John Anthony Jeans v John Richard Bruce & Ors

• IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50104/03 John Anthony Jeans v John Richard Bruce & Ors JUDGMENT The proceedings 1 These proceedings are conveniently divided into two separate although related sets of claims. The claims for contribution in relation to the guarantees of 12 June 1998 2 These claims raise a number of issues arising from two documents dated 12 June 1998 under which the plaintiff, Mr John Anthony Jeans and the first defendant, Mr John Richard Bruce purported to guarantee the obligations of Deangrove Pty Limited (Receivers and Manager's Appointed) ["Deangrove"] to the Commonwealth Bank of Australia (in each case "the guarantee"). The guarantees are near enough in identical terms to one another. 3 Each of Mr Jeans and Mr Bruce by different routes have become liable to the Commonwealth Bank following proceedings in the Federal Court of Australia [N 1142/2000] in which each was a cross defendant. The proceedings were settled as between the Bank and Mr Bruce. The Bank proceeded against Mr Jeans obtaining a judgment. 4 Mr Jeans seeks declaratory relief upholding his contention that (to the extent that the guarantee binds him) he has a claim for contribution in equity against Mr Bruce as co-guarantor which right is unaffected by the settlement reached between Mr Bruce and the Commonwealth Bank in the Federal Court proceedings. The claim is one in terms of an alleged entitlement to be reimbursed any sums paid by him to the Bank pursuant to a judgment recovered by the Bank against Mr Jeans in the Federal Court in excess of 50% of the liability of Deangrove to the Bank under the guarantee. 5 Mr Bruce by cross-claim seeks declaratory relief upholding his contention that he has a claim for contribution in equity against Mr Jeans as co-guarantor to be reimbursed any sums paid by him to the Bank pursuant to the Bank's judgment recovered against Mr Bruce in the Federal Court in excess of 50% of the liability of Deangrove to the Bank under the guarantee. The claims relating to the 'Heads of Agreement' 6 Mr Jeans in the summons and Mr Bruce by the cross-claim assert that: · a binding agreement was entered into by Mr Bruce, Mr Jeans, the second defendant, Harpley Nominees Pty Ltd ["Harpley Nominees"] and the third defendant a Victorian company, Advance Publicity Pty Ltd ["Advance" or "Advance Publicity"] in terms of a document called "Heads of Agreement" ["the heads of agreement "] dated 9 August 1999; · under this agreement [if authentic] Mr Bruce has an indemnity from Harpley Nominees and Advance in respect of his obligations under the guarantee, including an indemnity in respect of his obligation to Mr Jeans for contribution as a co-guarantor. 7 The proceedings presently before the Court litigated as a central issue, the circumstances in which the so-called heads of agreement are said to have been entered into. 8 Mr Jeans case as finally put was that on or about early September 1999 a document entitled heads of agreement recording the typewritten date "6 August 1999" was executed (inter alia) between Mr Jeans, Mr Bruce, Harpley Nominees and Advance Publicity. Harpley Nominees and Advance contended that no such document was ever executed on their behalf [nor agreed to] for reasons examined below. [A movement had occurred during the final hearing from the original claim that the document had been signed on or about 9 August 1999 - the matter was litigated accordingly] Clause 6.8 9 Clause 6.8 of the heads of agreement as propounded by Mr Jeans is in the following terms:

"Advance and Harpley shall indemnify and keep indemnified Bruce from and against all liability incurred by Bruce in respect of any personal guarantees given by Bruce of the obligations of Deangrove to the Commonwealth Bank of Australia whether in respect of principal, interest or costs under any Mortgage effected by Deangrove to the said Bank or any obligation incurred by Deangrove to the said Bank in the acquisition or development of the Holloways Beach development." The proceedings are dismissed against the Commonwealth Bank 10 On 12 September 2003 an order was made dismissing these proceedings against the Commonwealth Bank which was then a further defendant. Problems which arose during the course of the final hearing in terms of the Court being in a position to give rulings on admissibility of particular documents 11 By reason of the unusual circumstances where:

(ii) his case sought to prove that particular issue estoppels bound the defendants in particular ways [as for example contending that there was a concluded question as between himself and Mr Bruce that they were both bound to the Commonwealth Bank for the debts of Deangrove],

extensive time was taken while Mr Jeans was still in his case, during which submissions on admissibility were received. 12 The central issue concerned the so-called general rule that a judgment is not binding on a person who was not a party to the proceedings in which it was given and the identification of exceptions to this rule. On some authorities those exceptions have been said to arise where an indemnifier may be found to be estopped from denying the validity of a judgment, as for example, when having been given notice of the proceedings. 13 The matter was ultimately dealt with consensually as follows: · the plaintiff was granted leave to further amend the summons; · the defendants were granted leave to further amend their defences to cope with the new amendments to the summons; · the plaintiff was granted leave to file a reply to those defences which reply in the event, turned out to be quite extensive; · directions were given for the parties to have some little time in which to reorganise for the litigation of these new issues; · additional directions with respect to discovery in relation to the new issues were given and complied with; · by reason of the complexities which had arisen in relation to the admissibility questions and in order to explain the courts decision to reserve rulings on the tender of the so-called sensitive documents, a reasonably detailed set of reasons was delivered in the form of an interlocutory judgment. 14 It seems presently unnecessary to repeat the terms of that judgment which is self-explanatory and it is taken as a given that the matters set out in that judgment will wherever appropriate, be read together with this judgment. The amended pleadings which came forward 15 The amended pleadings which then came forward are particularly important and appropriate to be noted. Appendix 'A' to this judgment records the new pleadings. Difficulties involved in determining factual issues 16 This case is an example of the difficulties encountered by a trial judge in explaining both the evidence which was given, as well as the findings of fact. This is primarily because the case of the third and fourth defendants is that the heads of agreement in the form sued upon were never signed on their behalf. However at a particular point in time, as they accept, a single execution page was signed by Mr Herzog and sent by facsimile. 17 An important witness was a solicitor, Mr Butler, whose many disparate communications between the respective entities [proposed to be the parties to the heads of agreement] have been the subject of such close scrutiny. 18 This is a case where forgery as well as very substantial wrongdoing are alleged. A solicitor has been accused of ethical misconduct of the highest order inter alia in claiming to have sent particular correspondence when it is alleged that no such correspondence was sent. 19 In this particular case it is simply not practicable nor possible in explaining factual findings, to avoid going into very considerable detail in relation to which drafts of the heads of agreement were sent to which persons and in descending to specific evidence as necessary. Forgery allegations and allegations of professional misconduct require that treatment. 20 Particular focus is also given to whom were, or were perceived to be, legal advisers to the disparate parties and at what points in time. The background 21 Certain of the background events giving rise to this litigation are not in contention. In the Federal Court proceedings brought by Deangrove as first applicant and Mr Jeans as second applicant against the Commonwealth Bank, the Commonwealth Bank cross-claimed against Deangrove as first cross defendant, Mr Jeans as second cross defendant and Mr Bruce as the cross defendant. Mr Bruce also cross-claimed against the Bank. Neither Harpley Nominees nor Advance Publicity was a party to the Federal Court proceedings. 22 After Mr Bruce had given evidence in the Federal Court proceedings heard by Sackville J, the proceedings between the Bank and Mr Bruce were settled. 23 The Bank maintained and the Federal Court held: · that Mr Jeans executed the guarantee; · that Mr Bruce was liable to the Bank on the said guarantee; and · that Mr Jeans was liable to the Bank in respect of Deangrove's obligations to the Bank. 24 On 16 May 2003 judgment was entered against Mr Jeans in favour of the Commonwealth Bank in the sum of $4,749,813.30. Mr Jeans appealed from the decision at first instance and that appeal was dismissed by the Full Federal Court on 19 December 2003. Mr Jeans has filed an application for special leave to the High Court of Australia which has not yet been heard. The redevelopment in Cairns 25 Mr Jeans was at material times the sole director and a shareholder of Deangrove. That company had entered into various agreements and arrangements in terms of its proposal to acquire land at Holloways Breach, Cairns in Queensland for redevelopment purposes. 26 Mr Bruce's company John Bruce & Partners Pty Ltd ["JBP" or "John Bruce and Partners"] was the registered proprietor of a property at Broadbeach which was being developed. Harpley was the second mortgagee. Suncorp-Metway ["the Metway Bank" or "Suncorp-Metway"] was the first mortgagee. Late 1997/early 1998 - Holloways Beach land 27 In late 1997 or early 1998, Mr Jeans and Mr Bruce agreed that the first defendant or his nominee would acquire a 50% interest in the net profit of the development of the Holloways Beach land. March 1998 28 In March 1998, negotiations were undertaken by Mr Jeans with the Bank for finance in relation to the proposed acquisition of the Holloways Beach land and the construction of a development thereon. Prior to 3 June 1998 29 Prior to 3 June 1998, the Bank proposed that certain securities be delivered by Deangrove, Mr Jeans and Mr Bruce in relation to financial accommodation to be provided to Deangrove by the Bank in respect of the Holloways Beach development. 3 June 1998 30 On or about 3 June 1998, the Bank prepared security documents relating to advances that might be made by the Bank to Deangrove in relation to the proposed land acquisition and development. 31 The security documents proposed and propounded by the Bank to Deangrove included a form of guarantee for execution by Mr Jeans and Mr Bruce in respect of the obligations of Deangrove to the Bank.

Evidence given by Mr Bruce 32 Mr Bruce gave evidence that at material times he had been the sole director and secretary of John Bruce and Partners Pty Ltd-Architects, Project Managers and Development Consultants, having known Mr Jeans since 1995. He had been introduced by Mr Jeans in 1996 to Mr Herzog with whom he had become acquainted and had certain dealings. 33 Mr Bruce gave evidence: · that in the period 1996 to 1999 there was correspondence between Harpley and John Bruce and Partners with numerous requests for interest to be paid and that it is common ground that there were difficulties in discharging these commitments. John Bruce Partners was struggling to keep up with its mortgage commitment to Harpley Nominees in relation to the Broadbeach units [Transcript 292]; · in 1998 Mr Bruce made an arrangement with Mr Jeans concerning the Deangrove venture at Holloway's Beach. His firm was the architect of that project. It had a financial arrangement with Mr Jeans and hence Deangrove?

· the undocumented arrangement between his interests and Mr Jeans was that if there was an up-side, that is profit on Deangrove, he would be entitled to 50 percent of that profit; · it was because of that arrangement that Mr Bruce had been willing in June 1998 to give a guarantee to the Commonwealth Bank of Deangrove's obligations. 34 In about February 1999 Mr Bruce had written to Mr Herzog seeking to disband the then relationship between Mr Herzog, Mr Jeans and John Bruce and Partners. 35 Mr Bruce had consulted with Mr Jeans and Mr Butler [who was his usual solicitor during March and April 1999] as to how best to proceed and determined that a special meeting should be arranged and asked Mr Jeans to arrange for such a meeting to be attended by all interested parties and their relevant advisers to negotiate what he described as "an equitable and non-confrontational solution for [John Bruce and Partners]". 36 That meeting had taken place on 19 April 1999 and had been attended by Mr Herzog, Mr Backway, Mr Jeans, Mr McGillvray (an accountant with Mr Bruce), Mr Bywaters (an employee with Mr Bruce) and himself. The background to the meeting included Harpley being under secured [cf letter Mr Herzog to Mr Bruce at page 5 of Exhibit JRB 1 and cross examination of Mr Backway at transcript 417]. The group 37 Mr Backway was the senior finance controller of the group in 1999. The relevant group comprised companies including Advance Publicity [which was apparently a trustee of a trust] and Harpley Nominees [which was itself a trustee for a partnership of two trusts, the beneficial interest in one of which was held by Mr Herzog's wife and in another of which was held by Mr Herzog's sister-in-law]. [Transcript 413] 38 Mr Backway had joined the group in September 1996 and had remained there until August 2000, no one having been appointed to take his place at the precise time when he left. By the time he returned to Australia a successor had been appointed. He had left the country and had returned after approximately 18 months towards the end of 2001. It had become necessary for him to endeavour to locate his former files [which had already been put into different files by another person] so that he had had to endeavour to rebuild his own files. 39 Obviously it goes without saying that there may well have been documents which could not be located or had been misfiled with this background. 40 The meeting of 19 April had discussed the parameters of what was proposed. Mr Herzog had not been prepared to agree with certain proposals set out in earlier letters from Mr Bruce to him of February and March 1999 and had said that John Bruce and Partners had two principal assets [being the Noroton debt and the equity in Deangrove arising from the Holloways Beach development]. Mr Herzog had said that he wanted:

(i) the Noroton debt to offset what John Bruce and Partners owed Advance and

(ii) the Deangrove equity to offset the Broadbeach deficiency and to secure the investment of Harpley Nominees. 41 Mr Bruce had indicated that this was not equitable as he saw it as the amount of the Noroton debt and the Deangrove equity exceeded the amount of the Advance loan and the Broadbeach deficiency. 42 Mr Herzog had said that this was not a problem as he simply wanted to control the position in respect of Noroton and Deangrove so that he could get his money. He had said that what was left would be paid to Mr Bruce [presumably referring to Mr Bruce's interests].

Mr Butler to draft the heads of agreement 43 Mr Bruce gave evidence in his first affidavit that it was further suggested by someone at the meeting that Mr Butler be asked to draft heads of agreement which should contain appropriate clauses for the protection of each party and that Mr Butler should submit the draft to each party for comment. His evidence was that Mr Herzog had stressed that the heads of agreement which Mr Butler was to prepare required to be urgently finalised as Suncorp Metway were about to enter into possession. Mr Herzog had said that he wanted to cover his position and to take over the Suncorp Metway loan and to control the sale value of the units. He had suggested that Mr Jeans go to Brisbane to make a deal with Suncorp Metway. 44 Mr Bruce gave evidence in the witness box as follows:

"Q. And at the end of this meeting or towards the end of the meeting was there anything said that you recollect by any person about preparation of an agreement? A. Yes.

Q. Who said what? A. I can't recall that exactly, but if I might continue, it was something that everybody agreed to. [Mr Butler] was the only common denominator in the room, the only party that had some relationships to both sides of the - both parties." [Transcript 302]

"Q. Why did you ask for Mr Butler to be at this meeting? A. Mr Butler was also a solicitor, one of two that I used generally in the day to day operations of the company, and he is somebody that I trust. I think he has a fine ability to structure deals and agreements, structure them semantically so that it says what it's meant to say, and I felt comfortable with that, and I was aware that he had handled various tasks for Mr Herzog and I had a plan in my mind that whatever emanated from the meeting would be something that Butler might be able to take an intermediary type role." [Transcript 303-304]

"Q. You see in the facsimile [PX 14] on page 14 he had written to you, "As discussed, I have prepared the document as a draft on the basis that separate legal advice will be obtained"? A. Yes.

Q. What did you understand that to be a reference to at the time you received it? A. Confirmation of a discussion that was held at the meeting on 19 April where everybody was declared to have a responsibility to seek their own legal advice if they so desired.

Q. And did what he said in that note accord with your recollection of the discussion on 19 April or not? A. Yes, it does." [Transcript 305] 45 Mr Bruce's evidence was that he did not at any time on his own behalf or on behalf of his company retain Mr Butler's firm to prepare the heads of agreement and that Mr Butler never sent him a bill for preparation of the heads of agreement. Nor could he recall such a bill being sent to his company. [Transcript 303] Mr Herzog gives evidence as to legal advisers 46 Mr Herzog was also cross-examined as to his beliefs in terms of the solicitors acting for him in relation to the heads of agreement:

"Q. You have said, I think, that you engaged Mr Efron in connection with the heads of agreement in around May for some advice, is that right? A. Correct.

Q. Did you pay his firm for those services or don't you know? A. No, I am sure I paid them.

Q. And he sent you a bill, did he? A. I wouldn't know.

Q. Now, you did never get a bill from Mr Butler, did you, in connection with the heads of agreement? A. No.

Q. And I think you said earlier in your evidence that at least in the beginning Mr Butler's function was that he knew everybody and he was going to prepare a document but that you would have a right for your own legal advice in relation to it? A. No, at the beginning, he was definitely doing it for all parties. Then he suggested I should get an independent.

Q. And from that point you did not regard Mr Butler as your solicitor, did you? A. I did. We were fairly close to each other and I did definitely regard him as my solicitor.

Q. And he was your solicitor in relation to some continuing but different matters, wasn't he? A. No, in this matter too. He was constantly involved in all of this.

Q. So notwithstanding the fact that you had engaged and ultimately paid Mr Efron for advice in relation to the heads of agreement, you tell his Honour that you regarded Mr Butler as your solicitor in July 1999 in relation to what you should do about the heads of agreement? A. I expected him to work with me together on the heads of agreement, yes.

Q. Now, answer my question. Does that mean you did regard him as your solicitor ? A. Yes .

Q. But you never paid him? A. I think there was some arrangement there to pay fifty-fifty, but I can't remember if I paid him or not.

Q. You didn't pay him, did you? You can't swear that you did? A. I can't, no.

Q. So is what you're saying essentially this, that because you knew Mr Butler and because he was involved you had an expectation of him concerning the heads of agreement and his function, is that right, so far as you were concerned? A. I expected him to be fair about it and do the right thing for all parties.

Q. Right, but you were never deprived of Mr Efron's advice, were you? A. No.

Q. In relation to the heads of agreement? A. No." [Transcript 564 -565] Evidence given by Mr Butler 47 Mr Butler had at material times been employed by Jennifer E Darin solicitors as an employed solicitor working in the Chatswood office of that firm. He was the first witness put forward by Mr Jeans in these proceedings and was closely cross examined for over a day, generally in relation to the circumstances in which the heads of agreement were brought into existence. Extremely serious allegations were levelled at him during the cross-examination including the suggestion that particular letters which went into evidence and appeared to be letters signed by him had never been sent at all. He was accused of lying. He was accused of ethical misconduct. 48 Mr Butler gave evidence that he had acted for Mr Herzog from time to time in a number of matters from 1995 onwards and had had an involvement in preparing the heads of agreement. Mr Herzog had controlled Advance Publicity which was a Victorian company. 49 Mr Butler had also acted for Mr Jeans on his appeal to the Full Federal Court and on his application for special leave to the High Court. He had known Mr Jeans for approximately the last 10 years, a friendship having developed between them and he having acted for Mr Jeans in a large number of matters. 50 He had also known and acted for Mr Bruce on many occasions. Mr Bruce had also become a friend of his. 51 His evidence was that although he agreed to draw the heads of agreement he had not been acting for any individual party to the exclusion of the others. His evidence was that he "was probably acting on instructions from all the parties, but on the understanding that they would all get independent legal advice." [Transcript 58] 52 His evidence included:

"Q. So were you to act - do I understand what you are saying - in the interests of all of them as their solicitor? A. It was made clear from the time that I first agreed to prepare the draft that I couldn't act for all in that manner because they had differing interests and that is why - it was suggested that I do the draft simply because I was familiar with the various transactions that they wished to have dealt with and it was more a matter of convenience to the parties that I do a draft, but it was clearly understood that I wasn't preparing it on the basis that I was advising them all and that they would get independent advice about it before they committed themselves.

Q. …Did you prepare the document in the interests of all of them? A. I prepared the document to try to reflect the agreement that they had reached or were trying to reach.

Q. Were you in a conflict position in this matter? A. I think anybody that purported to act for all of the parties would be a conflict, I wouldn't - and that's why I never agreed to act other than to prepare a draft.

Q. Well, then once you prepared a draft you were leaving the matter to the parties to attend to, were you, for themselves or with their other solicitors? A. Yes, I wasn't acting for any one of them to the exclusion of the others. I was preparing draft documents.

Q. Were you acting for all of them? A. I was acting for all of them in preparing a draft." [Transcript 74] 53 On his evidence, in about May 1999 he became aware that Mr Graham Efron, solicitor of Graham Efron & Associates of Melbourne, was advising Advance and Harpley Nominees in the matter [Transcript 55]. 54 Excluding questions of his own involvement, he had never become aware of any solicitor advising Mr Jeans or Deangrove Pty Ltd. Nor had he become aware of any other solicitor advising John Bruce and Partners Pty Ltd or Mr Bruce in relation to the transaction [Transcript 55]. Nor had he communicated with any such person. 55 Mr Jeans was at the time very closely associated with Mr Herzog. At the time of the initial draft of the heads of agreement, Mr Jeans was not a party to the heads of agreement. Mr Butler had understood that Mr Jeans was in a position to give him instructions on behalf of Deangrove. [Transcript 60] Separate legal advice 56 The very first communication from Mr Butler addressed to Mr Herzog of 13 May 1999 and copied to Mr Backway [PX 79] at least gives some confirmation of Mr Butler's evidence that he had prepared the draft on the basis of separate legal advice being obtained:

"As discussed, I have prepared the document as a draft on the basis that separate legal advice will be obtained. The draft has not as yet been submitted to John Bruce who is away until Monday - I would appreciate your thoughts and I will make any necessary changes and submit a copy to John". The difficulties faced by Mr Butler 57 A great deal of the difficulties which faced Mr Butler and in respect of which he was intensively cross-examined concerned the mix and match of the manner in which he had communicated: sometimes with other solicitors and often directly, as by speaking to or writing to Mr Backway and permitting others [as for example Mr Backway] to himself play a part in providing documents or in speaking to others [see for example PX 91 where Mr Backway was to discuss particular letters with Mr Herzog and was to provide a copy of a document to Mr Bruce for his consideration]. 58 It is not putting too fine a point on what actually happened to summarise the matter by describing Mr Butler as the central cog in terms of the initial draft and later changes to the proposed heads of agreement: his sources of information as to which parties had which particular requests and which instructions being somewhat cloudy to say the least. 59 Mr Butler does not seem to have appreciated the need for parties apparently seeking to negotiate at arm's length, to be protected in terms of their own interests, nor the pervasive problems which can arise where one solicitor acts as some sort of conduit: now preparing a draft; now taking an instruction or request from one of the parties to make a change; now taking an instruction or request from another of the parties to make a different change; now receiving a communication from a solicitor acting for one of the parties [Mr Efron acting for Advance [PX 128]] which solicitor makes suggested changes in terms of a draft and requests that Mr Butler contact his office with the response and with a redraft of Agreement] and then proceeding, notwithstanding that request, to communicate directly with that solicitor's client about the matter. [PX 153] 60 It is hardly surprising in such circumstances where problems arise in relation to what is said to have become a legally binding contract, that it becomes so very difficult to disentangle: · what instructions were given and by whom and on what advice; · how and where, if at all, such instructions were implemented; · whether particular instructions were implemented on an informed basis as to all or only some of the parties [and if so, which parties and in what respects]. The genealogy of the heads of agreement 61 A great deal of evidence was adduced in relation to the genealogy of the heads of agreement and although a deal of that evidence is chronicled hereafter, it is not practicable to chronicle all of that evidence in the judgment. Hence the detail given in the judgment is not intended to be exhaustive. Much of it was documentary and is to be found in Exhibit PX. All of the evidence is of course taken into account in the judgment. The central purpose of the heads of agreement 62 Mr Butler gave evidence that at the time he was preparing the heads of agreement in 1999:

"[T]he central purpose of the document was to provide a mechanism under which the Herzog interests (Harpley Nominees and Advance) might be repaid the existing debts owed to them out of money that might become available to Mr Bruce or his company JBP." Sources of funds 63 On the evidence of Mr Butler those potential sources of funds were: · Mr Bruce's interest in the Deangrove Holloways Beach Development; · Mr Bruce's interest in the 19 units in the Broadbeach Motor Inn; · entitlements which then existed in terms of moneys due from Noroton Holdings Pty Ltd and Australian Property Holdings Ltd in consequence of a property development at Katoomba.

Additional general background 64 It is clear from the evidence given by Mr Backway [transcript 416-418] that: · in about March 1999 a valuation had been carried out of the 19 Broadbeach units by Erin Todd White; · the Suncorp-Metway loan under the first mortgage was for a sum of $1.950 million; · the valuation had produced a figure of $2.235 million with a result that the potential equity in the 19 units to satisfy the claim of Harpley Nominees as second mortgagee was $285,000. 65 Mr Backway accepted under cross-examination that the position was that Harpley Nominees was hopelessly under secured for its loan of $1.230 million, meaning that this investment was, as he believed, precarious at that stage. There were however two other assets of Mr Bruce which had some potential for recovery. The first was the entitlement that Mr Bruce's company was negotiating in terms of acquiring monies from Noroton Holdings. The second was Mr Bruce's entitlement through Deangrove in the Holloway's Beach Development which depended upon a successful financial outcome in that development. 66 There was a further loan of $350,000 which had been made to Mr Bruce's company which was secured by debenture. There had been a default in payment of interest to Harpley Nominees of approximately $136,000. 67 In short the total debts claimed by the Herzog interests were $1,230,950, [being the principal under the second mortgage over the Broadbeach units, $136,000 identified as overdue interest, and the $350,000 owed by way of loan secured by an equitable charge over the assets of the practice]. On those figures there was $1,716,950 owed to the Herzog interests and $285,000 worth of potential equity in Broadbeach [after satisfaction of the first mortgagee] to secure that. 68 Mr Backway gave evidence under cross-examination [transcript 423] that when the draft of the heads of agreement was received under cover of letter of 13 May 1999 [PX 39] he noticed clause 6.8 providing for the general form of indemnity in favour of Mr Bruce by Advance Publicity. His reaction was that such an indemnity should not be provided since the relevant companies in the group were owed $1.7 million so that there seemed to be no possible call for them to give an indemnity. He would have discussed that matter with Mr Herzog. Relationship between Mr Bruce and Mr Jeans 69 Mr Bruce gave evidence that Mr Jeans had been a consultant to Mr Bruce/Mr Bruce's company. Mr Jeans in that capacity had been a business development manager who was supposed open up opportunities for Mr Bruce. His evidence included:

"Q. And he had more to do, do I understand you, with Mr Herzog than you did? A. Yes.

Q. And you found, did you, that you could sometimes achieve more if he represented you in discussions than you represented yourself with Mr Herzog? A. Yes, but it was also a question of focus. I had to earn the income because architecture was our source of income, so I had to do that and somebody had to mind some of the administration issues that needed to be dealt with.

Q. Yes, and is it consistent with your recollection that you asked him to negotiate on your behalf with Mr Herzog for the lending of money required to pay an instalment to Suncorp Metway? A. I repeat I can't recall asking him to do it, but it was a thing that was necessary to be done and he went ahead and did it.

Q. And it was consistent with the role that you gave him generally in the matter? A. Yes.

Q. As your consultant, one of his jobs was to have negotiations with Mr Herzog? A. Well, Mr Herzog was perceived to be a source of potential work on a contact list and Tony's role, in a sense, was to keep that relationship smooth, but we also knew that Mr Herzog was at that stage a timely source of income for things that were necessary.

Q. Well, after the negotiations of April there were several further sums, were there not, that you wanted Mr Herzog to pay which had not been mentioned in April arising from later requirements of Suncorp? A. Well, there was one that was mentioned in the heads of agreement of $15,000 which I can't remember what it was for and then there was some money that was specifically related to the Suncorp Metway settlement, but I must sound an idiot to you that I can't recall all those details, but I tend to sort of put my mind into channels and those were things that I wasn't intimately involved in the day to day workings of.

Q. Did you leave those to Jeans, did you? A. I left a lot of it to Jeans, yes." [Transcript 348] The indemnity issue 70 It was put to Mr Butler under cross-examination that from the beginning Mr Backway had told Mr Butler that there would be no indemnity given to Mr Bruce for any personal guarantees in respect of Deangrove. His response was that this had not been said to him early in the peace but that he thought that in one conversation which he did have with Mr Backway, he had said that Advance did not want to give a guarantee [transcript 62]. 71 After looking at the file and file notes his evidence was that this had not been stated to him by Mr Backway directly but was a conversation [apparently of 31 May] which he had had with Mr Jeans, who had in turn conveyed to him that Mr Backway had advised that Advance would not provide any indemnity to Mr Bruce in respect of the Commonwealth Bank debt on Deangrove. [Transcript 65] 22 June letter 72 The matter had been clearly stated in a letter from Mr Efron to Mr Butler of 22 June 1999:

"Clause 6.8 is too broad. Pursuant to clause 6.8".. Advance shall indemnify Bruce personally against all liability in respect of any personal guarantees given by Bruce of the obligations of Deangrove whether in respect of principal, interest or costs under any of the mortgages effected by Deangrove or any obligation incurred by Deangrove in respect of the development". This clause is not acceptable, and implies ongoing obligations of Advance. Advance will not indemnify John Bruce and Partners or John Bruce personally ." [PX 131] [emphasis added]

[It is convenient to interpolate that in the same letter Mr Efron had requested "that a joint guarantor be proposed by your client " - Mr Butler having assumed that this was a reference to Mr Bruce or to John Bruce and Partners. [Transcript 90] 73 It is convenient to interpolate that Mr Bruce gave evidence that he had never seen this letter. [Transcript 340] 74 Mr Herzog albeit giving evidence [transcript 542] that he had not read this letter at the time [and contending that, even as he was in the witness box, he had still not read the letter], gave the following evidence in relation to the suggestions made by Mr Efron to him in the context of this letter:

"Well, first of all, I should definitely don't give any guarantees and you need to get the numbers that are outstanding. If you'd ever want to look at it you should get the numbers. We haven't got a clue what the outstandings are there. …

Q. By "get the numbers", you mean something along the lines of a requirement for disclosure of Deangrove's financial position? A. Correct." [Transcript 541] 75 Mr Herzog had also been aware that Mr Efron had [in the same letter], sought a disclosure of the financial position of Deangrove. [Transcript 541] File memorandum - 31 May 1999 76 Mr Butler noted in a file memorandum of his own of 31 May 1999 that he had telephoned Mr Efron [then acting, as Mr Butler understood it, for Advance and Harpley Nominees] who confirmed that the company was not prepared to give an indemnity. [PX 102] [Transcript 70-71] The file note makes the point that Mr Efron's client's were taking an option for the assignment of the Deangrove interest to cover both debts with any excess to be paid to Mr Bruce. Further file memorandum - 31 May 1999 77 A further file note made by Mr Butler of 31 May 1999 [PX 103] records an attendance upon Mr Jeans and a confirmation of the terms of Mr Butler's discussion with Mr Efron and includes:

"He rang… Beckway who confirms that Advance will not provide any indemnity to John Bruce in respect of the Commonwealth Bank debt on Deangrove.

Confirms that Advance would want the option of repayment of the Noroton liability from any monies received on account of the Deangrove facility in which case the Noroton debt would be re-assigned."

