interest or the holder of a mere equity in Unit 2 (that is, Lot 29). ..." (parenthesis added) 111 Mr McHardy's case is that the written agreement embodied the terms of an oral agreement made in April 2003, that is before registration. In the context of that agreement, it would be unconscionable and hence an exception to indefeasibility not to recognise that agreement. In the context of that allegation the plaintiff, in submissions, drew attention to two matters. The first was expressed in these terms: "4. It further ought to be noted that any personal equity must comprise a known legal or equitable cause of action enforceable against the registered proprietor of the interest in question. The expressions 'personal equity' and 'rights in personam' do not supply a blank canvas on which a plaintiff can paint any picture. Mr McHardy must be able to sheet home to the Plaintiff as registered proprietor of the relevant mortgages a liability under a recognized cause of action arising out of the Plaintiff's conduct in acquiring or holding its registered interest such as deceit, misrepresentation, mistake, unconscionable conduct, or duress and its conduct must amount to a breach of some obligation owed to him or to be otherwise unconscionable (Butt, P J, Land Law (6th ed) (2010) at paragraph 20 104, at p 821)." 112 The second matter related to the cogency of the proof offered concerning the alleged oral agreement. Attention was drawn to the judgment of Hammerschlag J in Commonwealth Bank of Australia v Serobian [2009] NSWSC 302, where his Honour said this: (at [362]) "Where a party seeks to rely upon spoken words as a foundation for a cause of action, including a cause of action based on a contract, the conversation must be proved to the reasonable satisfaction of the Court which means that the Court must feel an actual persuasion of its occurrence or its existence. Moreover, in the case of contract, the Court must be persuaded that any consensus reached was capable of forming a binding contract and was intended by the parties to be legally binding. In the absence of some reliable contemporaneous record or other satisfactory corroboration, a party may face serious difficulties of proof. Such reasonable satisfaction is not a state of mind that is obtained or established independently of the nature and consequences of the fact or facts to be proved. The seriousness of an allegation made, inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question of whether the issue has been proved to the reasonable satisfaction of the Court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony, or indirect inferences: see Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 362; Helton v Allen [1940] HCA 20; (1940) 63 CLR 691 at 712; Rejfek v McElroy [1965] HCA 46; (1965) 112 CLR 517 at 521; Watson v Foxman (2000) 49 NSWLR 315 at 319." 113 That passage refers to the words of McClelland CJ in Eq in Watson v Foxman (2000) 49 NSWLR 315, where the following was said in the context of conduct and words said to be deceptive and misleading: (at 318/319) " ... Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter or ordinary human experience." (emphasis added) 114 McClelland CJ in Eq added: (at 319) " ... What I have said ... is equally applicable, mutatis mutandis, to the causes of action based on contract and on equitable estoppel (with the added requirements, in the case of contract that any consensus reached was capable of forming a binding contract and was intended by the parties to be legally binding ..." 115 Against that background, let me return to the issues in order to make an evaluation of the evidence.

The alleged oral agreement. 116 Both Mr Filleul and Mr McHardy were experienced businessmen. Both, for a number of years, had been involved in property development. The project they had in contemplation in 2002/3 was large scale. It involved the construction of 33 luxury units on prime real estate at Dee Why. The cost was expected to be $17.4 million. The funding required exceeded $15.4 million (supra [25]). Completing the project would take a number of years. The sale of the units at the end of the project would be subject to market forces. Each recognised the risk of failure. Both were optimistic of success. 117 That being the context, Mr McHardy contends that an agreement was made in which, in consideration of his acting as site manager, and working to ensure the success of the project, he would be given title of one of the units in the development, free of encumbrance (supra [15]/[16]). 118 Mr Filleul agrees that they had a discussion. The arrangement was that, after recovering his outlay plus 30%, they would split the profits 50/50. The apartment that Mr McHardy was keen to have would come out of his share of the profits. If there was no profit, there would be no apartment (supra [19]/[20]). In cross examination by Mr McHardy, Mr Filleul said this: (supra [20]) (T 138/9) "Q. Did you explain that it came out of the profit? A. Of course. You didn't think I was going to give away an apartment ahead of the banks and everyone else." 119 Mr Filleul was no doubt anxious to secure the services of Mr McHardy. Mr McHardy had experience. He also had energy. He had recently divorced and been made bankrupt. He was hungry for success. I accept that Mr Filleul regarded him as an asset for the project. 