HP Mercantile Pty Limited v Hartnett & Ors [2015] NSWSC 1475 | Case summary

Questions 1 and 2

The dispute arises from the fact that, at all material times for each of the four projects, there were Gross Sale Proceeds that were not remitted to the Representative as required (see Statement of Agreed Facts at [26]). HPM, for whom Mr Walker SC and Mr Knowles appeared, submitted that this had the consequence that the condition in clause 5.2(c) - that the Grower's income from his interest in the Project be made available in its entirety by the Grower to the Representative for the purpose of meeting the Grower's payment obligations to the Lender under the Loan Agreement - was not satisfied. Accordingly, the Grower was not entitled to the benefit of the limited recourse provided for in the clause. In brief, it was HPM's contention that "the Grower's income from his interest in the Project" within clause 5.2(c) should be taken as a reference to the Grower's share of the income generated by the Project prior to deduction of any amounts; that is, it is to be equated with the Grower's share of the Gross Sale Proceeds.
The defendants, in terms of their legal representation, formed two groups. Mr Newlinds SC appeared with Mr d'Arville for one group, and Mr Leopold SC appeared with Ms Holmes for the other, larger group. Despite some differences in approach and emphasis, the submissions made for each group were broadly consistent. In essence, it was the contention of the defendants that "the Grower's income from his interest in the Project" within clause 5.2(c) should be taken as a reference to any amounts payable to the Grower pursuant to clause 17.8 of the Investment Deed. It was then submitted that, by reason of the irrevocable authority and direction referred to in clause 5.2(a), each Grower had made such income available in its entirety to the Representative for the purpose of meeting the Grower's payment obligations under its Loan Agreement. Accordingly, the Growers were entitled to the benefit of the limited recourse provided for in clause 5.2(c).
Whatever the precise content of the "plainly wrong" test, I consider that I am required to come to my own conclusion on the questions of construction that arise (see Undershaft (No 1) Limited v Commissioner of Taxation [2009] FCA 41 at [68]-[74] per Lindgren J, as applied by Kunc J in Guo Hui Cai v Xiao Yan Guo (No 2) [2014] NSWSC 1416 at [46]-[47]).
The applicable principles of construction of written commercial contracts are to be found in the statements made by the High Court in Pacific Carriers Limited v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22], Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; (2004) 219 CLR 165 at [40], and more recently in Electricity Generation Corporation v Woodside Energy Limited [2014] HCA 7; (2014) 251 CLR 640 at [35] (and see also the discussion by Leeming JA in Mainteck Services Pty Limited v Stein Heurtey SA [2014] NSWCA 184 at [71]-[85]).
It is necessary to determine what a reasonable business person would have understood the terms of the Loan Agreements to mean. That determination requires a consideration of the language used, the surrounding circumstances known to the parties, and the commercial purpose or objects to be secured by the agreement.
The Loan Agreements were entered into by a Lender who was the Manager of a horticultural scheme, and a Borrower who was to invest in the scheme. It is common ground that such investment was designed to achieve taxation advantages for the investor. The Loan Agreements provided funds to facilitate the making of such investment, and were entered into by the investor in conjunction with other agreements made with the Manager, namely a Licence Agreement and a Farming Agreement. It is relevant to note that an investor in a scheme became bound by the terms of the applicable Investment Deed or Deeds. It is also relevant to note that each of the forms of Loan Agreement was contained in a prospectus issued under the Corporations Law, and that an Application for Investor Loan form had to be completed by the Borrower.
Turning now to the terms of the Loan Agreements, it should be noted that the obligation to repay the Principal Sum is found in clause 3.2(a). The clause must be read with Item 4 of Schedule 1 to the agreement which stipulates when repayments of the Principal Sum must be made. Item 4 operates so that two repayments have to be made within six months of the date of the agreement. Item 4C provides that the balance of the Principal Sum is to be paid by direct deduction from "income of the Farm Business" in accordance with clause 17.7 of the Deed and clauses 3.3 and 5.2 of the Loan Agreement.
Clause 3.3 refers in terms to repayment of the balance of the Principal Sum and accrued interest (and all other monies owing under the agreement to the Lender) "by direct deduction from the monies payable by the Representative to the Borrower in pursuance of 17.8 representing the income of the Borrower in respect of the Borrower's Farming Allotments". The reference to 17.8 is plainly a reference to clause 17.8 of the Investment Deed. It is then stated that the Borrower, by his execution of the agreement, authorises the Representative to pay all such monies to the Lender subject to the operation of clause 5.2.
Clause 5.2(a) itself refers to the authority of the Representative to make such payments to the Lender out of amounts payable by the Representative to the Borrower in pursuance of clause 17.8 of the Investment Deed "representing the income of the Borrower in respect of the income of the Borrower's Farm Business (the Borrower's Farming Allotments)".
The words "direct deduction" found in Item 4C should be regarded as a reference to the direct deduction expressly mentioned in clause 3.3, namely, direct deduction from monies payable to the Borrower pursuant to clause 17.8 of the Investment Deed. Whilst I do not think that anything turns on it, it is likely in my view that the reference in Item 4C to clause 17.7 is an erroneous reference to clause 17.8 of the Investment Deed. Direct deduction in accordance with clause 17.7 to pay outstanding amounts of Principal Sum seems inapposite, as clause 17.7 is directed to costs, expenses and outgoings. It would make much more sense to refer to clause 17.8, in conjunction with clauses 3.3 and 5.2 of the Loan Agreement, as those provisions expressly pick up clause 17.8.
The obligation to pay interest on the unpaid amount of Principal Sum is found in clause 3.2(b). The clause must be read with Item 6 of Schedule 1 to the agreement which stipulates when interest payments must be made. Item 6 operates so that an initial payment of interest has to be made on the date of the agreement, and another on or before 30 June 1995 (see Items 6A and 6B). Item 6C provides that thereafter interest is to be paid on or before 30 June in each financial year in respect of that financial year.
Clauses 3.2(c) to (e) contain obligations to pay various other amounts to the Lender, including stamp duty and other taxes, and the costs of remedying defaults.
In summary, the payment obligations contained in clause 3.2, read with clause 3.3, require repayment of the balance of the Principal Sum and accrued interest, and all other monies owing under the agreement to the Lender (amounts other than Principal or interest), by direct deduction from monies payable to the Borrower pursuant to clause 17.8 of the Investment Deed. That is, for amounts falling within clause 3.3, a particular source of payment is identified. The terms of clause 5.3 suggest that aside from the interest payments referred to in Items 6A and 6B, clause 3.3 thereby operates to relieve the Borrower to some extent from liability to make the payments.
Clause 17.8 of the Investment Deed requires the Representative (within 60 days of the end of each financial year) to cause any credit on the account of the Grower to be paid to the Grower less any negative amount carried forward from an earlier period pursuant to clause 17.9. At the end of each financial year, the account of the Grower is credited by the Representative with a share of Net Income (see clause 17.6). Amounts are then deducted from the account by the Representative to pay costs, expenses and outgoings properly chargeable to the Grower under his agreements (see clause 17.7). The amount of any remaining credit, less any negative amount carried forward pursuant to clause 17.9, is then paid to the Grower under clause 17.8.
An amount is only paid to the Grower under clause 17.8 if there is a credit on the Grower's account that exceeds any negative amount carried forward from an earlier period pursuant to clause 17.9.
As envisaged by clauses 3.3 and 5.2(a), the Grower, by execution of the Loan Agreement, irrevocably authorises and directs the Representative to pay any clause 17.8 monies to the Lender until the whole of the Principal Sum has been repaid and interest paid. Clauses 3.3 and 5.2(a) indicate that clause 17.8 monies "represent the income of the Borrower" in respect of the Borrower's Farming Allotments or the Borrower's Farm Business.
Clause 5.2(b) then refers to the situation where "the Grower's income" in any one year is insufficient, after deduction of any other amounts payable to the Manager, to pay the amounts referred to in Items 4C, 5 and 6C. Those "other amounts" would include, for example, amounts of Licence Fees and amounts of farming costs payable out of clause 17.8 monies (see clause 14(a) of the Licence Agreement and clause 30(a) of the Farming Agreement). The amounts referred to in Items 4C and 6C include the balance of the Principal Sum, and interest in respect of financial years after 30 June 1995. It is not clear why Item 5, which merely refers to a rate of interest rather than an amount of interest, is included alongside Items 4C and 6C.
In any event, given that the amounts in Items 4C and 6C are to be paid by direct deduction out of monies payable by the Representative to the Grower under clause 17.8 of the Investment Deed, and given further that such monies "represent the income of the Borrower" in respect of the Borrower's Farming Allotments or the Borrower's Farm Business, "the Grower's income" where it first appears in clause 5.2(b) should be read as a reference, albeit shorthand, to monies payable by the Representative to the Grower under clause 17.8 of the Investment Deed.
Clause 5.2(b) thus operates so that if any monies payable under clause 17.8 in any year are insufficient (after the deduction of any other amount payable to the Manager) to pay the amounts referred to in Items 4C, 5 and 6C, then those amounts or part thereof may be paid out of "the Grower's income" in any subsequent year. Again, "the Grower's income" should be read as a reference to monies payable by the Representative to the Grower under clause 17.8 of the Investment Deed. The effect of clause 5.2(b) is that the obligations to pay the amounts out of clause 17.8 monies may be deferred to any subsequent year.
Clause 5.2(c), the limited recourse provision, refers to "the Grower's income from his interest in the Project". In order for there to be limited recourse in respect of the amounts referred to in Items 4C, 5 and 6C, such income must be "made available in its entirety by the Grower to the Representative for the purpose of meeting the Grower's payment obligations to the Lender under the Loan Agreement".
The concept of "the Grower's income from his interest in the Project" is central to the determination of separate questions 1 and 2. It is immediately apparent that the language employed in clause 5.2(c) concerning the income of the Grower differs from that employed in the preceding paragraphs of the clause. Mr Walker, for HPM, drew attention to the contrast in this respect between clauses 5.2(a) and 5.2(c), and noted that the provisions performed different functions. The former identifies a source of payment from which the Borrower's liability can be satisfied; the latter concerns recourse to the Borrower. It was submitted that in circumstances where the relevant words in clause 5.2(a) were given a defined meaning, the different words in clause 5.2(c) must have a different meaning. It was put that the words in clause 5.2(c) were apt to include all of the Gross Sale Proceeds.
HPM further submitted that clause 5.2(c) should be construed harmoniously with its analogues in the Licence Agreements (clause 14(c)) and Farming Agreements (clause 30(c)), and it made no sense to construe those provisions as referring to amounts payable under clause 17.8 because licence fees and farming fees are taken out at an earlier stage (see clause 17.7 of the Investment Deed). Clause 5.2(c) and its analogues should thus be understood as requiring the Grower to make available income to meet obligations under all such agreements and such income was income prior to the various deductions contemplated by the Investment Deed.
This construction was said to be supported by the language of clause 5.2(b) and its analogues, where income is referred to in a manner which suggests that the Grower's income is something that exists prior to any deductions.
HPM submitted that its construction was also supported by the terms of the Investment Deed (including clauses 16.1 and 16.6) which indicate that project income is received "for and on behalf of Growers", is "the property of the Growers", and that Growers have an interest in income generated by the project prior to any distribution under clause 17.8.
As noted earlier, HPM submitted that as there were Gross Sale Proceeds in respect of each scheme that were not remitted to the Representative as required (see Statement of Agreed Facts at [26]), the Grower's income from his interest in the Project had not been made available in its entirety within the meaning of clause 5.2(c). It was put that the notion of making income available to the Representative entailed a requirement to pay or cause money to be paid. Merely giving the authority and direction as referred to in clause 5.2(a) cannot be sufficient, otherwise the condition for limited recourse in clause 5.2(c) would be rendered otiose.
Mr Newlinds submitted that clause 5.2(a) defined, for the purposes of clause 5.2 generally, what was meant by Grower's income. That is what was intended by the words "representing the income of the Borrower in respect of income of the Borrower's Farm Business (the Borrower's Farming Allotments)", which words would otherwise be redundant. Mr Newlinds also pointed out that it would have been easy to employ the term Gross Sale Proceeds in clause 5.2(c) had that been the intention. Further, he submitted that it made little sense to regard a share of Gross Sale Proceeds as the Grower's income when no part of Gross Sale Proceeds can be identified as belonging to a particular Grower.
Mr Newlinds also submitted that it would be absurd if the Grower could not obtain the benefit of clause 5.2(c) due to a default by the Manager (who was at the time of contract also the Lender) in its obligations under the Farming Agreement to pay all Gross Sale Proceeds to the Representative. It was submitted that a Grower, by irrevocably authorising and directing the Representative in accordance with clause 5.2(a), did all he could to make available to the Representative the entirety of the income from his interest in the Project.
Mr Leopold submitted that clause 5.2(c) should be read in a way that is harmonious with clauses 3.2(a), 3.3, 5.2(a), 5.2(b) and 5.3 of the Loan Agreement, understood against the background of clauses 16 and 17 of the Investment Deed. In summary, it was put that those provisions of the Loan Agreement draw a sharp distinction between certain intial payments of principal and interest (see Items 4A, 4B, 6A and 6B in Schedule 1) and the payment of the balance of principal and interest (see Items 4C and 6C in Schedule 1), and repetitively reinforce that the balance of principal and interest is only to be paid out of amounts payable to the Grower under clause 17.8 of the Investment Deed. That is to say, those provisions indicate that there is no other recourse to the Grower in respect of the balance of principal and interest. In this context, clause 5.3 was relied upon as a further indication that the provisions (particularly clause 3.3) relieved the Grower from liability for the balance of principal and interest, save for satisfaction out of amounts payable to the Grower under clause 17.8.
Mr Leopold submitted that "the Grower's income from his interest in the Project" in clause 5.2(c) should be understood (as should the reference to "the Grower's income" in clause 5.2(b)) as any amounts payable to the Grower under clause 17.8 of the Investment Deed.
It was then submitted that it was only at the clause 17.8 stage that a Grower had any control or power over the application of income from the project, and only then could a Grower make available any income to the Representative. It was put that it would be absurd to make the limited recourse conditional upon something which the Grower was not in a position to satisfy.
The question of construction raised in relation to clause 5.2(c) concerns the condition for the operation of a limited recourse provision. In approaching the question, it is appropriate to consider the language of the condition as a whole. That language mandates that certain income of the Grower must be made available in its entirety by the Grower to the Representative for the purpose of meeting the Grower's obligations under the Loan Agreement. It is important to notice that the condition requires not merely that such income be made available to the Representative, it must be made available by the Grower. This suggests that the income is something over which Growers have control, so that they can place it at the disposal of another (see Gibbs J in Thompson v Smith (1976) 135 CLR 102 at 105), and thereby satisfy the condition.
It is true that Growers have an interest in the pool of fruit, of which the fruit from the Grower's own trees forms part (see clause 11.1 of the Farming Agreement), and thus an interest in the proceeds of sale of the pool of fruit (that is, Gross Sale Proceeds). Nonetheless, Growers do not receive the Gross Sale Proceeds or any portion of them, and are not in a position to control how Gross Sale Proceeds are actually dealt with. Gross Sale Proceeds are received by the Manager as agent for the Grower, but the Manager is obliged to pay them to the Representative to be dealt with in accordance with the Investment Deed. No proceeds are paid to a Grower apart from amounts that are payable under clause 17.8. In contrast to the position concerning Gross Sale Proceeds, Growers are in a position to control how payments under clause 17.8 are actually dealt with.
The Loan Agreements provide that the Growers irrevocably authorise and direct the representative to pay such amounts to the Lender "until the whole of the Principal Sum has been repaid and Interest paid". The Licence Agreements and Farming Agreements similarly provide that the Growers irrevocably authorise and direct the Representative to pay such amounts to the Manager until certain annual licence fees and other payments to the Manager have all been paid. There is no suggestion that such authorities and directions are not effective. It is agreed that none of the directions have been revoked. The authorities and directions place any amounts payable under clause 17.8 at the disposal of the Representative to apply the money towards the Grower's payment obligations under the Loan, Licence and Farming Agreements. A Grower thereby makes available to the Representative any amounts that are payable to the Grower pursuant to clause 17.8 of the Investment Deed. Those amounts are made available for the purpose (albeit not the sole purpose) of meeting the Grower's obligations under the Loan Agreement. I do not think that this conclusion necessarily renders the condition for limited recourse otiose. The condition is directed to whether, in fact, such income has been made available to the Representative in its entirety. It is possible that, despite the direction, an amount could be paid to the Grower by mistake. There is no suggestion that any such mistake has ever occurred.
The question remains whether such amounts should be regarded as "the Grower's income from his interest in the Project" within the meaning of clause 5.2(c). In my view, notwithstanding the different language employed throughout clause 5.2 concerning the income of the Grower, such amounts should be so regarded. By clause 5.2(a), all amounts payable pursuant to clause 17.8 are said to represent "the income of the Borrower in respect of the income of the Borrower's Farm Business (the Borrower's Farming Allotments)". That suggests that out of all the income generated by the Borrower's farm, the amounts payable under clause 17.8 may be taken to represent the Borrower's income from the farm business. Further, as noted earlier, it seems to me that "the Grower's income" within clause 5.2(b) should be read as a reference to monies payable under clause 17.8 of the Investment Deed. The draftsperson could have, but did not, repeat the language that was used in clause 5.2(a). Instead, a shorthand expression was employed. I do not think that the reference in clause 5.2(b) to "deductions of any other amount payable to the Manager" indicates that the Grower's income is something that exists prior to any deductions. The reference can just as well be read as merely descriptive of what remains of any amounts payable under clause 17.8 after the deduction of any other amount payable to the Manager.
In clause 5.2(c) yet another expression, "the Grower's income from his interest in the Project", is employed. To my mind, when read in the context of clause 5.2 as a whole, the expression ought to be taken as a further reference to the Borrower's income from the farm business, being amounts payable under clause 17.8 of the Investment Deed. As a source of income, the Grower's interest in the Project does not seem to me to be a concept that is different from the Borrower's Farm Business. Language that differs from that found in clause 5.2(a) is once again used, but I do not think that the change signifies that clause 5.2(c) is dealing with a different concept of income.
In my view, this construction does not create disharmony between the Loan Agreement and the Licence and Farming Agreements. It is correct that Licence Fees and farming fees are intended to be deducted before any amounts become payable under clause 17.8. However, clause 14 of the Licence Agreements and clause 30 of the Farming Agreements expressly provide that such fees can be met out of amounts payable under clause 17.8. Those provisions seemingly cater for the situation where there are arrears which may be paid in any subsequent year.
In its written submission, HPM supported its construction of clause 5.2(c) by reference to parts of the prospectuses issued in relation to the schemes. It was said that these formed part of the relevant context, or the surrounding circumstances known to the parties. I was referred to summaries of the terms of the Investor Loans, and to parts of the taxation opinions contained in the prospectuses, as well as to one part of the Treetop Prospectus.
I found such material (assuming it to be properly receivable on the question of construction) to be of no real assistance. The summaries of contractual provisions, and the opinions about the operation of such provisions, say little about the known background or commercial purpose of the contracts, and by their nature are apt to distract from the task of construing the language of the contract itself. In any event, I do not think that the statements, which are of course only a selection from the material provided to potential investors, provide any clear support for the construction favoured by HPM. This is reinforced by the existence of other statements which, if anything, tend to support the contrary construction. I was referred to some statements contained in the Application for Investor Loan forms, about the operation of the Loan Agreements, which could be said to fall into that category. Again, however, I found such material to be of no real assistance.
For the foregoing reasons, I have come to the conclusion that the construction of clause 5.2(c) favoured by the defendants is preferable to that favoured by HPM. In my view, reasonable business people would have understood the terms of the Loan Agreements, and in particular clause 5.2(c), to mean that a Borrower would have the benefit of the limited recourse provided for in clause 5.2(c) if the Borrower in fact made available to the Representative any amounts payable to the Borrower pursuant to clause 17.8 of the Investment Deed for the purpose of meeting the Grower's obligations under the Loan Agreement. Reasonable business people would have further understood that so long as any amounts payable to a Borrower pursuant to clause 17.8 were dealt with in accordance with an irrevocable authority and direction as envisaged by clause 5.2(a), a Borrower would have in fact made available to the Representative all such amounts for that purpose.
The above conclusions are consistent with those reached by Black J in HP Mercantile Pty Limited v Clements (supra) at [26]-[49], albeit that our reasoning differs in some respects. His Honour's conclusions fortify me in my own. Far from thinking that his Honour's decision on these issues is plainly wrong, I consider it to be, with respect, correct.
It follows from the above that both Questions 1 and 2 should be answered "Yes". The difference between paragraphs 26(a) and 26(b) of the Statement of Agreed Facts does not dictate that the questions should be answered differently to each other.

HP Mercantile Pty Limited v Hartnett & Ors

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