//
© 2026 Zoe. All rights reserved.
Zoe is a legal information platform. Always consult the Federal Register of Legislation for authoritative text.
[2002] FCAFC 285
Federal Court of Australia (Full Court)
2002-11-14
Drummond JJ
Original judgment source is linked above.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
AND: UNIQUE GOAL PTY LTD (In Liquidation) (ACN 064 926 843)
AND: BRIAROAKS PTY LTD (ACN 007 055 745)
UNIQUE GOAL PTY LTD (In Liquidation) (ACN 064 926 843)
THE COURT: 1 Before the Court are appeals and cross-appeals from the judgment of a Judge of this Court (Finkelstein J) arising from a dispute involving Unique Goal Pty Ltd (in Liquidation) ("Unique Goal" and also referred to as "the Trustee"), Briaroaks Pty Ltd, ("Briaroaks" and also referred to as "the Manager") and Fitzwood Pty Ltd ("Fitzwood"). Unique Goal was the trustee, Briaroaks the manager and Fitzwood a unitholder of a private unit trust, the Mt Alexander Unit Trust ("the Trust"). The Trust had been established in 1994 to purchase, manage the leasing of and resell a property at 641 Mt Alexander Road, Moonee Ponds ("the property"). The property was an eight-storey building comprising strata units, retail shops on the ground floor and offices on the upper floors. the facts found 2 Before outlining the matters in dispute in the appeal we set out the facts relevant to that dispute in summary form. This statement of the facts is largely derived from the judgment appealed from omitting reference to conflicting evidence not accepted by the learned primary Judge where that evidence is no longer in contest. 3 In June 1994 a property developer, a Mr Mackali, located the property. After conversations with Mr Drapac, an acquaintance who was also a property developer, Mr Cahill and a Mr Shapiro, another property developer, it was decided to put together a group of investors to subscribe capital via a unit trust to purchase the property. It was proposed that the purchase price would be found in part through the subscriptions for units and in part through bank finance. 4 A draft information memorandum was prepared and given to a number of prospective investors. The document outlined the strategy to be adopted as involving the property being progressively tenanted and sold to crystallise a profit. It was said that in the "medium term" the whole property would be resold and the Trust wound up after distribution of cash on hand. It was envisaged that the life of the Trust (described as "A sole purpose Unit Trust") would be twelve to eighteen months. 5 The document described how the anticipated profits were to be divided: "The profits generated by the development are to be split between the investor and the developer of [sic] a 50/50 basis. The investor will receive the first $500,000 profit generated, the developer the next $500,000 generated, and all further profit will be divided half each at the time it is distributed." 6 A feasibility study showed an anticipated potential net profit of $2,347,000, derived from gross realisations from sales of the strata units of $8,012,000, less total project costs of $5,665,000. The project costs included a management fee of $100,000. 7 Among the potential investors approached by Mr Mackali was Mr Goulopoulos, who was the senior partner in GSM Lawyers, a firm of solicitors which included Mr Mackali amongst its clients. Fitzwood is Mr Goulopoulos' family company. Mr Goulopoulos was given a copy of the draft information memorandum. By then the percentages of profit share had changed. The information memorandum explained: "The profits generated by the development are to be split between the investors and the developer on a 70% to unit holders/30% to the developer basis described. As a cash return is generated by the sale of areas within the building, the funds will be distributed in the following order.
(b) A claim that the respondents had breached a contract with the unitholders by selling the property without the consent of the committee of unitholders appointed on 30 November 1999.
(a) A claim that Mrs. Cristina Drapac was not validly appointed as a director of Unique Goal and by reason of the invalid appointment there was no proper or bona fide decision to sell the property to Pineross in December 1999; and …" 132 In Gerlach v Clifton Bricks Pty Ltd [2002] HCA 22, Gaudron, McHugh and Hayne JJ adopted, as the formulation of the proper principle to be applied when a party challenges the correctness of a final judgment on the ground that an interlocutory decision was wrong, the following statement at par [6]: "[O]n an appeal from the final order an appellate court can correct any interlocutory order which affected the final result." 133 Their Honours added, at par [7]: "It is necessary to make the qualification, 'which affected the final result', at least to reflect the well-established principle that a new trial is not ordered where an error of law, fact, misdirection or other wrong has not resulted in any miscarriage of justice." 134 The appellants have not demonstrated that, if Mrs Drapac was not in fact entitled to act as a director of the Trustee when she participated in the decisions in question, that would be sufficient, of itself, to justify the Trustee being denied the indemnity claimed. 135 The trustee's right of indemnity against liabilities properly incurred by the trustee in the execution of the trust is not limited to the trust property, but extends where the trust assets are insufficient to satisfy the indemnity, to a right of indemnity against the cestuis que trust personally where the cestuis que trust are all (as here) persons sui juris. See JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd (1985) 9 ACLR 593. The trustee is entitled to this indemnity because he incurs personal liabilities as a principal in his dealings with others though not acting in his own interests but for the benefit of the trust's beneficiaries. In JW Broomhead, McGarvie J said, at 635: "The basis of the principle is that the beneficiary who gets the benefit of the trust should bear its burdens unless he can show some good reason why his trustee should bear the burdens himself." 136 In In re Johnson; Sheaman v Robinson (1880) 15 Ch D 548, Jessel MR, in explaining the reason why the creditors of a trading trust are entitled to be subrogated to the trustee's lien for his indemnity gave the same explanation for the trustee's entitlement to that indemnity. He said, at 552: "The trust assets having been devoted to carrying on the trade, it would not be right that the cestui que trust should get the benefit of the trade without paying the liabilities; therefore the Court says to him, You shall not set up a trustee who may be a man of straw, and make him a bankrupt to avoid the responsibility of the assets for carrying on the trade: the Court puts the creditor, so to speak, as I understand it, in the place of the trustee. But if the trustee has wronged the trust estate, that is, if he has taken money out of the assets more than sufficient to pay the debts, and instead of applying them to the payment of the debts has put them into his own pocket, then it appears to me there is no such equity, because the cestuis que trust are not taking the benefit." 