Conway v Critchley

Formation of Contract 4At the commencement of his final address, counsel for the plaintiff stated that the conversations and documents on which he relied in support of the alleged agreement were "equivocal". That is certainly correct. Unfortunately for the plaintiff, uncertain and ambiguous evidence is hardly a firm foundation for inferring the existence of a legally binding agreement, especially when the contrary evidence, including the objective facts and the probabilities are more compelling. 5There were three protagonists involved in the making of the alleged agreement: the plaintiff, Mr Conway, an experienced businessman; the first defendant, Mr Critchley, an experienced accountant; and the sixth defendant Mr Thompson an experienced barrister. I am quite satisfied that in 2007 and 2008, each of them well understood that the making of a commercial agreement required more than some common expectation, mutual consensus or joint assumption. I am not suggesting that even these ingredients were necessarily present. Far from it, but at a minimum there had to be proof of a clear intention at some specified point in time that each intended to be legally bound to the other on terms that were mutually agreed and sufficiently certain. 6The formation of a legally binding agreement requires something tangible. Among other things, there must be actual contractual intention by each participant as well as reasonable certainty of terms and subject matter. A loosely formed shared idea, based wholly or partly on common expectations, mutual optimism and misplaced enthusiasm, to which greed and the hope of financial gain may be added in varying degrees, is not a contract. Nor does a mere consensus amount to a contract: ABC v XIVth Commonwealth Games (1988) 18 NSWLR 540 at 548. It is of the essence of contract that there be a voluntary assumption by each participant of a legally enforceable duty: Ermogenous v Greek Orthodox Community [2002] HCA 8; (2002) 209 CLR 95 at 105. Even more formal arrangements may not amount to a contract if the requisite intention is absent: South Australia v The Commonwealth [1962] HCA 10; (1962) 108 CLR 130 at 154. 7A startling illustration of the absence of these minimum requirements in relation to the agreement for which the plaintiff contends, was revealed in a message sent by Mr Thompson to Mr Critchley on 7 August 2008: Stephen, we will have to tie down all the legals before we go much further otherwise we will be at each others throats when (if) money comes in. David and I are of the view that we should each hold a 33 percent equity in each of the various companies and that these should be allocated sooner rather than later. (emphasis added) 8Mr Thompson's message was sent many months after the alleged agreement was said to have been made. It is inconsistent with its existence. I reject any suggestion that Mr Thompson's words should be, or were intended to be, limited to arrangements that were contemplated in respect of companies other than the second and third defendants. The incomplete state of affairs exhibited by those words should be contrasted with the following particulars of the agreement provided in the plaintiff's second further amended statement of claim: The agreement was oral and arose from discussions between the plaintiff, the first defendant and the sixth defendant at meetings between March 2007 and late 2007. Words were discussed to the effect that each of the plaintiff, the first defendant and the sixth defendant would obtain one third of the share capital each in the Venture (undefined) and in the Venture Companies (undefined). 9In contradistinction to the unresolved and fluid arrangements that prevailed in relation to the agreement said to have been made concerning the shareholding in the second and third defendants, the picture was different when the parties did reach actual agreement on other matters. Thus on 29 May 2008, Mr Critchley caused a company called WGA (Australia) Pty Ltd to be registered. Mr Critchley was appointed as its initial director and secretary and the shareholders were Mr Critchley as to 34 shares, a company controlled by Mr Conway as to 33 shares and a company controlled by Mr Thompson as to 33 shares. The share holding in WGA reflected an actual agreement between the protagonists. The company had no assets (unlike the second and third defendants) but its business was intended to be used for franchising agreements for the operation of liquor stores throughout Australia. Although the business did not prosper, the establishment of, and shareholding in, the company serves to illustrate what might have been expected to occur if, in truth, the parties had entered into the alleged agreement in relation to the second and third defendants.

