EDPI Pty Ltd v Rapdocs Pty Ltd

EDPI Pty Ltd v Rapdocs Pty Ltd - [2007] NSWSC 195 - NSWSC 2007 case summary — Zoe

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3 In these proceedings EDPI claims orders for the delivery up to it of the certificates of title to lots 1, 2 and 3. Those certificates of title were, at the time when proceedings were instituted, in the possession of Mr James, but with the exception of one which has been released on an interlocutory application to EDPI, are now in the custody of the Court. Rapdocs cross-claims for a declaration that it is beneficially entitled to 20 of the 30 issued units in the EDUT (alternatively, to a beneficial two-thirds interest in lots 1, 2 and 3) and an order for transfer of those units or interest to it. Those orders are sought by way of giving effect to the agreement that the defendants contend was struck between Mr Smith, Mr James and Mr Zoljalali on 2 December 2002. No point has been taken in the proceedings that Rapdocs was incorporated after the alleged agreement was made. 4 As the registered proprietor of lots 1, 2 and 3 - which EDPI now is, the subdivision plan having been registered - EDPI is prima facie entitled to the title deeds for those lots. Accordingly, the real issue in the proceedings is on the cross-claim, namely, whether the agreement was as propounded by Rapdocs. If that issue is resolved in Rapdocs' favour, a subsidiary issue arises as to whether, in the circumstances, it should be enforced by a court of equity. 5 There is in evidence what purports to be a unit certificate, evidencing the issue of 20 units in the Earth Developments Unit Trust ("EDUT") to Rapdocs. A family trust of Mr Zoljalali, called the Zoljalali Family Trust, holds 10 units in the EDUT. If the unit certificate in the name of Rapdocs is authentic, it would conclude the main issue in favour of the defendants. If not, there may be significant consequences for the credit of those who have propounded it. It is, therefore, convenient first to resolve the question of the authenticity of this unit certificate. 6 The unit certificate bears the date 6 February 2003. It was purportedly sent as an attachment to an email dated Saturday, 8 February 2003 at 2.10 pm from Mr Zoljalali to Mr Smith and Mr James. The unit certificate shows the unit holder as Rapdocs, states its ACN, and asserts that it relates to 20 units in the EDUT. 7 Rapdocs was incorporated on 6 February 2003. However, it was incorporated under the name Plus 55 Retirement Resorts Pty Limited on that day. Mr Smith had been provided with a copy of a draft of the deed of trust for the EDUT, and had made a number of annotations on it. The evidence does permit me to say precisely when, but it is instructive that in the schedule relating to unit holdings, which identified the initial units as 10 issued to Mr Zoljalali, the annotations suggested that what was contemplated was a total of 100 units, of which EDPI would hold 33, and Plus 55 (so described, not as Rapdocs), 66.

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47 It will be apparent from that email that Mr Zoljalali had already sent that morning a facsimile to Mr Freeman, of which no copy is in evidence. Nor is any copy of the unitholders agreement to which that email referred in evidence. But by 12.36 Mr Freeman had amended the letter agreement which had been drafted on 21 January 2003, and had forwarded it to Mr Smith, who signed it and returned it to Mr Freeman at 12.36. The amendments were marked up on the document, as follows: We refer to recent discussions in relation to the abovementioned Property and note that it has been agreed by and between our respective companies that in consideration of EDPI Pty Limited in its capacity as Trustee of the Earth Developments Unit Trust formed by Deed dated 6th February 2003 ("EDPI") introducing the Property to Lifestyle Retirement Projects No 2 Pty Limited ("Lifestyle") and in further consideration of EDPI not proceeding to acquire the Property and allowing Lifestyle to acquire the Property in place of EDPI that Lifestyle undertakes to EDPI that on the purchase of the Property and the registration of the Plan of Sub-Division it will transfer to EDPI for no consideration of