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[2013] NSWSC 745
Supreme Court of NSW
2012-05-24
Brereton J
Original judgment source is linked above.
Judgment 1Between 1988 and 2005, the first plaintiff and first-cross defendant David Richard Hawes, and the first defendant and first cross-claimant Trevor Laurence Dean, together engaged in approximately fifteen property development projects. They had no overarching partnership or joint venture agreement, and undertook each project as a discrete venture, utilising a variety of corporate and trust structures. One such structure was the fifth defendant Gallwey Pty Limited, in which their interests were held respectively by the second plaintiff Hawes Investments Pty Limited as the trustee of the Hawes Family Trust, and the second defendant T & B Dean Investments Pty Limited as trustee of the Dean Family Trust. For convenience and without intending any disrespect, I refer compendiously to the Hawes interests as "Hawes", and to the Dean interests as "Dean". 2In 2004 to 2005, Mr Hawes and Mr Dean decided to go their separate ways. To assist in the disentanglement of their affairs, they engaged the help of their accountants, Rhodes Docherty & Co. The separation of their affairs was effected by a series of settlement deeds and agreements dealing with the various structures, three of which - the Gallwey Deed, the Clydesdale Deed and the Warrawee Deed - are the subject of these proceedings. Originally in issue were the following claims and cross-claims arising out of the separation of their interests:
Christie St and the Gallwey Deed 3Hawes Investments and Dean Investments each held 50% of the units in the Gallwey Investment Trust, a unit trust of which Gallwey Pty Limited was the trustee and the assets of which comprised properties. 4In addition, Hawes Investments was the registered proprietor of suite 302, 118 Christie Street, St Leonards, being the land comprised in Lot 14 Strata Plan 60114; and Dean Investments was the registered proprietor of suite 301, 118 Christie Street, St Leonards, being the land comprised in Lot 13 Strata Plan 60114. Despite their separate ownership, suites 301 and 302 were not separated by a dividing wall, and were let to a single tenant who used them as a single business premises. Dean Investments and Hawes Investments had jointly borrowed $385,000 from Colonial First State Investments Limited ("Colonial"), originally in 1999, and renewed in 2002 and 2004. As security for the joint loan, Dean Investments had on 18 November 2004 given registered mortgage AB132529N over suite 301 to Colonial; and Hawes Investments had also on 18 November 2004 given registered mortgage AB132537P over suite 302 to Colonial. These mortgages were in substantially identical terms, referred to both Hawes Investments and Dean Investments as "borrowers" and Mr Dean, his wife Barbara Jean Dean, Mr Hawes and his wife Carol Elizabeth Hawes as "guarantors", and were cross-collateralised and contained cross-default provisions, such that a default under one mortgage was deemed to be a default under the other. Thus, each of Dean Investments and Hawes Investments had given separate mortgages to Colonial over their separately owned suites as security for their joint borrowing. 5Notwithstanding the separate ownership of suites 301 and 302, the parties routinely referred to those two properties, together with a third property (lot 14, 366 Sydney Road Balgowlah, being lot 14 in Strata Plan 62798) which was owned by Dean Investments and Hawes Investments as tenants in common in equal shares, as the Hawden Investment Partnership - although, despite the use of that nomenclature, no partnership returns were lodged, and income was separately recorded by Dean Investments and Hawes Investments in their returns. 6In unwinding their joint arrangements, and although each had solicitors acting for them (Curwoods (Mr Snelgrove) for Dean, and Staunton & Thompson (Mr Thompson) for Hawes), the parties made extensive use of the services of their accountants, and Rhodes Docherty played a major role in documenting the agreements reached - particularly the annexures that comprised calculations of the value transferred from, and consideration payable by, one party to the other. 7Negotiations for the division of Gallwey Investment Trust and the Hawden Investment Partnership assets appear to have commenced in about early January 2005, with a document prepared by Mr Docherty which (though not specifically referring to the Christie St property) proposed two exit options in respect of the Gallwey Investment Trust, namely:
Contribution 30Hawes Investments first invokes the doctrine of contribution, submitting that it and Dean Investments were joint obligors in respect of the Colonial loan; that there was nothing in the Gallwey deed to disturb the ordinary operation of the doctrine of contribution; and that there was nothing to indicate that Hawes Investments was to assume Dean Investments' obligation to repay its share of the loan. Accordingly, Hawes Investments claims that it has paid out a joint debt and is entitled to contribution from its co-obligor, Dean Investments. Hawes says that the terms of the Gallwey Deed do not affect the obligation to make contribution. 31The payment out by one joint obligor of a joint loan is a quintessential case for contribution. In this case, the essential question is whether the right to contribution was excluded or modified by the terms of the Gallwey Deed. The releases contained in clauses 3.5.2, 3.5.4 and 3.5.6 are far reaching. The respective rights and liabilities of the parties in connection with the Colonial loan and the mortgages that secured it are unquestionably within the scope of "dealings with the other solely concerning or relating to the Partnership and the Partnership Real Estate" within clause 3.5.2; and a claim for contribution arising out of them is a claim by one against the other "in respect of the Partnership and the Partnership Real Estate" within clause 3.5.4 and 3.5.6. Thus the question is whether the claim can be brought within the exception, spelt out in clause 3.5.4 but referred to also in 3.5.2 and 3.5.6, of "obligations arising hereunder to be performed and observed by a party (and in particular in relation to the Dissolution Agreement) whether arising from this Deed or some other document referred to herein intended to operate notwithstanding the terms of this Deed". 32The Dissolution Agreement obliged Dean Investments to transfer its interest in suite 301 to Hawes Investments. Implicitly, that was an obligation to transfer the interest unencumbered. The implication arises from conventional practice that when one purchases property it is to be conveyed unencumbered; from the circumstance that the price paid by Hawes Investments was calculated on the basis of the unencumbered value of the property; and from the distinction made in the Settlement Sheet with Balgowlah, where express provision was made that Hawes would take over the mortgage. The parties did not clearly articulate how, in the context of a joint loan secured by two separate mortgages over two properties, this was to be achieved. Ordinarily, as the transferring party, Dean Investments would have procured a discharge of its mortgage; if (as is likely) to do so it had to pay out the joint loan, it would have been entitled to contribution from Hawes Investments. In this case, Dean Investments did not convey the property unencumbered; to achieve that result, Hawes Investments procured the discharge through repaying the joint loan, which remained outstanding following settlement of the Gallwey Deed. While clause 12.2 of the deed obliged Hawes Investments to procure the release of Dean from their guarantees relating to the mortgages, it did not constitute an assumption of or indemnity in respect of the obligations of Dean Investments under the mortgage, although in practice it would be difficult if not impossible to perform without discharging the debt. After completion of the Gallwey Deed, Colonial remained entitled to sue either or both of Hawes Investments and Dean Investments to recover the loan, and either remained entitled to contribution from the other. 33Accordingly, in my view, Dean Investments' obligation to bear and discharge its share of the Colonial loan was an aspect of its obligation to transfer suite 301 unencumbered, which was an obligation arising under the Gallwey Deed, and under the mortgage - which was referred to in the deed and in respect of which the deed did not otherwise make provision, and so operated notwithstanding the Deed. Accordingly, in my judgment, the claim for contribution is not excluded by the terms of the Gallwey Deed. 34Prima facie, where a debt is charged on several properties, they contribute rateably: Aldrich v Cooper (1803) 8 Ves 382; 32 ER 402; Re Best; Parker v Best [1924] 1 Ch 42, 44; Young, Croft & Smith, On Equity, [12-460]. Nothing appears to displace that presumption in this case, and suites 301 and 302 should contribute proportionately to the values attributed to them, of $350,000 and $300,000 respectively. 35Hawes Investments is therefore entitled to judgment for 35/65ths of the amount it paid to discharge the Colonial loan, and interest from the date on which it was paid. That amount was $386,528.40 plus a discharge fee of $368.50, a total of $386,896.90, 35/65ths of which is $208,329, which should bear interest from 19 June 2007.