120 However, Mr Filleul was investing significant money in the development. He ultimately lost about $1.8 million. He was also investing his time. The sample of the site minutes which were tendered showed the intensity of his involvement (Ex 3, vol 2, tab 10). He also gave his personal guarantee. 121 But, quite apart from Mr Filleul's own stake, he knew, as an experienced man, the way in which the system worked. Those providing finance would insist upon security. The major financier would require a first mortgage. It would be a breach of the security arrangements to prefer the interests of Mr McHardy (supra [60]). 122 I therefore find Mr Filleul's account of their conversation much more plausible. There was no contemporaneous documentation of the discussion. Mr McHardy's recollection of what he said, many years later, did not have "a degree of precision sufficient to enable the Court to be reasonably satisfied" (Watson v Foxman (supra [113]) that Mr Filleul represented that, no matter what the outcome, Mr McHardy was guaranteed title to one of the units. I think it likely that the terms of their discussion were as described by Mr Filleul in his affidavit (Ex E [16]) (supra [19]). 123 That finding may be enough to end the claim, however I should not stop there. The evidence on the remaining issues is capable of reinforcing, or even contradicting the impression I have concerning the agreement made between Mr McHardy and Mr Filleul soon after the project began. I will therefore consider whether the financiers, Knightbridge and Capital Finance, were told of the arrangement between Mr McHardy and Mr Filleul and, if they were, whether their conduct may be considered unconscionable. 124 It is convenient to begin with Knightbridge, since its mortgage was the first to be registered (in March 2004), although it was later postponed in favour of Capital Finance.

Was Knightbridge told? 125 What was the basis of Mr McHardy's claim that Knightbridge, through Mr Jenkin, was made aware of the agreement that had been reached between Mr Filleul and himself? Nothing was put in writing. Mr McHardy's affidavit, prepared for these proceedings, did not include a conversation with Mr Jenkin, where he was apprised of the terms of their agreement, and its effect upon Knightbridge's security. The closest he got, in his affidavit, was the inclusion of Mr Jenkin's name in a list of those who were said to have witnessed some time before 10 May 2004, the following words being said: (Ex 3 [75]) (supra [35]) "'Warwick and I have done a deal. I'm getting Lot 29 in lieu of the remuneration I am entitled to." 126 That conversation could hardly be considered notice of an agreement which may be relied upon to displace Knightbridge's security. First, the conversation, to be relevant, must pre-date the registered mortgage of Knightbridge. That mortgage was registered on 12 March 2004 (supra [22]) (cf Ex 3 [75], 10 May 2005). Secondly, even assuming it can be accepted that Mr Jenkin witnessed such a conversation before March 2004, it hardly conveys with "a degree of precision sufficient to disclose" to the registered mortgagee that the private arrangement between Mr Filleul and Mr McHardy was to rank ahead of the registered first mortgage. It would be more reasonable to assume from these words that such an arrangement was subject to the rights of secured creditors under their mortgages. 127 Mr McHardy, when giving evidence, supplemented the material in his affidavit (supra [48]-[53]). He asserted Mr Jenkin was told of the arrangement, in rather more elaborate terms. However, the accounts he gave were contradictory. On the one hand he suggested that Mr Jenkin was told of the arrangement by Mr Filleul in his absence, and he was told about it later (supra [48]). On the other hand, he said that he was present when Mr Jenkin was informed. Indeed, he gave an elaborate account of being on Mr Jenkin's boat (supra [52]). His evidence was far from convincing. 128 Mr Jenkin, on the other hand, was an imposing man. He was a Chartered Accountant. He gave a straight forward account in which he said he did not know of any deal (supra [55]). He added, plausibly, that had he been informed, he would have been extremely concerned. He would have recognised immediately that it eroded Knightbridge's security. He would not have given his consent to such an arrangement. 129 I accept Mr Jenkin's evidence. I am not persuaded that Knightbridge was told of any arrangement between Mr McHardy and Mr Filleul. There was simply no basis for suggesting that Mr Jenkin (and therefore Knightbridge) acted unconscionably towards Mr McHardy. It follows that there is no basis, in the cross action by Mr McHardy against Knightbridge, for making the declaration and orders sought. The cross action should be dismissed. 130 Let me move then to the main issue in this trial, namely whether Capital Finance consented to this arrangement, such that it would be unconscionable to now insist upon their indefeasible security.