Inconsistent Evidence 10There was other evidence inconsistent with the agreement which the plaintiff sought to prove. I will mention three preliminary matters. To start with, when the plaintiff commenced these proceedings on 24 December 2008, he did not even plead an agreement, let alone the agreement which is now particularised. All that was pleaded in paragraph 12 of the original statement of claim was that "on or about July 2008, Critchley advised the plaintiff that he would cause" the share capital in the second and third defendants to be issued as to one third to each of the protagonists. 11Even the plaintiff's first affidavit said nothing about the making of any agreement, let alone the making of an agreement in 2007 as now particularised. It deposed only to a meeting in Mr Thompson's chambers in July 2008 when Mr Critchley was alleged to have said certain things. Only the amended statement of claim filed in June 2009 pleaded, for the first time, the making of an agreement. The oral agreement was said to have been made in December 2007. The particulars refer to paragraph 10 of Mr Thompson's affidavit sworn on 12 January 2009. That paragraph hardly supports the contention. It is vague and woolly in the extreme and is wholly unpersuasive. It did not improve in the witness box. Mr Thompson said: Thereafter an agreement was reached whereby David and Stephen and I would act to save the winery and operate it as an equal partnership with one third being owned by each of us. While I no longer recall exactly how this was fomented [sic], either David or Stephen or I said words to the effect, 'The way to save it is to settle with the NAB by buying Old Mudgee's debt out with a fresh company with each of us owning one third' and the other two saying words to the effect, 'Yes I agree'. Meetings to discuss progress were held many times at David's home, in my chambers, over the telephone and at other places based on this agreement.

Historical Facts 12There were other inconsistencies arising from the proven facts, the objective circumstances and the sequence of events. The sequence effectively started in November 2006 when a company known as "Old Mudgee" (Mudgee Wines Pty Ltd ACN 001 384 767) was placed into liquidation by order of the Supreme Court of South Australia. Old Mudgee conducted a winery business at Eurunderee in New South Wales. The plaintiff and his wife were its shareholders and directors. 13In early 2007 the plaintiff told Mr Critchley that he needed a short-term loan of $87,851.02 to be paid before 26 March 2007 to get the consent of the liquidator to prevent the winding up of Old Mudgee. Mr Critchley obtained a loan for that amount from Mr Whalley and Ms McLean in March and paid it to the Liquidator. As a result, the Supreme Court of South Australia terminated the winding up of Old Mudgee on 24 March 2007 and Mr Conway went back onto the Eurunderee Property. On 26 March NAB appointed David Leigh as receiver of Old Mudgee. 14For the remainder of the year, Mr Thompson engaged in negotiations on behalf of Mr Conway to raise sufficient finance to pay out the NAB loan. In December 2007 Mr Critchley made an offer on behalf of Eurunderee Wines to the receiver to purchase the Eurunderee property and Old Mudgee for $850,000. The receiver accepted this offer and the contract for sale was exchanged on 24 December 2007. The purchase price was proposed to be financed as follows: (a) $63,750 on exchange of contracts; (b) $312,000 to be borrowed from Latrobe Financial, secured by a registered first mortgage of the Eurunderee property; (c) $200,000 from Esanda to be secured over plant and equipment, with Mr Critchley to sign a personal guarantee; (d) Leon Wicht to provide the balance of $300,000. 15Mr Critchley had already borrowed $85,000 from Mr Wicht for the deposit, as recorded in writing on 6 December 2007. On 25 March 2008 Mr Critchley and Mr Conway had a meeting with Mr Wicht, in which Mr Critchley asked for a further $300,000, to which Mr Wicht responded: I have already agreed to lend you $85,000. If I am to put more money into the business I want an interest in the business. I will agree to lend the additional $300,000 on condition that interest is paid on the total $385,000 at 12% per year and I am allocated 30% of the share capital in the purchaser prior to the settlement of the transaction. 16Mr Critchley agreed and Mr Conway made no objection. The agreement was recorded in a letter from Eurunderee Wines dated 26 March 2008. In late March 2008, the receiver issued a notice to complete the contract for sale, stipulating 4 April 2008. On 3 April Esanda advised Mr Critchley that the moneys would not be available for settlement. Mr Critchley then borrowed $165,000 from Mr Whalley and Ms McLean, to be paid back when the Esanda moneys were advanced. On the morning of the settlement (4 April), Mr Wicht refused to advance the $300,000 that he had agreed to provide. As a result, Mr Critchley again approached Mr Whalley and Ms McLean, who provided the money on the basis that it would be repaid at $3000 per week over 2 years and that they would receive 35% of the shares in Eurunderee. This was recorded in a document entitled "Minute of Eurunderee Wines". 17The moneys provided by Mr Whalley and Ms McLean allowed for the completion of the settlement. By November 2008 Eurunderee Wines had no cash flow. It borrowed a further $150,000 from Mr Whalley and Ms McLean in return for a further 15% of the shares. In April 2009 La Trobe Financial advised Eurunderee Wines that the indicative payout figure for its loan was $318,152.02. Again, Mr Whalley and Ms McLean paid out the amount, this time in return for the balance of the shares in Eurunderee Wines.