Rectification 36Alternatively, Hawes Investments seeks rectification of the Gallwey Deed to give effect to what it contends was the conventional assumption on which the negotiations at all times proceeded, namely that Hawes and Dean would share the assets and liabilities equally. 37From the outset of their relationship, and at all times, the respective interests of Hawes and Dean in each of their ventures was equal. Invariably, their shareholdings and unit holdings, entitlements to share in profit and liability to contribute, were on a 50/50 basis. The basis on which Rhodes Docherty acted in structuring all transactions and agreements was that "equal benefits and losses would flow to or be borne by the Dean and Hawes interests" from their projects. 38During the negotiations for the separation of their interests, there were adjustments made for benefits that one party might gain from acquiring the properties (for example, avoiding the cost of partitioning, or agent's commission); and there were disputes about what adjustments were necessary to achieve equality (for example, Mr Dean's ultimately abandoned cross-claim for interest on what were said to be drawings made by Mr Hawes in excess of those made by Mr Dean); and there were disputes about the values to be attributed to various assets; but there was never a suggestion that either party should receive more or less than 50% of the net value ultimately struck after those matters were resolved. I accept that equality of interest in assets and liabilities was the conventional basis of dealing between them. In my view, that this was the conventional basis underlying the dealings of the parties is very clearly established. 39If my conclusion in respect of contribution be incorrect, then the Gallwey Deed failed to give effect to that conventional basis, in respect of suite 301, because it did not take into account the Colonial loan, leaving it to be born entirely by Hawes Investments. Dean Investments' share of the Colonial debt could have been assumed by Hawes Investments, or could have been discharged prior to transfer. The consideration was calculated on a basis quite inconsistent with the first of those possibilities; the worksheets seem to have assumed the second, at least initially when they expressly did so; this would have been a not unnatural assumption in the context of a simple discharge and transfer, but did not take into account the reality of a joint loan secured by separate mortgages. It is to be recalled that the final version of the deed also omitted the provision in respect of consideration that had appeared in all the earlier drafts, to the effect that the consideration - being one half of the value of each of suite 301 and Balgowlah - would be satisfied by the assumption by Hawes of all liabilities in relation to such assets. 40Hawes Investments seeks rectification of the deed, by amending annexure D, and consequentially annexure E, so as to make provision for deduction of Dean Investments' share of the Colonial loan, or alternatively by reinstating the words "Dean to pay out his mortgage", on the basis that their omission was not in accordance with the true underlying intention of the parties. Hawes says that the antecedent agreement was that the Dean would transfer its interest in suite 301 at an agreed (gross) valuation of $350,000, implicitly unencumbered, and points to the standard practice that the transferor discharge its mortgage on transfer. Hawes submits that the settlement sheet attached to the Gallwey deed was prepared (by Ms Rees) on the basis of an assumption that the amount due by Dean Investments to Colonial would be paid out prior to the transfer of suite 301. In either case, the practical effect would be that an additional amount (representing the 35/65th proportion of the mortgage attributable to suite 301) would be payable by Dean Investments to Hawes Investments. (The same considerations that inform proportionate or rateable allocation of the loan for the purposes of contribution also apply here). 41There are difficulties with the second way in which the rectification claim is put, not least of which is that Hawes Investments proposes that, for clarity, the words reinstated be - "T & B Dean Investments Pty Limited to repay half the loan secured by its mortgage" - which are not identical to those said to have inadvertently omitted. 42Moreover, it is difficult to accept that they were inadvertently omitted: despite Ms Rees' inability to explain the deletion, and the accountants' evidence that it was not the subject of instructions or discussion, Mr Thompson's note made on about 30 October 2006, striking through those words and substituting "DH to take over mortgage" suggests the contrary. However, Mr Hawes says he has no recollection of any such discussions. Mr Thompson, while conceding that it is possible that there were discussions on the topic, thinks it more likely that his notes of 30 October reflect him thinking about what was the best way to deal with the situation. He said that there may have been some discussion about Hawes taking over the mortgage, but does not recall any discussion of Hawes procuring a release of Dean's guarantee without repaying the loan. 43It is true that the relevant worksheets went through many drafts and were subject to negotiation. But while a large number of matters were negotiated at the time, and there was an element of give and take in the negotiations, none of them impinged on the underlying assumption and convention of equality of entitlement. While the deletion of the words "Dean to repay his mortgage" may not have been inadvertent, it appears to have been coupled with the notion - not ultimately reflected in the deed - that Hawes would take over the mortgage. Even if the omission of the words "Dean to repay his mortgage" was not inadvertent, that does not preclude rectification if the result did not give effect to the true intention of the parties. 44Ascertaining the understanding and intention of the principals today is complicated by their retrospective perceptions, not necessarily held at the time, in the light of what they now know; and by the circumstance that the critical documents were prepared by their intermediaries, the accountants. However, the omission from annexure D of the words "Dean to repay his mortgage"; alongside the consideration but apparent rejection of the words, similar to those used in respect of the Balgowlah property, "DH to take over mortgage"; together with the omission from clause 9 of Schedule 6 of the provision to the effect that the consideration would be satisfied by the assumption by Hawes of all liabilities relating to the transferred assets; suggests that the matter was given consideration, but - probably because of difficulty in grasping the complexity of having separate mortgages by separate mortgagors over separate properties securing a joint loan - unintentionally dealt with in a manner that failed to give effect to the underlying convention of equality. 45There is no evidence, from any quarter, that would support a conclusion that any one intended that Dean would be released or exonerated from liability in respect of its half share of the Colonial loan. Such a result would have been entirely inconsistent with the conventional basis on which the parties dealt. Thus, while Mr Docherty agreed that at no stage did anyone (on either side) instruct him to amend the spreadsheets such that Hawes Investments was to be given credit for repayment of the mortgage debt for suite 301, he said that so far as he was aware each party was to be responsible for their portion of the mortgage and that he was never aware of any variation from that position. Dean Investments submits that, had it been intended that the calculation of the financial adjustments between them reflect the discharge by the Hawes interests of the suite 301 mortgage, it would have been a simple matter to include that in the Schedule - as the parties did in respect of the mortgage over Balgowlah, also in Annexure D. However, I do not accept that all that has happened is that Hawes failed to ask for something: all involved were proceeding on the assumption that the calculations gave effect to equality. While Mr Dean says that his assent to the Gallwey Deed was on the basis of the totality of the bargain, including annexure D - "the bottom line" - and that he would not have proceeded with it had he been required to make an additional contribution, it must be said that this is a convenient piece of hypothetical evidence, quite inconsistent with the clear conventional basis of equality on which the parties dealt, and while Mr Dean may believe it to be the case now, I do not accept that that is how he would have acted had the matter received proper consideration at the time. 46Mr Hawes' evidence was to the effect that it was his understanding that he was to receive credit for any repayment of Dean's share of the loan. But he did not understand that he was to assume an obligation to repay, as distinct from one to remove Dean as a guarantor. He said that he believed that he could procure Dean's removal as guarantor without having to repay Dean's share of the loan, and that if he had understood he had to repay, he would have required a credit for it. This bespeaks an intention that Dean Investments remain liable for its share of the Colonial loan, although Hawes was somehow going to procure release of the guarantee without repaying the loan. 47There are really two possibilities: the first is that both the idea that Dean would discharge the mortgage, and the idea that Hawes would assume it, were rejected, so as to leave it on foot and unaffected by the Gallwey Deed; if so, that supports the conclusion I have reached in respect of contribution. The alternative is that, if the Gallwey Deed brought to an end Hawes' right to contribution by requiring Hawes to repay Dean's share of Colonial loan in order to procure release of Dean's guarantee, then the calculations in annexure D mistakenly failed to give effect to the underlying convention of equality, so that it ought to be rectified by deducting from the amount to be paid by Hawes an amount representing 35/65th of the joint loan of $385,000, which is the sum of $207,307.69. 48As that sum was not paid or adjusted on settlement, Hawes Investments would on that basis be entitled to judgment for $207,307.69 plus interest from the date of settlement, being 20 November 2006. 49The conclusions I have reached on the grounds of contribution and rectification relieve me of the need to consider unjust enrichment.
Winding up of HPG and Hawden Constructions 50Mr Hawes and Mr Dean are the directors of HPG, in which they each hold one of the two issued shares. HPG holds the only issued share in Hawden Constructions, of which Mr Hawes and Mr Dean are the directors. There is no deadlock breaking mechanism in either company. remain in the joint and equal ownership and control of Dean and Hawes. The deadlock had the result that, originally the sale of a joint project, owned by Hawden Constructions in respect of property at 1242 Pacific Highway, Pymble could not be implemented. While this was overcome and the property has been sold, the proceeds remain invested by a solicitor and have not been distributed to the shareholders. 51Although originally opposed by Mr Dean, this relief is no longer contested, as the Court was informed on 7 February 2012, the defendants have no objection to the winding-up orders sought by the plaintiffs, once the other matters in issue in these proceedings have been determined. 52I am satisfied that it is just and equitable that HPG and Hawden Constructions be wound up. Subject to compliance with the formal requirements, orders should be made that HPG and Hawden Constructions be wound up and a liquidator appointed.
The HPG Advances and the Clydesdale Fee 53Gallwey Pty Limited was the grantee of seven call options over residential properties at 2, 3, 4, 5, 6 and 8 Clydesdale Place, Pymble and 1190A Pacific Highway, Pymble, on which Mr Dean and Mr Hawes had intended to develop a residential complex. Five of the seven options expired on 15 August 2005. By 8 September 2005, when the Clydesdale Deed was executed, none of the options had been exercised.
The Clydesdale Deed 54Following negotiations between May and September 2005, as part of the unwinding of their interests, Mr Dean and Mr Hawes, and related entities, on 8 September 2005 entered into a Deed entitled "Deed of Settlement re: the Clydesdale Place Project" ("the Clydesdale Deed"). 55The Clydesdale Deed recited: D. Gallwey is the grantee of certain call options ("the Options") (which expression will where the context permits include any option hereafter obtained by the Hawes Group in substitution for an Option) to purchase the land ("the Land") comprising the Project, particulars of the Options and the Land being set out in Schedule 5 hereto. ... F. It is the intention of the parties that the Hawes Group will manage and control the project from the date of this deed and in particular that the Hawes Group will endeavour to obtain extensions of the Options for a further period during which period the Hawes Group will apply for a development ("D.A.") for the construction of the Project. G. It is the further intention of the parties that the Hawes Group will endeavour either to sell the Options with the benefit of the D.A. or to obtain finance for the purchase of the Land and construction of the Project. 56"Hawes Group" was defined to mean Mr Hawes and Glenside Group Pty Ltd ("Glenside"). "HPG Advances" was defined to mean, "the monies outlaid by various HPG entities in connection with the project totalling $308,661 as at the date of this deed". "The Project" was defined to mean "The development of a residential complex on land at Clydesdale Place, Pymble". 57The operative provisions were contained in Schedule 6. By clause 1, the Hawes Group was given sole entitlement to negotiate and deal with the grantors of the options, and Gallwey agreed to assign the options (or any of them) to the Hawes Group or its nominee, or to nominate the Hawes Group or its nominee as the party entitled to exercise the options; it was acknowledged that the Hawes Group had absolute discretion to surrender, let lapse, or vary any of the options and/or to enter into fresh option agreements with the grantors. The deed then provided as follows: 2. The parties agree that the Hawes Group will not be required to repay the HPG Advances or account to HPG or the Dean Group in respect of the Clydesdale Project except from Project Revenue as herein provided. 3. The Hawes Group will be entitled to raise finance to take the project to D.A. stage in such manner as it sees fit, including by way of profit participation by the finance provider. All monies payable to a finance provider and all costs in connection therewith will be counted as part of project Costs. In this regard the parties refer to the proposed funding as set out in the Loan Agreement Annexure 'A' hereto. The Hawes Group agrees that the eventual finance will be on the same or better terms (to the Hawes Entities) as those that are set out in Annexure 'A'. 4. The Hawes Group will pay from Project Revenue within the time period referred to in clause 7 below:- (a) the HPG Advances to HPG (approximately $308,600 plus the sum of $36,000 as referred to in clause 6 hereof); and (b) to the Dean Group a fee equal to 30% of the Profit (as defined hereafter), if any, derived by the Hawes Group following valuation or sale of the Options as set out in clause 5 below ("the Fee"). 5.1 A sale of the Options may be effected by way of assignment or nomination or surrender and new documentation, as the Hawes Group may negotiate. 5.2 In the event that the Hawes Group proceed with purchase of the Land or part thereof and with construction of the Project instead of selling the Options, the Fee payable to the Dean Group will be calculated by reference to a hypothetical sale of the Options. In order to calculate the hypothetical profit or loss, it will be assumed that the sale price of the Options was equal to the valuation ("the Valuation") of the land to be made by the valuer commissioned by the incoming first ranking lender of finance to complete the purchase of the Land (or part thereof) and the construction of the Project minus the Adjusted Purchase Prices of the Purchased Lots. If the Valuation does not make allowance for GST on the margin scheme basis, the parties agree to make an adjustment to the amount of the Valuation of an amount to be agreed or in default of agreement to be determined by the Determinator. 5.3 "Project Costs" will be all actual costs of the Clydesdale Project to the date of sale or of the Valuation as the case may be, whether part of the HPG Advances or incurred by Glenside, inclusive of GST on an actual sale or, in respect of a hypothetical sale, of an amount equal to the GST that would have been payable in respect of an actual sale at the assumed price at the date of the Valuation. 5.4 "Project Revenue" will be the sale price (if any) together with any rents or other income earned by the Project up to the date of sale or of the Valuation as the case may be. 5.5 "Adjusted Purchase Price" in relation to an Option is defined as the purchase price for the subject lot reduced by the amount of any option fee included in the HPG Advances that will be credited against the purchase price if the lot is purchased pursuant to an exercise of the Option. 5.6 "Profit" is defined herein as total Project Revenue minus total Project Costs PROVIDED THAT Project Costs will exclude management fees paid to Hawes Group but will include fees paid to all other consultants in relation to the Project. Should Profit be less than $0, no Fee will be payable. 6. The Hawes Group agrees that all bills owing and unpaid in relation to the Project as at the date of this deed (agreed at $36,000 due to Luchetti Lawyers) are the sole responsibility of the Hawes Group and indemnifies the Dean Group and HPG in relation thereto. Such bills will be paid by HPG and added to the HPG Advances. 7. Payment of the Fee is to be made after the date of settlement of a sale by the Hawes Group of the Options, or in the case of a hypothetical sale, from the date of the last settlement of a purchase by the Hawes Group of any Lot comprised in the Project. The Fee payable to the Dean Group shall be calculated and paid by the Hawes Group to the Dean Group within seven (7) days from the relevant settlement. The Hawes Group shall provide all relevant documents to explain and support the calculation. In the event of a dispute over the calculation of the Fee, the Determinator shall determine the Fee. 8. The Dean Group and Gallwey acknowledge that the project is speculative in nature and that the Hawes Group shall not have any duty of care in relation to the control and management of the Project from the date of this deed and hereby release the Hawes Group from all claims relating to or arising from any act, decision or omission on the party of the Hawes Group in relation to the Project. Without limitation, the Hawes Group will not be bound to exercise any Option or to obtain any extension or variation thereof or to obtain any substitute option. 58Annexure A was a pro forma loan agreement between Glenside as Developer, unspecified contributors, and Mr Hawes as covenantor, in respect of No.s 2, 4 and 6. It will be necessary to make further reference to its terms when considering questions of quantification of the Clydesdale Fee, below. 59Thus it was contemplated that the Hawes Group was to take over management and control of the Clydesdale project from Gallwey, endeavour to obtain extensions of the options and apply for a DA for the construction of the project, and either sell the options with the benefit of the DA, or proceed to apply for finance with a view to purchasing the land and itself constructing the project. 60On 23 September 2005, Glenside entered into a deed with Berry Street Properties ("the BSP Deed") in relation to No.s 3, 5 and 8, to the intent that BSP would provide funding for and take over the management of the project, and apply for and obtain a development consent for construction of the project, and at the election of BSP Glenside would sell the options, or nominate BSP as the party entitled to exercise them and then exit the project. It will be necessary to discuss the terms of this deed in greater detail in connection with quantification of the Fee, below. 61In October 2005, the options in respect of No.s 2, 4 and 6 Clydesdale Place, and those in respect of No.s 3, 5 and 8 Clydesdale Place, were novated from Gallwey to Glenside; the option in respect of 1190A Pacific Highway was not novated, and lapsed. As events transpired, No.s 2, 4 and 6 were dealt with separately to No.s 3, 5 and 8. 62Between October 2005 and March 2006, Glenside entered into agreements with various external investors in respect of No.s 2, 4 and 6, in accordance with Annexure A to the Clydesdale Deed. 63On 13 June 2006, Ku-ring-gai Council gave development consent in respect of No.s 2, 4 and 6. 64In about August and September 2006, the Call Option period set out in the respective Call Option deeds was extended to various dates in December 2006. 65On 14 November 2006, Ku-ring-gai Council gave development consent in respect of No.s 3, 5 and 8. 66On 24 November 2006, Clydesdale Place Pty Limited (CPPL) was registered, and on 26 November 2006, the CPP Trust was established. On 28 November 2006, 358 Pty Limited (358PL) was registered, and on the same day the 358 Trust was established. These entities were wholly owned and controlled by the Hawes interests, and were established in the context that the expiry of the options was imminent and that BSP was not in a position to exercise the options in respect of No.s 3, 5 and 8 before they would expire. The trusts were said to be "blind" results, apparently with the intent that it would be possible to substitute BSP, or another purchaser, if at a subsequent stage before completion one could be found. 67On 30 November 2006, Glenside and BSP entered into a Memorandum of Agreement whereby BSP consented to Glenside nominating 358PL to exercise the option in respect of No 5 - which would expire on 30 November - and to proceed to purchase No 5; and that if required Glenside would transfer control of 358PL as directed by BSP as part of a sale of the project; BSP acknowledged that if it were unable to procure a sale of the project prior to expiry of the options over No.s 3 and 8, Glenside was not undertaking any obligation to provide further assistance in respect of those properties and that if it did so it would require clause 7 of the head agreement to be renegotiated. 68In November and December 2006, Glenside nominated 358PL and CPPL, respectively, to exercise the options in respect of No.s 3, 5 and 8, and No.s 2, 4 and 6. 358PL and CPPL thereupon exercised the options and entered into contracts for the purchase of the properties to which those options applied. Some efforts to find an external purchaser continued, but at this stage without success. 358PL and CPPL then sought finance, from Suncorp Metway Pty Ltd (Suncorp), to enable completion of the purchase and development of the properties, and for that purpose obtained valuations from LandMark White on 19 February 2007, which valued No.s 3, 5 and 8 at $5,090,000 and No.s 2, 4 and 6 at $4,790,000. 69On or about 13 March 2007, Suncorp approved finance for 358PL and CPPL respectively to acquire No.s 3, 5 and 8 and No.s 2, 4 and 6 and to construct the project on them. In connection with the finance approval, Mr Hawes on 21 March 2007 made statutory declarations in respect of No.s 2, 4 and 6, and also in respect of No.s 3, 5 and 8, to the effect that the finance was of commercial financial benefit for the CPP trust and the 358 trust, as it would enable the trust to complete the purchase of the subject properties, and to proceed with redevelopment of the land. 70358PL completed the purchase of No.s 3, 5 and 8 on 15 March 2007, and CPPL completed the purchase of No.s 2, 4 and 6 on 21 March 2007. 71On 3 May 2007, 358PL entered into a contract for sale of No.s 3, 5 and 8 to an external party, Dia Gabraa. 72On 18 July 2007, the sale of No.s 3, 5 and 8 to Dia Gabraa was completed. 73In March 2008, Hawes commenced construction of the project on No.s 2, 4 and 6. 74Mr Dean, on behalf of HPG, sues Hawes and Glenside for $344,600 being the HPG Advances, under clause 4(a) of the Clydesdale Deed, and for the Clydesdale Fee under clause 4(b) of the deed. (Although the deed provided for determination of the Fee, in the event of dispute, by Mr Docherty as "determinator", there has been no request for "determination" by him of the Fee).
The HPG Advances 75Under clauses 2 and 4(a) of Schedule 6 of the Clydesdale Deed, the obligation of the Hawes Group to pay the HPG Advances was limited to "Project Revenue" as defined. The chapeau to clause 4 incorporated the time for payment prescribed in clause 7, under which payment was to be made within 7 days of settlement of a sale by the Hawes Group of the options, or (in the case of a hypothetical sale) the date of the last settlement of a purchase by the Hawes Group of any lot comprised in the project. As the HPG Advances are payable only out of "Project Revenue" as defined, the obligation to pay is not an absolute one, but a limited recourse obligation: if there was no "Project Revenue" as defined, then Hawes and Glenside have never become liable to pay the HPG Advances. If there was any Project Revenue, then it will be necessary to determine its amount, as the obligation imposed by clause 4 is to pay out of Project Revenue, and hence the obligation is limited by the amount of Project Revenue. 76Hawes submit that there was no Project Revenue as defined, and thus that no obligation to pay the HPG Advances ever arose.
The Clydesdale Fee 77Under clause 4(b) of Schedule 6 of the Clydesdale Deed, the Hawes Group is obliged to pay, from Project Revenue (as defined in clause 5.4), a fee of 30% of Profit (as defined in clause 5.6). Clause 5.6 provides: 5.6 "Profit" is defined herein as total Project Revenue minus total Project Costs PROVIDED THAT Project Costs will exclude management fees paid to Hawes Group but will include fees paid to all other consultants in relation to the Project. Should Profit be less than $0, no Fee will be payable." 78It follows that any obligation to pay the Fee is dependant on there being a Profit as defined; in turn, the existence of "Profit" is dependent upon there being "Project Revenue". If there is "Profit" its amount must be ascertained, in order to enable the Fee, being 30% of the Profit, to be calculated. 79While Hawes submitted that there were two bases on which Profit could be calculated - actual Profit as defined in clause 5.6, and a hypothetical Profit calculated pursuant to clause 5.2 - I do not agree that that accurately characterises the position. In any case, the Profit is to be calculated according to clause 5.6. That requires ascertaining the Project Revenue, as defined in clause 5.4. Project Revenue is informed by the actual sale price achieved in a sale under clause 5.1, or (in the circumstances in which it applies) the assumed sale price calculated in accordance with clause 5.2. 80Hawes submits that there was no Project Revenue, and thus that there could be no Profit as defined in clause 5.6.
Project Revenue 81The definition of "Project Revenue" in clause 5.4 of Schedule 6 includes three components: (1) the sale price, (2) any rents and (3) other income. There were no rents: the Project comprised call options, and the owners never paid rent. Nor was there any other income. Accordingly, the existence of Project Revenue depends on there being a "sale price" within the meaning of clause 5.4. 82The submission that there was no Project Revenue, and thus could be no Profit, involves the proposition that clause 5.2 was not engaged, for multiple reasons, namely: (1)The "sale price" for the purposes of clause 5.4 was nil, as the nomination of CPPL and 358PL was a sale under clause 5.1, for no consideration. Further, for the purposes of the HPG Advances, clause 5.2 was irrelevant. (2)In any event, the purchase by CPPL and 358PL of the options did not engage clause 5.2, because the preconditions to its application were not satisfied, in that: (a)there was no purchase by the Hawes Group as defined; and/or (b)the Hawes Group did not proceed with construction of the project; and/or (c)there was no first-ranking lender's valuation.
Was there a nil "sale price" under clause 5.1? 83Hawes submits that the term "sale price (if any)" in clause 5.4 refers to the price on sale of the options; that the project comprised the seven call options to purchase taken by Gallwey; that five of the seven options had expired on 15 August 2005, some weeks prior to the date of execution of the Clydesdale Deed; that at the date of execution no options had been exercised and no property, real or personal, purchased; and that thereafter Glenside (not Gallwey) obtained new options over 2, 3, 4, 5, 6 and 8 Clydesdale Place, did not obtain any new option over 1190A Pacific Highway, obtained subsequent extensions of those options, exercised the new options over No.s 2, 4 and 6 nominating CPPL to take those properties, exercised the new options over No.s 3, 5 and 8 nominating 358PL to take those properties, and did not charge any price to either CPPL or 358PL for the nominations. Accordingly, Hawes submits, the nomination by Glenside was a sale of the options without any consideration, and the sale price for the purposes of calculation of Project Revenue was nil: the possibility of there being a sale without consideration was contemplated in the deed by the use of the words "sale price (if any)", and the parties also expressly agreed that a sale may be effected by a nomination (clause 5.1 of Schedule 6). Alternatively, if the nomination of CPPL and 358PL was not a sale of the options, there was still no sale price, and thus no Project Revenue. 84In my judgment, this argument overlooks the overall structure of the arrangements put in place by the Clydesdale Deed, and the inter-relationship between clause 5.4 and clause 5.2. The options obtained by Glenside were "fresh option agreements" within the meaning of clause 1 of Schedule 6, but on a proper construction of Schedule 6 as a whole (and particularly in the light of recitals D, F and G), such "fresh option agreements" were to be dealt with under the deed as if they were "the Options". The Clydesdale Deed envisaged three possible courses of action by the Hawes Group in respect of the project: first, selling the options; secondly, obtaining finance for the purchase of the land and construction of the project, and exercising the options themselves (see recital G); and thirdly, allowing the options to lapse (see clauses 1 and 8 of Schedule 6). The first course of action - sale of the options by the Hawes Group - is dealt with in clause 5.1. The second, relating to the exercise of the options, is provided for in clause 5.2, which provides that in that event, the fee was to be calculated by reference to "a hypothetical sale of options", using an "assumed ... sale price" derived from a valuation by the valuer commissioned by the first ranking lender of finance to complete the purchase of the land and the construction of the project - less the adjusted purchase prices of the purchased properties (as defined) - as a proxy for the sale price of the options. The third - lapse of the options - could result in no benefit to Hawes, no Project Revenue, and thus no liability to account to Dean or repay the HPG Advances. But either sale of the options, or exercise of the options, could result in benefit to Hawes, through in the case of sale) realization of the value of the options, and (in the case of exercise) acquisition of the properties at the option price, which was potentially (and transpired to be) below market value. The intent of the arrangements established by the Clydesdale Deed was that to the extent that Hawes derived a benefit from sale or from exercise, HPG would be entitled to recover the HPG Advances, and Dean would be entitled to share in the profit, which in the first case would be calculated by reference to the sale price, and in the second by reference to an "assumed sale price" derived from a valuation. 85The reference in clause 5.4 to "sale price" includes an "assumed sale price" derived under clause 5.2; that this is so is confirmed by the reference in clause 5.4 to date of valuation in the alternative to date of sale. 86Hawes submitted that while clause 5.2 provided for calculation of a hypothetical profit or loss, it did not authorise calculation of hypothetical project revenue. The unsustainability of this submission is demonstrated, first, by the fact that clause 5.2 provides that in the circumstances in which it applies, "the Fee payable to the Dean Group will be calculated by reference to a hypothetical sale of the Options", secondly, that the definition of "Project Revenue" refers to date of sale or valuation, indicating that it could be satisfied as well by a hypothetical sale as an actual sale; and thirdly by the circumstance that such a construction would totally defeat the purpose of including reference to a hypothetical sale at all. 87Hawes also submitted that clause 5.2 did not apply to the HPG Advances, but only to the Clydesdale Fee. But while clause 5.2 in its own terms refers only to the Fee, reading clause 5 as a whole, there is no reason to exclude an "assumed ... sale price" under clause 5.2 from the concept of "sale price" in clause 5.4, especially bearing in mind that otherwise there would be a significant lacuna in clause 5.4. The reference to "valuation" in 5.4 supports the view that it includes a hypothetical sale of the kind referred to in clause 5.2. It is highly improbable that the parties would have intended that there be Project Revenue for one of the purposes for which it is relevant, but not for the other, if the Hawes Group proceeded itself to acquire and develop the land. 88Accordingly, on the proper construction of the deed, the reference to "sale price" in clause 5.4 includes, for all purposes, in the event that the conditions attracting the operation of clause 5.2 are satisfied, the "assumed ... sale price" referred to in that clause. For the additional reasons that follow, in my view, this was not a sale of the options, but a case of the Hawes Group proceeding with the purchase of the land itself within the meaning of clause 5.2.
No purchase by the Hawes Group? 89Hawes submits that clause 5.2 is not engaged because it applies only "In the event that the Hawes Group proceed with purchase of the Land or part thereof ..."; the term "Hawes Group" is defined in clause 1 to mean "individually and collectively Hawes and the Hawes Entities"; in the description of the parties at the commencement of the deed, the term "Hawes" is used to describe Mr Hawes, and "Hawes Entities" to describe the entities set out in Schedule 2; Schedule 2 names only Glenside; thus, in the Clydesdale Deed, the term "Hawes Group" means only Mr Hawes and Glenside; and neither of them proceeded with the purchase of the land (or part thereof); rather, CPPL and 358PL did so. 90I accept that clause 5.2 operated only if Hawes and/or Glenside purchased the land or part thereof. However, I do not accept that the purchase in the name of CPPL and 358PL was not a purchase by them, within the meaning of clause 5.2. 91When the new options obtained by Glenside were close to expiry, and further options or extensions could not be obtained, and a sale of the options had not been able to be negotiated, Glenside was not in a position to proceed with course (1) (sale of the options); nor did it wish to pursue course (3) (allow the options to lapse). Instead, it nominated 358PL to purchase No.s 3, 5 and 8 and CPPL to purchase No.s 2, 4 and 6. Both CPPL and 358PL were owned and controlled by Mr Hawes. As their names bespeak, they were incorporated for the very purpose of acquiring the properties. They were nominated for that purpose by Glenside. In substance, this was a case of Glenside, instead of selling the options or allowing them to lapse, proceeding with the purchase of the land, albeit through a nominee. To treat this as other than the Hawes Group proceeding with purchase of the land would circumvent the contractual intention of the parties, and enable Dean's interest to be defeated by a stratagem. Glenside could have exercised the option and acquired the land in its own name, in which case there would be no debate in this respect; that it chose to do so through a nominee does not deprive the transaction of the character, in substance, of a purchase by Glenside. 92Contrary to Hawes' submissions, this is entirely consistent with the context and purpose of the Clydesdale Deed, in facilitating a speculative salvage operation of a project in trouble, and placing no obligation on the Hawes Group except to the extent that it generated revenue. The Hawes Group owed no duty of care to Dean, and were released from "all claims relating to or arising from the any act decision or omission on the part of Hawes Group in relation to the Project" (clause 8 of Schedule 6). In this context, the role of clauses 4 and 5 was to preserve for Dean an entitlement to a share in the benefits, if and only if Hawes Group were able to generate project revenue. Had Glenside allowed the options to lapse, Dean could not have complained: the Hawes Group owed Dean no duty to achieve an optimal, or even a reasonable, outcome. But if they did gain project revenue, then obligations to pay the HPG Advances and the Fee arose. In my view, while they were not bound even to use their best endeavours to generate project revenue, they were not entitled to deprive Dean of its entitlement by the stratagem of using a nominee rather than exercising the option itself.
No construction of the project? 93Next, Hawes submitted that it was a precondition to the application of clause 5.2 that the Hawes Group proceed not only with the purchase of the land but also "with construction of the Project", and that this requirement was not satisfied. 94It is true that no construction was ever undertaken by Hawes, Glenside or any entity associated with them in respect of No.s 3, 5 and 8 (which were on sold to Dia Gabraa); and that CPPL eventually constructed on No.s 2, 4 and 6 only after the failure of repeated efforts to sell. However, pursuant to clause 7 of Schedule 6, the fee was payable - in the case of a hypothetical sale - within seven days from the date of the last settlement of the purchase by the Hawes Group of any lot comprised in the project. The plain intent is that once the options were exercised and the purchases of the relevant properties settled, the fee would be payable. It is inconceivable that construction would be practically commenced, let alone completed, within seven days of completion of the purchase. The parties could not sensibly have intended that Dean's entitlement to a fee would be dependent on the subjective intention of Hawes at the time of purchase of the land; nor that if he did not have the intention to construct the project at the time of the purchase, but having done so subsequently formed that intention, no fee would be payable, so that there would be no "Project Revenue". Nor could they sensibly have intended that if having purchased the land, the Hawes Group took advantage of an early opportunity to resell it before constructing the project, Dean would be deprived of the fee. It would make no commercial sense to construe clause 5.2 as depriving Dean of a fee just because Hawes may not yet have proceeded with construction of the project, or even formed the intention to do so. 95The seven day period after completion of the purchase for payment prescribed by clause 7, powerfully indicates that proceeding with construction was not intended to be a condition for payment of the fee, as distinct some additional words assumed to describe the purpose for which the Hawes Group would presumably exercise rather than sell the options or allow them to lapse. That the deed did not contemplate, expressly, a situation in which the Hawes Group purchased the land but did not proceed with construction of the project, supports this: the reason is that it was assumed that if the Hawes Group purchased, it would be in order to construct the project. 96Both the time provision in clause 7, and common sense, indicates that proceeding with construction was not intended to be a precondition to the operation of clause 5.2, the role of which was provide a mechanism for attributing a value to the options in the event that they were exercised, rather than sold or allowed to lapse.
No first ranking lender's valuation? 97Finally, Hawes submits that clause 5.2 can operate only when there is a valuation made by "the valuer commissioned by the incoming first ranking lender of finance", and that this requirement was not satisfied. Thus it is said that calculation of an assumed sale price is impossible, as it depends on the availability of a mortgagee's valuation that does not exist. 98Hawes submits that the requirement for the valuation to be made by a valuer commissioned by the lender is significant, as it is the instructing party who determines the assumptions made by the valuer, which can legitimately produce substantial variations in the valuations; that valuations commissioned by the first ranking lender are based on conservative assumptions and produce much lower valuations; that while a prudent lender may lend relying in part or whole on a borrower's valuation it may impose conditions as to injection of equity (as happened here) or otherwise take account of the basis of the valuation; and that treating the requirement as satisfied because the lender has regard to the valuation defies the commercial reality behind the contractual imposition of the requirement. 99The valuations of No.s 2, 4 and 6 and of No.s 3, 5 and 8 were made by LandMark White, a panel valuer for Suncorp, but addressed respectively to Glenside and 358PL, in each case for the attention of Mr Hawes, who had been the instructing party. They were expressed to be prepared "for first mortgage security purposes", with the endorsement "Reliance on this report for first mortgage security purposes is subject to written approval of the first mortgagee by LandMark White". 100Suncorp's Credit Approval Request documentation recorded that the valuer, LandMark White, was acting for both Suncorp and the borrower. It was recorded that the properties "have been valued by a panel valuer, LandMark White on 19 February 2007", and: The valuation was instructed by the borrower. The facility is conditioned accordingly to obtain formal assignment to the Bank. 101In the "Loan Conditions Schedule", the following condition was included: The valuation report dated 19 February undertaken by LandMark White (NSW) Ltd is to be reconfirmed and assigned by the valuer to the Bank. The valuer is to confirm the report complies in all respects with the Bank's standard instructions and that it is acceptable for mortgage security purposes. Any costs incurred are for the Borrower's account. 102This - like several other conditions - was "ticked" and initialled in handwriting, which I infer indicates compliance with the condition, and thus that the valuer reconfirmed the valuations and assigned them to the Bank and confirmed that they complied in all respects with the Bank's standard instructions and were acceptable for mortgage security purposes. 103In my view, the intention of the parties reflected in this aspect of clause 5.2 was that, knowing that Hawes Group would have to raise finance if it were to exercise the options and purchase the land, the financier would require a reliable (and probably conservative) valuation, which would provide a reasonably objective and independent means of determining value. The words "commissioned by ... the lender" were not intended to stipulate that the lender must be the instructing party, but only that it be a valuation that was accepted by the lender. Again, it could not have been intended that Hawes Group be able to avoid liability for a fee by pre-empting the lender through obtaining their own valuation and persuading the lender to accept it. 104In the events that happened, in my view the two LandMark White valuations amply satisfy the description of valuations by the "valuer commissioned by the incoming first ranking lender of finance". Indeed I would have been so satisfied if Suncorp had accepted them as sufficient for its purposes, even without the reconfirmation and assignment, but those latter matters reinforce the conclusion.
Conclusion as to Project Revenue 105I therefore reject the submission that there is no ascertainable sale price, and thus no Project Revenue. In the events that have happened, there being no rent or other income, the Project Revenue is the assumed sale price which, under clause 5.2, is the amount of the valuation, less the Adjusted Purchase Prices of the properties. The "Adjusted Purchase Price" is the purchase price for the subject lot reduced by the amount of any option fee included in the HPG Advances that will be credited against the purchase price if the lot is purchased pursuant to an exercise of the option. 106Accordingly, in respect of No.s 3, 5 and 8, the Project Revenue is calculated as follows:
Rectification 109Alternatively, the Dean interests sought rectification of the Clydesdale Deed in a number of respects. 110First, to clarify that the Deed also covered a situation where it was a nominee of the Hawes Group that purchased the land, rather than an entity within the Hawes Group, Dean sought to rectify clauses 5.2 and 7 of Schedule 6 by replacing the term "Hawes Group" with the term "Hawes Group or its nominee". 111Secondly, to clarify that construction of the project was not a pre-requisite to the operation of clause 5.2, Dean sought to rectify clause 5.2 by omitting the words "and with construction of the Project". 112Thirdly, to clarify that the valuation need not be "commissioned" as such by the incoming first ranking lender of finance, so long as that lender relies upon that valuation, Dean sought to rectify clause 5.2 by inserting words to the effect "or relied on". 113I have been able to resolve these issues by construction of the deed. If it were not possible to do so by construction, it would not have been open to rectify the deed to the effect sought. This is because, had Dean not succeeded as a matter of construction, the position would have been that the parties had failed to address the matters, rather than that they had reached agreement on them but had not accurately expressed their agreement in the deed.
Quantification of Profit and Fee 114The Clydesdale Fee is 30% of the Profit. The Profit is total Project Revenue minus total Project Costs, provided that Project Costs will exclude management fees paid to Mr Hawes and/or Glenside, but will include fees paid to all other consultants in relation to the Project (as defined in clause 5.6 of Schedule 6). The Project Costs are all actual costs of the Clydesdale Project to the date of sale or valuation as the case may be, whether part of the HPG Advances or incurred by Glenside, inclusive of GST on an actual sale or, in respect of a hypothetical sale, of an amount equal to the GST that would have been payable in respect of an actual sale at the assumed price at the date of the valuation (clause 5.3), including monies payable to a finance provider and all costs in connection therewith (clause 3). 115Initially, Hawes did not provide a calculation of the fee, and Dean calculated it from data provided by Hawes on 8 December 2010. In respect of No.s 2, 4 and 6, Dean allowed project costs of $490,472, and in respect of No.s 3, 5 and 8, $111,400. Hawes has since notified many additional claims, most of which Dean disputes. The parties have set out, in a "Scott Schedule", their competing positions in respect of project costs. I deal below with those that are contentious, by reference to the Scott Schedule, resolution of which should then enable the parties to bring in a final figure. 116There are a number of questions of principle that underlie these disputes. 117First, a number of items are disputed on the basis that they were paid after the date of the valuation, which was 19 February 2007. The question is whether the relevant date is the date on which the cost was incurred, or on which it was paid. The definition of Project Costs limits them to "all actual costs of the Clydesdale Project to the date of sale or of the Valuation as the case may be, whether part of the HPG Advances or incurred by Glenside, inclusive of GST on an actual sale or, in respect of a hypothetical sale, of an amount equal to the GST that would have been payable in respect of an actual sale at the assumed price at the date of the Valuation". Thus the definition treats the hypothetical sale as having taken place at the date of the valuation, rather than the date of exercise of the option. However, it speaks of costs "incurred" by Glenside. Moreover, GST would not be paid, though it would be incurred, on the date of a sale. In my view, project costs include those incurred, not only those paid, up to and including the date of the valuation. 118Secondly, a number of items are disputed on the basis that they relate to the purchase of the properties pursuant to exercise of the options, and are not associated with Glenside's holding, sale or "hypothetical sale" of the options and are thus not "actual costs of the Clydesdale Project ... incurred by Glenside". The purpose of the hypothetical sale formula was to ascertain the value Glenside gained by exercising the option, in lieu of selling it. If Glenside had sold the options, the selling costs would undoubtedly have been Project Costs. The purchase price of the properties is taken into account under the "Adjusted Purchase Price" formula. The costs associated with exercising the option reduce the value of the options to Glenside. Accordingly, in my view, costs associated with exercising the options are legitimate Project Costs. They had to be incurred for Glenside to acquire the value represented by the options. 119Thirdly, there is a claim for the "external investors' profit share" in respect of No.s 2, 4 and 6. Between October 2005 and March 2006, Glenside entered into funding arrangements in respect of No.s 2, 4 and 6 with several investors, in the form of Annexure A to the Clydesdale Deed. Annexure A provided for the project proceeds to be applied (upon sale or hypothetical sale) first in return of investors' capital of $370,000 pro rata between the contributors; secondly in payment of investors' primary profit share of $111,000; thirdly in return of developer's equity of $338,661, fourthly in return of any additional Developer's equity; fifthly in payment of Developer's primary profit share of $111,000, and finally in division of any residue one half to the developer, and the other half between the investors pro rata. Clause 3 of Schedule 6 of the Clydesdale Deed provided that the Hawes Group was entitled to raise finance in such manner as it saw fit, including by way of profit participation by the finance provider, and that all monies payable to a finance provider and all costs in connection therewith would be counted as part of project Costs, and referred in this regard to proposed funding arrangements as set out in the Loan Agreement at Annexure A to the deed. In my view, the "investors' primary profit share", and the investors entitlement to receive half of any residue, are "monies payable to a finance provider" within clause 3 and thus project costs, which were incurred when the funding deeds were entered into, prior to February 2007. 120Fourthly, there is a claim in respect of moneys paid or payable to Berry St Properties in connection with the BSP Deed. The BSP Deed of 23 September 2005 recited that it was the intention of the parties that BSP would provide funding for and take over the management of the project, and apply for and obtain a development consent for construction of the project, and further that at the election of BSP Glenside would sell the options with the benefit of the DA, or - if BSP desired to proceed with construction of the project itself - nominate BSP as the party entitled to exercise them and then exit the project. BSP agreed to provide the funds to procure grants of new options in respect of No.s 3, 5 and 8, and to do all things necessary and to use its best endeavours to obtain a DA before the new options expire, and provide funds for all costs and fees including consultants in connection with the project. Upon obtaining a DA, BSP was to notify Glenside within 4 weeks of its election that the Project be sold with the benefit of the DA, or that Glenside nominate BSP as to party entitled to exercise the options and exit the Project. In the event of a sale of the project, the proceeds were to be applied first, in reimbursement to BSP of all expenses of sale; secondly, in reimbursement to BSP of the costs incurred by it up to $250,000; thirdly, in reimbursement to Glenside of Glenside's costs (incurred before the date of the deed) of $170,000; fourthly, in reimbursement to BSP of any of its costs in excess of $250,000; and the residue to be shared two-thirds to BSP and one-third to Glenside. If at BSP's request Glenside nominated BSP to exercise the options and exited the project, Glenside was entitled to an exit fee of its costs of $170,000 plus one third of the amount by which the valuation on exit exceeded the total of Glenside's costs and BSP's costs. The deed made no provision in respect of Glenside exercising the options for its own benefit. 121Development approval in respect of No.s 3, 5 and 8 was granted on 14 November 2006. On 30 November 2006, the expiry date of the option over No 5, Glenside and BSP entered into an agreement which recited that the option over No 5 was about to expire and the grantor would not give an extension; that BSP was not in a position to exercise the No 5 option before it expired; and that a lender associated with Glenside - a Hawes company - was willing to provide short term finance to enable the option to be exercised and the balance of the deposit paid, but required that an entity under the control of Glenside be nominated as purchaser. By this agreement, BSP consented to Glenside nominating 358PL to exercise the option and purchase the property, and Glenside agreed that if required it would transfer control of 358PL as directed by BSP as part of a sale of the project as contemplated in the DSP Deed. The parties also agreed that if BSP was able to procure a sale of the project without further assistance from Glenside the provisions of clause 7 of the BSP Deed regarding distribution of the proceeds would apply subject only to BSP bearing all interest and costs incurred by Glenside in connection with the short-term finance. Clause 8 provided: If BSP is unable to procure a sale of the Project prior to the expiry of the options over 3 Clydesdale Place and 8 Clydesdale Place, the parties will consult further but BSP acknowledges that Glenside is not at this point undertaking any obligation to provide further assistance regarding the acquisition of those properties. Glenside states that if any further assistance is provided by it, it will require clause 7 of the Project Agreement to be renegotiated. 122BSP did not procure a sale of the project prior to expiry of the options over No.s 3 and 8. Glenside did provide "further assistance", through 358PL. There is no evidence of what if any further consultation or negotiations took place between BSP and Glenside. However, BSP had some role in finding Dia Gabraa as the ultimate purchaser of No.s 3, 5 and 8. 123The evidence of Mr Adamo (a director of BSP) which, though less than satisfactory in some respects, was not challenged, establishes that BSP prior to 19 February 2007 incurred and paid costs associated with the project, including engaging consultants and other steps necessary to obtain a development approval, amounting to $234,116, plus $9,000 option extension fees; that in conjunction with Mr Hawes, BSP endeavoured to find a purchaser but was not successful before the options expired, so that 358PL exercised the option; that he continued thereafter to attempt to sell the site and eventually did so, and on completion received from 358PL on or about 26 July 2007 "an amount of $250,000 to reimburse costs outlaid and also a consultancy fee of $15,000 plus $1,500 GST". 124Reference has already been made to clause 3 of Schedule 6 of the Clydesdale Deed. In addition to the reference to Annexure A, it provided "The Hawes Group agrees that the eventual finance will be on the same or better terms (to the Hawes Entities) as those that are set out in Annexure 'A'". 125It seems to me that the events that triggered BSP's rights to a distribution under clause 7 of the BSP Deed did not occur: BSP did not elect that the Project be sold with the benefit of the DA, nor that it be nominated to exercise the options. Rather, Glenside (through 358PL) exercised the options on its own behalf, though preserving the possibility of transferring control of 358PL to BSP, which did not occur. The arrangement between Glenside and BSP left highly ambiguous BSP's entitlement in the events that transpired. However, I am prepared to accept that, on one basis or another, it was entitled to the reimbursement of the expenses that it paid to consultants and others to progress the DA and market the project, and that $250,000 should be accepted as a reasonable compromise of these (including the option extension fees). However, I can see no basis on which BSP was entitled to the consultancy fee of $15,000 plus GST, unless it was in connection with the on sale to Dia Gabraa, in which case it was not a cost of the project or the hypothetical sale, and was incurred after 19 February 2007. In any event, Hawes has not discharged the onus of showing that this fee was a cost of the sale. Nor is there any evidence that the two-thirds profit share to which BSP was potentially entitled under clause 7 (fifthly) of the BSP Deed has been paid, or is payable. Had there been, the BSP funding would have been apparently on less favourable terms to Hawes than then pro forma funding agreements in Annexure A. However, on the basis that ultimately BSP receives only the reimbursement of its expenses, to that extent that BSP Deed was not on terms less favourable than Annexure A. 126Against those matters of principle, I turn to the specific items in dispute in the Scott Schedule. References to reasons "first', "secondly", "thirdly" and "fourthly" are to the four heads of reasons so enumerated above. 127Item 34 - Valuation fee $6,650. Allowed. The valuation was required to enable the Glenside to exercise the options and invoke the "hypothetical sale" mechanism. See reason secondly above. Although paid after the date of valuation, it was incurred no later than the date of valuation. 128Item 35 - Cost of funds for deposits (at 24%) $9,651. Disallowed. The cost of raising finance to fund the deposits upon exercise of the options was no more a Project Cost than the cost of finance to fund the balance purchase price upon completion. This was not funding the project (which involved realizing value from the options), but funding the purchase of the property. Whether Glenside raised finance to fund the purchase or did so from its own resources was a matter for its internal arrangements; the costs of raising finance were not an inherently necessary cost of exercising the option. 129Item 36 - Legal costs for options and purchases $10,004. Allowed. The legal costs of exercising the options and purchasing the properties were incidental to the exercise of the options, and necessarily incurred by Glenside in order to gain the value represented by the options. See reason secondly above. 130Item 37 - Stamp duty $156,807. Allowed. This was necessarily incurred as an aspect of exercising the option. See reason secondly above. It was incurred, though not paid, upon exercise of the option and the making of the contract that resulted, before 19 February 2007. See reason first above. Although clause 5.11 of the covering Clydesdale Deed provides that a party taking the benefit of any transaction provided for in the deed, for example a transfer of property, shall pay all stamp duties payable thereon, the Deed did not provide for a transfer of the properties to Glenside; this provision was intended to capture any duty that might be payable on assignment of the options from Gallwey to Glenside. In any event, even if caught by clause 5.11, that does not exclude stamp duty so paid from also falling within the definition of a "Project Cost". 131Item 38 - Agents Fees for acquisition $18,250. Disallowed. The evidence is insufficient to enable me to characterize this item. Hawes has not discharged to onus of establishing that it is a Project Cost. 132Item 39 - Company establishment costs $963. Allowed. This was the cost of incorporating CPPL to exercise the options and purchase the land, while preserving the possibility for an external purchaser to complete the purchase; it was incidental to the exercise of the options and incurred in order to facilitate a potential sale of the project before completion of the acquisition by CPPL. See reason secondly above. 133Item 40 - External investors' primary profit share $111,000. Allowed. See reason thirdly above. 134Item 43 - Half balance profit for external investors $190,174. Allowed. See reason thirdly above. 135Item 51 - Option extension fees not credited $9,000. Disallowed. These were paid by Berry St Properties, not by Glenside, and are included in the amount allowed under item 53. 136Item 52 - Valuation fee $7,650. Allowed, for the same reasons as apply to item 34. 137Item 53 - Berry St Properties costs to 19 February 2007 $265,000. Allowed at $250,000. See reason fourthly, and item 51. 138Item 54 - Cost of funds borrowed for deposits (at 24%) $15,892. Disallowed, for the same reasons as apply to item 35. 139Item 55 - Legal costs for options, exchange and settlement $7,499. Allowed, for the same reasons as apply to item 36. 140Item 56 - Legal costs for BSP agreement $1,800. Allowed. This was a cost in connection with raising finance, within clause 3 of Schedule 6. 141Item 57 - Stamp duty $176,816. Allowed, for the same reasons as apply to item 37. 142Item 58 - Agent fees for acquisition $48,422. Disallowed, for the same reasons as apply to item 38. 143Item 59 - Company establishment cost. Allowed, for the same reasons as apply to item 39. 144Item 66 - Glenside costs $170,000. In light of the view I take about item 68, this does not matter; nor does the countervailing item 70, which offsets it. 145Item 68 - BSP two-thirds profit share $198,760. Disallowed. There is no evidence that this was paid or is payable. See reason fourthly. 146Pursuant to clauses 4 and 7 of Schedule 6, payment of the Fee was to be made, in the case of a hypothetical sale, within seven days from the date of the last settlement of a purchase by the Hawes Group of any Lot comprised in the Project. The last such settlement was, in respect of No.s 2, 4 and 6, on 21 March 2007; seven days thereafter was 28 March 2007. Interest should accrue from that date.
Warrawee 147Hawes amended their Defence to the cross-claims brought by Dean in respect of the Warrawee Deed on 7 February 2012. Dean subsequently, on 9 May 2012, informed Hawes that those claims were abandoned. Only the question of costs remains outstanding: the Dean interests contending that the late amendment of the defence to the cross-claims necessitated the vacation of the hearing dates in February 2012, and that the defences previously pleaded were manifestly hopeless.
Interest on differential drawings on Directors' Loan Accounts 148HPG claimed $39,666.05 from Mr Hawes, being interest in respect of an alleged excess of drawings by Mr Hawes on loan account, it being contended that as a result of an error made by the accountant Mr Docherty in the preparation of a Schedule in 2006, Mr Hawes received $47,000 more than Mr Dean, and that while the principal difference of $47,000 had since been adjusted, interest should be paid on it. Mr Hawes denied that he was liable to pay this amount. 149From about 1988 onwards, Mr Hawes and Mr Dean each lent funds to HPG on directors' loan accounts to fund its activities, and from time to time received repayments in respect of such loans. Their loans earned interest, and running accounts were maintained recording the amount of funds provided and repayments made, together with any accrued interest entitlements. 150Mr Dean's case was that, in about April 2006, Mr Docherty was instructed by Mr Hawes and Mr Dean to verify the running accounts and determine the balance outstanding and due to each of them from HPG, and that as a result of erroneous calculations made by Mr Docherty, Mr Hawes received excess repayments of $47,000. Mr Dean complained that, although the principal amount of $47,000 was adjusted, this resulted in an amount of interest not accounted for, in the sum of $39,666.05, which remained unpaid. 151However, the evidence is Mr Hawes and Mr Dean had agreed that they would, over time, equalise their drawings from HPG. On 9 November 2006, in the presence of Mr Docherty, Mr Dean called Mr Hawes and said that HPG had paid $47,000 more in drawings to Mr Hawes than to Mr Dean. Mr Hawes accepted this, subject to checking. To remediate this, the Dean Family Trust received a credit of $47,000 from HPG on 22 December 2006 in a reconciliation statement. Mr Dean acknowledges that he (or a related entity) received the $47,000. It was not Mr Hawes (or any Hawes entity) that made this payment or credit: the $47,000 credit was given by HPG, and as a result, the drawings of Mr Dean and Mr Hawes were equalised. 152Nor does the evidence establish that HPG lent $47,000 to Mr Hawes. To the contrary, the $47,000 represents the difference between the amount of consultancy fees paid to Leanwick Pty Limited (a Dean entity) and those paid to Hawes over the period 1994 to 2006. These payments were not loans, but earned remuneration. Nor were any such fees paid to Mr Hawes, or to Mr Dean, personally. Mr Dean could not explain why he sued Mr Hawes personally for the "interest". 153There was no obligation, contractual or otherwise, on Mr Hawes to pay interest to HPG on drawings paid to him by HPG. HPG never agreed with Mr Hawes or Mr Dean that HPG would be entitled to interest on the difference in fees taken by Mr Hawes (and his related entities) and those drawn by Mr Dean (and his related entities). The fact that HPG paid interest on loans to it is irrelevant. There was no debt owed by Mr Hawes to HPG in respect of any difference in drawings paid to him and drawings paid to Mr Dean. There is no legal basis for HPG's claim for interest from Mr Hawes. 154This claim was doomed to fail. It was rightly abandoned, at the conclusion of the evidence, following the cross-examination of Mr Dean.
Conclusion 155Dean Investments' obligation to bear and discharge its share of the Colonial loan was an aspect of its obligation to transfer suite 301 unencumbered, which was an obligation arising under the Gallwey Deed, or under the mortgage which was referred to in the deed and, as the deed did not otherwise make provision in respect of it, to operate notwithstanding the Deed. Accordingly, in my judgment, the claim for contribution is not excluded by the terms of the Gallwey Deed. Hawes Investments is entitled to judgment for 35/65ths of the amount it paid to discharge the Colonial loan, and interest from the date on which it was paid. That amount was $386,528.40 plus a discharge fee of $368.50, a total of $386,896.90, 35/65ths of which is $208,329, which should bear interest from 19 June 2007. 156If my conclusion in respect of contribution be incorrect, then the Gallwey Deed failed to give effect to the conventional basis of equality of distribution of assets and liabilities on which the separation of the parties' interests proceeded, in respect of suite 301, because it did not take into account the Colonial loan, leaving it to be borne entirely by Hawes Investments, and the Gallwey Deed ought to be rectified by deducting from the amount to be paid by Hawes an amount representing 35/65th of the joint loan of $385,000, which is the sum of $207,307.69. As that sum was not paid or adjusted on settlement, Hawes Investments would on that basis be entitled to judgment for $207,307.69 plus interest from the date of settlement, being 20 November 2006. 157I am satisfied that it is just and equitable that HPG and Hawden Constructions be wound up. Subject to compliance with the formal requirements, orders should be made that HPG and Hawden Constructions be wound up and a liquidator appointed. 158On the proper construction of the Clydesdale deed, the reference to "sale price" in clause 5.4 includes, for all purposes, in the event that the conditions attracting the operation of clause 5.2 are satisfied, the "assumed ... sale price" referred to in that clause. In substance, this was a case of Glenside, instead of selling the options, or allowing them to lapse, proceeding with the purchase of the land, albeit through a nominee. Glenside could have exercised the option and acquired the land in its own name, in which case there would be no debate in this respect; that it chose to do so through a nominee does not deprive the transaction of the character, in substance, of a purchase by Glenside. 159Both the time provision in clause 7, and commercial common sense, indicates that proceeding with construction was not intended to be a precondition to the operation of clause 5.2, the role of which was provide a mechanism for attributing a value to the options in the event that they were exercised, rather than sold. 160In the events that happened, the two LandMark White valuations satisfy the description of valuations by the "valuer commissioned by the incoming first ranking lender of finance" within the meaning of the Clydesdale Deed. 161I therefore reject the submission that there is no ascertainable sale price, and thus no Project Revenue. The total Project Revenue was $2,296,727. 162As there is ample Project Revenue to accommodate it, there should be judgment that the Hawes Group pay HPG the HPG Advances, with interest from 28 March 2007. 163There should also be judgment that the Hawes Group pay the Dean Group the amount of the Clydesdale fee, being 30% of the Profit, also with interest from 28 March 2007. It will be necessary for the calculation of profit to be finalised, informed by these reasons, to quantify that fee. 164The claim under the Warrawee Deed having been abandoned by Dean, there should be judgment on it for the cross-defendants. 165HPG's claim for $39,666.05 from Mr Hawes as interest in respect of an alleged excess of drawings on loan account was doomed to fail and was rightly abandoned. On it, there should be judgment for the cross-defendants. 166I direct that the parties bring in short minutes to give effect to this judgment, at which time the formalities attending the winding up application, any outstanding questions of quantification, costs, and any consequential matters, can be dealt with.
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: 12 June 2013
Hawes & anor
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