Did Capital Finance consent? 131 It will be remembered that the first mortgages of Capital Finance were registered in May 2004, so that its consent (through Mr Mizzi), to be relevant, had to have been provided before that time. After that time, indefeasibility would operate. 132 Again, nothing was put in writing. Mr McHardy relies upon conversations which included Mr Filleul, Mr Mizzi and himself (and sometimes others) (supra [32]-[38]). Mr McHardy also relies upon the evidence of the builder, Mr Khalil (supra [39]). Mr Khalil was not a party to the conversation. However, it was said that Mr Mizzi later gave a direction which was consistent with an awareness of the arrangement between Mr Filleul and Mr McHardy. 133 Mr Mizzi denied that he was party to the conversations recounted by Mr McHardy. He said that he was not made aware of any agreement between Mr Filleul and Mr McHardy (supra [45]). Mr Filleul, likewise, denied having been present at any such conversation. He did, however, make one concession. He acknowledged that Lot 29 was referred to as "Rob's apartment". However, that evidence, and indeed the evidence of Mr Khalil, does not take the matter much further. In the expectation of a profit, Mr McHardy at some point may have earmarked Lot 29, which then became known as "Rob's apartment". That does not demonstrate that Capital Finance, through Mr Mizzi, gave its consent to a private arrangement between Messrs McHardy and Filleul which would have priority over the security which Capital Finance held. Ultimately, the issue of consent must be determined after an evaluation of the evidence of Mr McHardy, Mr Filleul and Mr Mizzi. 134 So, dealing with the participants in the alleged conversation, each had relevant experience. Each had either sought or provided finance for real property developments. I have referred already to the experience of Messrs Filleul and McHardy (supra [116]). Mr Mizzi, in his affidavit, stated his experience in these words: (Ex D [4]-[5]) "4. I have been working in property finance for over 25 years. I commenced my career at ANZ in 1985, where I worked for 10 years. I then moved to St George, where I worked in senior management in its property finance division for 9 years. 5. I joined (Capital Finance) as a senior manager in property finance NSW in around April 2003, where I stayed until July 2007, before commencing employment with Investec." (parenthesis added) 135 In considering whether the conversations relied upon by Mr McHardy have been established "with the degree of precision sufficient to enable a court" to be satisfied that they in fact occurred, two layers of implausibility must be penetrated. The first concerns the antecedent agreement between Messrs McHardy and Filleul, which they then jointly disclosed to the financier. The second is the reaction of the financier, in circumstances where it is suggested that the security of Capital Finance, as first mortgagee, was to be subject to the agreement reached between Mr Filleul and Mr McHardy. 136 Dealing with the first layer, I have already found that it is implausible that a person of Mr Filleul's experience would enter the agreement suggested by Mr McHardy. Still, it must be recognised that private individuals may agree upon anything, even against their own interests. But here, what is suggested is that they would then take their agreement to a financier and lay it before him, before finance had been approved. It may be assumed that Mr Filleul and Mr McHardy recognised that such an arrangement would necessarily reduce (to the value of the apartment) the security on offer. Both would surely recognise that such an arrangement may concern the financier. You would have expected a developer, for his own protection, with such an unusual arrangement, to put it in writing to the financier, lest there be some future misunderstanding. Indeed, you would not expect an experienced developer to put such a proposal before a financier, precisely because it is so unusual to offer first mortgage security, but then suggest that it was subject to an arrangement which should rank ahead of that security. 137 One then comes to the second layer of implausibility, that is the reaction of the financier. Mr McHardy, in his account of the conversation, said that Mr Mizzi reacted by simply saying: "Yes, that is fine" (supra [33] and [38]), as though it were a matter of no importance. Mr Mizzi did not question the arrangement. He did not seek clarification. He did not insist that it should be in writing. He made no comment concerning the effect of such an arrangement upon the bank's security. He did not even ask which unit in the development was to be excluded from the security on offer. There were, of course, differences between units in terms of their value. Some were two bedroom and others one bedroom. Some had one car space and others two. Some had a roof terrace. Others had access to a courtyard (Ex 4). Yet, on Mr McHardy's account, not a question was asked. Mr Mizzi reacted with a shrug of the shoulders. 138 How would you expect an experienced financier to react to such a suggestion? You would expect a person of experience to immediately recognise the implications for the security on offer. That is precisely how Mr Mizzi reacted to the suggestion that there was such an agreement. His affidavit included these words: (Ex D [37]) "37. Mr McHardy's assertion that I was aware of (and consented to) an arrangement between him and Mr Filleul where he would receive a unit at the Ce Vu Development for free, or as part of some remuneration agreement, is not true. As an experienced property finance manager I would never have agreed to any such arrangement because I would have been of the view that it could have an adverse impact upon my employer's secured financial position as well as the secured financial position of the 2nd mortgagee, Knightbridge Nominees. I was aware that under the Capital Finance mortgages the consent of Capital Finance to any agreement or disposition concerning the units was required." 139 Mr Nicodemou, Mr Mizzi's replacement at Capital Finance, said that he would have reacted in the same way. So did his colleague, Mr Fiatarone (supra [95]/[96]). Accordingly, I find the reaction attributed to Mr Mizzi by McHardy's account of their conversation ("Yes, that is fine") implausible. I accept the evidence of Mr Mizzi and Mr Filleul. I find that Capital Finance did not give its consent to an arrangement in the terms relied upon by Mr McHardy. 140 Even accepting the conversation relied upon by Mr McHardy at face value, it would not, to my mind, go far enough. It does not spell out that the arrangement was intended to rank ahead of the first mortgage security. It is consistent with an expectation of profit and a private arrangement that would come into operation once that profit had been made.