Further Inconsistencies 18Against the background of those facts, the following additional inconsistencies in the plaintiff's case emerged. Mr Conway knew of the existence of Mr Whalley and Ms McLean on the winery since July 2008 but made no formal allegation to them of any alleged agreement by which he owned one third of the winery (or of the shares in the second or third defendants) until June 2009. Furthermore, in or about November 2008, Mr Conway made an offer to purchase Mr Whalley's shares. The credit of Mr Whalley was not attacked in relation to this evidence. The offer by Mr Conway was not consistent with the agreement which he alleges. 19Additionally, Mr Conway said that conversations occurred in July 2008 to the effect that Mr Critchley would transfer shares to him. On his pleaded case however, such a conversation could not have occurred because he alleged that the original agreement had been amended in March 2008 so that the shares would be held by Mr Critchley on trust. Finally, for what it is worth, Mr Thompson himself never made any claim to a one third interest in the winery in accordance with the agreement for which the plaintiff contended.

Commercial Probability 20I should turn to the commercial probabilities. They do not assist the plaintiff. The circumstances of the purchase of the winery from the receiver were as follows. Mr Conway and Mr Thompson did not contribute any moneys to the purchase price of $850,000 and did not provide any securities or guarantee to help fund the purchase price. Nor did they assert that they would have contributed any moneys or provided any securities. Indeed, it is obvious that Mr Conway was financially destitute and unable to do so. 21Further, Mr Thompson says that he was quite unaware, at the time, of the contract to purchase the winery from the receivers. In the absence of funding from Mr Thompson or Mr Conway, which was never sought and never given, Mr Critchley arranged finance for the purchase and Mr Whalley and Ms McLean funded part of the purchase. In due course Mr Whalley and Ms McLean paid out the financier Latrobe Financial. 22If Mr Conway's version of the agreement is accepted, he and Mr Thompson are entitled to 66 percent of an asset purchased for $850,000 without ever having paid any moneys towards the purchase, without borrowing or guaranteeing any of the moneys to fund the purchase and without having to account for liabilities incurred to acquire the asset in the first place.

The Thompson Correspondence 23The plaintiff relied on certain correspondence in 2007 to which Mr Thompson was a party. Despite the plaintiff's case that the alleged agreement was negotiated between March and December 2007, it seems tolerably clear that until December 2007 Mr Thompson was negotiating on behalf the plaintiff in the hope of achieving a better and different outcome for Mr Conway, one that was materially inconsistent with the agreement that is now alleged. 24Those negotiations were broad ranging and involved the attempted refinancing of the total indebtedness owing by Mr and Mrs Conway to the National Australia Bank with a view to retaining both the winery property and Mr Conway's adjacent residence known as Linden. I do not think that any clear solution was apparent and a number of different options were considered. No clear and definite arrangement was agreed or resolved. Mr Critchley was involved to some extent and the participation of his company Eurunderee Wines Pty Ltd (the third defendant) was even contemplated but not resolved. Nor does it matter, in the light of the uncertainty of the arrangements, that Mr Critchley may have permitted Mr Thompson to use the letterhead of the second or third defendants. 25It was not until December 2007 that a separate proposal involving Mr Critchley clearly emerged. It followed the effective practical collapse of Mr Thompson's negotiations on behalf of the plaintiff relating to the overall indebtedness of Mr & Mrs Conway and the release of both secured properties. The receiver explained the position to Mr Thompson on 21 December 2007 as follows: Mark, I respond as follows:

1. Our discussions of 6 December 2007 were totally in respect of an overall settlement within a very short time period of 1.45 million dollars. This time frame was entirely designed around the NAB's proceedings for possession of a Linden property which were in court on 7 December 2007.
2. The above amount was to settle the entire debts and guarantees between NAB and Mudgee Wines and the Conways.
3. This amount was never paid and I was advised by Harry Calleja that he was not funding this sum and correspondence from Ed Goulding confirmed that finance for this was still conditional.
4. Separately to the above, Stephen Critchley offered to purchase the Mudgee Wines property, plant and equipment and stock for $850,000. (emphasis added) 26There are other problems. On the plaintiff's case, one of the companies that was the subject of the alleged agreement in 2007 was the second defendant but it was not registered until 11 June 2008. Then in November 2008, by which time the plaintiff contended that he had a binding agreement that he was, or was entitled to become, a one third owner of the winery, he had an disagreement on the premises with Mr Whalley and "walked out" without, it seems, asserting any right of ownership. This is hardly consistent with the agreement that he says had been made a year earlier.

Mr Conway's Credibility 27The plaintiff's claim in relation to the agreement does not satisfy the most fundamental requirements of proof. For the reasons that I have explained, it is inconsistent with the probabilities. It is even less likely when account is taken of all of the reasons that persuade me that Mr Conway's credibility is unsatisfactory. As these matters are also relevant to the second issue relating to the wine storage tanks, I will deal with them now: (a)I have reached the view that in relation to obtaining $200,000 from the Bank of Queensland Equipment Finance Limited, in circumstances where 33 tanks were described as new but were non existent, and where Mr Conway knew that two tanks were subject to a retention of title clause in favour of A & G Engineering, Mr Conway acted in a manner which was at least misleading. (b)When Mr Conway brought a claim for conversion in relation to the 33 tanks, he initially informed the court that they were "new" tanks. As a result, on his summary judgment application before Debelle AJ, his Honour dealt with the claim on the basis that the tanks were new and recorded this in his reasons. In fact the tanks were not new, a matter to which I will return. And Mr Conway knew that the tanks were not new prior to the commencement of the proceedings. (c)Mr Conway swore a statutory declaration in connection with the rental agreement for the tanks stating that the tanks were free of encumbrances. This was to his knowledge incorrect as far as the two 50,000 litre tanks acquired from A & G Engineering were concerned. He admitted that the statutory declaration was untrue in relation to these tanks. (d)In December 2006, Mr Conway caused a company known as "Old Mudgee" to enter into a bill of exchange and to borrow $200,000 at a time when the company was in liquidation. He did not inform the lender that it had been in liquidation since 7 November 2006. As a result, Nolan Investments Pty Ltd paid $200,000 to Old Mudgee by deposit into Mr Critchley's account on 15 December 2006. The moneys from Nolan Investments were used in part to pay creditors of Old Mudgee, and in part to pay himself. (e)In an affidavit in the Supreme Court of South Australia, Mr Conway deposed that an outstanding amount owing to A & G Engineering by Old Mudgee had been paid when it had not. He also deposed to the NAB loan of $1.7 million having been refinanced when it had not been refinanced. That affidavit was relied upon in an application to terminate the winding up of Old Mudgee. (f)Mr Conway's original allegation in these proceedings was that Mr Critchley said to him that he would issue shares to Mr Conway and Mr Thompson in July 2008. Six months later that allegation changed to allege conversations "in or about late March or April 2007". It later changed again to "meetings between March 2007 and late 2007". It was transparently obvious that these changes of position were done in order to attempt to match the alleged conversations with the dates of the exchange of contract with the receiver (24 December 2007) and settlement of the transaction on 4 April 2008.