the whole of the land contained in proposed Lots 1, 2 and 3. … Finally we confirm that EDPI will be responsible for the cost of an will construct a section of the road being listed in the Plan by Cattarin Consulting Civil and Structural Engineers, Drawing No C3 File No 01024 from Chainage 00 to Chainage 45 as part of the works required in order to obtain approval from Hornsby Shire Council for registration of the Plan of SubDivision at the Land and Property Information however Lifestyle shall be responsible for and shall pay all other costs associated with obtaining the sub-division of the Property . Would you please confirm your agreement to the above terms and conditions of the arrangement between our respective companies by signing your agreement at the foot of this and returning the enclosed copy letter. 48 Contracts for the purchase of the Pennant Hills property were exchanged on 7 February 2003. The contract did not state that either purchaser purchased as trustee. 49 The more probable explanation for the amendments contained in the letter of 6 February 2003 from the draft of 21 January which introduced the reference to EDPI acting in its capacity as trustee of the EDUT, is that Mr Zoljalali was the source of the instructions for those amendments, which were probably conveyed in his facsimile to Mr Freeman earlier that morning. 50 As I have said, the email of 5 February is significant. Its chief significance is that it is probably the only document in the case, but certainly the only document which predates exchange of contracts on 7 February, which is consistent only with one and not with the other version of the understanding between the parties. In speaking of "the issuance of units in the EDPI Trust to our vehicle" it was consistent only with an understanding that the Smith/James interests were to acquire units in the trust of which EDPI was to be trustee. 51 Mr Zoljalali said that he paid no attention to that paragraph of the email, as it was not addressed to him and he took it to be communication between Mr James and his accountant. However, somewhat inconsistently, he conceded that he read Mr James' response to that email. More significantly, when one comes to examine the emails of the morning of 6 February 2003, they consistently refer to the EDPI Trust and its details, and the only reference to the EDPI Trust prior to those emails is in the penultimate paragraph of the email of 5 February 2003, which Mr Zoljalali professes not to have read. In those circumstances, I am afraid that I am unable to accept that Mr Zoljalali did not read the penultimate paragraph of the email of 5 February 2003. The responses in subsequent emails on the morning of 6 February point to that paragraph having been considered by Mr Zoljalali. The sequence of the ensuing emails, and the inclusion in the letter agreement of 6 February 2003 - as I would infer on his instructions - of reference to EDPI acting in its capacity as trustee of the trust, point to there being an understanding between the parties that Mr Zoljalali's "vehicle" would acquire 30 percent of the Pennant Hills property, but that it would do so in its capacity as trustee of a trust in which Mr Smith and Mr James would have an interest. 52 Moreover, despite the brazen nature of the enterprise of Mr Smith and Mr James, I cannot contemplate that Mr James would have sent the 5 February email, most of the contents of which were addressed to Mr Zoljalali, expressly asserting the necessity of the issue of units in the EDPI Trust to the Smith/James vehicle, unless he believed that there was already some understanding that that was to happen. Otherwise, it would likely have precipitated a dispute with Mr Zoljalali, on the eve of exchange. 53 Mr Murr of senior counsel, for the plaintiff, suggested that while Mr Smith and Mr James had that understanding, it was not something that they had disclosed to Mr Zoljalali. But why then would they act on 5 February as if it were already agreed, and why would Mr Zoljalali proceed to provide details of the EDUT. 54 Mr Murr also put that whereas on 2 December they told Mr Zoljalali that he would receive the three residential lots, they never intended to honour that agreement. However, I cannot see how on 2 December they could have told Mr Zoljalali that he would receive the three residential lots, contemporaneously not intending to honour that offer, in circumstances where they cannot have foretold what Mr Zoljalali's reaction would be thereafter, or what documentation he would require, nor predict that he would not withdraw if they did not honour such an offer; and if they had made such a proposal, not intending to honour it, I cannot see why on 5 February, Mr James would suddenly have raised the question of the issue of units to their vehicle in circumstances where, if Mr Zoljalali's response was to the effect of "Well, that was never our deal", the opportunity to acquire the property might well have been lost. 55 Further, the reference in the 6 February emails to a unitholders agreement cannot, I think, be explained away in the way Mr Murr suggested, as a reference to the 6 February letter. In no way was the 6 February letter, from EDPI to Lifestyle, capable of being described as a unit holder's agreement. As Mr Zoljalali was never to be an investor in the Lifestyle Trust, it is unlikely to have been a reference to an agreement between unitholders in the Lifestyle Trust. It is much more likely to have been a reference to an agreement between unitholders in the EDUT. 56 Next, there was a meeting on 20 March 2003 between Mr Smith, Mr James, Mr Zoljalali, and his accountant Mr Belz. There is considerable dispute as to what took place at that meeting, and it is unnecessary for present purposes to resolve the whole of that dispute. However, on 21 March 2003 at 11.36 am, Mr Smith sent an email to Mr Zoljalali, with a copy to Mr James, entitled "EDPI Trust Deed amendments" as follows: Gentlemen, have forwarded the Rapdocs Pty Limited deed to Ron Burns and arranged for a copy of our information pack for Limona to be sent to him as agreed yesterday. It occurred to me that the changes to the EDPI Trust Deed to restrict the maximum number of units which would be issued by the trustee have not been carried into effect. The maximum number should be divisible by three and the power of the trustee to create more or additional units should be removed from the deed.

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58 Mr Zoljalali said that he was contemplating embarking into further ventures with Mr Smith and Mr James and took these proposed changes to be a step towards those further ventures, with the EDUT as a potential vehicle. On the other hand, the nature of the changes proposed makes clear that what was contemplated was a three way split of the beneficial interest. As at that stage all the units in the trust were held by the Zoljalali Family Trust, the issue of further units to bring about a three way split would necessarily dilute the Zoljalali Family Trust's indirect interest in the three residential lots at Pennant Hills. Moreover, Mr Smith's email suggests that the proposed amendment was not a new idea but something which had been previously contemplated, and Mr Zoljalali's response does not convey any surprise at the proposal. While I do not think that these matters are nearly as significant as the 5 February email, they add weight to the view that there was a pre-existing understanding that the beneficial interest in the EDUT, which was to acquire the three residential lots, was to be split three ways between Mr Smith, Mr James and Mr Zoljalali. 59 After March 2003, there was a substantial amount of conduct of all three parties which suggested that all accepted that Mr Smith and Mr James had some reason to be interested in the way in which the development of the residential lots progressed. The original development approvals for lots 1, 2 and 3 were held by Mr Smith. Mr Zoljalali arranged meetings with the architect and the council to discuss the residential subdivision, specifically to accommodate Mr Smith and Mr James. But perhaps the most significant document in this class is an email dated 2 August 2004, shortly before the relationship broke down, from Mr Zoljalali to Mr Smith and Mr James, in which Mr Zoljalali wrote: I say: let's stay true and lay to rest the misunderstandings and handshake deals (obviously they don't work!!) and start from a clean slate.