137 In Balkin v Peck (1998) 98 ATC 4,842, Mason P, with Priestley JA and Sheppard AJA agreeing, said, of the trustee's right to indemnity against beneficiaries who are sui juris, at 4,847: "It is understandable why Lord Lindley [in Hardoon v Belilios [1901] AC 118 at 123] emphasised the equitable basis of the right in a trustee context. However, the notion of a right to contribution, recoupment or indemnity is not peculiar to equitable relationships. Such rights, unless grounded in contract or statute, derive from the unfairness of a person who gets all or part of the benefit of property or a legal transaction not bearing all or the proportionate part of the burden associated with it." 138 It is because the trustee's right of indemnity is founded on this equitable consideration that requires beneficiaries who benefit from the activities of their trustee to meet the liabilities incurred by the trustee in generating these benefits that trustees are not disentitled to indemnity merely because they have been guilty of breach of trust or other misconduct. Even a trustee who improperly incurs a liability is entitled to be indemnified in respect of that liability to the extent to which, acting in good faith, he has benefited the trust estate. Nor does a trustee liable to compensate the trust for loss caused by his misconduct necessarily lose his right of indemnity: if there is a balance in favour of the defaulting trustee between what is due to the trust from the trustee by way of compensation and what is due to the trustee from the trust by way of indemnity, the trustee can recover the balance (and he can do that without first paying what is due by way of compensation). See RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 at 396 and 397 - 398. 139 The ground of appeal now in question is based upon the proposition that, solely because Mrs Drapac was not validly appointed a director, the indemnity claimed by the Trustee against liabilities it incurred in respect of its sale of the property to Pineross to which Mr and Mrs Drapac committed the trustee, is not available. The appellants do not suggest that the Trustee lacked power to sell the property. Nor do they suggest that the Trustee's retainer of the selling agent and its entry into the contract with Pineross in the exercise of its power of sale were not legally enforceable transactions. The equitable principle upon which the Trustee's right of indemnity rests explains why the indemnity is not lost merely because the rules for making decisions internal to a corporate trustee are not followed. So far as concerns this ground of appeal, the beneficiaries obtained from the Trustee the exercise of the power of sale in a manner that was legally effective as between the Trustee and the purchaser providing a financial benefit to the beneficiaries. The exercise by the Trustee of that power in that way, if otherwise bona fide, is not converted into conduct engaged in by the Trustee improperly or in bad faith, for the purposes of the indemnity rule, solely because Mrs Drapac may not have been validly appointed a director. 140 The learned primary Judge was correct in refusing the amendment now the subject of par 4 of the claim for relief in the notice of appeal because it lacked prospects of success. 141 As Gerlach shows, even if it were clear that the Trustee had no right to the indemnity claimed solely because Mrs Drapac was not validly appointed as a director when she took part in the Trustee's decision to sell to Pineross, the appellants would still need to show that the learned primary Judge's exercise of the discretion against them to permit the point now in issue to be pursued at the end of the trial had miscarried. The appellants do not dispute the Trustee's contention, made to the learned primary Judge and repeated on appeal, that if the amendment had been allowed, it would have been entitled to the opportunity to call further evidence on the point. Whether Mrs Drapac was properly appointed a director and whether the appellants are, in any event, barred from relying on any defect in Mrs Drapac's claim to be entitled to act as a director of the Trustee, given the evidence suggesting that Mr Goulopoulos acting on behalf of Fitzwood accepted her as such, are all issues that we think would have to be investigated before a conclusion could be reached on the point. Since further evidence would have been required, it is impossible to say that the learned primary Judge's decision to refuse the amendment pursued so late in the trial was an erroneous exercise of his discretion. · Was the Registrar's calculation of the management fee made on an incorrect basis? 142 His Honour published his reasons on 19 November 2001; the parties failed to agree on the amount of the management fee payable to Briaroaks so his Honour held a directions hearing on 7 December 2001 to deal with this matter. Counsel for the appellants described his Honour as having then given "de facto directions" to the Registrar to calculate the amount of the management fee on the basis of a deemed sale of the property as at 9 August 2000. On 2 July 2002, the Registrar certified that he had calculated the management fee in the sum of $177,981. On 9 July 2002, Fitzwood gave notice that it objected to the Registrar's calculation of this amount; no grounds were stated. On 16 July 2002, the learned primary Judge dismissed Fitzwood's objection and ordered it to pay to Briaroaks the amount of the management fee certified by the Registrar. 143 By the appellants' second amended notice of appeal filed by leave granted at the start of the hearing of the appeal, Fitzwood appealed his Honour's order of 16 July 2002 and sought an order from this Court that "the question of the quantum of the management fee be referred back to the trial judge for determination". Fitzwood asserted in this notice of appeal that the order fixing the amount of the management fee was flawed with numerous errors, including its reliance on "a deemed sale price determined as at 9 August 2000" rather than as at 9 November 1999. However, in the course of the appeal, Fitzwood abandoned all its complaints about the order of 16 July 2002, save only that in par 37(c) of the amended notice of appeal. It is now said that the order of 16 July 2002 is erroneous only in so far as the calculation of the management fee took into account lease income from the project from 28 February 2000, when the management agreement was terminated, up to 9 August 2000. If the post 28 February income is excluded, the management fee will be much less than that which his Honour ordered Fitzwood to pay to Briaroaks. 144 At the hearing of the appeal, Fitzwood produced a calculation of the management fee showing the figure that it says should be adopted if 28 February 2000, rather than 9 August 2000, were the correct cut-off date for lease income. This calculation gives a spurious air of simplicity to the point Fitzwood now wants to run for the first time. It was made on the simple basis of pro rata-ing the lease income derived through the period 1 November 1999 to 9 August 2000 of $347,259 (the figure used by the Registrar in his calculation) over the whole of that period and then deducting that part of the whole assumed to have been derived in the period 28 February 2000 to 9 August 2000 from the figure arrived at by the Registrar for "net proceeds [of sale and leasing of the property] less deductions". Determination of the proceeds derived from the leasing of the property to 28 February 2000 is not, however, a matter for pro rata estimation: the precise figure should be ascertainable from the accounts. Briaroaks does not agree that Fitzwood's calculation should be accepted as showing the amount of the management fee to which it is entitled if Fitzwood were permitted to argue this point now. Fitzwood's calculation cannot be forced on Briaroaks: the fee suggested by it will differ from, and may turn out to be less than, that which Fitzwood should properly pay to Briaroaks if the actual lease income to 28 February 2000 is identified, as it can be, and the calculation of the fee is made by reference to that date instead of the 9 August date. 145 Fitzwood's contention that it is illogical and unjust to give Briaroaks the benefit of lease income earned after its management agreement was terminated would be compelling but for the fact that the payment here in question was not the fee which the Trustee was bound by clause 9 of the management agreement to pay to Briaroaks, but rather the fee which Fitzwood promised to pay under the special agreement it made with Briaroaks and Mr Drapac to resolve the dispute between them. Further, to accede to Fitzwood's contention would result in Fitzwood being allowed to depart from the position it deliberately adopted in the proceedings until after the Registrar issued his certificate. 146 As Fitzwood correctly pointed out in its outline of submissions filed in the appeal on 26 August last when it was challenging the entirety of the order made by the learned primary Judge that gave effect to the Registrar's certificate, the Manager was only entitled by the management agreement to a management fee (payable by the Trustee) on the sale of the property and the property has never been sold: instead, Fitzwood and Mapeka ultimately purchased all the units in the Trust not already held by them (save for the units still held by another). In these submissions, Fitzwood goes on to say: "Despite this Fitzwood agreed that it would pay a management fee, properly calculated, on a 'deemed sale'" which should be taken to have occurred on 9 November 1999 when Fitzwood and Mapeka entered into the agreements to purchase the other units in the trust. Fitzwood also acknowledged in these submissions that: "The express basis on which Finkelstein J fixed the date of the deemed sale as 9 August 2000, was that this was the date that the last of the units were acquired" by them. (The order of 16 July 2002 did not require Mapeka to pay this fee jointly with Fitzwood presumably because Mapeka was not party to the special agreement between Fitzwood and Briaroaks and Mr Drapac.) 147 If Fitzwood is permitted to pursue its challenge to the amount of the fee now, the calculation of the management fee would, as it correctly recognises in its second amended notice of appeal, have to be referred back to the primary Judge for determination after receiving such further evidence as the parties might put before him. The history of this litigation gives no reason to think that that hearing would be a formality. That a further hearing would be required is, in the circumstances of this long-running litigation, a powerful consideration against permitting Fitzwood to depart from the case it ran on the management fee until 9 July last. 148 How the Registrar arrived at the amount of the management fee appears from pp 18 and 19 of his reasons of 2 July 2002 for issuing his certificate. He had to decide first, whether the gross proceeds from the deemed sale on 9 August 2000 should be taken at the appellants' figure of $5,196,277 or the Manager's figure of $6,235,000. The Registrar adopted the Manager's figure and there is now no longer any challenge to that. One of the other income amounts he brought into account in his calculations was the sum of $347,259, as the profits from leasing the property for the period 1 November 1999 to 9 August 2000. As appears from the Registrar's reasons, Briaroaks initially contended for a figure of $348,983 while Fitzwood contended for a figure of $297,597; but the parties agreed during the hearing that he should adopt $347,259 as the amount of the profits from leasing the property in the period 1 November 1999 to 9 August 2000, subject only to Fitzwood's contention that it should be reduced by $7,384 in respect of certain receiver's fees. The Registrar refused to make this reduction and no challenge is now made to that. 149 The Registrar referred in his reasons to the directions given by the learned primary Judge on 7 December 2001. It appears from the brief extract from the transcript of the hearing before the Registrar that the appellants produced to this Court that counsel for Fitzwood, in his closing submissions, reminded the Registrar that his principal submission was that the management fee should be calculated by "tak[ing] the price that was agreed on the aborted settlement in November" 1999 and that "we don't resile from that"; counsel added: "it is just his Honour said do it this way". The Registrar's response was to say he was bound by the Judge's direction to calculate the deemed sale price as at 9 August 2000. In giving his directions for the calculation of the management fee, the learned primary Judge dealt only with the date for calculating the sale proceeds; he did not advert to the cut-off date for calculating the lease income component of that fee. It was therefore open to Fitzwood, if it had chosen to do so, to put argument and evidence before the Registrar that the lease income component should be calculated only up to the date of termination of the management agreement in February 2000. Instead of doing that, Fitzwood presented a case to the Registrar that accepted that the lease income up to the deemed date of sale should be taken into account. 150 That Fitzwood's position until recently was that lease income should be calculated to the date of deemed sale and not to the date of termination of the management agreement is confirmed by its written submissions to the Registrar at the directions hearing on 24 January 2002. In these submissions, Fitzwood identified the issues for that official's determination as including: "What are the net proceeds from leasing of the property for the period 1 November 1999 to 9 August 2000?" Fitzwood there made no mention of any earlier date to be considered in the alternative and made no mention of reserving its right to contend for an earlier date. That it made no such reservation and accepted 9 August 2000 as the relevant date for calculating the proceeds from leasing of the property is further demonstrated by the section of its written submissions of 15 March 2002 to the Registrar: pars 14 to 18 are confined to providing reasons why the figure of $297,597 that Fitzwood was then relying on should be accepted as the amount of the proceeds derived from the leasing of the property. That figure was calculated up to 9 August 2000. 151 From 7 December 2001 until after the Registrar issued his certificate, the appellants conducted their case with respect to the quantification of the management fee on the basis that the relevant date for determining the proceeds derived by the project from both the sale and the leasing of the property was the date of the deemed sale. The appellants may, until they abandoned it during the appeal, have kept open the right to argue that 9 November 1999, rather than 9 August 2000, should be treated as the date of that sale. But until they raised the point in par 37(c) of the second amended notice of appeal, they never suggested that lease income should be calculated by reference to any date other than the date of the deemed sale, i.e. either 9 November 1999 or 9 August 2000. 152 It is not to the point to say now that, in calculating the management fee, it is illogical to bring into account in favour of the Manager the proceeds from the leasing of the property between the date of termination of the management agreement, 28 February 2000, and 30 June 2000. The exercise undertaken by the Registrar was an artificial one in so far as Fitzwood was prepared to agree that it would pay Briaroaks its management fee, though it was not entitled to any fee from the Trustee under the management agreement; Fitzwood also conducted the case before the Registrar on the basis that that fee should be calculated on the figure selected by the Registrar from the two alternatives put forward by the parties as the amount of the deemed proceeds of a notional sale of the property on 9 August 2000 and on the ultimately agreed figure of $347,259 as the profits from the leasing of the property to 9 August 2000. The Registrar was invited by Fitzwood to adopt as the gross profits from the leasing of the property a figure calculated down to this date even though Fitzwood then well knew that the management agreement had been terminated on 28 February 2000. 153 That the respondents have the benefit of the lease income figure down to 9 August is but one reflection of the artificial exercise that Fitzwood agreed with the respondents that the Registrar should be asked to undertake. No doubt Fitzwood had its reasons for making that special agreement with the respondents. 154 Fitzwood does not challenge the Registrar's calculation by reason of some deficiency that vitiates that agreement. Instead, it now puts the agreement to one side and argues that it is illogical to bring gross lease proceeds earned after the termination of the management agreement into account, as the Registrar has in his calculation, though that is but one component of the management fee to which Briaroaks is entitled only because Fitzwood made that special agreement. It is not completely accurate to describe this as a case in which a party seeks to resile from the position deliberately adopted in the proceedings below. Fitzwood is content to maintain its position with respect to the fee, subject only to resiling from a single element of it on the ground that, if the fact that it agreed to the Registrar undertaking his calculations on an artificial basis is ignored, there would be a want of logic and justice in permitting the Manager to benefit from income received without any effort on its part because it was received after the management agreement was terminated. 155 The appeal against the learned primary Judge's order of 16 July 2002 must be dismissed. The issues on the cross-appeal · The proper construction of the management agreement clause 9.1.8 156 At first instance evidence was led by the appellant and the cross-appellants of the negotiations which led to the introduction of clause 9.1.8, evidence was given by the solicitor who drafted it of what in his opinion it meant and evidence was also led of what a number of the unitholders intended by this provision. Expert evidence was also given by a chartered accountant. 157 Although this evidence was admitted without objection and some of it was in any event admissible on other matters in dispute (for example the question of rectification), his Honour took no account of it here because he was of the view, correctly in our opinion, that it could not be used in construing the clause: Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596. 158 The principles relevant to the interpretation of a contract are not in dispute. As the learned primary Judge noted, the object of construing a contract is to discover the mutual intention of the parties in relation to the obligations each assumed. Intention, however, is not to be ascertained by reference to subjective intention but by reference to the language which the parties have employed, having regard to the context in which the words are used. Context is used in the broad sense suggested by the High Court in CIC Insurance Ltd v Bankstown Football Club (1995-7) 187 CLR 384 at 408. 159 The relevant approach to be adopted has been most recently summarised by Gleeson CJ in Wilson v Anderson [2002] HCA 29 at [8] - [9]: "The law of contract seeks to give effect to the common intention of the parties to a contract. But the test is objective and impersonal. The common intention is to be ascertained by reference to what a reasonable person would understand by the language used by the parties to express their agreement. If the contract is in the form of a document, then it is the meaning that the document would convey to a reasonable person that matters. The reason for this appears most clearly in the case of commercial contracts. Many such contracts pass through a succession of hands in the course of trade, and the rights and liabilities of parties other than the original contracting parties are governed by them. As Lord Devlin observed, writing extra-judicially, it is only the document that can speak to the third person. In the case of a will, or a deed, or other written instrument, the object of a court is to discover, and give effect to, the intention of the testator, or parties; but it is in the meaning of the instrument, discovered according to established principles of construction, that such intention is found. That is not to say that the exercise is formal and literalistic. On the contrary, common law and statutory principles of construction frequently demand consideration of background, purpose and object, surrounding circumstances, and other matters which may throw light on the meaning of unclear language." 160 The learned primary Judge correctly approached the question of construction by reference to the language used in the management agreement as amended by the addition of clause 9.1.8. His Honour pointed out, correctly, that the language used was not free from difficulty and, particularly, that the initial concept of "net proceeds derived by the Project from the sale and leasing of the Property" presented a problem because an examination of the clause as a whole made it clear that what was meant by "net proceeds" was not the proceeds which remained after the deduction of all relevant expenses (the ordinary meaning of the phrase), but rather gross proceeds because the provisions of clauses 9.1.2 to 9.1.7 listed the types of deductions which would ordinarily be made from the gross proceeds of a venture in order to arrive at the net position. Likewise, while there was no direct reference to what, if anything, should be done with interest which might be derived from surplus funds which were invested, common sense suggested that it should not be ignored, and that it should be taken into account as part of the net proceeds derived by the project along with the gross proceeds of sale of the property, and the rent received from tenants. 161 But whatever the difficulty may be in construing the meaning of "net proceeds", the language of clause 9.1.8, if not felicitously expressed, is nevertheless quite clear. It requires that there be deducted from the net proceeds, derived by the project from the sale and leasing of the property, an amount being the sum of depreciation and the building allowance. As his Honour correctly points out, it was necessary to refer to "an amount equal to" in the clause since depreciation and building allowances merely represented amounts which would be required to be taken into account as deductions in the calculation of the net income of the Trust estate pursuant to s 95 of the Income Tax Assessment Act 1936. While the clause uses the word "expensed" it is obvious that neither amount is an expense in the real sense of the word, whatever the word "expensed" may mean to accountants. 162 The building allowance was introduced into the income tax legislation in 1983 as an incentive to encourage building construction in Australia. In essence, the construction, extension, alteration or improvement of a building used to produce income gave rise to a deduction of 4% of an amount defined in the legislation as "qualifying expenditure". The percentage was changed later, but the general principle of the deduction continued. The benefit of the allowance was, however, rather affected by the introduction of capital gains tax. The detail is not here relevant, but it suffices to say that the amount of the building allowance operates to reduce the cost base of the building so that when the building is sold and the proceeds distributed to a unitholder in a trust, or where the unitholder disposed of his or her units, the consequence would be, ignoring indexation of the cost base, to treat the difference between the amount received by the unitholder and the cost base of the unit i.e. the price to the unitholder after deducting the unitholder's share of the building allowance which has been allowed, as a deduction. 163 It would be commercially strange if the Manager were to share in the building allowance when usually the sale of the building would operate to negate it by bringing it to account as a capital gain to the owner of the building or, here, to the unitholder. No doubt that is the explanation for the concern of the unitholders to ensure that the management agreement dealt specifically with the matter. 164 In one sense it may be thought strange, also, to refer, as clause 9.1.8 does, to the amount of the building allowance and depreciation as having been "paid" to the unitholders. Certainly in the case of the building allowance, while it operates in essence to give a deduction to unitholders for income tax purposes, it does not have any real trust accounting consequence so far as the Trust is concerned. There may be a difference between the building allowance and depreciation, because depreciation is a matter which accountants would ordinarily provide for in the accounts of a trust estate, although the depreciation rate used may be different from that required to be used for taxation purposes. However, commercial practice, and this seems to underlie the clause, is for the trustees of a unit trust to distribute to unitholders an amount equal to the building allowance as if the amount distributed was a return of capital. There is reference in the judgment to the evidence of a Mr Wight, an accountant, where a calculation is made, using depreciation as an example, which demonstrates that deducting depreciation from what is otherwise an income profit leaves an amount equal to the depreciation to be distributed to unitholders, presumably as a return of capital. The example presupposes that for the purposes of trust law the depreciation is to be deducted before determining the amount of a distribution. That would be true so long as the rate of depreciation for income tax purposes equated with that to be applied for ordinary commercial accounting purposes. It is not strictly true with the building allowance, although the accountant made no distinction between the two capital amounts. 165 In summary, therefore, the provisions of clause 9.1.8 have clearly been drafted on the basis that the amounts deductible for tax purposes for depreciation and building allowance will be distributed, probably as a return of capital to unitholders, that is to say, will be "paid" to the unitholders. That explains why there is a reference to "payment to the unitholders". It does not necessarily explain the use of the word "expensed" in connection with the non-cash expenses, unless that too is a reference to the fact that there will have been paid to unitholders an amount equal to the depreciation and building allowances. However, what is clearly meant is that there is to be deducted from the net profit otherwise calculated all amounts that have been paid to unitholders that are equal to the figure deducted for taxation purposes for depreciation and as the building allowance. Whether these amounts are treated by the Trustee as being an income distribution or a capital return, and the latter would be a more appropriate characterisation, the Manager would, but for clause 9.1.8, be entitled to 30% of the distribution actually made. 166 The judgment notes that: "A payment of an amount equal to the non-cash expenses ensures that the cash position of the trust equates with its accounting position. That is, if an amount equal to the non-cash expenses were not distributed, there would be a corresponding amount of cash left in the trust. This is because of the nature of the non-cash expenses and the fact that they consist in a book entry rather than actual cash expenses. By providing that these amounts are to be "paid" to the unitholders before the calculation of the manager's fee takes place, cl 9.1.8 makes it clear that only the unitholders (and not the Manager) are to enjoy the benefit of these items." 167 In this passage his Honour appears to be treating the depreciation and building allowance as both being relevant to trust accounting in the trust law sense. That this is so emerges from his Honour's use of the expression "accounting position". Strictly, however, the building allowance is a tax law concept not relevant to trust accounting unless made so expressly by the terms of the trust deed. That does not seem to be the case here. What his Honour says in the passage cited is true only if the rules to be applied in determining the accounting position of the trust are the same as the rules for ascertaining the net income of the trust estate for taxation purposes. However, as already noted, it is clear that the accountant who gave expert evidence took the commercial approach of equating tax law and trust law accounting so as to give rise to a possibility of distributing cash from the Trustee to unitholders equal to the amount of the capital allowances (i.e. the non-cash expenditure). Further, neither the appellants nor the respondents sought to rely upon there being any difference between trust and tax law accounting principles, or, for that matter, to challenge the ability of the Trustee to make distributions of cash equal to both depreciation and the building allowance. 168 However, while these matters should be noted, ultimately it is clear that the intention as expressed in clause 9.1.8 is that amounts equal to depreciation and building allowance are to be deducted from the gross proceeds of sale to determine the Manager's fee, at least if actually distributed to unitholders. 169 It was submitted for the Manager that the construction adopted by his Honour produced such an absurd result that it should not be accepted. With respect to the submission, this is not so. Indeed, as already pointed out, it would be commercially peculiar if the building allowance went, in part, to the Manager, rather than to the unitholders. The absurdity was said to arise because the amount of the Manager's fee when calculated would be small, having regard to the amount of effort the Manager might be required to undertake. Indeed, a consequence of clause 9.1.8 is that the longer the Manager continued to manage the property, the lower the management fee. This comes about because the longer the Manager continued to manage the property, the greater the sum total of the building allowances and depreciation would be, that is to say, the greater the sum which had to be deducted from the gross proceeds of sale. But it also came about here because the appreciation over time of the value of the property as reflected in the sale price ultimately realised, was not as high as might have been expected. The converse would be, however, that the longer the time which elapsed, the greater would be the amount due to the Manager as its share of the rental income. 170 However, the answer to the criticism really is that the parties in any event did not expect that the project would be other than a medium-term one of twelve to fifteen months. Had this been the case, it may well be that the management fee would have been considerably higher because the amount to be deducted from the proceeds of sale would have been considerably less. But the property was held far longer than was expected. And if there is a problem for the Manager, that is the cause of the problem. 171 Ultimately, it is our view that there is only one way in which clause 9.1.8 can be interpreted. And that is in the way it was interpreted by the learned primary Judge. In our view his Honour did not err in his construction of clause 9.1.8. · Rectification. 172 The principles applicable to rectification are well summarised in the judgment of McLelland A-JA in Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 in a passage, subsequently cited with approval by Gillard J in Victoria Garden Developments Pty Ltd v Commissioner of State Revenue (Vic) (1999) 99 ATC 4683 at 4697. His Honour said: "In general, the remedy of rectification of an instrument is available where it is established by clear and convincing proof that at the time of execution of the instrument the relevant party or parties as the case may be had an actual intention (if more than one party, a common intention) as to the effect which the instrument would have which was inconsistent with the effect which the instrument as executed did have in some clearly identified way. In this context 'effect' means the legal and factual operation of the instrument according to its true construction, but does not include legal or factual consequences of the operation of the instrument of a more remote, or collateral, kind…" 173 The learned primary Judge, after setting out, with respect, correctly, that it was necessary for Mr Drapac to provide clear and convincing proof of a common intention before an application for rectification could succeed, continued: "I reject the claim for rectification. The agreement operates in the very way it was intended to operate. It is in the form sought by Mr Pruden, to which Mr Drapac agreed. I do not believe that Mr Drapac instructed his solicitor, Mr Cookes, to draft the agreement so that it would have a different effect. I accept Mr Cookes' evidence, supported as it is by the surrounding circumstances, that he drafted the agreement in accordance with Mr Drapacs's instructions. I do not believe that Mr Cookes misunderstood those instructions. Indeed, Mr Drapac understood full well how the management agreement was to operate. It was on the basis of that understanding that some years later Mr Drapac told Mr Cookes, falsely as it turns out, that the agreement had been varied to exclude non-cash expenses as a deduction. Mr Drapac could not have contemplated such a variation unless he understood that, in its unamended form, the agreement required the deduction of non-cash expenses. In the early days of the venture, the requirement to deduct non-cash expenses would not have concerned the manager. However, with the passage of time, cl 9.1.8 had the effect of increasingly diminishing the manager's entitlement and I do not doubt that either Mr Drapac was aware or became aware of this." 174 His Honour's findings, as set out in this passage, were clearly open to him. In argument, senior counsel for the Manager submitted that his Honour has misunderstood the exchange of correspondence which is set out at [20] and [22] of these reasons. With respect the correspondence supports, rather than contradicts, his Honour's conclusion. There is a further problem. Assuming that there was at least some common intention that clause 9.1.8 meant something, just what was it that it was intended to mean? Short of suggesting that the clause be written out of the contract, there was simply no attempt to indicate what the intended meaning of the clause would otherwise be. We think it likely that Mr Drapac did understand, as he said in correspondence to Mr McCormack in August 1998, exactly what clause 9.1.8 meant. We would add that his Honour's finding set out above was, in part, also dependent upon his Honour's view of Mr Drapac's credit and should not be disturbed where his Honour had the advantage, not open to the appeal Court, to observe Mr Drapac in the witness box. · Whether there was an agreement by Fitzwood to pay the fee on a basis calculated without regard to the non-cash expenses or whether Fitzwood was estopped from denying the Manager's claim for the fee calculated on the basis advanced by the Manager. 175 The claim sought to be advanced by the Manager in contract was based on what was said to have happened on and shortly before 19 October 1999. The facts found by his Honour are set out in our reasons at [30] - [36]. It suffices here to say that Mr Cookes was instructed on 11 October to prepare documents to give effect to a sale of units proposed by Fitzwood and the then unnamed associate. The offer price had been calculated by Mr DeBono. The figure he arrived at took into account the management fee calculated on a cash basis. Thereafter the formal offers to purchase were dispatched. The offer was conditional upon termination of the management agreement as from the date of settlement. 176 On 19 October there was a meeting at which both Mr Goulopoulos and Mr Drapac were present along with Mr Wain, Mr DeBono and Mr Cookes. His Honour found that there was no contract to pay the management fee, on the basis claimed by the Manager, entered into on that day and dismissed a contractual claim advanced on behalf of the Manager. One reason for so finding was that Mr Goulopoulos on behalf of Fitzwood never promised to pay the claimed management fee. Nor for that matter had Fitzwood (or Mapeka which later emerged as the associate) then agreed to purchase the units. It would have been remarkable had there been at that time any agreement on the part of Fitzwood to pay the management fee when Fitzwood and Mapeka had no binding agreement to purchase the outstanding units. In the circumstances it is difficult to see how a claim in contract could succeed, nor for that matter how there could be any estoppel based on those facts. 177 His Honour found that there were insuperable problems for the Manager in making out a case for estoppel apart from the lack of proof of any representation that could be relied upon. His Honour points out in his reasons that neither the Trustee nor the Manager changed its position in reliance of any promise which Mr Goulopoulos made at the meeting, even if the Trustee did write to unitholders to recommend acceptance of the Fitzwood offer. Nor could the warranties made by the Trustee and the Manager in the Sales Agreements be relied upon in support of an estoppel because the agreements in question had been rescinded. Hence, as his Honour said, neither the Trustee nor the Manager would suffer any detriment if Fitzwood were permitted to depart from its promise. 178 The case in estoppel advanced before us appears to have been somewhat different to that dealt with by the learned primary Judge. However, no complaint was made on behalf of Fitzwood on this basis and because it can be simply dealt with we propose to deal with it here. 179 The submission is that after clause 9.1.8 came into operation, accounts of the Trust were prepared showing a management fee which continued to be calculated on the cash basis. It is said to have been the common understanding of the parties as at the date clause 9.1.8 was inserted, and at all times thereafter, that the management fee would be paid in accordance with the method of calculation in those accounts. It is said that the Manager, on the faith of this method of calculation, remained the Manager, and expended time and money in managing the property to its detriment. Reference is made also to the resolutions passed in August 1995 by which the Manager's entitlement to a fee was reduced from a 30% entitlement, based not only upon a $700,000 threshold of "net profits" (below which it reduced to 15%), but a sliding scale between $700,000 and $1 million. It is said that the Manager relied upon these resolutions and the fact that the accounts contemplated the cash basis of calculation to govern the future relationship between the Trustee and itself, and thus suffered a detriment. 