2 June 1999 - Butler writes to Backway 78 A good example of the problems which were being encountered by the particular position of Mr Butler is to be found in the circumstance that following the 31 May 1999 file memorandum, he wrote on 2 June 1999 to Mr Backway enclosing what he described as "copy of draft Heads of Agreement herewith to incorporate the various changes discussed…" 79 He added:

"A copy has been provided to John Bruce today and he is wanting to execute today or tomorrow." 80 However on examination it becomes quite plain that the draft heads of agreement enclosed under cover of this facsimile had not removed nor altered every word of the earlier indemnity. His cross-examination included:

"Q. How could you possibly write what appears at 104? He wants one thing. Advance wants something else. How on earth would you say what is said at 104? A. It was said and the draft was sent on the basis that that's what John Bruce insisted upon, that is what appeared in the document in the first place. I was still waiting for advice from Mr Efron." [Transcript 79]

"Q. And it was false, wasn't it, to say that the heads of agreement that you forwarded on 10 June incorporated the various changes discussed, wasn't it ? A. Well, it did. There were the changes - any further changes that Advance wanted were yet to come from Mr Efron in a note or letter which he advised me on 31 May in due course I would receive.

Q. Well, you see, you have moved on to what Mr Efron was going to send you. There is no suggestion about what you had written on 10 June, is there, that this is pending receipt of any document from Mr Efron, is there? A. No." [Transcript 80] 10 June 1999 - Butler writes to Bruce 81 On 10 June 1999 Mr Butler wrote to Mr Bruce stating inter alia:

"I enclose herewith a further draft of the Heads of Agreement which takes into consideration those matters raised by you and Advance Publicity Pty Ltd and incorporates those changes required by Advance Publicity P/L.

I note that you will seek your own independent advice…" [PX 123] 82 The cross-examination of Mr Butler included:

"Q. That was completely false, wasn't it? A. No.

Q. It was completely false, wasn't it? A. No.

Q. If you look back at 102 and 103? A. No.

Q. There had been no account taken of the matters raised by Advance through Mr Backway noted in paragraph 2 at 103, had there? A. In terms of 102--

Q. No, 103, second paragraph, there had been no account taken of that, had there? A. As to an indemnity - the indemnity being--

Q. Yes, the removal of an indemnity? A. No." [Transcript 83] 83 Mr Butler was taxed under cross-examination with the fact that there were no notes of his own, making the point that he had drawn the attention of Mr Bruce to the fact that Advance was not prepared to give the indemnity. Yet in many of his internal file memoranda he had recorded detailed discussions with a number of parties about particular numbered clauses. His evidence was simply that he had drawn the attention of Mr Bruce to the reluctance of Advance to give an indemnity. [Transcript 85-86] 84 Mr Bruce accepted that following receipt of the letter of 10 June 1999 from Mr Butler he would have had telephone conversations with Mr Butler about the heads of agreement. [Transcript 308.1] 85 Mr Bruce believed that he had been aware in June 1999 that Mr Efron had been consulted on behalf of Advance Publicity with respect to the heads of agreement but could not be precise. Although he could not recall the date, he also believed that it may have been sometime after the heads of agreement were signed when he first became so aware. [Transcript 308] 15 June 1999 - Butler writes to Backway 86 Mr Butler wrote to Mr Backway on 15 June 1999 stating inter alia:

"I enclose herewith a further re-engrossment of the proposed Heads of Agreement taking into consideration the various comments made by you and Mr Bruce." [PX 127] 87 The enclosed document was admitted into evidence as exhibit D1. It included clause 6.8 which had not been deleted. The cross-examination of Mr Butler included:

"Q. If you were treating Advance Publicity as one of your clients for any purpose, you surely had to draw to their attention that one thing that they had asked for was not in this document, namely, the deletion of clause 6.8 or any indemnity to it, didn't you? A. No, that is not what my conversation with Mr Efron was.

Q. Well, you surely had to draw to their attention that this was a provisional document subject to whatever might be received from Mr Efron, didn't you ? A. It was always a provisional document. It was a draft. It had--

Q. You didn't say so though, did you? Mr Butler, you didn't mention Mr Efron or anything that you were waiting from Mr Efron for in your letter at page 127, did you?…

Q. You said nothing about Mr Efron or anything-- A. Advance knew of the involvement of Mr Efron.

Q. Yes. A. The document was obviously a draft. It had blanks in it that needed to be filled.

Q. Were you hoping that it wouldn't be noticed that 6.8 was still in this document? A. No,…"

Q… Were you intending to set this by? A. Absolutely not.

Q. Well, why don't you mention that it will need to be revised when you get Mr Efron's letter or advice? A. I envisaged that that draft would be referred by Advance to Mr Efron whilst he was considering the various matters that had been discussed in my previous conversations with him and, to the extent that it incorporated the comments of John Bruce, would allow him to take those into account as well." [Transcript 87-89] 15 June 1999 - Letter from Mr Butler to Mr Bruce 88 On 15 June 1999 Mr Butler wrote to Mr Bruce [who gave evidence that he received this letter around the date it bore - transcript 306] inter alia in the following terms: "I refer to the telephone conversations of recent date and would confirm that I have re-engrossed the Heads of Agreement, taking into consideration the matters referred to in your fax of the 10th instant and our discussions of the 11th instant.

I am advised that Advance Publicity is not prepared to agree to the deletion of Clause 4.9 or the amendment of the period in Clause 5.3.

I have amended Clause 6.6 to take into consideration your concerns.

I note that Mr Jeans is to provide the unit numbers to be inserted in Clause 6.9 and that your Company is to provide the unit numbers for insertion in the First Schedule.

I have forwarded a copy of the Heads of Agreement as enclosed herewith to Advance Publicity and note that you will liaise with the Company with a view to an exchange." [PX 126] Request for comprehensive alterations 89 The letter from Mr Efron to Mr Butler of 22 June 1999 [which has already been referred to] constituted a request for comprehensive alterations to the draft heads of agreement and, in the last paragraph, a request that Mr Butler contact the office of Mr Efron in light of the matters raised in the letter "and/or [produce] a re-draft of Agreement reflecting answers to same". The following evidence was given by Mr Butler under cross-examination:

"Q. Now, Mr Butler, from this point of time onwards, if not before, I suggest to you, it was apparent to you that the companies of Mr Herzog were no longer represented by you in this transaction, if they had previously been represented by you at all? A. Again, my position was still the drafting of the document. It wasn't acting for any one of these parties to the exclusion of another. Efron had been instructed, as I had asked Advance to do, from the beginning, to get independent advice about what I was drafting.

Q. Do you see in paragraph 5, last sentence, Mr Efron was saying to you, page 131, "We request that a joint guarantor be proposed by your client", do you see that? A. Yes.

Q. He was treating Bruce as your client, wasn't he? A. That's the inference I guess from that.

Q. And asking to you get back to him, in the last paragraph on page 132, with "your response to the matters raised herein or a redrafted agreement", do you see that? A. Yes.

Q. That would treat you as no longer the solicitor, if you ever were, as no longer the solicitor for Advance, wouldn't it? A. I never regarded myself as the solicitor for Advance to the exclusion of any of the other parties.

Q. Whether to the exclusion or otherwise, you were asked to deal with their solicitor, weren't you, by the last paragraph of this letter? A. I was asked to take those matters into consideration in draft.

HIS HONOUR: Q. Was there anyone else who you at this time considered to be acting for Mr Bruce? A. No, I think Mr Bruce had advised that he may get advice when a final form of document had been agreed upon before he committed himself to it, but he wasn't proposing to do it until then.

Q. So the answer to my question was no? A. No." [Transcript 82 - 83] Alleged breach of the Law Society Rules 90 Instead of responding to Mr Efron, Mr Butler communicated directly with Mr Backway. It was put to Mr Butler that for him to communicate directly with Advance constituted a breach of rule 31 of the Law Society Rules. This rule provided that a practitioner who was acting on behalf of a party in any transaction must not communicate directly with any other party for whom, to the knowledge of the practitioner, another practitioner was currently acting, unless a procedure was gone through and even then, that such communication could be only for very limited purposes. The cross-examination of Mr Butler included:

"Q. You see, there was a solicitor, Mr Efron, who was another legal practitioner, wasn't he? A. Yes.

Q. And he was acting on behalf of Advance and had asked you to respond to him by his letter of 22 June, hadn't he? A. To contact his office.

Q. And instead of doing that you went straight to his client, didn't you? A. I continued to send drafts to his client on the same basis as I had commenced to act to provide him with drafts with him getting advice. I had subsequent communications directly with Mr Backway. There was never any suggestion that I should forward anything to Mr Efron to the exclusion of Mr Backway.

Q. If you regarded Mr Backway or Advance Publicity as your client, you were in a hopeless position of conflict, weren't you, such that you could not accept instructions to act for them at the same time as acting for the other parties to this transaction? A. Well, I have explained my position there before.

Q. That is a greater problem, isn't it, if that was so, than a breach of rule 31 to your understanding, if you were in such a position of conflict? A. I was not in that position. I was in a position, again, where I was drafting a document to assist the parties to come - to reflect an agreement that they had reached with them getting their own advice about it." [Transcript 94-95] 29 June 1999 - Butler to Backway/Advance bypassing Mr Efron 91 Mr Butler by his letter of 29 June 1999 addressed to Mr Backway/Advance Publicity responded directly to the particular proposed amendments which had been suggested in the letter from Mr Efron. The variation to clause 6.8 92 The version of the heads of agreement enclosed by Mr Butler under cover of his letter of 29 June 1999 only varied clause 6.8 very slightly. As already indicated the previous form of clause 6.8 [Exhibit D1/ PX 111] had read:

"Advance shall indemnify and keep indemnified Bruce from and against all liability incurred by Bruce in respect of any personal guarantees given by Bruce of the obligations of Deangrove whether in respect of principal, interest or costs under any Mortgage effected by Deangrove or any obligation incurred by Deangrove in the acquisition or development of the Holloways Beach development." 93 The new form of clause 6.8 [PX 151] now read:

"Advance shall indemnify and keep indemnified Bruce from and against all liability incurred by Bruce in respect of any personal guarantees given by Bruce of the obligations of Deangrove to the Commonwealth bank of Australia whether in respect of principal, interest or costs under any Mortgage effected by Deangrove to the said Bank or any obligation incurred by Deangrove to the said Bank in the acquisition or development of the Holloways Beach development." 94 Clearly this new form of the clause did not cope with the request which had come forward from Mr Efron in terms of his instruction that "Advance will not indemnify John Bruce and Partners or John Bruce personally" [PX 131]. This was put to Mr Butler:

"Q. Yes, the only amendments to take account of Mr Efron's paragraph 6 on page 131 are those which appear from 6.8 at page 151? A. Yes.

Q. And that doesn't get within a bull's roar of it, does it? A. Well, it limits the liability to John Bruce's personal liability in respect of his guarantee to the Commonwealth Bank rather than the obligations of Deangrove.

Q. It doesn't get within cooee of what Mr Efron had asked for on page 131 in paragraph 6, does it? A. I wouldn't say within cooee, it's a variation on the broad terms of 6.8 before which, as he says, clause 6.8 is too broad. It was cut down substantially….

Q. And you say 6 is dealt with by amendment to clause 6.8? A. Yes.

Q. That hardly deals with 6, does it? A. Well, it deals with it.

Q. Some of the subject matter, but by no means do you comply with the requests, do you? A. It deals with the request and narrows the extent of the indemnity that was previously there." [Transcript 87-88] Legal Practitioners - period 22 June 1999 up to 5 July 1999 95 Mr Butler was asked in relation to the period from 22 June 1999 up to 5 July 1999 which legal practitioners were acting for which clients in the matters relating to the heads of agreement. His evidence under cross-examination was that at that stage as he understood it, Mr Backway and Mr Herzog were getting advice from Mr Efron. He was not aware of whether or not Mr Bruce or Mr Jeans or Deangrove were getting other advice. [Transcript 101-102] His evidence included:

"Q. Are you suggesting you didn't know one way or the other whether they were getting other advice? A. My understanding from what they told me was that when it appeared that the document was in final form they proposed to get advice at that stage, and probably not until then.

Q. Probably. But you didn't think there was anyone else advising them about these documents at all, did you, at any time actually? A. I didn't know whether they were getting any advice from anybody else. I was dealing directly with them.

Q. You'd never been told that they were getting advice from anyone else, had you? A. No, I hadn't." [Transcript 102] 2 July 1999 letter from Clayton Utz to John Bruce & Partners and how the parties reacted 96 On 2 July 1999 a letter from Clayton Utz [acting for Suncorp-Metway] was received by John Bruce & Partners enclosing a notice of demand in respect of the Suncorp-Metway mortgage, demanding the sum of $2,007,833.52 and threatening to exercise their clients rights under the security in the absence of the demand being met. The amount was said to be due and payable on 2 July 1999. [PX 160] 97 Mr Bruce had no funds available to satisfy this demand. The appointment of the receivers made even more precarious Harpley's second mortgage held over the property. The current valuation of the 19 units in the development by Herron Todd White known to Mr Herzog to be $2,235,000 [Ex JRB-1 p 5]. That figure had been incorporated by Mr Butler into the heads of agreement in clause 5.1 as the sale price of the units to Advance [clause 5.1 PX 137].

98 At about the same time, Mr Herzog was engaged in discussions with the CBA, offering a guarantee of $250,000 to the bank to remedy Deangrove's default in relation to the Holloways Beach project. 99 In order to avert a sale of Broadbeach by the receivers, Mr Herzog was placed in a position where he either had to acquire the first mortgage or guarantee it. A proposal was developed in negotiations with Suncorp-Metway for a deed of forbearance on the basis of a guarantee and indemnity by Harpley in favour of Suncorp-Metway. This would provide a moratorium to Mr Herzog to organise an onsale of the Broadbeach Development to Islands Hotels Limited. 100 Mr Butler took an instrumental part in the negotiation and effectuation of the deed of forbearance with Suncorp-Metway. By 28 July 1999, parallel and interdependent negotiations were proceedings with Suncorp-Metway on the other hand and for the consummation of the heads of agreement on the other. At the same time Mr Butler was also engaged in the preparation of a deed to settle outstanding disputes between Mr Jeans and Mr Bruce.

5 July 1999 - Butler letter to Backway - Express Post? 101 Exhibit PX153 is a letter from Mr Butler to Mr Backway of 5 July 1999 which includes a sticker of the type produced when a letter is sent "express post". Mr Butler's evidence was that the sticker had probably been placed upon the letter by the office staff. His evidence was that the letter bore his own signature. The letter reads:

"I refer to the conversations of recent date and note that the further suggested alterations to the Heads of Agreement are acceptable to you.

I would confirm that Mr Bruce has confirmed that the alterations are also acceptable to him and he is anticipating executing and exchanging the Agreement on Wednesday the 10th instant.

I enclose herewith a re-engrossed copy of the Deed incorporating the alterations and await your further advices as to its execution and exchange." 102 It may be noted in passing that the following Wednesday would have been 7 July and not 10 July. Like letters to Bruce and Jeans 103 On the same day letters in precisely the same form were sent to Mr Bruce and to Mr Jeans [PX 153A and 153B]. 104 It was put to Mr Butler that exhibit PX 153 did not represent a communication which was sent to Mr Backway bearing his signature or otherwise on or about the date it bore or at any other time. It was put to him that neither the document nor the purported attachments were ever sent to Mr Backway. His evidence was that these propositions were not correct. [Transcript 182] 105 By July 1999 Mr Herzog or his family had taken up a significant position in Islands Hotels Limited which was a public company. 8 July 1999 - Butler file memorandum 106 A file memorandum of Mr Butler of 8 July 1999 [PX 154] reads as follows:

"Rang John Bruce. He confirms that the alterations to the Heads of Agreement are acceptable to him and he wishes to exchange.

We to speak to Mr Herzog's office with a view to exchange today by fax subsequently to be confirmed by the originals and such exchange to be subject to execution of the deed by Mr Jeans on his return from Port Moresby.

Also agrees with the proposed sale of the Broadbeach Units to Islands, Hotels and Resorts Limited [4] shares and agrees that that exchange should take place in conjunction with the putting in place of the Heads of Agreement with Mr Herzog because of the related provisions as to the Broadbeach mortgages. Details will need to be inserted in the contracts after further information is obtained following Mr Jean's return from Pt Moresby probably next Sunday. 8 July, 1999

Rang Geoff Backway. Confirmed receipt of the Amended Heads of Agreement incorporating the matters discussed with him. Has not as yet had am opportunity to consider them in any detail or specifically to discuss with Mr Herzog who has returned from overseas. He will go through the documents and discuss with him with a view to exchange and he and/or Izzi will discuss draft with Graham Efron. Confirmed that Mr Bruce has agreed to the amendments and has executed the Heads of Agreement and is in a position to exchange. Confirmed that if an exchange is effected before Mr Jeans returns from Pt Moresby that the exchange be effected subject to his execution on his return." 107 Mr Butler gave evidence · that it was his invariable practice to use the word "confirm" as meaning "advise". [transcript 133] · that it appeared that what had been forwarded by him on 5 July to Mr Backway was likely to be simply another engrossment in the same terms as included the new pages 3 - 7 in the form enclosed in Mr Butler's facsimile to Mr Backway of 29 June 1999 [now to be found as PX 146 (second page of this pagination)-151]. 108 Mr Butler accepted that as the note of his telephone call to Mr Backway of 8 July recorded, Mr Backway's office had not had an opportunity to consider the amended heads of agreement in any detail and had not discussed it with Mr Herzog. Also that Mr Backway and/or Mr Herzog would discuss the draft with Mr Efron. But Mr Bruce was said to have agreed to the amendments and to have executed the heads of agreement and to be in a position to exchange. Returning to the 5 July letter 109 The second and third defendants contended that there are problems with the letter of 5 July 1999 from Mr Butler to Mr Backway [PX 153]. In this letter Mr Butler was noting that Mr Backway had confirmed that the alterations were acceptable to him. Yet three days later Mr Butler's file note made the point that Mr Backway had not yet had the opportunity to consider the amended heads of agreement in any detail. Mr Butler explained this suggested problem as follows:

"Q. Well, that means that you couldn't have been told by him prior to 5 July that the suggested alterations forwarded on 29 June were acceptable to him, doesn't it? A. No, it doesn't.

Q. Well, do you say that he found them acceptable some time before 5 July, but on 8 July told you that he hadn't even considered them in detail? A. No, what he told me was that the proposed amendments were acceptable, and I took that as being acceptable to him personally. He subsequently received a full engrossment of the document on the basis that that engrossment, if acceptable to all of the parties, could then be exchanged in that form. All he was saying to me on 8 July is that I haven't looked at it in that context in any detail, I need to talk to Mr Herzog and to Mr Efron." [Transcript 126] 110 Mr Butler accepted that there did not appear to have been any written reply to the 5 July letter in his file from Mr Backway. He said that most of his communications with Mr Backway had been by telephone as he spoke to him on a fairly regular basis. [Transcript 127.45] 9 July 1999 - Butler file memorandum 111 Mr Butler also produced a file memorandum of 9 July 1999 [PX 155] reading:

"John Bruce rang. Discussed generally the exchange of the Heads of Agreement which need Mr Jeans signature and as he will not be returning to Australia until Monday it appears that an exchange cannot take place until then. He is seeing his bank at 10.00 o'clock on Monday and requests a letter from us confirming that position for production to the bank." 9 July 1999 - Butler letter to Bruce 112 For that purpose Mr Butler had prepared a letter addressed to Mr Bruce which is dated 9 July 1999 [PX 157] and is in the following terms:

"I refer to the telephone conversation today and would confirm that I have spoken to Mr Backway in Melbourne in relation to an exchange of the Heads of Agreement.

Mr Backway confirms that he is holding the original of the Heads of Agreement which incorporates the various matters discussed with him.

He confirms that Mr Jeans overseas until next Monday and that accordingly an exchange of the Heads of Agreement cannot be effected until Mr Jeans' return.

It is anticipated that the exchange will initially be effected by facsimile and then will then be confirmed by an exchange of the original documents.

I will contact you further next Monday as to the proposed arrangements for the exchange on Monday." 113 Mr Butler's evidence included:

"Q. And when you prepared the document at 157 you must have had in your mind, mustn't you, your conversation with Backway of 8 July recorded at 154? That's the previous day to the date of the letter at 157. You must have, mustn't you? A. I would have been aware of that conversation, yes.

Q. It would have been fresh in your mind, wouldn't it? A. Yes, and I may have even subsequently spoken to Jeff Backway before I wrote that letter to him…

Q. And in the conversation you were told that there were two - that there were three things to happen, weren't there? I think from Backway's point of view one was he should consider this document in detail; two was he'd have to talk it over with Mr Herzog? A. Yes.

Q. And, three, either he or Herzog was going to discuss it with Efron? A. Yes.

Q. Yet in the document which you prepared for production to the banker, you have carefully refrained, haven't you, from referring to those facts?…

Q. Well, the overview omits to mention that the other party to the exchange has yet to decide whether he will participate in the exchange, doesn't it? A. No…

Q. It omits to mention that the other party to the exchange has not decided to participate in the exchange, doesn't it? A. It doesn't say that, no… Q. And I want to suggest to you that bearing in mind what you had been told by Backway, and which you have yourself noted at 154, your purpose in couching the letter at 157 as you have was to mislead the banker? A. No, that's not correct.

Q. Mislead the banker into thinking that an exchange would take place. That's right, isn't it? A. No.

Q. Well, why do you say in the letter that you have spoken to Mr Backway in Melbourne in relation to an exchange of the heads of agreement? It failed to mention that Backway had said he was making up his own mind about this document and needed to speak to two other people? A. It wasn't intended to be a detailed explanation or summary to the banker of all of the negotiations that were taking place. It was just an overview of what was happening.

Q. You, in effect, ask His Honour to accept, do you, that when you wrote that letter you were not intending to mislead the banker? Is that what you say? A. No, I was not.

Q. Not intending to fail to state the facts which you have recorded at the foot of 154 about the information you were given by Mr Backway? A. No.

Q. Well, I suggest to you you plainly were? A. Oh, that's not the case." [Transcript 1 37-1 39] Receiver appointed 114 On 16 July 1999 a receiver was appointed by the Metway Bank to the Broadbeach units and from that time much attention was directed to the endeavour to have those receivers removed. [Transcript 139] 115 Mr Bruce gave evidence that the appointment of the receivers and provided a serious commercial problem for him [Transcript 309]. His further evidence included:

"Q. As things stood in July 1999, apart from the heads of agreement document, which catered for servicing the Suncorp Metway debt by Mr Herzog's interests, had you any other way of dealing with the overdue moneys to Suncorp Metway at that time? A. No, nothing that was readily available to me, no…

Q. Had you pursued the dealings with Mr Herzog and the drafting of the heads of agreement in the expectation that the finalisation of that document would solve the commercial problem for your company in relation to Suncorp Metway?" A. Yes. [Transcript 210] 116 His evidence was that he had travelled to Suncorp-Metway in Brisbane together with Mr Jeans and Mr Herzog when discussions took place in an endeavour to negotiate a position with the bank. [Transcript 311] Interrupting the chronology to outline the general position which will require to be determined 117 It seems convenient to stop at this point in time and to proceed to examine the central parameters of the stances taken now by one party, and now by another, in relation to the events alleged to have occurred. Mr Butler's initial evidence 118 Mr Butler initially claimed that to his understanding the heads of agreement had been exchanged on 9 August 1999 in Melbourne. He deposed in his first affidavit that he did not hold an original counterpart but that he was provided by Mr Bruce [shortly after 9 August 1999] with a photocopy of the heads of agreement signed [as he had understood it] by Mr Herzog on behalf of the second and third defendants, having been signed in Melbourne. Mr Butler's later evidence 119 He later claims to have located a further file which he then examined to then give evidence of a modified version of what had happened. This is to be found in his second affidavit. He now claimed that on 9 August 1999 he had sent a facsimile to Mr Backway attaching a re-draft of clause 3.2. His now proposition was that on 3 September 1999 he sent a letter to Mr Herzog enclosing with that a number of documents, including three copies of the heads of agreement which had been executed on behalf of all parties save the second and third defendants. He had thereafter received by post, two copies of those heads of agreement, which had been executed by Mr Herzog for and on behalf of the second and third defendants. 120 The case of the second and third defendants denied that they [by medium of Mr Herzog] had ever received the 3 September letter, signed any such heads of agreement or returned them to Sydney. Mr Herzog's evidence 121 Mr Herzog had deposed that: · he was informed by Mr Backway that he had requested certain changes to draft documents; · no copy of the heads of agreement was ever presented to him for signature; · in late July 1999 he had a telephone conversation with Mr Butler who had said that he had fixed the document to the satisfaction of Mr Efron, advised that Mr Bruce was under pressure from the bank to remove the debenture and asked Mr Herzog to sign a page of the document which Mr Butler had faxed to Mr Herzog; · Mr Herzog asked for the page to be sent to him and said that he would sign and fax it back to Mr Butler; · Mr Butler then faxed one-page only of the document to Mr Herzog who signed it and faxed it back to Mr Butler; · Mr Herzog had believed when he signed the document that the document had been amended so as to delete a reference to any guarantee by Mr Bruce in respect of the Deangrove development and believed, based upon what Mr Butler had told him, that the document in other respects was agreed with Mr Efron and Mr Backway; · the purported originals of the agreements bearing the signature of some person on behalf of the second and third defendants had been shown to him and that he did not sign the documents nor was he aware as to who had signed them. 122 Under cross-examination Mr Herzog gave evidence that he glanced through the first draft of the heads of agreement when they arrived and discussed the draft with Mr Backway. He did not notice that clause 6.8 included an indemnity. [Transcript 535] 123 He had also during May 1999 discussed the heads of agreement with Mr Efron. [Transcript 535] 124 His evidence was that he had known in May 1999 and earlier that "there [were] plenty of troubles in Deangrove" as he had learned of this from Mr Jeans. [Transcript 536] 125 Following the conclusion of the cross-examination and before re-examination the Court put some short questions to Mr Herzog and his evidence was as follows:

"Q. As I have understood you - correct me if I am wrong - back then, on 29 July, you were very unhappy with and would not agree, on your evidence, to any such clause. Is that right? A. Absolutely.

Q. Can you tell me why? A. I knew Deangrove was in trouble financially, lots of trouble. They asked for help, this 270 and the last 50,000 loan, and I was happy to help them, happy to help pay. I was offered a Deangrove opportunity as a 50 percent partner in 1998 and I didn't take it. I also was with Mr Jeans overseas and I know that the transaction with the Japanese fell through - there was troubles. As much as you - nobody would sign that guarantee or the indemnity, not me and nobody else. Mr Butler knew my feelings - " [Transcript 584] 126 He accepted that in his letter to Mr Bruce of 26 March 1999 [JRB 1 at page 4] he had advised that Mr Jeans "has our authority to deal with matters on our behalf" - being a reference to the heads of agreement issue having been instigated by Mr Jeans [Transcript 536] 127 His evidence in answer to a question as to what was the conversation which took place between himself and Mr Butler [at the time he had signed the one page document] was as follows:

"A. Bruce saves us a lot of money, lots of money, and I am not guaranteeing anything, and I don't know what the debt of Deangrove was, I didn't have a clue and I knew Deangrove was in plenty of trouble." [Transcript 537] 128 Mr Herzog had been aware in June 1999 that Mr Efron had made a number of suggestions about the draft agreement and these were:

"Definitely not to guarantee anything, you would have to be off your head" [Transcript 540] 129 It seems plain from the evidence given by Mr Herzog that his interest in June 1999 in the possibility of moneys coming from the Deangrove project was because it would quite probably materially assist to reduce the level of indebtedness to Advance and Harpley Nominees. 130 His evidence was that he did not wish to give a guarantee for Deangrove, notwithstanding the fact that in June 1999 he had been prepared to guarantee its obligations to the Commonwealth Bank up to an amount of $270,000 on certain conditions to help Mr Jeans, whose project this was. He had understood that there was a financial arrangement between Mr Jeans and Mr Bruce whereby Mr Bruce might share in a successful outcome, because both of those persons had so informed him [Transcript 543]. There is however no reliable evidence before the court which records precisely what were the prospects known to Mr Herzog in terms of the viability of the Holloways Beach project or in terms of the amount which Mr Bruce's company may have obtained in terms of an entitlement to 50% of the net proceeds. It would seem that this was the reason for Mr Efron seeking full disclosure from Mr Bruce of the general financial position. 131 Mr Herzog's evidence [affidavit paragraph 26] was that no copy of the heads of agreement had ever been presented to him for signature. [Transcript 544] 132 His evidence concerning his denial that he had ever signed either of the original versions of the heads of agreement which went into the evidence as exhibits P1 and P9 included:

Q. Yes. A. The first time I seen the copy my accountant came up to me and said, "Hang on, that's not your signature", when we received it from Ball and Schmidt, sort of got a big shock of it, spoke to Mr Bruce at that time. Now I've seen both copies. This certainly resembles my copy, but I didn't sign it. I have signed - if you have a look, I signed the 29th and if you have a look at that other signature, the other original signature which I'd like you to have a look, definitely not signed by me." [Transcript 567]

Evidence of Mr Backway 133 Mr Backway deposed to having received from the office of Mr Butler, a draft agreement on 28 July which was not then read. He had first deposed that he was ill on 29 July and that on 30 July he had returned to work and read the document which had been received by him by facsimile on 28 July, when he noticed that a page was missing. He had deposed that he telephoned Mr Butler to ask him to send the additional page by facsimile [which was page 8 of the document which contained an indemnity provision]. He was not certain as to whether it was in the same terms as an earlier draft or whether it was then in different terms. 134 He had rung Mr Butler upon receipt of the additional page and said "Bob, there is still an indemnity clause in this document. It has to be removed". Mr Butler had said to him that Mr Butler would get instructions. [I interpolate to note that Mr Butler has denied that this telephone conversation took place (affidavit 20 May 2004 - paragraph 14)]. 135 He later gave evidence that he had in fact been ill on Wednesday 28 July. 136 Mr Backway [transcript 447] was cross-examined in relation to his altered evidence:

"Q. I just want to go back to your evidence in your first affidavit, and it is at paragraph 9? You see, in paragraph 9 you say, in your first affidavit sworn on 4 February 2004, in the first sentence: "Late in the day on the 28th I received from Mr Butler's office a draft agreement". Now that's incorrect, isn't it? A. It is incorrect, yes.

Q. And you also say: "I did not read the document on 28 July". Is that correct or incorrect? A. Which would be correct since I wasn't there on the 28th.

