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Representation: Counsel:
T Kane (Plaintiff)
N Allan (Defendant)
Solicitors:
Hansons Lawyers (Plaintiff)
Ziman and Ziman Solicitors (Defendant)

File Number(s): 2024/174427

Publication restriction: Nil.

JUDGMENT

1. Mr Tom Folino Gallo sues Mr Samy Saad for breach of a purported contract made between them personally for the repayment of a debt due to Mr Gallo’s companies from Mr Saad’s company (“the Corporate Debt”). The Corporate Debt was to be postponed by entry of their respective companies into a Deed of Subordination on 13 July 2023 (“the Deed”). The parties to the Deed included Mr Gallo’s companies as creditors, Mr Saad’s company as debtor and a third-party financier of a property development project undertaken by the debtor company. The legal effect of cl 2 of the Deed is that the Corporate Debt is postponed and no part of it is due for payment or capable of being declared due for payment until the loan due to the third-party financier is fully repaid and all security in respect of it is discharged. Clause 2.1.3 has the effect that the deed of loan under which the Corporate Debt was advanced is amended “to the extent necessary” to give effect to the Deed.

2. As pleaded in paragraph 1 of the Amended Statement of Claim filed on 17 December 2024, Mr Gallo’s case is as follows:

“On or about 6 and 13 July 2023 the plaintiff and the defendant entered into an agreement pursuant to which:

(a) in consideration of the plaintiff agreeing to procure the execution by Windlock Pty Limited …., Gallo Super Pty Ltd …. As trustee for Gallo Superannuation Fund and AFJG [sic] Pty Ltd … as trustee for the R&T Super Fund (the Companies) of a document tilted Deed of Subordination.

(b) the defendant agreed to pay to the plaintiff an amount equal to the indebtedness of Shiloh Properties Pty Ltd … (‘the Agreement’) to the Companies, together with interest on such amount at a rate of 15% per annum.

Particulars

i. The agreement was express.

ii. The agreement was partly in writing and partly oral. The written part of the agreement consisted of text messages dated 30 June 2023; and 3 July 2023.”

3. Windlock Pty Ltd (“Windlock”), Gallo Super Pty Ltd (“Gallo Super”) and AJFG Pty Ltd (“AJFG”) are the entities I have termed “Mr Gallo’s Companies” although, as I explain later AJFG is a company controlled by a relative of Mr Gallo. Shiloh Properties Pty Ltd (“Shiloh”) is Mr Saad’s company.

4. By his Defence filed on 4 March 2025, Mr Saad denies the agreement, avers that any indebtedness was that of his company and is due to Mr Gallo’s Companies rather than Mr Gallo himself. He avers that the Corporate Debt “is affected by” the Deed. Mr Saad takes issue with the amount of the principal claimed and claims that the default interest rate of 15% is unenforceable as a penalty.

Decision

5. For the reasons which follow, I have determined that Mr Gallo’s claim has not been made good and I will give judgment for the defendant. Essentially, I have accepted that Mr Gallo and Mr Saad entered into an arrangement in July 2023 under which, in acknowledgment of the entry of Mr Gallo’s Companies into the Deed, Mr Saad promised to repay to Mr Gallo (or otherwise at his direction) the amount of the Corporate Debt. However, I have decided that the arrangement was not enforceable as a contract essentially for two reasons, each of which on its own would defeat the plaintiff’s claim. First, I am not satisfied that there was an intention to enter into an enforceable contract and secondly, in the alternative, the arrangement, if a contract at all, was a collateral contract for which the consideration was the entry into the Deed. The purported contract was directly inconsistent with the Deed and accordingly the arrangement between Mr Gallo and Mr Saad is unenforceable. Moreover, had it been necessary to decide the matter, I would have been of the view the default interest provision was not a penalty. Given my conclusions, it is unnecessary for me for the purpose of this judgment to calculate precisely the amount due under the Corporate Debt.

Background

6. Mr Saad is a property developer. The Corporate Debt was incurred by his company. Shiloh was Mr Saad’s corporate vehicle undertaking a major development project in Shellharbour named “Elevation 77”. The project was a mixed commercial, retail and residential development.

7. Windlock and Gallo Super were controlled by Mr Gallo and his son. AJFG is a company controlled by Mr Gallo’s nephew, Mr Robert Gallo, and his wife. While Mr Gallo had no interest in, or held office in AJFG, he seems to have occupied the position paterf**amilias of his extended family and AJFG was involved in advancing the loan that became the Corporate Debt. Mr Gallo and members of his extended family had for many years conducted a successful engineering business. The success of the business enabled the family to branch out as private financiers.

8. The evidence disclosed that St George Bank, a division of Westpac Banking Corporation, was the principal financier for Elevation 77. While Mr Gallo and Mr Saad had not previously had financial dealings together, Mr Saad approached Mr Gallo in October 2021 to borrow $2 million to complete Elevation 77. They met on 19 October 2021 and by text message dated 21 October 2021, Mr Saad confirmed he was seeking a loan of $2 million to complete the project. He made clear that he was looking for the loan urgently.

9. I interpolate that as at 25 October 2021 another of Mr Saad’s company’s, Daascon Pty Ltd (“Daascon”) was the builder on the project.

10. On 25 October 2021, a deed of loan was entered into between Mr Gallo’s Companies, on the one hand, and Shiloh on the other, advancing the sum of $2 million at an interest rate of 10% per annum and 15% during a period of default (“the Deed of Loan”). The loan was for a period of 12 months. However, over the period until July 2023, further sums were apparently advanced. It is disputed, but the plaintiff asserted that the total indebtedness when the July 2023 arrangement was made was in the sum of $3,163,888.47. The loan was secured by an unregistered mortgage over the development site. Mr Saad personally guaranteed Shiloh’s performance. I interpolate for clarity, Mr Saad is not sued on his guarantee.

Amendment to the Pleadings

11. I have summarised the parties’ pleaded cases above. It is of interest to record that when commenced, the plaintiff was Windlock suing Shiloh on the Deed of Loan. When the defendant’s solicitors drew the Deed to the attention of the plaintiff’s solicitors, after enquiries, the entire pleaded case was abandoned and the claim recast into its present form with Mr Gallo and Mr Saad substituted as plaintiff and defendant.

The Factual Matrix for the July Arrangement

12. Although no formal demand for repayment had been made under the Deed of Loan, it is fair to say that by the middle of 2023, Mr Gallo was becoming restive. Moreover, the existing principal financier’s loan was falling due, and St George was unwilling to extend the loan. Rather, it was demanding repayment. Mr Saad was in the process of renegotiating the St George loan with a private financier, Certane CT Pty Ltd (“Certane”). While it was prepared to advance the necessary funds, Certane would only do so if Shiloh and its existing creditors entered into the Deed subordinating their interests to Certane’s and postponing their entitlement to repayment until Certane as the principal financier recouped all of its entitlements.

13. By mid-2023 Elevation 77 was nearing completion. Both Mr Gallo and Mr Saad appreciated that if Shiloh was unable to refinance the St George loan, its financial position would have been precarious; and were Shiloh to collapse, Mr Gallo’s Companies' prospects of recovery were likely to have been problematic at best.

14. Mr Gallo’s concern in this regard is illustrated, to my mind, by the consideration that he agreed to the withdrawal of the registration of a personal property security providing part security for the Corporate Debt when asked to assuage the incoming financier’s concerns.

15. In broad terms, Mr Gallo’s concerns led him to request a meeting with Mr Saad, which was organised to take place at the Fraternity Club at Fairy Meadow on 6 July 2023. Mr Gallo’s account of the meeting is contained in his affidavit of 8 May 2025 (“May 2025 Gallo Affidavit”) at [23]-[26]. Mr Gallo said the substance of the discussion at the meeting was as follows:

16. Mr Saad was having issues with various sub-contractors and had placed Daascon into administration to frustrate those sub-contractors. Mr Saad intended to “fix up” the sub-contractors privately. I infer, not out of Shiloh’s funds.

17. Mr Saad had refinanced but the incoming financier required other creditors to execute the Deed. Mr Saad requested Mr Gallo’s agreement to entry into the Deed.

18. Mr Gallo agreed to enter into the Deed subordinating and postponing the interests of the Gallo companies on the basis that Mr Saad personally paid the Corporate Debt, which Mr Gallo said was “roughly” $4 million plus interest, at the rate of $1 million per month. Mr Gallo agreed to secure such other signatures as were necessary.

19. Following the meeting, Mr Gallo caused up-to-date loan statements to be forwarded to Mr Saad and a second meeting was arranged for 13 July 2023.

20. On Mr Gallo’s evidence, at the second meeting, Mr Saad only presented the execution page rather than the whole of the Deed for signature. Mr Gallo and Mr Saad confirmed the terms of the previous arrangement that Mr Gallo would procure the necessary signatures on Mr Saad’s personal promise to repay the Corporate Debt with the first instalment of $1 million payable during the first week of August 2023: May 2025 Gallo Affidavit [34]. On this issue, Mr Saad disputes Mr Gallo’s account. In his affidavit sworn on 25 June 2025 (at [9] – [12]; “Saad Affidavit”), Mr Saad insists that his understanding was the dealings between him and Mr Gallo were done in their capacities as directors of their respective companies, not as individuals. I admitted evidence of Mr Saad’s understanding for limited purposes under s 136 of the Evidence Act 1995 (NSW). Mr Saad also insists that the full Deed was presented to Mr Gallo, who took it away with him to secure the necessary signatures: Saad Affidavit [13]-[14].

21. Nothing turns on the detail of whether the full Deed was provided for execution because regardless of the dispute, Mr Gallo and Mr Saad agree that the Deed was duly executed on 13 July 2023 subordinating Mr Gallo’s Companies’ priority to the incoming principal financier, Certane, and postponing their entitlement to repayment as previously discussed in these reasons. On 3 August 2023, Mr Saad caused the sum of $1 million to be paid to Windlock. Mr Saad disputes that this payment was made pursuant to any arrangement finalised on 13 July 2023. The money was paid out of a Shiloh account (Exhibit 1). Although, if not paid pursuant to a separate arrangement, it is hard to understand why it was paid given the operation of the Deed postponing the Corporate Debt. No further payments or repayments were made either under the Deed of Loan or by reference to the July arrangement.

The Evidence

19. Mr Kane of Counsel appearing for the plaintiff and Mr Allan of Counsel for the defendant both drew my attention to the oft-cited dictum of McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315 at 319. Also apposite is Brooker v Friend & Brooker Pty Ltd [2006] NSWCA 385 at [104] (McColl JA). While one must bear in mind the erosion of accurate recall by the effluxion of time and the insidious, often subconscious, effect of self-interest in matters which develop into litigation, I am not so sure that the sage observations of McLelland CJ in Eq are applicable in all respects in the present case. The effluxion of time is not great; there are contemporaneous documents, including the Deed, correspondence and text messages; and the apparent logic of events is a reliable guide in the present case.

20. I accept, however, that as the asserted contract is one partly in writing and partly oral, the conduct of the parties after 13 July 2023 may be relied upon to ascertain whether an agreement was made, and if so, what has been agreed: Lym International Pty Ltd v Marcolongo [2011] NSWCA 303; (2011) 15 BPR 29,465; at [136] – [149], see also Queensland Phosphate Pty Ltd v Korda [2017] VSCA 269 at [37]. This is in contradistinction to the use of post-contractual conduct as an aid to construction: cf Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 at [25]-[26].

Plaintiff’s Evidence

Mr Bahlmann

21. Mr Gallo called his solicitor, Mr Peter Bahlmann, who gave evidence in chief by way of affidavit affirmed 4 March 2026 (“Bahlmann Affidavit”). That evidence largely relates the history of these proceedings, but it also very helpfully annexed many of the relevant documents to this dispute.

22. The cross-examination of Mr Bahlmann was relatively short. Mr Bahlmann confirmed that his office had removed a PPS Registration over the development at Shellharbour on or around 29 June 2023: 18.10-15T.

Mr Steven Gallo

23. Mr Steven Gallo’s affidavit affirmed 3 March 2026 was read (“Steven Affidaivt”). It established the means through which the plaintiff had recovered the various text messages exhibited in evidence as well as those text messages. Mr Steven Gallo was not required for cross-examination.

Mr Robert Gallo

24. Mr Robert Gallo, who for clarity and without intending any disrespect, I will refer to as Robert, gave evidence in chief largely by way of affidavit affirmed 25 July 2025 (“Robert Affidavit”).

25. Robert’s evidence was that sometime in the middle of 2023, he received a phone call from his uncle, in which he was told words to the effect of “I am coming to see you… I will be there soon with Mr Saad. I need you to sign a document he needs to help him raise some money. He has promised me he will then get me paid by Christmas and I can get you repaid”: Robert Affidavit [7]. “There” in this context refers to an office premises. When Messrs Gallo and Saad arrived later, Robert was presented only with the execution page of the Deed. He signed it and then took it home for his wife Teresa’s, signature. He then took the page to Mr Gallo’s house to procure the signatures of Mr Steven Gallo and his wife, Grazia: Robert Affidavit [12]-[20].

26. Under cross-examination, Robert confirmed that he and his wife are directors of AJFG. His super fund, for which AJFG is the corporate trustee, lent money to Shiloh under the Deed of Loan in 2021: 23.25-42T. Robert gave evidence that when the Deed was signed, he did not know what the document was: 24.1-11T. His evidence was that Mr Gallo presented him a piece of paper and he signed it: 24.38-25.1.

27. During the course of cross-examination Robert contradicted both his evidence in the Robert Affidavit at [7] and his oral testimony as it relates to when words were said to him by Mr Gallo. Robert’s “settled” evidence, if I can use that term, was that the conversation about the promise of repayment of the AJFG debt occurred when Mr Gallo attended the office. Robert characterised any apparent contradiction as a mistake caused by nerves: 29.10-20T.

28. I regarded Robert as a generally credible witness, and I am inclined to accept his evidence and treat his inconsistencies as the product of natural nervousness while under cross-examination. I do not consider when that conversation precisely occurred over the course of that day to be material. I accept his evidence that Mr Gallo informed him he would be repaid, and in particular I accept that Robert was only presented with the execution page of the Deed.

29. I infer however when he signed the execution page of the Deed he understood from what Mr Gallo said to him that he was signing a legal document to facilitate Shiloh refinancing and that he consented to that. Bearing in mind he is a party to neither the proceedings nor the putative contract, nonetheless his signature binds him to the terms of the Deed: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52.

Mr Tom Gallo, Plaintiff

30. In addition to the May 2025 Gallo Affidavit, a further affidavit of the plaintiff sworn 5 March 2026 (“March 2026 Gallo Affidavit”) was read. Together, those affidavits comprised his evidence-in-chief. The March 2026 Gallo Affidavit largely serves to correct an earlier issue with the May 2025 Gallo Affidavit.

31. I do not propose to exhaustively summarise the cross-examination, but I will discuss some of the more pertinent evidence that fell from it. The course of cross-examination established that Mr Gallo has been in the business of lending money since at least 2012: 34.50-35.2T. He was taken to the text messages between him and Mr Saad, extracted in Annexure B to the Steven Affidavit, and accepted they showed Mr Saad asking him for $2 million in connection with the Elevation 77 project in October 2021: 36.10-50T.

32. I want to pause here to make some observations about the chain of text messages that is in evidence. It is tolerably clear to me that they are not complete, and messages have been removed or deleted. I was not invited to find, nor do I, that this incomplete record is a result of any deliberate act of deception on behalf of Mr Gallo. I accept his evidence that any deletion would have been accidental: 38.45-50T.

33. There was a caveat lodged over the land the subject of Elevation 77, which Mr Saad asked Mr Gallo to remove in around April 2023 in advance of an application for further finance from St George. Mr Gallo gave instructions to that effect to his solicitor: 40.45-41.30T.

34. By June 2023, Mr Gallo accepted he did not have any particular concern about getting paid right away: 46.15-20T. Mr Gallo texted Mr Saad “[n]o problem to pay over a period of six months. If possible I would need the first payment of one million by mid August”. Mr Saad responded largely agreeing and wrote further “[c]an we catch up next Monday… about payment schedule”: Steven Affidavit Annexure B p 9; 46.40-47.10T. It was the payment schedule which was subject to the discussion at the Fraternity Club: 47.10-15T.

35. At the 6 July 2023 meeting, the recent receipt of the occupation certificate for Elevation 77 was discussed, as was the forthcoming sale of units and the repayment of the Corporate Debt under the Deed of Loan. Mr Gallo was concerned because of the financial trouble experienced by Daascon and how that reflected upon Mr Saad’s capacity as a director to manage his companies: 52.28-40T. One of the issues raised at that meeting was about the capacity of Shiloh to pay debts on time: 53.18-24T. It was squarely put to Mr Gallo that the conversation said to found the July arrangement on 6 July 2023 did not occur, a proposition he rejected: 58.40-59.3T. Generally, Mr Gallo remained firm on agreement having been reached. It was Mr Gallo’s evidence that his relationship with Mr Saad was “extremely flexible” and he was willing to provide leeway as to the timing for repayment of the debt: 60.5-10T.

36. Messrs Gallo and Saad met again at the Fraternity Club at around midday on 13 July 2023. Mr Saad brought the unsigned Deed with him in preparation for its execution. Mr Gallo denied reading it and said he was only given a page to take away. I have already said, both parties accept the validity of the Deed. He could not remember if it was stapled: 47.23-48T. Mr Gallo confirmed that when he said, “this is between you and me” (May 2025 Gallo Affidavit [34]), he was referring to as between him and Mr Saad in their personal capacities: 60.37-61.10T. This, of course, is a matter of subjective intent only. The words have to be assessed objectively in all the circumstances known to the parties.

37. On 20 July 2023, Mr Gallo texted Mr Saad seeking confirmation of the forthcoming payment of $1 million on 1 August. Mr Saad texted back “… I will be able to give you the $1.0m next week for sure”: Steven Affidavit Annexure B p 11. On 3 August, Mr Saad sought the bank details for the deposit, and Mr Gallo arranged for the bank details of Windlock to be sent to Mr Gallo: 65.10-30T. As I have said the payment was drawn from Shiloh’s account.

38. The cross-examination continued into other matters which I do not consider relevant to fully set out here. Fundamentally, Mr Gallo maintained his position that he had a personal agreement with Mr Saad and at all times regarded himself as dealing with Mr Saad in his personal capacity, rather than as a director of Shiloh. Mr Gallo’s evidence was not without a degree of inconsistency. I do not consider that to be unusual, particularly given the effluxion of time and the rather informal basis on which Messrs Gallo and Saad dealt with each other. I regarded Mr Gallo as a credible witness on the whole.

Defendant’s Evidence

39. Mr Saad’s evidence-in-chief was mostly given by way of affidavit. The contents of the Saad Affidavit are largely summarised above. Suffice it to say, there is something of a chasm between Messrs Gallo and Saad as to the events of 6 and 13 July 2023.

40. Mr Saad had changed phones following the text exchanges that were in evidence, and consequently they were no longer available to him: 86.1-6T. Initially, it seemed that Mr Saad questioned the authenticity of the texts, however he appeared to resile from that position: 86.36-87.12T.

41. Monies paid pursuant to the Deed of Loan always came from Windlock’s account, rather than the other entities: 88.34-89.7T. Mr Saad accepted that by July 2023, the Corporate Debt was “roughly” $4.5 million. Around this time, Mr Saad was attempting to refinance the existing line of credit with St George Bank from a new lender, being Certane, as the loan from St George had fallen due: 89.27-48T. The monies borrowed from Certane, ultimately, were around $50 million: 90.42-91.4T.

42. Certane originally entered into another deed of subordination securing its priority over and above two other creditors, being Barwon Investment Partners Pty Ltd and Samy Saad Custodian Services Pty Ltd. This deed did not cover the Corporate Debt. Later, Certane required a further assurance of its priority and required Shiloh to enter into the Deed. Mr Saad gave evidence that prior to lending any money, Certane was already aware of Mr Gallo’s Companies as secured creditors: 92.13-03.41T.

43. I interpolate here that I have some difficulty accepting this last proposition. The correspondence from Certane’s solicitor, in evidence as page 70 of Exhibit PB-1 to the Bahlmann Affidavit, provides:

“Our client later became aware of the existence of an additional secured creditor requiring subordination and a new version of the Subordination Deed was circulated by Maddocks on 29 June 2024… “

I consider that 2024 should read 2023 here, given the context. In any event, I do not consider that email to be determinative of the issue of Certane’s knowledge. However, during the entire process of the refinancing, Certane was represented. They sought to secure their position by procuring a deed of subordination from other creditors. It is difficult to accept that they knew of the Corporate Debt and simply decided not to seek subordination, only to change their mind.

44. Regardless, after Certane expressed their requirement for the subordination and postponement of the Corporate Debt, it fell to Mr Saad to seek the consent of Mr Gallo’s Companies: 92.43-93.11T. This is what occurred in relation to the PPS registration of the charge: “[n]ow St George Bank found out about it & demanding that we remove it””: Steven Affidavit Annexure B p 8.

45. Mr Saad understood, prior to its execution, that the effect of the Deed was to ensure that the Corporate Debt would not be payable until Certane had been paid out, and if it was not, then that postponement would be indefinite: 98.21-99.1T. Mr Saad confirmed he sent the message to Mr Gallo confirming he could pay $1 million by end of August on 3 July 2023: 99.46-100.24T.

46. The 6 July meeting, naturally, was the subject of lengthy cross-examination. Mr Saad accepted that at the time of the meeting, Daascon had (2 days prior) entered into administration. He accepted that that had discussed this with Mr Gallo at the meeting, and that he had told Mr Gallo that he was going to fix up Daascon’s creditors privately – by which he meant separate to Daascon’s accounts: 101.34-102.33T. Mr Saad denied that Mr Gallo had asked whether he would fix him up privately, however: 102.35-38T. He denied that he did this to convince or procure Mr Gallo’s entry into the Deed: 103.8-10T. He denied that he had promised to pay Mr Gallo back by Christmas: 104.39-45T. He did accept however that he had asked Mr Gallo how much was owing and Mr Gallo arranged for an up-to-date account to be provided: 105.10-25T. He accepted that this account was sent to him after the meeting: 107.6-13T.

47. As relates to the 13 July meeting, Mr Saad denied that there was any agreement for personal payment of the Corporate Debt at that meeting, and denied that there was any schedule of payments agreed upon: 108.8-43T. Mr Saad accepted that he knew that the effect of the Deed was to disallow the repayment of the Corporate Debt until after Certane had been paid out: 109.29-32T. Mr Saad’s version of the agreement was to the effect that Mr Saad would try to pay Mr Gallo back, but he could not promise that: 110.7-13T. Mr Saad accepted that the payment of the $1 million was the first payment in what was expected to be a series of payments: 112.29-31T. Mr Saad also accepted by the terms of the Deed he was not permitted to pay Mr Gallo’s Companies monies owing under the Deed of Loan: 114.36-39T.

Was There an Agreement?

48. For the reasons that follow, on balance I prefer the evidence of Mr Gallo, which, combined with the documentary material that is otherwise in evidence and the apparent logic of events, leads me to accept that Mr Gallo and Mr Saad made an arrangement whereby Mr Saad would repay the Corporate Debt out of funds under his personal control. Other than the first instalment for which Mr Gallo seems to have had a pressing need, there seems to have been a surprisingly uncommercial approach to the performance required of Mr Saad. I wish to make clear that in reaching this conclusion I have put Mr Gallo’s subjective intent and beliefs to one side. However, this conclusion is consistent with Mr Saad’s evidence as summarised above (at [47]; 110.7-31T).

49. In the weeks leading up to 6 July 2023, there was clearly some angst on the part of Mr Saad about the need to refinance the St George debt. As I have said this was vital to the viability of the completion of Elevation 77. Certane evidently saw merit facilitating that refinance but did so subject to the condition that their debt would have priority. As I have found above, I consider it more likely that they did not initially know about the Corporate Debt but subsequently discovered it during their due diligence.

50. I am satisfied that on 6 July 2023, Mr Saad explained that the refinancing required the subordination of the Corporate Debt. This was the requirement for the Deed that had been previously mentioned to Mr Gallo by Mr Saad’s solicitor. Mr Saad’s evidence was that he agreed he had told Mr Gallo he would “fix up” Daascon’s creditors privately at the 6 July meeting. A side deal between the natural persons that stood behind the corporate veil is clearly not an alien concept to Mr Saad.

51. Both parties sought to characterise the payment of $1 million in August 2023 differently. Mr Gallo pointed to it as compliance with the terms of their side agreement and characterised the payment into the Windlock account as being in accordance with Mr Gallo’s direction to pay. Mr Saad’s position seems to have been that this was really an ex gratia payment in the face of Mr Gallo’s own financial difficulties. It seems very unlikely in all the circumstances that Mr Saad would have agreed to pay these funds unless it reduced the Corporate Debt.

52. I think that the contemporaneous text messages do contain the language of expectation. They may not be the language that a lawyer would use to document an arrangement for the repayment of a debt, but they are laden with an understanding of an arrangement. “[A]re we good for the mill on the 1st August?” [sic] (Steven Affidavit Annexure B p 11) suggests an agreement for payment that covers both quantum and timing. It is not “can you”, rather it adverts to some previous understanding. I do not wish to be understood as applying some principle of formal legal interpretation to a text message, but the use of the definite article here, even in everyday speech, also leads one to the conclusion that there is a particular payment in mind, one that has been previously discussed and agreed upon between the parties.

53. The tone of Mr Gallo’s messages inquiring about repayment does not really escalate into the language of demand until April 2024 (see Steven Affidavit Annexure B p 16). I accept that this is reflective of Mr Gallo’s evidence that he did not intend on being officious or demanding strict compliance with the timing for payment agreement: 60.5-10T. I do not consider that a level of flexibility militates against a finding that an agreement existed, especially in the context of the informal nature of their relationship as evidenced by their correspondence. But the uncommercial nature of the arrangement is striking given both protagonists had engaged lawyers to properly document their previous dealings and the discussions leading to the arrangement were in the context of executing a necessary legal document (ie the Deed) to complete the refinancing of the Elevation 77 project, which was in their mutual interest. Moreover, as I emphasise below the arrangement itself ran counter to the central intent and effect of the Deed. I can accept that a “my word is bond” or “handshake” approach may the preferred style of the self-made but that is not how these men previously consummated their dealings. Again, this conclusion is broadly consistent with the loose arrangement Mr Saad described (at [47] above).

54. I hold an actual persuasion on the balance of probabilities that on 6 July 2023, the parties entered into an arrangement whereby Mr Saad would pay Mr Gallo or at his direction an amount equal to the Corporate Debt, and in return Mr Gallo would procure the signatures necessary to ensure the Deed was executed. The arrangement was confirmed on 13 July 2023. The question remains, is the July arrangement legally enforceable?

Legal Issues with the Plaintiff’s Case

55. In light of these factual findings, I turn now to consider whether this agreement is capable of having the force of law. As is clear from the above, I have largely preferred Mr Gallo’s evidence in this case. Unfortunately for Mr Gallo, however, I consider the legal issues in his claim to be insurmountable, and therefore dispositive of these proceedings.

Intention to create legal relations

56. As with all other matters relating to the formation of a legally enforceable contract, the question of intent to enter into legal relations is determined objectively. In Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; [2002] HCA 8 at [25] (“Ermogenous”), Gaudron, McHugh, Hayne and Callanan JJ said that the expression “intention to create legal relations”:

“[D]escribes what it is that would be objectively conveyed by what was said or done, having regard to the circumstances in which those statements and actions happened. It is not a search for the uncommunicated subjective motives or intention to the parties.”

(Citations omitted.)

The inquiry into this aspect of the formation of a legally enforceable contract “may take account of the subject matter of the agreement, the status of the parties to it, their relationship to one another, and other surrounding circumstances” (Ermogenous at [25]).

57. In Heilbut*, Symons & Co* v Buckleton [1913] AC 30 at 47 (“Heilbut Symons”) Lord Moulton spoke of the caution with which English law views collateral contracts. His Lordship said the law viewed such contracts, being those with the sole effect of varying or adding to the terms of a written contract, “with suspicion”. This suspicion extends not only to the terms of such contracts, “but the existence of animus contrahendi on the part of all the parties to them”. The learned author of Heydon on Contract: The General Part (2019, Thomson Reuters) at p 226 (“Heydon on Contract”) said that “animus contrahendi” should be understood “in the sense of an intent to affect legal relations”. The author also pointed out that there are differences between Australian and English common law with regard to collateral contracts and Heilbut Symons may no longer be regarded as good law in England: pp 226-7. The relevance of intention as relates to collateral contracts will become clearer below.

58. What both Mr Gallo and Mr Saad knew was that Shiloh had to refinance and the matter was urgent. As much as $50 million was at stake. Mr Gallo knew because he had been told that the new financier required the execution of the Deed and this would postpone the legal entitlement of Mr Gallo’s Companies to recover the Corporate Debt for an indefinite period. He also knew that for Mr Saad the execution of the Deed postponing the Corporate Debt (and the debt of other creditors) was absolutely essential to the incoming financier. Absent new finance, as I have said, the prospects of recoupment of the Corporate Debt was at best precarious. In these circumstances, Mr Gallo was prepared to enter into the Deed fully aware of its legal effect, but he was looking for some commitment from Mr Saad as to repayment within what he regarded as a reasonable time given the debt was already due.

59. Contrary to his evidence, I am satisfied that Mr Saad, who desperately needed Mr Gallo’s co-operation, was prepared to make a commitment to at least attempting to repay the debt over a period of months.

60. It is also clear from the communication between them that other than the first instalment of $1 million payable in August 2023, Mr Gallo was prepared to allow a degree of flexibility to the repayments. I infer that he appreciated Mr Saad would have a degree of difficulty in sourcing funds independently from Elevation 77, whatever other assets he may be able to liquidate. This accounts for the large degree of informality absent from their previous deals.

61. Certane, I infer, would not have agreed to excluding the Corporate Debt from the operation of the Deed. This would be contrary to the facts as I have found them. When the Corporate Debt came to their attention, Certane amended the Deed to specifically cover it. In reality, viewed objectively, the arrangement between Mr Gallo and Mr Saad was a gentlemen’s agreement “on a handshake basis” that Mr Saad would, on the quiet, as it were, attempt to discharge the Corporate Debt from any funds excess to Shiloh’s obligations to the new financier. It was for this reason that Mr Gallo was flexible and forbearant up until April 2024. It remains that the only consideration for this arrangement was Mr Gallo Companies’ entry into the Deed. In the context of the execution of the Deed, I am of the view that the informal nature of the arrangement bespeaks an absence of an intent to enter into legal relations, and the claim fails for that reason.

Collateral Contract

62. If contrary to my view, the July arrangement has the hallmarks of an enforceable contract it can only be a collateral contract. I accept there may be some issues with that formulation; namely, the parties themselves are legally distinct, even if the parties did not treat them as such. I do not think that is necessarily determinative, given the permissibility of what Heydon describes as ‘tripartite collateral contracts’: Heydon on Contract at p 228. The only identifiable consideration given by Mr Gallo is an agreement to procure the agreement of Mr Gallo’s Companies to execute into the Deed. That is of course the pleaded case.

63. The law as it relates to collateral contracts is well settled in Australia. In Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133; [1919] HCA 64 (“Hoyt*’*s v Spencer”), Issacs J (at 147) said this:

“The truth is that a collateral contract, which may be either antecedent or contemporaneous, being supplementary only to the main contract, cannot impinge on it, or alter its provisions or the rights created by it; consequently, where the main contract is relied on as the consideration in whole or part for the promise contained in the collateral contract, it is a wholly inconsistent and impossible contention that the other party is not to have the full benefit of the main contract as made…”

(Emphasis in original, citations omitted.)

64. Turning to the present case, there are some issues which cause disquiet when applying these principles. The first is that the Deed does not discharge the Corporate Debt entirely or in part but postpones or ranks it after the debts owing to a “senior creditor”. That is to say, no change to the quantum or existence of the Corporate Debt is made through the Deed. The second issue, which is related but separate, is that it is not the rights of Mr Gallo or Mr Saad (as related to each other as individuals) that are governed by the Deed, rather the rights of the corporate entities.

65. I mention these issues as this is perhaps not the classic case of inconsistency between a collateral and main contract, as the rights may not strictly be the same. But that does not change my fundamental opinion that the July arrangement (if enforceable) has the effect of completely subverting the Deed which is the main agreement. The July arrangement does not modify the Corporate Debt. Its sole effect is to evade the purpose of the Deed. That aspect of the July arrangement was embraced as part of the case for Mr Gallo: 127.23-27T.

66. The pre-6 July 2023 position between the respective companies was that the Corporate Debt was due. The effect of the Deed is to postpone that debt. The effect of the July arrangement was to provide for the repayment of that debt through separate channels within the coming months. This purported agreement was entered into to ensure Mr Gallo’s Companies received their funds contrary to the Deed. These two agreements are not compatible at all, either in purpose or effect. Indeed, Mr Kane accepted that they were inconsistent during his closing submissions: 116.29-34T. I am of the view that if I am wrong about the absence of an intention to create legal relations, the July arrangement stands or falls as a collateral contract. The July arrangement and the Deed are so fundamentally inconsistent and incompatible that the July arrangement is unenforceable as contrary to the rule in Hoyt*’s v Spencer.* I therefore consider that no enforceable contract exists, and Mr Gallo’s claim as pleaded fails.

Applicable Interest Rate

67. There was much debate between the parties as to, in the event that I did find a binding agreement was made, what the applicable interest rate would be and it is appropriate I express my views on the issue on a contingent basis. Mr Gallo’s position was that the agreement imported the interest provisions of the Deed of Loan. I accept this. The promise to pay Shiloh’s debts personally means that the interest provisions should be subsumed into this new agreement. It is necessary then for me to consider those provisions in light of a complaint that the provisions are punitive.

68. Under the Deed of Loan, as is common in many commercial arrangements, a standard rate of interest of 10% was applicable, with an additional 5% accruing during any period of default. The effect of that regime is not novel, although I accept that it was drawn in a way that somewhat diverges from the standard practice of having a discounted and standard rate. However, it is the substance, rather than the form, of the agreement to which I must have regard. Mr Saad contended that the interest rate provision was punitive in nature and thus unenforceable. The parties’ mutual position was that if I found that it was, then the whole interest provision would fall away.

69. The principles applicable to such an exercise have been fulsomely set out by the High Court in Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28 (“Paciocco”). The gravamen of the enquiry as to whether any provision is punitive was summarised by Gageler J, as the Chief Justice then was, as follows (at [164]):

“… the fact that the amount of a payment stipulated to be made on breach of contract is set at a level which provides a negative incentive – even a very strong negative incentive – to perform the contract is not enough to justify the conclusion that the stipulation served only to punish. The prospect of paying compensatory damages to be assessed by a court in the event of breach itself provides a negative incentive to perform a contract. The relevant indicator of punishment lies in the negative incentive to perform being so far out of proportion with the positive interest in performance that the negative incentive amounts to deterrence by threat of punishment.”

70. As his Honour observed, it is an exercise in proportionality. The mere fact of a negative incentive is not sufficient to render a provision unenforceable as punitive. The burden of establishing that it is so lies with Mr Saad as the one who contends that it is punitive: Paciocco at [167]. Mr Saad did not cavil with the rates as being disproportionate and pointed only to the text of the provision as giving rise to a punitive element. I do not think an argument predicated entirely on form is sufficient to engage with the principles necessary to characterise a provision as being punitive. I would find that the provision is enforceable.

Conclusion

71. This case is a cautionary tale for directors who seek to conduct business while weaving in and out of the protection of the corporate veil. The law as it relates to the consistency of collateral contracts exists to protect certainty of contract. Side contracts which seek to subvert the obligations owing in a main contract, particularly where third parties are involved, are repugnant to that certainty.

72. For these reasons, I make the following orders:

73. Judgment for the defendant.

74. The plaintiff is to pay the defendant’s costs.

75. Liberty to apply for any special order as to costs as may be available in the circumstances.

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