180 There are a number of answers to the submission. The first is the finding by the learned primary Judge that Mr Drapac at all times was aware that the basis for calculation of the fee was such as to require a deduction of the net profit to take into account the non-cash expenditure. We have already noted that this finding was open to the learned primary Judge and should not be disturbed. Another is that it is not at all clear that the unitholders would appreciate that the figure in the accounts was calculated on a basis that ignored clause 9.1.8. The method of calculation of the fee is not stated. Further, the figure would depend upon what amount it was expected the property would be sold at. There is no direct evidence that the unitholders knew or understood the method of calculation, although it might be possible to infer that they did, assuming that they were aware of the terms of the management agreement. In fact Mr Goulopoulos did not receive a copy of the amended management agreement until 10 November 1997, when it was sent to him by Mr McCormack. 181 In our opinion the Manager can not succeed either in showing there was a contract to which Fitzwood, or for that matter any other person, was a party, that the Manager be paid a fee on a basis inconsistent with clause 9 as amended by the addition of clause 9.1.8 or in showing that Fitzwood or any other relevant person was estopped from claiming that the fee should be calculated on a basis contemplated by clause 9 in its unamended form. · Was a binding agreement formed on 8 November 1999? 182 It was the submission of the Manager that binding agreements had been entered into at least on 8 November 1999 between the unitholders and the relevant party seeking to acquire units (that is to say, Fitzwood and Mapeka) and, more relevantly, between the unitholders, the Trustee and the Manager that the Manager would be paid the fee calculated on a cash basis and without taking into account as a deduction from the net profits the non-cash expenditure. It was submitted that this contract was either still on foot and should thus be enforced or, alternatively, it had been repudiated and that the Manager was entitled, accordingly, to recover damages for breach of it, that is to say to recover the difference between the management fee otherwise payable and the management fee calculated in accordance with that contract. 183 The submission may be broken up into a number of parts. First, it is submitted that there was an oral agreement which included a joint promise of Fitzwood and Mapeka between 18 and 21 October 1999 to pay or cause to be paid the agreed management fee to Briaroaks in the event that the unitholders accepted the joint offer and the Manager agreed to retire. Second, it is said that there were agreements drawn up to give effect to the agreement reached, these being the offer documents. Third, it is said to have been the objective intention of the parties that these written agreements settle together as the one transaction. The fact that settlement was to occur over two days was a result of taxation advice to ensure that the management fee was deductible. Fourth, it is said that the agreements were executed and exchanged by all parties on 8 November 1999 so that a binding agreement came into existence. Fifth, it is said that there was a non-performance of the agreement by Fitzwood refusing to put the Trustee into funds to pay the management fee. In consequence the Manager was entitled, so it was submitted, to accept the repudiation by Fitzwood and terminate the agreement and recover damages. This acceptance of the repudiation was, it was said, effected when Mr Drapac crossed out the execution pages. 184 His Honour rejected the submission. He found that there was no prior oral agreement. At no time did Mr Goulopoulos on behalf of Fitzwood, or anyone else on behalf of Mapeka, say that the Manager's fee would be paid. In fact nothing relevantly was said by Mr Goulopoulos to unitholders or to Mr Drapac at this time on the subject of the management fee. Second, in fact Mr Goulopoulos told Mr Cookes that the management fee would not be paid. 185 The existence of a prior oral agreement would not be fatal to the submission if there was a binding agreement which came into existence on 8 or 9 November 1999 which was not rescinded by the Manager, abandoned by mutual consent, or failed by non fulfilment of a pre‑condition. 186 It was an essential element of the case for the Manager that there was an exchange which took place on 8 November 1999 which resulted in the individual contracts between unitholders on the one hand, and Fitzwood or Mapeka on the other, thus becoming binding. But it was also an essential part of the Manager's case that the contract, being one that was conditional upon termination of the management agreement or completion, was in fact completed. 187 The learned primary Judge rejected the submission that a binding contract had come into existence. He did so primarily because, in his Honour's view, it was explicit in the conduct of the parties at relevant times that no binding contract would come into existence until all relevant documents had been executed and exchanged. By relevant documents his Honour meant not merely the Sale Agreements but also the agreement to terminate the contract between the Manager and the Trustee. The termination agreement was not exchanged. Nor was it ever intended by Mr Goulopoulos that it would be. 188 It will have been noted that his Honour found that at the settlement meeting of 8 November 1999 the executed parts of the Sale Agreements had been exchanged. It is clear enough that there was a physical exchange of these parts. However, we do not take his Honour as having decided that there was an exchange in the normal legal sense such as to result in there coming into being a binding contract. The better view would, in our opinion, be that in the context of Mr Goulopoulos not having bought with him the cheque for payment of the management fee being the consideration for termination of the management agreement, that the physical exchange was conditional upon there being completion of the agreements by the termination of the management agreement and payment of the management fee. It is clear enough that Mr Drapac for his part did not agree to there being any binding agreement unless it was clear that the Manager was to receive the management fee calculated as Mr Drapac required, on a basis which excluded a deduction for the non-cash items. 189 At this stage it is necessary to say something about the documents that were executed. First, the parties to the Sale Agreements were the Trustee, the Manager, the relevant purchaser and Mr and Mrs Drapac, as well as the prospective vendor unitholders. As already noted, there were "covenants" or warranties in the agreement to be given by the Manager and Mr and Mrs Drapac that there were or would be no liabilities, actual or contingent, at the settlement date or arising thereafter and that accounts of the Trust were prepared so as to give a true and fair view of the state of affairs of the Trust. Accounts attached showed a liability for the Manager's fee as a contingent liability. It may be inferred that the figure was calculated without deduction of amounts under clause 9.1.8. The Manager, inter alia, agreed to indemnify vendors of units for any claims that might be brought against them for undisclosed liabilities. The document refers to a deed of termination of management agreement, as referred to in clause 5.10, as being one of a number of documents that were to be handed over on settlement. However, clause 5.10 had presumably been changed at some time before the document was presented for execution so that it, inconsistently, contained no reference at all to a deed of termination of the management agreement. No deed or agreement terminating the management agreement was, as the facts already narrated show, ever executed at that time. A draft had been prepared but it did not indicate the figure to be paid to the Manager. However, it is submitted that it is implicit that the amount to be included in the document should be the figure shown in the accounts attached to the unit sale agreement as the contingent liability of the Trust to the Manager. This submission would seem to be correct. 190 It is not difficult to conclude that the parties (or at least the vendors, the Manager and Mr and Mrs Drapac) did intend that the management agreement be terminated on settlement and that the Manager would be paid out the amount shown in the accounts as the management fee. Indeed, it was an essential prerequisite of the agreement that this happen. 191 However in our view, while there was a physical exchange of contracts on 8 November 1999, it is clear that there was to be no binding agreement unless there was also a termination of the management agreement and the Manager was paid. It matters not for present purposes whether at the time of the physical exchange the correct analysis is that no binding agreement was entered into because there had not yet been payment of the management fee or whether at the time of the physical exchange there was a binding agreement entered into but the exchange was conditional upon the Manager being paid its fee on completion as consideration for the termination of the management agreement. The legal consequence will be the same. 192 Mr Cookes in his affidavit evidence made it clear that correspondence prior to 8 November stipulated that it was a condition of the contract that, unless the sale was settled on the date specified in the contract, the contract would be at an end. At a meeting of the directors of the Trustees before settlement was to take place the executed documents were checked. Thereafter, Mr Goulopoulos handed over cheques but not the cheque for the management fee, which he said was not payable until the following day when the management agreement was to be terminated. Mr Drapac declined to settle on that basis, so the settlement did not proceed. It was Mr Cookes who suggested that all documents and cheques be held in escrow pending settlement taking place on the next day. On the next day, when it became clear that Mr Goulopoulos would not deliver a cheque to the Trustee for payment of the Manager, Mr Drapac then said that he was withdrawing from the sale both as a director of the Manager and as director of the Trustee. Clearly he was also withdrawing as a party in his own right. Mr Goulopoulos indicated that it was not acceptable that the transaction proceed without the covenants and warranties that were to be given by the Manager. 193 It seems clear from Mr Cookes' evidence and, indeed, from the evidence of Mr Goulopoulos and Mr Spiliotis to which we were referred, that no agreement existed after 9 November 1999 to pay any money to the Manager. Any agreement reached on 8 November 1999 came to an end on 9 November 1999 when the condition that the management agreement would be terminated was not satisfied. Certainly Mr Goulopoulos clearly had not agreed to pay anything and perhaps intended not to pay anything as his Honour found. 194 If, contrary to our view, there were held to have been an exchange of contracts on 8 November leading to a binding and unconditional agreement being entered into, we agree with the learned primary Judge that the Manager (and Mr and Mrs Drapac) would have been entitled to rescind the bargain since they had been induced to enter into the agreements on the basis of a representation that the management fee would be paid: cf Redgrave v Hurd (1881) 20 Ch D 1 to which reference is made at [92] in his Honour's reasons. However, the better view is that the contract formed on exchange (if indeed the physical exchange led to a binding contract) was clearly conditional upon payment of the management fee and termination of the management agreement on 9 November. When that did not happen the contract was, on any view, rescinded. However, the rescission did not lead to the Manager having any right to recover damages as claimed. the cross-appeal by the manager and mr drapac against the solicitors 195 Mr Cookes, then a member of Price Brent, now the seventh cross-respondent, supervised the drafting of the management agreement and himself drafted clause 9.1.8. We have set out the circumstances in which this was done at [9] - [24] above. The learned primary Judge held that Price Brent owed a duty of care to the Manager and Mr Drapac with respect to the matters the subject of their complaints against Price Brent. But he dismissed their claims for the following reasons (at [175]):
"On the facts as I have found them, the claim must be rejected. The reasons are simple enough. First, cl 9.1.8. reflects the actual intention of the trustee, the manager and those beneficiaries who were involved in the discussions that lead to its introduction. Second, a solicitor is under no obligation to advise his client, or the person to whom he owes a duty of care, what the client or that other person already knows. So much must be obvious. And I have found that Mr Drapac knew exactly how cl 9.1.8 was to operate."
196 The Manager and Mr Drapac submitted, first that the learned primary Judge was in error in making these findings. In rejecting the complaint of the Manager and Mr Drapac about the learned primary Judge's refusal to order rectification of the management agreement, we have explained why these findings, that Mr Drapac knew how clause 9.1 was to operate and that it reflected his actual intention (as well as that of others involved in the project), made by his Honour must stand. For this reason, the appeal against the learned primary Judge's dismissal of the case of the Manager and Mr Drapac against Price Brent must fail. The second submission upon which they here relied must also be rejected. It was to the effect that clause 9.1.8 resulted in clause 9 having such an unreasonable operation that Mr Cookes was duty bound to draw that to Mr Drapac's attention, to seek clarification from him that the clause truly reflected his intention and to go so far as to advise Mr Drapac to seek independent advice as to the operation of the clause. In rejecting the challenge of the Manager and Mr Drapac to the learned primary Judge's interpretation of clause 9 of the management agreement, we have explained why clause 9.1.8, far from producing an unreasonable result, gave clause 9 a commercially sensible operation as between Mr Drapac's company and the unitholders in the circumstances in which the management agreement was concluded. This submission lacks substance too. 197 For these reasons, and the reasons given in [8], the cross-appeal against the dismissal of the case against all the solicitors must itself be dismissed. It is therefore unnecessary to deal with the point raised by the solicitors' amended notice of contention that the learned primary Judge was wrong in holding that the solicitors owed a duty of care to the Manager and Mr Drapac, particularly in connection with the preparation by Price Brent of the management agreement. I certify that the preceding one hundred and ninety-seven (197) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Lee, Hill and Drummond.
Counsel for the First, Second and Third Appellants and the First, Second and Third Cross-Respondents: Dr C Pannam QC and Mr A Paterson
Solicitor for the First, Second and Third Appellants and the First, Second and Third Cross-Respondents: GSM Lawyers
Counsel for the First Respondent and the Sixth Cross-Respondent: Mr J Wilson
Solicitor for the First Respondent and the Sixth Cross-Respondent: Voitin Walker Davis
Counsel for the Second and Third Respondents and the First and Second Cross-Appellants: Mr N Magee QC, Mr I Jones and Mr C Sievers
Solicitor for the Second and Third Respondents and the First and Second Cross-Appellants: Rigby Cooke Lawyers
Counsel for the Seventh, Eighth and Ninth Cross-Respondents: Mr G McEwen
Solicitor for the Seventh, Eighth and Ninth Cross-Respondents: Minter Ellison Lawyers
Date of Hearing: 5, 6 & 7 August 2002
Date of Judgment: 14 November 2002
Fitzwood Pty Ltd (ACN 005 180 163)
Unique Goal Pty Ltd