LCM Operations Pty Ltd v Rabah Enterprises Pty Ltd

These proceedings

1. These proceedings were commenced on 9 September 2020. The plaintiff sued Rabah for $14.8 million as an outstanding debt said to arise from a contract between 316 Group and Rabah for the provision of construction services in relation to the Burwood development. The contract was said to be implied from the course of conduct carried on between the parties. Rabah was said to have acknowledged that the fee was payable as a debt, in Rabah's 2016 income tax return and BAS for the quarter ending 31 March 2016. Alternatively, the plaintiff sued in quantum meruit for a reasonable fee for the construction services provided to Rabah. By its Commercial List Response, Rabah denied the existence of a contract, the debt and the quantum meruit claim.
2. In February 2021, the plaintiff filed a motion for discovery. On 9 April 2021, orders were made for limited discovery, being documents in respect of any contract between 316 Group and Rabah to provide services in relation to the Burwood development, documents evidencing Rabah's acknowledgement that a fee of $14.8 million was a debt payable to 316 Group and documents referring to the value of the services provided by 316 Group. On 30 April 2021, Rabah provided discovery of 26 documents, none of which related to the matter of interest to the plaintiff. The documents did not include any verified financial records for Rabah.
3. On 24 May 2021, Hammerschlag J noted his preliminary view that the Commercial List Response did not comply with Practice Note SC Eq 3 in that it did not disclose in any meaningful way the issues which the defendant believed were likely to arise but rather stated the general issue. His Honour gave leave to the plaintiff to file an application to strike out the Commercial List Response.
4. In June 2021, the defendant filed an Amended Commercial List Response, which pleaded a more detailed agreement between Nouredeen and Youssef by which Rabah would appoint 316 Group to act as project manager for the Burwood development. In August 2021, the plaintiff filed an Amended Commercial List Statement, effectively re-asserting some of the suggested arrangements between 316 Group and Rabah, as pleaded in the Amended Commercial List Response, by adding those arrangements to the terms of the contract pleaded by the plaintiff.
5. On 21 March 2022, Hammerschlag J made further orders for discovery in respect of Rabah's March 2016 BAS, 2016 tax return and financial statements, and any amended assessments of the BAS or tax return. In addition, Rabah was required to discover documents and correspondence between Rabah and East St Developments, Metro Tipper Hire, Lion Civil Group, Mohamad and Omar in respect of moneys paid to 316 Group and the terms on which the moneys were paid.
6. Rabah provided further discovery of six documents, including Rabah's financial statements and income tax return for the 2016 financial year, together with its BAS for the March 2016 quarter. The further discovery did not include any documents or correspondence with East St Developments, Metro Tipper Hire, Lion Civil Group, Mohamad or Omar concerning monies paid to 316 Group.

DEBT CLAIM

1. The plaintiff's first claim was in debt. The plaintiff contended that 316 Group and Rabah had entered into a contract, which was either implied or could be inferred from their course of conduct. As to the terms of the contract, the plaintiff repeated some of the features of the arrangement as alleged by the defendant. Specifically, 316 Group would be appointed as project manager to provide construction and project management services to Rabah in relation to the Burwood development, including coordinating with the builder, engaging subcontractors and suppliers when necessary, managing Rabah's payments to third parties, managing and coordinating the development and dealing with the builder and third parties. In addition, it was a term of the contract that, on completion of the development, Rabah would pay 316 Group for the construction and project management services a sum equal to the total amount of obligations incurred by 316 Group in providing those services together with interest calculated at 8% per annum.
2. On completion of the development, 316 Group charged a fee of $14.8 million, which Rabah acknowledged as a debt payable in its 2016 tax return and March 2016 BAS. However, Rabah had not paid any part of the fee. The plaintiff advanced a claim in debt for the outstanding sum of $14.8 million due to 316 Group.
3. In closing submissions, the plaintiff also sued by indebitatus assumpsit, being a quasi-contractual claim distinguishable from a common law claim in debt: Young v Queensland Trustees Ltd [1956] HCA 1; (1956) 99 CLR 560 at 567, 569 (per Dixon CJ, McTiernan and Taylor JJ); Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; (1987) 162 CLR 221 at 230 (per Brennan J). Where an action indebitatus assumpsit was not pleaded, it is not necessary to consider that submission further.
4. The plaintiff relied on the March 2016 BAS and unsigned 2016 financial statements for both 316 Group and Rabah, together with Rabah's 2016 income tax return, as evidence of a debt owed by Rabah to 316 Group as prima facie evidence of the transactions recorded, where the presumption under section 1305 of the Corporations Act 2001 (Cth) had not been displaced. These documents were "financial records" within the meaning of section 286 of the Corporations Act and therefore prima facie evidence of the transactions they record: section 1305; Advanced Holdings Pty Limited as Trustee for The Demian Trust v Commissioner of Taxation [2021] FCAFC 135; (2021) 113 ATR 508 at 552 ([169]) (per Logan, McKerracher and Perram JJ); Australian Securities and Investments Commission v Rich [2005] NSWSC 417; (2005) 191 FLR 385 at 455 [311] (per Austin J); Federal Commissioner of Taxation v Cassiniti [2018] FCAF 212; (2018) 266 FCR 385 at 405 [71]-[72] (per Logan J).

