Gallus Properties P/L & Ors v Richardson & Ors [2004] QSC 415

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH - OTHER MATTERS- where there is a joint venture for the development of land - where an agreement for sale has been made in breach of the joint venture agreement - whether an interlocutory injunction restraining dealings with the land be ordered

EQUITY - EQUITABLE REMEDIES - INJUNCTIONS - INTERLOCUTORY INJUNCTIONS - BALANCE OF CONVENIENCE

CORPORATIONS - CONSTITUTION AND LEGAL CAPACITY - EXTERNAL LITIGATION - SECURITY FOR COSTS - OTHER MATTERS - where plaintiff prepared personally to undertake to meet any costs order against the corporate plaintiff - whether security for costs ordered against the plaintiffs - Mantaray principle applied

Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304, applied

Stubbs Barbeler for the first and second defendants

[1] WILSON J: The plaintiffs seek an interlocutory injunction restraining dealings in certain land at Yeppoon and the appointment of receivers to take possession of the land and other assets of a certain joint venture. The first and second defendants seek an order that the plaintiffs provide security for costs.

[2] The first plaintiff and the first and second defendants are parties to a joint venture agreement for the development of the land. The second plaintiff is a director of the first plaintiff. The third plaintiff is the trustee vehicle for the joint venture. The second defendant is the registered proprietor of the land, and it has agreed to sell the land to the third defendant. Briefly, the plaintiffs' case is that the second defendant holds the land on trust for the joint venturers and that -

(a)

insofar as the second defendant has entered into the contract of sale with the third defendant, it has breached the joint venture agreement and acted in breach of trust;

(b)

insofar as the first defendant has caused the second defendant to enter into the contract of sale, she has breached the joint venture agreement, breached fiduciary duties and/or participated in the second defendant's breach of trust;

(c)

insofar as the third defendant has entered into the contract of sale, it has participated in the second defendant's breach of trust.

The defendants concede that there are serious questions to be tried as to the second defendant's alleged breach trust and the other defendants' complicity in it, but submit that the balance of convenience does not favour the grant of an interlocutory injunction restraining dealings in the land, and that there would be no utility in the appointment of receivers.

[3] By the Lammermoor Beach Unit Trust deed made on 9 July 1999 the third plaintiff became trustee of a unit trust. Each of the joint venturers holds units in the trust: originally, the first plaintiff held 51 ordinary units, the first defendant 35 ordinary units, and the second defendant 14 ordinary units, but since 24 December 2003 the first plaintiff and the second defendant have each held 50% of the ordinary units in the trust.

[4] The joint venture agreement is styled the "Unitholders Participation Agreement". It was also made on 9 July 1999. It was recorded in the recitals to the agreement -

(a) that the second defendant was or proposed to become registered proprietor of the land;

(b) that the third plaintiff was the trustee of the Lammermoor Beach Unit Trust;

(c) that the first plaintiff, the first defendant and the second defendant held all the issued units in the trust;

(d) that the second defendant, the first plaintiff and the first defendant intended -

"to enter into a joint venture through [the third plaintiff] to cause [the second defendant] to acquire, develop, market, and sell the Land and to otherwise carry out the project upon such terms and conditions of [the] Agreement as determined by the [the first plaintiff, the second defendant and the first defendant] from time to time";

(e) that the parties were entering the agreement for that purpose.

The respective interests of the participants in the joint venture were originally first plaintiff 51%, first defendant 35% and second defendant 14%, but they were subsequently changed to first plaintiff 50% and first and second defendant together 50%. By the terms of the agreement they were to share profits and losses of the Project and the Project Expenses in those proportions (clause 5.1), and they were to advance funds to the Trustee (the second plaintiff) in those proportions (clause 6.1). By clause 9.1 the joint venturers agreed that the Project should be supervised and controlled "on behalf of the Ambarr [the second defendant] by the Trustee [the third plaintiff]". The third plaintiff in its capacity as trustee of the Lammermoor Beach Unit Trust was, as far as it was able, to cause the land to be acquired, manage and develop the land as a residential subdivision, and dispose of the land in subdivided allotments (clause 12.1).The first plaintiff was appointed the project manager to act on behalf of the Trustee (clause 14.1).

[5] Disputes arose between the first plaintiff and the first defendant. To resolve those disputes, in late 2003 the unit holdings and the interests in the joint venture were changed as already noted; further it was agreed that the second plaintiff should be appointed a director of the second defendant and that he and the other director (the first defendant) should continue as such for the duration of the joint venture, and that they must act jointly in passing any resolution or otherwise binding or acting on behalf of the second defendant.

[6] The joint venture is now approximately half way through the development of stage 7 of the project, which involves the development of what is referred to as "the Balance Land". Apparently no development has proceeded since about December last year, at least partly because of disagreements among the participants, and yet no one has sought to invoke the deadlock provisions in clause 11 of the joint venture agreement.

[7] The first defendant is the only shareholder in the second defendant. On 1 August 2004 she purported to remove the second plaintiff as a director of the second defendant. Then she unilaterally caused the second defendant, as vendor, to enter into a contract dated 23 August 2004 with the third defendant as purchaser in respect of the land (and a deed of variation to that contract dated 23 September 2004).

[8] Does the second defendant hold the land on trust for the joint venturers? Clause 6.3 of the joint venture agreement is in these terms -

The Participants acknowledge that Ammbar shall be deemed to have contributed to the Project the amount of $720,000.00 representing the gross value of the Land which shall be deemed to be a Project Expense and notwithstanding the definitions of Project Expense in Clause 1.1 shall include and carry with it all debts, interest, stamp duty, acquisition costs, legals, valuations, finance fees and the like agreed at $720,000.00 as at the commencement date."

Senior counsel for the plaintiffs submitted that the land was deemed to have been contributed to the joint venture by the second defendant, the contribution being deemed equivalent to $720,000-00. He submitted that the second defendant remained registered as proprietor of the land, and therefore held the legal title to it on trust for the joint venturers according to their respective interests and in accordance with the terms of the joint venture agreement and the unit trust. However, a contrary interpretation is open. The participants agreed to enter into a joint venture through the third plaintiff as trustee to cause the second defendant to acquire, develop, market and sell the land (recital D). By clause 5.1 they agreed to "share in the profits and losses of the Project and the Project Expenses". Clause 6.3 was not cast in terms of the second defendant's contributing the land to the project, but rather in terms of its being deemed to have contributed a sum of money. By clause 8 the Trustee (the third plaintiff) was entitled to take a mortgage over the land to secure its interests and those of the participants "in the Project" (rather than in the land). Whether the second defendant holds the land on trust for the participants is a difficult question, which it is not necessary ultimately to resolve on this application. Suffice it to say that there are strong indications that it does not.

[9] The first defendant caused the second defendant to enter into the contract to sell the land without consultation with the plaintiffs or any of them, and so in breach at least of the agreement made in November/December 2003. In fact this application was brought in response to an earlier contract to sell to the third defendant (dated 28 July 2004, also entered into without consultation, but later rescinded), and it was not until the defendants filed material in response to the application that the plaintiffs learnt of the contract made on 23 August 2004. There is a serious issue, which turns on credibility, as to whether the third defendant knew of the first defendant's alleged lack of authority to act other than jointly with the second plaintiff in causing the second defendant to enter into this contract.

[10] As counsel for the third defendant submitted, the joint venture is beset with financial difficulties. There are 8 mortgages registered against the land. At least 2 of the mortgagees have given notice of exercise of power of sale, and another has commenced proceedings for recovery of possession. A related company of the third defendant has taken an assignment of the first mortgage pursuant to which a notice of exercise of power of sale had been issued. According to the second plaintiff the total amount secured under the mortgages is $1.935 million, of which $783,000-00 is disputed. He is optimistic about the prospects of refinancing, but the first proposal (dated 19 August 2004) did not proceed, and the latest proposal (dated 14 October 2004) is no more than a vague expression of interest on the part of a potential financier.

[11] Counsel for the first and second defendants submitted that damages would be an adequate alternate remedy in this case.

[12] On the evidence, there is likely to be profit for whichever party completes the development. The third defendant's estimate of the profit if it completes the development is $3.2 million. The second plaintiff's estimate of the profit if the development is completed by the participants in the joint venture is $4.464 million, while his estimate of the profit to the participants if the sale proceeds is only $567,000-00.

[13] The first and second defendants proffered an undertaking not to dispose of the sale proceeds before trial.

[14] There is reason for concern that the contract price of $2.8 million may not represent the market value of the land in its present state. The third defendant put 2 valuations into evidence. PRP Valuers and Consultants Gold Coast Pty Limited valued the land "as is" with the benefit of existing approval for subdivision into 95 serviced building allotments as at 18 February 2004 at $3.545 million. The other valuation, that of John Logan & Associates, seems to have been prepared on a different basis: on 28 January 2004 they affirmed their earlier valuation (as at 21 August 2003) of an englobo valuation of $840,000-00 (with no mention of subdivision approval), gross realisation of stage 7 with 28 allotments $4 million, and balance englobo land (with potential for 67 allotments) $740,000-00. Further, the purchase price under the first contract with the third defendant (made on 28 July 2004) was $5.25 million, but there is no explanation for the reduction in price to $2.8 million.

[15] The three plaintiffs proffered the usual undertaking as to damages, but the defendants submitted that the undertaking is worthless. Searches of the first and third plaintiffs revealed that neither is registered as proprietor of land, and both have charges registered against them. The second plaintiff produced a statement of his net worth as being $4.157 million. However, the assets consist of interests as shareholder or beneficiary in related companies and trusts which are undertaking property development (including the subject development at Yeppoon), the values assigned to them are not supported by independent valuations, and the projects are all substantially encumbered.

[16] Senior counsel for the plaintiffs submitted, correctly, that the worth of the undertaking must be assessed in light of the likely damages if an injunction were wrongly granted. Completion of the contract with the third defendant is due on 31 January 2005. Until then, all that is at risk insofar as the third defendant is concerned are due diligence expenses; thereafter if the sale is completed, all that will be at risk are the costs of delay in proceeding with the project until a trial can be had (and the plaintiffs seek a speedy hearing). In short, he submitted, the risks for the third defendant are not great. It is difficult to estimate what loss the first and second defendants would be likely to suffer if an injunction were wrongly granted. Their main concern is to avoid a mortgagee's sale, in which event they would presumably lose any chance of profiting from the development. The evidence of the likely profits from the development suggests that there are likely to be moneys from which an award of damages could be met.

[17] It is difficult to form even a tentative view as to where the merits lie in the behaviour of the participants in the joint venture beyond what is inherent in the defendants' concession that there are serious questions to be tried. I am particularly concerned by the apparent secrecy with which the contract with the third defendant (a company related to the assignee of the first mortgage) was made, and whether the sale may be at an undervalue in all the circumstances. It seems to me that the balance of convenience favours restraining the completion of that sale, or any other disposition of the land, until trial or further earlier order.

[18] I do not accept the submission of Counsel for the first and second defendants that there would be no utility in appointing receivers. It is not suggested that they should be empowered to proceed with the development pending trial, but simply to preserve the assets, probably by refinancing. I think there would be utility in the appointment of receivers to do this. If they formed the view that the only way to avoid a mortgagee's sale was to sell the land in its present state (whether pursuant to the current contract with the third defendant or otherwise), the Court could be asked to remove or amend the injunction.

[19] The first and second defendants seek security for costs against the plaintiffs, but in view of the second plaintiff's preparedness personally to undertake to meet any costs order against the corporate plaintiffs, their application must fail: Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304.

[20] On 14 September 2004 the first plaintiff lodged a caveat against the land claiming an equitable interest as joint proprietor of an estate in fee simple "pursuant to a written agreement dated 9 July 1999 between Ammbar Pty Ltd ACN 080 616 191 as registered owner and Kerrie Suzanne Richardson and Gallus Properties Pty Ltd ACN 010 863 902" (presumably the joint venture agreement). In his written and oral submissions counsel for the first and second defendants sought the removal of the caveat. However, his clients did not seek such an order in their application filed on 14 October 2004. In the circumstances, I am not prepared to deal with that question.

[21] I will hear counsel on the form of the order, which should provide for an injunction restraining the disposition of the land pending trial or further earlier order, the appointment of receivers, and the powers of the receivers. Counsel may be able to agree on directions for the further conduct of the litigation. There should be liberty to apply. I will hear counsel also on costs.

[22] I have received written submissions on costs.

[23] Before filing their application the plaintiffs sought undertakings from the first and second defendants not to dispose of the land. When those undertakings were not forthcoming, the plaintiffs filed their application on 29 September 2004, seeking orders -

"1. That pending trial or further earlier order the first, second and third defendants be restrained (by themselves, by their servants or agents) from taking any step to sell, purchase, transfer, convey or otherwise deal with the land described as lot 202 on SP 161001 in County of Livingston, Parish of Hewittville ("the Balance Land");

3. Alternatively to 2. that pending trial or further earlier order, the first defendant be restrained from entering into any agreement or transaction for and on behalf of the second defendant without the written consent of the second plaintiff;"

[24] In a letter dated 6 October 2004 (after the filing of the plaintiffs' application) the solicitors for the first and second defendants -

(a) asserted that the undertaking as to damages then offered by the second plaintiff on behalf of the first and third plaintiffs was of no value;

(b) foreshadowed an application for security for costs;

(c) asserted that the appointment of receivers was premature; and

(d) offered an undertaking in terms of paragraph 3 of the plaintiffs' application.

[25] The contract between the second defendant and the third defendant dated 23 August 2004 did not come to light until the filing by the third defendant of Mr Pullar's affidavit on 12 October 2004.

[26] The plaintiffs' solicitors did not provide a substantive reply to the correspondence from the first and second defendants' solicitors until they filed another affidavit by the second plaintiff on 14 October 2004. In that affidavit the second plaintiff swore (in para 23) -

"23. Exhibit 'PG-39' is a financial statement of net worth. It is accurate and records the true position. I have provided it to show that I can provide a valuable (usual) undertaking which I wish to give to obtain the orders sought."

[27] On 14 October 2004 (the same day) the first and second defendants filed their application (a copy of which had been provided to the plaintiffs' solicitors the day before).

[28] Ultimately the plaintiffs succeeded in obtaining an interlocutory injunction restraining the first and second defendants from taking any step in execution of the contract dated 23 August 2004 or otherwise disposing of the land until trial or further earlier order, an injunction restraining the third defendant from taking any step in execution of the contract until trial or further earlier order, and in having receivers appointed.

[29] In most cases where an applicant is successful in obtaining an interlocutory injunction, it is appropriate that the costs of the application be costs in the cause. In this case the plaintiffs seek their costs against the first and second defendants on the basis that they had sought undertakings from those parties before the application was filed. But of course by the time the undertakings were sought, unbeknown to the plaintiffs, the contract they were talking about was no longer on foot and the contract of 23 August had been executed.

[30] In all the circumstances I consider that the costs of the plaintiffs' application against the first and second defendants should be reserved. So, too, should the costs of the plaintiffs' application against the third defendant, since the proper resolution of that costs question may involve consideration of the ultimate determination of costs between the plaintiffs and the first and second defendants.

[31] The first and second defendants failed in their application for security for costs and did not pursue the application for the removal of Astills as solicitors for the plaintiffs. While their solicitors' letter of 6 October 2004 is a relevant factor on the question of the costs of that application, in all the circumstances I am not persuaded that costs ought not follow the event of that application: ie, I consider that the first and second defendants should pay the plaintiffs' costs of that application. The third defendant was not a party to that application.

[32] The parties have otherwise agreed on the terms of the order.