Confirmation provided by the evidence. 141 My conclusion is based upon an evaluation of evidence where there are differing accounts of what was said. A number of matters reinforce that conclusion. 142 First, the security documents which were subsequently executed, embodying the arrangements between Pella Properties and Capital Finance, are inconsistent with the agreement alleged by Mr McHardy. The security required by Capital Finance in its letter of 10 May 2004 offering a Facility Agreement was the whole of the development (not the development excluding Lot 29). The mortgages and the floating charge, as well as the guarantee, related to the whole of the development. No exception was made in respect of Lot 29. 143 Secondly, the memoranda prepared by Mr Mizzi, where he sought approval from his superiors for the finance required by the developer, each assumed the entire development would be the security. No reference was made to Lot 29 or its exclusion. The first memorandum was prepared on 18 November 2003. It referred to a proposal to construct "33 units". It included calculations which were clearly based upon the whole development, assessing the return and the risk (supra [25]). On 18 February 2004, Mr Mizzi prepared a further memorandum headed "33 Luxury Units at Dee Why". The figures had been reworked. Again there was no suggestion that Lot 29 had been excluded (supra [26]). The deal therefore went ahead, after the Letter of Offer of 10 May 2004 was accepted by Pella Properties on 11 May (supra [27]/[28]). 144 The third memorandum was prepared on 30 November 2004. By that stage the land had been purchased with the money advanced by Capital Finance. Demolition was about to begin with construction early the following year. It became apparent that Pella Properties would be unable to fulfil a precondition of the financial arrangements made on 10 May 2004, which required the presale of a number of units. The market had slowed (supra [68]). Pella Properties, in these circumstances, put an alternative proposal. It had procured a number of Put and Call options, which had been assessed by the solicitors for Capital Finance as being enforceable. It therefore sought the authority of Capital Finance to vary the agreement, substituting the options for the contracts of sale which the Facility Agreement had specified. 145 Mr Mizzi, in his memorandum of 30 November 2004, considered the question whether Capital Finance should accede to the request by Pella Properties and extend finance upon that basis. It was, no doubt, a delicate issue. The security on offer had been reduced. The margins had therefore been reduced and the risk was greater. It was greater still because it was evident that the financial climate had changed for the worse. Mr Mizzi made his assessment and ultimately recommended that finance for the next stage should be made available. He clearly assumed all 33 apartments were available as security to Capital Finance. Lot 29 was not excluded. He ultimately recommended that the agreement be varied and finance approved (supra [68]-[71]). The memoranda are important because they cover the period from November 2003, when Capital Finance was first approached, to November 2004, that is some months after the alleged written agreement of 6 September 2004. 146 Thirdly, when Mr McHardy took up occupation of Lot 29, it will be remembered that he sought and was given by Mr Filleul, on behalf of Pella Properties, a letter in the following terms which, for convenience, I repeat: (Ex M) (supra [85]) "Pella Properties agrees to let you live in Apartment 29 free of rent for providing security for the building, maintenance of the grounds including lawn mowing and cleaning of the common entry areas of the complex." 147 That letter made no reference to the agreement, or Mr McHardy's right to occupy the unit pursuant to the agreement. Its terms, in my view, are inconsistent with such an agreement. 148 Fourthly, in September 2008, a matter of weeks before the appointment of Receivers, Mr McHardy made an offer for "all residential apts" (supra [91]). It will be remembered that he offered "to purchase the remaining ten apartments" for $4.3 million. The ten apartments included Lot 29. He did not, at that time, assert that he had the right to apartment 29, so that Capital Finance should assess his offer upon that basis. Had he believed that he had such a right, I would have expected him to have drawn it to the attention of Capital Finance. 149 Fifthly, once his offer was rejected and Receivers appointed on 30 July 2008, Mr McHardy did not himself, or through solicitors, immediately write to the Receivers and draw their attention to his interest in Lot 29. I would have expected him to have done so. He had, after all, consulted a solicitor, Ms Genevieve Staff, two weeks earlier in respect of his offer for the ten apartments. When cross examined, he could not explain why he had not advised the Receivers soon after their appointment (supra [99]). The first notification of the claim received by the Receivers was after the email to Mr Fiatarone of 24 March 2009 (supra [97]). 150 All these matters reinforce my view that Capital Finance did not consent to any arrangement that Mr McHardy was entitled to Lot 29 before the provision of finance, or at any time. 151 Let me, for completeness, deal with the alleged written agreement.

Was there a written agreement? 152 Mr McHardy asserted that the written agreement was prepared by him and signed by Mr Filleul on 6 September 2004 (supra [58]). Mr Filleul, in emphatic terms, denied that suggestion (supra [60]). It was not his signature. It was a forgery (supra [63]). 153 A number of comments should be made. First, the written agreement, on Mr McHardy's case, presupposes the antecedent oral agreement, which I have found improbable. Secondly, Mr McHardy explained that he had not previously put his agreement with Mr Filleul in writing "because he trusted Mr Filleul" (supra [58]). That, however, does not explain why, in September 2004, the agreement was put in writing. He did not suggest that in September 2004 he had changed his view and had reason to distrust Mr Filleul. That may suggest that there was some other reason for the document. A likely explanation was that the market conditions had worsened, and the prospect or certainty of a profit, had receded. Thirdly, Mr McHardy's evidence concerning the original of the agreement and its whereabouts, was not satisfactory. No-one from the solicitor's office was called to say that he or she had been given the original, but had misplaced it. Fourthly, the misspellings of Mr Filleul's name, especially his name where he was meant to sign the document, add to the doubts about the document. Finally, Mr Filleul, it will be remembered, provided a number of reasons why he would not have signed a document in that form. It would have amounted to a preference of Mr McHardy over the subscribers to the Hawkesbury Trust, who were his friends and who trusted him. It would also have been a breach of the terms of the registered first mortgage (supra [60]). I find both reasons persuasive. 154 There are two matters that may suggest that Mr Filleul did sign the document. The first was that Mr McHardy certainly approached Mr Filleul in September 2005 and asked him to sign a "Deed of Acknowledgement" (Ex E, annex E). Why would he forge (or arrange the forgery) of one document, and yet seek Mr Filleul's signature on another? One can speculate that there may be reasons. However, it is a matter to weigh. 155 The second concerns the terms of the Deed itself. One of the recitals to the deed was in these terms, which I repeat for convenience: (Ex E, annex E) (supra [76]) "B. On 6 September 2004 an agreement was entered into ( 2004 agreement ) which provided among other things that Filleul and (.......) engaged the services of McHardy for the purposes of developing the Site by constructing the Complex ( Services )." 156 As mentioned, Mr Filleul certainly saw that document and refused to sign it (supra [76]-[83]). It will be noticed that recital does not state that the agreement of 6 September 2004 was in writing. Nor does it refer to the terms of the written agreement, transferring ownership of the apartment (or Lot 29). It simply refers to an agreement that Mr McHardy provide services in respect of the development, which of course he did. 157 On balance, I am not persuaded, as a matter of probability, that Mr Filleul signed the written agreement. 158 Again, even were one to assume that the document was authentic and signed by Mr Filleul, it did not, as Mr McHardy conceded, confer a right to the apartment, Lot 29 (supra [64]-[67]). On its face, its purpose was to allow Mr McHardy the rights of a secured creditor (supra [67]). On Mr McHardy's case, it was to overcome that ambiguity that he attempted to have Mr Filleul sign the Deed of Acknowledgment (supra [76]).