Conclusion

1. There is no dispute that there was an agreement between Rabah and 316 Group; the controversy is as to its terms. The plaintiff embraced some of the terms proffered by the defendant, but not others. I conclude that Nouredeen and Youssef initially planned to undertake the Burwood development together, through Rabah. However, Youssef did not come up with his half of the money. When development consent was obtained, Nouredeen replaced Youssef as a director of Rabah. It may well be that Youssef wanted to continue to have a role in the project; whether the brothers discussed this to the level of detail now suggested, including discussing the proposal with Mr Hassan, seems less likely. More likely, any discussion about the arrangement between Rabah and 316 Group took place when 316 Group was incorporated some 18 months later.
2. Once Rabah was in a position for the development consent to become operative, 316 Group was incorporated. The name chosen for the company indicates that it was intended to have a role in relation to the development of the Burwood property, given the correspondence of the name with the property's street address. Whilst Nouredeen and Youssef were both directors and equal shareholders, the company's principal place of business was Youssef's address. I accept that Youssef ran the company. It is likely that Nouredeen knew that he was a director and shareholder in 316 Group: see [32].
3. I accept that Youssef used his work on the Burwood project as his practical training, when obtaining a building licence. But I do not think this was the reason that 316 Group was incorporated, where the necessary practical experience was gained by Youssef working for Mr Zeitoun: see [92]. Nor do I accept that 316 Group was established so that Youssef could "run money through [the] company [to] look financially stable" and thereby obtain finance or win work for his future career as a builder. The suggestion that 316 Group was a mere contrivance to give Youssef credibility in his future business endeavours seems like a lot of trouble to go to. Nor was it clear how 316 Group's payment of invoices would achieve the objective of "getting the company's name out to the industry". A more likely and straightforward explanation is that 316 Group was incorporated for the purpose suggested by the very name of the company, that is, to provide services in respect of the Burwood development, and so I find.

SET-OFF

1. By the Amended Commercial List Response, the defendant contended that, if it was found to owe an amount to 316 Group, it claimed a set off "pursuant to the Agreement." The defendant submitted that any set-off would be for the full extent of the loans made by Rabah. Evidence that the loans to 316 Group were understated was said to be compelling. Where there could be no dispute that Rabah funded all of 316 Group's costs of the development, there was said to be no basis to find that the understated loan balances were accurate.
2. The plaintiff conceded that Rabah made loans to 316 Group in order to pay developers, but the quantum of the loans, and the nature of any loan agreement, was in dispute. In the alternative, the plaintiff submitted that the amount of any loan from Rabah to 316 Group was likely recorded in Rabah's 2016 financial statements as a non-current asset described as "Other assets" of $8,732,500. A comparable amount was recorded in 316 Group's 2016 financial statement as a non-current liability described as "Financial liabilities" of $8,829,560.25.
3. The plaintiff submitted that any set-off must arise under s 553C of the Corporations Act. Subsection 553C(2) was said to disentitle Rabah from claiming a set-off as, at the time of providing the loan to 316 Group under the terms of suggested agreement, Rabah had notice of the fact 316 Group was insolvent. 316 Group had no income except for the money lent to it by Rabah. 316 Group was obliged to pay 8% interest on all amounts paid to it by Rabah. Further, by receiving funds from Rabah to pay suppliers and contractors, 316 Group incurred GST and income tax debts. Nouredeen was aware of each of these matters, which had the consequence that 316 Group was insolvent from inception. Were the Court to form the view that set-off was not available under section 533C, then Rabah would be entitled to lodge a Proof of Debt in the liquidation of 316 Group and rank pari passu with the ATO in respect of recovering any amounts owed to it by 316 Group.
4. Further, the plaintiff submitted that a set-off under section 553C required mutuality, that is, that the credits, debts, or claims be between the same persons: Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609 at 623. Some of the loans were by third parties. Rabah has failed to prove that these loans were made on behalf of Rabah. Rabah's evidence rose no higher than Nouredeen's assertions that he arranged for funds to be transferred to 316 Group, with some ad hoc documents in respect of the $1 million from Omar. Rabah had not explained what the $1 million represented, that is, whether it a loan from Omar to Rabah or Rabah's income. If these amounts were in the nature of income payable to Rabah, then this would be income derived by Rabah for taxation purposes when it is dealt with in any way on its behalf or as it directs: Income Tax Assessment Act 1997 (Cth), section 6-5(4). Rabah must explain whether it has returned as income any of the amounts allegedly transferred at its direction.

