These proceedings relate to a development in Petersham NSW. The site chosen for the development was purchased in December 2001 for $3,120,000 by Hebbel Constructions Pty Ltd ("Hebbel") and Bitar Pty Ltd ("Bitar"). Hebbel was controlled, and the shares in it were owned, by Mr Mansour Taouk ("Mr Taouk"). Bitar was controlled, and the shares in it were owned, by Mr John Katter. Hebbel and Bitar each contributed $1,560,000 to the purchase price. What was envisaged was the demolition of the existing structures and the construction of apartments, townhouses, and shops. I shall refer to the development project as "the project".
Hebbel and Bitar had developed another site previously and with some success. They agreed that there would be a partnership along similar lines to the previous development, but Mr John Katter suggested that they should use a separate company to undertake construction and Mr Taouk agreed. In February 2002, Bitar Hebbel Constructions Pty Ltd ("BHC") was established with shares held equally by Hebbel and Bitar.
It took some time for a development plan to be prepared and approved and for funding to be obtained. Mr Taouk says that he had a conversation with Mr John Katter in 2008 to the following effect (see Exhibit A1 p 80):
I said: "We need to arrange the construction loan to start the construction on the site."
He said: "We can go together and shop around for the best deal."
I said: "We probably need around $250,000 per unit for construction. So we need around $7,750,000 for construction. If we need to tip in any more money for the construction we will put it in out of our own pocket."
He said: "That's fine no problem."
A loan was arranged from Bank West and some $300,000 was received in September 2008, but in January 2009 Mr John Katter died.
There were subsequently delays, partly attributable, it seems, to the question of control of Bitar. Eventually in December 2010 Mr Joseph Katter ("Mr Katter"), Mr John Katter's brother, came to control Bitar after a contest between Mr Katter and his brother's widow.
Hebbel Constructions Pty Limited v Bitar Pty Limited [2017] NSWSC 917 | Case summary | Zoe
Later, a substantial loan was obtained from the Commonwealth Bank of Australia ("CBA"). The development construction was completed in early 2014. Most of the apartments and townhouses have been sold. There remain five residential units and five shops which have not been sold.
There is agreement between the parties on a number of matters, namely:
1. That Hebbel and Bitar were partners, and that BHC was formed for the purposes of the partnership.
2. That Hebbel and Bitar contributed equally to the purchase of the land.
3. That the partnership between Hebbel and Bitar ought to be dissolved and wound up.
4. That there have been serious deficiencies in the partnership record keeping for the project.
Mr F Assaf of counsel appears for Hebbel, the plaintiff, and Mr Taouk (a cross defendant), and Mr P King, of counsel, with Ms F Sinclair, appears for Bitar and Mr Katter.
There is currently an amount of money (approximately $185,000) in Gavel & Page's trust account (solicitors who have been acting on the sale of the units). The CBA have been repaid all of the monies lent by it and the interest due upon the loans.
There was no formal partnership agreement entered into between and Bitar and Hebbel, or between Bitar and Hebbel on the one hand and BHC on the other. There are disputes as to:
1. How much was contributed to the project by Hebbel.
2. How much was taken out of the funds advanced by the banks for purposes which were not project purposes by:
1. Hebbel;
2. Mr Taouk;
3. Bitar; and
4. Mr Katter.
1. What was expended by BHC and Hebbel on the project.
2. Whether Mr Taouk has borrowed money from third parties for the project which should be treated as loans by Hebbel to the partnership for which Hebbel should be reimbursed with interest.
The parties agreed on the appointment of a joint expert - a Mr Gwynne of PKF(NS) Forensic Accountants Pty Ltd ("PKF"). Mr Gwynne provided a report dated 3 August 2016. It is detailed and Mr Gwynne highlights some of the difficulties which he has faced and makes clear the matters on which he is not able to express an opinion: see Exhibit A1 pp 541 - 756. I summarise his principal conclusions:
1. BHC made payments of $7,646,691, and Hebbel made payments of $1,265,386 (a total of $8,912,077) for the project and for which there are supporting invoices and documentation. (See: Table 1)
2. Hebbel and BHC paid out another $1,982,176 ($1.46 million BHC and $519,400 Hebbel), for which there is no supporting documentation. (See: Table 1)
3. That Mr Taouk received $102,721 out of funds of BHC and Hebbel of $102,721 and Mr Katter received $391,827 out of funds of BHC and Hebbel that were not for the project. (See: Table 1)
4. The sale of lots within the project has yielded $13,480,500. (See: Annexure 28)
5. The residential units, which have not been sold, are units 1, 4, 11, 25, and 26. None of the five commercial units have been sold. (See: Paragraph 11.2.2 in Exhibit A1 p 573)
6. Rent of $94,260 was received from some of the commercial units. In addition, some smaller amounts were paid to an agent. Mr Gwynne estimates that a total $99,152.50 of rent could have been achieved (see: Exhibit A1 p 574), but notes that he has not been provided with rental information "for unit 11 or any of the commercial properties" (See: paragraph 11).
7. Loans totalling $2.234 million are claimed by Hebbel to have been advanced by lenders other than the CBA: see Exhibit A1 table 7 p 569. There is no evidence they have been repaid.
8. CBA provided, in addition to the main funding, $855,880.14 worth of bank bills that were supposed to have been paid to BHC but were deposited by CBA into the Hebbel account, and only some of which was transferred to BHC's account by Hebbel (see: Exhibit A1 p 553 and Table 5 p 565).
To understand the controversy between the parties I need to set out some further aspects of the project's history.
Although when Mr Taouk and Mr John Katter spoke in 2008 they contemplated the building work being undertaken by BHC using Mr Taouk's license, that is not what in fact occurred. In 2011 a building contract was entered into between Hebbel as the builder and BHC as the owner. By the terms of that contract, Hebbel agreed to construct the building and related works for $6.8 million. The building contract describes BHC as "the owner" but in fact the owners of the land were Hebbel and Bitar. The CBA was well aware that Hebbel and Bitar owned the land because it took a mortgage from Hebbel and Bitar over the Petersham site as security for the loan that it granted: see Exhibit A2 p 916, and the CBA appears to have regarded the borrowers as Bitar and Hebbel: see Exhibit A2 p 1354. As the work on site progressed, and as the costs of construction mounted, the CBA appointed a quantity surveyor (Mr Portelli of JQPS Pty Ltd) to monitor progress.
All of the CBA's project reports are in evidence (see: Exhibit A3) and in each the developer is referred to as "Hebbel Constructions Pty Ltd & Bitar Pty Ltd" (see for example Exh A3 p 1904). The building contractor is described as Hebbel and in a statutory declaration attached to the report (exhibit A3 p 1922). Mr Taouk has, as director and shareholder of Hebbel, made declarations in relation to the works that all subcontractors have been paid, that the works have been constructed in accordance with all consents approvals legislation and standards, that payments have been made to suppliers and:
Any amendments required to the project documents, variations or to or under the Building Agreement, cost variations known to date and potential claims have been notified to the Client/Developer.
(see: Exhibit A3 p 1922)
I shall refer to the contract between Hebbel and BHC as "the construction contract". The construction contract is in the form of the Master Builders Construction Contract (see: Exhibit A2 p 1253 - 1285). It is signed by Mr Taouk on behalf of Hebbel and by Mr Taouk and Mr Katter on behalf of BHC (see: Exh A2 p 1256). It is not dated but the parties are agreed that it was executed on or about 25 January 2011 (see T87.25).
In 2011 when the building work was commenced, Hebbel received a construction certificate from the Marrickville Council: see Exhibit A2 p 957.
