KENDELL v CARNEGIE & ORS

Court of Appeal (NSW)|2006-11-03|Before: Hodgson JA, McColl JA, Bryson JA, Coll JA

CITATION: KENDELL v CARNEGIE & ORS [2006] NSWCA 302 This decision has been amended. Please see the end of the judgment for a list of the amendments.

JUDGMENT OF: Hodgson JA at 1; McColl JA at 2; Bryson JA at 3

DECISION: 1. The appeal is dismissed with costs; 2. The cross-appeal is dismissed: each party is to pay his or its own costs of the cross-appeal.

District Court Rules 1973 (NSW) Part 31 r.12A LEGISLATION CITED: Trade Practices Act 1974 (Cth) s.52 Uniform Civil Procedure Rules 2005 (NSW) r.36.15

Balkin v Peck (1998) 43 NSWLR 706 Cash v Wells (1830) 1 B & Ad 375; 109 ER 826 Coles v Burke (1987) 10 NSWLR 429 Deputy Commissioner of Taxation (NSW) v Chamberlain (1990) 93 ALR 729 Easyfind (NSW) Pty Ltd v Patterson (1987) 11 NSWLR 98 Futuretronics International Pty Ltd v Gadzia [1992] 2 VR 217 Hardoon v Belilios [1901] AC 118 James v ANZ Banking Group Ltd (1986) 64 ALR 347 Jones v Bouffier (1911) 12 CLR 579 CASES CITED: Jones v Dumbrell [1981] VR, 199 Macquarie Generation v Peabody Resources Ltd [2001] Aust Contract R 90-121, [2000] NSWCA 361 McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 Roach v B&W Steel Pty Ltd (1991) 23 NSWLR 110 Shirriff v The Nominal Defendant [1999] NSWCA 152 Smith v Budandan Enterprises [2002] 55 NSWLR 367 Solle v Butcher [1950] 1 KB 671 Svanosio v McNamara (1956) 96 CLR 186 Taylor v Johnson (1983) 151 CLR 422 With v O'Flanagan [1936] Ch 575

David Ward Kendell - Appellant Michael Brian Carnegie - 1st Respondent PARTIES: Aculeo Pty Ltd - 2nd Respondent Australian Vineyard Estates Pty Ltd (In Liq) - 3rd Respondent Tackelly No.6 P/L - 4th Respondent

COUNSEL: J. Hogan-Doran - Appellant G.P. McNally - Respondents (1, 2 & 3)

SOLICITORS: David Ward Kendell, Mosman - Appellant Davis Breene Conti, Sydney - Respondents (1, 2 & 3)

