Eurofinance Corporation Pty Ltd v Carrymoor Investments Pty Ltd

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG J Monday 22 May 2000

1348/97 - EUROFINANCE CORPORATION PTY LTD v CARRYMOOR INVESTMENTS PTY LTD & ANOR

1 HIS HONOUR: Essentially, the plaintiff is a finance broker. On 30 March 1994, it entered into a fees agreement with a company, now deregistered, Carrymoor Pty Ltd ("CPL"). The agreement was "amended" on 22 April 1994. Under the amended agreement, CPL was to pay the plaintiff an initial fee of $100,000 plus 5% of CPL's net profit derived from a project at Chatswood up to a limit of $450,000. I will deal with the exact text of the agreement in due course. 2 At all material times, the second defendant, Mr Barry Waugh, was the directing force of CPL though at the commencement of the events being considered in these reasons he was not actually the major shareholder in CPL. However, at all material times Mr Waugh was either the person with authority to make decisions, or was the controller of what I will call "the Carrymoor interests" which include the interests of Mr Waugh personally, the interests of CPL and the interests of the present first defendant Carrymoor Investments Pty Ltd ("Carrymoor"), a company which was incorporated on 17 March 1994.

3 The plaintiff is a company controlled by Mr Dimitrios (Jim) Socratous. During its dealings with the Carrymoor interests, Mr Robert Hunter represented the plaintiff. 4 Mr Waugh and Mr Hunter first met in November 1992. They met in conjunction with a project at Leichhardt in which the Carrymoor interests were then involved. At that stage Mr Waugh believed Mr Hunter was working for a company associated with Aussie Home Loans. 5 Mr Waugh's role in the Carrymoor operations was to locate development sites. He found a site which he considered ripe for development at 460-470 Victoria Avenue Chatswood, on the western side of the railway line backing on to Thomas Street. In September 1993, the Carrymoor interests obtained an option from Telstra which owned the major site in the development. That option was to expire on 31 March 1994 but could be extended on the payment of $50,000 per month up to 31 July 1994. By March 1994, the Carrymoor interests had acquired two other options expiring in June 1994. 6 In about September 1993, Mr Hunter became aware, probably from what Mr Waugh told him, that Mr Waugh required finance in order to put together his development at the Chatswood site. According to Mr Waugh, he was disappointed with the high percentage of the profits that most financiers required and solicited Mr Hunter's assistance. 7 Mr Hunter commenced work as what he describes as a "commercial finance consultant" to the plaintiff in November 1993. He was working on a commission only basis. Mr Hunter says that Mr Waugh called on him and told him that he had all the options he needed for his proposal, that he was getting ready a development application and that he would like Mr Hunter to assist "by looking at the project and working out the finance for the project". At that time Mr Waugh also met Jim Socratous. 8 The proposal involved developing the amalgamated site for an apartment hotel with serviced apartments as well as office and retail space. 9 Mr Hunter approached various financial institutions and also spoke to the people who operated Radisson Hotels. 10 The development application was lodged with Willoughby Council on 29 November 1993. The architect employed by the Carrymoor interests was Mr Wolski. Mr Wolski told Mr Waugh that Peter Wallace of B+B Developments Pty Ltd had expressed interest in the project. On 21 December 1993, Mr Waugh attended a meeting with B+B with Mr Hunter and three representatives of B+B. 11 As is not uncommon in this sort of commercial deal, although both the plaintiff and the Carrymoor interests spoke in terms of millions of dollars, neither had much in the way of cash resources. Mr Waugh at the time appears to have been in the throes of a divorce and was living in rented premises. Moreover, Mr Forge, who was formerly the major shareholder of CPL had married and his wife had persuaded him to divest himself of the shares in CPL which Mr Waugh had acquired. Thus in March 1994, Mr Waugh was sitting on a project that could well have been worth $14 million, but was scratching around to find $50,000 for extending the option over the Telstra site whilst he was debating with B+B as to how the project might proceed. 12 Despite its name, the plaintiff is a very small operation. Mr Socratous appears to be an accountant practising at Stanmore, who in 1994 was suffering from problems regarding the dissolution of his previous partnership. He appears to have had little money of his own but did have a line of credit with a financial institution from which he could draw to fund small ventures. Otherwise the plaintiff, as a subsidiary of Mr Socratous' accountancy practice, would act as a broker to provide finance directly from major financial institutions. 13 It is, at first sight, disturbing to see that what last century would have been called a moneylender, is these days called a financial consultant. It is also disturbing to see a secured loan of $56,000 supported by a personal guarantee at the interest rate of 144% per annum (reducible for prompt payment to a mere 120% per annum). In earlier years these rates would have been struck down by the legislation against usury. However, commercially, the financing of this venture was a very high risk matter as there was a very good chance that the project could not be on-sold or completed before the options ran out. Furthermore, the evidence suggests that many major financiers were not interested in the project (alternatively the plaintiff did not try very hard to get them interested in the project) because despite any efforts that were made by the plaintiff no finance was forthcoming apart from moneys advanced by another company in Mr Socratous' group, Advance Investment Finance No 2 Pty Ltd. It is also useful to note in this connection, by way of balancing what I have said, that it would seem that major financiers who do become involved in this sort of project take up to 50% of the profits of a successful development as well as being cushioned to a great extent against losses that might be incurred from developments which fail. 14 I will take up the narrative again as at 16 March 1994. On that day, Heads of Agreement were entered into by CPL and B+B which gave B+B the opportunity to participate in the Chatswood project by providing mezzanine funding tied to a building contract agreement. However, the Heads of Agreement did not give CPL any certainty with respect to B+B proceeding to completion. Mr Waugh accordingly continued to ask Mr Hunter to pursue other options, particularly financing options should B+B not proceed further. 15 Mr Waugh says that he mentioned to Mr Hunter in mid-March that Carrymoor would be incorporated as a new company to enter into the dealings with B+B. 16 Mr Waugh says he met Mr Socratous at Stanmore sometime in mid-March and asked for an advance of money to keep the project alive as he thought it was probable that it would return a profit of at least $1 million to CPL. Mr Waugh says Mr Socratous agreed to lend $200,000 but only advance the money in draw downs of $50,000. Mr Socratous said that if that was the way it happened, he could ensure that each amount was used to extend the options. Mr Waugh reluctantly agreed. The first advance was actually $56,000 being $50,000 to extend the option and $6,000 for a loan "establishment fee". On the same day, the first fees agreement was signed. 17 On 20 April 1994, Willoughby Council granted development consent for the project. 18 Mr Waugh says that on about 20 April 1994 he had a conversation with Mr Hunter in which he was told that Mr Socratous wished to amend the fees agreement and was threatening to pull out of the deal. Mr Waugh responded that the deal was that Mr Socratous' company would lend $200,000 in tranches. Mr Hunter said that he would get back to Mr Waugh and on 22 April faxed the second fees agreement to him. 19 Mr Hunter puts that on 21 April 1994 he told Mr Waugh that there was some ambiguity in the fees agreement which he would like to remove. 20 On 26 April 1994 Mr Waugh said that he had a conversation with Mr Hunter in which he protested that a lot of the risk had gone out of the deal with the development approval coming through and B+B coming on the scene, and that he thought that Jim Socratous was just trying to grab more money. Mr Waugh indicated that he could not see any reason why he should sign the second fees agreement. According to Mr Waugh, Mr Hunter then said "That wouldn't be a good idea Barry". Mr Waugh responded "Do you mean if I refuse to sign Jim is going to withhold my second $50,000? It was always agreed that Jim would advance all of the moneys I needed to get the deal through to the end of June now you are pressuring me by threatening to withhold the second $50,000 knowing full well if I don't pay that money this week the Telstra option will lapse." Mr Hunter replied: "Look, Jim is under a lot of pressure due to the breakdown of his accounting partnership. He's not himself and he wants this fees agreement signed. I really wouldn't rock the boat at this time." Mr Waugh says that there was another conversation on 28 April 1994 where Mr Waugh said, "I really think what you are telling me is that if I don't sign the new fees agreement the company wont get the $50,000 promised to it." Mr Hunter said, "No, Barry, but let me say this will make things easier all round if you do." 21 The second fees agreement was signed on 28 April 1994 and shortly afterwards the second tranche of the loan of $56,000 (being $50,000 plus a $6,000 "establishment fee") was provided. Mr Hunter does not accept those conversations took place. He says that all that happened was that he reminded Mr Waugh that he had not signed the amended fees agreement and Mr Waugh said "I'll sign the fees agreement but I'd like to clarify the amount payable to Eurofinance. The amount of the fee should not exceed 10% of the total profit made by Carrymoor". Mr Hunter agreed to that. Mr Waugh made a handwritten amendment to the fees agreement and signed it. 22 Of the two versions of what happened in March, I prefer that of Mr Waugh. There was no obvious reason for preferring one version to the other, nor did either witness wilt under the cross-examination that was directed to him. Both Mr Waugh and Mr Hunter displayed themselves as members of that layer of the commercial community which could easily convince themselves that what they were saying was more or less correct if it was to their advantage. However, the principal reasons why I prefer Mr Waugh's version are:

(1) that Mr Hunter would not go so far as to deny parts of Mr Waugh's version but merely say he had no recall; and

(2) Mr Waugh's version fits in far better with the concrete external facts that the deadline for the next option payment to Telstra was rapidly approaching and that the obtaining of Mr Socratous' second $50,000 loan was essential. It also is far more credible to believe that there was an initial understanding that $200,000 in total would be advanced rather than a month to month $50,000 (plus of course a $6,000 "establishment fee", ie an upfront payment of 10.7% of what was borrowed in addition to the 144% interest). 23 I thus accept Mr Waugh's version of the conversations. 24 On 31 May 1994, the third $56,000 was made available (again $6,000 was taken as an "establishment fee"). From 11 June 1994, the plaintiff had no further involvement with the project or in any negotiations with B+B. The only dealings that CPL had with the plaintiff after that time was to repay moneys owing to Mr Socratous on 30 June 1994. 25 On 24 June 1994, the basis of the agreement to enter into a joint venture with B+B was settled. 26 On about 28 June 1994, Mr Waugh received a facsimile from Mr Hunter including a further fees agreement. This fees agreement included Carrymoor as a party and did not take into account the $100,000 that was being paid direct to the plaintiff by Vicwood (NSW) Pty Ltd, the entity that was administering the joint venture deal. Mr Waugh refused to sign it. 27 Messrs Waugh and Hunter had a conversation in which Mr Waugh suggested that the new fees agreement was another attempt to increase fees. Mr Hunter said that the agreement was necessary in order to ensure that the plaintiff would receive its fee and because Carrymoor was not a party to previous fees agreements. Mr Hunter says that Mr Waugh replied: "The introduction of Carrymoor Investments was not to avoid or limit the payment of fees but rather for tax and business planning purposes. Your position is still the same." Mr Hunter says he said: "We're not suggesting it was to avoid fees, but our legal advice is that it would be appropriate for Carrymoor Investments to be a signatory to our fees agreement." Mr Waugh agrees that some such conversation took place, but he says that the vital utterance of his was "Carrymoor Investments has not been introduced for the intention of reducing your fees. It was done for a number of commercial reasons. My priority is to get the deal done and we can talk about your fees later." 28 In cross-examination it was put that Mr Waugh was unhappy that he had been "ramped" in respect of the second fees agreement and had decided to put himself into a position of advantage by not signing the third. Mr Waugh agreed that he was unhappy about having to sign the second fees agreement and that he did indeed have in his mind that he would have a card up his sleeve to use as a negotiating point later by not having Carrymoor a party to the fees agreement. This cross-examination rather confirmed my view that I should prefer Mr Waugh's evidence as to what had happened in April. Mr Waugh, however, on his evidence, was trying to be very clever by saying that it was not the intention of the Carrymoor interests by introducing Carrymoor that the fee be reduced and that it was done for commercial reasons, but at the same time he had it in his mind that this would be a very good spin-off. I accept that this was so. It would seem to me that this was the way in which Mr Waugh's commercial mind worked and it was activated in part by what he felt was the injustice of having to sign the April agreement. Accordingly, I prefer again Mr Waugh's evidence to that of Mr Hunter so far as the conversation of 28 June 1994 is concerned. 29 To complete the factual background, in about April 1995, B+B exercised their option to take 100% interest in the project and as a result of which the Carrymoor interests were paid out by a payment of $3,050,000.00. In due course, the project was on-sold by B+B to another entrepreneur. 30 The plaintiff says that on the facts which it presented (not all of which I have accepted), the defendants, namely Carrymoor and Mr Waugh, are bound to pay it $175,000 plus interest on one or other of the following grounds:

(1) damages for the tort of inducing a breach of contract;

(2) equitable compensation for breach of fiduciary duty to act conscionably; and

(3) breach of s 52 of the Trade Practices Act or s 42 of the Fair Trading Act. 31 Various defences were pleaded. Some were abandoned, but essentially the defences were that on the facts the plaintiff had not made out its case. There was also a cross-claim that the fees agreement be set aside as being unconscionable or as having been brought about by economic duress. 32 I will first deal with the three claims made by the plaintiff. 33 As to procuring a breach of contract, the plaintiff must prove that there actually was a breach of contract between CPL and the plaintiff. 34 The relevant contract is the fees agreement which has a typed date of 22 April, 1994 being the second fees agreement signed by Mr Waugh on 28 April 1994. Apart from formal parts, this reads as follows: "RE: 'CHATSWOODO PROJECT' 460-470 VICTORIA AVENUE, CHATSWOOD Following discussions held on 20 April, 1994 this letter records the amended Fees Agreement between Carrymoor Pty Ltd ('Carrymoor') and Elmstone Finance Pty Ltd ('Elmstone') in respect to consultancy services for the above project ('the project'). This letter supersedes Fees Agreement dated 30 March, 1994. Fees are as follows: 1. Payable by Carrymoor to Elmstone on settlement of initial finance drawdown or sale of land;* plus $100,000 2. 5% of Carrymoors' net profit from the project (or net profit on sale of the land) up to a maximum of: $450,000 Payable within 90 days of project completion or on settlement of sale of the land, as the case may be. 3. Sale of hotel or part thereof (by Elmstone) then payable by Carrymoor to Elmstone a fee equal to 1.25% of the gross sale amount. * Subject to any payment to Elmstone not exceeding 10% of the profit earned at that time by Carrymoor Pty Ltd." 35 Mr Hammerschlag, who appeared for the plaintiff, put that there must be an implied term in the fees agreement that CPL would not put it out of its power to perform the agreement. He cited as authority for that proposition, in chronological order, Turner v Goldsmith [1891] 1 QB 544; Ogdens Ltd v Nelson [1905] AC 109 and Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596. 36 In Turner's case a manufacturer agreed to employ a traveller for five years. At the end of two years the defendant's manufactory was burnt down and he did not resume business. The plaintiff recovered substantial damages because he had not been given a reasonable opportunity to earn his commission over the five year period. The actual decision does not really seem to support to Mr Hammerschlag's submissions. The English Court of Appeal took the view that the defendant was not bound to actually manufacture the articles the plaintiff was to sell, he could buy them in from someone else and that on the true construction of the contract, it was to enure for five years. Indeed, Kay and Lopes LJJ said at 551 that the plaintiff was not seeking to rely on any implied condition, rather it was the defendant who was alleging there was an implied condition that the agreement came to an end if his factory was burnt down and this was not a condition that should be implied. 37 In Ogdens Ltd v Nelson, there was an express contract to distribute profits for a period of four years. The defendant ceased business before the four years was up. The House of Lords held that there had been a breach of contract for which damages should be paid. There was no consideration of any implied term. 38 In the St Martins' case at 607, Mason J noted that it was common ground in that case that the contract imposed an implied obligation on each party to do all that was reasonably necessary to secure performance of the contract. 39 However, it is certainly trite law as Lord Blackburn said in Mackay v Dick (1881) 6 App Cas 251, 263 that: "as a general rule ... where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect." 40 Mr Coles QC who appeared with Mrs Emmett for the defendants, said that in this type of case, by which he meant a commission agent's case, the authorities show that no such term is to be implied generally, either as a term necessary to give business efficacy to a contract under the rules laid down by the Privy Council in BP Refinery (Westernport) Pty Ltd v Hastings SC (1977) 180 CLR 266, 283, or because of an implication of law. He particularly relies on the well known case of Luxor (Eastbourne) Ltd v Cooper [1941] AC 108. The headnote of that case says: "Where an agent is promised a commission only if he brings about the sale which he is endeavouring to effect there is no room for an implied term that the principal will not dispose of the property himself or through other channels or otherwise act so as to prevent the agent earning his commission." 41 Bowstead & Reynolds on Agency 16th ed (Sweet & Maxwell, London, 1996) article 60, state the law thus: "The principal will only be liable for preventing the agent from earning his remuneration when the implication of a promise that he will not do so is necessary to give business efficacy to the contract, or otherwise to effect the intention of the parties."

That, with respect, seems to me to state the law. 42 In Mona Oil Equipment & Supply Co Ltd v Rhodesia Railways Ltd [1949] 2 All ER 1014, 1017, Devlin J said: "In truth, the proposed term, (ie that a party would not put it out of his power to perform the contract) like all other implied terms, must be judged by the test whether or not it is necessary for the business efficacy of the contract. The fact that an act, if not prohibited by the contract, is one which would result in a party being robbed of the benefits which otherwise the contract would give him is certainly an important matter to be considered in relation to the business efficacy of the contract, but it is not necessarily the most important, and it is certainly not the only matter. There are many decided cases in which it has not prevailed." 43 We have here a situation where the "finance consultant" has drafted a fees agreement. There have been two versions of it. The parties were a little unclear as to just what would be involved. Not only were they unclear as to what would be involved in the project, they were also unclear as to just exactly what the finance consultant would be expected to do. 44 The second version of the fees agreement seems to provide for three distinct stages, viz:

(2) profit from the project or profit on the sale of the land; and

(3) sale of the hotel or apartments built on the land.

I cannot see how, especially in view of the approach to these matters set out in the Luxor case which has been followed ever since, there is any business efficacy in implying a term that CPL is not to put it out of its power to perform the agreement by having some other company take up the deal. This is reinforced by the background details relied on by Mr Coles QC that the options provided for exercise by a nominee and that it would not be at all unusual for some other vehicle to be used to carry out the project. Indeed, the project is not even defined. 45 If business people wish to make vague deals, so be it, but it is difficult for a court to say when they do that there is some business efficacy or necessity for implying terms which deal with matters which they might have included had they thought of it. This is particularly the case where, as I accept, the plaintiff was told about the existence of the new company before the second fees agreement was executed. 46 Accordingly I decline to imply a term and it must follow that there has thus been no breach by CPL, and accordingly, no matter what the other members of the Carrymoor interests did, there can be no procurement of a breach. Accordingly, the first approach fails. 47 The second approach was to say there must be some equitable compensation because of the unconscionable conduct of the Carrymoor interests, or because of some breach of fiduciary duty. 48 I must confess I found it startling that one could say that damages flowed, even equitable damages, just because there was unconscionable conduct. Especially when one remembers that prior to the mid-nineteenth century it was only in very very rare cases that equity would grant a monetary remedy to conflate equitable principles into some sort of cause of action for damages. Mr Hammerschlag, however, put that I was really behind the times in saying this and that there are cases which he cited as authority for the proposition: Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175 and Coghlan v S H Lock (Australia) Ltd (1985) 4 NSWLR 158. 49 Neither of those cases were equity cases. Both were conventional estoppel cases. They were decided on estoppel by convention. Estoppel by convention is now recognised as being a form of common law estoppel; see Dabbs v Seaman (1925) 36 CLR 538, 550. 50 The estoppel put forward by Mr Hammerschlag here was that each party assumed that the change in the legal entity which was the Carrymoor interests participant in the project would not affect the remuneration paid to the plaintiff. In order to support this as a matter of fact I would need to be satisfied that Mr Hunter's version of the conversations should be accepted over Mr Waugh's. As I have indicated earlier, I cannot do this. Accordingly any factual basis for conventional estoppel falls away. 51 The third method of approach is to say that there was a false and misleading statement made by Mr Waugh that the plaintiff's right to remuneration would not be affected by the change in identity of the Carrymoor participant. This again primarily depends on accepting Mr Hunter and for the reasons I have given, this must fail. 52 Although it was not argued before me, the statement made by Mr Waugh on his own evidence was not the full truth. Whilst the effect on the plaintiff was not the motivating factor for changing the identity of the Carrymoor participant, it was not at all out of Mr Waugh's mind that this might be the incidental effect. However, even if it could be said that there was some misstatement, there is virtually no evidence of reliance. The best that the plaintiff can say is that had it realised that it was mistaken it would have sought legal advice. In fact the evidence showed it did seek legal advice; it tried to have a third version of the fees agreement brought about, but was unable to do so. 53 Accordingly, in my view, the Trade Practices Act count also fails. 54 It follows from what I have said, that there must be a verdict for the defendants. 55 I note that it is regrettable that these proceedings were brought in the Supreme Court. Essentially they were a small commercial cause which was well within the jurisdiction of the District Court to consider and that is where they should have been commenced. Although the parties were involved in transactions which may have produced a lot of money, the actual amount in dispute between the parties was only $175,000. Had the plaintiff succeeded, some special order as to costs might have had to be made. 56 In the circumstances there appears to be no purpose in considering the cross-claim. However, the parties are entitled to a short finding on the cross-claim in case the matter should go further. 57 Economic duress is a reason for setting aside a contract. However the authorities are quite clear that commercial pressure, even to the point where the party the subject of the pressure is left with little choice but to act as he did, is not of itself sufficient; see eg Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50, 106 et seq. In the instant case, the factual background was such that the parties were dealing with a high risk project. The people involved were experienced businessmen, and were aware of the terms offered by financiers in this market. Mr Waugh saw that there was considerable profit to be made, as in fact he did make, out of the transaction and realised that he needed to pay a very heavy price in the short term to make sure that he still had a ticket in the lottery. 58 Although I have generally accepted Mr Waugh's version of the evidence, and whilst I consider that he was put under pressure to sign the second fees agreement by the implied threat that he may not get the liquid funds to pay the Telstra extension fee if he did not, I do not consider this is sufficient to make out the claim of economic duress. 59 As to the alternate claim that was pressed on the cross-claim that the plaintiff in fact did very little and that it was already over-remunerated by the $100,000 it in fact was paid, it seems to me that whilst again there is some basis in fact for the submission, the Carrymoor interests needed someone to supply short term liquid capital. The defendants chose the plaintiff and left the amount of the work that the plaintiff was required to do relatively vague. Mr Coles QC submitted that it was a fragile agreement. So it was, but that affects both sides. Mr Waugh entered into the agreement. If he considers that there has been a breach of a warranty he may perhaps be able to sue in damages, though this would be difficult as CPL has now been deregistered. However, there was some performance of some duties on behalf of the plaintiff and I cannot see any reason in conscience in the circumstances to set aside the agreement. 60 Accordingly, it is not necessary to consider whether the right parties are here to make any such order. 61 The cross-claim must be dismissed. 62 The orders accordingly are that the claim and the cross-claim are dismissed with costs in each case. I will reserve liberty to apply should it be thought necessary to make some more precise order as to costs which will allow the work of the costs assessor to be minimised. The exhibits may be returned on the usual undertaking to return them should there be an appeal.

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