Conclusion

1. I take the pleading - set off "pursuant to the Agreement" - to mean that Rabah relies on a contractual right of set-off sourced in its agreement with 316 Group. The common law recognises a contractual right of set-off where the parties have agreed that, in certain circumstances, money owing to each of them may be automatically, or at a party's election, set-off: National Australia Bank Ltd v Idoport Pty Ltd [2007] NSWSC 1349 at [45] (per Young CJ in Eq). Contractual set-off "does the arithmetic in the sense of combining credits and debits between the parties. In the result, the liability of a party is restricted to the resulting balance": Commercial Factors Ltd v Maxwell Printing Ltd [1994] 1 NZLR 724 at 737 (per Hammond J).
2. Contractual rights of set-off are commonly found in bankers' agreements with customers relating to multiple accounts and commercial contracts including, effectively, clearing house arrangements: Commercial Factors v Maxwell Printing at 373. There were few reported cases of contractual set-off: see, for example, Opal Maritime Agencies Pty Ltd v The Proceeds of Sale of the Vessel MV "Skulptor Konenkov" (2000) 98 FCR 519; [2000] FCA 507 at [161]; British Eagle International Airlines Ltd v Compagnie Nationale Air France (1975) 1 WLR 758 and Commercial Factors v Maxwell Printing.
3. Whether there is a contractual right of set-off depends "solely upon the construction of the contract that the parties have made": National Australia Bank v Idoport at [47]. In the absence of an express term dealing with set-off, contractual right of set-off may also arise from custom or be inferred from conduct: Southern Textile Converters Pty Ltd v Stehar Knitting Mills Pty Ltd [1979] 1 NSWLR 692, 698 (per Sheppard J); Commercial Factors v Maxwell Printing at 739 (per Hammond J); S.R Derham The Law of Set-Off (4th edition, 2010) at 16.02.
4. Here, the alleged agreement was oral. After speaking with Mr Hassan about the proposed arrangement between Rabah and 316 Group, Nouredeen said to Youssef, "Rabah can lend the money to your company to pay for the construction. Then at the end you can issue an invoice to cancel out the loan."
5. Again, post-contractual conduct assists in determining whether this was a term of the contract, or to infer a contractual right of set-off from conduct. In May 2016, 316 Group charged a fee without any deduction for the amounts recorded in its "Loans" account. Rabah recognised the fee in full and without deduction of any set-off, when filing its BAS three months' later in August 2016. Rabah made no complaint that 316 Group's fee was incorrectly calculated or failed to take into account a set-off for Rabah's loans. Almost a year later, in June 2017, Rabah lodged its 2016 tax return which claimed, as a deduction, 316 Group's fee in full. No steps have been taken by Rabah in the subsequent six years to amend either the BAS or income tax return to correctly record 316 Group's fee after set-off of Rabah's loans.

JOINT VENTURE

1. It is not strictly necessary to determine this claim, which was put by the plaintiff in the alternative. In the event I am wrong as to the debt claim, I will consider this claim and briefly. In the Amended Commercial List Statement, the plaintiff noted Rabah's alleged agreement between Nouredeen and Youssef. The plaintiff contended that the proper characterisation of the arrangement between the brothers was that an original incorporated joint venture via Rabah was modified such that there was an unincorporated joint venture between Rabah and 316 Group, with each brother controlling one company. As such, 316 Group and Rabah were each entitled to half of the net proceeds of the development. The plaintiff sought, in the alternative, a half share in the net proceeds of the development.
2. The plaintiff submitted that, while there was no written joint venture agreement, Nouredeen and Youssef contracted to the joint venture on terms of the agreement for which Rabah contended. However, there was no loan from Rabah to 316 Group and no intention for 316 Group to repay money "loaned" to it. The joint venture was structured this way to justify non-payment of the invoice at the conclusion of the development. Otherwise, 316 Group would have performed work, and incurred liabilities, for no commercial benefit.
3. The defendant submitted that there was no evidence of a joint venture, where Rabah owned the property, engaged the builder and provided all of the funding for the development. It was said to be inconceivable that Rabah would agree to give up half of the profits of the development in these circumstances, given that Youssef only attended the site for 12 hours per week and his role was to pay bills: see [204].

Conclusion

1. As to whether there was a joint venture, in United Dominions Corp Limited v Brian Pty Limited [1985] HCA 49; (1985) 157 CLR 1, Mason, Brennan and Deane JJ considered the nature of a joint venture at 10: The term "joint venture" … connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. … The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership: such as a company, a trust, an agency or joint ownership. The borderline between what can properly be described as a "joint venture" and what should more properly be seen as no more than a simple contractual relationship may, on occasion, be blurred.
2. More recently in Gibson Motorsport Merchandise Pty Limited v Forbes [2005] FCA 749, Crennan J noted that the recognisable and common characteristics of joint ventures include, at [80]: 1. Participants hold proprietary interests in the assets of the joint undertaking, often, but not necessarily, as tenants-in-common … 2. Participants exercise joint control of the undertaking. 3. Participants contribute to the joint undertaking, not necessarily equally; such contributions may be disparate: Canny Gabriel Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 at 327; Television Broadcasters Limited v Ashton's Nominees Pty Ltd (No.1) (1979) 22 SASR 552. 4. Participants in the joint undertaking enjoy rights and assume obligations, which are often several, and calculated by reference to ownership of shares and/or contributions made. 5. Participants have a joint (or community of) interest in the performance of the undertaking's purpose: Cummings v Lewis (1993) 41 FCR 559 at 314/315 (per Cooper J). 6. Participants associate in the undertaking for mutual commercial gain which can be mutual profits.
3. Her Honour noted that these characteristics could be "found in various permutations and constellations such that it is not appropriate to attempt to isolate which characteristics would be both necessary and sufficient for the constitution of a joint venture agreement" and it was always a question of fact whether any particular undertaking constituted a joint undertaking for mutual commercial gain: at [81].

QUANTUM MERUIT

1. It is also not strictly necessary to consider this claim, which the plaintiff brought in the alternative. I will do so briefly. Mr Bell was asked to opine on the amount of reasonable remuneration that would be payable to 316 Group, on the assumption that it was appointed by Rabah to provide project management services for the development of the Burwood property. In arriving at his opinion, Mr Bell relied on the contemporaneous documents which the plaintiff had managed to obtain with respect to the development of the property. Mr Bell then had 61 documents to hand, most of which did not specifically relate to project management services. Based on his experience, Mr Bell expected that a number of other documents would exist. Mr Bell focussed on the builder's tender submission, the building contract, 316 Group's bank statements and the progress drawdown reports. In particular, Schedule 2 to the building contract included labour rates, including $85 an hour plus GST for Director/Principal.
2. Mr Bell entered the transactions from 316 Group's bank statements into an Excel spreadsheet and sorted the payments that were identifiable as related to trade packages. He compared these payments to the budget included in the progress drawdown reports to check that the payments corresponded with the contract sum. Having established that the payments were referable to the Burwood project, Mr Bell recorded the days shown in the bank statements where it was shown that 316 Group was engaged in project management services. He then extrapolated the results for the period not covered by the bank statements, where progress was documented in the progress drawdown reports. Mr Bell then applied a rate that was appropriate to the periods where he assumed project management services were provided. