Edmonds & Ors v Donovan & Ors; Disctronics Ltd v Kingston Links Country Club Pty Ltd [2005] VSCA 36

2. On 22 February last, this Court delivered reasons for judgment on the several appeals and the cross appeal in these two matters, which were identified as the "main proceeding" and the "caveat proceeding". Both matters were heard together, at trial and on appeal. The trial judge adjudicated first on all issues of liability, delivering reasons on 23 October 2002, and subsequently on all issues of compensation and assessment, delivering further reasons on 3 December 2002.

5. One of the matters dealt with in the later reasons of 3 December was the entitlement of the so-called Buxton interests to 20% of the profit of the venture which was operated for some time by the new consortium established by Cahill and Edmonds soon after their departure from that agreed upon in July 1999 with the respondents. As to that 20% share of profit from the new venture, Phillips, J.A. said, in paragraph [84] of his reasons for judgment (in which the other members of the Court agreed):

"The parties were agreed on appeal that the amount in question was $800,000 and the question was whether that sum should have been deducted from what otherwise was the profit for division between the appellants and the respondents. The judge said not and the appellants contended that that was error."

That identified the issue, but his Honour continued:-

"During argument even this point of dispute was resolved; for Mr. Scerri announced that his clients now agreed with the appellants that the sum of $800,000 ought to have been deducted from what otherwise was the found profit of $4,990,562 before calculation of the four-sixths which was due to the respondents[1]."

12. As we recalled it, during argument on the appeals Mr. Scerri made the concession described above. As we noted it at the time, there was no longer any dispute over whether the amount of $800,000 should be deducted but only over whether Cahill and Edmonds, as the parties in breach of fiduciary duties, were entitled to one-third of what was left after that deduction or should get nothing at all - or, as Mr. Scerri primarily contended, there should be an account of profits before any division was even attempted. And that was how matters stood when the Court handed down its reasons for judgment on 22 February.

15. When the parties re-assembled last Thursday (24 February) for the Court to pronounce formal orders in the two proceedings, Mr. Parmenter drew attention to paragraph [84] and submitted that it mistook the position. Mr. Scerri, he said, had not conceded that should be a deduction of $800,000: what he had conceded, or had intended to concede, was only that that was the dollar sum at issue; that was the sum that stood to be deducted if Mr. Sher's submission was correct that such a deduction was appropriate despite the trial judge's conclusion to the contrary. It is easy then to see how the misunderstanding arose; for, as we apprehended it, Mr. Scerri was concerned not with the deduction as such, but with the debate over whether Cahill and Edmonds should get anything at all or whether there should be an account of profits first.

18. However that may be, Mr. Delany was not in a position to contest Mr. Parmenter's assertion as to the concession made and, on the basis that Mr. Parmenter is correct, the question that remains is whether it was appropriate that there should be a deduction of $800,000 before dividing what otherwise was the profit between appellants and respondents, despite her Honour's holding otherwise.

21. In the reasons for judgment delivered on 3 December 2002, her Honour dealt with the payment to the Buxton interests in paragraphs [38] to [42]. In essence, the decision was that the respondents, as plaintiffs, were entitled to four-sixths of the "basic amount" (as it was called[2]) before any deduction of the disputed 20% for the Buxton interests on the ground that (as her Honour had already found) there had been no agreement by the members of the earlier consortium (agreed upon in July 1999) that 20% of the profit should be paid to "the equity provider". That was a matter that had been left open ended (her Honour had found) and hence (she concluded) it was appropriate that no deduction should be made now if, as was the case, the intention of the judgment "was to place the four plaintiffs in the position they would have been but for the breach of fiduciary duty by the subject defendants."

24. With respect, it seems to us that the deduction of some payment for the Buxton interests should not depend upon such agreement as was reached or not reached in July 1999 by the members of the earlier consortium. As Mr. Sher's memorandum headed "Buxton"[3] shows, under the arrangements made for the new consortium established by Cahill and Edmonds with the Buxton interests, equity contribution was required in the following amounts: $120,000 from Buxton, $330,000 from Cahill and $150,000 from Edmonds. The respective proportions were Buxton 20%, Cahill 55% and Edmonds 25%. This was the source of the argument that the Buxton interests were entitled to receive a 20% share of the profit which otherwise stood for division at the conclusion of the new consortium's joint venture.