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60 There is no apparent reason for the final invoice for the subdivision works for Thompson Close, which was the residential subdivision, to be shared between the three unless the three each had an interest in that subdivision. 61 Ultimately, therefore, I conclude that on 2 December the parties agreed, not that Mr Zoljalali would receive beneficially all three residential lots, but that his "vehicle" would receive those lots on the basis that Mr Zoljalali, Mr Smith and Mr James would each have a one-third beneficial interest in that vehicle. Mr Zoljalali's own evidence refers to the use of the term "vehicle" as does the later correspondence. The 30 percent return which would otherwise be involved to Mr Zoljalali is so enormous and uncommercial in the circumstances as itself to strain credulity. While much of the documentary material is silent on the topic, that is unsurprising in circumstances where Mr Smith and Mr James, who were the ones who had some interest in having it documented, were equally keen to ensure that their proposed breach of trust remained obscured. There is at least one document, namely the email of 5 February 2003, which is consistent only with their version and not with the other, and the correspondence immediately subsequent to it tells strongly against Mr Zoljalali's protestation that he did not read the relevant part of that email. 62 I have not overlooked, in reaching this conclusion, that in my view the oral evidence of Mr Smith and Mr James is entitled to no credit at all. I have already referred to their respective involvement in the fabrication of, and giving of evidence related to, the purported unit certificate. Mr James persisted in denying the forgery, and as I have said, resorted to dissembling to identify purported differences in identical signatures. He also denied that there was anything inappropriate or improper about their proposed obtaining of a benefit at the expense of the beneficiaries of the Lifestyle Trust. While persisting in his denials, he gave his evidence in a guarded manner, and frequently said that he did not understand questions that were entirely clear. Mr Smith, who on entering the witness box professed that he was an honest man, and honest in his commercial dealings, soon conceded that he was not honest in this transaction, and that it amounted to outright theft of two-thirds of a million dollars from his beneficiaries. But as Mr Murr put, Mr Smith really only conceded what could no longer be denied. In fact, both were embarking on a momentous breach of their fiduciary obligations. 63 However, it is unnecessary to, and I do not, accept in full, either version of the 2 December meeting as set forth in the affidavits. It is sufficient that I conclude that a reasonable bystander would have understood from what passed between the parties on that occasion that Mr Zoljalali's vehicle was to hold the three residential lots on trust for Mr Zoljalali, Mr Smith and Mr James equally. That Mr Zoljalali had that understanding is indicated by his response to the 5 February email, his instructions for the inclusion of reference to EDPI purchasing as trustee in the 6 February letter agreement, his ready acceptance of proposed amendments to the trust deed which would have had that effect, and his insistence (as late as 2 August 2004) that costs relating to the Thompson Close subdivision should be borne equally by the three of them. 64 It follows that the agreement that I find was made, was one which was intended by Mr Smith and Mr James to obtain for them a benefit at the expense of their beneficiaries, without their beneficiaries' knowledge or consent. It was a flagrant procurement, or aiding and abetting, of a breach of trust by LRP2 of which they were directors, and the question then arises whether a court of equity should enforce it and grant declaratory or other relief to give effect to it. At one stage, late in the course of the hearing, the plaintiff foreshadowed seeking leave to amend to raise a defence of illegality or unclean hands, but for reasons which are understandable did not persist in that course. However, I made clear that I did not think that that was the end of the issue, since where a court of equity is asked to grant discretionary relief such as specific performance, ultimately the discretion to grant or withhold that relief lies in the Court. 65 Probably the leading authority in this State on "unclean hands" is the decision of Long Innes J in Kettles and Gas Appliances Limited v Anthony Hordern & Sons Limited (1934) 35 SR (NSW) 108, particularly at 126 - 131. The significance of that case, as is pointed out by the authors of the 4th Edition of Meagher Gummow & Lehane (at [3-120]), is that whereas in most cases in which a plaintiff has been declined relief on the basis of unclean hands the plaintiff's conduct has amounted to some breach of a duty which is owed to the defendant, in Kettles the plaintiff's impropriety consisted of a dereliction of a duty owed to the public generally. This followed authorities descending from Leather Cloth Company Ltd v American Leather Cloth Company Ltd (1865) 11 HLC 523, in which Lord Cranworth had said (at 542): Nobody doubts that a trader can be guilty of such misrepresentations in respect to his goods as to amount to a fraud upon the public, and to disentitle him on that ground, as against a lawful trader, to the relief in a court of equity which he might otherwise claim. .... The general rule seems to be that the misstatement of any material fact calculated to deceive the public will be sufficient for the purpose.

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68 The present is a much stronger case for declining relief on the grounds of unclean hands than was Kettles. In this case the defendants seek the aid of the Court to gain for themselves the benefit of an egregious breach of fiduciary duty which they instituted and procured. I cannot think of anything more foreign to a Court of Equity than lending the aid of the Court to the enforcement of such an agreement. 69 However, for the defendants, Mr Sirtes asserts that they have "washed their hands". This cleansing is said to have come about, not as a result of anything that took place before the defendants came to equity seeking equitable relief, but as a result of a statement made, almost at the end of the trial, that the defendants would submit to terms that they held their interests in the residential lots, if the case was otherwise determined in their favour, upon trust for the Lifestyle Trust. 70 In Kettles, Long Innes J discussed the circumstances in which a plaintiff can "wash its hands" before it comes to equity. His Honour said (at 129-130): Mr Bonney however contended that the plaintiff had effectively washed its hands before it came into court, and relied upon the decision in Benedictus v Sullivan, Powell & Co (12 RPC 25, 32); Mrs Pomeroy Ltd v Scale (24 RPC 177) and the observation of Lord Tomlin in J H Coles Pty Ltd v Need (50 RPC 379) also referred to. Those cases are clearly distinguishable from the present. In Benedictus the misrepresentations had been discontinued for more than a year before the suit was brought, and in Mrs Pomeroy , Parker J, as he then was, held that the misrepresentations had been made by accident and had been after a comparatively short time discontinued, and an undertaking at once given more than a month before the institution of the suit, that they would not be continued; and in J H Coles Pty Ltd v Need it was held that the plaintiff never had any fraudulent intent but that even if it had, that would constitute no reason why it should not - for the protection of the public as well as itself - maintain the suit which was in that case the only way in which it could wash its hands. In the present case there is no evidence that the plaintiff had washed its hands before suit brought, or in fact at all.

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Friday 16 February (Costs) 76 In Kettles and Gas Appliances Limited v Anthony Hordern & Sons Limited, Long Innes J turned to the question of costs and said (at 131): In this case the plaintiff has charged fraud against the defendant, and - doubtless for tactical reasons - has persisted in such charge to the last. Had the defendant confined its defence to rebutting that charge, and also the charge of using the name 'Captain' of 'Captain Kettle', and to relying on the use by the plaintiff of the word 'Patented' I should have thought the suit should have been dismissed with costs. The defendant, however, has strenuously denied any infraction of the plaintiff's rights, and has insisted upon its rights to continue the course of action complained of. I consequently cannot regard the defendant as being wholly successful; the case, therefore, does not fall within any of the classes mentioned by Atkin LJ in Ritter v Godfrey [1920] 2 KB 47 at 60. I have held that the defendant has committed a civil wrong against the plaintiff, and the suit fails not by reason of the merits of the defendant, but by reason of the demerits of the plaintiff. Under these circumstances I think each party should bear its own costs not covered by any order made prior to this date. 77 The present case, at least on the cross-claim, bears some similarity to the circumstances that Long Innes J there considered, although the position is somewhat more complicated. In considering the present circumstances in the context of what Long Innes J said, it is necessary to compare the position of the defendant cross-claimant in these proceedings with that of the plaintiff in the passage from Kettles. 78 First, there was an offer of compromise, to which I shall come. Secondly, quite apart from the cross-claim, the plaintiff has succeeded on the claim for delivery up of the certificates of title, and, associated with it, the removal of caveats lodged by the defendants. Thus, the plaintiff has succeeded in obtaining the relief which it initially came to court to get. However, at the final hearing the issues on that part of the claim were minimal and occupied very little time; as a broad assessment I do not think that they involved more than about ten per cent of the case as a whole from its inception until its conclusion, save insofar as specific costs orders otherwise address the issue of costs. In other words, about ninety per cent of the costs with which I am dealing are attributable to the cross-claim. 79 In Kettles, the plaintiff had charged fraudulent as well as innocent passing off and persisted with it to the end. Somewhat similarly, in this case, the cross-claimants not only alleged that there was agreement but also alleged that that agreement had been carried into effect and a unit certificate issued, in which false contention they persisted and never abandoned. Had the cross-defendants confined their defence to rebutting the allegation that it had issued a unit certificate and pursued the question of clean hands then, as in Kettles, the prima facie position (before considering any impact of the offer of compromise) would have been that the suit should have been dismissed with costs. But the cross-defendants strenuously denied that there was any such agreement as the cross-claimants asserted, and on that issue the cross-claimants prevailed; moreover the cross-defendants did not themselves agitate the "clean hands" defence. 80 It was the "agreement" issue that occupied by far the greater part of the case, and while it was to some extent exacerbated by the forgery issue, the cross-defendants must be regarded as having been unsuccessful on the main issue that was litigated. In those circumstances, but for the impact of the offer of compromise, I would be inclined to the view that the defendants should pay ten per cent of the plaintiff's costs (reflecting the plaintiff's success on the delivery up issue) and that there otherwise should be no order as to costs. 81 However, the position is further complicated by the offer of compromise, which the plaintiff served on 22 December 2004 and by which it offered to compromise the proceedings on terms of orders for delivery up of the three title deeds, dismissing the cross-claim and that the plaintiff pay the defendant's costs of the proceedings and cross-claim as agreed or assessed. That offer was not accepted, and the plaintiff has obtained orders not less favourable than the terms of the offer. Accordingly, my starting point must be not the position which I have outlined above as following from Kettles, but that prescribed by (NSW) Uniform Civil Procedure Rules r 42.14(2): (2) Unless the court orders otherwise, the plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim: (a) assessed on the ordinary basis up to the time from which those costs are to be assessed on an indemnity basis under paragraph (b), and

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which would be 23 December 2004. 82 The question therefore becomes whether there is sufficient reason for the Court to otherwise order. It has been said that this question should be approached on the basis that exceptional circumstances will be required to justify a departure from the rule (Morgan v Johnson (1998) 44 NSWLR 578 581-2 (Mason P); Hillier v Sheather (1995) 36 NSWLR 414 422-3 (Kirby P)). One circumstance in which a successful plaintiff offeror may be refused costs under the rule is where the costs are apparently disproportionate to the judgment amount and the proceedings were pursued for an extraneous purpose [Jones v Sutton (No 2) (2005) NSWCA 203]. 83 Had the plaintiff limited itself to denying the issue of the unit certificate and asserting a lack of clean hands on the part of the cross-claimants, then there would be no reason whatsoever to "otherwise order". But it has to be said that the costs of the case have been very substantially increased by the plaintiff's denial that the agreement between the parties was to the effect alleged by the cross-claimants. Although I am not sure that the case would have been over in one day had that issue not been pressed, it would certainly have been over in half the time which the hearing ultimately took. At least about half of the costs of the case were attributable to the plaintiff's denial of the agreement, on which issue the defendants succeeded. 84 I do not accept Mr Baran's submission that it is wrong in principle to look at issues on which parties succeeded and failed for the purpose of determining whether the Court should otherwise order for the purpose of r 42.14. The rule does not prescribe or limit the factors to which the Court can have regard in deciding whether or not to otherwise order. Although, as I have said, it has been said that the question should be approached on the basis that exceptional circumstances will ordinarily be required to justify an "otherwise order", even those authorities do not say that exceptional circumstances will always be required to justify a departure. The decision in Jones v Sutton, which proceeded essentially on the basis that costs were unnecessarily incurred and that those unnecessarily incurred costs ought not be visited on the unsuccessful offeree, is analogous to the present circumstances. I do not see why the plaintiff should recover its costs of unsuccessfully denying that there was such an agreement as the defendants asserted. 85 As I have said, on a rough basis, I think it can be said that the length of the case was roughly doubled by that issue, and in making that assessment I include the costs of the delivery up and the forgery issues in the other half. To my mind the plaintiff ought not, despite its offer of compromise, have the costs of resisting the cross-claimants' argument on the agreement issue. It should have half of its costs of the proceedings, assessed on the ordinary basis up to 22 December 2004, and on the indemnity basis thereafter. 86 My orders are: 1. Order that the defendants pay one half of the plaintiff's costs of the proceedings (including the cross-claim), save in so far as any other costs order already makes provision, such costs be assessed on the ordinary basis up to 22 December 2004 and on the indemnity basis from 23 December 2004.

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Judgment (63 paragraphs)

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