Consent by Capital Finance to the occupation of Lot 29. 159 I have accepted that Mr McHardy probably occupied Lot 29 from about May 2006 (supra [75]). Obviously he spoke to Mr Filleul some time before that concerning Lot 29 and earmarked it for himself. It is difficult to say when that may have occurred. Mr McHardy suggested, in his affidavit, a conversation with Mr Filleul on that issue in March 2003 (supra [17]). I believe it likely, however, that it was much later than that. 160 The selection of Lot 29 and the Put and Call option of 21 October 2004 (which related to unit 32) are matters in respect of which competing inferences are open. Mr Filleul suggested that "Rob's unit" in the early days was unit 32 and later became Lot 29 (Ex E [44]). The option involved an expensive unit (unit 32) and required a significant deposit (5% of a discounted sale price of $688,500) (supra [69]). The option is consistent with an investment at a time that Mr McHardy may still have been optimistic as to his share of the profits. It no doubt helped in the refinancing of the development, the subject of Mr Mizzi's memorandum of 30 November 2004 (supra [68]). 161 The "written agreement", which bears the date 6 September 2004, refers to apartment 29. It was drafted by Mr McHardy. If it was drafted on or about the date it bears, then obviously Lot 29 had been earmarked by that date. For the reasons stated, however, I am not persuaded that Mr Filleul signed that document. Nor am I confident that it came into existence in September 2004. The only thing that can be said with confidence is that, by the beginning of 2006, when the valuation of the units was undertaken by L J Hooker (Ex 4) (supra [72]), Mr McHardy had nominated apartment 29, since it was marked "sold". It was a smaller apartment and far less expensive than unit 32. His selection of Lot 29, after construction began, is consistent with a lowering of his expectations as the economic outlook worsened. 162 The Deed of Acknowledgement of September 2006, that Mr Filleul refused to sign, included a recital which was altered by Mr McHardy in his handwriting (Recital G). In its altered form, it read as follows: (supra [77]) "McHardy will be given the right to carry out improvements and occupy Lot 29 when it is ready to be occupied." 163 It may be inferred that most of the improvements (apart from perhaps the swimming pool) were made after that time. I have accepted that, using his money and time, Mr McHardy did improve Lot 29. I have no real evidence as to the difference in value that such improvements made. It is clear from Mr McHardy's written submissions that the value of these improvements are a significant source of grievance, in that that Capital Finance will get the benefit of such improvements if Mr McHardy fails in his action. Capital Finance responded to that suggestion that Mr McHardy, in any event, has had the benefit of rent-free accommodation for many years. 164 The Amended First Cross Claim commenced by Mr McHardy against Capital Finance asserts that the benefit of his goods and services were provided in circumstance that would make it unjust for Capital Finance to retain them (paras [5] to [7]). In Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387, Mason CJ and Wilson J said this: (at 404) "The decision in Crabb is consistent with the principle of proprietary estoppel applied in Ramsden v Dyson (1866) LR 1 HL 129. Under that principle a person whose conduct creates or lends force to an assumption by another that he will obtain an interest in the first person's land and on the basis of that expectation the other person alters his position or acts to his detriment, may bring into existence an equity in favour of that other person, the nature and extent of the equity depending on the circumstances. And it should be noted that in Crabb , as in Ramsden v Dyson , although equity acted by proprietary interest came into existence as the only appropriate means by which the defendants could be effectively estopped from exercising their existing legal rights. One may therefore discern in the cases a common thread which links them together, namely, the principle that equity will come to the relief of a plaintiff who has acted to his detriment on the basis of a basic assumption in relation to which the other party to the transaction has 'played such a part in the adoption of the assumption that it would be unfair or unjust if he were left free to ignore it': per Dixon J in Grundt (1937) 59 CLR 675; see also Thompson (1933) 49 CLR 547. Equity comes to the relief of such a plaintiff on the footing that it would be unconscionable conduct on the part of the other party to ignore the assumption." 165 Mr McHardy asserted, in his sworn Defence, that Messrs Mizzi, Nicodemou and Fiatarone knew, not only about his agreement with Mr Filleul, but about his occupation of Lot 29 (supra [94]). Mr Khalil asserted that Mr Mizzi gave a direction that Capital Finance should not pay the design costs or fit-out of "Rob's unit" (Ex 7 [9]). 166 Mr Nicodemou and Mr Fiatarone each said, and I accept, that they had no such knowledge (supra [95]). Mr Mizzi, who only visited the site periodically, said that he was not aware that Mr McHardy was in occupation (T 44), which I accept as likely. Mr Mizzi gave the following evidence concerning the fit-out: (T 46) "HIS HONOUR

Capital Finance Aust Ltd v Pella Properties Pty Ltd & Anor

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Judgment (90 paragraphs)

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Cases Cited (17)