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40861/05

HODGSON JA McCOLL JA BRYSON JA

3 NOVEMBER 2006 DAVID WARD KENDELL v MICHAEL BRIAN CARNEGIE & 3 ORS Judgment 1 HODGSON JA: I agree with Bryson JA. 2 McCOLL JA: I agree with Bryson JA. 3 BRYSON JA: The appellant Mr Kendell appeals by leave earlier granted from orders of his Honour Judge Sorby in the District Court at Sydney. His Honour dismissed a Notice of Motion dated 30 May 2003 by which Mr Kendell sought orders under Part 31 rule 12A of the District Court Rules setting aside orders made by his Honour Judge Puckeridge on 22 November 2002. 4 Part 31 r.12A of the District Court Rules 1973 (NSW) was in these terms: [Pt 31 r 12A] Setting aside of judgment or order 12A (1) A judgment or order of the Court in any proceedings may, on sufficient cause being shown, be set aside, on terms, by order of the Court, if the judgment was given or entered up, or the order was made, irregularly, illegally or against good faith. (2) A judgment or order of the Court in any proceedings may, on terms, be set aside by order of the Court if the parties to the proceedings consent. 5 The corresponding provision in the Uniform Civil Procedure Rules 2005 (NSW) now in force is r.36.15 and is in very similar terms. 6 The dealings out of which the litigation arose, and the litigation itself, were complex. Mr Kendell was for many years a director of Australian Vineyard Estates Pty Ltd (AVE) and in July 1996 he caused AVE to purchase a Kwik Copy franchise printing business carried on at Chatswood New South Wales. AVE was then trustee of the Kendell Family Trust. The business was carried on in leased premises at Chatswood Plaza, Railway Street, Chatswood. In July 1996 the sublease was transferred to Mr Kendell (and not to AVE) by the previous sublessees, the previous owners of the business. Although no trust instrument is referred to it has been accepted that Mr Kendell held the sublease as trustee for AVE, which in turn held its equitable interest as trustee of the Kendell Family Trust. In a commercial transaction in April 1997 interests associated with Mr Carnegie the first respondent became, in effect, owners of half the business; the trust was reconstituted as the Carnegie-Kendell Family Trust and persons associated with Mr Carnegie became beneficiaries as to half the assets of the trust. Aculeo Pty Ltd is one of the persons associated with Mr Carnegie. Consideration of $325,000 passed to interests associated with Mr Kendell; the effect produced was that a half interest in the business was sold to interests associated with Mr Carnegie. 7 In December 1999, in a further transaction in the nature of a sale, interests in the trust and the business associated with Mr Kendell passed to persons associated with Mr Carnegie in consideration of a payment of $125,000. The trust was renamed the Carnegie Family Trust and AVE continued to be the trustee; Mr Kendell ceased to be a director and ceased to have any control over or interest in affairs of the trust and the business. An Indemnity Deed dated 31 December 1997 established a number of obligations and entitlements in the new state of affairs, including entitlements relating to loans and guarantees by which Mr Kendell and interests associated with him had provided the business with finance. On payment, over a period of 18 months, of money which Mr Kendell and Mrs Kendell had lent to AVE, AVE's debt to them was to be discharged; there were to be general releases and in particular Mr and Mrs Kendell were to release the balance of loan accounts due to them by AVE. Mr and Mrs Kendell gave warranties and indemnities to interests associated with Mr Carnegie with respect to obligations of AVE and of trust obligations. Other provisions established completely the withdrawal of Mr Kendell and interests associated with him from the business and from the trust. 8 The Indemnity Deed included the following clauses 12 and 13 (in which DWK refers to Mr Kendell and PAK refers to Mrs Kendell): (Blue 1, Tab 13 pp135-136) 12. Carnegie and Aculeo jointly and severally indemnify each of DWK and PAK against all sums of money which they may pay or be liable to pay under any guarantee or indemnity given to any party (" the beneficiary") in respect of any liability or prospective liability of the Trustee including, without limitation, the guarantees of the Guaranteed Funds and Carnegie and Aculeo must pay to DWK and PAK all sums of money due under this clause:- (1) without deduction or set off or counter claim; and (2) whether or not DWK or PAK has paid the sum due to the beneficiary. 13. In furtherance of his indemnity Carnegie agrees with DWK and PAK: (1) to execute joint and several guarantees of those liabilities of the Trustee which are guaranteed by DWK and PAK and are not guaranteed by himself. (2) do all things necessary at the cost of DWK to obtain the release of DWK and PAK under the Franchise Agreement with Kwik Kopy Australia Pty Limited. (3) to procure that the Trustee obtain a Bankers Undertaking from Citibank under the existing security arrangements in the sum of $15,000 to replace the Bankers Undertaking given by Westpac (at the request of DWK and PAK) to Mabilu Pty Limited to secure their residual liability under the assigned lease of the premises 1 Railway St, Chatswood. In the event of Citibank requiring additional security for a Bankers Undertaking Carnegie will execute such documents as are necessary to jointly and severally with DWK and PAK indemnify Westpac in respect of payment under the Bankers Undertaking. 9 There were no express arrangements, in the Indemnity Deed or anywhere else, about the sublease, which still had several years to run. Mr Kendell continued to be the sublessee and continued to hold the sublease on trust for AVE. It might have been contemplated that in due course Mr Kendell would transfer the sublease to AVE or to some new nominee of AVE; or that the sublease would continue and that AVE would meet all obligations and handle all affairs relating to the sublease, leaving Mr Kendell in no more than a nominal position. 10 Mr Kendell was of the view that his involvement in the sublease should end and that it should be transferred to AVE, or that some other way AVE should become the sublessee. He endeavoured to bring it about that the sublease was transferred to AVE or that a new sublease was granted to AVE in its place (presumably on surrender). At some time the reversion of the sublease, that is the interest of the sublessor, passed to Tackelly No. 6 Pty Ltd (Tackelly), which took the position that if AVE were to become the sublessee it should do so on terms different to those in the existing sublease; and AVE was not willing to accept those terms. Then Tackelly took the position that occupation of the premises by AVE was in breach of a covenant in the lease, and gave Notice to Quit. AVE vacated the premises at some time about July 1999; AVE paid all the rent up to that time. AVE moved the business to premises elsewhere in Chatswood and continued to conduct it. Tackelly sued Mr Kendell in the District Court in 2000 and claimed that Mr Kendell was liable for rent for a period after AVE gave up possession, continuing, presumably, until the time when, according to Tackelly's view of things, the lease was formally terminated. Tackelly also made other claims for damages for breach of covenant relating to the condition of the premises. 11 It was AVE's position that conduct of Mr Kendell had caused disturbance of its possession, and that Mr Kendell was in breach of obligations as trustee and should compensate AVE. The merits of the positions of AVE and Mr Kendell about this claim have never been judicially examined. 12 On 1 August 2002 AVE agreed to sell the business to a new entity, which can be referred to as Kudu, which at the same time bought another printing business conducted in Chatswood, by Bannerman Bros Pty Ltd; and Kudu amalgamated and thereafter conducted the two businesses. In this sale AVE was entitled to receive only value of plant, equipment, furniture, fittings, fixtures and stock in trade as valued; the valuation was $69,270. (It was in dispute whether AVE was entitled to receive and whether AVE received anything for goodwill in this valuation). 13 The action which Tackelly commenced in 2000 became complex. Tackelly sued Mr Kendell and AVE for rent from 1 September 1999 to 31 August 2000 and made other claims for damages, costs and interest associated with the termination of the sublease. In the First Cross-claim Mr Kendell sued AVE, Mr Carnegie and Aculeo Pty Ltd claiming that he was entitled, under the Indemnity Agreement of 31 December 1997 or an oral or implied term, to be indemnified against liabilities relating to the sublease. In the Second Cross-claim AVE made claims against Mr Kendell alleging breaches of his duty as trustee; and also made claims against Tackelly. The action and cross claims were given an appointment for hearing on 22 and 23 April 2002; but were not reached on that occasion and were given a further appointment for hearing on 27 August 2002. 14 In the course of preparation for hearing Mr Kendell, who is a solicitor and conducted the litigation himself, wrote a letter to the solicitors then representing AVE, Mr Carnegie and Aculeo Pty Ltd and raised several topics. He asked for particulars of paragraph 8 of the Defence to the First Cross-claim, and asked in detail for particulars of the actions of himself which were said to be in breach of the Indemnity Agreement and of his obligations as trustee. Further paragraphs of the letter dealt with arrangements for production of documents on Notice to Produce and asked for confirmation that Mr Carnegie and associated interests had no documents in the classes for which there had been no production. The last paragraph of his letter was: (Blue 1/217, Tab 24) Finally would you confirm that Australian Vineyard Estates Pty Limitrd as trustee of the former Kendell Family Trust is still the owner of the Kwik Kopy franchise at Chatswood in the event of your client not providing this information I will issue a subpoena to produce to the franchisor. 15 Mr Carnegie's solicitor replied on 9 April 2002, referring to Mr Kendell's letter and another letter and saying: (Blue 1/219, Tab 25) Further to our most recent correspondence we confirm that our client has no further documents in answer to your notice to produce and further confirm that Australian Vineyard Estate Pty Limited holds the Kwik Kopy franchise at Chatswood. 16 It is not clear to me in what way this question and answer dealt with particulars of the cross-claim against Mr Kendell, or was otherwise appropriate for inquiry and answer while preparing for the hearing; it may be, as counsel for Mr Kendell suggested, that it related to AVE's claim for loss of business opportunity. It was not part of any negotiation for settlement: there were no such negotiations at that time. It was true in every sense on 9 April 2002 that AVE held the Kwik Kopy franchise at Chatswood. After 1 August 2002 this was no longer true, as it had given up its interest by carrying out the Kudu transaction. 17 On 27 August 2002, the first day of the hearing of the action in the District Court, Terms of Settlement signed by counsel were entered into between Mr Kendell and Mr Carnegie and interests associated with him. The Terms of Settlement were associated with arrangements under which from then on Mr Kendell would make common cause with Mr Carnegie and interests associated with him and would contest issues with Tackelly in the hope of a successful outcome. The contemplation was that the orders for which the Terms of Settlement provided would be made when the Court's decision had been given on the remaining issues. The Terms of Settlement were as follows: (Blue 1/226, Tab 28) By consent and without admissions, Order that:

Judgment be entered on the first defendant/first cross-claimant's cross-claim for the first defendant/first cross-claimant/fourth cross-defendant against the second defendant/first cross-defendant/second cross-claimant in its capacity as trustee of the Carnegie Family Trust formerly known as The Kendell-Carnegie Family Trust and as the Kendell Family Trust for such amount, if any, as may be the subject of judgment for the plaintiff against the first defendant on the plaintiffs claim.

The second defendant in its capacity as trustee of the Carnegie Family Trust formerly known as The Kendell-Carnegie Family Trust and as the Kendell Family Trust pay the first defendant such amount, if any, as may be ordered to be paid by way of costs by the first defendant to the plaintiff on the plaintiff's claim.

Judgment be entered for each of the second cross-defendant and the third cross-defendant against the first defendant/first cross-claimant on the first defendant/first cross-claimant's cross-claim.

Judgment be entered for the first defendant/fourth cross-defendant against the second defendant/second cross-claimant on the second defendant/second cross-claimant's cross-claim..

There be no order as to costs on the first defendant/first cross-claimant's cross-claim.

There be no order as to costs as between the second defendant/second cross-claimant and the first defendant/fourth cross-defendant on the second defendant/second cross-claimant's cross-claim.

Dated this 27th day of August 2002 18 The effect of cl 1 was that Mr Kendell was to recover judgment against AVE for the amount of any judgment which Tackelly recovered against Mr Kendell. Under cl 2 AVE was to pay Mr Kendell any costs which Mr Kendell was ordered to pay Tackelly. Under cl 3 Mr Carnegie and Aculeo Pty Limited were to have judgment in their favour on Mr Kendell's cross-claim and under cl 4. Mr Kendell was to have judgment in his favour on AVE's second cross-claim. 19 When he entered into the Terms of Settlement Mr Kendell believed that Mr Carnegie owned the franchise business, and would not let the business go down the drain; the Trial Judge found that this was a reasonable belief to hold. 20 The hearing of the action in the District Court led to the decision of his Honour Judge Puckeridge on 22 November 2002; Judge Puckeridge gave judgment in favour of Tackelly against Mr Kendell for $80,738, and went on, giving effect to the Terms of Settlement, to give judgment for Mr Kendell against AVE for the same amount with costs. A claim for costs of $58,250 was made although the evidence does not show whether these costs have been assessed. Mr Kendell attempted to enforce the judgment and served a statutory demand on AVE. Thereafter the directors of AVE took the company into administration on 13 March 2003, and AVE went into liquidation on 2 May 2003. 21 It became known, through the administration and liquidation, that AVE had no resources from which to meet the judgment which Mr Kendell recovered against it; and further that after the Kudu transaction on 1 August 2002 AVE had, in substance, no resources with which to meet any judgment which Mr Kendell might recover against it, because the whole proceeds of the Kudu transaction went towards a secured debt to a bank; and the secured debt was not fully satisfied. With hindsight it can be seen that the arrangement in cl 1 of the Terms of Settlement for Mr Kendell to recover judgment against AVE if judgment were given for Tackelly against Mr Kendell was of no value to Mr Kendell because AVE had no resources; whereas at the same time Mr Kendell gave up what ever prospects he may have had for recovering any remedy on his cross-claim against Mr Carnegie and Aculeo Pty Ltd. 22 Lengthy as my narration has been, it has abbreviated the circumstances considerably. 23 There is little value in examining closely Mr Kendell's prospects of success against AVE if the Terms of Settlement were set aside and the cross claims were opened up again for adjudication. As trustee he was entitled to indemnity out of the trust asset, but the sublease no longer exists. He may also have had an entitlement to a personal indemnity from AVE in respect of obligations he incurred as trustee on the principles associated with Hardoon v Belilios [1901] AC 118; see Balkin v Peck (1998) 43 NSWLR 706; this would depend on showing that the liability was properly incurred; and in any event AVE has no resources. The indemnity given by Mr Carnegie and Aculeo in cl 12 of the Indemnity Deed of 31 December 1997 does not on its face appear to extend to liabilities incurred by Mr Kendell as trustee for AVE of the sublease because the liabilities alleged by Tackelly were not liabilities of Mr Kendell under any guarantee or indemnity. The contention that Mr Kendell had some entitlement in respect of Mr Carnegie's agreements in cl 13, subcl (1) or otherwise, also appears to be very difficult. There are also considerable difficulties in the way of showing that there was some implied contractual obligation of Mr Carnegie or of Aculeo in relation to liabilities incurred by Mr Kendell in respect of the sublease after the transaction of December 1997. 24 The bases of Mr Kendell's claim in the Notice of Motion to set aside the orders which Judge Puckeridge made under the Terms of Settlement were set out at length in Points of Claim filed in the District Court. It was contended to the effect that during negotiations for the Terms of Settlement the representatives of AVE, Carnegie and Aculeo implied by their conduct that the Kwik Kopy business at Chatswood continued to be owned by the trust of which AVE was trustee (see Points of Claim para [33], Red 61). It was not contended that during negotiations for the Terms of Settlement there was any express reference, either in any inquiry on behalf of Mr Kendell or in any statement on behalf of Mr Carnegie and associated interests, to whether or not AVE still owned the business or still held the franchise; or to any subject connected with AVE's financial position or capacity to meet a judgment against it. The contention was based upon what was said to be the continuing effect of the statement in the letter of 9 April 2002, and also on what was said to be implied by conducting negotiations for and entering into an agreement which provided for judgment against AVE. 25 His Honour Judge Sorby gave reserved judgment on the Notice of Motion on 10 November 2004 and when stating what he regarded as the relevant law said: (Red 61-64): (a) Good faith and Mistake A consent judgment may be set aside as being entered into "irregularly, illegally or against good faith" if one party is entering into the consent judgment under some serious mistake or misapprehension about either the content or subject matter of the consent judgment and the other party: s Induces the mistaken belief in the first party or deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension; or s Is aware of the mistake and fails to correct it.

(i) Where one party induces a mistake or deliberately sets out to conceal the discovery of a mistake

(ii) Where one party knows of the other's mistake but fails to point it out

Notwithstanding the technical rules on actionable mistake in equity, a consent judgment may also be set aside as being entered into "irregularly, illegally or against good faith" if one party is entering into the consent judgment under some serious mistake or misapprehension about either the content or subject matter of the consent judgment and the other party, knowing of the first party's delusion, takes advantage of that mistake by concluding a compromise agreement without pointing out the mistake or misapprehension.

(b) The duty to act in good faith generally A consent judgment may be set aside as being entered into "irregularly, illegally or against good faith" wherever there is misconduct or dishonourable conduct by a party procuring a judgment that undermined the authority of that judgment. Coles v Burke (1987) 10 NSWLR 429 at 437 per Kirby P.

The content of the "good faith" requirements in Pt 31 r 12A has not been fully defined in relevant authorities. 26 His Honour also referred to Easyfind (NSW) Pty Ltd v Patterson (1987) 11 NSWLR 98 (Young J) at 107-108, which relates to inherent powers of the Supreme Court, and not to the powers of the District Court under Pt.31 r.12A. The Trial Judge also referred to Roach v B&W Steel Pty Ltd (1991) 23 NSWLR 110 at 114C-E. 27 The Trial Judge said: (69) The Issues The key issues are whether the failure of the Respondent to advise the Applicant of the change in ownership of the Kwik Kopy was a significant factor in inducing the applicant to settle the cross claims and secondly, whether the Respondents, being aware of the mistake deliberately set out ot ensure that the Applicant did not discover the fact that the Kwik Kopy franchise had been sold. 28 Judge Sorby set out the following passage from Taylor v Johnson (1983) 151 CLR 422 (Mason ACJ, Murphy and Deane JJ) at 432: The particular proposition of law which we see as appropriate and adequate for disposing of the present appeal may be narrowly stated. It is that a party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension. 29 The next passage in Taylor v Johnson should also be noticed. After referring to support in the authorities their Honours went on (432-433): Moreover, and perhaps more importantly, it is a principle which is best calculated to do justice between the parties to a contract in the situation which it contemplates. In such a situation it is unfair that the mistaken party should be held to the written contract by the other party whose lack of precise knowledge of the first party's actual mistake proceeds from wilful ignorance because, knowing or having reason to know that there is some mistake or misapprehension, he engages deliberately in a course of conduct which is designed to inhibit discovery of it. Our comment can, for present purposes, be limited in its application to the case where the second party has not materially altered his position and the rights of strangers have not intervened. 30 Judge Sorby also referred to Deputy Commissioner of Taxation (NSW) v Chamberlain (1990) 93 ALR 729 at 737 and 740. 31 Judge Sorby considered the facts extensively. In stating his conclusions his Honour found: 48. … at the time agreement was reached on 27.8.02 Mr Kendell did consider that the status of AVE was fundamental to his settling various actions as he was concerned as to whether AVE could meet its liabilities in particular as to him as the person who signed the lease. He held a belief, perhaps wrongly, that Mr Carnegie would "not let the business go down the drain". In other words Mr Carnegie would continue to operate it and make a profit. It seems to me such a belief was reasonable given the evidence of Mr Kendell as to the turnover of the business. The failure of the Respondents, through Mr Carnegie or his legal representatives, to disclose the fact (the sale of the business), led Mr Kendell to settle the Cross Claims under a serious mistake on his part. Further, there can be no doubt in my view, on the balance of probabilities, that Mr Carnegie and his legal representatives knew that Mr Kendell had been advised in April 2002 that the business had not been sold, that circumstance had changed within a few weeks of the settlement on 27.8.02, but did not disclose that fact to Mr Kendell or anybody that may have been acting on his behalf. This was information wholly within their purview. This omission led Mr Kendell to enter into the contract under the misapprehension that the business was still under the control of Mr Carnegie. 32 Judge Sorby went on to find, after review of the facts upon which the finding was based, "… I am not satisfied on the balance of probabilities that Mr Carnegie 'deliberately set out to ensure' that Mr Kendell did not become aware of his mistake or misapprehension." The Trial Judge regarded it as necessary, to meet the test stated in Taylor v Johnson, to show that Mr Carnegie deliberately set out to ensure that Mr Kendell did not become aware of the mistake. In stating his conclusion the Trial Judge said: (Red 52) I am therefore not satisfied that there was a deliberate action to conceal the sale from the Applicant such as would allow me to void in part the agreement entered into by the parties on 27.8.02 and the subject of orders made on 22.11.02. 33 On behalf of Mr Kendell it was contended that the Trial Judge's decision was in error in several respects. It was contended that the Trial Judge should have dealt with questions, which went far beyond the application of Taylor v Johnson but were debated at the hearing, on whether or not a mistake had been induced by Mr Carnegie, Aculeo and AVE, and on whether or not those parties were aware of Mr Kendell's mistake and took advantage of it. It was also contended that the Trial Judge had not dealt or not dealt appropriately with contentions that Mr Carnegie and his interest engaged in misrepresentation in failing to correct the representation in the letter of 9 April 2002, and further or alternatively in entering into Terms of Settlement in which AVE agreed to judgment (in the stated events) and thereby promised to do something which AVE was not in a position to do, that is meet the judgment. It was contended that there was no treatment in the judgment of whether or not the mistake was induced; that the Trial Judge should have found and did not deal adequately with the contention that the Carnegie interests knew of Mr Kendell's mistake and failed to point it out. 34 Counsel contended that when, as in the letter of 9 April 2002, some factual statement has been made, it is in most circumstances at least on the cards that settlement negotiations would be entered into; and that this aided the contention that Mr Kendell could rely on that statement and could expect to be corrected if it were no longer correct.

35 It was contended that, notwithstanding that it had been found that Mr Carnegie did not really turn his mind to the subject, it should have been found that Mr Carnegie should have been aware that Mr Kendell was giving away live claims for something that he believed had some substance to it. It was contended that it would have been apparent to Mr Carnegie, from the terms of the settlement negotiations and from the fact that they were taking place, that Mr Kendell were settling the proceedings on the basis of an assumption that AVE still owned the business. In my opinion this contention had no basis in substance.

36 It was contended that implicit in negotiating for consent to judgment was a representation that AVE was in a position where it could meet that judgment.

37 It was also contended that on a broader basis of good faith, having regard to all the circumstances, the judgment should be set aside. 38 It was not contended that the Trial Judge was in error in his treatment of Taylor v Johnson; the contention was to the effect that other significant subjects which were put before the Trial Judge had not been dealt with. 39 Counsel placed some reliance on a message which Mr Carnegie wrote on 8 July 2002 (Blue 2/593) in which, after discussing a proposed role for AVE as bare trustee in a contemplated partnership (it would seem, the Kudu entity), said "Secondly, I have advised that AVE (old ABN) has a contingent liability arising out of a court case. Its only asset is the KK business. It too is a trustee and whilst I could lead everyone on a merry dance removing it as trustee and vest the asset in a new trustee, I don't intend to". This serves to show clearly that Mr Carnegie knew that the Kwik Kopy franchise was AVE's only asset, but in my opinion it has no other relevance.

40 In the passage which the Trial Judge cited from Taylor v Johnson (at 432) the statement of the High Court majority relates to circumstances in which a contract will be rescinded by an order of the court as an exercise of powers in equity. Their Honours were not stating circumstances in which what purports to be a written contract is void (or voidable) according to the common law; there is no need and no possibility of equitable relief to rescind a contract unless there is first a contract according to the common law. Their Honours' discussion and consideration of case law and other sources at pages 428-432 dealt both with the circumstances in which a purported contract is void at common law for mistake and with the circumstances in which a contract would be relieved against in equity for reasons related to mistake; but when their Honours came to state their conclusion, their proposition relates only to relief in equity. 41 Endeavours both in the judgment under appeal and in the arguments of both parties to relate the facts under consideration to the passage cited from Taylor v Johnson were, it must respectfully be said, not well directed. The proposition stated by the High Court majority was a proposition about a party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term. The proposition does not relate generally to the significance of mistake for either the existence of a contract or for equitable relief against a contract, but is limited to a serious mistake about the contents of the contract in relation to a fundamental term. Mr Kendell does not claim that there was any mistake of that kind; that is, he does not claim and there is no basis for him to claim that he was mistaken as to whether or not a term was or was not part of the contract, or that he was mistaken as to the significance, meaning or effect of any term. In my opinion the passage which the Trial Judge cited from Taylor v Johnson was not directly relevant to the issue for decision under Pt. 31 r.12A; but I do not say that the reasoning in the passage cited was of no assistance in deciding the question whether the consent judgment was given against good faith, raised by the terms of r.12A. 42 No basis has been suggested and in my opinion there is no basis for bringing under consideration whether the consent judgment was given irregularly or illegally. The relevant matter to decide was whether Mr Kendell showed that the judgment was given against good faith. This is not a closely defined test, and is not to be equated with a test whether the Terms of Settlement were void at common law for mistake, or were open to be rescinded in equity for a mistake of the kind described in Taylor v Johnson, or for a mistake of some other kind. Judge Sorby was not asked to grant equitable relief, the limits which circumscribe the power of the District Court to grant equitable relief were not relevant and the considerable doubt which must attend whether or not rescission would be granted (in view of the impact of the liquidation of AVE on the rights of persons other than the present parties) does not affect the decision. 43 In my respectful opinion Judge Sorby misdirected himself by taking the passage cited from Taylor v Johnson as a source, or it may be the source of the test to be applied, his conclusion based on that direction should be set aside and the Court of Appeal should itself set about deciding whether on the material before the District Court and on the findings in that Court it should be concluded that the consent judgment was entered up against good faith. 44 The operation of Pt. 31 r.12A was considered in Coles v Burke (1987) 10 NSWLR 429 in the leading judgment of Kirby P with whom Samuels JA and McHugh JA concurred. See pages 436F-437G. Kirby P said (at 437): The genus which is involved in the phrase "irregularly, illegally or against good faith" appears to me to be misconduct or dishonourable conduct of the person who procured the judgment which it is suggested undermines the authority of that judgment warranting the exceptional course for which r 12A provides. Here, there was no such lack of good faith on the part of the claimants. The signing of the judgment was made in accordance with the authority of the order earlier consented to and after a warning had been given by the letter to which I have referred. It is perhaps undesirable, in the modern practice of the legal profession (where much give and take is required) that judgment should be signed in this way without a final telephone call or other warning. However, the failure to give such a final and further warning could not, on any view, amount to a lack of good faith. Therefore, r 12A, likewise, has no application to these circumstances. 45 I add that r.12A(1) requires "sufficient cause", recognising the need for finality by protecting judgments from being set aside for slight or uncertain causes. 46 Kirby P also showed that the power of the District Court to set aside judgments was exhausted by the explicit provisions of the District Court Act and rules; and, this is not being a default judgment, Pt.31 r.12A was the only source of power available: see 437E-F. 47 The passage in Coles v Burke at 437 was referred to in Roach v B&W Steel Pty Ltd (1991) 23 NSWLR 110 (Kirby P, Clarke and Handley JJA) at 113. The Court said (113-114): In Cash v Wells (1830) 1 B & Ad 375; 109 ER 826, the Court of Kings Bench held that a default judgment signed contrary to the terms of a contract between the parties was "against good faith" and we see no reason why in this day and age the breach of a promissory representation should be treated any differently for this purpose: compare Legione v Hateley (1983) 152 CLR 406 at 421-423.It does not matter that the legal practitioner who acted to obtain the judgment or order was not aware at the time that his or her conduct was contrary to an earlier promise or representation made by or on behalf of the client. It would still be contrary to good faith for a client to attempt to retain the benefit of an order innocently obtained by his legal practitioner if it had been obtained contrary to a promise or representation binding on the client.

Equity granted relief in cases of innocent misrepresentation because it was judged to be unconscionable for the representor to attempt to retain the benefit of a contract obtained however innocently through his misrepresentation once the truth was known. Similarly equity grants relief by way of rescission or rectification in respect of contracts entered into by one party under the influence of a material mistake if the other party "knows or ought to know" of that mistake: see Taylor v Johnson (1983) 151 CLR 422 at 432-433. Equity judged that it was unconscionable for one party to take advantage of an obvious and material mistake of another. This principle was applied by Finlay J in Lewis v Combell Constructions Pty Ltd (1989) 18 NSWLR 528 in setting aside a settlement of litigation. 48 The facts in Roach were in no way similar to the present case, or to the facts in Coles v Burke. Although the Court of Appeal gave extended consideration and based its decision on the judgment under appeal having been obtained against good faith, there was an alternate and altogether clear ground for setting the judgment aside as there clearly was an irregularity. An arrangement had been made between counsel for a Notice of Motion which had been stood over generally to be restored to the list on an agreed date; one party did restore it to the list for that day but did not inform the other party that it had done so. The other party did not appear on the appointed day and the motion was disposed of in its absence. With marked irregularity, proper notice of restoration of the motion to the list had not been given and there was no evidence before the District Court judge that such notice had been given - see p115C-D.

49 Cash v Wells, a decision from 1830, dealt specifically with signing a default judgment "against good faith". References in Roach, including the reference to Taylor v Johnson, which relate to circumstances in which equitable relief is granted on grounds of unconscionability and to constructive knowledge, went beyond the matter under decision in Roach and did not express disapproval of what had earlier been said in Coles v Burke. No disapproval was expressed of Kirby P's reference in Coles v Burke to the need that the person who procured the judgment should have been guilty of some misconduct or dishonourable conduct. 50 The Court of Appeal disposed of Roach v B&W Steel by deciding that judgment was obtained against good faith on imputing the sum of the knowledge of several representatives of the plaintiff to the plaintiff himself; although no one mind had had all that knowledge and in particular the plaintiff had not, and no one had made the interpretation which was available on all the knowledge of the circumstances. Their Honours said (at 114): In our judgment the history of the proceedings referred to by Nield DCJ establishes that the legal advisers of the plaintiff "knew or ought to have known" on 31 October 1988 that the absence of the defendant from the court that day was the result of some mistake and did not reflect a deliberate decision on its party no longer to "hotly contest" the making of an order extending time. Mr Seery who then appeared for the plaintiff had not appeared previously and we accept that he was not then aware of the history of the matter. The plaintiff's solicitor, who was aware of the history, may not have been in court and the decision to proceed without inquiry of the defendant's solicitors was made by a barrister who was not aware of the history. In the result it may be that no one was personally guilty of conduct "against good faith". Nevertheless the rule is satisfied if a party or his legal advisers knew or ought to have known the relevant facts. A client cannot escape responsibility for the acts and omissions of his solicitor and barrister because neither was fully aware of the facts. In accordance with ordinary principles the knowledge of both will be imputed to the client.

There is conflict, at least in appearance, between expressions in Roach v B&W Steel and expressions in Coles v Burke . 51 Shirriff v The Nominal Defendant [1999] NSWCA 152 was an appeal against an order of the District Court which set aside an earlier order granting leave to commence an action against the Nominal Defendant out of time; the decision under appeal was based on Pt.31 r.12A and on a holding to the effect that the order granting leave was made on the basis and on the faith that the evidence was complete and accurate; whereas it was materially incorrect; see Fitzgerald JA at paras [13] and [14]. Fitzgerald JA (with whom Beazley JA agreed) made the following observations which bear on what is to be understood from the decisions in Coles v Burke and in Roach v B&W Steel Pty Ltd. 16 The present case is plainly distinguishable from Roach , 23 NSWLR 110. which in turn distinguished Coles v Burke [1987] 10 NSWLR 429. In Roach , 23 NSWLR 110. an application which had been stood over on the basis that it would be restored to the list on proper notice to the other party's solicitors. One party caused the application to be restored to the list without proper notice being given to the other party's solicitors and, when the other party did not appear, proceeded ex parte and obtained an order. Not surprisingly, it was held by this Court Kirby P, Clarke and Handley JJA. that the ex parte order had been obtained against good faith. In its judgment, the Court said: p 114B. "In our judgment the history of the proceedings ... establishes that the legal advisers of the plaintiff 'knew or ought to have known' ... that the absence of the defendant from the court that day was the result of some mistake and did not reflect a deliberate decision on its party [sic] no longer to 'hotly contest' the making of [the] order .... ... the decision to proceed without inquiry of the defendant's solicitors was made by a barrister who was not aware of the history. In the result it may be that no-one was personally guilty of conduct 'against good faith'. Nevertheless the rule is satisfied if a party or his legal advisers knew or ought to have known of the relevant facts. A client cannot escape responsibility for the acts and omissions of his solicitor and barrister because neither was fully aware of the facts. In accordance with ordinary principles the knowledge of both will be imputed to the client."

17 On the uncontested evidence of the claimant, neither she nor her legal representatives knew or ought to have known that, after she had been struck by an unidentified motor vehicle, she had attended briefly at Sydney Hospital where a blood sample had been taken which, on analysis, disclosed a blood alcohol content of 0.133. Her omission to disclose those matters to the Acting Judge who made the order of 23 February 1997 does not lead to a conclusion that that order was made against good faith.

18 In Roach , 23 NSWLR 110. the Court said: 23 NSWLR 110, 113G. "It does not matter that the legal practitioner who acted to obtain the judgment or order was not aware at the time that his or her conduct was contrary to an earlier promise or representation made by or on behalf of the client. It would still be contrary to good faith for a client to attempt to retain the benefit of an order innocently obtained by his legal practitioner if it had been obtained contrary to a promise or representation binding on the client."

19 The latter statement must, I think, be regarded as an observation made by the Court in the course of proceeding to the real basis for its decision, which is set out in the passage first quoted. I do not consider that the passage last quoted is intended to express a general principle that, whenever it would be contrary to good faith for a party to attempt to retain the benefit of an order, that order must have been made against good faith. For example, a matter arising subsequent to an order, or fresh evidence which could not have been obtained with proper diligence prior to the order, might make it unjust for a party to retain the benefit of the order, but would not mean that the order was "made … against good faith."

20 In any event, I am not persuaded that it is contrary to good faith for the claimant to attempt to retain the benefit of the order made on 27 February 1997 in the circumstances of this case, which need not be fully repeated. It is sufficient to point to the basis upon which the order of 27 February 1997 was made and to mention once again the uncontested evidence of the claimant.

21 Roach 23 NSWLR 110. did not question the correctness of this Court's earlier decision in Coles v Burke [1987] 10 NSWLR 429. Kirby P, with whom McHugh JA and, materially, Samuels JA agreed, expressed the opinion that the phrase "against good faith" was concerned with "misconduct or dishonourable conduct of the person who procured the judgment which it is suggested undermines the authority of that judgment ...". 10 NSWLR 429, 437C. 52 In my respectful opinion Fitzgerald JA's observations show clearly that the reference in Roach to its being contrary to good faith to attempt to retain the benefit of an order if it had been obtained contrary to a promise or representation binding on the client was not the real basis for decision, and was not an exposition of the reference to "against good faith" in r.12A. The reference in Roach v B&W Steel to unconscionability in later relying on a judgment which had been entered up as a result of a mistake is not in my respectful opinion authorised by the terms of r.12A, which relates good faith to the circumstance in which the judgment was given, and does not extend to lack of good faith in reliance on the judgment at some later time. 53 In Smith v Budandan Enterprises [2002] 55 NSWLR 367 at 374 [60] to 375 [67] M.W. Campbell AJA (with whom Mason P. and Beazley JA agreed) considered the effect of Roach v B&W Steel on observations in Coles v Burke and said (at 375[67]: "In my view Roach makes it clear that the ground of irregularity referred to in Pt.31 r.12A can be made out without misconduct or dishonourable conduct being established." In my respectful view this observation should be understood with the benefit of Fitzgerald JA's observations in Shirriff v The Nominal Defendant, to which the Court of Appeal was not referred in Smith v Bundanan Enterprises. The observations of MW Campbell AJA at [63] do not, if correctly understood, give approval to the reference in Roach to retaining the benefit of an order innocently obtained. The force of the words "against good faith" in their context in r.12A was well expressed in Coles v Burke by Kirby P. 54 However that may be, there are no circumstances in the present facts which are in any way similar to the circumstances in which it was found in Roach v B&W Steel that the judgment was obtained against good faith: no summation of knowledge available to the Carnegie group and its representatives can produce a result of the kind reached in Roach v B&W Steel. 55 Counsel referred to authorities relating to misleading and deceptive conduct in the context of s.52 of the Trade Practices Act 1974 (Cth) dealing with a contractual promise as an implied representation that the promisor then had an intention to carry out that promise. These authorities (James v ANZ Banking Group Ltd (1986) 64 ALR 347 at 372, Futuretronics International Pty Ltd v Gadzia [1992] 2 VR 217 at 239) do not address consenting to a judgment as a representation of ability to satisfy it. In the absence of some communication or other circumstances which put a different complexion on the facts, consenting to a judgment does not in my view carry any implication of this kind. It was also contended that the contemplated course of continuing to resist Tackelly's claim in the litigation conveyed some representation about AVE's financial position; in my view there is no reasonable basis for this contention. 56 Counsel's written submissions reviewed many cases in which the concept of good faith in the context of contractual dealings has been considered. 57 In my opinion a decision that the judgment was given against good faith upon the facts of the present case would not be correct; and is not reasonably available. The matters treated as significant in the passage cited from Taylor v Johnson at 432 could not be found against Mr Carnegie and interests associated with him either; it could not be found that Mr Carnegie and those associated with him were aware or that circumstances existed which indicated that Mr Kendell was entering into the contract under some serious mistake or misapprehension, and it could not be found that Mr Carnegie and those associated with him deliberately set out to ensure that Mr Kendell not become aware of the existence of his mistake or misapprehension. There is no reasonable basis for concluding that Mr Carnegie or anyone associated with him knew the significance that Mr Kendell attributes to what was stated in the letter of 9 April 2002; or should have known that matter, in the absence of any reference to it at any stage in the negotiations for settlement. 58 The letter of 9 April 2002 was not and could not reasonably be regarded as part of any negotiation for settlement. Principles under which a party who makes a representation in the course of a negotiation should give information of any change have no application: see With v O'Flanagan [1936] Ch 575 at 583, Jones v Bouffier (1911) 12 CLR 579 at 617, Jones v Dumbrell [1981] VR, 199 at 203 (Smith J), Macquarie Generation v Peabody Resources Ltd [2001] Aust Contract R 90-121, [2000] NSWCA 361 at [6-23] Mason P. See too Spencer Bower, Turner and Handley, Actionable Misrepresentation (4th Ed) at [75] to [77]. 59 The common law test for the influence of mistake on contract formation, referred to in Taylor v Johnson at 429-430 with citations from Solle v Butcher [1950] 1 KB 671 at 691, McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 at 407-408 and Svanosio v McNamara (1956) 96 CLR 186 at 195-196 has no application to the present facts. Echoing Solle v Butcher, to all outward appearances the parties agreed with sufficient certainty in the same terms on the same subject matter. If it should be accepted (which I find difficult) that a belief by Mr Kendell that AVE still owned the business on 27 August 2002 was a mistake in any relevant sense, it was not as a matter of fact a mistake into which he had fallen by any reasonable process. Its connection with the decision to enter into the Terms of Settlement was not supported by any defensible line of reasoning, he did not tell the Carnegie interests of his state of mind, and they could not have known of it in any other way. 60 There is not and could not, I would think, ever be an exhaustive judicial definition of what is against good faith; only very broad limits are set by proceeding by analogy from circumstances in which judicial remedies are based on good faith, unconscionability, or other concepts closely related to good faith. I would include the passage cited from Taylor v Johnson among the many conceivably available sources from which to proceed by analogy. "Against good faith" is an expression which requires the impeachment of the intention or behaviour of the person whose good faith is impugned. 61 The material for consideration is quite limited. The principal matter under consideration is the statement in the letter of 9 April 2002 that AVE still conducted the Kwik Kopy business. If this statement were to be significant, it would have to be, or it would have to be found that Mr Kendell understood it as a continuing statement, still in effect on 27 August 2002, to the effect that AVE was still conducting the business. That is not the meaning of what the letter of 9 April 2002 said, and it could only have some such force if it had been repeated or referred to in some terms which showed that it described the facts as they continued to be, or if some communication from Mr Kendell showed that he understood it that way; and also showed that his understanding was relevant to his decision whether to enter into the Terms of Settlement. There are no circumstances of any kind which, by the test of good faith, could or should have made the Carnegie interests understand that Mr Kendell thought that the statement of 9 April 2002 had continuing effect, or that he understood it to be important for the purpose of settlement negotiations. On its face the statement was not important for the settlement negotiations; the facts that AVE was conducting the Kwik Kopy business and held the franchise convey nothing of substance about whether AVE should enter into an agreement to consent to a judgment or would be in a position to meet that judgment when it was given. A company can continue to conduct a business without having significant financial resources, and can give up conducting a business without injuring its financial position; everything depends on circumstances none of which were told to Mr Kendell, and he made no enquiry about them. There was, for example, no enquiry, even in the most general terms, about AVE's resources or capacity to pay debts, or about the state of its accounts. At the heart of this matter is that, having told Mr Kendell what was stated on 9 April 2002, AVE and the Carnegie interests did not tell him that the business had been sold on 1 August. In the circumstances, I see no element of lack of good faith in this. 62 The other matter put forward was the absence of any statement, in the negotiation on 27 August 2002 or earlier, about AVE's capacity actually to pay any judgment to be entered against it under the Terms of Settlement. Evidence given before Judge Sorby shows that by 27 August 2002, unless Mr Carnegie made funds available to it, AVE had no capacity to pay any significant judgment given against it; and that Mr Carnegie knew this. Mr Carnegie's evidence about the state of his own intentions about furnishing AVE with any credit AVE might need is difficult to understand and internally inconsistent. The proposition that entering into the Terms of Settlement was against good faith depends upon the view that agreement that a company will consent to a judgment conveys the representation that the judgment will be met. Although circumstances may well alter this conclusion, the conclusion which should generally be based on a consent to judgment is, in my opinion, that no representation is conveyed about whether the amount the judgment can be paid, or about what will be the outcome of attempts to enforce it. The context of the Terms of Settlement included that the claim against AVE, like the claim against Mr Kendell, was being resisted, and was being taken to trial in the hopes of success, and the question whether any judgment would be paid may not have been a predominant concern. In any event, in my opinion, there is no indication of lack of good faith in the circumstances. In my view it should be concluded that it has not been shown that the judgment was given against good faith, Mr Kendell's Notice of Motion should have been dismissed (as it was) by Judge Sorby, and the appeal should be dismissed with costs. 63 The first ground of appeal contended that the Trial Judge was in error in his conclusion on r.12A and in particular that he should have determined that the Carnegie interests deliberately ensured that Mr Kendell was not aware of a fundamental mistake which he had made. In my opinion this ground should not be upheld. 64 Ground 2 contends that the Trial Judge was in error in not disposing of the application on the basis that the Carnegie interests were or ought to have been aware that Mr Kendell was mistaken in a fundamental respect, and unconscionably failed to inform Mr Kendell of his mistake. In my opinion this ground should not be upheld. 65 Ground 3 contends to the effect that the Trial Judge erred in law in failing to apply the law of contractual misrepresentation. In my opinion this ground should not be upheld; decision under r.12A did not require the Trial Judge to apply the law of contractual misrepresentation. The law relating to change of circumstances after making a representation in the course of negotiation has no application. 66 Ground 4 relates to an alleged implied representation, made by entering into the Terms of Settlement, that AVE could perform the Terms of Settlement and satisfy the consent judgment. In my opinion this ground should not succeed because there was no such implied representation. 67 Grounds 5 and 6 raised related contentions which I would not uphold and Ground 7 was a general challenge to the decision below. I would not uphold these grounds. 68 The Carnegie interests raised further contentions by way of notice of contention and cross appeal with which it is not necessary to deal. 69 In my opinion the Court of Appeal should order:

The cross-appeal is dismissed: each party is to pay his or its own costs of the cross-appeal.

02/03/2007 - negotations should be negotiations - Paragraph(s) catchwords 05/09/2007 - 'Would' changed to 'put' in the third sentence of paragraph 55. - Paragraph(s) 55

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Trade Practices Act 1974(Cth)

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