A major part of the dispute between the parties focuses on the construction contract. Bitar claims that all of what Hebbel, or Mr Taouk, claims as partnership costs to which he, on behalf of Hebbel, has contributed and which should be treated as loans to the partnership, are in fact construction costs for which Hebbel, under the construction contract, was solely responsible. The construction contract permits variations and amendments, but the process for amendment was not followed by Hebbel, says Bitar, and therefore the contract price remains at $6.8 million as specified in the contract at Exh A2 p 1264. Thus, says Bitar, no amount above the $6.8 million paid for construction costs can now be claimed by Hebbel (or Mr Taouk) from the partnership.
Another significant and important dispute between the parties centres on the absence of documentation to support many of the amounts claimed. I have referred to the fact that Mr Gwynne has identified almost $2 million of payments which are claimed to have been made by Hebbel for which there is no supporting documentation. There are, for example, extensive payments recorded on cheque butts as 'wages' but no wage records have been produced and Mr Taouk's evidence is that neither Hebbel nor BHC kept any wage records. Since much of the payments made ostensibly for wages are to Mr Taouk or his family, there are real questions about the legitimacy of the payments. Mr Taouk made no attempt for himself, or through other witnesses, either to Mr Gwynne, or the Court, to establish precisely what work was done by himself or his family on the project which entitled them to payment.
Another area of dispute between the parties centred on the fact that the project was delayed. Mr Katter claims the building work was delayed because of Mr Taouk and, towards the end of the hearing, he sought to claim that there should be deducted from any amount otherwise due to Hebbel an amount of $450,000, using the nominated date of completion under the contract (30 June 2012) and the actual date of completion i.e. 31 January 2014 (see Schedule 2 to the construction contract p 1264) i.e. $1,200 per day multiplied by the 375 working days.
Another dispute centres on Mr King's contention that neither Hebbel nor BHC (if BHC, as Mr Assaf contends, was the builder) held a building licence with the consequence that the work was carried out by an unlicensed builder and Hebbel cannot make any claims by virtue of s 10 of the Home Building Act 1989 (NSW).
A further dispute centred on what occurred after the building was completed. Mr Taouk permitted his daughter Anna to reside in one of the apartments rent free. Mr Taouk did not obtain Mr Katter's agreement to such a course and Mr Katter points to that conduct as indicative of how Mr Taouk viewed this project. Hebbel (through Mr Taouk) accepts that it must account for the lost rent for the period that Anna occupied the unit free of charge. The only dispute now on this is whether the amount for rent foregone was $750 per week, as Mr Katter contends, or $650 per week, as Hebbel contends. The parties are agreed that that is a matter the referee should determine.
There is a dispute between the parties as to the identity of the referee to be appointed. Hebbel wants Mr Gwynne since he has already embarked on a detailed examination of the documentation and produced his report as a joint expert (and PKC has earned fees of approximately $80,000 for that work) and Bitar wants Mr McGeogh, a chartered accountant, to be appointed as referee. I will explain later the reasons advanced by Bitar for that position.
There is also a dispute as to whether the Court should appoint a receiver. Hebbel contends that a receiver should be appointed. Bitar does not want one appointed, claiming that there is not much left to do.
In considering the issues that have arisen I need to also draw attention to the identity of the parties to the proceedings and the most recent iteration of the pleadings i.e. the Further Amended Statement of Claim ("FASTOCL") and the Amended Cross Claim.
The only plaintiff in the FASTOCL is Hebbel; Mr Taouk is not a plaintiff. The first defendant is Bitar, and the second defendant is named as Hebbel and Bitar. BHC was previously joined as the third defendant, but it has been deleted from Hebbel's claim. Hebbel and Bitar are partners but the partnership is not a legal entity as such - it was referred to on occasions by Mr King as 'the firm' and as 'an accounting entity'. Since Hebbel and Bitar each own 50% of its shares BHC is deadlocked. No application was made by Bitar to bring proceedings in the name of BHC (see, for example, Gerard Cassegrain & Co Pty Ltd v Cassegrain; Cassegrain v Gerard Cassegrain & Co [2010] NSWSC 91, Stanton (WA) P/L v Vasquez Investments [2017] NSWSC 128). In the First Cross Claim Amended Statement of Cross Claim ("FCC"), Bitar is the first cross claimant and the second cross claimant is Mr Katter. Hebbel is the first cross defendant, Mr Taouk the second cross defendant, and BHC is the third cross defendant.
Credit of Witnesses
In submissions very little was said concerning the credit of witnesses. Mr King in referring to Mr Taouk and a question that he answered, said that it was the only question that he answered in a clear manner. Mr Assaf said nothing concerning Mr Katter's credit, or that of the witnesses he called, Mr Taouk or Mr Rafi Taouk.
In relation to Mr Taouk it will be observed that he had the benefit of an interpreter in the Arabic language. On a number of occasions he answered questions in English without the need for interpretation. I did have some doubt as to whether he really needed an interpreter at all, but he chose that course and Mr King did not object to him utilising the service of an interpreter.
Mr Taouk was a very poor witness and for the following reasons:
1. He frequently failed to answer questions asked of him.
2. He made assertions of fact which were established to be incorrect and on some occasions persisted with the assertion, notwithstanding that the falsity of his assertion has been established - the most obvious example being his contention that all cheques issued by BHC and signed by him were countersigned by Mr Katter: see Exhibit A2 and T110.5 - 12, T121.6 - T125.42 and T125.44 - T126.7.
3. He asserted on several occasions that Hebbel did "not exist" other than as a partner with Bitar: see T155.35 - 40 and I set out T157.44 - T158.29:
Q. Did BHC make any claim in respect of GST refunds?
A. INTERPRETER: Yes, but I don't know when.
Q. Did Hebbel make any claim in respect of GST refunds?
A. INTERPRETER: Please don't say Hebbel anymore. There is no Hebbel. There was Hebbel and Bitar - same: half and half.
Q. Mr Taouk, you recall yesterday that I demonstrated to you that Hebbel Constructions Pty Ltd was the builder according to the building contract in this case? Do you recall that question and the document I showed you?
A. INTERPRETER: The licence for the - for building is Mansour Taouk.
HIS HONOUR: He didn't ask you about the licence. He asked you about the building contract.
WITNESS (INTERPRETER): Can you repeat it, please?
KING
Q. I drew your attention yesterday to the document called Building Contract, which identified Hebbel Constructions Pty Ltd under your signature as the builder. Do you recall that?
A. INTERPRETER: No, I forgot. No idea.
Q. Do you mean you forgot that yesterday you were shown that document?
A. INTERPRETER: He didn't show me anything.
Q. Are you playing with this Court, Mr Taouk?
A. INTERPRETER: No.
Q. Did Hebbel make any claim in respect of GST relating to this development?
A. INTERPRETER: If there is any refund from GST it will return to Bitar and Hebbel.
Q. When is that going to happen?
A. INTERPRETER: Whenever come - when it return, when it happen
1. I set out the cross examination at T147.4 - T148.38:
Q. Mr Taouk, can you explain to this Court why it is that in relation to your personal tax return for the year ending June 2009, you lodged with the Commonwealth a tax return that stated that your income was $32,662, and in respect of that same tax year, you lodged with the Commonwealth Bank of Australia, for the purposes of obtaining finance, a copy of a tax return showing an income of $137,050.
A. INTERPRETER: Honest to God, I can't recall anything at all.
Q. You were either being very dishonest to the Australian Government, or being very dishonest to the bank, weren't you, Mr Taouk?
A. INTERPRETER: I've been here for 61 years. All I've done, it was honest, but sometime, you know, like some mistakes would occur.
Q. Who did you lie to? The Commonwealth or the bank?
A. INTERPRETER: I never lied.
Q. Do you have no explanation to this Court for the difference to which I have pointed out, have you?
A. INTERPRETER: I speak, like, everything in my head. If I don't know - I don't know. There's nothing to do.
Q. Would you have a look at this document that I asked the officer to show you, and I'd ask you to accept, and if you wish me to demonstrate it, I will, but this is a further document produced by the Commonwealth Bank.
A. INTERPRETER: Okay.
Q. And do you see that that is a tax return in relation to Bitar Hebbel Constructions Pty Ltd?
A. INTERPRETER: Did I - okay, did I sign it?
Q. Just for the moment, would you observe the nature of the document.
A. INTERPRETER: Okay.
Q. Did you give instructions for the preparation of that document?
A. INTERPRETER: No idea.
Q. You have any explanation as to why it was found in the Commonwealth Bank records in respect of the application of Bitar Hebbel Constructions Pty Ltd in respect of finance?
A. INTERPRETER: Who is seen applied for finance or known who.
Q. Do you remember yesterday I asked you some questions about the finance contract provided by the Commonwealth Bank on 1 February 2011?
A. INTERPRETER: I forgot.
Q. Would you have a look, please, at the last page in the document that you've been shown.
A. INTERPRETER: Just asking you - there's my signature on it.
Q. Can I suggest to you that the balance sheet that's shown on that page is a complete sham?
A. INTERPRETER: In other words, it's lies. It's lies. Nothing to do.
Q. And you were the one who gave instructions to tell those lies to the bank, weren't you?
A. INTERPRETER: I never go in bank..(foreign language)..I never went to the bank by myself. Always I go to the bank with my partner.
Q. You were the one who gave the instructions for the preparation of that document, weren't you?
A. INTERPRETER: Myself and my partner always to the bank.
HIS HONOUR: You're not answering the question, Mr Taouk.
WITNESS: Can you repeat?
INTERPRETER: Can you repeat?
KING
Q. You were the person who gave the instructions for the preparation of that document, weren't you?
A. INTERPRETER: No.
Q. Who was it?
A. INTERPRETER: I don't know.
Q. Do you have any explanation as to how it arrived in that form in the bank's records in support of an application for finance by Bitar Hebbel Constructions Pty Ltd in relation to the Petersham development?
A. INTERPRETER: No, like, I'm 80 years old and after ten years I cannot tell you what happened
These questions related to significant discrepancies between the tax return lodged by Mr Taouk and that provided to the CBA, and also related to Exhibit 6, which was produced out of the records of the CBA, and which shows Mr Katter as having earned income as managing director's fees of $124,825 from BHC, which Mr Katter says is not true: see T280.9 - 15.
1. He denied that there had been any falling out between himself and Mr Katter.
Mr Taouk mentioned on several occasions that he is of advanced age and he relied on that and the passage of time for his poor recollection of matters.
I was left with the clear impression that Mr Taouk is not a reliable witness and I approach his evidence with considerable caution.
Mr Rafi Taouk was not shown to have been untruthful in the evidence he gave. His evidence mainly went to the creation of Exhibit D - a ledger which he says he created on his own initiative for the period of 2011 to 2013. Exhibit D was not provided to Mr Gwynne for his consideration at any time, even though on Rafi's evidence Mr Taouk was aware that Rafi had the ledger. The ledger was largely created from cheque butts and there is no ready means to ascertain whether the same cheque butts were those given to Mr Gwynne. I do not think that Rafi's evidence takes Hebbel's case further.
Mr Katter's credibility as a witness was also undermined somewhat because:
1. He also, on occasions, (far fewer than Mr Taouk) did not answer the question asked of him.
2. He, on a number of occasions, answered a question with an emphatic "no" or "yes" only to indicate shortly after that the answer should be the opposite: see for example T271.16 - 25 and see T294.
3. His affidavit used terms with which he seemed unfamiliar with and unable to explain, prompting Mr Assaf to suggest to him that they were really the words of his lawyer, which he denied: see T251.36 - 45 and see T254.
4. He appeared to be very defensive in his manner of answering questions: see for example T268.36 - 45, and T269.30 - 36.
5. Whilst in his affidavit of 29 May 2017 he said he had attended a meeting at the CBA (see: paragraph 21(ii)) he said he could not recall having attended: see T295.21.
6. He endeavoured to assert that cheques that had been drawn by BHC to himself or his family or to third parties to whom he owed obligations were not to be regarded as payments to him personally for the purposes of partnership accounting: see T298 - T303. At T304 I sought to clarify with him that he was drawing a distinction between payments that directly went to him and those which were paid in connection with the estate or in resolution of his dispute with his sister-in-law, which he accepted was so. Later Mr Katter asserted that the payment of that kind did benefit the partnership because until the family dispute was resolved the partnership project could not proceed. There was a concession by Mr King at T312 - T313 which I think accepts that all payments out recorded by Mr Gwynne in his report as paid out to Mr Katter should be treated as requiring adjustment.
Mr Katter dealt effectively with the suggestions made to him in cross examination that he (as opposed to Mr Taouk or the broker used by both Mr Taouk and Mr Katter in relation to funding) had provided false information to the CBA.
Towards the end of his cross examination, Mr Katter explained that he regarded Mr Taouk as having conspired with two other persons to make him (Mr Katter) bankrupt after he, Mr Katter, had refused to hand over half of Bitar to Mr Taouk. Mr Katter on appeal was successful in having his bankruptcy annulled. In my view these allegations are not relevant to anything which needs to be decided in this case, but given that they were not made in any of his twelve affidavits, and were not put to Mr Taouk in cross examination, I am unable to accept that Mr Taouk did seek to have Mr Katter made bankrupt.
One matter on which Mr Katter and Mr Taouk differed was on whether there was a dispute between them. Mr Taouk denied that there was such a dispute and asserted that he and Mr Katter are friends. Mr Taouk seemed to have forgotten the fact that Mr Katter complained to the CBA (see: 13 April 2017 Affidavit of Joseph Katter at paragraph 19) about the conduct of the partnership business by Mr Taouk and Mr Taouk's family, and Mr Taouk later admitted that Mr Katter had called the police (see: T153.25 - 49). Mr Taouk had to admit that Mr Katter did not agree to the sale of one of the units to Anna Taouk, but he seemed to downplay that as well; see also paragraph 141 of Mr Taouk's Affidavit of 23 September 2016, which is indicative of ongoing problems in the conduct of the partnership.
As it transpires the factual disputes between Mr Taouk and Mr Katter do not have much significance to the outcome of this case. Partnership accounts were not properly maintained; The fact that Mr Taouk did not provide adequate information to Mr Katter as to expenditure during the partnership, if such information were sought, might explain why Mr Katter did not cooperate in co-signing cheques, but no claim is made by Hebbel that Bitar delayed the project. It is Bitar that claims that Hebbel is responsible for delays and those delays seem to be asserted solely in relation to the construction contract, a matter with which I deal later in these reasons.
The Construction Contract
Mr Assaf sought to persuade me that the construction contract was not treated by the partners as a real contract and/or was abandoned. In support of these arguments he contended:
1. The construction contract is based upon a false premise because it describes BHC as "the owner" when in fact the owners were Hebbel and Bitar.
2. Because BHC was not the owner of the property, it could not comply with various clauses of the contract, such as clause 3(a)(i), clause 31, and clause 3(b) which required BHC to provide evidence of its capacity to pay for the works, yet it was not the borrower from the CBA: see Exh A1 p 437 and clause 5.
3. The contract is incomplete because:
1. no stages are identified in Schedule 3;
2. no insurance details are provided in Schedule 4; and
3. rates for amounts payable under clause 6(g) compensation for delay.
1. The parties did not comply with the contract because:
1. before construction commenced on 3 February 2011, $129,348 was paid by CBA to BHC rather than Hebbel and funds were spent on various construction invoices: see Annexure 6 in Exh A1 p 605.
2. Hebbel was not paid the $6.78 million specified in the construction contract - drawdowns were paid to BHC rather than Hebbel (except for three drawdowns) payments were made for Hebbel to BHC: see Exh A1 p 567 and Annexure 3 p 544 - 545.
3. clause 30 of the construction contract required all funds from the CBA to be paid to the builder.
4. no payment claims were made in accordance with schedule 2 clause (c).
5. no retention money was paid or kept in accordance with schedule 2 clause (f): see Exh A2 p 1264.
1. The Court should find that the parties mutually abandoned or abrogated the contract from the outset and Mr Assaf refers to DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 and Ryder v Frohlich [2004] NSWCA 472
The construction contract contains a nominated sum for completion. It is executed by both Hebbel and BHC. It contains a lump sum amount which BHC must pay Hebbel. It is a formal document that has been implemented by Hebbel through Mr Taouk. It has been relied on by the CBA, and certificates have been issued. I think it must be inferred that documents have been provided to the council naming Hebbel as the builder since Mr Taouk has declared that all consents necessary for the building work have been obtained, and on 6 June 2011 Marrickville Local Council issued a construction certificate to Hebbel: see Exh A2 p 957. Certificates of Compliance by subcontractors were issued to Hebbel or Mr Taouk: see Exhibit A3 pp 2481 - 2494. I have referred to Mr Taouk's statutory declarations annexed to the JPQS progress reports.
In relation to [37(5)] it is true that the owner of the property was not BHC but Hebbel and Bitar were the owners and they created BHC. Challenging the identity of the owner does not place doubt on the identity of the builder. For reasons best known to themselves, Hebbel and Bitar decided to create a partnership vehicle and they have utilised that vehicle to enter into a contract with Hebbel. It is clear that the CBA was aware that BHC did not own the land because CBA's loan agreement was with Hebbel and Bitar: see Exh A2 p 1286 and the CBA took a mortgage from Hebbel and Bitar: see Exh A2 p 916. The fact that the CBA paid monies to BHC rather than Hebbel ([37(4)]) is not supportive of the proposition that Hebbel was not the builder - the CBA were providing the money to the partnership vehicle BHC. The CBA did require BHC to pay all of the money lent to the builder and money was paid by BHC to Hebbel or to persons to whom Hebbel had liabilities. In relation to [37(3)], there is a provision for delay (see Exh A2 p 1264) and in any event, incompleteness of the contract (for example the absence of a definition of stages) does not establish that the builder was BHC rather than Hebbel. Schedule 6, which was left blank, was for special conditions of which there were none. Insurance details were not completed in Schedule 4 (see Exh A2 p 1265), but a certificate of insurance for BHC (and Mr Taouk) was included: see Exh A2 p 1263.
The fact that many payments were made by BHC to contractors and suppliers does not establish that Hebbel was not the builder. What it demonstrates is that BHC was willing to pay Hebbel's contractors directly. There are invoices addressed to Hebbel, and some to BHC (see: Tab 44), but there was no evidence given by Mr Taouk or anyone else as to why some supply contracts were entered into by Hebbel and some with BHC.
There are in evidence only two licenses: one in the name of Mr Taouk at Exh A1 pp 342 - 344 incorporated as an annexure to the JPQS report. The other is a license for Mr Sam Taouk (see: Exh A2 p 1324) but it is not a building license. At one stage Mr Assaf sought to contend that Mr Taouk himself was the builder (see: T34.36 - T35.24) but Mr Taouk did not assert that he was, rather saying that the builder was both Hebbel and Bitar (see: T86.1) and in final submissions the contention that Mr Taouk was the builder was not pressed. It was agreed that Hebbel did not hold a building license, nor did Bitar or BHC.
In my view it is clear from the construction contract that Hebbel (and not BHC or Mr Taouk) was the builder, and nothing put by Mr Assaf persuades me that Hebbel was not in fact the builder.
I do not think there is any evidence that the construction contract was mutually abandoned. The relevant corporate mind is that of BHC, and BHC can only act by the minds of Mr Taouk and Mr Katter. Neither gave evidence of any consideration by them as directors of BHC's position, and Mr Katter certainly did not conclude that the construction contract had come to an end, and nor was it put to him that it had. The absence of any advice to the Council and the CBA that the construction contract had been abandoned by Hebbel or BHC, coupled with the positive evidence of the CBA's engagement with that contract through its quantity surveyor, says otherwise.
I conclude that, subject to the impact of the Home Building Act, the construction contract regulates what is due from BHC to Hebbel.
It follows that unless there have been variations to the construction contract's lump sum price the amount due from BHC to Hebbel is $6.8 million.
An examination of the construction contract, the JPQS reports and the limited correspondence between the CBA, on the one hand, and Hebbel and Bitar (and BHC), on the other, reveals a course of events in which the CBA, as funder of the project, effectively took control of the administration of the construction contract - relying on JPQS to assess what variations and delay claims should be allowed. Mr Taouk's evidence at T159.49 - T160.5 confirms that he viewed the CBA as determining what was due to the builder. Neither Hebbel, nor Bitar, nor BHC challenged the CBA's right to do this and I think it provides an answer to Bitar's claim that there was no proper administration of the construction contract, and Hebbel's claim that BHC and Hebbel had abandoned the contract. In my view Bitar cannot assert that no delay claims were made and considered, and that there were no variations to the contract, when JQPS has determined, and the CBA accepted and permitted payment of funds on the basis that there were. Mr King contended that how the bank dealt with the project is not determinative of the position as between the partners. Whilst that might be true in different circumstances, here BHC (and Hebbel and Bitar) ceded their control of the construction contract to the CBA through its agent JPQS.
The last progress report of JPQS in November 2013 (see Exh A3 p 2459 et seq) contains the following conclusions:
1. The adjusted construction contract amount is $8,266,809.29 (which I shall round up to $8.3 million).
2. The CBA loan approval for the project is $8,717,809.29 (excluding the purchase of land, stamp duty, GST and capitulated interest) which I shall round down to $8.7 million.
3. There will be a shortfall of $756,300 (which I shall round up to $760,000).
4. The revised start date was 4 February 2011 and revised date for completion is 13 December 2013 (originally 30 June 2012).
5. Extensions of 345 days have been claimed and allowed.
6. Mr Taouk's license issued by the Office of Fair Trading was current and expired in 2016.
I proceed upon the basis that, pursuant to the construction contract, Hebbel was entitled to be paid $8.3 million. If BHC itself paid amounts directly to Hebbel's subcontractors and suppliers then those payments must be added to the amounts treated as paid to Hebbel. For Hebbel as a partner to establish that it has contributed to the partnership more than 50% of the monies available to BHC it must establish:
1. that Hebbel did in fact pay to, or on behalf of, BHC the amounts which it claims it did pay to or on behalf of BHC (or the partnership) being amounts which were not construction costs (and therefore not the subject of the construction contract) but were in fact non construction project costs. The development fee of approximately $50,000 is a good example of an amount paid by Hebbel for which it is entitled to a contribution from the partnership because it is for the project and is not a construction cost; and
2. that amounts which were taken out of BHC, when added to the amounts paid directly to BHC to Hebbel's subcontractors and suppliers to Mr Taouk and his family, did not exceed the amount due to Hebbel under the construction contract.
I shall consider the basis of Hebbel's claims for approximately $2 million of loans, but it will be apparent from the above that establishing payment of money into BHC for construction costs will not, of itself, establish that any money is due to Hebbel, and nor will such be established if monies have been paid out to Hebbel, Mr Taouk, or his family.
I think it is necessary to refocus on the pleadings. A point made with some force by Mr King is the need to examine how Hebbel has sought, in the FASTOCL, to make out its case. Hebbel says that:
1. Hebbel and Bitar agreed to share equally in the expenses of developing the property (and in the profits).
2. That Hebbel "paid or alternatively advanced to the Partnership" the amounts set out as No 1 - 24 and totalling $2,097,535.77 (set out in paragraph 23).
3. That the amounts referred to in paragraph 23 were "payments made by or alternatively on behalf of" Hebbel in "the ordinary and proper conduct of the Partnership within the meaning of s 24(1)(2)(a) of the Partnership Act 1892" (NSW) or were "necessarily done for the preservation of the business or property of the partnership" within the meaning of s 24(1)(2)(b) and were beyond the amount of capital which Hebbel had agreed to subscribe within the meaning of s 24(1)(3) (i.e. the half share of the purchase price of the property, see: paragraph 23A of the FASTOCL).
4. That Hebbel is entitled to interest on all the payments made by it in accordance with s 24(1)(3) of the Partnership Act.
It will be observed that Hebbel does not make any claim against BHC. Both Hebbel and Bitar accept that BHC was "the conduit" for the partnership. Bitar claims that Hebbel, through Mr Taouk, treated BHC as its own. Strictly any amount paid by Hebbel to BHC is not a payment to the partnership since the partnership was between Hebbel and Bitar, but no point of that kind was taken.
I set out s 24 of the Partnership Act:
24. Rules as to the interests and duty of partners other than partners in incorporated limited partnership subject to special agreement
(1) The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement expressed or implied between the partners, by the following rules:
(1) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses whether of capital or otherwise sustained by the firm.
(2) The firm must indemnify every partner in respect of payment made and personal liabilities incurred by the partner.
(a) In the ordinary and proper conduct of the business of the firm, or
(b) In or about anything necessarily done for the preservation of the business or property of the firm.
(3) A partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital which the partner has agreed to subscribe is entitled to interest at the rate of seven per centum per annum from the date of the payment or advances.
(4) A partner is not entitled before the ascertainment of profits to interest on the capital subscribed by the partner.
(5) Every partner may take part in the management of the partnership business.
(6) No partner shall be entitled to remuneration for acting in the partnership business.
(7) No person may be introduced as a partner without the consent of all existing partners.
(8) Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of partners, but no change may be made in the nature of the partnership business without the consent of all existing partners.
(9) The partnership books are to be kept at the place of business of the partnership (or the principal place, if there is more than one), and every partner may, when the partner thinks fit, have access to and inspect and copy any of them.
(2) This section does not apply to or in respect of an incorporated limited partnership.
(Emphasis added)
Examining the items for which Hebbel claims in paragraph 23A of the FASTOCL:
1. No 1- $550,383.77 - reference is made in the FASTOCL to paragraphs 56 - 58 of Mr Taouk's affidavit of 23 September 2016 ("the September affidavit"). Mr Taouk borrowed $600,000 from RAMS and paid it into Hebbel's account. He says that he told Mr Katter that he would use those funds for construction costs (for the project implicitly). He says Hebbel did spend $549,000 on construction costs but he says he has misplaced the cheque butts and has no record of expenditure. I do not think Hebbel has established on the balance of probabilities that it did expend this money on the project.
2. No 2 - $50,000 - paragraph 67 of the September affidavit is referred to. The $50,000 was paid to the CBA as a non-refundable establishment fee. That is an expense which should be borne equally.
3. No 3 - $158,522- paragraph 80. This was also a draw down from RAMS. Paragraph 80 does not establish what Mr Taouk did with the money.
4. No 4 - $10,000 - paragraph 81. This paragraph does not establish for what the $10,000 was used.
5. No 5 - $17,000 - paragraph 88. This money was received from Mr Jabbour and put into BHC's account (see: tab 32). Mr Taouk says it was used to pay for piling work on the project.
6. No 6, 7, 8, 9, 10, 11, 15, 16, 17, 20 and 22 - paragraph 83. There are payments into BHC's account of various amounts. Mr Taouk does not recall making these cash deposits into BHC's account and he cannot demonstrate that they were paid into the account by him. He says no one else could have made the payments. It is highly unlikely that amounts of $30,000 and $20,000 of cash would be held by Mr Taouk and yet he is not able to demonstrate from where the money came.
7. No 12 and 13 - $100,000 - paragraphs 96 - 97. Mr Taouk says he borrowed two amounts, each of $100,000 from his daughter Anna, which he says he paid into BHC. Tab 36, to which reference is made, does show to deposits of cheques into a BHC account, which Mr Taouk said was his account: see T104 - T105. The document establishes that the two amounts were paid to BHC, but no detail has been provided of what the cheques drawn using those funds were paid towards.
8. No 14 - $300,000 - paragraphs 101 - 102. This is a cheque he received from Mr Katter so there is no basis for Hebbel claiming it.
9. No 18 - $48,000 - paragraph 103. Mr Taouk says that he obtained a $48,000 loan from his son-in-law and that he deposited that amount in BHC's account (see: tab 39).
10. No 19 - $38,700 - paragraphs 104 - 106. Mr Taouk says he borrowed this money from Mr Chidac, and deposited the amount into BHC's account with the CBA. The document at p 1376 of Exh A2 does show an amount of $38,700 deposited in BHC's account on 5 March 2013. Once again it is not shown what use was made of those funds.
11. No 21 - paragraph 108. Mr Taouk says that was a loan he obtained from Progressive Mortgage for $200,000, which he deposited into Hebbel's account. He says he told Mr Katter that Progressive had agreed to lend "us" $200,000 and that Hebbel used $100,276.12 on building work.
12. No 23 - paragraph 111. Mr Taouk says the amount of $300,000 was borrowed from Mr Joseph Taouk and Nizar Azzi (friends, not relatives). He says he repaid the funds with other borrowings from relatives. He says that $300,000 was spent by Hebbel on the project and indeed many of the expenses referenced appear to be project expenditure (see tabs 43 and 44).
13. No 24 - $24,390 - paragraphs 118 - 120. Mr Taouk says that $50,000 was loaned to Hebbel from Jabbour Jabbour. Out of this amount, $24,390 was paid for a development purpose- being an invoice from Wombat Glass, which appears to be a construction cost.
There are a number of obstacles in the path of Hebbel's claim. The first and most obvious obstacle is that Mr Taouk agrees that all of the claims referred to in FASTOCL 23 and 23A are claims of payment made for construction work on the project: see T89.28. It follows that since Hebbel was contractually required to construct the buildings, loans made by Mr Taouk or his friends and relatives, even if made on behalf of Hebbel, and even if used to pay for construction costs, were not 'loans' to the partnership at all. They were loans to Hebbel to enable it to meet its obligations, albeit using BHC as a conduit for payment to the various subcontractors and suppliers. The only way in which Hebbel could recover those amounts would be to establish that it had contributed them to pay non-construction costs for which Hebbel as the builder was not liable. One of the amounts in FASTOCL 23 meets that requirement, namely $50,000 (approximately) payable for the development application. The payment on behalf of the partnership of the development fee would meet the criteria for an advance by one partner pursuant to s 24(3) of the Partnership Act. I think this first obstacle precludes Hebbel from recovery of these amounts as loans except the $50,000 in item 2, and in relation to that item, it is not clear whether Mr Gwynne has allowed for the $50,000 as an expense of the project in his Table 1. That particular item is one on which Mr Gwynne can be asked to express a view upon and take into account.
The second obstacle is that we know from Mr Gwynne's report that $1.46 million has been paid out by BHC for amounts for which there was no supporting documentation. First, payments into BHC by Hebbel or Mr Taouk that were not used for partnership purposes are not payments recoverable under s 24 since they are not an advance or paid to the partnership, but rather for another purpose and nor are they payments made in the ordinary and proper conduct of the partnership business necessarily done for the preservation of the assets of the firm. Secondly, amounts which were paid out to Mr Taouk, Hebbel, Mr Taouk's family, or third parties who had no connection with the project, should be regarded as repayments of any monies due by BHC to Hebbel (whether they were actually paid in by Mr Taouk or Hebbel).
The last point is tied to the overall difficulty in this case of determining what amount had been received by Hebbel under the construction contract, i.e. if it was entitled to $8.3 million under the construction contract how much has been paid to it (or directly to its subcontractors and suppliers)? If it has received $8.3 million, it is not entitled to any further amount, even if it had to expend more to complete the construction. Hebbel does not claim that it has not been paid all the money to which it is entitled under the construction contract, indeed it asserts that it was not the builder and, alternatively, that the contract has been abandoned. No question was addressed on this topic to Mr Gwynne in the letter of joint engagement, presumably because on Hebbel's case it was not the builder, so it is owed nothing under the construction contract. Without determining whether Hebbel has received more or less than that to which it was contractually entitled under the construction contract (putting to one side for the moment the effect of the Home Building Act) it is not possible to know whether any money established to have been paid to the partnership by Hebbel has not been effectively repaid by paying subcontractors and suppliers to whom Hebbel was, as builder, liable.
The final problem is that, as I have noted, the quality of proof is, in a number of respects, deficient. Given the other obstacles, it is not necessary to dwell on these.
I summarise the position here. Hebbel cannot recover on loans that were made for the purpose of payment of construction costs because it had the obligation to meet those construction costs under the construction contract. Only some of the payments alleged to have been loaned to BHC or for partnership purposes have been established to have been made. No claim based on restitution was advanced. There is a real question (as Mr King contended) as to whether a party can claim for repayment of a 'loan' where no terms, even of an implied nature, can be identified, but I do not need to decide that point because Mr Taouk says that all of the loans were used for construction costs, being costs for which Hebbel was responsible under the construction contract. Hebbel makes no claim for a shortfall in monies due to it under the construction contract. Nor is it necessary to consider whether Hebbel is precluded from bringing a claim against BHC for lack of a building license because Hebbel makes no such claim.
It follows that Hebbel's claim for recovery of the "loans" cannot succeed. Mr Assaf relied on Abignano Nominees Pty Ltd v Sheripeter Pty Ltd [2016] NSWSC 1378 in relation to allowance of 7% interest at [29] - [38], but the question of interest simply does not arise in the light of this conclusion.
Delay
According to the report from JPQS, there were 345 days claimed for delay and 345 were approved: see Exh A3 p 2477. The actual date of completion was 31 January 2014 rather than 3 December 2013 (revised date according to JPQS). The delay claim would be in the order of 39 days multiplied by $1,200, which equals $46,800, assuming there was no basis for an extension. However, it would have to be BHC which made such a claim and not Bitar. Whether there is a basis for that extension is not something which has been investigated. Delay was not pleaded by Bitar and it was not a matter raised with Mr Gwynne.
The Referee
Bitar claims that Mr Gwynne should not be appointed as referee, notwithstanding his extensive work in connection with the issues and his familiarity with the project. It does so on the basis of the following history:
1. Mr Gwynne was appointed as joint expert by Hebbel and Bitar.
2. He was provided with information and documentation by both parties.
3. He produced his report of 3 August 2016.
4. After he delivered his report to the parties, the solicitors for Hebbel, Paramonte Legal (Mr Patrick Wiggins), wrote to him on 5 December 2016 without the agreement of Bitar or its solicitors seeking to provide some of the missing documentation and answers to some of the matters raised: see Exh 7.
5. Mr Gwynne commenced consideration of the new material and he prepared a draft: see Exh 7.
6. Shortly after he received the letter from the plaintiff's solicitor, Mr Gwynne learnt that the request for a further report had come only from Hebbel's solicitors and he contacted Bitar's solicitor.
7. Bitar's solicitor told Mr Gwynne he did not agree to any further report being prepared.
8. Exhibit 7, which is copied from Mr Gwynne's computer, was produced to the Court at Mr King's request of Mr Gwynne to do so.
Mr King contends that Mr Gwynne has been 'tainted' by what occurred. He did not contend that Mr Gwynne's first report could not be received or that Mr Gwynne could not continue to be retained by the parties as a joint expert in connection with his August 2016 report. I asked Mr King whether his objection to Mr Gwynne as referee would be maintained if the tasks which the referee will be given do not include considering the material which Mr Gwynne was given in December 2016 and April this year. Mr King said that if that task were not one given to Mr Gwynne, Bitar would not wish to put anything against the appointment of Mr Gwynne.
Mr Assaf contends that there is an inherent inconsistency in Bitar's position. Mr King does not advance any suggestion that Mr Gwynne is biased or has acted improperly, or is unsuitable, but rather appears to be advancing the case that there is an apprehension of bias because Mr Gwynne heard from one of the parties without having the benefit of the other side's contentions before he commenced on the second report (albeit in draft). Mr Assaf says that Bitar can be given the opportunity to be heard on any point it wishes to advance, and that Mr Gwynne is well able to consider it, but if it is contended that there is a bias that cannot be cured then it must exist whether or not Mr Gwynne is tasked with this particular head of enquiry.
It was wholly inappropriate for Mr Wiggins to have written to Mr Gwynne without the agreement of Bitar's solicitors, or Bitar (through Mr Katter), if McKell's, Mr Katter's former solicitors, had ceased acting. Mr Gwynne was an expert jointly appointed to undertake the tasks which were specified. Mr Gwynne was concerned about the source of instructions, and quite properly contacted Mr Brigden on 19 January. Mr Gwynne indicated his willingness to proceed but needed further clarification (see his email of 20 January 2017). By letter of 30 March 2017, Mr Wiggins wrote to Mr Brigden noting that Mr Brigden had previously indicated that it would be seeking an order that Mr Gwynne be removed but that no such orders were sought on 16 March 2017 when the matter was listed for directions. Mr Wiggins' letter advised that he intended to provide responses to Mr Gwynne's queries in Mr Gwynne's email of 20 January 2017 and to request that he finalise his supplementary report. He also asked Mr Brigden to respond by 3 April 2017 if he objected to this course and as to when Bitar would respond to the queries in Mr Gwynne's email. Mr Brigden did not respond and Mr Wiggins wrote to Mr Gwynne on 4 April 2017 providing further information and requesting Mr Gwynne to finalise his report.
Mr Gwynne did not finalise his report and nor did he provide his draft to either party until Mr King asked him to produce it.
Mr King explained that Bitar's concern centred on the fact that Mr Gwynne had prepared a draft supplementary report on the basis of submissions put to him by Hebbel without any input from Bitar. The question which needs to be framed is this: might a fair minded lay observer reasonably apprehend that Mr Gwynne might not bring an impartial mind to the resolution of the questions which he is called on to decide: see Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337, at [6]. I accept that he has been provided with documents and explanations by Hebbel which he has considered. In respect of some of those documents and explanations he has formed the view on a preliminary basis that they are inadequate. In respect of those which he has, on a preliminary basis, thought the explanations sufficient to require alteration to the figures in his first report, I do not think that a fair minded lay observer might reasonably apprehend that Mr Gwynne would not bring an impartial mind to considering the documents and arguments of Bitar, should any be advanced (other than those advanced before me which I have rejected). In any event, the questions which I think should be addressed by the referee are quite limited, and I set these out later in these reasons.
Bitar's Cross Claim
In the FCC Bitar and Mr Katter claim that Hebbel and Mr Taouk have removed from the BHC bank account with the CBA a total of $3,894,828.20 without any invoices, receipt vouchers, or any other supporting documentation.
By its FCC Bitar also claims that:
1. The partnership owes $67,046.81 to third parties and that Hebbel has the obligation to pay that money.
2. Hebbel and Mr Taouk failed to provide and maintain management accounts and ledgers.
3. That Bitar and Mr Katter hold a 50% interest in each of the remaining assets of the partnership i.e. the units and the Gavel & Page bank account. The parties are agreed that the residential units and the commercial lots have a current market value of approximately $5.5 million.
A claim relating to a development known as the Edmonson Park Development in the FCC (paragraphs 32 - 35) was abandoned by Bitar in final submissions.
It is clear that Hebbel and Bitar decided that BHC would be the partnership vehicle. A bank account was created with the CBA and substantial funds passed through that account. Although the CBA described Hebbel and Bitar as the developers, as I have noted, the bank seems to have accepted that BHC was the partnership entity.
Contrary to the claims contained in the FCC Mr Katter has no interest in the partnership or the partnership assets. Bitar is a partner with Hebbel, and Bitar and Hebbel own 50% of BHC. Neither Mr Katter, nor Mr Taouk, have any personal entitlement to the partnership assets. Mr Katter and Mr Taouk could be creditors of the partnership, but Mr Katter does not assert that he has provided funds to the partnership and Mr Taouk makes no claim, in his own right, in respect of monies that he says were advanced by Hebbel.
Strictly, it may be BHC that is entitled to the net profits arising out of the project, but both Hebbel and Bitar seem to be agreed that they are the entities who should derive the profits. They are agreed that the net profits, after payment of all expenses and debt, should be distributed equally.
In relation to the claim by Bitar that Hebbel has taken $3.8 million from BHC, I am unable to ascertain how that figure has been derived or calculated and no material has been provided to support the claim. Using Mr Gwynne's report there is an amount of $1,462,775 (Table 1) that is identified as having been paid by BHC for which there was no supporting documentation. I have taken that figure of $1.46 million into account in what I say below. I should also note that although Mr Katter claimed to be concerned that Hebbel had used goods and services for projects other than the Petersham project, that claim was, as Mr Assaf submitted, never substantiated by any evidence.
In relation to the issue of creditors of $67,000, I think that all creditors of the partnership operating as BHC, or as Hebbel and Bitar, must be paid whatever amount is rightfully due to them. To that end the receiver should make enquiries and advertise to ensure that all debts and obligations of the partnership are ascertained and dealt with, including debts and obligations owed to the Australian Taxation Office.
There will need to be a determination of what, if any, amounts have been received as refunds of GST by Hebbel that are properly to be regarded as monies of BHC (or Hebbel and Bitar).
It will also be necessary to ensure that all of the ten remaining units are sold in an appropriate and timely fashion.
The matters in [74] - [76] lead to the topic of dispute which I have identified in respect of the appointment of a receiver.
Mr Assaf drew attention to Rowlands v MacDonald [2002] NSWSC 282, in which, in dealing with the issue of appointment of an interim receiver, Barrett J (as his Honour then was) referred to the entitlement "as a general rule, and practically as a matter of course of the appointment of an interim receiver" per Long Innes J in Tate v Barry (1928) 28 SR (NSW) 380. Mr King contended that the remaining assets of the partnership were clearly identified and there was no need to appoint a receiver which would lead to additional expense.
Whilst a general rule is not always followed, and the matter remains one for the exercise of the Court's discretion, there are several reasons why I am persuaded that a receiver should be appointed here:
1. There has been an extensive history of disagreement and conflict between the parties.
2. There are ten units to be sold, one of which is currently occupied by Mr Taouk's daughter.
3. The units have a combined value of at least $5 million.
4. It is difficult to imagine that there will be no occasion when instructions would be required in connection with the sale of ten units and I have no confidence that the process will not be productive of conflict, even though there seems to be a person whom both sides regard as a suitable real estate person.
5. The woeful record keeping of the partnership leads me to have no confidence that all claims upon the partnership will be properly identified by the parties themselves.
Hebbel proposed as receiver Mr Daniel Friskin, an official liquidator. Whilst Bitar opposed the appointment of a receiver, opposition to Mr Friskin was not maintained. Mr Friskin as receiver should make all decisions regarding the sale of the remaining ten units.
Mr King prepared a list of questions that Bitar contended should be answered by the Court and by the referee ("Revised Questions Proposed by First Defendant"). He also set out what were the answers which Bitar contends should be given. Leaving out the responses, the questions for the Court were outlined as follows:
1. Is the plaintiff entitled to a credit in the settling of the account of the firm in respect of the 24 loan transactions alleged in FASOC paragraphs 23 and 23A and the interest alleged in paragraph 23B?
2. Assuming the answer to question 1 is in the affirmative as to all or some of the claims is the Plaintiff precluded from recovery of all or any of such sums on the ground of illegality as alleged in paragraph 15D of the Amended Defence?
3. Was the plaintiff the builder of the Petersham Development i.e. between January 2011 to date?
4. Is the Plaintiff limited in its reward as the builder to the contract price of $6,870,000 incl of GST or some other amount as determined by the Court?
5. If the answers to 3 or 4 are in the negative is the Plaintiff entitled to claim the cash payments to Mr Taouk in the sum of $1,700,000 expressed as 'wages' or otherwise?
6. Is the Plaintiff precluded from recovery of all or any of any additional sum referred to in questions 3 to 5 on the ground of illegality as alleged in paragraph 15D of the Amended Defence?
7. Ought the plaintiff pay to the firm [the Second Defendant] and in the settling of the account give credit to the First Defendant for an adjustment with respect to the difference between the contract price and the amounts referred to in Column 1 of Table 1 in the PKF Report, namely $2,042,077 [i.e. $8,912,077 - $6,870,000]?
The questions for the referee were as follows:
1. Ought the plaintiff pay to the firm [the Second Defendant] and in the settling of the account give credit to the First Defendant for an adjustment with respect to payments made at the instance of the plaintiff and unsupported by documents in the sum of $1,462,775 or some other sum, whether as payments on other projects or construction cost overruns, or otherwise not in the ordinary and proper conduct of the business of the firm?
2. Whether the non-project expenses of the shareholders of the partners of the firm ought to be credited against the respective partners' interest and if so in what sum [cf $31,453 re Mr Taouk and $333,521 re Mr Katter]?
3. Should any adjustment be made in favour of the firm for GST credits claimed by or for the Plaintiff in respect of the development and in what amount?
4. Should the Plaintiff pay to the firm [the Second Defendant] and in the settling of the account give credit to the First Defendant for an adjustment with respect to delay costs under the building contract made 25 1 2011 and under the finance arrangements with CBA and if so in what amount? [CB 1264 and 1278]
5. Should the Plaintiff pay to the firm and give credit to the firm in the settling of the account moneys received and moneys foregone in respect of rent and if so in what sum?
6. Whether any and if so what adjustments should be made to the final partnership account for partners drawings against the Gavel and Page account [including drawings which exceed a partner's entitlement]?
7. What if any further question should be referred to the referee?
8. Upon settling the accounts what amount or amounts should be paid:
1. to the Plaintiff by the First or Second Defendants
2. by the firm to the Plaintiff
3. by the Plaintiff to the First Defendant
4. by the Second and /or Third Cross Defendants to the cross claimant?
1. In what form should the creditors' advertisement be published and when?
2. What costs orders should be made?
In relation to the various questions, which Mr Assaf broadly accepted as appropriate, I set out my conclusions and comments below.
Question 1- Hebbel is not entitled to a credit for the amounts in FASOC 23 and 23A, except perhaps for Item 2 in the FASOC 23, depending on whether this amount has been taken into account by Mr Gwynne in his Table 1.
Question 2- The question does not strictly arise. The claim of contributions by way of advance to the partnership, if otherwise established, is not a claim caught by reason of the Home Building Act, but the contributions, even if established as made, are not recoverable as loans because they were used to pay construction costs for which Hebbel was liable under the construction contract.
Question 3- Hebbel was the builder of the project at all relevant times.
Question 4- Hebbel is not limited in its reward as the builder to $6.87 million, but is entitled to an amount of $8.3 million. Hebbel, however, has made no claim for any amount against BHC and no allowance should be made to it for any shortfall even if there were found to be one.
Question 5- Hebbel is not entitled to claim any payments to Mr Taouk as wages. This is for two reasons. The first is because there are no wage records in support of the amounts claimed for wages. The second is because wages payable to Mr Taouk and others in relation to construction work are properly payable by Hebbel as builder, and not the partnership.
Question 6- Hebbel does not make any claim for an additional sum, and therefore this question does not need to be determined.
Questions 7 and 8- Need to be considered together, although question 8 is one which the referee needs to determine. The construction contract price has been varied to $8.3 million. That still leaves a shortfall between the $8.9 million and the contract price of $500,000. As I have said, no portion of the excess of $8.3 million in construction costs is payable by BHC. Of the $1.26 million paid out by Hebbel and referred to in Table 1, none of the construction costs are recoverable from the partnership since they could only be recoverable from BHC if Hebbel had not been paid the varied contract sum of $8.3 million and Hebbel has advanced no such claim. The referee should assess what, if any, of the $1.26 million have been established to have been paid for non-construction costs, that amount to be set against the $1.46 million (or such adjusted amount as the referee determines are not supported by invoices in the light of further material supplied by Hebbel and any responses of Bitar). If Hebbel has received in excess of $8.3 million, either by way of payment to it, or Mr Taouk, or for Mr Taouk's benefit, or by payment for construction costs for the project by BHC to third parties, then the amount in excess of $8.3 million should be treated as a debt of Hebbel to the partnership, to be set off against any money paid to BHC, or for non-construction project costs.
Question 9- The parties are agreed on this.
Question 10- The parties are agreed that this question should be referred to the referee to determine what amounts of GST have been paid by Hebbel on behalf of the project, and what refunds have been received by Hebbel in connection with the project. However, in my view, to the extent that Hebbel has paid GST on purchases for the construction costs, these are not claimable by Hebbel from the partnership, and any refunds received by Hebbel are not refunds that should be treated as partnership refunds because Hebbel was the builder. The referee should, therefore, determine what refunds have been received by Hebbel for GST expended in connection with the project that are not for construction costs.
Question 11- I have dealt with the question of delay at [60]. The only delay for which BHC may have a claim is the 39 days between 3 December 2013 and 31 January 2014. This claim has not previously been examined by JPQS or anyone else. The referee can determine whether Hebbel is entitled to an extension of time for the 39 days of delay unless Bitar and Hebbel do not want to expend money on such an enquiry.
Question 12- The parties agree that Hebbel must give credit for the rent foregone by the occupation of Anna in one of the residential units. The only question to be determined by the referee is the amount of the weekly rent.
Question 13- The parties are agreed that adjustments should be made to the final partnership account for Hebbel and Bitar drawings against the Gavel & Page account, including drawings which exceed Hebbel or Bitar's entitlement. These payments would include payments to Mr Taouk and Mr Katter, or to third parties at their direction.
Questions 14 and 15- These conclusions deal with these questions.
Question 16- The form of the creditors' advertisement should be determined by the receiver. The receiver should specifically be directed to:
1. Ascertain from the ATO what amounts are, or may be due, by BHC, Hebbel and Bitar to the ATO in relation to the project;
2. Ascertain from the Department of Fair Trading what obligations BHC, and/or Hebbel and Bitar, may have to purchasers of the units in the project and what amounts, if any, should be set aside as contingencies in connection with the project and in respect of any breach by Hebbel, Bitar and BHC of the Home Building Act.
Question 17- The question of costs should be determined after the outcome of the referee's report is known. The outcome may not be decisive in determining who should pay costs, but the outcome may be relevant to the decision on costs.
Both Bitar and Hebbel seek dissolution of the partnership at a time when the only remaining task is the sale of the balance of the units. Relations between the partners have, it appears, led to an absence of trust and confidence, certainly on the part of Bitar towards Hebbel, but I am inclined to think by Hebbel towards Bitar as well. These conditions make it unlikely that the partnership can ever function as it ought and, accordingly, I am satisfied that circumstances have arisen which justify the dissolution of the partnership (s 35(f) of the Partnership Act 1892 (NSW)).
Conclusion
It follows from the above that there should be a declaration that:
1. The partnership should, as of today, be dissolved.
2. Mr Friskin should be appointed receiver and manager to wind up the affairs and business of the partnership, including the shares in BHC and the sale of the ten units. The receiver's tasks must include attending to the matters in [74] and [96] and Mr Friskin is entitled to have regard to the Gwynne report, the further conclusions of the referee in relation to matters set out in [91] - [97] and [99(3)] below and these reasons. Given that Mr Friskin is an official liquidator, I do not think it is necessary that he provide security (see: Ritchie's Uniform Civil Procedure NSW at 26.3.30).
3. Mr Gwynne should be appointed referee to determine the questions:
1. What is the amount of rent foregone by Anna's occupation of one of the units?
2. What amounts have been paid by Hebbel for GST and what refunds have been received by Hebbel for non-construction project purchases?
3. What, if any, of the $1.26 million identified in Table 1 of the Gwynne report have been established to have been paid for non-construction costs, that amount to be set off against the $1.46 million (or such adjusted amount as the referee determines are not supported by invoices)?
4. What refunds, if any, have been received by Hebbel for GST expended in connection with the project that are not for construction costs?
5. Whether Hebbel is entitled to an extension of time for the 39 days of delay unless Bitar and Hebbel do not want to expend money on such an enquiry?
6. Consequentially, and having regard also to the answers to questions 8 9, 10, 11, 12 and 13 (see [89] - [94]) and the matter raised in [54], what monies are owed:
1. to the partnership by Hebbel;
2. to the partnership by Bitar;
3. by the partnership to Hebbel; and
4. by the partnership to Bitar?
On the question of costs, the parties should seek to have the matter relisted before me by arrangement with my Associate once all matters have been determined by the referee.
[2]
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Decision last updated: 11 July 2017