Q. All right, and then you say in the next sentence: "On 29 July I was out from the office because I was ill". That is incorrect? A. Yes, it was the 28th, not the 29th.

Q. And you were indeed there on the 29th? A. I was there late on the 29th because I had to go somewhere else in the morning, yes, or early part of the morning.

HIS HONOUR: Q. I'm sorry, did I understand you to say that on 29 July you were actually in the office late, even though you were ill? Is that what you just said? A. Yes, I had to go to another meeting out near where I lived, so I didn't arrive in to the office on the 29th until mid morning or lunch time, thereabouts…

HIS HONOUR: Yes. I'm just having difficulty working out from what Mr Backway is now saying what day, if any, he was ill on for the whole of the day. I don't understand currently what the answer to that is.

HIS HONOUR: Q. And you weren't in at any time, as you recall it, on that day at all? A. That's correct, your Honour.

IRELAND: Q. You have agreed with me that the first sentence of paragraph 9 in your first affidavit is incorrect? A. Yes.

Q. You've agreed with me that the third sentence in paragraph 9 of your affidavit is incorrect? A. Mm mm, yes.

Q. The fourth sentence is incorrect because, on your evidence, it was the 29th that you returned to work and not the 30th? A. Correct.

Q. And if we look at page 184 of the tender bundle, which is the single page-- A. Yes.

Q. This is the execution page 12 of the heads of agreement that we've been looking at? A. Yes.

Q. We can see by the upside down fax mark that it came through - if the fax marks are correct - it came through just before 5 o'clock, eleven minutes to five on the afternoon of the 28th. Correct? A. Yes.

Q. And the fax mark at the top, which is by inference from Mr Butler's office when he receives it, is 12.23 on the 29th. Right? A. Correct.

Q. So somebody, if those fax marks are correct, has faxed it from the Melbourne office with Mr Herzog's signatures on it around 12.23 on 29 July 1999? A. Correct.

Q. And it was you that did that, wasn't it? A. It was not me, no. Mr Herzog told me that he faxed it himself .

Q. But you were there. You have told his Honour just now you were there mid morning on the 29th? A. I was there, but I hadn't spoken to Mr Herzog at that time.

Q. And you say he told you? A. He told me that he had faxed page 12. Page 12? Yes, back to Bob, after a conversation he had had with Bob that the agreement was okay.

Q. When did he say he had had that conversation with Mr Butler? A. He didn't specify when he had the conversation.

Q. Did alarm bells ring for you then? A. I was quite irate, yes." [Transcript 447] 137 Mr Backway gave evidence that he had never received any copy of the heads of agreement document for execution by the second or third defendants from Mr Butler and had never furnished any such document to Mr Herzog for execution. Nor did he ever receive from Mr Butler any copy of any of the heads of agreement executed by any of the other parties to the heads of agreement. 138 Mr Backway gave evidence in re-examination concerning the agreement which Mr Herzog had been asked to sign on July 1999 that it had been his own understanding that Mr Butler had told Mr Herzog that the document was in order with what had been discussed with Mr Efron. [Transcript 502]

Evidence given by Mr Bruce 139 Mr Bruce then gave evidence of the period between May and August 1999 in which Mr Butler had produced draft heads of agreement which apparently at various times had been submitted to the respective parties in respect of proposed amendments separately sought by them. Mr Butler had advised him of the progress of those negotiations between the parties and had provided him with copies of some of those drafts. He had become aware that various draft heads of agreement passed back and forth between the lawyers for Mr Herzog and Mr Butler during that period and he was also made aware of Efron & Associates being lawyers acting on behalf of Mr Herzog in the matter. 140 He had deposed in his first affidavit as follows:

"29. I particularly observed, because of its particular importance to me, that the first draft of the Heads of Agreement dated 17 May 1999 and every variation up to and including the Final Heads of Agreement dated 9 August 1999 (encl.) included a Clause 6.8, which provided for an Indemnity by Harpley/Advance in favour of Bruce…. I reviewed the draft and it was faxed back to Butler with my alterations and certain markings in my handwriting shortly after my receipt of it….

30. The initial draft Heads of Agreement faxed from Butler to me on 17 May 1999 is attached and bears the fax date imprint from Butler's legal firm, Jennifer E Darin. A true copy of same appears at pages 15 to 24 of exhibit "JRB 1" Clause 6.8 of that document reads: "Advance shall indemnify and keep indemnified Bruce from and against all liability incurred by Bruce in respect of any personal guarantees given by Bruce of the obligations of Deangrove whether in respect of principal, interest or costs under any Mortgage effected by Deangrove or any obligation incurred by Deangrove in the acquisition or development of the Holloways Beach development.

31. I subsequently saw various other amendments to Draft Heads of Agreements where other pertinent amendments had been made. I received a letter dated 15 June 1999 from Butler relating to certain proposed amendments but no reference is contained therein to clause 6.8 of the original. A true copy of this letter appears at page 25 of exhibit "JRB 1".

32. About this time, Butler telephoned me to advise in a letter apparently dated 22 June 1999 (referred to in paragraph 8 of his affidavit of 20 May 2004) that Efron thought that the Clause 6.8 of the Draft Heads of Agreement (the Indemnity clause) proposed by Butler was too general. Whereas I was prepared to concede that the clause was broad, I informed Butler that I could not proceed unless it was included.

33. Butler subsequently showed me and explained to me a revised Clause 6.8 that he had drafted which restricted the scope of the Indemnity from being a general Indemnity to all liabilities, to one restricted to the Commonwealth Bank Guarantee. I informed him that I would accept this clause." [Affidavit of Mr Bruce of 7 June 2004] 141 He deposed that in June 1999 Mr Butler had advised him that Mr Butler had received a letter from Mr Efron and associates seeking restrictions to the indemnity in the proposed heads of agreement. Mr Bruce had deposed that he advised Mr Butler that changing the wording so as to limit the scope of the indemnity was "okay" but that the indemnity was a necessary inclusion and to advise Mr Efron that Mr Bruce would not agreed to deletion under any circumstances [first affidavit paragraph 41] [emphasis added] 142 He gave evidence that prior to one amendment the final wording of clause 6.8 had read as follows:

"36. During that time the final wording of Clause 6.8 read: "Advance shall indemnify and keep indemnified Bruce from and against all liability incurred by Bruce in respect of any personal guarantees given by Bruce of the obligations of Deangrove to the Commonwealth Bank of Australia whether in respect of principal, interest or costs under any Mortgage effected by Deangrove to the said bank or any obligation incurred by Deangrove to the said bank in acquisition or development of the Holloways Beach development." [Affidavit of Mr Bruce of 7 June 2004] 143 He deposed that on 9 August 1999 Mr Butler sent him a facsimile relating to a re-draft of clause 3.2 of the agreement and that he had approved of the suggested amendment and that Mr Butler suggested exchange of the heads of agreement that same day by telephone to Mr Butler. 144 Mr Bruce under cross-examination by Mr Rayment gave the following evidence:

"Q. I just wanted to clarify something else with you, please, while we're speaking generally about this matter. At about 31 May 1999 or at any time in 1999 were you told that Mr Butler had had a telephone conversation with Mr Efron in which Mr Efron said that Mr Herzog's company was not prepared to give you an indemnity but would take an assignment of the Noroton debt with an option for the assignment of the Deangrove interest? Were you told that? A. I was told - I know that, what you've just suggested to me I know from somewhere in the past. Where it fits in that chronologically, I don't know. That's all I can say at the moment.

Q. Well, were you told by Mr Jeans in May 1999 that Mr Backway had told him that Advance would not provide any indemnity to you in respect of the Commonwealth Bank debt on Deangrove? Were you told that by Mr Jeans? A. I don't believe I was. I believe I was told that by Mr Butler.

Q. What, Mr Butler told you that Mr Backway had said that he would not provide any indemnity to you in respect of the Commonwealth Bank debt on Deangrove. Is that what you said? A. No, what Mr Butler told me was that he had spoken to Mr Efron and Mr Efron said it was too broad and you'll notice that there's--

Q. No, no, you see, I'm not asking you about Mr Efron at the moment, I'm asking you about Mr Backway and Mr Jeans. You told me that you were not, to the best of your recollection, told by Jeans that Backway had said to Jeans that Advance would not provide any indemnity to you? A. No.

Q. You were not told that by Jeans? A. That would have rung alarm bells with me because that's - my basic intent of the whole thing was the indemnity.

Q. All right, so Jeans never told you that? A. Not that I can remember, no.

Q. Were you ever told by Butler that Jeans had told him, Butler, such a thing, that is that Backway said that Advance wouldn't give any indemnity to you for the Commonwealth Bank debt? A. No, I don't believe I was.

Q. You say you don't believe you were. Is this a matter of recollection or is this something that you would remember if you were told-- A. I was trying to explain it to you in that I believe I would remember if I was told that because, as I said, my principle in proceeding with the document was to satisfy the indemnity or the obligation we had to Mr Herzog's interests, but to indemnify myself in respect of the Commonwealth Bank moneys because if I passed all the control over to Mr Herzog I had nothing to secure how he might deal with those assets in respect of the Commonwealth Bank. …

RAYMENT: Q. Well, are you sure that you were not told by Butler that Jeans had told him that Mr Backway had said Advance will not provide any indemnity to you in respect of the Commonwealth Bank debt on Deangrove? Are you sure about that? A. As near as I can be, I'm sure…

RAYMENT: Q. And Jeans never told you that himself, do I understand you to be saying? A. No, not that I'm aware, no.

Q. So the most you say, do you, that you heard about this matter was something that you were told by Mr Butler about Mr Efron. Is that right? A. That's right.

Q. And then you were told it in qualified terms, were you, in some way, what Mr Efron had said? A. That's right.

Q. That he'd only said it was too wide? A. That's right.

Q. You were not told, do I understand you to be telling his Honour, by anyone in 1999 that at any time the second and third defendants had said that they would not give you an indemnity. Is that right? A. Yes, and it mattered little to me also because I was the other side of the agreement and I wasn't going to accept heads of agreement unless there was an indemnity, so I kept stressing there had to be an indemnity, and so that's what I was - that's what was being managed for me as part of this process of using Butler as the conduit to the agreement.

Q. If you say that you kept indicating that you were pressing the indemnity, does that suggest that you were told that there was some problem about it? A. Yes, the problem was--

Q. A problem about giving it to you? A. No, not about giving it to me, because it was in there from day one. The first agreement, 17 May, had the indemnity in and the only words that changed in the indemnity was in relation to the Commonwealth Bank, which was a narrowing of its effect.

HIS HONOUR: Q. From what you said a few seconds ago I rather gathered - correct me if I am wrong - that you were relying in some fashion on Mr Butler to look after this for you in terms of being sure the indemnity was there. I may have misheard you-- A. No, that's it, your Honour. Before the indemnity started, I told Butler that there had to be a security there for me because I [was] handing control of my assets to someone else." [Transcript 336-3 40] 145 Mr Bruce had given evidence under cross-examination that he had not travelled to Melbourne in order to exchange the heads of agreement. He did not believe that there ever had been an arrangement which had been cancelled to that effect. He presumed that he would not have had the ability and the expertise to handle the exchange and he would not have done so because it is something he would have expected his solicitors to do-that is to say he would have expected Mr Butler to act, as he was asked to act, from the 19 April meeting and to stand between and bring the settlement to a conclusion. [Transcript 340-3 41] Evidence given by Mr Efron 146 Mr Efron gave evidence that: · he had given advice to Mr Herzog and to Mr Backway in about May 1999 in relation to a draft heads of agreement which had been forwarded to them by Mr Butler; · he had spoken to Mr Butler about the draft agreement on about 31 May 1999 by telephone; · at the time his client was Advance Publicity and to the best of his recollection Harpley Nominees had not been referred to in the initial draft documentation; · that he had stated to Mr Butler that his client would not under any circumstances indemnify Mr Bruce and that Mr Butler in reply had said that he would have to seek instructions from his client; · that the best of his recollection his last contact with Mr Butler in relation to the heads of agreement was his letter to Mr Butler of 22 June 1999; · that the former solicitor on the record in these present proceedings was the late Mr Duncan who died on 22 February 2004 and had had possession of the original client files and of the files of relating to the heads of agreement and relating to these proceedings. Approximately one week after the death of Mr Duncan, Mr Efron had received a telephone call from Mr Duncan's brother-in-law who had informed him that he had destroyed all of Mr Duncan's file and work-related papers and that there was nothing left. 147 The court has been informed that Mr Duncan died in tragic circumstances and there was no further or other evidence given in relation to how it had come about the these papers had been destroyed. The Court has been informed that no point is taken by any party seeking to examine those circumstances. There was a consensus at the bar table that these proceedings are to be determined upon the basis that the above described client files and files relating to the heads of agreement were simply not available. The court proceeds accordingly. 148 Under cross-examination Mr Efron gave evidence that he spoke to Mr Butler by telephone on 31 May 1999 and very specifically conveyed to Mr Butler that he had very clear instructions to communicate that Advance was not prepared to give an indemnity and there was to be no indemnity. [Transcript 514 - 515] Receiver retires 149 The receiver retired on 9 August 1999. Continuing the chronology 28 July 1999 - Jeans writes to Butler 150 On 28 July 1999 Mr Jeans wrote to Mr Butler in the following terms:

" Re: John Bruce + Partners, extension of loan facilities

Please find enclosed two cheques for $15,000, one from Harpley Nominees who has agreed to advance a further $15,000 to John Bruce + Partners collateralized with its current loan facility to John Bruce + Partners, which is secured by second mortgage over 19 lots at the Broadbeach Motor Inn.

The condition of this advance and the agreement by Harpley Nominees to John Bruce selling the unit for a price which will not realise the full amount of John Bruce's indebtedness is the irrevocable assignment of John Bruce + Partners' interest in Deangrove Pty Ltd's development at Holloways Beach.

The second cheque for $15,000 is from Advance Publicity Pty Ltd and is an extension of the facility already provided to John Bruce + Partners and secured by a fixed and floating charge over the company. This further advance and the agreement by Advance Publicity Pty Ltd to accept a capital only repayment of John Bruce's indebtedness to it, now to be $365,000, is the irrevocable assignment of the Noriton debt to John Bruce being assigned to Advance Publicity Pty Ltd.

As discussed with you on the telephone, the fixed and floating charge held by Advance Publicity Pty Ltd over John Bruce + Partners will be released on payment of $30,000 by John Bruce + Partners. This amount is to be split into two and to be allocated $15,000 to Harpley Nominees and $15,000 to Advance Publicity Pty Ltd, and further the payment by John Bruce + Partners of all outstanding body corporate levies, council rates and land tax on the 19 lots together with the lodging of the interest payment due on the facility to Metway Finance for the 90 day period of the contract. On receipt of these monies, or acknowledgement from the creditors of payment, Advance Publicity will release its fixed and floating charge over John Bruce + Partners.

In accordance with the original agreement interest will become payable by John Bruce + Partners on a monthly basis on the $365,000 advanced by Advance Publicity Pty Ltd at the rate of 10% and interest will continue to accrue on the Harpley Nominees amount until total satisfaction. Both amounts are to be personally guaranteed by John Bruce + Partners." [PX166B] 151 Mr Butler gave evidence that he provided Mr Bruce was a copy of that letter at about the time that he had received it. [Transcript 141] 152 Mr Bruce gave evidence that he did not believe that he had never seen this letter. [Transcript 345] 28 July 1999 Butler facsimile to Backway 153 On 28 July 1999 Mr Butler sent a facsimile to Mr Backway [PX 166A and following] in the following terms: "Redraft of Heads of Agreement herewith as discussed with Tony Jeans. John Bruce will be signing today and hopes to exchange tomorrow. Exchange could be effected initially by fax if the terms of the Heads of Agreement are acceptable to you. Please advise as soon as possible." 154 The enclosure still included clause 6.8. 28 July 1999 - file note of Butler 155 Mr Butler prepared an important file memorandum dated 28 July 1999 [but including a number of references to apparent phone calls made on that and the following day]. This read: "John Bruce rang. He has spoken to the Bank and anticipates that they will approve the drawing of the $70,000.00 cheque - the Bank should ring him shortly. He will sign the Contract and get it back to us asap with a cheque. He will be in Orange tomorrow at a funeral but will ring us during the day.

28 July 1999: Richard Bywaters rang. The Bank has approved of the drawing of the cheque. John Bruce is proposing to sign the Agreement and drop in to us this afternoon with the cheque. We to contact Metway's Solicitors, Clayton Utz, Llloyd Nash on 0732927000.

28 July 1999: Rang Lloyd Nash and confirmed we holding $30,000.00 and further amount of $70,000.00 being couriered to us. He will get instructions from Metway for the preparation of a Deed of Forebearance and anticipates that it will probably take up to 48 hours to prepare and put in place. We to confirm upon receipt of balance of $70,000.00. His fax no. 07 32927950.

28 July 1999: John Bruce rang. Confirmed above. He agrees with the terms of the amended Heads of Agreement and has signed them and a cheque and will have delivered to us by courier either tonight or tomorrow morning.

29 July 1999: John Bruce rang. Agreement and cheque are on the way to us by courier. Confirmed all seems OK - he will ring later in the day.

29 July 1999: Tony Jeans rang. Signing Agreement and will fax to us for exchange. Faxed to him a copy of his Deed with JBP - he has signed and faxed to Arianne who is arranging fior execution by Bill Barrett and she will then fax to us.

29 July 1999: Rang Geoff Backway. Has Deed - discussed generally he will have signed by Izzi and will fax to us ." [PX 180] [emphasis added] 156 The file note is accepted as accurately recording the events noted. 157 This file note does not record any conversation with Mr Herzog. Mr Butler gave evidence that he could not recall whether not he did have a conversation with Mr Herzog at this time. [Transcript 142] 158 Under cross-examination Mr Herzog gave the following evidence:

"Q. What about the document that was received on 28 July 1999 by facsimile? A. I saw one sheet on that facsimile that came to me. That document did come to my office but I didn't realise it until later. When I spoke to Mr Butler the following morning, the 29th, I said, "Would you fax me another thing" - he asked me to sign it as emergency to - for Bruce to be able to obtain a further mortgage or loan from the bank, needed that the bank should remove as an urgency, "Can you sign the last paragraph". I sayings, "Well, did you fix everything that Mr Efron was concerned about?" He says, "I have", and I trusted Mr Butler without any doubt, and he asked me to sign the one page and I signed and faxed it back. So I had never seen the document as a complete, even when it arrived there.

Q. Are you telling his Honour that you signed a single page, unassociated with any other documents? A. Correct.

Q. How was it then in your mind that the heads of agreement was then in place? A. It was in draft form in place and Mr Butler asked me to sign it, he needed it urgently, he told me the rest of the parties are signing it and I trusted Mr Butler. Very simple, he is my lawyer and I certainly trusted.

Q. He was your lawyer? A. Absolutely.

Q. Wasn't Mr Efron your lawyer about-- A. No, as well, but Butler was as well." [Transcript 544-545] 159 There was certainly some confusion in the evidence given by Mr Herzog as to precisely what had happened: · he had deposed that Mr Butler in late July 1999 had asked him to sign a page of the document which "I faxed to you" and that Mr Butler then sent to him one page only of the document which Mr Herzog signed and sent back to Mr Butler line facsimile [Affidavit paragraph 26]; · under cross-examination however Mr Herzog gave the following evidence:

"Q. Read out what you see on the foot of the page upside down, the facsimile print? A. "Jennifer E Darin" fax number and July 28th, 1649 page 5.

Q. You could see when you got that document that it was page 5 of a facsimile transmission, couldn't you? A. I wouldn't have taken any notice of that.

Q. And the truth of the matter is that it came to your office as part of a facsimile transmission, not on its own, didn't it? A. I am sure it did but that is the page I got to sign and give back.

Q. Well, how did it happen that out of the whole of the facsimile transmission this comes to you late on the 28th you only looked at one page? A. I didn't look at one page. I was trying to - when Mr Butler rang me to try and get it signed, I said to him, "Well, fax me a sheet". He said, "Well, you've got it". So then - I must have changed it in my - "you have got it in your office", but then the girl said, "Oh yes, it arrived yesterday". I said, "Give us the page", so she gave me the page.

Q. So it was your girl that gave you a single page? A. Yes.

Q. Not Mr Butler that sent you a single page, is that right? A. No, he didn't. He sent it the day - he said to me it was there. I must change - I asked that I should change that earlier.

Q. I am sorry, I missed that last answer. A. I said in the affidavit I said that I thought it was Mr - I asked Mr Butler to send me another fax but then he said to me there is one there.

Q. Well, paragraph 26 of your affidavit is just untrue, isn't it? A. Why would you say that?

Q. Pause you suggest there "Mr Butler then faxed me one page only"-- A. Correct.

Q. --"which I signed and faxed back to him"? A. Correct.

Q. You want to alter that evidence now, don't you? A. Yes, I wanted to change that.

Q. You just told us that there was a number of pages in your office and your girl gave you one?

A. Correct. Q. How did you happen to make that significant mistake in your affidavit?

WITNESS: I asked my people today that I should change that this morning because I think I made a mistake there.

IRELAND: Q. You told your lawyers that, did you? A. In fact to Mr Efron, I said to him I felt that that is not quite what happened from memory. Q. Because you had worked out, hadn't you, that you couldn't escape the consequences of a facsimile mark-- A. It had the facsimile mark--

Q. -- on Exhibit P 17? A. No, I disagree with that.

Q. You had woken up to the fact that your evidence would be demonstrated to be false in paragraph 26 this morning when you spoke to Mr Efron, hadn't you? A. No.

Q. You had invented a conversation in which Mr Butler - with Mr Butler, hadn't you, in paragraph 26? A. Definitely not.

Q. And you had invented the statement that he sent you a single page only? A. I made a mistake there.

Q. You now want to retract the last sentence of paragraph 26, don't you? A. Yes, I made a mistake there.

Q. It was untrue, wasn't it? A. Absolutely true what I said.

Q. It was true but a mistake, is that what you say? A. Mistake in the bottom end of it.

Q. The last sentence of paragraph 26 in your affidavit was rue, you say, but a mistake? A. A mistake on the one word." [Transcript 547-549] 160 Mr Herzog's difficulty of recall is apparent from the fact that when it was put to him [Transcript 551] that what had happened on 29 July was that he had discussed the deed generally with Mr Backway his answer was "can't recall it". 161 Mr Herzog's evidence was that within one or two days of his having sent back the single page Mr Jeans informed him that Mr Jeans had signed the heads of agreement and his further understanding was that the heads of agreement which had been signed by the other parties was the document which he had received on 28 July. [Transcript 558] 162 There is no doubt on the evidence but that by 29 July 1999 Mr Herzog was aware that receivers had been appointed to the Broadbeach development units by Suncorp Metway which was a position that Mr Herzog was uncomfortable with. He saw it as necessary to try to protect his equity in the property which would be destroyed on sale by the first mortgagee. [Transcript 553] He proceeded to authorise a negotiation with Suncorp Metway for a forbearance which involved in his company guaranteeing the first mortgage. The document appears in Exhibit PX at 242 and following and the indemnities is to be found at 247. Cross-examination on the alleged conversation with Mr Herzog 163 It was put to Mr Butler under cross-examination that he had had such a conversation and had told Mr Herzog that he had fixed the heads of Agreement document to the satisfaction of Mr Efron. Mr Butler gave evidence that he had had no recollection of ever saying these words to Mr Herzog. His cross-examination included:

"Q. Well, is that because you didn't conceive yourself to have fixed the document to Mr Efron's satisfaction? You have no recollection of saying that? A. No.

Q. Do you conceive yourself to have fixed it to his satisfaction? A. Whether eventually it was, I don't know.

Q. You don't know? A. The heads of agreement was an evolving document. After my initial draft, the only changes that I made were changes that came about as a result of discussions between one or other of the parties, and as redrafts were done, they were then sent to everybody to further consider.

Q. Now, I suggest to you you said "I have fixed the document to Efron's satisfaction" in late July ? A. I wouldn't have said that because if it had been amended to Mr Efron's satisfaction, that would have been something for Mr Herzog to satisfy himself by talking to Mr Efron.

Q. And I also suggest you said to Mr Herzog, "Bruce is under pressure from the bank to get rid of the debenture, your debenture," Mr Herzog's debenture, you see? A. No.

Q. Well, you were aware in late July, weren't you, that one of Mr Herzog's companies had a debenture registered -- A. Yes, I knew that.

Q. -- in respect of John Bruce & Partners Pty Limited? A. Yes, I knew that.

Q. And it was your understanding that the bank wished that document to be gone?…

Q. You understood that the Commonwealth Bank wished to be rid of Mr Herzog's debenture over John Bruce & Partners. Is that right? A. No, I wasn't aware of that. I think the bank wanted to know the terms under which the debenture could be discharged, but in terms of them being anxious to have it removed, no.

Q. Well, I suggest you said to Mr Herzog, "Bruce is under pressure from the bank to get rid of your debenture." Do you agree with that, or not? A. No, I don't.

Q. And then I suggest you said to him, "Will you sign a page of the document which I will fax to you ?" A. Sorry, a page of ?

Q. " The document which I will fax to you?" A. Definitely not .

Q. And did Mr Herzog say to you, "Send me the page. I will sign it and send it back to you "? A. No, I never had a conversation with him in those terms .

Q. Did you receive on or about 29 July a page of the document from Mr Herzog apparently bearing his signature by fax? A. I received a page from Jeff Backway, who I had several conversations with on that day.

Q. Well, did you receive it from Mr Herzog's company - did you? A. Yes.

Q. And I suggest to you that that followed discussions between you and Herzog? A. No, it didn't.

Q. And I suggest to you that to your understanding Mr Herzog trusted you? A. To the extent that Mr Herzog trusted anybody, I guess, so." [Transcript 143-145] 164 Mr Herzog gave evidence [Transcript 544] that he had signed the single page document on 29 July 1999. The matter later became the subject of further cross-examination. His evidence was that by the end of July 1999 it was "in place but not completed". [Transcript 544].

Discussions with Mr Backway 165 The further cross-examination of Mr Butler in relation to discussions with Mr Backway included:

"Q. And I suggest to you that you did speak to Mr Backway shortly after receiving a signed page in a conversation in which Mr Backway said to you, "Bob, there is still an indemnity clause in this document. It has to be removed." That's right, isn't it? A. No, that's not right.

Q. And I suggest that you said words to the effect that you would get instructions. A. No, that conversation never occurred. [I interpolate to note that this and the previous answer are accepted as reliable]

Q. And I suggest to you that previously when earlier drafts of this document had been sent by you you got a call from Mr Backway saying, "We will not be giving any guarantee or indemnity to Bruce or anyone else"? A. No.

Q. And that you said you would speak to Mr Bruce to have the clause removed? A. No, definitely not. Mr Bruce at all times insisted that there be an indemnity, and there is no version of the heads of agreement that ever did not have an indemnity in it .

Q. And I suggest to you that you had a number of other discussions with Mr Backway in the course of which he said, "There will be no indemnity at all"? A. No, that's not right.

Q. And that you said to Mr Backway in the course of one such discussion, "John," meaning John Bruce, "wants your indemnity for the guarantee," and that Mr Backway replied, "Whatever John may want we are not prepared to agree to it, to agree to any indemnity"? A. No.

HIS HONOUR: Q. Are you quite certain of those last few answers of yourself? A. Conversations in those terms, yes….

RAYMENT: Q. There's no room for error, is there, in your recollection about this matter, about that question?…

Q. The questions that His Honour just asked you about, the questions that I was putting to you about Mr Backway having made it clear to you there would be no indemnity. You distinctly deny that? A. Mr Backway, on one occasion I can recall, having said that Advance did not want to give a guarantee, that was in the course of the discussions concerning various drafts of the agreement, but there was never - certainly around this time, the July period, there was no conversation with Mr Backway in those terms . Mr Backway on 29 July, as noted on page 180, said that he would have the deed of the heads of agreement signed by Mr Herzog and faxed back to me. What he faxed back, in fact, was just the last page . I rang him and said, "Jeff, I only got the last page. Can you send the whole document?" He sent the balance of it to me but didn't do it until the following morning." [Transcript 146 - 147] 30 July 1999 - Facsimile from Mr Bruce to Mr Butler 166 By 30 July 1999 a deed clarifying certain disputes between John Bruce and Partners on one hand and Mr Jeans which had been signed on behalf of John Bruce and Partners was sent by facsimile [PX 201] [transcript 314]. Mr Bruce gave evidence that it was after that date that he had signed the heads of agreement document. [Transcript 314] Finding as to the sequence of events which occurred between 28 and 30 July 1999 167 The contemporaneous documents are of considerable assistance in reaching the factual finding as to the sequence of events. The finding is however grounded upon the whole of evidence. What occurred was as follows: · on the afternoon of 28 July 1999, Mr Butler transmitted to Mr Backway an amended draft of the Heads of Agreement. This (for the first time) included Harpley as an indemnifying party under clause 6.8; · on 29 July 1999, Mr Backway telephoned Mr Butler's office and asked for a further copy of page 8 to be faxed to him which was done [PX 182]; · later on 29 July 1999, there was a telephone conversation between Mr Butler and Mr Backway in which Mr Backway said that he had the document which was discussed generally and Mr Backway stated that he would have the Heads of Agreement signed by Mr Herzog [PX 180]; · at 12:23 pm on 29 July 1999, Mr Butler received by facsimile from Mr Herzog's office a single page 12 of the Heads of Agreement bearing what are admitted to be the authentic signatures of Mr Herzog on behalf of advance and Harpley [PX 184]; · at 1:10 pm on 29 July 1999, Mr Backway left a message for Mr Butler to phone him; · Mr Butler later asked that the whole of the Heads of Agreement be retransmitted to him and this was done by Mr Backway the following day 30 July 1999 [PX 185A-185L]. This transmission was a continuous one of 12 pages but the execution page was not resent. This document included the indemnity provision in clause 6.8. Mr Backway gave evidence of certain notations he placed upon the agreement prior to forwarding same by facsimile. Those notations appear on the exhibit. Notably no notation was made to clause 6.8; · there was no conversation as alleged by Mr Backway on 30 July 1999 in which he protested the inclusion of the indemnity provisions in clause 6.8. In this respect there is no file note of Mr Butler which records a telephone call with Mr Backway at all on 30 July 1999. 3 September 1999 - Butler letter to Herzog - Express Post? 168 A further document which went into evidence [PX 287] appears to have been a letter from Mr Butler to Mr Herzog of 3 September 1999 which also has the 'express post' sticker upon it. It was in the following terms:

"Mr I Herzog Advance Publicity Pty LImited 203 Ingles Street PORT MELBOURNE VIC 3207

I refer to previous communications concerning the Heads of Agreement which I would confirm were exchanged on the 9th August 1999.