27. As the Buxton interests were held by her Honour to be innocent parties, bearing no responsibility for the breach of fiduciary duties committed by Cahill and Edmonds (and there was no challenge to that finding on appeal), it is difficult to oppose the appellants' claim for the deduction of the $800,000 before computation of "four-sixths of the basic amount" for the respondents, by way of equitable compensation. That is not because there was an agreement in July 1999 that the equity provider, who ever it was, would receive such a share of profit; for her Honour found that no such agreement was finally reached. It is because the new consortium went ahead with the venture in a way which was altogether different from that involving Disctronics - a difference which was described in the reasons for judgment delivered on 22 February: see paragraph [79].

30. In short, in July 1999 the consortium members agreed upon a venture which would see the purchase of the golf course, the installation of the long-term tenant and the immediate sale of the whole to the equity provider, the consortium members dividing profit according to the difference (in brief) between the selling price accepted by the vendor of the golf course and the purchase price paid by the equity provider, after the deduction of expenses. The whole venture was within a relatively short time frame and, when Disctronics became the equity provider (as it were), the only remaining difficulty was to calculate profit (as mentioned in paragraphs [39] and [42] of the reasons of 22 February). In contrast, the new consortium, though it went ahead and purchased the golf course and installed the long-term tenant, did not on-sell the golf course. Instead, and as that consortium always intended, the members held on to the golf course, made significant improvements and ran the enterprise for profit until ultimately selling by a contract dated 29 October 2002.

33. For a significant period of time, the respondents simply stood by[4]. True it is there were warnings given by the respondents early in the piece about breaches of duty and in December 2000 Disctronics lodged its caveat claiming an interest by way of constructive trust over the golf course. But it was not until KLCC sued in early June 2001 to remove the caveat that the respondents commenced the main proceeding to seek an account of profits made, equitable compensation or the like. Beyond that the respondents took no steps to prevent, first, the purchase of the golf course by the new consortium and the installation of the long-term tenant; the subsequent construction of substantial improvements; and, finally and importantly, the running of the whole as a viable commercial enterprise, entailing presumably both risk and expertise.

36. If, after such delay, equitable compensation was to be paid to the respondents, as the judge decided, and if that was to be by way of sharing the profit earned by the new consortium, that profit was surely to be calculated only after making due allowance for the interests of the innocent parties - the Buxton interests - whose contribution was a necessary part of the progress of the venture. To put it another way, the entitlement of the Buxton interests in return for their participation in the new joint venture was, as between appellants and respondents, an expense to be met before calculation of the "basic amount" which fell to be parcelled out, as to four-sixths for the respondents by way of equitable compensation. Moreover, as Mr. Sher submitted, the deduction of 20% for the Buxton interests is at least consistent with the scenarios that were being put forward by Edmonds in July 1999, scenarios which after all formed the basis, even if indirectly, for the agreement to share profit in the proportions adopted by the trial judge when awarding equitable compensation.

39. Accordingly, whether or not Mr. Scerri's concession was properly understood in the first place, the result is the same. In our opinion, her Honour was, with respect, in error in declining to make the deduction of $800,000 before proceeding to the calculation necessary to provide equitable compensation in due measure for the respondents. To that extent - but to that extent only - the appeal by the appellants, commenced by notice of appeal dated 20 December 2002, should be allowed, as was concluded in the reasons for judgment of 22 February.

42. On that basis the parties are agreed upon the orders to be made. The appeal we have just identified should be allowed in part for the sake of reducing the "basic amount" for division between the parties by $800,000 (four sixths being the entitlement of the four successful plaintiffs) and adjusting interest accordingly. As to costs, the respondents are to pay the appellants' costs of grounds 1 and 2 in the notice of appeal dated 20 December 2002, they being the grounds on which the appellants succeeded. As to the remaining grounds 3, 4 and 5, these were not pursued in argument but the parties are none the less agreed that the appellants are to pay the respondents' costs, such as they are, of those grounds.

[1] The amount of $4,990,562 is found in paragraph [42] of the trial judge's reasons for judgment, 3 December 2002.

[2] This "basic amount" was an agreed sum, subject to certain disputed items which the trial judge addressed in turn. It was a calculation of both operating profit and capital profit as a single sum: reasons for judgment, 3 December 2002, paragraph [7].

[3] The memorandum was handed up by Mr. Sher on 9 November and it was on 10 November that Mr. Scerri made the concession now called into question.

[4] Reasons for judgment 22 February 2005, paragraphs [66], [67].