Hawcroft General Trading Co Pty Ltd v Hawcroft

Discussions Concerning the Policy

1. The Company owns and operates a hotel in Newcastle and a motel in Muswellbrook. Martin and his brother, Peter Hawcroft (Peter), were the only directors of the Company from July 2003 until 4 September 2007, when their sister, Mrs Michelle Jamieson (Michelle), and their brother, Mr John Hawcroft (John), were appointed as directors of the Company. Peter resigned as a director of the Company in August 2011 and since then has had nothing to do with the Company. As from August 2011, Michelle, John and Martin were equal shareholders in the Company.
2. The Policy was issued to the Company in 1996 It was initially taken out to satisfy the security requirements for a loan to the Company by the State Bank. It appears that Martin was responsible for the management of the Company's business and that the Policy was required on the basis that the success of the business of the Company was dependant on Martin. Jennifer also played a part in management of the business of the Company. Accordingly, life insurance was taken out on the lives of both Martin and Jennifer. It appears that, by 2005, the requirement of the State Bank for the insurance no longer existed.
3. As at 8 March 2005, Martin and Peter were the only directors of the Company and, on that day, they held a meeting as the directors of the Company. Mr Hugh McKensey of Messrs Forsythes, accountants, was present for part of the meeting. Messrs Forsythes acted for the Company. The minutes of the meeting record that Martin tabled a letter from Colonial Mutual regarding term life insurance policies on the lives of Martin and Jennifer, which were recorded as being owned and paid by the Company. The Policy was one of those policies. The minutes record that it was agreed that Colonial Mutual be contacted immediately with a view to:

• transferring the Policy, on the life of Martin, to joint ownership of the Company and Jennifer,
• obtaining the cost of limiting the total cover on the life of Martin, and
• cancelling the cover on the life of Jennifer.

1. The minutes record that the method of accounting for the cost of the term policies in prior years was discussed and that it was agreed that the costs to date should have been borne by the Company on capital account. The minutes said that, subject to the ownership of the Policy on the life of Martin being transferred to joint ownership, the Company would pay 50% of the costs of the Policy as key man insurance on revenue account.
2. On 26 July 2005, Martin sent a facsimile communication to Mr Dave Austin of Colonial Mutual saying that he, Martin, a director of the Company, would be contacting Mr Austin to renegotiate the Policy. On 3 August 2005, Martin received a facsimile from Colonial Mutual providing quotations for premiums for varying sums insured on the lives of Martin and Jennifer.
3. On 4 August 2005, Mr McKensey prepared a file note concerning a meeting with Martin. The file note recorded that the current position in relation to the Policy was that the Company was "owner - 100%". The file note also recorded that, at the directors' meeting on 8 March 2005, agreement had been reached between Martin and Peter to reduce the cover on Martin's life and to change ownership of the Policy to the Company and to Jennifer as tenants-in-common, with each owning 50% and Martin paying 50% of the premium. The note also recorded that there had been numerous telephone conversations with Colonial Mutual between March and July 2005 attempting to obtain all relevant information to effect the required changes.
4. Mr McKensey's file note then recorded that, following the receipt of all relevant information, Martin recommended that the Policy on Jennifer's life be cancelled forthwith, that the sum insured on Martin's life be reduced, that half the ownership of the Policy on Martin's life be transferred to Jennifer and that the monthly premium on the Policy be paid from a personal bank or credit card account of Martin. The note recorded that the proposal would reduce the payments for insurance on Martin's life currently being made by the Company and would reduce the amount being paid on Jennifer's life to nil.
5. Thus, it is apparent that, as at the time of Martin's meeting with Mr McKensey, the only proposal was that a half interest in the Policy be transferred to Jennifer. There was no suggestion that Martin was to become the beneficial owner or that there was an agreement to assign the Policy to Martin.
6. On 12 August 2005, Martin sent a facsimile to Colonial Mutual on behalf of the Company requesting cancellation of the policy on Jennifer's life. Shortly thereafter, the Company received a letter from Colonial Mutual concerning alterations in the relevant policies. A statement of the alterations enclosed with the letter indicated that, effective from 14 September 2005, the Policy would be the only policy remaining. On 26 August 2005, Martin sent a facsimile to Colonial Mutual on behalf of the Company requesting that the cover on his life be reduced to $2 million effective immediately. The Company received a letter from Colonial Mutual dated 2 September 2005, confirming that the Policy had been altered, effective from 14 September 2005, reducing the cover on Martin's life to $2 million. There was no suggestion of a transfer of any interest under the Policy to either Martin or Jennifer.
7. At some unidentified time, probably shortly before September 2005, Martin brought into existence a handwritten facsimile communication addressed to Colonial Mutual. The document related to the cancellation of the cover on Jennifer's life and reduction of the cover on Martin's life to $2 million. It also contemplated that the "[n]ew policy" be "charged against Martin". The details of a credit card of Martin's were set out. However, there is no evidence that the facsimile was ever sent by Martin. Colonial Mutual produced material on subpoena which did not include such a facsimile from Martin. The only possible conclusion is that the handwritten facsimile communication was never sent to Colonial Mutual.
8. On 28 September 2005, Mr Bruce Killingly, an accountant with Messrs Forsythes, made a file note concerning personal insurance and group salary continuance in relation to Martin. The note was stated to be a follow-up from a meeting with Mr McKensey on 8 September 2005 and recorded that Mr Killingly met with Martin on 23 September 2005 to implement the changes noted in Mr McKensey's file note of 4 August 2005. Mr Killingly's note recorded that Martin undertook to contact the current broker on his policies to arrange for a memorandum of transfer to move the policies to a superannuation trustee and to seek personal statement forms to have loadings removed. The note also made references to group salary continuance for the Company that are not presently relevant. Significantly, no mention was made of transferring ownership of the Policy to Martin or Jennifer.
9. Clearly enough, as at 28 September 2005, there was no agreement between the Company, on the one hand, and Martin, on the other, for the transfer or assignment of the benefit of the Policy. The only possible arrangement was one involving the transfer of the Policy to the Company and Jennifer in equal shares. Whether or not the arrangement was a binding contract, it was clearly executory and nothing had been done to give effect to it.
10. It appears to be common ground that from 2005 until Martin's death the premiums payable under the Policy to Colonial Mutual continued to be paid by the Company. However, Martin's loan account with the Company was debited with the amount of the premiums paid by the Company. The evidence supports a finding that Peter, who was the only other director of the Company until his resignation in 2011, kept a close eye on the financial records of the Company. An inference can therefore be drawn that he was aware that the Company was paying the premiums on the Policy but was debiting Martin's loan account with the corresponding amount.
11. An internal document of Colonial Mutual records that, on 27 July 2007, following a request from Martin, a memorandum of transfer form to change ownership of the Policy and a notice of nomination of beneficiary form in relation to the Policy were sent to Martin. A nomination of beneficiary form signed by Martin and dated 7 September 2010 was in evidence. The form had been completed by describing Martin as the policy owner and Jennifer as the nominated beneficiary. However, there is nothing to suggest that the form was ever sent by Martin to Colonial Mutual. More significantly, there was no evidence that any memorandum of transfer was completed or any notification was given to Colonial Mutual of any transfer of any interest under the Policy to Martin or anyone else.
12. It follows that, even by July 2007, nothing formal had been done to give effect to any arrangement. The document later signed by Martin in September 2010 is some evidence of Martin's intention. However, it does not constitute evidence of any communication between Martin and the Company to give effect to his intention.
13. During 2011 and 2012, Peter, Martin, Michelle and John engaged in negotiations as to their future involvement in the Company. That entailed the development of a "Protocol" for the future management of the Company. A settlement was finally reached with the result that Peter departed from the Company and each of Martin, Michelle and John remained as equal shareholders and the only directors of the Company. Martin continued as managing director.
14. The Protocol went through a number of drafts, only the first of which was signed by the three continuing directors. Each version contained a clause dealing with key man insurance over Martin's life. The signed version of the Protocol contains a statement as follows: [The Company] will take over and continue the payment of key-man insurance on the life of [Martin] for $2,000,000 at a cost of approximately $1,800 per month that was previously paid by [The Company] prior to the death of Edward Samuel Hawcroft. In the event of a claim on this policy the proceeds are to be used by [the Company] to employ a competent manager to prepare [the hotels] for sale within a maximum period of two years from the receipt of such proceeds of claim to enable the liquidation of [the Company]. The subsequent versions of the Protocol, which were not signed, contained differing references to the Company taking out key man insurance on the life of Martin for $2 million. Mr McKensey was involved in the drafting of the Protocol and attended the meetings at which it was considered.
15. The language of the Protocol is hardly consistent with an understanding on the part of Martin that he was the beneficial owner of the Policy. On the assumption that the reference to key man insurance on Martin's life for $2 million was a reference to the Policy, the Protocol made clear that the Policy was still owned beneficially by the Company.
16. Jennifer gave evidence by affidavit that, on an occasion in 2005, Martin told her that the policy on her life was being cancelled and that the cover on his life was being reduced. She also said in her affidavit evidence that, on another occasion in 2005, Martin said to her concerning the Policy "from now it's my policy and we will be paying for it". Jennifer also said that, in August 2011, when Martin was in hospital, he told her that, if anything happened to him, "there is that policy, there is a couple of million there". He told her, when he came out of hospital, that he wanted to put some insurance in place to take care of their children "on top of the policy I took over from the Company".
17. However, there was no evidence to suggest that any application was made to Colonial Mutual for the transfer of the Policy to Martin or Jennifer. There was no evidence of any form of communication between Martin on the one hand and the Company on the other, whereby Martin would take an assignment of the Policy or that the Company agreed to assign the Policy to Martin. There was no evidence of any communication between Martin and the Company to the effect that Martin would pay the premiums on the Policy, by having them debited to his loan account, as consideration for a transfer or assignment of the benefit of the Policy to him.

The Opinion

1. Following Martin's death, questions arose concerning the beneficial ownership of the Policy. Steps were then taken to retain Ms Cheeseman to advise on the question. The basis upon which the Opinion was provided is of some significance. Ms Cheeseman was briefed to advise on a number of questions pertaining to the entitlement to the Proceeds under the Policy. The Opinion recorded that Ms Cheeseman's instructing solicitors acted for the Company, John, Michelle and Jennifer, who had instructed the solicitors jointly to brief Ms Cheeseman to advise on the issue of entitlement and that she had been retained to provide the Opinion for distribution to each of the parties, who had individually approved the materials briefed.
2. Ms Cheeseman provided the Opinion on 20 August 2013. Ms Cheeseman stated that her opinion was expressed in the absence of complete evidence as to discussions or representations made between the relevant parties from the inception of the Policy until Martin's death. She observed that that type of evidence was likely to be of importance if the issues canvassed in the Opinion were ever litigated and may materially affect any determination as to the relative entitlements. In particular, she said that it was possible that such evidence may involve disputed issues of fact that were ultimately only capable of resolution by a Court (Judgment at [348]).
3. Ms Cheeseman answered several questions. First, Ms Cheeseman expressed her opinion that the Company was the legal owner of the Policy, given that the Policy remains in the name of the Company, the premium was debited to Martin's loan account from 15 June 2005 and the premium was not recorded as an insurance expense in the general ledger. That is unexceptionable.
4. Next, relevantly, Ms Cheeseman expressed her opinion that Martin's estate was the equitable owner of the Policy on the basis that, in 2005, the Company transferred the equitable ownership of the Policy to Martin. Ms Cheeseman said that there was also an argument that Jennifer may have an equitable interest in the Policy but that, on the present information, the stronger argument was that Martin's estate was the equitable owner. Specifically, she said that payment of the premium did not, of itself, give rise to an equitable interest but was one of a number of factors that illustrate a clear intention to assign or transfer the benefit of the Policy to Jennifer.
5. Next, Ms Cheeseman expressed her opinion that the steps undertaken to cancel the insurance on Jennifer's life and reduce the cover on Martin's life, as evidenced in the materials described above, constituted one of a number of factors that demonstrate an intention to assign or transfer the benefit of the Policy to Jennifer. In addition, she said, the purported attempts by Martin to transfer the Policy constituted another of a number of factors that demonstrated an intention to assign or transfer the benefit of the Policy to Jennifer.
6. Finally, Ms Cheeseman expressed the opinion that, assuming no restrictions were placed on his appointment as managing director of the Company, Martin, as managing director at the relevant time, had express authority to exercise the rights of the directors and that right included the power and right to deal with the Policy on behalf of the Company and to bind the Company accordingly. Ms Cheeseman expressed the opinion that Jennifer's equitable interest in the Policy was enforceable against the Company.
7. In the reasoning in the Opinion dealing with the question of equitable ownership, Ms Cheeseman referred to a note made by Mr McKensey setting out his recollection that, in August 2005, Peter reneged on the agreement for the Company to have a jointly owned and paid policy on Martin's life. Peter apparently resented having to pay any part of the premiums, indirectly as a shareholder, and he believed that he would take over management of the Company's hotels if anything happened to Martin. Mr McKensey said that Peter wanted any payment for the Policy by the Company to cease forthwith but that rather than immediately cancelling the Policy, Martin decided that he would take over the Policy, and the payment of the premiums and, have the Policy transferred to him.
8. Mr McKensey's notes state that Martin's unilateral decision to have the Policy transferred to him was the result of Peter's ordering the cessation of the payment of premiums by the Company. Ms Cheeseman recorded that Mr McKensey said that he was not aware of whether Peter had agreed to Martin assigning the benefit of the Policy to Jennifer. Mr McKensey added that Peter "did not give a damn" what happened to the Policy as long as the Company had no liability for any premium, actual or contingent.
9. Ms Cheeseman concluded that the material available to her supported the proposition that, at some time after the directors' meeting of 8 March 2005, the directors of the Company decided that, instead of the Policy being transferred to the Company and Jennifer in equal shares, the Policy would instead be transferred to Martin and he would take over the whole of the premium payments. Ms Cheeseman expressed the view that, having regard to the circumstances outlined above, the Company intended to transfer the Policy to Martin. She expressed the view that, while the Company was the legal owner of the Policy, there was a strong inference based on the above material that Martin "had assumed equitable ownership".
10. Ms Cheeseman then expressed the view that the position as to whether Martin, as the equitable owner of the Policy, had assigned the benefit of the Policy to Jennifer was less clear. She said that, depending upon the terms of Martin's will, it may not be necessary for more detailed consideration to be given to the question of whether Jennifer had an equitable entitlement in her own right.
11. Before the Opinion of Ms Cheeseman was made available to the Company, Jennifer, Michelle or John, each had to sign a confidentiality undertaking and agreement whereby, as a condition of receiving the Opinion, that party would, unless otherwise compelled by law, preserve total confidentiality in relation to the advice conveyed in the Opinion. Each acknowledged that the purpose of the Opinion was to provide, "on a without prejudice basis", advice in relation to the resolution, whether through negotiation or by commencement of legal proceedings, of the dispute that had arisen in relation to the Policy.

The Evaluation

1. On 27 September 2013, the Company, John, Michelle and Jennifer and Ms Cheeseman entered into an agreement (the Evaluation Agreement). The Evaluation Agreement recited that:

• the parties had retained Ms Cheeseman, as evaluator, to provide a written opinion in respect of a dispute as to which of the parties was entitled to the Proceeds pursuant to the Policy;
• the Opinion had been given on the basis of certain materials;
• the parties wished to engage in a process to enable Ms Cheeseman to provide a further written evaluation in respect of the dispute, according to the procedures set out in the Evaluation Agreement;
• Moray & Agnew had been jointly retained for the purposes of the Evaluation; and
• the parties had had the opportunity to retain separate legal representation to represent their respective interests in connection with the evaluation.

1. The Evaluation Agreement provided that Ms Cheeseman would provide a written evaluation containing her views of the likely outcome of the dispute, if resolved by a Court, based on the materials put forward for consideration in accordance with the Evaluation Agreement. The Evaluation Agreement provided specifically that Ms Cheeseman would not impose a result on any party, make decisions for any party or provide advice to any party in connection with the dispute. However, the parties agreed to co-operate with her and each other during the evaluation and endeavour to comply with reasonable requests by Ms Cheeseman or other parties to promote the efficient and expeditious completion of the written evaluation.
2. The Evaluation Agreement then set out a timetable for the steps to be taken to complete the evaluation process. The last step was the preparation of a written evaluation addressing final questions that were to be formulated by the parties and then circulated by Moray & Agnew. The written evaluation was to identify the material relied upon by Ms Cheeseman and was to include reasons for her conclusions.
3. On 26 February 2014, Ms Cheeseman provided the Evaluation, which recorded that it was made in the absence of complete evidence as to "discussions and/or representations" made between the relevant parties from the inception of the Policy until Martin's death. The Evaluation stated that evidence of that type was likely to be of importance if the issues canvassed were ever litigated and "may materially affect any determination of the issues raised". It confirmed that it was possible that such evidence may involve disputed issues of fact that were ultimately only capable of resolution by a court.
4. The Evaluation then stated that it was based on the materials provided by the parties and represented Ms Cheeseman's opinion as to the likely outcome of the issues identified, having regard only to the materials provided, without taking into account any additional evidence and in particular oral evidence that may be led should the dispute become the subject of court proceedings. The Evaluation stated that any future determination of the issues in dispute by a court would "depend on the application of the law to the facts as found at trial". Finally, the Evaluation confirmed that both in determining the facts and in interpreting the effect of the documentary evidence, there was room for reasonable minds to differ.
5. After setting out the detailed factual background, the Evaluation addressed the final questions posed by Moray & Agnew. The primary question was the identity of the person who was entitled to the Proceeds payable under the Policy. The Evaluation expressed the view that, at the time of Martin's death, the Company retained legal ownership of the Policy but equitable ownership had been assigned to Martin in 2005 and, upon his death, became an asset of his estate. Therefore, Jennifer, as his executrix, was entitled to be paid the Proceeds under the Policy in accordance with the terms of Martin's will.
6. The Evaluation expressed the view that the effect of the events of 2005 was that the Company assigned the beneficial interest in the Policy to Martin in consideration of Martin undertaking to meet premium payments. It stated that, where the formalities necessary to effect a legal assignment of a life insurance policy are not observed, the assignment was still capable of operating as an equitable assignment of the owner's interest in the Policy. The Evaluation said that the absence of a minute or board resolution recording the decisions made by the Company was not definitive and did not displace the inference that arose from the whole of the surrounding circumstances that the directors were in agreement. The Evaluation said that the material gave rise to the inference that the Company abandoned the Policy and either agreed to, or acquiesced in, Martin assuming equitable ownership on the basis that he met all premium contributions from that time forward. Therefore, the Evaluation said, Martin became beneficially entitled to the Policy from the date on which he assumed liability for the payment of premiums in about mid-2005.
7. In response to several specific questions raised by the parties, the Evaluation expressed the view that the net effect of the materials was that, in 2005, Peter and Martin, the directors of the Company, agreed that the Company would cease to maintain the Policy and that Martin, in return for assuming liability for the payments of premium, would take the benefit of the Policy. She also expressed the view that, if the decision that Martin take over the Policy was made by him in his capacity as managing director, that decision was within his authority, having regard to the fact that the antecedent decision that the Company would no longer make premium payments was a decision with which both the directors of the Company agreed. She also said that, in any event, based on Peter's continuing involvement in the business of the Company, there was a clear inference that the Company consented to or acquiesced in that course of action.
8. The minutes of a meeting of the directors of the Company held on 25 March 2014 record that the resolution of "insurance matter" was imminent. The minutes record that Michelle and John advised that they "accept the Policy does belong to the estate of [Martin and that the transfer of funds to the estate was to be undertaken "in such a manner as to ensure no income or capital gains tax liability for [the Company]". On 3 April 2014, Jennifer's solicitors wrote to the Company on her behalf, in her capacity as executrix of Martin's will. The solicitors said that the contention of Martin's estate was that, while the Company had at all material times been the legal owner of the Policy, the equitable and beneficial owner of the Policy at the time of Martin's death was with Martin himself. The solicitors said that Jennifer understood that her co-directors now accepted that contention and pressed the Company "to deal with this matter" and instruct Moray & Agnew "to avoid further loss". Those minutes and the letter from Jennifer's solicitors must be understood in the light of the Evaluation.

The Indemnity Deed

1. The Indemnity Deed is dated 20 May 2014 and is expressed to be a deed made between Jennifer and the Company. It recites that the Company was the owner of the Policy, that Jennifer is the executor and trustee of Martin's estate, that the parties had agreed that until 2005 the premiums for the Policy were paid by the Company and that in, and subsequent to, 2005 events occurred that have raised issues regarding "entitlement to the proceeds from the [Policy]". The Indemnity Deed then recites that the parties had jointly obtained advice of counsel on respective entitlement to the Proceeds from the Policy "as a result of which" the parties had agreed to enter into the Indemnity Deed.
2. The pivotal provision of the Indemnity Deed is cl 2, which provides as follows: The Company will promptly claim upon and account to [Jennifer] for the whole of the proceeds of the [Policy]. Clause 2 is under the heading "Indemnified Event". The term "Indemnified Event" is defined in cl 1 as meaning "the Company claiming on the Insurance Policy for the purposes of and attending to payment of the proceeds thereof to the indemnifier", being Jennifer.
3. Clause 3 of the Indemnity Deed is headed "Indemnity" and provides that Jennifer will unconditionally and irrevocably indemnify the Company against any and all demands, claims, suits, actions, liabilities, costs and expenses that may be made or brought against or suffered or incurred by the Company in respect of the Indemnified Event or the payment by the Company to Jennifer in respect of the Indemnified Event. Clause 4 deals with the preservation of the Company's rights and relevantly provides that, if any transaction or payment under the Indemnity Deed is void, voidable or otherwise unenforceable or refundable, the Company is to be entitled as against Jennifer to all rights under the Indemnity Deed and any collateral rights or security that it would have had if the transaction or payment had not occurred or been made, as the case may be. Jennifer was also required to do all things and sign such documents necessary to restore to the Company its rights under the Indemnity deed or any collateral rights or security immediately before that transaction or payment.
4. Clause 8, under the heading "General", relevantly provides that the Indemnity Deed may only be varied or replaced by a deed executed by the parties. Clause 8 also provides that a right in favour of the Company or a breach of an obligation of Jennifer under the Indemnity Deed could only be waived by an instrument duly executed by the Company. It also provides that the rights of the Company under the Indemnity Deed were to be cumulative and were to be in addition to any of its other rights.
5. Somewhat anomalously, no such provision was provided for waiver of rights of Jennifer. Of course, the only right conferred on Jennifer was the promise by the Company contained in cl 2 to claim upon, and account to Jennifer for, the whole of the Proceeds under the Policy.

The Private Ruling

1. On 17 June 2014, the solicitors acting for the Company wrote to Jennifer's solicitors, saying that the Company had agreed to claim the Proceeds and account to Jennifer. However, the letter said that it was the solicitors' understanding that capital gains tax would be payable if the Proceeds were paid to someone who was not the "original beneficial owner" and that person paid money or gave other consideration for the acquisition of any right or interest in the Policy. The letter said that, for the purposes of settling Jennifer's claim, the Company was prepared to accept that it was not the "beneficial owner" of the Policy as, on the advice of counsel, Martin's estate was the equitable owner and beneficially entitled to the Proceeds.
2. The letter of 17 June 2014 went on to say that Colonial Mutual had already indicated that it would not accept an assignment of the Policy after Martin's death and that, therefore, it would seem that the Company would have to be the claimant. The letter said that there were issues in holding that Martin, or Martin's estate, was the assignee as it was difficult to pinpoint a point in time where there had been an acquisition by Martin of "the rights or interest in" the Policy. The letter said that the Board was concerned about possible tax implications and how the payment should best be treated and that accurate advice in that regard was also of prime benefit to Jennifer. The letter said that it was therefore proposed by the Board of the Company that advice be sought as to:

• the effect of the Board's determining that there had been an assignment of the equitable interest in the Policy to Martin;
• how the Company or Jennifer be best advised to claim the Proceeds, and
• how the claim under the Policy should properly be dealt with in the records of the Company. The letter sought confirmation from Jennifer that the costs of seeking tax advice be met out of the Proceeds of the Policy.

1. On 23 June 2014, Mr Darren Shone, a taxation partner of PKF Lawler Partners Pty Ltd, sent an email to Mr McKensey setting out, inter alia, the scope of tax advice that he was asked to provide as well as an estimate of his costs. On 8 July 2014, Mr Shone wrote to Mr McKensey giving advice concerning the taxation consequences of receipt of the Proceeds under the Policy, when received by the Company. He advised that, given the sums involved and the history of the matter and the related uncertainty, a private ruling by the Australian Taxation Office (ATO) should be applied for, addressing the following issues:

• whether there was a beneficial ownership change of the Policy for no consideration that would qualify for capital gains tax (CGT) exemption, based on the legal opinion that an equitable interest had been established in the Policy, so that the payment received by the Company was merely as agent for Martin's estate;
• alternatively, whether the payment of the Proceeds to Martin's estate would be an ordinary dividend under s 44(1) of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act);
• alternatively, whether the payment by the Company be regarded as a payment under s 109C of Div 7A of the 1936 Act by the Company and therefore be subject to income tax in the hands of the recipient as a deemed dividend;
• if so, whether the provisions of s 109J of Div 7A could be applied so that the payment would not be a deemed dividend and, if so, whether that would require the Company to be directed by a Court that it recognises the beneficial interest in the Policy being held by Martin's estate; and
• if the payment of the Proceeds is not excluded from Div 7A, whether the ATO would exercise a discretion to allow the dividend to be franked.

1. Division 7A is concerned with distributions to entities connected with a private company and consists of ss 109B to 109ZE. Under s 109C(1), a private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder, or a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time. The dividend is taken to equal the amount paid.
2. Under s 109C(3), payment to an entity includes a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity. However, under s 109C(3A), a loan to an entity is not a payment to the entity and payments converted to loans before the private company's tax return lodgement day are treated as loans. Further, under s 109J, a private company is not taken under s 109C to pay a dividend because of the payment of an amount, to the extent that the payment discharges an obligation of the private company to pay money to the entity and is not more than would have been required to discharge the obligation had the private company and entity been dealing with each other at arm's length.
3. The Company was a private company for the purposes of Division 7A. Mr Shone advised that a private ruling should be sought after the receipt of the Proceeds from Colonial Mutual by the Company but before the Proceeds were distributed by the Company. He advised that, if the Proceeds were required, they should be lent pending the receipt of the private ruling from the ATO. He recommended clear documentation of the loan and terms prior to the drawing of funds, and recommended that such a loan be drawn up in compliance with the terms of Div 7A.
4. Mr Shone then gave his advice as follows:

• the Policy was acquired for a capital purpose;
• there was no actual assignment of the Policy to be able to benefit directly from the CGT exemption in Martin's estate, in that there was only an intention to assign, which had created an equitable interest in the Policy that may be capable of enforcement against the Company in a Court of equity;
• accordingly, the CGT exemptions for the assignment of a Policy to another for no consideration cannot be applied;
• the benefits paid to the Company would benefit from the CGT exemption and would not be subject to income tax, on the basis that the Proceeds of the Policy should be recorded against a reserve in the financial statements of the Company, rather than remain included in retained profits;
• the payment by the Company should not be regarded as being an ordinary dividend and taxable under s 44(1) of the 1936 Act since it was not payable to a shareholder but rather to an associate of a shareholder, being Martin's estate;
• if the payment was made as a dividend to a shareholder, it could be franked;
• the payment of the Proceeds under the Policy would constitute a payment for the purposes of Div 7A and therefore potentially would be a deemed dividend under Div 7A;
• s 109J has potential application to make the payment exempt from Div 7A and therefore not a deemed dividend in the hands of the recipient where the Company is under an obligation to pay the amounts;
• if the payment of the Proceeds would be a dividend or deemed dividend, it would be taxable in the hands of the recipient as income, and would be frankable as a deemed dividend if the Commissioner agrees;
• consideration could be given to converting the payment to a loan and having the taxation consequences by way of deemed dividends spread over a period of seven or 25 years or liquidating the Company so that the equity reserved created by the Company on receipt of the Proceeds can be distributed as Proceeds and benefit from the concessional tax treatment afforded to capital gains.

1. On 11 July 2014, Mr Shone made an application to the ATO for a private ruling relating to the appropriate taxation treatment of the Proceeds under the Policy. The application was made on behalf of the Company, Jennifer, in her capacity as executrix of the will of Martin, and Jennifer, in her own right. On 16 September 2014, the ATO provided the following ruling:
2. There was no change in the beneficial ownership of the Policy from the Company to the estate of Martin that would qualify for the CGT exemption under s 118-300 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act).
3. The receipt of the Proceeds by the Company would benefit from the CGT exemption under s 118-300 of the 1997 Act.
4. The payment by the Company to Martin's estate of the amount representing the Proceeds received under the Policy would be an ordinary dividend under s 44(1) of the 1936 Act. The ruling was expressed to apply for the periods ending 30 June 2015, 30 June 2016 and 30 June 2017.
5. The ruling concluded by observing that the applicants for the ruling were in the process of determining their rights in relation to the Proceeds of the Policy. The ruling referred to correspondence dated 11 August 2014, which is not in evidence, to the effect that the applicants for the ruling made the following statement: The treatment for the proceeds will depend upon the outcome of the ruling. The proceeds will be received by [the Company] in the 2014/15 income year. If the proceeds can be treated as a life insurance claim to [Jennifer] and paid out with the benefit of an exemption they will be immediately paid to [Jennifer]. Likewise, if the s 109J exemption from Div 7A is found to apply, then the proceeds will be paid to [Jennifer]. If neither of the above applies, and the amount on distribution would be a dividend under s 44, then the funds will be retained in [the Company] and may be distributed as dividends at a later time.
6. In its reasons for the decision contained in the ruling, the ATO expressed the view that the Company was the beneficial as well as legal owner of the Policy and the Proceeds. The reasons asserted that Colonial Mutual would only recognise the Company as the owner of the Policy and would only pay the Proceeds to the Company. The ATO also observed that there was no evidence to indicate that Martin explicitly expressed his intention to create a trust. Therefore, an express trust did not exist in relation to the Policy. The reasons stated that Martin, as managing director of the Company, would have received on a regular basis paperwork in relation to the Policy that would have specified the owner and beneficiary of the Policy. Therefore, it was unlikely that he would have assumed that ownership of the Policy or the beneficiary of the Policy had changed. The mere intention to transfer the Policy, without actually doing so, was said to be insufficient for a change in beneficial ownership to occur.

The Development Agreement

1. The Development Agreement is dated 25 November 2014. The parties to it are Michelle, John, Jennifer and the Company. After reciting the incorporation of the Company, the business of the Company and the fact that each of Michelle, John and Jennifer owns 200 shares in its capital, the Development Agreement recites that proceedings are being commenced in the Supreme Court for declaratory relief in relation to the Policy and for which legal advice had been obtained confirming that "Martin's estate (and/or Jennifer) is entitled to the Proceeds". The Development Agreement also recites that Jennifer had agreed to lend $1 million "from the Policy Proceeds" and that the parties had agreed to continue the operation of the Company's business and undertake necessary building and refurbishment works for that purpose until 30 June 2016, when they intended reviewing the operation of the Company's business.
2. While the Development Agreement is expressed to be an "agreement", it is also expressed to be signed, sealed and delivered by each of the parties. Further, in cl 1, which deals with definitions and interpretation, reference is made to "this deed". References are also made in other clauses to "this deed". For example, cl 10 provides that, as between the parties, if there is any inconsistency between the provisions "of this deed" and other nominated documents, the other documents are to be read subject "to this deed" and "the provisions of this deed", are to prevail to the extent of the inconsistency. Again, cl 15.4 provides that "this deed" may be executed in any number of counterparts.
3. It is clear that the Development Agreement operated as a deed by virtue of s 38 of the Conveyancing Act 1919 (NSW). That has some significance in relation to the provision in the Indemnity Deed that the Indemnity Deed may only be varied or replaced by a deed executed by the parties. Thus, cl 15.7 of the Development Deed provides as follows: All oral representations, communications and prior deeds in relation to the subject matter are merged in and superseded by this deed and the Succession Deed. [Emphasis added] The Company attaches critical significance to that provision, as will appear below.
4. As indicated above, cl 1 deals with "definitions and interpretation". Clause 1.3 provides that headings are for convenience of reference only and do not effect interpretation. Under cl 2, the rights and obligations created by the Development Agreement were to commence on, and were enforceable from, the execution date of the Development Agreement or such later date as might be agreed by the holders of shares in the Company. There has been no suggestion that there was any such agreement.
5. Clause 3 of the Development Agreement provides that the parties will enter into a "Succession Deed" in the terms of the form of deed annexed to the Development Agreement. The Succession Deed was intended to govern the relationship between the Company, on the one hand, and Michelle, John and Jennifer, in their capacity as shareholders of the Company, on the other. It was also intended to govern the relationship of each of Michelle, John and Jennifer with each other.
6. For reasons that will be mentioned later, it is relevant that the Succession Deed contained the following in cl 16.7: All oral representations and communications in relation to the subject matter are merged in and superseded by this deed. There is significance in the fact that, in contrast to cl 15.7 of the Development Agreement, cl 16.7 of the Succession Deed makes no reference to "prior deeds".
7. Under cl 4, the parties agreed that the Company would enter into a facility with National Australia Bank Ltd (NAB) for up to $9,920,000, for the purpose of undertaking certain Building Works (the Building Works) and that each of Michelle, John and Jennifer would guarantee the Company's obligations in respect of that facility. The parties also agreed that the Company would proceed with the Building Works in a proper and businesslike manner. Clause 5 dealt with the scope of the Building Works.
8. By cl 7 of the Development Agreement, each of Michelle, John and Jennifer was to contribute $500,000 to the Company by way of deferred shareholder loans by instalments on 1 April 2015, 1 May 2015 and 1 June 2015. Clause 7 provided for the payment of interest and the priority of the loans as against loans from any banks or other institutional lenders and the loan to be made by Jennifer under cl 6, to which I shall refer below. Clause 7 provided that, in the event that one of the shareholders failed to contribute any instalment of the deferred loan, the others would be entitled to acquire the shares of the defaulting shareholder for a price calculated in accordance with the Succession Deed.
9. Under cl 8, the parties were to use their best endeavours to refinance the facility to be provided by NAB as referred to in cl 4. If any holder of shares did not accept or support any proposals for refinancing, that shareholder was to be deemed to have given notice under the Succession Deed whereby the other holders of shares would have an option to acquire the first shareholders' shares in the capital of the Company.
10. Clause 6 of the Development Agreement is of critical relevance. By cl 6.1, Jennifer was to provide a loan of $1 million to the Company by instalments on 1 April 2015, 1 May 2015 and 1 June 2015. The loan was to be second in priority after the facility from NAB referred to in cl 4 and was to be secured by a mortgage over properties owned by the Company. The amount of the facility from NAB was not to exceed the sum of $10,816,000 without Jennifer's consent. Jennifer's loan was to be guaranteed by each of John and Michelle, who agreed to indemnify Jennifer from any loss or damage by reason of the Company's breaching the terms of Jennifer's loan. Interest was to be payable at the rate specified and the loan was to be repayable on the earlier of one of three alternatives, being the sale of Jennifer's shares in the Company, the sale of the principal property of the Company and the date of 1 April 2018. However, the Company was to have the right to early repayment of the loan without penalty in the event of any refinance by the Company of its borrowings.
11. Clauses 6.2 and 6.3 of the Development Agreement are of particular importance and were in the following terms: 6.2. Source of Funds The parties acknowledge that: (a) the funds to be supplied by Jennifer for the Loan are the Policy Proceeds; (b) the provision of the Loan by Jennifer (either as the legal personal representative of Martin's estate or personally depending on the orders in the Court Proceedings) is subject to her receiving the Policy Proceeds; (c) they will duty authorise and do all things reasonably required for the release of $1,000,000.00 from the trust account of Moray & Agnew to make each of the payments of Jennifer's Loan in a timely manner; (d) such payments will be in the Company's name until the conclusion of the Court Proceedings when they will be transferred to the name of either the estate of the late Martin Hawcroft or to Jennifer personally in accordance with the orders in the Court Proceedings and interest will be paid thereon as provided above from the date of advance. 6.3. Undertaking So as to properly effect the agreements between the parties, the parties agree and undertake as follows: (a) the Company will join in the Court Proceedings; (b) each of the Shareholders agree that neither they nor the Company will adduce any evidence in the Court Proceedings above and beyond that provided to Counsel in the course of deliberations to provide her opinion and evaluation as the respective entitlement of the and expeditiously deal with all matters in relation to the Court Proceedings; (c) upon determination of the Court Proceedings the parties will undertake all necessary steps to effect a transfer to [a] party nominated by the Court as entitled to the Policy Proceeds; (d) until the date of such determination interest will continue to accrue for the benefit of the ultimate beneficiary of the insurance policy.
12. The construction of those provisions gives rise to difficult questions as to what question the proposed court proceedings were intended to resolve. The Company contends that the proceedings were to resolve the question of whether Jennifer or the Company was the beneficial owner of the Policy. Jennifer contends that they were to resolve only whether Jennifer was entitled in her personal capacity or as executrix of Martin's will.

The Proceedings in the Equity Division

1. The proposed court proceedings were commenced by summons filed on 1 May 2015. Jennifer was named as the plaintiff and the Company was named as the defendant, as was contemplated by cl 6.3(a). There was no indication that Jennifer was suing other than in her personal capacity. The relief claimed was, first, a declaration that, as at the time of his death, Martin was the beneficial owner of the Policy. Secondly, the relief claimed a declaration that: (a) the Company holds the Proceeds of the Policy on trust for Martin's estate; or (b) Martin's estate is beneficially entitled to the Proceeds; or (c) the Company is otherwise liable in equity to account to Martin's estate for those Proceeds. Those claims clearly indicate that Jennifer was suing in her capacity as executrix.
2. As the legal owner of the Policy, the Company may have been a necessary party. If it was joined only for that reason, it would be expected to have filed a submitting appearance, since it had no interest in the outcome. There was no suggestion in the prayers for relief that Jennifer was personally entitled to the Proceeds. Further, if the purpose of the proposed court proceedings was to determine who was entitled as between Jennifer, in her own right, and Jennifer, as executrix, it would have been necessary to join a party to represent the estate. Thus, it is clear enough that the only question to be determined by that summons was whether Martin's estate was entitled to the Proceeds as against the Company.
3. In the amended summons filed on 13 August 2015, Jennifer was named as plaintiff in her capacity as executrix of Martin's estate. In addition, an additional prayer was included seeking an order compelling the Company to comply with its obligation under cl 2 of the Indemnity Deed to account for the whole of the Proceeds or alternatively to pay damages to Jennifer for breach of that obligation. Clearly, there was still no question raised in the amended summons as to whether Jennifer personally or Jennifer as executrix of Martin's estate was entitled to the Proceeds. The only contradictor was the Company.
4. The amended summons was supported by a statement of claim filed on 9 November 2015. The relief claimed in the statement of claim was the same as that claimed in the amended summons. Contrary to the provisions of the Uniform Civil Procedure Rules 2005 (NSW), paras 7 to 30 of the statement of claim set out much of the evidence that might be relied upon to demonstrate that there had been an assignment to Martin by the Company.
5. Relevantly for present purposes, the statement of claim then made allegations to the following effect:
6. On 20 May 2014, Jennifer and the Company entered into the Indemnity Deed.
7. By cl 2 of the Indemnity Deed, the Company agreed promptly to claim upon and account to, Jennifer for the whole of the proceeds of the Policy.
8. On 17 July 2014, in response to a claim by the Company, Colonial Mutual paid to the Company the whole of the proceeds of the Policy.
9. On 25 July 2014, the whole of the proceeds of the Policy was paid into the trust account of Moray & Agnew.
10. In breach of cl 2 of the Indemnity Deed, the Company failed to account to Jennifer for the whole, or any part, of the proceeds of the Policy and denied any liability to pay those funds, or any part of those funds, to Jennifer.
11. By reason of the matters pleaded in pars 7 to 30, in or about 2005, or alternatively on a date before 30 April 2012, the Company assigned to Martin in equity the Policy or the rights as insured under the Policy.
12. At the time of his death on 30 April 2012, Martin was the beneficial owner of the Policy, or of the rights as insured under that Policy.
13. Following the death of Martin and the grant of probate, the Policy, or the rights as insured under the Policy, passed to Jennifer in her capacity as executrix of the estate of Martin, as an asset of that estate. 39 The estate of Martin is beneficially entitled to the whole of the proceeds of the Policy 40 The Company is liable to account to Jennifer, in equity, for the whole of the proceeds of the Policy.
14. Relevantly for present purposes, in its defence, filed on 17 November 2015, the Company did not admit the allegations made in pars 30 and 35 and denied the allegations made in pars 36 to 40. However, the Company admitted that it entered into the Indemnity Deed and the Development Agreement but said that it entered into those instruments in reliance upon the advice of Ms Cheeseman, as the jointly appointed legal representative of the parties. The Company asserted that, in those circumstances, the Indemnity Deed and the Development Agreement were entered into under a bilateral or mutual mistake and that each is liable to be set aside.

Equitable Assignment

1. As I have said, the primary judge concluded that there was no equitable assignment of the Policy by the Company to Martin prior to his death. His Honour made no error in that regard.
2. Clearly enough, at some time in the second half of 2005, Martin decided to pay the premiums on the Policy and, in effect, he paid the premiums in respect of the Policy from mid-2005 until the time of his death, by having his loan account with the Company debited with the amount of the premiums when paid by the Company. An inference should be drawn that Peter was aware of such arrangements.
3. However, the evidence summarised above leads inevitably to the conclusion that there was no dispositive act by the Company. In the absence of some dispositive act by the Company, the only basis upon which a finding could be made that there had been an assignment in equity of the benefit of the Policy would be that a contract had been made between the Company and Martin, whereby it was agreed that, in consideration of Martin henceforth paying the premiums in respect of the Policy, the Company would assign the benefit of the Policy to Martin or would hold the Policy or the benefit payable under it on trust for Martin.
4. While mutual promises are the essence of a contractual relationship, the promises need not be express. An agreement whereby mutual obligations are assumed can be inferred from circumstances if the conduct of the parties is explicable only on the basis of a binding agreement. Thus, a contract may be inferred from the acts and conduct of the parties if the conduct, viewed in the light of the surrounding circumstances, shows a tacit understanding or agreement and is capable of establishing all the essential elements of an express contract. However, anterior promises should not be inferred for conduct that represents no more than an adjustment of the relationship of the parties in the light of changing circumstances. [1] The question is whether, in all the circumstances, it can be inferred that mutual assent has been manifested. That depends upon what a reasonable person in the position of the parties would think as to whether there was a concluded bargain. [2]
5. Having regard to the decision made at the meeting of 8 March 2005, it is clear enough that Martin, whether as managing director or otherwise, was not authorised to make a contract with himself and without the participation of Peter. It is somewhat unfortunate that Peter did not give evidence. It appears that there may have been some falling out between Peter, on the one hand, and his three siblings, on the other, that led to his giving up his interests in the Company. That may be justification for drawing no adverse inference against either party for the failure to adduce evidence from Peter.
6. Nevertheless, the evidence outlined above does not point to any time at which an inference could be drawn that such an agreement had been made. It is clear enough from the evidence that Martin was aware of the formalities required for a transfer or assignment of the benefit of the Policy and it would be possible to speculate as to why Martin did not take any formal steps to formalise an agreement or to effect a transfer of the Policy into his name. Nothing is to be gained by speculating as to why nothing formal was done. The inescapable fact is that nothing was done in that regard. Further, the only evidence of consideration of the question by the directors of the Company is to the effect that the Company and Jennifer would have a half interest in the Policy. There is no evidence that anyone acting on behalf of the Company expressly turned a mind to the possibility that Martin was to become the beneficial owner of the Policy. There is no basis for drawing an inference that anyone did so. It is necessary to infer a concluded bargain, not merely a common intention or expectation.
7. However, in the circumstances, it is not possible to draw an inference that there were communications involving the Company that could give rise to a binding contract between the Company and Martin. In the absence of any evidence beyond that summarised above, it is not possible to conclude that there was any manifestation of mutual assent on the part of Martin and the Company. It is not possible to conclude that either the Company or Martin could think that there was a concluded bargain that the Company would assign the Policy to Martin.

Construction of the Instruments

1. The primary judge concluded that, in the absence of mistake, the effect of the Indemnity Deed was to impose an obligation on the Company to pay to Jennifer the amount of the Proceeds. His Honour rejected the contention advanced on behalf of the Company that the obligation imposed by cl 2 of the Indemnity Deed should not be enforced because it was entered into by Jennifer and the Company under a common mistake.
2. In the appeal, the Company contended that any obligation on the part of the Company under cl 2 of the Indemnity Deed was superseded by and merged in the Development Agreement, by the operation of cl 15.7 of the Development Agreement. The Company contended that the effect of cl 15.7 was that cl 2 of the Indemnity Deed was no longer effective and that, on the proper construction of cll 6.2 and 6.3 of the Development Agreement, the entitlement of the Company, on the one hand, and Jennifer or Martin's estate, on the other, was to abide the outcome of the proceedings to be commenced in the Supreme Court. It is not clear to what extent, if at all, that that contention was advanced to the primary judge. However, Jennifer accepts that it is open to the Company to advance the contention on the hearing of the appeal. Indeed, the primary contention before his Honour was that the Development Agreement should be set aside.
3. The Indemnity Deed does not expressly address the question of beneficial ownership of the Policy or the Proceeds, except to the extent that a recital refers to the Opinion. Even then, the recital does not say anything about the substance of the Opinion. Rather, it simply says that, "as a result of" the Opinion, the parties have agreed to enter into the Indemnity Deed. Clause 2 then requires the Company to "claim upon and account to [Jennifer] for the whole of the [Proceeds]". However, nothing is said about the basis upon which the Company was to "account to Jennifer" for the Proceeds.
4. Clause 2 appears to say two things, as follows:

• the Company will promptly claim upon … the Insurance Policy;
• the Company will promptly … account to [Jennifer] for the whole of the Proceeds of the Insurance Policy. The requirement for the Company to claim on the Policy was doubtless included because the Company was the legal owner of the Policy and was the only party who could make a claim on Colonial Mutual under the Policy. The intended meaning of the second obligation, however, is not entirely clear.

1. One might have expected a provision in the Indemnity Deed whereby the Company and Jennifer agreed that the Proceeds to be obtained by the Company upon making its claim would be owned by Jennifer. That may have been what was intended by providing that the Company would "account to" Jennifer for the Proceeds, meaning that the Company would transfer or assign the Proceeds to Jennifer. Thus, it may be possible to construe cl 2 as a promise by the Company to pay the whole of the Proceeds to Jennifer as her property. That appears to be the way in which the primary judge construed the words.
2. It is necessary to consider the effect of the Development Agreement against that background, bearing in mind that the Development Agreement was made after Jennifer and the Company had jointly applied for a private ruling from the ATO. In connection with that application, the ATO was told that, if the Proceeds could be treated as a life insurance claim and paid out to Jennifer with the benefit of a CGT exemption or if a s 109J exemption from Div 7A were to apply in respect of such a payment, the Proceeds would be paid to Jennifer. On the other hand, if neither of those exemptions was available, and the amount paid was to be treated as a dividend under s 44 of the 1936 Act, then the Proceeds would be retained in the Company. The parties then received the private ruling indicating that the view taken by the ATO was that since there had been no assignment of the beneficial interest in the Policy to Martin, the Proceeds would be treated as an ordinary dividend if paid to Martin's estate.
3. Thus, the Development Agreement recited that proceedings were being commenced for declaratory relief that Martin's estate, or Jennifer in her own right, was entitled to the Proceeds. Reference was made in the recitals to the obtaining of legal advice but, as with the Indemnity Deed, the substance of the legal advice was not stated. Each of cl 6.2 and cl 6.3 then refers to the proposed Court proceedings.
4. One possible view of the Development Agreement is that it was made on the assumption that the Court proceedings were intended to determine simply whether it was Jennifer, in her capacity as executrix of Martin's will, or Jennifer, in her own personal capacity, who was entitled to the proceeds. Thus, cl 6.2(a) referred to the provision of the proposed $1,000,000 loan to the Company by Jennifer, either as the legal personal representative of Martin or personally, depending on the orders in the Court proceedings. Further, cl 6.2(d) contemplated that payments of instalments of Jennifer's loan were to be made "in the Company's name" until the conclusion of the Court proceedings, when the "payments" were to be transferred to the name of either Martin's estate or Jennifer personally, in accordance with the orders made by the Court. Those provisions suggest that the parties had in mind that the only result of the Court proceedings would be that either Martin's estate or Jennifer personally would be entitled to the Proceeds.
5. Clause 6.3(b) of the Development Agreement also suggests that an assumption underlying the Development Agreement was that the result of the Court proceedings would confirm the substance of the Opinion and the Evaluation, namely, that Martin's estate was beneficially entitled to the Proceeds. Thus, the parties agreed that, in the Court proceedings, they would not adduce any evidence above and beyond that provided to Ms Cheeseman in the course of the deliberations that led to the Opinion and Evaluation. It appears that the parties may have expected that the result of the proposed Court proceedings would be to make a declaration that Jennifer was entitled to the Proceeds either personally or as executrix of Martin's will.

Mistake

1. The primary judge concluded that there was no operative common mistake. His Honour considered that, while the parties may have been mistaken as to whether it was safe to contract on the basis of the Opinion and Evaluation, there was no promise or warranty and litigation was contemplated by them. While it was not necessary for his Honour to determine whether the effect of the relevant instruments was that the Company was to bear the risk that the Opinion or Evaluation was wrong, his Honour could see no material to support that contention. On the other hand, his Honour could not see how the Development Agreement had the effect of establishing that the correctness or otherwise of the Opinion and Evaluation was a condition precedent or precondition of either of those instruments.
2. In the light of the conclusion reached above concerning the proper construction and effect of the Development Agreement, it is unnecessary to determine whether or not the two instruments were entered into on the basis of a common mistake, namely, the mistaken belief, based on the Opinion and Evaluation, that Jennifer, in her capacity as executrix of the estate of Martin, was entitled to the Proceeds. It is also unnecessary to consider the question of whether, if there were an operative common mistake, that mistake would render the Indemnity Deed and Development Agreement void or was such that equity would give relief.
3. The primary judge concluded that even if he was wrong as to the existence of an operative common mistake, he would not have found that the Instrument should be set aside. In that regard, his Honour considered first the position with respect to common mistake at law and then the position in equity.
4. As to the position at law, the primary judge observed that common mistake was traditionally only a vitiating factor at common law in two cases, namely, res sua, where a buyer contracted to buy something that the buyer already owned, and res extincta, where the buyer contracted to buy something that did not in fact exist. In each case, the purported contract was void at law although, as the law developed, a third category of "fundamental common mistake" had emerged as a further case where the common law might declare a contract void.
5. The primary judge then considered the proposition that mistake, like accident or fraud, could affect the conscience, such that it would be unjust for a court of equity to allow a contract founded upon a mistake to stand. However, his Honour observed, equity only gave relief in a limited number of fact situations. Ultimately, his Honour concluded that, since both parties were represented by solicitors, neither sought to take advantage of the other and neither could be considered vulnerable, there was no unconscionable conduct and no special reason advanced as to why equity should interfere.
6. Various kinds of common mistake might have the effect of vitiating the consensus on the part of the parties that is required for any contract. For example, apart from the kinds of mistake identified by the primary judge, if the parties are not ad idem as to the subject matter of the contract or if there is a mistake as to the identity of a party to the contract, there may be a basis for concluding that there is no contract.
7. The contention advanced on behalf of the Company is that each of the Indemnity Deed and the Development Agreement was entered into on the basis of a common assumption by Jennifer and the Company, induced by the Opinion and the Evaluation, that the conduct of Martin in 2005 had resulted in an enforceable contract for the assignment of the benefit of the Policy. It may be that both Jennifer and the Company assumed that the opinion expressed by Ms Cheeseman in the Opinion or Evaluation was correct. However, there is nothing in the language of either the Indemnity Deed or the Development Agreement to indicate that there was an assumption on the part of each of them that was fundamental to the contract to the effect that Martin had become the beneficial owner of the Policy, such that neither would have entered into either of the instruments in question if some doubt had been cast on the correctness of the conclusions expressed by Ms Cheeseman. It is unnecessary to say anything further on that question.

Trust and Estoppel

1. The statement of claim also made allegations of a constructive or implied trust and equitable estoppel in support of the relief sought in the amended summons. On the hearing of the appeal, it was conceded on behalf of Jennifer that, if she succeeded on her contention that there had been an equitable assignment of the Policy, it would be unnecessary to determine whether there was a constructive or implied trust or an operative estoppel. It was also conceded that, if Jennifer failed in her contention as to equitable assignment, the claims of constructive or implied trust would also fail. Accordingly, it is not necessary to deal with those matters.
2. To the extent that some equitable estoppel was relied on, it was limited to the amounts debited to Martin's account for the premiums paid by the Company. It is difficult to see any unequivocal representation by the Company that could support any estoppel in favour of Martin or his estate. Further, the evidence outlined above in relation to the alleged assignment does not demonstrate conduct engaged in by Martin to his detriment that would support an estoppel against the Company.

Conclusion

1. It follows from the above, that the primary judge erred in making the orders that he made. The appeal should therefore be allowed and the orders made by his Honour should be set aside. In lieu thereof there should be a declaration that the Proceeds are owned by the Company.
2. In the ordinary course, costs would follow the event and Jennifer should be required to pay the Company's costs of the appeal and at first instance. However, in circumstances where the question on which the Company has succeeded was not argued before the primary judge, the appropriate course is to give the parties the opportunity to make submissions on the question of costs.
3. I propose the following orders: 1. Allow the appeal from the orders made in the Equity Division on 5 May 2016 and 9 September 2016. 2. Set aside the orders entered on both of those dates and in lieu of those orders: 1. order that the amended summons filed by the plaintiff in the Equity Division on 13 August 2015 be dismissed; 2. declare pursuant to the cross-summons filed on 13 July 2015 that the cross-claimant, Hawcroft General Trading Co Pty Ltd, is entitled both legally and beneficially to the proceeds of CommInsure Life Policy No 0049702 issued by The Colonial Mutual Life Assurance Society Limited. 1. Direct the parties to file and serve within 21 days of these orders such submissions as they wish concerning the costs at first instance and the costs on the appeal together with any submissions they may wish to make on the terms of order (2)(b).

Endnotes

1. See Integrated Computer Services Pty Limited v Digital Equipment Corp (Aust) Pty Limited (1988) 5 BPR 11,110 at 11,117-118.
2. See Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 at [81] DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 11 May 2017