I enclose herewith as discussed three re-engrossed clean copies of the Heads of Agreement in the same form as exchanged with a view to each being executed by all of the parties such that each of the parties holds a copy of the document bearing the signatures of each other party .

The documents herewith have been executed by Mr Bruce and his companies and also Mr Jeans and his company.

Please sign all three copies on behalf of Advance Publicity Pty Limited and Harpley Nominees Pty Limited and retain one copy for your own records and return the remaining two copies also duly signed to me for provision of one copy to Mr Bruce and one copy to Mr Jeans.

I would also appreciate your forwarding to me a copy of the Deed of Guarantee and Indemnity with Metway bearing your original signatures and seal, a copy of which was faxed to me on the 9th August. The original signatures are required for stamping purposes in Queensland.

The writer is overseas until the end of next week and will contact you on his return.

Please advise as to any further information which you may require at this stage." [emphasis added] 169 It was put to Mr Butler that this document which purported to attach re-engrossed copies of heads of agreement was never sent. His evidence was that it was sent by express post on or about the date that it bore. [Transcript 149]

General Reliability of the evidence given by Mr Butler 170 Before Mr Butler had made his affidavit of September 2003 he would have looked at some parts of files in order to obtain particular dates as he accepted under cross-examination [Transcript 152]. The title of the particular file was "John Bruce & Partners Pty Ltd RE Advance Publicity Pty Ltd". [Transcript 152]. 171 In paragraph 6 of his affidavit of 19 September he deposed:

"When the form of the Heads of Agreement was finalised faxes were then sent to me by Mr Backway on 29 and 30 July 1999 which provided me with a facsimile copy of the Heads of Agreement signed by Mr Izzy Herzog on behalf of Advance Publicity Pty Limited and Harpley Nominees Pty Limited." 172 In paragraph 7 of his affidavit of 19 September 2003 he had deposed that he did not take part in the subsequent exchange of counterpart documents and understood that this had taken place on 9 August 1999 in Melbourne. [Transcript 152]. His evidence was that his understanding as to the date when exchange had taken place was simply his recollection without looking at the file - he seemed to recall that some document had gone down to Melbourne but he could not say that his recollection was gained by information received from any particular person. [Transcript 153]. His understanding was that it was probably Mr Jeans who had gone to Melbourne to do the exchange. 173 He had also deposed that he did not hold an original counterpart of the heads of agreement. In making that statement in his affidavit he was intending to refer to what was in the files of Jennifer E Darin rather than to his personal position. He had intended to indicate that those files did not contain an original counterpart. 174 The precise position in relation to his searches of the files for the purpose of being able to state [in his affidavit on 19 September 2003] that he did not hold an original counterpart is somewhat complex. The following seems to have been his evidence: · he probably looked at the above described file, as it would have been inappropriate for him to give the evidence which he had in his affidavit without himself or some person upon whom he could rely having searched files; [Transcript 153] · he knew that he had previously made a search for the original counterpart of the document in connection with it being required for District Court proceedings and at that time [2001] had been unable to find a further copy of the original; [Transcript 153 - 154] · parts of the District Court file were presently in court having been released to the solicitors for Mr Herzog who subsequently took over those proceedings; [Transcript 154.50] · a copy of the original document had been provided to counsel briefed in the District Court proceedings [and he believed also to the receiver of John Bruce & Partners who had inspected the file and likely taken a copy of the document] [Transcript 155]. He could not recall having [prior to his making of his first affidavit] furnished a copy of the document to any other person. [Transcript 155] 175 Under cross-examination the following was put to Mr Butler:

"Q. And may we take it that the files to which you had access included the file which is presently on the witness table? A. Yes.

Q. I want to suggest to you that if that file contained the letter of 3 September 1999, the one that we have at 287 in the bundle of documents, you would not have sworn the affidavit in the terms in which you swore it last September? A. No, because the letter and the original of the document weren't found in that file. That was the problem. The problem was that the documents were located in a further file, and they were, in fact, attached to various documents in relation to the Metway dealings, as was that letter, because the letter was written at a time when the Metway, subsequent Metway dealings were in progress, and it finished up in a file not directly related to the creation of the heads of agreement, and that was the problem in terms of locating it." [Transcript 156] 176 Whilst he was in the witness box Mr Butler was shown the document file called "John Bruce & Partners Pty Ltd re-Publicity Pty Ltd". He was shown the document which is also now PX 287. He said he had moved this document from a blue manila folder which had Metway documents associated with that part of the file. His evidence then included:

"Q. Are you saying that when you swore your affidavit - no, I withdraw that. Are you saying that when you went to search for an original document you looked in volume one of the file but not volume two of it and not in a manila folder that was associated with it? Is that what you are saying? A. No, I'm saying that to the extent that I looked I did not see it at the time.

Q. Well, does that mean that you didn't look in the blue folder? A. I obviously didn't look as well as I could have at the time.

Q. Well, you went looking for an original and you could only find a photostat? A. Yes.

Q. And you think that photostat was handed over to another solicitor. You didn't give that photostat at any time, did you, to Mr Bruce? A. My recollection at the time was that the photocopy was of an original and, as I said in the affidavit, I assumed at the time that the photocopy was of the original that Mr Bruce finished up with.

Q. No. Well, that's not my question. My question is: you didn't give a copy of the photocopy to Mr Bruce, did you? A. I can't remember doing so." [Transcript 159] 177 He may have given a copy to Bull, Son & Schmidt. [Transcript 159] 178 This cross-examination went to Mr Butler's evidence [in his later affidavit of 27 November 2003] that after he had sworn his first affidavit he had undertaken further investigations and located a further file which he had examined and with the benefit of which he was able to depose to particular facts. Those seem to have been the documents which at one stage were in the so-called blue folder. [Transcript 161] 179 At [transcript 160] he gave the following evidence:

"Q. Right. Well, now, this - surely the volume two of the file which you had for Bruce & Partners was available to you in September last year, wasn't it, and the manila folder that you've been talking about as well? A. It was available to me, yes.

Q. And had been available in 2001 when you went looking for the original of any document, any heads of agreement document? A. Yes.

Q. And the photostat that you were provided by Mr Bruce was given to you shortly after 9 August, was it? A. In hindsight, it clearly couldn't have been, but that was my recollection at the time that I swore that affidavit .

Q. You say "In hindsight it clearly couldn't have been". Why is that? A. Because the original wasn't returned to me until some time in September.

Q. Well, when you swore the affidavit of 19 September 2003, it was then your recollection, was it, that you had received this photostat from Bruce during August? A. That was my recollection. It was dated 9 August, yes.

Q. And was that a recollection that you had had for some years? A. No, I couldn't say that, but it was my recollection at the time that I swore the affidavit.

Q. Well, you certainly didn't remember in September having received any original documents signed by Mr Herzog at any time. Is that right? A. At the time I swore the affidavit I had no recollection of that, no." 180 The chronology to which he then deposed was as follows: · following receipt of facsimile copies of the proposed heads of agreement on 9 August 1999 he was involved in further discussion with Mr Backway with respect to amendment of clause 3.2 of the heads of agreement. On 9 August 1999 he sent a facsimile to Mr Backway, attaching a redraft of clause 3.2; · on 23 August 1999, Mr Bruce wrote to Mr Herzog; · on 3 September 1999 Mr Butler sent a letter to Mr Herzog. Enclosed with that letter were a number of documents including 3 copies of the heads of agreement which had been executed on behalf of all parties except the second and third defendants; · shortly thereafter, he received by post two copies of the heads of agreement which had been executed by Mr Herzog for and on behalf of the second and third defendants; · on 10 September 1999, Mr Bruce wrote to Mr Jeans concerning matters including the heads of agreement; · on 13 September 1999, Mr Herzog wrote to Mr Bruce regarding the heads of agreement; · on 1 October 1999, Mr Backway wrote on behalf of the third defendant to Mr Bruce. Mr Butler received a copy of that letter at the time; · on 15 October 1999 Mr Backway signed a letter on behalf of Mr Herzog as a director of the third defendant addressed to Mr Bruce. Mr Butler received a copy of that letter at the time. · on 15 October 1999, Mr Bruce wrote to Mr Herzog. Mr Butler received a copy of that letter at the time. · on 1 November 1999, Mr Bruce wrote to Mr Herzog; · 8 November 1999, Mr Herzog replied by letter to Mr Bruce. 181 Mr Butler was then taxed under cross-examination with aspects of his new chronology:

"Q. Well, the first thing you tell us is that in paragraph 5 you sent - in paragraph 5 you say you sent a redraft of clause 3.2 of the heads of agreement to Backway. Now, that must have appeared from volume one, mustn't it? A. Yes.

Q. And if you sent a redraft of clause 3.2 on 9 August, did you still think when you swore this affidavit of November that there had been some exchange on 9 August? A. There had been an exchange prior to that date .

Q. Prior to 9 August? What, prior to your sending a new clause there had been an exchange? Is that what you're saying? A. The parties had faxed the executed document on 29 July .

… Q. And, you see, in your affidavit of September you have stated a recollection - I'm sorry, yes, you have stated an understanding that there was an exchange done on 9 August in Melbourne. Do you see that? A. Yes.

Q. Yet in paragraph 5 of your second affidavit of 27 September [ sic ] you have discovered that you sent clause 3.2 to Mr Backway on 9 August. Do you see that? A. Yes.

Q. And that had been apparent to you, hadn't it, when you read through volume one before you swore your affidavit of 19 September last year, surely? A. If I had had the file in front of me and I had read the file at the time, yes.

Q. Do you now wish to modify what you have previously said about that? A. I can't recall in September whether I had the whole of the file in front of me at the time or whether I had seen it. I clearly didn't address those issues that are dealt with in the November affidavit." [Transcript 163] 9 August 1999 - letter from Mr Butler to Mr Bruce 182 A facsimile transmission was sent by Mr Butler to Mr Bruce on 9 August 1999 enclosing a re-draft of clause 3.2. The facsimile cover sheet [PX 222] included a message in the following terms:

"I refer to our telephone conversation of this morning and enclose herewith a re-draft of clause 3.2 in accordance with Izzi Herzog's requirements in respect of his guarantee. If Ok with you, I can insert into the Deed and can then exchange all today. The amount would then need to be paid or secured before the Charge was removed. I await your instructions." [PX 222] 183 Mr Bruce gave evidence that on that same day he had initialled the document which was the substitute page 3 [and is to be found at PX 226] [transcript 315].

Stepping back to examine the events of 9 August 1999 in perspective 184 The first defendant made a number of submissions in this regard which seem to me to be of substance putting a number of the relevant parameters and facts which obtained at this general point in time into perspective. To the extent that the following statement includes a reference to factual matters the finding of the Court is that those factual matters are proven on the balance of probabilities. 185 In short: · 9 August 1999 was a Monday. On the previous Friday (6 August) Mr Butler had been in touch with Mr Nash of Clayton Utz, Mr Backway and Mr Bruce concerning the proposed settlement with Suncorp-Metway [PX 208]; · the settlement with Suncorp-Metway required the execution of a deed of forbearance by Suncorp-Metway and the execution by Harpley of a guarantee and indemnity in relation to JBP's obligations to Suncorp-Metway under the first mortgage over Broadbeach; · in a commercial sense, the two documents were interdependent. In essence, Harpley was stepping in to give a guarantee an indemnity to Suncorp-Metway as the price of removing the receivers which would then allow a sale to Islands Hotels of the Broadbeach units as intended by Mr Herzog; · at the same time, from Mr Bruce's viewpoint, the discharge which the heads of agreement accomplished in acquitting his obligations to Harpley was fundamental. The heads of agreement also had the effect of assigning in favour of Advance any profits to which JBP or Bruce himself was entitled arising out of his commercial arrangements with Mr Jeans in relation to the Holloway's Beach project. Mr Jeans then became an essential party to the heads of agreement consenting to that assignment. Also, Mr Bruce's guarantee to the CBA was to subsist; · the dealings for the forbearance under the Suncorp-Metway mortgage led to further costs and at Mr Herzog's insistence clause 3.2 of the heads of agreement (as exchanged by facsimile on 30 July 1999) had to be amended to place an additional burden upon Mr Bruce. This change was one required by Mr Herzog and Mr Backway; · on 8 August 1999 (Sunday) Mr Butler had prepared the facsimile attaching a redraft of the deed submitted by Suncorp-Metway. This document was not transmitted by facsimile to Mr Herzog's offices until the morning of 9 August 1999 [PX 209ff]; · on the same morning, Mr Butler had sent to Mr Backway the proposed redraft of clause 3 of the heads of agreement which included a sub-clause 3.2.5 [PX 221]. This change was also sent to Mr Bruce [PX 222]; · the proposed redraft to clause 3.2 was received by Mr Backway who left a telephone message for Mr Butler at 12:45 pm "that it was fine" [PX 224]. At 1:59 pm, Mr Bruce's office sent a facsimile to Mr Butler with his initials confirming the change to that clause [PX 225-226]; · the deed of guarantee and indemnity had been executed in facsimile form by Mr Herzog and other director of Harpley and witnessed by Mr Backway and then returned to Mr Butler's office by facsimile transmission earlier that day [PX 210-219]; · Mr Butler passed on the facsimile executed copies of the deed of forbearance and the deed of guarantee to Mr Nash of Clayton Utz [PX 227].

186 I further accept as of substance the proposition that for the purposes of this case, the signal significance of these events is that the only variation sought by the Herzog interests to the document which had been in their offices on 29 July 1999 was a change to clause 3.2. Significantly, no issue was raised concerning the inclusion of the indemnity provisions in clause 6.8. There is no single piece of paper up to this point in the case which suggests any enduring complaint by Mr Backway, Mr Herzog, Mr Efron or anybody else concerning the indemnity which was undoubtedly part of the document which had been in Mr Herzog's offices and returned on 30 July 1999 to Mr Butler by facsimile. 11 August 1999 Butler writes to Bruce 187 On 11 August 1999 Mr Butler wrote to Mr Bruce confirming that the heads of agreement had finally been put in place and enclosing for his information a copy of the heads of agreement. [PX 285]. This letter was very detailed and read as follows:

"I refer to the telephone conversations of recent date and would confirm that the Heads of Agreement with Advance Publicity Pty Limited ("Advance"), Harpley Nominees Pty Limited ("Harpley"), Mr Jeans and the Companies associated with you has finally been put in place.

I enclose herewith for your information a copy of the Heads of Agreement as executed.

I note that the agreement the subject of the Heads of Agreement was entered into by you and your associated Companies with a view to regaining full control and ownership of your Company, involving both the obtaining of the Trust Units and the removal of the Charge over the Company's undertaking, and also retiring the debts associated with the interests which held the Trust Units and the Charge.

The consideration for the acquisition of the Trust Units has been provided by way of an assignment to Advance of the debt due to you by Noroton Holdings Pty Limited ("the Noroton Debt"), in effect on a "factoring" basis such that after recovery of the consideration for the shares and the repayment of the Advance facility from the amount of that debt, you will be entitled to an accounting for any excess. In that regard I note that the Katoomba project the subject of the Noroton Debt is progressing well such that it is anticipated that the necessary Development Approval will be obtained within a reasonable period of time.

The assignment of the Noroton Debt was also the consideration for the discharge of the loan facility of three hundred and fifty thousand dollars ($350,000.00) provided by Advance and secured by way of a fixed and floating charge over the business undertaking of your Company.

That Charge will accordingly now be discharged upon payment of the amounts referred to in clause 3.2 of the Heads of Agreement, namely the sum of thirty thousand dollars ($30,000.00) provided by Advance and Harpley, any Council rates and amounts due to the Body Corporate, any outstanding interest due to Metway, and the payment or securing of the amount of forty thousand dollars ($40,000.00) due at the end of this month to Metway as consideration for the extension of the Metway facility until 29 October 1999 (and being interest to that date).

I note that the Metway facility has expired and that in consideration of the amount recently paid to Metway and the amount of forty thousand dollars ($40,000.00) payable at the end of this month, Metway has agreed to an extension of the facility to 29 October 1999 so as to enable the sale to Advance to proceed.

The Heads of Agreement also includes a provision for the acquisition of the Broadbeach units by Advance for a consideration of two million two hundred and thirty five thousand dollars ($2,235,000.00) with completion to be effected within ninety (90) days. That consideration will be sufficient to pay out the First Mortgage to Suncorp-Metway Bank and partly pay out the Second Mortgage to Harpley. The balance of the amount due under the Harpley Second Mortgage will be paid from your entitlement to a share of the profits generated by Deangrove Pty Limited by the resort development at Holloways Beach, Queensland.

I further note that you are satisfied that the sale price represents the best price which can be achieved for the Units in view of the present economic circumstances on the Gold Coast.

The Heads of Agreement provides for Harpley to discharge its Mortgage upon receipt of the balance of the proceeds of the sale to Advance, an agreement which was necessary as the amount of the sale price will not be sufficient to pay the full amount of that Mortgage. The balance then outstanding is accordingly secured by the assignment to Harpley of your Deangrove entitlement (acknowledged by Deangrove), the excess of which will be paid or assigned to you after satisfaction of the balance remaining on the Harpley facility.

I note that you have guaranteed the Deangrove facilities with the Commonwealth Bank. The Heads of Agreement provides that Advance shall indemnify you in respect of that guarantee .

The nett effect of the completion of the arrangements contemplated by the Heads of Agreement will be that you will effectively own and control the John Bruce + Partners business again, the Charge will be removed and the Broadbeach Units which have been a continual financial drain on the Company will have been sold, with the share of profits in the Deangrove venture being available to meet the shortfall in the payout of the Second Mortgage. I note that you then intend to return to the Company's core business of architecture.

Please advise as to any further information which you may require at this stage." [PX 285-286] [emphasis added] 188 Mr Bruce gave evidence that he had received this letter. [Transcript 315] 23 August 1999 Bruce writes to Herzog 189 On 23 August 1999 Mr Bruce wrote to Mr Herzog advising that the heads of agreement that had been signed were basically between himself and Mr Herzog. [PX 286A]. This letter read as follows:

"The Heads of Agreement that has been signed, despite having many signatories, is basically between you and me.

During its formation I have been well aware and appreciate of how you have honoured the basic underlying intent of the Agreement, which was to repay Advance and Harpley, retire everyone from the unfortunate Broadbeach investment, and leave JBP in a financial state where it could trade on, and grow out of its own efforts.

In the Agreement Clause 5.1 states a purchase price by Advance of $2,235,000 but Clause 5.8 allows for Advance to introduce another purchaser.

Advance introduced IHL at a price of $2,435,000 and all contracts were signed by JBP and we therefore had completed our obligation under the Agreement.

We have been advised by Tony that because of the unfortunate Metway/Receivers episode this IHL price is to be reduced to 'surprise, surprise' the Advance purchase price of $2,235,000.

Firstly the Metway/Receivers episode was exaggerated by Tony, as is his usual way, and no adverse publicity appeared where JBP's name was mentioned. Tony apparently developed in that time an aspiration to 'steal' the JBP units at a very low price if JBP went into receivership, which was never on the cards.

Now Tony is seeking to reduce the price after our total deal has been done to IHL's advantage, and presumably his, whereas the benefit should be to Harpley and Advance.

JBP had considered that the $200,000 excess from the Broadbeach sale would be passed to Harpley and/or Advance and therefore take some pressure off the final result achieved out of Deangrove.

I do not believe that IHL reduced purchase price originated anywhere other than in Tony's mind and I believe he is in some perverse way just trying to screw JBP and me.

1. Had a deal been done between you and me in respect of the IHL purchase at $2,435,000?

2. Do you want me to accept the reduced $2,235,000 deal, recognising that in a short period of time Advance will settle at that price anyway, but to the $200,000 detriment of the immediate balance between Harpley and JBP?

If you feel that Tony is doing the honourable and legally correct thing and that I should resign all the contracts at the lower price then I would like:

(a) your assurance that the sale price from Advance to IHL, after Advance settles for $2,235,000, is also $2,235,000 and no premium is being paid by IHL;

(b) a copy of the relevant page of each purchase contract between IHL or others and Deangrove so that I can be assured that sufficient income is being derived from the Deangrove sale to settle the JBP debt to Harpley.

By the way, despite Tony's pressure for contracts to be signed (at his figure) to suit FIRB requirements, there is no need to include signed contracts in any FIRB Approval application.

Sorry to involve you in this, but I want to keep a very strong focus on the end result that you kindly agreed to allow, that sees an amicable and financially clean result for Advance, Harpley and JBP." [PX 286A and 286B] 190 Mr Bruce gave evidence that having made some references in the letter of 23 August to various clauses in the agreement he had had available to him when he wrote that letter to Mr Herzog the document which had come to him with Mr Butler's letter of 11 August 1999. [Transcript 315] 3 September 1999 Butler writes to Herzog 191 There is in evidence and already described the letter of 3 September 1999 said to have been written by Mr Butler to Mr Herzog. [PX 287 and following] 192 Mr Bruce gave evidence in relation to the heads of agreement which had been enclosed with this letter [recording on PX 300 his own signature on three occasions] that he believed that he had signed the document first so that one stage it had only had his own three signatures upon it. He had been supplied the document to Mr Butler [Transcript 315-316] 193 Mr Herzog's evidence under cross-examination in relation to this matter was that he assumed that he had received the letter [Transcript 5 68-5 69]. He sought to retract this answer in re-examination. [Transcript 586]. The evidence given in re-examination on the issue is rejected. The finding is that he received the letter. 10 September 1999 - letter from Mr Bruce to Mr Jeans copied to Mr Herzog and to Mr Butler 194 On 10 September 1999 Mr Bruce wrote to Mr Jeans and copied his letter to Mr Herzog and to Mr Butler [29-31]. This letter dealt with a number of issues then current between the parties but included the following:

"Izzy and I agreed in the Heads of Agreement that he would indemnify the guarantee given in my name at the CBA. He has not taken over the guarantee! So if you change or extend the loan and/or the CBA agrees to this process, my legal advice is that my guarantee is invalidated unless I specifically agree in writing to any change or extension to the terms and statement of the original loan." [paragraph 11 Exhibit JRB 1 at page31] [emphasis added] 13 September 1999 Herzog writes to Bruce 195 On 13 September 1999 Mr Herzog wrote to Mr Bruce in the following terms:

"I have received a copy of your correspondence to Tony in relation to Deangrove. I have read the letter and the facts of what has been expended etc are a matter for you and Tony.

In relation to our Heads of Agreement however you appear to have some form of misunderstanding.

John Bruce and Partners owes Harpley Nominees $1,230,950 plus interest on the Broadbeach Property as a Second Mortgage. John Bruce and Partners are unable to repay that amount. In order to assist John Bruce and Partners and hopefully repay Harpley some of its debt the Heads of Agreement was entered into whereby Harpley was to receive the equity held by JBP in order to satisfy its debt. If there was excess equity this would go to JBP but if there was insufficient equity then the shortfall was guaranteed to be paid by John Bruce and Partners or yourself personally.

Harpley therefore only has an interest in whatever equity there is in Deangrove. It has not, which is confirmed by Bob Butler, given any indemnity in relation to Debts of Deangrove including the Commonwealth Bank.

I believe that I have made every attempt to help you in this most difficult situation but the so called equity was offered to us to resolve a problem held by John Bruce and Partners and ultimately you John.

It would therefore seem to me, based on our Heads of Agreement, prudent for you to do whatever is possible to ensure that the Deangrove equity position is protected and maximised so as to minimise any shortfall on the Harpley facility which is guaranteed by yourself." [PX 307A] [emphasis added] 196 Mr Bruce gave evidence that he had received this letter but did not believe that he had spoken to Mr Herzog about it. He could not recall whether he had written back or not but thought that he may have written back to Mr Herzog. [Transcript 316] 197 Under cross-examination by Mr Rayment he gave the following evidence:

"Q. "Harpley therefore only has an interest in whatever equity there is in Deangrove. It has not, which is confirmed by Bob Butler, given any indemnity in relation to debts of Deangrove including the Commonwealth Bank". Do you see that? A. I do.

Q. And when you read that you took it that it was being suggested by Herzog that what you had said in your letter about an indemnity to the CBA was disagreed in by Mr Herzog, didn't you? A. I think I explained to you yesterday that I took the reference to the word "debts" to mean, you know, any deficiency in the end calculation of profit or loss for Deangrove. What we did about the indemnity at that stage was an issue for Jeans and I.

Q. Well, are you telling his Honour that although this letter said to you, "You appear to have some form of misunderstanding", you took this fourth paragraph to relate to something that you had not asserted in your own letter of 10 September. Is that what you're saying?…

Q. Did you take, do you say, although this letter said that you had some form of misunderstanding and went to the question of this indemnity, you took it that this remark was not addressed to what you said in your letter of 10 September. Is that what you say? A. Did I think it was not addressed to that? No, I did not.

Q. You see, the only reference to an indemnity in your letter of 10 September for the Commonwealth Bank money was in your paragraphs 11 and 12, wasn't it? A. That's right.

Q. And you were being given to understand, were you not, by this letter of 13 September that Mr Butler had confirmed and that the writer was stating that there was no indemnity given in relation to debts of Deangrove including the Commonwealth Bank, that is no indemnity at all? A. That's what it says, yes." [Transcript 359] 198 Mr Backway gave evidence that he had spoken to Mr Herzog about this. His evidence was:

"The basic discussion, not in specific words because I couldn't remember, would have been around why would there have - Izzy would have said, "Why would Bruce believe there was indemnity?" I said, "I've confirmed that there is no indemnity with Mr Butler", and he said, "Are you sure", and I said "Yes", and he said, "Well, we'd better prepare a letter to respond to Mr Bruce's queries of the 10th", which is his letter here." [Transcript 482] 199 Mr Backway was asked under cross-examination by Mr Ireland where he asserted that the matter had been confirmed by Mr Butter to him and his evidence was that it had been fervently confirmed to him in discussions which he had with Mr Butler in late August or perhaps early September. [Transcript 486] 200 Mr Backway then encountered difficulties in his further cross-examination because his affidavits had simply not included any such assertion:

"Q. But you see, you swore an affidavit as recently as last Friday in this matter, didn't you? A. I did.

Q. In paragraph 8 of that affidavit on the third page you assert a telephone conversation with Mr Butler on 30 July. Do you see that? A. Yes.

Q. And I put to you yesterday that that did not occur, do you remember, and you disagreed? A. I disagreed with that, yes.

Q. Then you go on to say, however, that in that conversation he was going to seek instructions. Right? A. Correct.

Q. And there it was left, according to your affidavit? A. Yes.

Q. He said to you, you assert, in the telephone conversation of 30 July 1999, that he would seek instructions from John Bruce. Right? A. Correct.

Q. So the matter was up in the air at that point about the indemnity from Bruce's standpoint, according to your affidavit? A. At July it was up in the air, yes.

Q. Then you say in paragraph 9: "As I discovered in early August that further amendments were required and a new replacement document would be prepared, I then believed that what Mr Herzog had signed was to be treated as a draft and I took no further action about the page which Mr Herzog had signed on 29 July 1999". Do you see that? A. Yes.

Q. Nowhere in your affidavit do you assert any conversation after 30 July in which Mr Butler came back to you and confirmed, as you purported to say in the letter at 307A, that there was no indemnity ? A. I was not required to comment any further than my thoughts as of the 30th. That's all I was asked to do .

Q. But if it was the truth that Butler had come back to you and said, oh yes, Mr Bruce recognises there's no indemnity, that would have been a very important matter as you understood the issues in this case, wouldn't it? A. As I said, I wasn't asked to go any further than the 30th.

Q. Now answer my question. A. Yes.

Q. If it had been said, i.e. Butler came back to you and said "Bruce is content to knock out the indemnity", that would have been a highly significant matter in your mind, for the purposes of this case, wouldn't it? A. It would have been probably, yes ." [Transcript 486-487] 201 Mr Herzog gave evidence that Mr Backway prepared the letter and that both he and Mr Backway effectively settled it together. By reference to the second paragraph in the letter Mr Herzog under cross-examination accepted that he had had no doubt but that there was a heads of agreement in place as at 13 September 1999. [Transcript 569-570] 202 Mr Herzog gave evidence in relation to this letter that it had been his own belief at this time that the heads of agreement had been signed in good faith by all parties involved. [Transcript 571] 1 October 1999 Backway writes to Bruce [cc Butler] 203 On 1 October 1999 Mr Backway wrote to Mr Bruce (copying the letter to Mr Butler. It was in the following terms:

The above heads of Agreement was signed in good faith, I believe, by all parties involved. It was specifically prepared to help John Bruce and Partners obtain financing for its ongoing operations by removing our Debenture Mortgage over John Bruce and Partners.

Clause 4.9 sets out that interest at the rate of 10% per annum is payable in advance on the various amounts owing by John Bruce and Partners to Advance Publicity namely being $50,000 in relation to the Units and shares, $350,000 loan and the further loan of $15,000 paid on the 27th July 1999.

In accordance with the agreement entered into interest of $3,458.33 per month is payable. To date no monies have been received. Amounts for August, September and October are due and amount to $10,374.99.

I therefore have to give you notice that you are in default of the agreement and in accordance with Cl 4.9 unless the default is rectified within 7 Days the Full amount of the advance becomes due and payable.

Please ensure payment is received promptly or I will have to instruct Jennifer Darin to take whatever actions are provided for under the agreement without further notice to yourselves." [PX 321] 204 Mr Bruce gave evidence that he had received this letter and that the date stamp "received" with the date "6 October 1999" was his office date stamp. His evidence was that he had believed the first sentence of the letter which had stated that the heads of agreement were signed in good faith by all parties involved. [Transcript 317] 205 Mr Herzog gave evidence that he believed that he was aware that this letter was going out. He was shown that it referred to certain provisions in the heads of agreement and accepted that as at this date he regarded the heads of agreement as being in place [that being the heads of agreement in the form that had been in his office on 29 July- but he added "with amendments to come". [Transcript 571-572] 15 October 1999 - Mr Herzog writes to Mr Bruce and copies the letter to Mr Butler 206 On 15 October 1999 Mr Herzog wrote [PX 322] in the following terms:

This is to inform you that Advance Publicity Pty Ltd hopes to settle the sale of the Broadbeach units this weekend.

In accordance with Cl 3 of the Heads of Agreement John Bruce and Partners are responsible to ensure that all amounts payable to Metway, other than principal and all outstandings of rates and body corporate fees are paid before the heads of agreement is enforceable and therefore that settlement of Broadbeach can take place.