The 33 Tanks Claim 28I am afraid to say that I have reached the conclusion that the plaintiff's claim to ownership and possession of the 33 wine storage tanks that are said to be on the winery property is nothing more than an exercise in dissimulation. Curiously there was no allegation whatsoever in the original statement of claim about any 33 wine storage tanks. And when Mr Thompson made a demand on behalf of Mr Conway for "all his stuff" on 2 December 2008, he did not include the 33 tanks now claimed, but limited his demand to two stainless steel 2,500 litre tanks. 29The plaintiff's starting point for the claim that is now advanced is a rental agreement dated 19 April 2005 between the company known as Old Mudgee and BOQ Equipment Finance Limited. Mr and Mrs Conway were guarantors pursuant to that agreement. That however is the wrong starting point. The agreement with BOQ assumes the existence of 33 new wine storage tanks on the basis of which Mr Conway raised $200,000 from BOQ. In effect, the tanks were put forward by Mr Conway as collateral and accepted by BOQ, sight unseen, for the raising of $200,000. However, the mere existence of the agreement does not prove the fact of the tanks or the reality of their existence. 30There are many features of the transaction with BOQ in 2005 that raise questions about Mr Conway's honesty, to some aspects of which I have already referred. Some other features of that transaction included the following. Mr Conway signed a tax invoice on 2 May 2005 addressed to BOQ's agent, the Leasing Centre, listing 33 new tanks and incorrectly stating as to two tanks that they were unencumbered. BOQ produced at the hearing a tax invoice dated 17 April 2005 said to be that of Ashflex Holdings Pty Ltd for the "new" tanks which were said to be the subject of the agreement with BOQ. It also produced a receipt said to be that of Ashflex acknowledging payment for the tanks. Mr Bakka, a director of Ashflex, deposed that those documents were not issued by Ashflex and that Ashflex did not supply the tanks, nor did it receive $220,000 from Old Mudgee for them. Further, a sample of the letterhead used by Ashflex in 2005 is different to the documents produced by BOQ which were said to be those of Ashflex Holdings. Mr Conway could offer no explanation in cross-examination as to how the supposed Ashflex documents ended up in the possession of BOQ. I am satisfied that it is more likely than not that the Ashflex documents were provided to BOQ by Mr Conway in an attempt to demonstrate proof of the purchase of the 33 tanks. I am not at all satisfied that Mr Critchley was responsible for the production of those documents. 31The true position in relation to the tanks was as follows: In May 2002, only 15 tanks existed on the Eurunderee property, none of them new. Their estimated value was $89,400. In May 2004, two new 50,000 litre tanks were purchased from A & G Engineering for a price of $28,765. The acquisition appears to have been financed by Esanda Finance and the goods were subject to a retention of title clause. I reject the submission that the retention of title clause did not apply. The standard terms and conditions of A & G Engineering, including the retention of title clause, were provided to Mr Conway on 13 April 2004 and the tax invoice is dated 12 May 2004. 32The plaintiff does not, and cannot, point to any evidence that might, even faintly, suggest that before the rental agreement with BOQ in 2005, the company known as Old Mudgee acquired any more wine storage tanks, let alone another 31 new wine storage tanks. 33By 2008, BOQ must have had doubts about the value of or the existence of the 33 new tanks which were the subject of its rental agreement and on the basis of which it had advanced $200,000 to Mr Conway in 2005. It commissioned an inspection and valuation. Mr McNeilly attended for that purpose on 5 June 2008. He spoke to Mr Critchley and "the wine maker at Mudgee Wines". This could only have been Mr Conway. Mr McNeilly recorded in his notes of inspection that Mr Critchley and Mr Conway both said to him that "I was wasting my time and the wine tanks you are looking for are not here". His ultimate conclusion was: It is hard to see where the missing tanks are and I think the tanks missing on your list are not the same as the tanks I inspected or the original customer financed second-hand tanks? Missing 21 stainless steel tanks and there is 15 that don't match but could be yours? 34Mr Campbell Anderson, a chartered loss adjuster, carried out an audit of all tanks on the Eurunderee property. He found that the majority of the tanks are between 30 and 50 years old. Of all the tanks on the property, Mr Anderson could only identify the two A & G Engineering tanks as near new, apart from several tanks that had been brought on to the property by Mr Whalley. 35Mr Critchley has done an analysis of what tanks are on the Eurunderee property compared to those listed in the BOQ rental agreement and he found that only the two A & G Engineering tanks are present. Mr Whalley and Ms McLean gave evidence to similar effect. They were hardly challenged on this evidence. Even Mr Thompson said that on 3 April 2008, on the day before settlement of the sale of the winery by the receiver, he only counted 20 tanks inside the shed. 36There was no challenge to Mr Anderson's evidence other than that he agreed that his estimated ages of the tanks were variable by up to 20 percent. I accept his evidence, which I will conveniently summarise in tabular form in the appendix to these reasons. Mr Anderson's evidence leads to the conclusion that apart from the two new 50,000 litre tanks purchased from A & G Engineering, the other supposedly new tanks which were the subject of the rental agreement with BOQ did not exist and never have existed.

The Two A & G Engineering Tanks 37As to the two new tanks acquired from A & G Engineering, the balance of the purchase price had not been paid by Old Mudgee at the date of the rental agreement with BOQ. Title did not therefore pass to BOQ and remained with A & G Engineering. Mr Whalley subsequently caused the outstanding balance to be paid by the second defendant. A & G Engineering issued an invoice to the second defendant for the purchase of what were now secondhand tanks. Upon payment of the outstanding balance, the second defendant acquired valid title to the tanks. The intention of A & G Engineering to pass title to the second defendant is recorded in an email sent to Mr Whalley on 11 April 2012. It does not matter that Mr Walley may have known of Mr Conway's claim. 38The practical commercial result is that the second defendant has acquired two secondhand tanks from A & G Engineering for what may possibly be a modest price when compared to the cost price for the tanks as new in 2004. I am in no position to judge the comparative value. This result however is the necessary legal consequence of what has occurred. I have no sympathy for the plaintiff bearing in mind my findings about his absence of honesty in connection with the BOQ transaction in which he declared, among other things, that those two tanks were unencumbered when they were not.

Orders 39The result of the hearing on the separate questions therefore is as follows: (a)I find that there was no agreement or agreements as alleged in paragraph 18 and 19 of the second further amended statement of claim. (b)I find that the plaintiff is not entitled to ownership and possession of the wine storage tanks identified in the sale and lease back agreement referred to in paragraph 74 of the second further amended statement of claim. (c)The plaintiff should pay the costs of the first to fifth defendants of the separate hearing. oOo

Appendix Tank No Approximate Capacity (1) Approximate age Which Tanks Match Sale Agreement Which Tanks Match BOQ Lease Agreement 1 36,000 5-10 2 36,000 5-10 3 4,800 20-30 4 4,800 20-30 5 3,000 (BOC carbon dioxide tank) 50 6 17,500 20-30 7 5,500 (at rear of property not in use) 30-40 8 8,700 (at rear of property not in use) 30-40 9 6,000 (at rear of property not in use) 30-40 10 4,300 (at rear of property not in use) 30-40 11 50,000 5 Yes, (1-74), but under finance Yes (250,000 litre tanks) 12 50,000 5 Yes (1-74) Yes (250,000 litre tanks) 13 6,300 (scrap) Unknown 14 9,300 (scrap) Unknown 15 N/A (fuel tank) 16 1,000 40 17 1,900 40 18 4,000 40 19 4,200 40 20 4,200 40 21 4,600 40 22 5,000 40 23 7,500 40 24 10,900 50 25 8,000 50 26 8,000 50 27 8,000 50 28 1,900 5-10 Brought onto premises by Mr Whalley 29 4,600 5-10 Brought onto premises by Mr Whalley 30 1,200 40-50 31 6,400 10 32 500 40-50 33 500 40-50 34 750 40-50 35 870 40-50 36 4,300 20-30 37 400 Gallons (milk vat) 50 38 10,750 8 Yes (1-3), but not new 39 10,750 8 Yes (1-4), but not new 40 10,750 8 Yes (1-5), but not new 41 10,750 8 Yes (1-6), but not new 42 11,200 40-50 43` 28,000 30-40

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 22 November 2012