In accordance with Cl 8 you have guaranteed any non performance by John Bruce and Partners and to reimburse all losses, damages, expenses and costs which both Harpley and Advance shall be entitled to recover by reason of a default.

We hope that in the interests of everyone involved that settlement of the Units will not be delayed due to any acts or omissions by John Bruce and Partners.

An essential part of the total agreement is your equity in the Cairns property. I have been informed that there are major problems with this development and I believe it would be in the best interest of everyone if you would work closely with Tony Jeans to ensure the problems are satisfactorily resolves so that everyone can recover their investments in the various undertakings and move on." 207 Mr Bruce gave evidence that when he had received and read this letter he believed that Mr Herzog was regarding the heads of agreement as operative and had had no reason to doubt that at any time up until recently. [PX 317] 15 October 1999-Mr Bruce writes to Mr Herzog 208 On 15 October 1999 Mr Bruce wrote to Mr Herzog a detailed letter including the following:

"With respect to your letter of 15 October, I confirm John Bruce + Partners' obligation to the Heads of Agreement.

As I understand the situation, all JBP obligation to Metway is paid up to the end of October and overpayments thus generated will be dealt with by the Advance Publicity/JBP lawyer at settlement.

Likewise, I understand that any adjustments necessary in respect of rates and body corporate fees will be part of the settlement process.

On this basis I know of no act or omission by JBP that could affect the settlement. If there is something specific that you are concerned about, please provide the appropriate details.

Finally, concerning Holloways Beach, if the published and constantly confirmed intention of Islands Hotels Limited to purchase 50 units for $7.59 million is still applicable, then the issue of the JBP indebtedness to Harpley out of Broadbeach should be concluded satisfactorily." [PX 323] 209 Mr Bruce gave the following evidence:

"Q. And at the time you wrote the letter of 15 October 1999 did you have a belief, and if so what was it, concerning the then operation of the heads of agreement?

A. As far as I was concerned, the heads of agreement had been operable since 9 August 1999 and I had no reason to doubt that at any stage." [Transcript 318] November 1999 210 By about November 1999 an extension had been negotiated with Suncorp Metway to completion on the 19 units in the Broadbeach project and Mr Herzog had become involved with a public company Island Hotels Limited in which his interests had obtained a shareholding. Island Hotels was an overseas hotel company which was looking to obtain suitable properties in Australia and one of the properties offered to it comprised the 19 units in Broadbeach. Island Hotels had initially taken over [or simply refinanced] the commitment of the mortgage of Suncorp Metway and ultimately purchased the unit in August 2000. The sale price to Island's Hotels was $2.350. Mr Herzog had negotiated the matter with Island's Hotels together with Mr Jeans. 17 July 2000 211 On 17 July 2000 Mr Butler had written to Mr Backway confirming instructions given to him by Advice Publicity in relation to the giving of notice of assignment to Noroton Holdings and Australasian Property and to take steps necessary to enforce payment. [PX 328F] Mr Herzog gave evidence that some other moneys had been paid and that he had given instructions for proceedings to be instituted on behalf of Advance for the balance. He under cross-examination gave the following evidence:

"Q. I want to suggest to you that that right to recover the balance in your mind depended upon the validity of the heads of agreement? A. Not really.

Q. But it was in place, wasn't it? A. Well, it helped, having that in a formula of which way to go, but we had all that done before.

Q. The heads of agreement was in place, was it not-- A. Yes, it was, in July.

Q. --when the proceedings were instituted? A. Correct." [Transcript 577-578] 5 September 2000 212 By letter of this date Noroton Holdings wrote to Mr Butler, the letter being copied to Mr Bruce [Exhibit P 10]. The letter was in the following terms:

"I refer to previous correspondence and in particular your letters of 21st July 2000 and of today's date, and confirm that we enclose a payment of $185,000 to your client, Advance Publicity Pty Limited.

An amount of $45,000 has already been paid direct to John Bruce & Partners prior to us having knowledge of the assignment, therefore the $185,000 is the balance of the $230,000 owing.

John Bruce has undertaken new architectural work for which we have been invoiced and paid another $60,000.

John Bruce is currently undertaking additional architectural work to the value of $45,000 which we herewith confirm we are agreeable to pay to your client directly, 60 days after the issuance of an operational development consent in respect of the Katoomba Golf Course project." 213 The cross-examination of Mr Bruce included:

"IRELAND: Q. Looking at Exhibit P10 which you were just shown, it refers to a payment of $185,000 from Noroton to Advance Publicity? A. Yes.

Q. I want to you assume for the moment that the heads of agreement document was not at that stage, in September 2000, valid or operative as between your interests and Harpley and Advance. A. Yes.

Q. Making that assumption, if you had believed that to be so in September 2000 when this payment of $185,000 you became aware of being made, would you have done anything on that hypothesis? A. I think I would have kept the money.

Q. And what was your belief when you took no action in respect to this payment? A. I believed that the Noroton debt had been assigned to Advance by reason of the heads of agreement." [Transcript 319] 2001 correspondence 13 August 2001 214 The letter of 13 August 2001 from Bull Son & Schmidt addressed to Mr Herzog has a director of Harpley Nominees was in the following terms:

We act for John Richard Bruce who has been joined to the Federal Court proceedings involving Deangrove Pty Limited (Receivers and Managers appointed), John Anthony Jeans and the Commonwealth Bank ("the Bank"). Please refer to the enclosed copy of the amended Cross Claim filed on behalf of the Bank which outlines the Bank's claim against our client.

We understand that in accordance with clause 6.8 of the Heads of Agreement between John Bruce & Partners Pty Limited, Advanced Publicity Pty Limited, Deangrove Pty Limited, Panjang Holdings Pty Limited, John Richard Bruce and John Anthony Jeans and Harpley Nominees Pty Limited ("the Heads of Agreement") that both Advanced Publicity Pty Limited and Harpley Nominees Pty Limited have indemnified our client: "from and against all liability incurred by Bruce in respect of any personal guarantees given by Bruce of the obligations of Deangrove to the Commonwealth Bank of Australia whether in respect of principle, interest or costs under any mortgage effected by Deangrove to the said bank or any obligation incurred by Deangrove to the said bank in the acquisition or development of the Holloway's Beach Development."

1. Our client has come to a commercial arrangement with Mr Jeans concerning other court proceedings between his company and Mr Jeans, where Mr Jeans has agreed to focus on the resolution of this Federal Court action.

2. Our client intends to rely upon the indemnity provided by Advanced Publicity and Harpley Nominees in clause 6.8 of the Heads of Agreement ("the Indemnity") in his defence of the Bank's claim.

3. Our client assumes but wants you to confirm that you will fulfil your obligations under the Indemnity, to cover our client's costs in defending this Federal Court action and any judgment made for or against our client.

4. Our client also wants you to advise whether there is an alternate legal process, using your own legal advice, which you would seek to follow in recognition of your indemnity position.

Please note that the most recent court orders require our client to have filed his pleadings with the Federal Court before the next Directions Hearing on 7 September 2001. Therefore we need to know if you intend to fulfil the Indemnity within seven days of the date of this letter." [PX 329-330] 215 Mr Herzog gave evidence that he had received a shock when he read this letter and that he could see that at this stage the Federal Court proceedings were on foot and that Mr Bruce was joined in them by the Commonwealth Bank pursuing the debt that he had guaranteed to the bank in respect of Deangrove. What had happened was put by him as follows:

"Mr Fletcher was my accountant at that time. I asked Mr Fletcher to search the place, see whether we could find the heads of agreement in our office - we're fairly well systematically filing. We couldn't find heads of agreement anywhere, so I said, well, send us the heads of agreement, because I didn't think we signed anything except the July one, send us the heads of agreement that contains that, and he did, and on that I said to - Mr Fletcher said to me, "Hang on, this is not your signature". I got a shock….

Q. So from what you've said it seems that it was not you but Mr Fletcher that generated the thought that it wasn't your signature? A. Absolutely.

Q. Right, because you thought it might be your signature-- A. No.

Q. --hence the search of the office? A. I didn't even - when we received that agreement I got a shock, it must have been done, and when he showed me that it's not my signature I got a shock, I just couldn't believe it.

Q. But it was he who originated the idea in your head that it was not your signature, wasn't it? A. It was not too original, once he showed it to me it was easy to identify…

Q. And did you look at the agreement that was with it? A. There was no agreement with it?

Q. I'm sorry, you're referring there to the letter of 13 August, the first letter from Ball Son and Schmidt? A. Correct.

Q. Do you remember there was one later addressed in the same way which enclosed the agreement? Did you see a letter later? Do you remember that or not? A. No, I believe that when I got the letter from Ball Schmidt I asked my office to look for the heads of agreement. We couldn't find an executed document that stated on 9 August, I think. Then we asked Ball Schmidt to send us one and I think they actually faxed it to us, but I can't recall now….

Q. So you then asked, did you, for a search to be made, a further search to be made, for any original documents? A. Correct, to see whether there is a fully executed document dated 9 August.

Q. And you say none could be found? A. None was found.

Q. And then Ball Son and Schmidt were asked for the document upon which they were relying, correct? A. Correct.

Q. In came the photocopy? A. Correct.

Q. The accountant said, "You don't need to worry about this, it's not your signature"? A. Correct.

Q. And from then on you've been saying it's not your signature? A. Correct. [Transcript 579, 580, 582, 583] Letter [Exhibit D 4] 20 August 2001 - Bull Son & Schmidt to Mr Herzog 216 By letter of this date Bull Son & Schmidt enclosed copies of the Commonwealth Bank's cross claim and the heads of agreement. 23 August 2001 - Mr Butler's file note 217 On 23 August 2001 Mr Butler's file note [Exhibit D3] records a number of telephone conversations with Mr Herzog including the following:

"… Herzog rang. Has received a letter of demand from Bull Son & Schmidt Solicitors who act for John Bruce in relation to the Deangrove proceedings claiming an indemnity. He says that the signature on the document forwarded to him and on which they apparently rely is not his and in event he is not prepared to get involved in legal proceedings with John Bruce. He has advised him that in effect unless the demand is withdrawn and John Bruce does something immediately about the defaults by John Bruce in payment of interest then he will put in a receiver and reserves the right to do that at any time after next Monday." 218 Mr Butler accepted under cross-examination that if he had replied to Mr Herzog in some way he would probably have recorded the substance of that reply in this note. [Transcript 166] 219 Under cross-examination Mr Butler gave the following evidence:

"Q. May we take it that on 23 August 2001 it was not your belief that you then held either the original or any copy of any document signed by Mr Herzog in the forms of the heads of agreement. Is that right? A. I probably believed at the time that I had a copy of the heads of agreement.

Q. You didn't mention that to Mr Herzog, did you? A. Well, I haven't recorded a note of it here.

Q. What I want to suggest to you is that that was not your state of mind at the time as otherwise you most certainly would have told him that you had a copy of some document signed by him? A. Not necessarily. He told me of a letter of demand. I don't know that I went into any detail with him about the basis on which they were claiming an indemnity. I hadn't seen any correspondence at that stage.

Q. Well, I suggest to you that you would, if you had some understanding at that time that he had signed a heads of agreement document and that you had a copy of it, you would have told him of it when he said those things to you on 23 August. You must have surely? A. If I knew that that was what he was referring to. What was discussed there went further and it was on the basis of Mr Herzog's denial of him having signed the document that I ceased to act in it." [Transcript 167] 24 August 2001 220 Mr Efron wrote on 24 August 2001 in the following terms:

"We are instructed on behalf of Advance Publicity Pty. Ltd. and Harpley Nominees Pty. Ltd. ("the Companies")

We have been instructed to respond to your letters dated 13 August, 2001 and 20 August, 2001, addressed to Sir Israel Herzog.

1. Our clients deny that the Heads of Agreement, a copy of which was enclosed under cover of your faxed letter dated 20 August, 2001, was ever duly executed on behalf of the Companies;

2. Notwithstanding the fact that the Heads of Agreement were not duly executed on behalf of the Companies, there was or would have been a failure of consideration on behalf of your client, in fulfilment of his obligations under the alleged agreement and those of his related company John Bruce & Partners Pty. Ltd, in reliance upon which the indemnity was allegedly given;

3. Your client or the Company of which he is a Director, namely John Bruce & Partners Pty. Ltd. is very substantially indebted to the Companies and in substantial breach of the terms of a mortgage debenture, entered into by it to secure a loan of approximately $350,000.

4. Your client has provided personal guarantees in respect of other debts due to the Companies, which have not been paid.

In the circumstances we are instructed that, unless by close of business on 29th August, 2001, we have received from your client both a formal release of any indemnity said to exist under the terms of the Heads of Agreement, together with a Schedule of Payments acceptable to our client, our client intends to enforce the mortgage debenture in its favour over the assets and undertaking of John Bruce & Partners Pty. Ltd.

We are also instructed that in the event that your client seeks to involve the Companies in the Federal Court proceedings by way of joinder or otherwise, in purported reliance on any alleged indemnity, such proceedings as your client may wish to bring will be strenuously defended. Our client will also be seeking to counterclaim against your client for all amounts guaranteed by him and in respect of which there has been default in payment.

We await your client's response in due course." [PX 330A & B) 30 August 2001 - Letter from John Bruce & Partners to Bull, Son & Schmidt 221 The 30 August 2001 letter read:

"I do not require you to deal with the issue of John Bruce + Partners or my relationship with Mr. Herzog or his associated entities. You have no instruction in that regard so please desist immediately so that you will not feel that any costs can be directed to John Bruce + Partners in this regard.

Mr Herzog and I have made a verbal arrangement, which overrides the advices you have received from Efron & Associates.

Your specific instruction is to act on behalf of me in respect of my guarantee to the Commonwealth Bank on monies loaned to Deangrove Pty Ltd.

In that regard you are to follow and duplicate wherever possible, the actions and evidence produced by Bob Butler of Jennifer E Darin - Solicitors. You are not to run off on any tangents, you are simply to follow Bob Butler's lead so that his deemed inability to act for both the Director of Deangrove and I is covered.

The Director of Deangrove, Mr. Tony Jeans, and I have exactly the same motive and requirements in respect of the matter against the Commonwealth Bank, and I need someone to provide very cost effective duplication of Butler's and Deangrove's initiatives.

Please consider the foregoing prior to our conversation at 12 noon, Thursday and presumably our meeting later in the afternoon." [PX 330 C] 5 September 2001 - letter exhibit D 5 Bruce and partners to Butler "…[I]t seems that I am free to use you for John Bruce + Partners advice, which is the way it was when the original Heads of Agreement was constructed". 6 September 2001 222 There was then a letter from Mr Efron addressed to John Bruce and Partners Pty Ltd of 6 September 2001 in the following terms:

"We refer to the above matter and enclose herewith Deed of Release.

Please ensure Deed is executed and returned to our office by facsimile transmission and hard copy, by no later than 4.00pm Friday 7th September 2001.

If your have any queries in relation to this matter, please contact our office." [PX 331] 5 September 2001 223 A letter from Mr Efron addressed to Bull Son Schmidt of 5 September 2001 was in the following terms:

"We refer to the above matter and previous correspondence in regards to this matter.

We enclose herewith a copy of the proposed Deed between John Bruce and ors for execution and return.

Upon our instructions, the Deed reflects the agreement reached between our respective clients.

Mr Herzog has requested that this Deed be forwarded to John Bruce and we request that you forward same to him.

We look receipt to receipt of an executed copy in due course.

Please note that upon our client's instructions, our client requires this matter to be resolved by no later than Friday 7th September. In the event that this matter is not resolved by that date our clients reserve all their rights." [PX 332] 224 This letter enclosed a Deed of Release a copy of which is appended to this judgment importantly clause 3 was in the following terms:

3.1 JBP and Bruce release and discharge Advance and Harpley from all actions, claims, suits, costs and demands which JBP and Bruce have now or may have at any time against Harpley or Advance, their officers or employees or their successors or assigns arising out of or in respect of the Heads of Agreement or anything contained therein.

3.2 Bruce agrees that he is not entitled to any indemnity in the Proceeding from Advance or Harpley, pursuant to the terms of the Heads of Agreement or otherwise and releases and discharges and indemnifies Advance and Harpley, their officers or employees or their successors or assigns, from any and all actions, claims, suits costs and demands which but for this Deed, Bruce would or may have against Advance or Harpley in the Proceeding or arising out of the Proceeding." [PX 336] The second affidavit of Mr Bruce of 17 June 2004 225 In this affidavit Mr Bruce gave detailed evidence of particular respects in which he as well as the second and third defendants had acted in terms of their obligations by reference to the Heads of Agreement. His evidence was that in discharging particular identified obligations upon the basis that the heads of agreement were executed and operative there would be seen to arise a clear material disadvantage to him if Advance and Harpley Nominees were permitted to depart from what he described as "the operative joint assumption" set out in (paragraph 2) of his affidavit. 226 This affidavit was allowed into evidence subject to and Evidence Act 1995 section 136 limiting order which limited the admissibility to those particular statements of fact which could be strictly proven. Later events and the tender of particular documents [JRB 1, 3-8] have satisfied me that the following particular events are shown and have been proven to have occurred: · "By reference to Clause 2.1 of the HOA Panjang (a unit trust company of which Mr Bruce was sole director) transferred Trust Units to Advance in pursuance to the terms of Clause 4.4.1 of the HOA. · By reference to Clause 3.1 of the HOA, John Bruce and Partners permitted the then existing Floating Charge by Advance over the assets of JBP to be increased to $365,000.00. · By reference to the provisions of Clause 4.1 of the heads of agreement JBP and Mr Bruce assigned the "Noroton Debt" with all the remedies and rights attaching thereto to Advance. Advance subsequently acted on the rights conferred by the heads of agreement and instigated proceedings in the District Court of NSW No. 3293 of 2001 against Mr Bruce and Noroton. These proceedings are being defended by Noroton and are still being pursued by Advance as Plaintiff. The effect of the assignment was to pass control for payment of a $630,000 asset into the hand of Advance. $185,000.00 of this debt has been paid by Noroton to advance pursuant to the assignment. JBP and Bruce have been joined as a party to these proceedings. · By reference to Clause 5.1 of the heads of agreement, JBP assigned and transferred all of its Broadbeach units, referred to in the 1st schedule of the heads of agreement. Under the provisions of Clause 5, the Suncorp Metway mortgage was discharged as against JBP, by reason of an on-sale by Advance as required under the provisions of the heads of agreement. JBP signed the Contracts of Sale at the direction of Advance. The amount due under the Harpley Mortgage, mentioned in Clause 5.6 of the heads of agreement, could not be fully paid; it was necessary to proceed under Clause 5.9.1 which in turn refers to Clause 6 of the heads of agreement. · By reference to the heads of agreement, JBP, allowed control of the Broadbeach units to rest in Advance, consequently it lost the right of negotiation with Purchasers and the right to negotiate with Suncorp Metway. By reason of the Harpley Mortgage deficiency arising out of this sale of Broadbeach, JBP was required to transfer to Harpley its 50% interest in the Deangrove Equity this represented the privotal reason why the deprivation of control in the form of Clause 6.8 of the heads of agreement be provided by Harpley/Advance in respect of the CBA Guarantee. Harpley/Advance controlled the asset and the method of disposal of units, whilst Mr Bruce still carried the Guarantee for the Deangrove Loan. Mr Bruce would not have agreed to the various transactions imposed in the heads of agreement, if Advance/Harpley were not to provide such an indemnity. · On or about 17 July 2000, the second cross defendant retained Jennifer E Darin solicitors to institute proceedings against Noroton Holdings Pty Limited and Australasian Property Limited to recover monies to which those parties were entitled pursuant to the said Heads of Agreement; · Thereafter, Jennifer E Darin solicitors maintained claims on behalf of the second cross defendant against Noroton Holdings Pty Limited and Australasian Property Limited; · On or about 5 September 2000 Jennifer E Darin recovered a sum of $185,000 for the second cross defendant pursuant to its claims against Noroton Holdings Pty Limited and Australasian Property Limited; · Mr Bruce suffered detriment by the permitted and concurred assertion by the second and third cross defendants of an entitlement to recover monies from Noroton Holdings Pty Limited and Australasian Property Limited which prevented and precluded him from any such recovery." The heads of agreement - central finding 227 The balance of probabilities supports a finding that the evidence generally given by Mr Butler in terms of the circumstances concerning the execution of the heads of agreement should be accepted. Notwithstanding the troubled waters which he is shown to have entered: · in agreeing to prepare the draft heads of agreement; · in thereafter continuing in the role of taking instructions from the disparate parties [and then forwarding subsequent drafts]; · in terms of his apparent failure to understand the basic proposition that even without being formally appointed as solicitor for any party, what he was about concerned a likely conflict of interest as between the interests of one group and interests of another,

there are too many indicators confirmatory of the evidence which he gave and destructive of the evidence given by Mr Backway and Mr Herzog to permit of any other finding. 228 I proceed to identify certain of those indicators. 229 Firstly, in terms of the record keeping of the respective parties, Mr Butler generally kept detailed records of his correspondence and file notes. Mr Backway was faced with the difficulties already referred to, where he was not in the habit of keeping old notes and generally followed a practice of simply communicating orally [mostly by telephone] and more importantly, where his files had been dismembered/re-filed by some other person in his absence and where he had had to rebuild those files. 230 Secondly, Mr Herzog is not shown to have been a person who took particular care personally in terms of documents which he was content to sign. He relied upon others for this purpose: see for example his letter of 26 March 1999 to Mr Bruce advising that Mr Jeans "has our authority to deal with matters on our behalf…" On a number of occasions during the course of his evidence he made the point that he had left the detail to others. This is most particularly apparent on the occasion when he simply · signed the execution page of the heads of agreement; · sent it by facsimile to Mr Butler,

without even taking the care to read the earlier pages of those same heads of agreement which had been sent into his office by facsimile. 231 That this occurred in late July simply bespeaks the urgency of the situation on the ground. The signing on that day of the execution page occurred in circumstances in which, unless the heads of agreement were put into place, the receivership posed very real and likely imminent prejudice to the interests of Mr Herzog. Documents are sometimes signed in the heat of the moment. The balance of probabilities favours that explanation to the central issue raised and effectual level in these proceedings. 232 Thirdly, the court is unable to accept the evidence of Mr Herzog as reliable. He was not shown to have a good memory in terms of contemporaneous documents. Under cross-examination he was shown to have given inconsistent evidence in a number of areas. His contention for example that Mr Butler had been his solicitor in relation to the preparation of the heads of agreement is rejected both: · in terms of his own beliefs; · as well as in terms of the fact that neither he nor Advance nor Harpley Nominees ever received a fee note from Mr Butler. 233 Fourthly, there are simply too many problems with the evidence given by Mr Backway for the court to be in a position to accept his evidence as having been reliable. In relation to the important question of whether he had been away from the office on the 28th or the 29th of July, he gave too many versions for the court to be in a position to accept his evidence as reliable. Of course his final affidavit was dated very late in the day. His newest version was given after other oral and documentary evidence had been received, and most particularly after the evidence given by Mr Butler. 234 Whilst it has to be accepted that there were many inconsistencies in the evidence given by most of the witnesses, Mr Backway in this section of the cross-examination of earlier set out in the judgment had failed in paragraph 8 of his affidavit made as recently as 18 June 2004 to contend that there was any conversation after 30 July 1999 in which Mr Butler confirmed to him that there was no indemnity. Paragraph 8 had included:

"I telephoned Mr Butler's office on 29 July on several occasions asking to speak to him but he was not available and did not ring back. On the following day he returned my call and I said to him words to the effect (a omitting colourful language) "How could you tell Izzy that the agreement was okay when the indemnity clause is still in there?". He said words to the effect "John would not agree to have it removed". I said, "Bob we are owed over $1.6 million by John Bruce and we are not indemnifying him against anything". He said words to the effect that he would seek instructions from John Bruce." 235 Had it been the case that Mr Butler had later come back to Mr Backway and confirmed that there was no indemnity then this would indeed have been a highly significant matter to have been included in the affidavits of Mr Backway. It was not. 236 Fifthly, it is apparent from the evidence that following the sending by Mr Herzog of the single page of the heads of agreement executed by him on 29 July the balance of the pages of the heads of agreement were sent [indeed on the following day] by facsimile to Mr Butler. This is. I accept, quite inconsistent with any suggestion that those remaining pages included an important provision with which the Mr Herzog interests could not agree and had not agreed. 237 Sixthly, the case theory for which the second and third defendants contend is simply too far-fetched - effectively amounting to a conspiracy theory. The evidence does not prove this case. The wrongdoing for which the second and third defendants' case contend, involves an adverse finding against Mr Butler of an entirely different dimension and universe to the finding which is in fact made. Yes, he was either very naive or short-sighted to have imagined, at the inception of the whole project, that playing the role which the parties had asked him to play [in terms of drafting the heads of agreement] was not ripe with difficulties and not to have seen the matter as an accident waiting to happen. Yes, he was either very naive or short-sighted after having received the letter from Mr Efron, to have imagined that he could continue to deal with the two groups of parties where at that time there were different instructions being given by each of them. But to make a finding on the evidence in support of the many pieces of the puzzle which underpin the case of the second and third defendants is altogether another matter. There are after all, only a limited number of possibilities which could provide an explanation as to how the heads of agreement came to be signed. The court can only proceed on the balance of probabilities and on the evidence before it. 238 In terms of the Court's determination of the credit of Mr Butler, even taking into account all of the problems which he faced in cross-examination, I cannot accept from the evidence, nor from his demeanour, that he was involved in the deception and underhand conduct which the second and third defendants case at least on one view, would either attribute to him or regard him as having joined in as a participant. Applying the balance of probabilities test I cannot accept that on the evidence the letters which he swore he had sent to Melbourne by express post were not sent. A finding is made that they were sent. I reject the proposition that underpins the whole of the allegation that these letters are not authentic. Notwithstanding the vigorous cross-examination of Mr Butler the finding is that he was not a party to the type of fraud and deception which would have been involved in the production of the letters and the pretence through the whole of the final hearing that they were authentic. The evidence before the court falls very very far short of even having come close to establishing any such thing. Any suggestion that the court may infer the absence of Mr Jeans from the witness box as proving some involvement by him in this type of fraud and deception is also rejected. 239 Nor can I accept on the evidence that Mr Butler was a party in any sense to the subterfuge for which the second and third defendants contend in terms of the production of the original form of heads of agreement, which unless they came in from Melbourne, had to have been received by his office from someone and by some form of arrangement. Whilst there may be some explanations conceivable [as for example the forgery at the instance of Mr Jeans or Mr Bruce of the signatures of Mr Herzog to the heads of agreement] taking place entirely outside the knowledge of Mr Butler, the evidence falls far short on the balance of probabilities from establishing any such explanations. 240 Further I reject the proposition that Mr Butler was in any fashion a party to serious wrongdoing if the submission is that he knowingly received into his possession the two original versions of the heads of agreement [apparently signed by all parties] in some fashion other than the regular receipt of the documents following their having first been signed in Sydney and then sent to Melbourne and then returned to his office by Mr Herzog interests. 241 Any suggestion that the court may infer the absence of Mr Jeans from the witness box as proving some involvement by him in the fraudulent arranging of forged signatures of Mr Herzog and the production to the office of Mr Butler of the heads of agreement as if coming in from Melbourne, is also rejected. Any suggestion that the court should find that Mr Bruce was involved in such frauds is rejected. Any such cases fall very far short of what was proved. To my mind at least in the state of the evidence regarded as reliable before this Court, any such cases can only be regarded as fanciful in the extreme. 242 These considerations are not in any sense properly addressed as it seems to me by Mr Rayment's submission that the sole focus must be upon whether the second and third defendants had signed the documents recording the typewritten date 6 August 1999 [said to have been despatched to the second and third defendants under cover of the 3 September 1999 letter and said to have been signed by Mr Herzog and returned to the office of Mr Butler]. Certainly that is the question for decision as pleaded. But to so state the proposition is misconceived. 243 The court must proceed upon all of the evidence and is not blinkered in that sense. The fact is that the conspiracy theory [even to the extent that it prays in aid the failure of Mr Jeans to give evidence himself] is simply too far-fetched to be accepted as reliable when weighed against the actual evidence presently before the court. And of course that conspiracy theory and the testing of the propositions put by the second and third defendants must cope with section 140 (2) of the Evidence Act which provides that without limiting the matters that the court may take into account in deciding whether it is satisfied that the case has been proved on the balance of probabilities, the court is to take into account inter alia the gravity of the matters alleged. This is a case where that parameter is of very real significance and is clearly engaged. 244 The second and third defendants have submitted that the Court has [by dint of the fourth paragraph of the letter of 13 September 1999 from Mr Herzog to Mr Bruce PX 307A], a strong indicator in favour of the acceptance of the evidence given by Mr Herzog and by Mr Backway. The proposition is that it is almost certainly quite clear that the Herzog interests would not have: · signed the original of two copies of the heads of agreement replete with the offending clause and proceeded, soon after 3 September 1999, to forward those signed copies to Mr Butler; · only a few days thereafter, have sent the 13 September 1999 letter [making the point that Harpley Nominees, [as Mr Butler was said to have confirmed] had not given any indemnity in relation to the debts of Deangrove including the Commonwealth Bank. 245 Whilst this matter certainly requires to be weighed in the overall consideration of all of the evidence, the case of the second and third defendants places too much emphasis upon one sentence in one letter. Even before this statement in this letter, Mr Herzog had signed the one execution page submitted to him from Sydney and had done so notwithstanding that the offending clause appeared in the earlier pages which were in his office. These were dynamic times and there was urgency involved in the execution of the heads of agreement. Findings on the forgery issue 246 On the balance of probabilities, the handwriting evidence does not establish that the signatures of Mr Herzog were forged. The submission of the second and third defendants that the handwriting evidence does not establish that the signatures were genuine does not carry the case the requisite distance. That the handwriting expert evidence does not decide the matter one way or another is neither here nor there. The court's determination proceeds upon the basis of all of the evidence, the balance of probabilities on that evidence being as the Court finds, that the documents were signed by Mr Herzog.

The legal issues which arise 247 A number of issues concerning matters of law and principle have been raised. Threshold points taken by the second and third defendants 248 The second and third defendants have taken a number of threshold points. In each case these are said to be freestanding and fatal to the plaintiff's claims. The first threshold proposition - the plaintiff did not sign the guarantee 249 The first of these threshold points is said to rely upon the proposition that contribution between co-sureties depends upon the underlying legal relationship. The matter is put as follows in Rowlatt on Principal and Surety, Fifth Edition, Gabriel Moss Q.C. and David Marks, Sweet & Maxwell page 164:

" General 7-45 Where a co-surety pays the debt, or more than his proportion of it and the principal is insolvent, the co-surety is entitled to contribution from his fellow co- sureties, to equalise the burden. It makes no difference whether the co-sureties are bound jointly or severally or jointly and severally. Nor does it matter whether the co-sureties are bound by the same instrument or by separate instruments, whether in the same sum or different sums, whether at the same time or different times. Nor does it matter whether the surety paying the debt knows of the existence of any other sureties, since the rule of contribution does not depend upon agreement, express or implied, but upon an equity arising from the mere fact of the existence of co-sureties for the same debt owed to the same creditor. Nor is it material that one surety agreed to become bound before another surety…

Contributing co-sureties must be sureties in the same degree 7-46 The equity depends upon the creditor's original ability (apart from any equity preventing him from doing so) to charge the co-surety from whom contribution is sought as much as the co- surety seeking contribution. Where this could not have been done there is no inequity to be remedied and no contribution. For example, where the surety's guarantee provides that he cannot be sued unless the other sureties may default, no right to contribution arises against him. The surety in that position is in reality "a surety for the surety "." [Paragraph 7-46 was cited with approval by Gummow J in Street & Halls v Retravision (NSW) Pty Ltd (1995) 56 FCR 588 at 598] 250 Rowlatt at 7-57 deals with payments when a surety has not been sued as follows:

"A surety may pay as soon as the demand becomes due and claim contribution. If there is any doubt as to whether the sum is due, the surety should give notice to the co-sureties to defend, make terms or pay their proportions. If the co-sureties do not take any such action, the co-sureties will not be entitled to claim that the surety paid improperly. The absence of notice permits the co-sureties to establish, if they can, that payments could have been resisted. Contribution is of course not possible where a surety pays without being liable to the creditor". 251 The short proposition for which the second and third defendants contend particularly relies upon the last sentence of paragraph Rowlatt: 7-57. The contention [joined in by the first defendant] is that the plaintiff has sworn that he did not sign the guarantee during the Federal Court proceedings both at first instance [on the unsuccessful application to withdraw an admission] and on appeal, and presently continues on the application for leave to appeal to the High Court of Australia, to so contend. The proposition is that there is evidence presently before the court that the plaintiff did not sign the guarantee. The proposition is that the plaintiff not having signed the guarantee is not and never had been a co-surety. The matter is said to be a fortiori. 252 To the extent that a claim is made by the plaintiff that at law [and unless successful before the High Court of Australia] he has been found to be liable on the guarantee and is bound by the finding that he signed the guarantee, the second and third defendants contention is that for the reasons given in their submissions summarised in the interlocutory judgment [reserving on the questions of admissibility of the sensitive documents] there was no issue estoppel binding the first defendant [that is to say preventing the first defendant from denying the finding by the Federal Court in terms of the plaintiff having signed the guarantee]. 253 Part and parcel of the second and third defendants first threshold point seeks to draw a distinction in terms of the issue estoppel questions as between on one hand, the position which obtains between an indemnifier and the person indemnified and on the other hand, the position which obtains as between co-sureties. The second threshold proposition - release of one co-guarantor releases all others 254 The second threshold proposition relies upon the principle that in the case of sureties, joint suretyship is the essential condition of liability of each surety, or as sometimes put, is "part of the consideration of the contract of each". 255 The authorities cited in support of this principle include Walker v Bowry (1924) 35 CLR 48 where a creditor had obtained judgment against the appellant, one of several sureties who under a deed of guarantee had contracted jointly and severally. The appellant, being adjudicated insolvent on the creditor's petition, paid the sum of £800 to the creditor in satisfaction of the judgment debt and the creditor released him from the judgment debt and all claims in respect of it; and the adjudication of insolvency was thereupon annulled. The action was by the appellant against one of his co-sureties for contribution in respect of the sum paid to the creditor. The holding was that the release of the appellant from the judgment debt as effectively discharged the other sureties as if the creditor had released him from his obligations under the guarantee. 256 The judgment of Starke J at 57-58 included the following:

"Now the Judicial Committee have said, in Ward v National Bank of New Zealand Limited (1883) 8 App. Cas., at 764: - "It has been held that when the creditor releases one of two or more sureties who have contracted jointly and severally, the others are discharged, the joint suretyship of the others being part of the consideration of the contract of each. In Bonser v Cox (1841) 4 Beav 379, at p. 383, where the defendant agreed to become a surety for Richard Cox in a joint and several bond to be executed by Richard Cox and himself, and the execution of the bond by Richard Cox was not obtained, Lord Longdale observes. 'The surety has a right to say "The arrangement was, that Richard Cox, as well as myself, should be held bound by bond to the creditor: that arrangement never was carried into effect,"' and the decision would obviously have been the same if Richard Cox had executed the bond and had been afterwards released." (See also Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) 252; (1893) AC 317; Kendall v Hamilton (1879) 4 App Cas 504, at pp. 515-516)

And at common law the release of one of a number of co-debtors jointly or jointly and severally liable for the same debt released all ( Cheetham v Ward (1797) 1 Bos & P 630); Nicholson v Revill (1836) 4 Ad & El 675; EWA (a debtor) Re [1901] 2 KB 642). It is unnecessary to say whether the common law cases were founded on the same principle - historically, perhaps, they were not - but it is the principle laid down by the Judicial Committee in the case of suretyship, and is in line with the speech of the Lord Chancellor (Cairns) to the House of Lords in Kendall v Hamilton. In the case of sureties, the principle is that the joint suretyship is the "essential condition of the liability" of each, or, as the Judicial Committee phrase it, "part of the consideration of the contract of each" (See Rowlatt on Principal and Surety, p. 272; Ellesmere Brewery Co v Cooper (1896) 1 QB 75, at p. 82; Barry v Moroney (1873) 8 IrRepCL 554; (1872) 7 Ir. Rep. CL 110).

Does it make any difference that the creditor has pursued one surety to judgment on a joint and several guarantee, and then released him from the judgment debt? The judgment itself does not affect his right to indemnity from the principal, or to contribution from his co-sureties. The equities arising from the relationship of principal and surety still subsist. But, in releasing the judgment debt, the creditor just as surely discharges the "joint suretyship" and also the arrangement that both should be bound to the creditor as if he released all claims upon the guarantee itself. The creditor has broken the essential condition of liability of the other sureties and thereby discharged them. The principle stated in Ward v National Bank of New Zealand (1883) 8 App. Cas. 755 entirely covers the case, and is quite consistent with, and, indeed, untouched by, the doctrine of King v Hoare (1844) 13 M & W 494, Kendall v Hamilton (1879) 4 App Cas 504 and other cases based on them." 257 This threshold issue raised by the second and third defendants contends that the effect of the settlement procured by the first defendant from the Commonwealth Bank on the evidence establishes the release by the Bank of the first defendant from his otherwise obligations under his guarantee.

The third threshold proposition - availability of equable contribution depends upon the person claiming it having actually paid or being about to be required to pay an obligation from his own money 258 This third threshold proposition put by the second and third defendants of relies upon the evidence before the court which is to the effect that the plaintiff has not been shown to have actually paid nor to be about to pay the obligation from his own moneys. On the evidence he clearly has no possibility of so doing. 259 It is common ground that Mr Jeans has been served with a bankruptcy notice issued by the Commonwealth Bank claiming to recover $4,814,426.29 [the judgment debt] and that the time for compliance has been extended to 21 January 2004 [on an application relying upon the leave application to the High Court]. 260 Campbell J held in Belan v Casey (2003) 57 NSWLR 670:

"Effect on equitable contribution of the way in which the judgment debt was discharged

68 It is a fundamental requirement for the availability of equitable contribution that the person claiming it has actually paid, or is about to be required to pay, an obligation from his own money.

69 The rationale of equitable contribution does not depend upon any implied contract but rather on "general principles of justice" : Dering v Earl of Winchelsea (1787) 1 Cox 318 at 321; 29 ER 1184 at 1185. In Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342 at 352 Kitto J said that the reason for contribution existing both at law and in equity is, "… that payment by the one discharges not only himself but each of the others, and qui sentit commodum sentire debet et onus." (The Latin maxim translates as, "He who gains the advantage must also suffer the burden." ) That payment by the person claiming contribution has been made, or is imminent, is an essential part of this rationale.

70 In Mahoney v McManus (1981) 180 CLR 370 at 378, Gibbs CJ (with whom Murphy and Aickin JJ agreed) held that an equity of contribution existed when sureties and a principal debtor were all being pressed to pay a debt, one surety put the principal debtor in funds so that the debt could be paid and the principal debtor paid it. On any precise legal analysis, the surety had not paid the debt yet, even so, the payment made by the surety was regarded as a payment made "under" the guarantee, and a right of contribution was available from the other sureties because of it. Their Honours said: "… the doctrine of contribution is based on the principle of natural justice that if several persons have a common obligation they should as between themselves contribute proportionately in satisfaction of that obligation. The operation of such a principle should not be defeated by too technical an approach to the question whether a surety has paid the creditor, when he has supplied moneys to the principal debtor for the purpose of making such payment." 71 In Cockburn v GIO Finance Ltd (No.2) (2001) 51 NSWLR 624 at 631 Mason P (with whom Davies AJA and Ipp AJA agreed) said: "The injustice prevented by an award of contribution or recoupment is the enrichment of the defendant at the expense of the plaintiff actually or imminently liable in part (contribution) or whole (recoupment): see generally Bonner v Tottenham and Edmonton Permanent Investment Building Society [1899] 1 QB 161 at 174, per Vaughan Williams LJ; Armstrong v Commissioner of Stamp Duties (1967) 69 SR (NSW) 38 at 47; 86 WN (Pt 2) (NSW) 259 at 266, per Walsh JA; Mahoney v McManus (1981) 180 CLR 370 at 388, per Brennan J. On this basis, the concept of unjust enrichment has been seen as the underlying principle. The right of contribution depends on matters of substance, not form." 72 In Burke v LFOT Pty Ltd [2002] HCA 17; (2002) 76 ALJR 749 at [40] McHugh J said that since the decision of Dering v Earl of Winchelsea in 1787, "It has never been doubted that the right of contribution depends upon matters of substance, not form."

At [38] he explained the rationale by saying, "an order of contribution prevents the injustice that would otherwise flow to the plaintiff by the defendant being enriched at the plaintiff's expense in circumstances where they have a common obligation to meet the liability which the plaintiff has met or will have to meet." 73 At [41] McHugh J, after identifying relationships traditionally regarded as giving rise to an order for contribution, said: "More often than not, the relationships between the parties in those cases exhibit the characteristics commonly regarded as essential to establishing an entitlement to contribution, namely "a common interest and a common burthen" ( Ellesmere Brewery Co v Cooper [1896] 1 QB 75 at 79 per Lord Russell CJ). The nature of the relevant interest and burden is such that the discharge of the burden by one party constitutes a benefit to the other or others which, in fairness, the law cannot countenance them keeping."

And at [46]: "The basic rationale of the right to contribution was consequently lacking - the discharge by one co-obligor of its liability to the principal which discharged the liability of the other."

74 The onus of establishing that the circumstances exist which warrant the making of an order for contribution is on the person who seeks such an order." 261 The second and third defendants contend that this onus has not been discharged. 262 The submissions from the plaintiff concerning the decision in Belan put the matter as follows:

"In Belan , Campbell J was considering a claim for contribution under S.5 of the Law Reform (Miscellaneous Provisions) Act 1946 and in equity following an award of damages in defamation proceedings. That was a case in which judgment had been recovered by the plaintiff against each defendant. One of the defendants satisfied the judgment and then died. His executors brought contribution proceedings against the other defendant. Ultimately the decisive conclusion in the case was that any contribution claim was statute barred. Along the way, Campbell J considered two matters pertinent to the present case. The first was whether the existence of the respective judgments against the defendants grounded equitable contribution. In this respect, his Honour touched on the principle already referred to as to the implied contract theory giving rise to an obligation under a judgment debt [140-141] and concluded [42]: " So far as the judgment against two joint tortfeasors being a basis for equitable contribution is concerned, the judgment establishes that the two tortfeasors are indeed under a liability . Each of them is under a liability of the same type, and payments by one of them of that liability will discharge the other. However those factors are not by themselves necessarily enough to establish the existence of an equity of contribution. The factors which I have mentioned earlier (at 709 [136] supra) as ones which make me pause before deciding that there can be an equity of contribution between tortfeasors, apply equally to the situation where joint tortfeasors have been found liable by judgment as to the situation where they have not been found liable by judgment. " (emphasis supplied)

In paragraphs 135 and 136 of the judgment (709-710) Campbell J had considered whether the statutory provision under S.5 of the Law Reform Act should lead to equity " following the law ". This was a matter which his Honour did not ultimately determine [143] at 711.

As previously stated, the limitation issue was decisive against the plaintiff in the end.

Insofar as Campbell J made reference to the statement of principles it was in the following terms [68 at 688]: " It is a fundamental requirement for the availability of equitable contribution that the person claiming it has actually paid, or is about to be required to pay , an obligation from his own money. " (emphasis supplied)

There can be no doubt that that test is satisfied in the present proceedings. Mr Jeans has been threatened with bankruptcy proceedings upon the judgment of the Federal Court against him under his guarantee obtained by the CBA."

The fourth threshold proposition - proper construction of the indemnity provision in the heads of agreement 263 The former version of clause 6.8 [Exhibit D1/ PX 87/111] had read:

"Advance and Harpley shall indemnify and keep indemnified Bruce from and against all liability incurred by Bruce in respect of any personal guarantees given by Bruce of the obligations of Deangrove whether in respect of principal, interest or costs under any Mortgage effected by Deangrove or any obligation incurred by Deangrove in the acquisition or development of the Holloways Beach development." 264 The later form of clause 6.8 [PX 316] read:

"Advance and Harpley shall indemnify and keep indemnified Bruce from and against all liability incurred by Bruce in respect of any personal guarantees given by Bruce of the obligations of Deangrove to the Commonwealth Bank of Australia whether in respect of principal, interest or costs under any Mortgage effected by Deangrove to the said Bank or any obligation incurred by Deangrove to the said Bank in the acquisition or development of the Holloway Beach Development." 265 The short proposition of the second and third defendants in this regard was that upon its proper construction, the later form of clause 6.8 did not extend to an indemnity covering a liability incurred by Mr Bruce to a co-guarantor. This is put as a natural reading of clause 6.8. However the second and third defendants further seek to gain assistance from the movement from the earlier to the later form that clause. 266 In Codelfa Construction Pty Limited v State Rail Authority (NSW) (1982) 149 CLR 337 Mason J [at 25] put the principle as follows:

"There may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention. If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal. After all, the court is interpreting the contract which the parties have made and in that exercise the court takes into account what reasonable men in that situation would have intended to convey by the words chosen. But is it right to carry that exercise to the point of placing on the words of the contract a meaning which the parties have united in rejecting? It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances. See Heimann v Commonwealth of Australia (1938) 38 SR (NSW) 691, at p 695." (at p353) 267 The submission was that had the final form ended after the words "Commonwealth Bank of Australia", there may have been an issue as to the proper construction of the clause as to whether or not the words "in respect of…" could be said to extend to cover the liability of Mr Bruce to Mr Jeans as a co-guarantor. Discretionary defences 268 The second and third defendants also put forward, as did the first defendant, a number of discretionary defences. These generally took issue with matters such as the utility of the grant of declaratory relief. Account sought by the first defendant 269 An account is sought by the first defendant in relation to the indemnity given by the second and third defendants. 270 In such account the first defendant proposed to seek to be indemnified in respect:

· of any amount in respect of which he is held liable to make contribution to the plaintiff, plus; · the amount of $50,000 paid by him to the Commonwealth Bank of Australia, plus; · any incurred costs and expenses, including legal expenses and, in that regard, particularly, any legal expenses of the current proceedings. 271 The first defendant contended that such account should not embrace any amounts asserted as contra amounts by virtue of the transactions between the parties in that the entitlement to such possible asserted contra amounts had not been the subject of reverse cross-claims in these proceedings. Dealing with the threshold points 272 In terms of the proper exercise of the Court's discretion to grant or refuse declaratory relief, the third threshold proposition succeeds. I proceed to treat with that issue. Dealing with the third threshold proposition 273 Three issues appear to arise:

1. Is a surety, against whom the creditor has obtained judgment on the guaranteed debt, entitled to contribution from a co-surety before the surety has paid that debt?

2. If so, is that surety entitled to contribution from a co-surety when the surety is not able to pay the guaranteed debt?

3. If so, what, if any, declaratory orders are appropriate in such a situation? Issue 1 274 It appears to be established that a surety, against whom the creditor has obtained judgment on the guaranteed debt, is entitled to contribution from a co-surety before the surety has paid that debt: Wolmershausen v Gullick [1893] 2 Ch 514]

275 In Mahoney v McManus (1981) 55 ALJR 673, Gibbs CJ said (at 675):

"The right to contribution arises when a surety has paid or provided more than his proper share of the principal debt, but it may also be enforced by a surety who has not made payment; the circumstances in which a surety who has not made payment may enforce a claim to contribution have not been precisely defined, but it appears that he may at least do so as soon as a creditor has acquired a right to immediate payment from him."

[See also McLean v Discount and Finance Ltd (1939) 64 CLR 312 at 341 per Starke J; Anderson-Berry, Re; Harris v Griffith [1928] Ch 290] Issue 2 276 There appear to be conflicting lines of authority as to whether or not a surety, who has not paid, and is not able to pay, the guaranteed debt, is entitled to contribution from a co-surety. 277 One line of authority is illustrated by Woolmington v Bronze Lamp Restaurant Pty Ltd [1984] 2 NSWLR 242. In that case the plaintiff surety, upon whom the creditor had issued a demand for payment, claimed, amongst other things, an order for contribution against the co-surety. Needham J said (at 245):

"In respect of these claims, therefore, it seems to me that the plaintiff would be entitled to the declaration and order only if he had paid the full amount or had paid his share of the amount, or satisfied the court that he was willing, able and prepared to pay that amount. As none of those facts exist in the present case, it seems to me that the plaintiff is not entitled to those orders". 278 That line of authority may be contrasted with that illustrated by Bond v Larobi Pty Ltd (1992) 6 WAR 489. In that case one issue was whether the plaintiff surety, who had not paid, and was not willing or able to pay, a judgment on the guaranteed debt was entitled to a declaration for contribution against the co-sureties. Owen J, after reviewing the authorities, including Woolmington, said (at 503):

"…I can see no reason in principle why a demonstration of willingness and ability to pay should be a condition precedent to the accrual of the cause of action [for contribution]…It seems to me, as a matter of general principle, that the right to contribution, in the sense of the cause of action, accrues once there is a judgment against the surety regardless of whether the judgment has been satisfied or whether the surety is wiling and able to pay it…On the other hand, whether the plaintiff is willing and able to pay the debt, or at least his just proportion, is a matter which could be relevant to, and may well govern, the relief which a court will grant. It seems to me that the Woolmington case can be explained on this basis…". 279 In my opinion, at least where a creditor has obtained judgment against the surety on the guaranteed debt, the better view is that of Owen J, because it correctly distinguishes between the accrual of the cause of action for contribution and the nature of the relief granted. Once a creditor obtains judgment against the surety on the guaranteed debt, the cause of action is complete. It matters not whether the surety is willing or able to pay that debt. Those matters are properly directed to the nature of the relief to be granted. Issue 3 280 Consistently with the analysis in Bond, the failure of a surety to demonstrate an ability and willingness to pay his just proportion of the guaranteed debt is a factor to be taken into account in determining what, if any, relief is available to the surety in a contribution action. Where there is no real prospect of the surety making payment, no relief may be granted. 281 In Bond, the evidence raised a prima facie case that the plaintiff surety was neither willing nor able to pay his just proportion of the guaranteed debt. Accordingly, the risk of injustice to him in having to pay more than his just proportion had not been demonstrated. Taking that into account, Owen J said (at 503-504):

"I am attracted to the view that the appropriate orders, if any, to be made in favour of the plaintiff in this action would be prospective, that is, conditioned on him having made payment. If there is no real prospect of him meeting the condition it would be futile to make the orders." 282 In my view Mr Jeans having clearly failed to prove that there is any prospect whatever of his meeting any similar prospective order which might be made in the present proceedings, the proper exercise of the discretion is to decline to make declaration 3 as futile and/or of no utility. Dealing with the second threshold proposition 283 On analysis the second threshold proposition is not sound. I proceed to deal with why this is so. 284 Sackville J directed judgment in terms of the terms of settlement. [Transcript 604] 285 The terms of settlement [PX 59-60] were in the following terms:

"1. Judgment for the cross claimant (Commonwealth Bank of Australia) ('the Bank') against the third cross respondent (John Richard Bruce) ('Mr Bruce') in the sum of $4,672,379.71.

2. Order that the second cross claim (by Mr Bruce against the Bank) be dismissed, such dismissal to operate as a res judicata.

4. Note the agreement of the Bank and Mr Bruce as follows: (a) the Bank will not: (i) take any steps to enforce the judgment against Mr Bruce; or (ii) notify Baycorp or any equivalent body of the terms of the judgment, if Mr Bruce makes payment to the Bank in accordance with sub-paragraph (b). (b) Mr Bruce agrees to make the following payments to the Bank, on or before the dates specified, time being of the essence of this agreement, such payments to be made by bank cheque in favour of the Bank and delivered to L E Taylor (attention Ms Carla Collingwood) or as L E Taylor may direct in writing: (i) $20,000 on or before 1 July 2003;

(ii) $5,000 on or before 1 August 2003; (iii) $5,000 on or before 1 September 2003; (iv) $5,000 on or before 1 October 2003; (v) $5,000 on or before 1 November 2003; (vi) $5,000 on or before 1 December 2003; (vii) $5,000 on or before 1 January 2004. (c) it is acknowledged and agreed that if Mr Bruce fails to make any of the payments specified in sub-paragraph (b) on or before the dates therein specified, then the Bank is at liberty to enforce the judgment against Mr Bruce." 286 The correspondence which is in evidence passing between Mr Bruce and the Commonwealth Bank and the deposit receipts in evidence and general materials where Mr Bruce acknowledged that he had had difficulties in effecting certain of the payments required as part of the settlement arrangements agreed between himself and the bank makes plain that the Bank notwithstanding late payments made outside the 'time is of the essence' term, has accepted the amounts paid and has bound itself to the position that the terms of settlement, insofar as requiring payments to be made to the Bank, are to be regarded as having been honoured. [cf for example use by the Bank of the words "payment…was in satisfaction of short minutes of order" [JRB 2]. 287 The fact is that notwithstanding the terms of the judgment in fact entered against Mr Bruce, the settlement which was achieved was that the claim against him would be compromised upon the basis that he made the payments provided for in the terms of settlement. This was an agreement for full value. 288 The proposition put forward by the second and third defendants is that the Commonwealth Bank effectively bound itself to a promise that in the event that the payments were made, the bank would not enforce the judgment and relevantly for present purposes, amounted to a promise [in that circumstance] to release Mr Bruce from any further or other obligation to comply with the terms of the judgment. Reliance is placed upon the clear authority in support of the proposition that a promise to do something for value is treated in equity as the doing of that thing: cf Fireproof Doors Limited, In re v The Company [1916] 2 Ch 142 at 150. The submission is that in this area of the law the issue turns upon questions of substance and not form and the underlying fairness of the matter requires that it be dealt with without regard to the niceties of whether a judgment is or is not still on the register of judgments. Covenant not to sue 289 The misconception in the submissions of the second and third defendants is to fail to accept the applicability in the present circumstances of this qualification to the rule now in focus. The qualification was explained in the following terms in Dorgal Holdings Pty Ltd v Buckley (1996) 22 ACSR 164 at 167 per McLelland CJ in Eq:

"…if on the true construction of the instrument in which it appears, that which purports to be a release of one of several (or joint and several) debtors was intended not to operate as a release of the whole obligation by reason that other debtors jointly (or jointly and severally) liable with the debtor purportedly released were intended to remain liable then it will be treated not as a release in the strict sense but as a covenant not to sue the debtor purportedly released…. The same qualification is applicable to a purported release of a guaranteed debt, so far as the liability of a surety is concerned." 290 The qualification provides that whereas a release of one of a number of joint, or joint and several, debtors releases all of them from the joint debt, a covenant not to sue does not. The rationale for this qualification is that where there is a single promisor a release will discharge him by putting an end to the obligation, whereas a covenant not to sue does not directly put an end to the obligation but is a contract not to enforce it. A covenant not to sue does not put an end to the obligation except by virtue of the rule against circuity of action. However, if there are several joint, or joint and several, promisors and the creditor sues others than those whom he covenanted not to sue, the rule against circuity of action does not apply and the action will succeed [see G. L. Williams, Joint Obligations, Butterworth & Co (Publishers) Ltd, London, 1949 at para 51]. 291 The distinction between a release and a covenant not to sue was considered recently by the Full Federal Court in Pollak v National Australia Bank Ltd [2002] FCA 237. In Pollak, the Court at BC200200812 [15] - [17] expressed the matter as follows: · the distinction between a release and a covenant not to sue is a question of construction of the contract between the creditor and the joint debtor in light of the surrounding circumstances; · where an instrument purports to release one of two or more joint debtors it will be construed as a covenant not to sue if it discloses an intention to reserve rights against the other joint debtor; · an agreement may constitute a covenant not to sue, rather than a release, even where there is no express reservation of rights against debtors. 292 In my view the terms of settlement properly construed in light of the surrounding circumstances constituted a covenant not to sue rather than a release, even although there was no express reservation of the creditor's rights against the co-surety. The issue is one of impression. Dealing with the fourth proposition 293 In my view this proposition should be rejected. The matter raises a short question of construction. The phrase "in respect of" where first appearing in the later form of clause 6.8 is very wide. There are no indications that the words should be construed narrowly. Nor is there any compelling reason in favour of reading down the meaning of the phrase. I do not regard the passage cited above from Codelfa as applicable in these circumstances. It is trite that the construction exercise is an objective one. 294 Upon its proper construction the later form of clause 6.8 extends to an indemnity covering a liability of Mr Bruce to a co-guarantor. Returning to dealing with the first threshold point 295 Notwithstanding the findings sustaining third threshold point the first of the threshold points remains to be dealt with. I proceed accordingly. 296 It has been argued by the second and third defendants that it is not the existence of the co-ordinate liability of the two sureties that gives right to equitable contribution but rather the existence of the guarantee itself. 297 The plaintiff has contended that the existence of the co-ordinate liability is concluded against Mr Jeans and Mr Bruce by the judgments of the Federal Court. 298 A number of questions of principle of some complexity require to be treated with and of course the questions of admissibility remain to be dealt with. 299 The principal questions which appear to arise for analysis are: · what is the jurisprudential provenance of the rule that an indemnifier is estopped from averring contrary to a judgment handed down in previous relevant proceedings to which his/her indemnified was a party? · can such an estoppel arise in respect of a non-party co-guarantor? Res judicata estoppels generally. 300 It is necessary to return to some basics in terms of res judicata estoppels generally. Origin 301 The proposition that a res judicata may affect the liberty of the parties and their privies to aver issues and/or causes of action in subsequent proceedings is of ancient origin. In Duchess of Kingston's Case (1776) 20 State Tr 355 at 358, for instance, De Grey CJ said the following in respect of the doctrine later termed 'issue estoppel':

"From the variety of cases relative to judgments being given in evidence in civil suits, these two deductions seem to follow as generally true: first, that the judgment of a court of concurrent jurisdiction, directly upon the point, is as a plea, a bar, or as evidence, conclusive, between the same parties, upon the same matter, directly in question in another court: secondly, that the judgment of a court of exclusive jurisdiction directly upon the point, is, in like manner, conclusive upon the same matter, between the same parties, coming incidentally into question in another court, for a different purpose." 302 Similarly in R v Inhabitants of the Township of Hartington Middle Quarter (1855) 4 El &Bl 780 at 795, Coleridge J concluded on the facts that:

"[t]he judgments in the two cases therefore rest on the same foundation: which, having been settled in the first, cannot be, as between the same parties, unsettled in the latter." 303 From these early origins, the subsequent development of the doctrine in England and Australia has been characterised by a remarkable degree of consistency and stability. In words to very similar effect as those of De Grey CJ in Duchess of Kingston's Case, Spencer Bower, Turner and Handley [Spencer Bower, Turner and Handley, The Doctrine of Res Judicata, Third Edition, Butterworths, London, 1996, page 4 [9]] have defined the contemporary operation of res judicata estoppels thus:

"Where a final judicial decision has been pronounced on the merits by an English or (with certain exceptions) a foreign judicial tribunal with jurisdiction over the parties and the subject matter, any party to such litigation, as against any other party (and in the case of a decision in rem , any person whatsoever, as against any other person) is estopped in any subsequent litigation from disputing such decision on the merits, whether it be used as the foundation of an action, or as a bar to any claim, indictment, affirmative defence or allegation, provided the party entitled raises the point at the proper time. "

[Note that the equivalent passage from the first edition of this work was approved by Lord Guest in Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) [1967] AC 853 at 933, with his Lordship further adding (at 935) that the doctrine "has also been accepted as good law by the courts in Australia for a number of years."] Operation 304 Authorities from recent decades have concentrated on defining precisely which aspects of a res judicata remain binding on the parties and their privies. It is now settled that this area involves the potential operation of three interrelated- but nonetheless conceptually distinct- estoppels:

(a) 'Cause of Action Estoppel' (alternatively, res judicata or estoppel per rem judicatam ): As expressed by Fullagar J in Jackson v Goldsmith (1950) 81 CLR 446 at 466 (approved by Gibbs CJ, Mason and Aickin JJ in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 at 597), "where an action has been brought and judgment has been entered in that action, no other proceedings can thereafter be maintained on the same cause of action." As Fullagar J put the matter (at 467), the critical question that arises when such a cause of action estoppel is pleaded is "whether the cause of action in the later proceedings is the same as that which was litigated in the former proceedings." If the prior cause is indeed identical to the subsequent, then it has been deprived of any independent existence and cannot be averred as between the same parties or their privies; if established the cause merges in the judgment, and if defeated it is extinguished ad infinitum: Blair & Anor v Curran (1939) 62 CLR 464 at 532, per Dixon J.

(b) 'Issue Estoppel' (alternatively, 'estoppel by record'): An issue estoppel, as put by Higgins J in Hoysted v Federal Commissioner of Taxation (1921) 29 CLR 537 at 561, differs from a cause of action estoppel in that the scope of its operation is not confined to the final conclusions of law reached in the prior proceedings. Rather, as stated by Dixon J in Blair v Curran at 532-533, an issue estoppel arises in subsequent proceedings when "a state of fact or law is alleged or denied the existence of which is a matter necessarily decided by the prior judgment, decree or order", provided always that the issues in question were "fundamental or cardinal" to the prior decision rather than merely "subsidiary or collateral." While manifold judicial clarifications of this dichotomy have since been formulated, it is sufficient for present purposes to underscore that the estoppel extends only to those matters upon which it was necessary for the court to reach a conclusion, typically being matters against which an avenue of appeal lies: Murphy & Ors v Abi-Saab & Ors (1995) 37 NSWLR 280 at 288, per Gleeson CJ (with whom Kirby P and Rolfe AJA agreed).

(c) 'Anshun Estopel': The extended application of the res judicata estoppels primarily associated in Australia with the decision in Port of Melbourne Authority v Anshun Pty Ltd has its origins in the judgment of Wigram VC in Henderson v Henderson (1843) 3 Hare 100 at 114-5, where the Vice Chancellor said: "The plea of res judicata applies, except in special circumstances, not only to points upon which the court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time." 305 In Anshun, Gibbs CJ, Mason and Aickin JJ similarly held (at 602) that parties and their privies will be estopped from presenting a claim or defence in subsequent proceedings when, although not actually raised in the first action, that matter was "so relevant to the subject matter of the first action that it would have been unreasonable not to rely on it." While the application of this test is largely a matter of fact- turning on considerations of (inter alia) expense to the parties, the importance of the issue to the prior proceedings and the motives of the party in failing to raise it- its intended strictness is evident in their Honours express rejection (at 601-2) of the equivalent English formulation to the effect that all matters which "could and therefore should have been litigated in the earlier proceedings" will be caught by this form of res judicata estoppel: Yat Tung Investment Co Ltd v Dao Heng Bank Ltd [1975] AC 581 at 590, per Lord Kilbrandon. Binding Effect 306 A res judicata estoppel, in whatever form, is of binding effect only in respect of the parties to the prior proceedings and those in a relationship of privity with such parties. As stated by Mellish LJ in Parker v Lewis (1873) LR8ChApp 1056 at 1059-60:

"It is unquestionably not the general rule of law that a judgment obtained by A against B is conclusive in any action by B against C … a judgment inter partes is conclusive only between the parties and those claiming under them." 307 More specifically, "[i]t has always been said" by the common law that for a non-party to be bound by a res judicata, "there must be privity of blood, title or interest": Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) at 910, per Lord Reid. As this issue will be discussed in more detail below in the specific co-guarantor context, it is sufficient for present purposes to note that the types of relationships said to give rise to such privities have, traditionally, been decidedly circumscribed. 308 Presently in Australia the leading authority on privity of interest- that of blood and title being relatively axiomatic- is found in the judgment of Barwick CJ in Ramsay v Pigram (1968) 118 CLR 271, a case in which the New South Wales police department was found not to be a privy of one of its officers in respect of two negligence proceedings concerning a motor vehicle accident. Expressly declining to consider United States judgments purporting to extend the doctrine to encompass shared economic or financial interests between the party and the supposed privy, the Chief Justice instead formulated (at 279) the narrow test that: "[t]he basic requirement of a privy in interest is that the privy must claim under or through the person of whom he is said to be a privy." (See also McTiernan J at 282; Taylor J (with whom Kitto J agreed) at 288; Windeyer J at 289-290.)

309 Hence as per Gummow J in Trawl Industries of Australia Pty Ltd (in liq) & Ors v Effem Foods Pty Ltd (1992) 36 FCR 406 at 414, Anglo-Australian courts in approaching the question of privity of interest "have looked to legal rather than economic indicia as the criterion of operation of the privity doctrine"; thus in that case the mere fact that the second to sixth applicants were, variously, directors, members, guarantors and creditors of the first applicant ('Trawl') was not sufficient to render them as privies of Trawl for the purpose of subsequent proceedings. While the outcome of prior proceedings involving Trawl may well have had a "commercial consequence" (at 415) for the second to sixth applicants such as to potentially give rise to a 'collateral estoppel' or 'issue preclusion' under United States law, Gummow J nonetheless held (at 417) that "any introduction of doctrines developed in the course of this century in the United States is for the High Court, after reconsideration of Ramsay v Pilgrim." On appeal [Effem Foods Pty Ltd v Trawl Industries of Australia Pty Ltd (Receivers and Managers appointed) (in liq) & Ors (1993) 43 FCR 510], the Full Federal Court unanimously upheld his Honour's judgment below, Northrop and Lee JJ stating (at 528) with reference to Ramsay that "the law relating to privity of interest in this respect in Australia is so settled that this Court is bound by the earlier authorities." (See also Burchett J at 543.)

Relationship to the 'True' Estoppels 310 As will later become evident, it is critical for present purposes to distinguish between the genesis and function of res judicata estoppels and those of the 'true' estoppels of, without purporting to be exhaustive; estoppel by statement of fact in a deed (Roberts v Karr (1809) 1 Taunt 495); estoppel by representation of existing fact (as contrasted with a "statement of something which the party intends or does not intend to do": Jorden v Money [1843-60] All ER Rep 350 at 356, per Lord Cranworth); estoppel by convention (Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 at 244, per Gibbs CJ, Mason, Wilson Brennan and Dawson JJ in obiter); proprietary estoppel in equity (Taylors Fashion Ltd v Liverpool Victoria Trustees Co Ltd [1982] 1 QB 133); and both the limited form of promissory estoppel prevalent in England and traceable to the judgment of Denning J in Central London Property Trust Limited v High Trees House Limited [1947] KB 130, and the significantly expanded manifestation of same developed as an independent cause of action in Australia by the High Court in Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387.

311 The analysis in terms of "one overarching doctrine of estoppel" in view of the "fundamental purpose of all estoppels to afford protection against the detriment which would flow from a party's change of position if the assumption that led to it were deserted" is to be found in Commonwealth v Verwayen (1990) 170 CLR 394 at 410 [Mason CJ, Deans J] [cf however Meagher, Gummow and Lehane's Equity: Doctrines and Remedies, Fourth Edition, Butterworths, Sydney, 2002, page 535 [17-005]]. There still exists a plethora of academic and judicial authority to the effect that the various 'true' estoppels share, at the very least, two common and underlying features: · First, that the foundation of the relevant estoppel rests upon some words or conduct of a party that has the effect of affirming a proposition, whether as to a purported state of existing fact or as to future intention: see Spencer Bower, Feltham, Hochberg and Leech, The Law Relating to Estoppel by Representation, Fourth Edition, LexisNexis UK, London, 2004, page 5; · Second, that the estoppel is thereby activated by the fact that the affirmation of that proposition has induced another to act to his/her detriment such that it would be 'unfair' or 'unconscionable' to permit the first-mentioned person to deny its truth; 312 The general principle underlying all true estoppels can be summarised, as per Lord Denning MR in Amalgamated Investment and Property Co Ltd v Texas Commerce International Bank Ltd [1982] QB 84 at 122, as follows:

"When the parties to a transaction proceed on the basis of an underlying assumption- either of fact or of law- whether due to misrepresentation or mistake makes no difference- on which they have conducted the dealings between them- neither of them will be allowed to go back on that assumption when it would be unfair or unjust to allow him to do so. (Cited with approval by Lord Bingham in Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1 at 33.) " 313 While his Lordship was there referring specifically to the equitable estoppels, similarly in Legione v Hateley (1983) 152 CLR 406 at 430 Mason and Deane JJ referred to "a common principle underlying the established emanations of estoppel in pais"- including estoppel by convention and estoppel by representation of fact- and cited Dixon J in Thompson v Palmer (1933) 49 CLR 507 at 547 stating that "[t]he object of estoppel in pais is to prevent an unjust departure by one person from an assumption adopted by another as the basis of some act or omission which, unless the assumption be adhered to, would operate to that other's detriment."

314 To the extent that it gives rise to 'estoppels', therefore, it is apparent that the doctrine of res judicata is a mere simulacrum. Whereas the true estoppels hinge upon the conduct of one party and the response that conduct engenders in another, the res judicata estoppels embody considerations of broader public policy and spring, in the immediate sense, from the decisions of courts rather than from the actions of individuals. The classic statement in this regard is from the speech of Lord Blackburn in Lockyer v Ferryman (1877) 2 App Cas 519 at 530:

"The object of the rule of res judicata is always put upon two grounds- the one public policy, that it is in the interest of the State that there should be an end of litigation, and on the other, the hardship on the individual that he should be vexed twice for the same cause." 315 Alternatively expressed (at 466) by Fullagar J in Jackson v Goldsmith, the doctrine cannot be "correctly classified under the heading of estoppel at all. It is a broad rule of public policy based on the principles expressed in the maxims "interest reipublicae ut sit finis litium" and "nemo debet bis vexari pro eadem causa""; viz, that there is a public interest in both the finality of litigation and the protection of the individual from the vexatious re-litigation of a cause (or, in the modern context, an issue of fact or law). Citing this passage of Fullagar J and noting that "[i]t is correct to say that res judicata or cause of action estoppel derives from the principles embodied in those maxims, which principles are fundamental to any civilized and just judicial system", Deane and Gaudron JJ in Rogers v R (1994) 181 CLR 251 at 273 added a third maxim; res judicata pro veritate acciptur, being the "need for decisions of the courts, unless set aside or quashed, to be accepted as incontrovertibly correct." (See also: Mills v Cooper [1967] 2 QB 459 at 469, per Diplock LJ; Director of Public Prosecutions v Humphrys [1977] AC 1 at 27, per Lord Hailsham.

316 Certainly, it must be conceded that the res judicata estoppels and the true estoppels do share a common element in respect of the former doctrine's second function of promoting "private justice" (Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) at 933, per Lord Guest); as it would be conducive of unfairness or unconscionability to permit a party to 'go back on' a representation in appropriate circumstances, so too would it be "unreasonable that the same controversy should be re-litigated over and over again": Morrison Rose & Partners v Hillman [1961] 2 QB 266 at 278, per Pearson LJ.

317 Save for this generic theoretical similarity, therefore, it seems plain that in a doctrinal sense the res judicata estoppels are entirely sui generis from their contemporary namesakes. While the rationale of estoppels arising from words or conduct may once have been related, in the same manner as the res judicata estoppels, to the prevention of pleading of facts under the old pleading system, their present overriding policy function of preventing unfairness to individuals is substantially removed from that of res judicata. To this end it is perhaps worth reiterating the statement of Fullagar J above in Jackson v Goldsmith to the effect that res judicata estoppels cannot be 'correctly classified under the heading of estoppel at all', and noting further that Deane and Gaudron JJ in Rogers likewise dictated (at 274) that issue estoppel specifically "ought to be seen, not as a true estoppel, but as a different manifestation of those same policy considerations" underpinning cause of action estoppel (or res judicata in Australian parlance). (See also CSR Limited v Cigna Insurance Australia Limited & Ors (1997) 189 CLR 345 at 394, where Dawson, Toohey, Gaudron, McHugh, Gummow and Kirby JJ noted of Anshun that "the judgments in that case do not proceed by reference to the ordinary principles of estoppel.") 318 It has been suggested academically that it is the historical origins, rather than any present similarity, of res judicata and the true estoppels that have resulted in their continuing classification under the same legal rubric. Specifically, the original function of res judicata was (and indeed to a large extent still is) to preserve the integrity of the judicial record by preventing the court from having to decide the same cause or issue twice; thus the earliest estoppel beyond res judicata, by statement of fact in a deed, was merely an extension of this logic on the basis that facts asserted in a solemn accord were analogous to those determined judicially. Sometime during the nineteenth century, however, and concurrently with the expansion of the true estoppels to comprehend statements of fact simpliciter, the rationale lurched towards the concepts of fairness and justice prevalent today (perhaps with the intrusion of equitable precepts, hastened by fusion towards the end of the century) and away from those underpinning res judicata estoppels. As stated by Spencer Bower, Feltham, Hochberg and Leech at page 10: "By then [the end of the nineteenth century] the underlying policy of estoppel had changed twice: first, from the rationale that the court should not have to decide the same issue twice between the same parties, to the rationale that a party may not resile from a proposition to which he has solemnly and formally assented; and then, from that to the modern rationale that it is unfair for a party to resile from a representation upon which he has induced another to rely if the other will thereby suffer." See also: A M. Prichard, "Tenancy by Estoppel: The Problem and Its Relevance" (1964) 80 Law Quarterly Review 370 at 372. The 'indemnifier's exception' The rule and its development 319 Notwithstanding the general rule that only parties to the proceedings and their privies are bound by a res judicata, it appears settled that a limited exception to this rule, derived from an obiter passage in the ancient case of Duffield v Scott (1789) 100 ER 628, exists in respect of a non-party bound by contract to indemnify a party for a liability the subject of the first proceedings. In Duffield, Scott was the executor of one Balcher's estate, who had covenanted to indemnify Duffield against all debts incurred by Duffield's wife during the currency of a deed of separation. Such a debt was incurred and judgment duly obtained against Duffield, who then sought indemnity from Balcher's estate. While liability for the primary debt was conceded, the executor refused to pay Duffield's costs and expenses of defending the action as notice of it had not been provided, thus depriving the executor of the opportunity to intervene and undertake a defence. While judgment was ultimately for Duffield on the basis that the terms of the deed of indemnity were sufficiently general to encompass incurred costs, and that no specific provision as to notice had been made, Buller J concluded (at 630) by emphasising the practical advisability of giving notice in such instances as:

"The purpose of giving notice is not in order to give a ground of action; but if a demand be made which the person indemnifying is bound to pay, and notice be given to him, and he refuse to defend the action, in consequence of which the person to be indemnified is obliged to pay the demand, that is equivalent to judgment, and estops the other party from saying that the defendant in the first action was not bound to pay the money." 320 Thus concluded Buller J's reasons, and no further elaboration was provided as to the legal basis upon which the 'estoppel' referred to was based.

321 Authorities subsequent to Duffield have, moreover, failed to further clarify the issue; indeed one might hazard the suggestion that, at least in respect of the exact provenance of this 'indemnifier's exception' to the general rule that only parties and their privies are bound, the case law is in a decidedly vestigial condition. The disparate propositions 322 Specifically, the following, in many respects contradictory propositions have been put forward:

(a) that the preclusion arises from, and is restricted to cases involving, an express contract of indemnity, provided that the requirements as to notice and refusal to intervene outlined in Duffield are satisfied;

(b) that the preclusion arises from the words and/or conduct of the indemnifier in the manner of an ordinary estoppel by representation of fact, regardless of the existence and/or terms of the contract of indemnity but provided that the requirements as to notice and refusal to intervene outlined in Duffield are satisfied;

(c) that the preclusion arises from the contract of indemnity, regardless of whether notice is provided;

(d) that the preclusion arises from the broader doctrine of abuse of process.

(e) that the preclusion arises from the contract of indemnity, but extends only to the fact of the indemnified's liability to the claimant rather than to the relitigation of issues relevant to whether the contract of indemnity responds to that liability. 323 On balance, it would seem that the potentially broad application of the 'estoppel' outlined in Duffield has been conflated into a significantly narrower doctrine reflected most accurately in proposition (e) above. However, critically for present purposes, the authorities by no means positively preclude the setting up of an estoppel in the manner described by proposition (b) above.

324 Given the utility of observing the development of these authorities sequentially, and the fact that many individual cases stand for multiple propositions, it seems useful to consider the decisions in date order.

325 In Smith v Crompton (1832) 3 B & Ad 407, the first reported case to consider Buller J's dictum in Duffield, Crompton covenanted with Smith to the effect that the former had good title to pass in respect of the conveyance of certain realty. Subsequently, Smith's title was impeached in proceedings brought by a prior titleholder, which Smith compromised on terms unfavourable to him. Thus the instant proceedings were commenced to enforce the indemnity, which Crompton resisted on the basis that no notice of the first proceedings had been provided to him. Judgment was for Smith, with Lord Tenterden CJ following Duffield in holding that:

"The only effect of want of notice in such a case as this, is to let in the party who is called upon for an indemnity to shew that the plaintiff has no claim in respect of the alleged loss, or not to the amount alleged; the he made an improvident bargain; and that the defendant might have obtained better terms if the opportunity had been given him." 326 As in Duffield, however, no further elaboration was provided as to the genesis or operation of this estoppel against the indemnifier.

327 The next case, Jones v Williams (1841) 8 M & W 349, concerned the making of a bond by one RJ (whose executrix was the plaintiff in this action) in favour of one WJ, with the defendant JW agreeing to indemnify RJ for all losses consequent upon his execution of the bond. Following the death of RJ, his estate became liable to pay the bonded amount and proceedings to this effect were commenced and won by WJ (the fact of which was known to JW). In the subsequent proceedings upon the indemnity, JW sought to argue that no liability attached to him as, the prior judgment notwithstanding, RJ's estate was not itself liable on the bond. This defence, however, was shortly dispensed with by Parke B (with whom Alderson B and Gurney B agreed) on the basis that "[i]t was proved that the defendant had notice of the action upon the bond, and he ought to have undertaken the defence" (at 501). While this decision represents the first ratio application of Duffield, therefore, like Smith it fails to expand upon the jurisprudential basis according to which JW was estopped from averring contrary to the determinations of the first judgment.

328 Then comes the anomalous case of King v Norman (1847) 4 CB 884. In it, one S was appointed collector of taxes and the plaintiff King undertook to act as one of his sureties for the benefit of the Crown; in turn, the defendant Norman covenanted to indemnify King for any and all liabilities he might incur as a result of his suretyship. S fell into default with the Receiver-General, who thereupon commenced successful proceedings against King to enforce his guarantee. In the subsequent proceedings upon the indemnity, King- consistent with Duffield, Smith, and Jones, although there is no mention in the report that those cases were put before the court in this case- sought to tender the prior judgment as evidence conclusive of his right to indemnification. Nonetheless Coltman J, as is evident from the following passage, did not discuss those authorities and instead rejected the tender on the basis that Norman was neither a party nor a privy to the prior action:

"The judgment was, in this case, evidence that the plaintiff had been sued, and, coupled with proof, or (as in this case) an admission, of liability to some extent, might lead the jury to conclude that the plaintiff had been subjected to a bona fide pressure, by which he was forced and obliged to pay whatever he was legally liable to pay through Strachan's default. But, whether he was legally liable to the extent for which judgment was signed, is a matter which could only be collected by inference from the judgment: and, for such a purpose, the judgment could not be used, without holding that a stranger to a judgment,- who has no opportunity to cross-examine the witnesses, or to dispute the conclusions to be drawn from the evidence,- can be bound by the verdict, where the judgment is after verdict, or can be bound by an agreement made without his privity or intervention, between the parties to the judgment, where, as in the present case, it is a judgment founded on agreement. The law, we apprehend, is not so. The judgment cannot be used for such a purpose against one who is neither a party nor privy to it." 329 Accordingly, this decision is now cited primarily for the proposition that the mere relationship of indemnifier and indemnified does not give rise to a privity of interest for the purposes of the res judicata estoppels.

330 It was not until Parker v Lewis (1873) LR8Ch App1056, almost a century after the decision in Duffield, that consideration was given to the basis of the 'estoppel' set out in that latter case. While the facts of Parker are not especially germane to the issue presently under consideration, concerning the effect of a series of fraudulent commercial transactions and the application of the rule in Foss v Harbottle (1843) 2 Hare 461, Mellish LJ in a short concurring judgment substantially restricted the potential scope of the Duffield 'estoppel' by firmly identifying its locus as being in the effect of the contract of indemnity specifically. Noting (at 1059) that Smith and Jones were both judgments on "express contracts of indemnity", his Lordship then stated:

"I think that the law with reference to express contracts of indemnity is, that if a person has agreed to indemnify another against a particular claim or a particular demand, and an action is brought on that demand, he may then give notice to the person who has agreed to indemnify him to come in and defend the action, and if he does not come in, and refuses to come in, he may then compromise at once on the best terms he can, and then bring an action on the contract of indemnity. On the other hand, if he does not choose to trust the other person with the defence to the action, he may, if he pleases, go on and defend it, and then, if the verdict is obtained against him, and judgment signed upon it, I agree that at law that judgment, in the case of express contract of indemnity is conclusive. But I apprehend it is conclusive on account of what the law considers the true meaning of such a contract of indemnity to be… by reason of that contract of indemnity, the judgment is conclusive; but in my opinion it is conclusive because that is the meaning of the contract between the parties, for it is unquestionably not the general rule of law that a judgment obtained by A against B is conclusive in an action by B against C." [Emphasis added] 331 Upon this reasoning, therefore, the 'estoppel' referred to by Buller J in Duffield is no estoppel at all. First, as the mere existence of a contract of indemnity does not create a relationship of privity (following King v Norman), no res judicata estoppel can arise to bind the indemnifier to the prior decision. And second, as the judgment is binding upon the indemnifier due to 'what the law considers the true meaning of such a contract of indemnity to be', it is clearly not the case that the refusal of the indemnifier to act sets up an estoppel by representation to the effect that he/she is content to be bound by the resulting judgment. 332 With respect, however, it would appear that Mellish LJ's restriction of Buller J's dicta to instances of express written contracts of indemnity perhaps rests upon a misreading of the latter's use of the expression 'estopped' in Duffield. As is apparent from the above passage, his Lordship's principal concern was to curtail the possible over-expansion of the general rule that it is only parties and their privies who are bound by a res judicata, as if the 'estoppel' set up against the indemnifier was merely an extension of the res judicata estoppel binding upon the injured party and the indemnified. However, a better reading of Duffield is that the estoppel therein described is one ancillary to the principal res judicata estoppel operative upon the parties, derived from the conduct of the indemnifier in representing a contentedness to be bound by the outcome of the proceedings and operating only as against the indemnified. Given that to establish such an estoppel would require proof by the indemnified of all the constituent elements of such an estoppel- representation, reliance, detriment- it is difficult to envisage how in such a circumstance the general rule as to the effect of res judicata estoppels would be either offended nor enlarged. 333 It is thus important for present purposes to note that, given that the proceedings in Parker were upon a breach of trust, Mellish LJ's comments, while emphatic, were strictly obiter. 334 Two decades later in Mercantile Investment and General Trust Company v River Plate Trust, Loan and Agency Company [1894] 1 Ch 578, the appellants Mercantile held debentures in an American land speculation company, which debentures were secured by purported charges over property in Mexico held by the respondents River Plate as trustees for the American company (the charges were, in fact, invalid due to non-registration). Subsequently, the American company was acquired by an English company, whereupon the former assigned to the latter all its assets in consideration of the latter undertaking to provide an indemnity for all its liabilities. A meeting of debenture holders, in which Mercantile refused to participate, then resolved to convert the value of their securities into equity in the English company. Notwithstanding this resolution, Mercantile commenced proceedings for interest in arrears and were successful over the American company's defence (assisted and funded by the English company) that Mercantile were bound by the resolution to cancel the debentures. Proceedings were then brought against the English company as assignees of the debentures, who promptly set up an identical defence as that deployed in the earlier action against the American company. Mercantile responded by submitting, on the authority of Parker, that the English company were estopped from doing so. 335 Romer J began (at 594) by reiterating the well-established point (following King v Norman) that the mere fact that a contract of indemnity was in place between the English and American companies did not in itself render the former a privy of the latter; and this conclusion still followed regardless of the substantial degree of financial assistance that had been provided to the American company during the first proceedings. Moreover, Romer J then went on to confirm and clarify the dicta of Mellish LJ in Parker by holding that no estoppel could arise between Mercantile and the English company as, although the latter had expressly indemnified a party to the prior proceedings, Mercantile was a stranger to that contract. At 595-596, his Honour said:

"Lastly, it was said that, inasmuch as the American Company defended with the knowledge and approval of the English Company, the latter would be estopped under their covenant of indemnity from disputing the judgment as against the American Company suing them on the express covenant of indemnity. That is quite true. But this is not an action on the covenant of indemnity. The estoppel last referred to is only between the party indemnifying and the party indemnified, and arises only by virtue of a term implied in an express covenant of indemnity , as was pointed out in the case of Parker v Lewis . In the present case, not only are the American Company not suing, but they are not even parties to the action. The Plaintiffs are suing the English company on grounds which, the Plaintiffs maintain, make the English company directly liable to them, and not merely the American company. In such an action I can find no grounds for estoppel merely because the English Company may be estopped as against the American company if and when the latter sue on their covenant of indemnity." [Emphasis added] 336 Next is Edwards v Insurance Office of Australia Ltd (1933) 34 SR (NSW) 88, the first Australian case in the line of authority and a further decision following the contract-based approach adopted in Parker. An employee of the appellant Edwards was involved in a motor vehicle accident that led to the institution of proceedings against him as vicariously liable for his employee's negligence. As required by the terms of his public liability policy, Edwards notified the appellant insurers of the claim and invited them to assume the defence of the action; the insurers, however, declined to do so and disputed their liability to indemnify. Edwards compromised the proceedings and then commenced against the insurers, seeking to tender the compromise in evidence as conclusive of his right to indemnification. Citing Parker, Davidson J (at 94) shortly stated that "[i]t is clear that proof of a judgment against the plaintiffs would be evidence of legal liability, in the circumstances"; however the significance of this decision in a broader sense lies in its confirmation that the 'estoppel' may arise by prior compromise as much as prior judgment, provided that compromise was shown to be "reasonable" (at 95). 337 However, despite the relatively clarity of the issue following Parker, Mercantile and Edwards, the next two decisions of Cacciola & Ors v Fire & All Risks Insurance Co Ltd [1971] 1 NSWLR 691 and Brice & Ors v J H Wackerbarth (Australasia) Pty Ltd [1974] 2 Lloyd's Rep 274 witness a degree of confusion creeping into the authorities. In Cacciola, the question before the court was the meaning of the expression "legally liable by way of damages" as contained in the appellant's contract of indemnity insurance with the respondent. In finding that it referred to the determination of actual liability flowing from the signing of a judgment, Jacobs JA (with whom Moffitt JA and Taylor AJA generally agreed) emphasised (at 695) that it was only at this stage that the issue of liability becomes conclusive as between the indemnified and the indemnifier:

"As Mr. Yeldham submitted, the policy does not indemnify against a possible future liability, but against an ascertained enforceable liability. If it were otherwise it would be difficult to see why the finding of a verdict or the entry of judgment in an action between the injured person and the insured person should in arbitration or court proceedings between the injured and the disputing insurer be regarded as determining the amount of the legal liability. Upon such an approach the determination of the matter in the action would be largely irrelevant. The legal liability would, if this argument were accepted, be truly determined when the injury occurred. The judgment might eventually go upon wrong facts or upon a wrong view of the law. It would be difficult to imagine that these matters could be relitigated between the insurer and insured by way of determining between them whether the insured had become legally liable by way of damages." [Emphasis added] 338 This case, therefore, marks the beginning of a further move away from any notion of the Duffield estoppel as arising from anything other than the contract of indemnity itself; it is important to note that Jacobs JA above, as with later cases on this point, do not refer to the former requirements of notice and a refusal to intervene before the conclusiveness of the judgment as against the indemnifier arises. This may be perhaps due to the almost invariable 'claims made and notified' basis of many modern insurance policies rather than any conscious doctrinal digression, but for present purposes the decline of the use of the expression 'estoppel' is nonetheless significant.

339 Adding to the confusion, in Brice the respondent insurance brokers sought to join their professional indemnity insurers as third parties to an action in negligence brought against them by a Lloyd's syndicate which they formerly represented. The insurers resisted their addition, submitting that the brokers had no cause of action against them given that, on the reasoning of Cacciola and the earlier English case of Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 at 373, no liability under the policy arise until after judgment against the indemnified had been signed. Although he ultimately allowed the addition on the basis of the public interest in avoiding the multiplicity of litigation, in the course of his reasons Lord Denning MR (with whom Orr LJ agreed) made the following comment [at 276]:

"Let me assume that the action between the plaintiff and the defendants is tried first separately. The Judge may give judgment against the defendants on the ground that they were negligent in accepting risks without taking due care. He may say nothing as to whether the plaintiffs were dishonest. Next let me assume that the defendants claim indemnity from the insurers. The insurers may challenge the finding of negligence or they may want to charge the defendants with dishonesty. If the two actions are tried separately, you may get the same questions being tried twice, with possible different results." [Emphasis added] 340 No further explanation for the highlighted passage above was provided, nor was any authority cited. 341 Next, however, comes the seminal case of Ben Shipping Co (Pte) Ltd v An Bord Bainne ("The C Joyce") [1986] 2 All ER 177. The appellants Ben Shipping chartered their vessel 'The C Joyce' to the respondents An Bord under a charterparty which provided (inter alia) that the shipowners were not liable for damage to cargo save for instances of their own negligence or default. However at the insistence of An Bord the pro forma agreement was modified to provide that all bills of lading had to include a clause paramount to the effect that the carriage of the relevant goods was subject to the Hague Rules, thus exposing Ben Shipping to a degree of third party liability notwithstanding the terms of the charterparty. An Bord then used the vessel to shipped bagged milk power to South Africa, and on completion of the voyage the then bill holders complained of damage to the goods and short delivery. Proceedings were commenced against Ben Shipping, who responded by inviting An Bord to take over the defence on the basis of the limitation of liability clause in the charterparty; when An Bord refused, the shipowners settled the litigation against the bill owners and triggered the arbitration clause in the charterparty. The matter thus came before Bingham J in the Commercial Court on a special case stated, namely whether An Bord, on the authority of Duffield, were bound by the prior judgment against Ben Shipping. There was no evidence that Ben Shipping were negligent within the meaning of the charterparty. 342 Bingham J began by citing text from Halsbury's paraphrasing the 'estoppel' in Duffield, and immediately questioned (at 185) its scope in stating:

"The authority cited in support of the proposition emphasised [ Duffield, Smith, Jones and Parker ] is not modern. If the shipowners' proposition is correct and of general application, one wonders why so promising a sapling failed to develop into a forest tree." 343 Observing that, following Parker, "[f]or the last century … this principle has lain fallow", in the following lengthy passage [at 187] his Honour strictly confined the scope of the Duffield line of authority:

"To succeed in their estoppel claim, the shipowners must establish as a matter of law that having given notice to the charters of the claim made against them (the shipowners) in South Africa, and the charters having declined to conduct the defence, they (the charters) are estopped from contesting the liability of the shipowners to the third party in South Africa and the reasonableness of the compromise and the incurring of costs, even though there was no express contract of indemnity and the charterers bona fide and on reasonable grounds challenged the shipowners' right to indemnity and the claim was settled without immediate reference to the charters. I do not think any such principle can be clearly found in the authorities relied on. Nor do I think it desirable to attempt to lay down such a far reaching principle. It is of course good sense and common practice for a defendant to give notice of a claim against him and any proposed settlement to a person against whom he intends to seek indemnity or contribution, if such a person is not joined as a third party. This gives that person the opportunity to raise any points or objections he wishes, and will make it somewhat harder to raise arguments later which he could have raised at the time. It is, however, a large stride from a commonsense tactical practice to a rule of law. The present case is a good example of how unfairly such a rule could work. The charterers did not (it seems reasonable to infer) believe they were bound to indemnify the shipowners against the South Africa claim. Even if one assumes that they were wrong in that belief, it remains the fact that they need have had and in all probability had no knowledge at all of how the cargo damage occurred. Having disassociated themselves from the proceedings they knew nothing of the terms of the settlement. The rule contended for would present the charters with a choice between taking over the defence of a claim which they believed to be nothing to do with them and thereafter (if that belief was falsified) finding themselves bound to indemnify the shipowners against settlement of a claim even though the claim could be shown to be ill-founded or the settlement unreasonable. The authorities support, and I can see virtue in, a much more limited principle, but that would not avail the shipowners here." [Emphasis added] 344 Accordingly his Lordship found that the Duffield estoppel had no operation on the facts, and that An Bord were not precluded from relitigating issues determined by the settlement in the prior proceedings.

345 The above passage represents a latter day restatement of the concerns expressed by Mellish LJ in Parker concerning the potentially oppressive application of the Duffield 'estoppel' if that concept is not carefully defined. It is manifestly not acceptable, that is to say, to construct a doctrine which extends the scope of the binding effect of the res judicata to persons other than the parties and their privies. With respect, Bingham J's above concerns seem to rest upon a misreading of Parker; given that the there was no express contract of indemnity between Ben Shipping and An Bord but merely a limitation of liability clause, the Duffield estoppel- as subsequently interpreted in cases such as Parker and Mercantile Investments- had no application to the facts of this case. Rather than the principle having 'lain fallow' since Parker, its failure to burgeon into a 'forest tree' can perhaps be explained by the fact that, following Parker, its application and legal foundation had been restricted to instances of express written contracts of indemnity. 346 Thus it is evident that Bingham J's concerns regarding the Duffield 'estoppel' relate primarily to an objection to the potential unfairness its operation would engender if based upon the mere fact of an indemnity followed by notice and inaction without more. More specifically, his Lordship was not averse to the estoppel arising in factual circumstances where the conduct of the indemnifier, regardless of whether an express contract of indemnity was in existence, would negative the possibility of unfairness. Critically, at 185 his Lordship said:

"The shipowners did not argue that the correspondence between themselves and the charters, annexed to the interim award, gave rise to any estoppel by representation. It was not suggested that the charters had made any relevant representation (save of unwillingness to become involved in the South African proceedings in any way) or that the owners had relied on any such representation." [Emphasis added] 347 The effect of this passage is to leave open the possibility of, the insistence in Parker of the existence of a written contract notwithstanding, the setting up of an estoppel by representation by a non-party indemnifier when the facts of a specific case are sufficient to establish all the usual elements of such an estoppel. 348 The next case, South Australian Housing Trust v State Government Insurance Commission (1989) 51 SASR 1, is of note due to its introduction of another doctrine by which a prior judgment can be rendered binding as between an indemnified and indemnifier in subsequent proceedings. The appellant housing trust was sued in negligence arising out of the injury of one of its tenants following the malfunctioning of a gas stove, a claim which was duly notified to the respondents as the trust's indemnity insurers. The insurers, however, denied any potential liability on the basis of an alleged breach of contract by the trust, and thus refused to defend or take part in the proceedings. Judgment was subsequently rendered against the trust, in the course of which facts were established sufficient to show that the trust had failed to take 'reasonable measures' to maintain its household appliances as required by its policy with the respondents. The trust, however, then commenced proceedings against the insurers for indemnity, with the latter seeking to tender the prior judgment as proof of their non-liability over the trust's attempts to relitigate issues already determined. But rather than setting up a defence based upon Duffield or Parker, the insurers submitted that to allow the trust to relitigate determined issues would constitute an abuse of process. Although this defence was ultimately rejected on the ground that there was a sufficient dissimilarity between the issues arising in the second proceedings as compared to the first, King CJ (at 18), with reference to classic authorities such as Reichel v Magrath (1889) 14 App Cas 665 and Hunter v Chief Constable of the West Midlands Police [1982] AC 529, was receptive to its application in an appropriate case:

"There can be no doubt that, quite apart from any specific legal rules, a court has power to prevent an abuse of its processes … There are a number of instances in the books of this principle being utilised to prevent a party from relitigating issues which have been decided against that party in other proceedings, notwithstanding that such relitigation was not precluded by the rules relating to estoppel by judgment." 349 In State Bank of New South Wales Ltd v Alexander Stenhouse & Ors (1997) Aust Torts Reports ¶81-423 (NSWSC), the plaintiff bank received monies in error from a Swiss bank due to the fraud of third parties; in subsequent litigation between the two, the Swiss bank succeeded in obtaining restitution of the funds on the ground of unjust enrichment, but failed on a concurrent claim in negligence. The appellant bank held three tiers of professional indemnity insurance, which provided indemnity solely in instances of negligence; thus in subsequent proceedings against its insurers the bank sought to challenge the findings in the first proceedings regarding its lack of negligence. To this the insurers, as in South Australian Housing Trust, sought to have the defence struck out as an abuse of process. While the proceedings ultimately permitted to remain on foot, in the course of his reasons Giles CJ Comm D expanded upon the deployment of the abuse of process doctrine in this context by stating that; "[i]n principle, there can be abuse of process when an insured seeks to relitigate against his insurer, when seeking indemnity, an issue decided in the proceedings brought by a claimant against the insured in respect of whose claim indemnity is sought" (at 64,088). That is to say (at 64,086):

"One category of case where abuse of process may exist is where a party seeks to relitigate an issue already decided. Principles of res judicata and issue estoppel will preclude relitigation of an issue between the same parties. These principles can be seen as founded on the same considerations as those informing the jurisdiction to stay proceedings for abuse of process, see Rogers v R at 265, 274. But there may be abuse of process warranting a stay where a party seeks to relitigate an issue decided between himself and a third party. " 350 Similarly in FAI General Insurance Company Ltd v Interchase Corporation Ltd (1998) 10 ANZ Ins Cas ¶61-428, the plaintiffs Interchase sought to add the appellants FAI as defendants in proceedings in negligence against the former's land valuers in Queensland (FAI being the valuers indemnity insurers). In the course of his reasons, one of the bases for Davies JA rejecting the application was that it would be unnecessary given that (at 74,819):

"There can be no doubt that, in the present case, both FAI and the valuers will have full opportunity of contesting the question in respect of which the declaration is sought. It would therefore, in my view be an abuse of process to permit either to litigate that question in subsequent proceedings. It follows therefore that the declaration sought would effectively determine the question of FAI's liability to the valuers as between those parties. " 351 However, while concurring with his general conclusion Byrne J was decidedly more cautious than Davies JA in this respect, emphasising (at 74,825) the high bar required to be overcome before the defence of a claim- as opposed to its prosecution -by a non-party to the prior proceedings could be found to be an abuse of process. 352 It is important to note that, as in South Australian Housing Trust and State Bank, their Honours did not discuss Duffield or the above subsequent authorities, nor is there anything in the report to suggest that those cases were put in argument. 353 The abuse of process doctrine as discussed in South Australian Housing Trust, State Bank and Interchase can be distinguished for present purposes. Both the former two decisions concerned attempts by the indemnified in subsequent proceedings to reopen issues determined in the prior, as compared to the situation here under consideration; namely the effect of a res judicata on a non-party indemnifier seeking to defend rather than prosecute a claim. While there is the matter of the broad dictum of Davies JA in Interchase, it would seem, with respect, that the qualifications expressed by Byrne J are especially persuasive. It is difficult to envisage, that is to say, the frivolity or vexatiousness in a defendant merely attempting to litigate issues not before determined in proceedings to which it was a party; rather, if an indemnifier is to be so precluded, the basis of same should more properly lie in the more certain (and indeed, in this context, less strained) legal terrain of contract or estoppel by representation. In addition, there do not appear to be further authorities supporting the broad approach of Davies JA in this respect. 354 Returning to date order, the next case is the critical decision of Ipp J in Gracechurch Holdings Pty Ltd v Breeze & Anor (1992) 7 WAR 518. In that case, Mr and Mrs Breeze were directors of a small proprietary company granted a lese of certain realty by the appellant Gracechurch, secured by the personal guarantees of Mr and Mrs Breeze. In turn, Mr Breeze had undertaken to indemnify Mrs Breeze in respect of any and all liabilities she might incur as a result of the guarantee. After a default on the lease and many convolutions not here relevant, judgment was obtained against Mrs Breeze in proceedings of which Mr Breeze had notice but to which he was not a party, and one of the questions before the court was whether he was bound by that decision. Beginning by citing the general rule that only parties to a proceeding and their privies are bound by the res judicata, Ipp J advanced cautiously (echoing the concerns of Bingham J in Ben Shipping) on the following basis (at 523):

"In cases involving indemnities, however, circumstances can arise entitling a person being indemnified to prove a judgment, obtained against him by a creditor, in proceedings against the indemnifier. This can only occur on a strictly limited basis. Ordinarily a judgment against the person being indemnified, in respect of a matter covered by the indemnity, cannot be tendered in evidence in an action between that person and the indemnifier." 355 After citing Parker and Mercantile, his Honour went onto to note (at 524) that those decisions appeared to establish that this exception to the general rule sprang from an "implicit" aspect of the express contract of indemnity. Critically for present purposes, his Honour then stated (at 524):

"I have some doubt, with respect, as to whether this approach, on analysis, is strictly correct. I would have thought that in an appropriate case an estoppel to similar effect would arise, irrespective of whether there is to be a clause implied in the contract of indemnity." 356 The inference to be drawn from this passage would appear to be that Ipp J preferred an approach which conceives of the Duffield estoppel as springing not from the contract of indemnity, but rather from the conduct of the indemnifier and in accordance with the general principles of estoppel by representation as mooted by Bingham J in Ben Shipping. Indeed, his Honour cited Spencer Bower & Turner, The Doctrine of Res Judicata, Second Edition, Butterworths, London, 1969, para 235 (discussed further below) to the effect that the estoppel arises from an 'election' by the indemnifier rather than the contract. A fortiori this conclusion is bolstered by his Honour's finding that no such estoppel had been set up on the facts of this case, on the basis that Mr Breezes' conduct was at all times "consistent with strenuous opposition to Gracechurch's claim" (at 524). In those circumstances, therefore, it could not be said that Mr Breeze had represented to Mrs Breeze a contentedness to be bound by any judgment Gracechurch might obtain in the latter's proceedings against her. 357 Ipp J did however add the following:

"I also agree, with respect, with the reservations express in Ben Shipping Co v An Bord Bainne [1986] 2 All ER 177 by Bingham J who doubted whether an "estoppel" would always arise in the circumstances postulated in Halsbury (op cit). His Lordship was, however, prepared to accept that in limited instances an "estoppel" of the kind suggested might arise. Further, the qualification to the rule in King v Norman may, depending on the circumstances, not rest on estoppel at all. Rather, there may well be, as explained in Res Judicata; (1969); Spencer Bower & Turner (at p 235): "an election (implied from conduct and inaction) by the indemnifying party that he was content to treat the judgment in the first action as binding upon himself, although in fact and law, he not being a party thereto, it was not so."" 358 The question of whether the Duffield estoppel can arise from the conduct of the indemnifier rather than the contract of indemnity does not appear to have received any judicial consideration subsequent to this decision. Rather the exception seems to have hardened into a fixed rule that, as an adjunct of the contract, the indemnifier will be bound to the prior judgment in respect of the fact of the indemnified's liability to the claimant, but not in respect of issues previously determined but nonetheless relevant to whether the indemnity responds to that liability. As mooted above in relation to the decision in Cacciola, it is not inconceivable that this doctrinal turn has occurred as an accidental result of the nature of modern contracts of insurance rather than a deliberate design to effect a shift in the authorities.

359 Thus in JN Taylor Holdings Limited (in liq) and JN Taylor Finance Pty Ltd (in liq) v Bond & Ors (1993) 59 SASR 432, the liquidators of the appellant companies sued several of their former directors for breach of statutory and general law duties. Leave was sought and received to add the defendant's indemnity insurers (as in Interchase), and in the course of his reasons King CJ listed (at 440) as one of the bases upon which the judge below had misdirected himself that:

"Secondly, I think that while correctly holding, as he did, that the insurer would not be able to relitigate the issue of the liability of the directors to the plaintiffs, his Honour overlooked that, notwithstanding that, the insurer in an action to enforce the policy would not be bound, unless a party to these proceedings, by findings of fact in these proceedings as to the nature of the breaches of duty which caused the loss. Those findings, if made binding on the insurer, might well determine whether the causes of the loss were wrongful acts within the meaning of the policy and might have a bearing on whether there had been breaches of the policy." 360 Thus while the first aspect of the proposition put by King CJ is consistent with the decision in Cacciola, the second aspect appears to be an entirely new development. 361 As mentioned above, however, it is a development that has gained considerable support. Thus in C E Health Casualty & General Insurance Ltd & Anor v Pyramid Building Society (in liq) [1997] 2 VR 256, another case in which the claimants sought to join the defendant's indemnity insurers as co-defendants, Ormiston JA rejected this step as unnecessary on the basis that (at 273) "in practical terms proof of liability in the action automatically leads to an obligation to indemnify under an applicable policy, unless the insured has been in breach of one of the conditions of the policy." (See also Phillips JA at 294.) 362 Finally in VACC Insurance Co Ltd v BP Australia Ltd (1999) 47 NSWLR 716 one Geselle was the proprietor of a petrol station successfully sued in negligence, along with the respondents BP as co-defendants, in relation to an accident involving the malfunctioning of a petrol pump. BP then commenced proceedings against Geselle for contribution, which was assessed on the basis of the trial judge's conclusions that the latter had been so reckless in failing to maintain the pump that an award of exemplary damages was justified. Following Geselle's entry into liquidation, BP commenced proceedings against Geselle's public liability insurer, the appellant VACC, pursuant to s 6(4) of the Law Reform (Miscellaneous Provisions) Act, which VACC resisted on the basis that BP were bound to the findings in the contribution proceedings to the effect that Geselle had been so grossly negligent that the policy would not respond. In turn, BP sought to re-open those findings. Citing (inter alia) Parker, Cacciola and C.E. Heath, and distinguishing Lord Denning MR's ambiguous statement in Brice as an unexplained aberration, Fitzgerald JA began by stating (at 723 [26]) that:

"the general view is that, subject to the provisions of particular policy, a judgment against an insured is conclusive, as a matter of contract, to establish the insured's entitlement to indemnity from the insurer in accordance with the policy. " 363 Moreover, his Honour went on to affirm the modern position that such conclusiveness only extends to the fact of the indemnified's liability, as opposed to issues relevant to whether the contract of indemnity responds to that liability. At 724 [28], his Honour said:

"I cannot discern any basis upon which an insurer could be precluded from asserting a breach of policy against an insured contrary to findings of fact in a proceeding in which judgment had been given against the insured in favour of a third party." 364 Mutatis mutandis, therefore, as the line of authority derived from Parker (references to Duffield and its notion of an 'estoppel' having been discarded) would not preclude the indemnifier from relitigating issues concerning Geselle's negligence to the extent relevant to whether the policy would respond, so it could not preclude an indemnified (BP standing in the shoes of Geselle) from doing likewise. 365 Subsequently, this limited interpretation was affirmed in Insurance Exchange of Australia v Dooley & Anor (2000) 50 NSWLR 222 at [83], per Fitzgerald AJA and State of New South Wales v AXA Insurance Australia Ltd (formerly known as Union Des Assurances De Paris IARD) (2002) 54 NSWLR 409 at [47], per Ipp AJA (with whom Mason P and Giles JA agreed). 366 However, after coming to the above conclusion Fitzgerald JA nonetheless went on in VACC to state (at 724 [29]) that "it does not necessarily follow that an insured is free to relitigate against its insurer findings made against the insured in the proceedings in which the judgment in favour of a third party relied upon by the insured against the insurer was given against the insured." Specifically, his Honour's concern was that the sole basis upon which BP obtained a cause of action against VACC was via the contribution judgment, being a decision which was predicated upon Geselle having been so reckless as to warrant the award of exemplary damages (and, by extension, ensure that its policy with VACC did not respond). Thus for BP to seek to relitigate this issue of recklessness in its proceedings against VACC would be to simultaneously affirm the contribution judgment as providing it with a cause of action and then undermine its factual findings as destroying any chance of success in that action. For Fitzgerald JA (at 725), BP's approbation and reprobation in this manner was clearly unconscionable such that- although the indemnifier's exception had no application- it was estopped from averring contrary to the findings of fact in the contribution proceedings. At 725 [33], his Honour said:

"It is unnecessary for present purposes to decide whether this is part of the doctrine of estoppel in pais or an independent doctrine: cf Cave v Mills (1862) 7 H&N 913 at 927-928; 158 ER 740 at 746-747, per Wilde B; Edwards v Culcairn Shire Council (1963) 64 SR (NSW) 62 (at 70; 36). While the classic statement concerning estoppel in pais by Dixon J in Thompson v Palmer (1933) 49 CLR 507 at 547; see also Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 at 676; relates to an inconsistent departure from an assumption which formed the basis of a past exercise of rights not an attempt to act on two inconsistent bases simultaneously, I cannot identify a difference in principle." 367 The significance of this conclusion for present purposes is that it provides a concrete example of the ordinary principles of what his Honour calls estoppel in pais (that is, estoppel by representation of fact) operating in superaddition to the res judicata estoppels to extend the binding effect of a judgment to persons other than the parties or their privies. Moreover, the entities between which that estoppel sprang were not in legal relations in the form of an express contract of indemnity as required by Parker. Accordingly, this aspect of the decision in VACC stands as a practical demonstration of the operation of the form of estoppel by representation identified in legal theory by Bingham J in Ben Shipping and Ipp J in Gracechurch. Conclusions and Observations 368 In light of the above, it can be concluded in respect of the so-called 'disparate propositions' set out above that: · Proposition (d) (abuse of process) can be shortly distinguished on the basis that the authorities applying the doctrine of abuse of process to the present context (South Australian Housing Trust, State Bank and Interchase) concern the situation wherein the indemnified seeks to re-litigate issues determined in proceedings to which he/she was directly a party. In contrast, it would require a strained application of that doctrine to find that an indemnifier was acting frivolously or vexatiously in attempting to reopen matters, by way of defence, determined in prior proceedings to which it was not a party. · Equally, proposition (c) (preclusion arising from contract of indemnity, regardless of notice) can be distinguished on the basis that while many modern authorities do not make mention of the need, expressed in Duffield and Parker especially, for the indemnifier to have had notice and then deliberately elected not to participate, it can be comfortably presumed that this is a product of the nature of modern insurance contracts rather than a deliberate doctrinal shift. It would, that is to say, be manifestly unfair to bind a non-party or non-privy to a res judicata determined without the opportunity for participation or comment by that person. · The prevailing position in the authorities is a combination of proposition (a) (preclusion arises from contract of indemnity, provided that notice and refusal to participate are present) and proposition (e) (preclusion arises from contract, but extends only to the fact of the indemnified's liability). Since the early decisions of Parker and Mercantile and those subsequent, it is clear that the 'estoppel' referred to in Duffield has been inexorably latched onto the contract of indemnity rather than any conduct of the indemnifier in the operative manner of the true estoppels. Moreover the most recent decision in the chain of authorities, epitomised by VACC, have the effect of further limiting the indemnifier's exception to precluding the contestation of the fact of the indemnified's liability to the claimant, but not to previously determined issues relevant to whether the contract of indemnity responds to that liability. While this rule is unquestionably a long way from any notion of the indemnifier being 'estopped' in the true sense of the word, it appears to represent the prevailing state of the authorities at present. · However, this conclusion in no way forecloses the possibility of the exception resting upon proposition (b) (representation from words or conduct). While the authorities disclose no ratio application of this approach, the obiter of Bingham J in Ben Shipping and Ipp J in Gracechurch manifestly contemplate that it is a legitimate perspective to adopt. In addition, the application of an estoppel by representation of fact in VACC provides a practical illustration of how such an estoppel might arise. Further it is clearly supported by Spencer Bower, Turner and Handley who state (at [224]), after quoting the passage from Duffield set out above, that "[t]his type of case involves an estoppel by representation, the indemnifying party representing that he is content to treat any judgment as binding on himself. To a similar effect, in the second edition of that work Spencer Bower and Turner state (at [235]) that: "it is clear that it [ Duffield ] was not intended to suggest that this type of case raises any question of estoppel per rem judicatum at all, the "estoppel" there referred to being an election (implied from conduct and inaction) by the indemnifying party that he was content to treat the judgment in the first action as binding upon himself, though in fact and law, he not being a party thereto, it was not so. "

Plainly, to be enforceable in the absence of consideration such an 'election' must fall within the scope of the doctrine of estoppel by representation of fact. Conclusion 369 Accordingly, it is my conclusion that the 'indemnifier's exception' to the general rule that only parties and their privies are bound by a res judicata is of dual provenance, being (a) the contract of indemnity; and (b) the words and conduct of the indemnifier, understood in the context of the general law relating to estoppel by representation of fact. The situation of co-guarantors 370 Plainly if the estoppel identified in Duffield has its legal basis in, and arises from, an implied term in the contract of indemnity, then the doctrine developed from that case can have no application to the situation of co-guarantors under separate instruments.

371 However this conclusion does not follow if the alternative, estoppel by representation basis is adopted: the application of this form of estoppel would depend solely on the nature of the non-party's conduct and the response to same by the guarantor party in accordance with the general principles of estoppel by representation outlined above. Moreover, any differences in the nature of the legal relationship between indemnified and indemnifier and co-guarantors would not therefore be relevant to the potential setting up of the estoppel, save for the similarity that judgment against one guarantor triggers an equitable right of contribution, in the same manner as judgment against an indemnified triggers a right of indemnification.

372 In such case, however, it is critical to establish, that the facts of the matter disclose all the relevant elements of an estoppel by representation of fact.

373 Finally, it should be noted that, as is the situation in respect of non-party indemnifiers on the authorities of King v Norman, Parker and Gracechurch, the mere fact that a non-party is a co-guarantor with a party is unlikely to provide a sufficient basis for a finding that the former is a privy of the latter, such that the res judicata estoppel binding the party may directly extend to the non-party. As detailed above, Australian authority in the form of Ramsay, as followed recently by the Full Federal Court in Trawl Industries, dictates that the 'basic requirement of a privy in interest is that the privy must claim under or through the person of whom he is said to be a privy'; the focus is on shared legal interests rather than merely shared economic. Accordingly, the only means by which a non-party co-guarantor may be bound by a res judicata to which he or she is not a party is by the operation of the estoppel by representation method described above. 374 The results of the above analysis can be summarised by way of the following propositions: · It is trite law that the only persons subject to a res judicata estoppel are the parties to the relevant proceedings and their privies in title, blood or interest. [I note that in the above analysis unless the specific is substituted for the general, the expression 'res judicata estoppels' is denotative of 'cause of action estoppels' (known commonly to Australian jurisprudence as res judicata simpliciter: Effem Foods v Trawl Industries at 514, per Northrop and Lee JJ), 'issue estoppels' and the doctrine known in England as the 'principle in Henderson v Henderson' and in Australia as 'Anshun estoppel'. Such usage is consistent with that adopted in Spencer Bower, Turner and Handley, The Doctrine of Res Judicata, Third Edition, Butterworths, London, 1996] · However, when a non-party indemnifier (A) is put upon notice that proceedings in respect of a liability cognisable by the indemnity are on foot against his/her indemnified (B) but nonetheless fails to intervene, the binding effect of any resultant res judicata may extend to A on the basis that his/her inaction constitutes a representation to the parties that he/she is content to be bound by the outcome. In such a case, A is not bound to the res judicata as a privy of B; rather, A is bound in his/her own right and as a consequence of a second estoppel set up by the above representation. Alternatively, A is bound by the res judicata as a result of a term implied by law into the contract of indemnity. · Accordingly, a non-party co-guarantor (C) may be bound by a res judicata to which the other guarantor (D) is directly subject on the basis that, by analogy with the above rule in respect of non-party indemnifiers acting with notice of a litigation, C has set up an estoppel by representation to the effect that he/she is content to be bound by the outcome. Applying the analysis to the present facts 375 To my mind the evidence clearly satisfies the criteria necessary to establish the requisite estoppel by representation as against both the first as well as the second and third defendants. On the evidence each of these two sets of parties by their relevant conduct and/or inaction, represented that they were content to treat the judgment in the Federal Court proceedings as binding upon themselves, although in fact and in law, as at the moment when Sackville J published his reasons for judgment, the first defendant was not longer a party to those proceedings, the second and third defendants never having been parties to the proceedings. It would be unjust to allow either of the two sets of parties to now deny that the Federal Court judgment is to be treated as binding upon them. 376 It is unnecessary to examine the position of Mr Bruce who was on notice in every possible way not only of the nature of the proceedings, but also of Mr Jeans unsuccessful attempts to obtain leave to withdraw his admission that he had signed the guarantee. 377 It is also plain on the evidence that the second and third defendants were given formal notice of the claim made against Mr Bruce under his guarantee in the Federal Court proceedings. A letter was written to Mr Herzog by solicitors acting for Mr Bruce on 13 August 2001 [PX 329-330] drawing specific attention to the existence of the Federal Court proceedings and the claim against Mr Bruce under his guarantee. Specific attention was also drawn to clause 6.8 of the heads of agreement. The stance taken by Advance Publicity and Harpley Nominees was to deny that the indemnity was ever executed on behalf of the companies (PX 330A). Further, on 5 September 2001, after some discussions between Mr Bruce and Mr Herzog, an attempt was made by the solicitors acting then for the second and third defendants to obtain a formal release from Mr Bruce and his company and replace the heads of agreement with another document which omitted the indemnity previously found in clause 6.8 [PX 332-340]. However, that document was not executed. 378 Each of the facts pleaded in paragraphs 1-10 and 12-15 and 17 (a)-(d) of the Reply had been clearly proved. 379 In the result the circumstances proven by dint of the facts pleaded in paragraph 1-10 of the Reply give rise to a binding estoppel operative against the first defendant preventing him from asserting: · the invalidity of the respective liabilities of Mr Jeans and of himself under their guarantees; · the invalidity of the liability of Deangrove to the Commonwealth Bank. 380 Further to the detriment of Mr Bruce, the assertion by the second and third defendants of an entitlement to recover moneys from Noroton Holdings and Australasian Property Holdings precluded Mr Bruce from any such recovery operating to his detriment. 381 Further the circumstances proven by dint of the facts pleaded in paragraphs 12-15 and 17 (a)-(d) of the Reply give rise to an estoppel operative against the second and third defendants preventing them from asserting the invalidity of the judgments entered against Mr Jeans, Mr Bruce and Deangrove in the Federal Court proceedings. 382 For the reasons already given the submission of the second and third defendants that the principles as between an indemnifier and a person indemnified have no application to the position as between co-guarantors is rejected. The suggested distinction [in terms of the fact that persons who might in the future be called upon to make equitable contribution as co-guarantors are not required to intervene in pending proceedings against persons who might one day make such a claim against them, even if they are aware of the fact that such proceedings are pending] is on analysis not one of substance. Evidentiary rulings 383 The plaintiff having established the existence of issue estoppels against not only the first defendant, but also the second and third defendants arising from the Federal Court proceedings: · The short minutes of order in the Federal Court proceedings dated 2 April 2003 directing judgment for the Commonwealth Bank against the first defendant Mr Bruce are admissible against him in these proceedings, as they constitute an issue estoppel in respect of the following matters: - the fact that Mr Jeans was a guarantor to the Bank of the debts of Deangrove;

• the fact that Mr Bruce was a guarantor to the Bank of the debts of Deangrove; - the amount of their liability respectively under the judgments. · It is incorrect to characterise the document at PX 58-60 as "Terms of Settlement". Judgment was directed to be entered in accordance with those terms in the Federal Court proceedings on 3 April 2003 [transcript pp 604-605]. The document at PX 58-60 constitutes evidence of the judgment of the Federal Court. · The amended cross-claim upon which that judgment was based is also admissible. In order to determine and identify the precise issue estoppels which exist - see generally Spencer Bower, Turner & Handley (3rd Ed) para 204 and especially Sterling Engineering Co Ltd v Patchett [1955] AC 534 at 541 where Viscount Simon said: "So far as the action was concerned, an order was made whereby it was dismissed with costs, and that was awful. And it is clear that whatever else your Lordships may look at in the event of a plea of res judicata being raised, you are at least entitled to know what were the issues raised in the pleadings in the action ..." [emphasis added] · As between Mr Jeans and Mr Bruce, their common liability to the Commonwealth Bank as guarantors is a concluded question determined by the earlier proceedings. · As between Mr Jeans and the second and third defendants, the pleadings and the judgment in the Federal Court action as to:

• the liability of Mr Jeans to the Bank as guarantor;

• the liability of Mr Bruce to the Bank as a guarantor are also admissible. 384 The exhibit markings will be as follows: · As to the guarantee by Mr Bruce, which is pages 1 to 12 of the PX red volume, there was no objection by any of the defendants and that material is already included in exhibit PX.

· The guarantee by Mr Jeans is pages 13 to 25 of the PX red volume. · The Federal Court judgments are to be found at PX pages 26 to 57 and 63 to 75. · As to the documents following page 58, namely the terms of settlement against Mr Bruce, those terms of settlement were not the subject of an objection by the first defendant to the tender as against it and those pages are already part of exhibit PX but only as against the first defendant. They are now also admitted against the second and third defendants. The way forward 385 The parties ought now to be in a position to seek to formulate short minutes of order, although perhaps not in every respect. The principal issues litigated have been the subject of reasons for judgment. The complexities involved and the many disparate sets of submissions mean that it is appropriate to reserve leave to address on any pleaded matters which it may be submitted still remain to be dealt with. Submissions will also be taken on costs. It is to be hoped that the parties will endeavour to reach a consensus on any matters of detail in terms of the proper orders to follow from the reasons for judgment.

I certify that paragraphs 1 - 385 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 19 July 2004

      Susan Piggott
      Associate
      19 July 2004

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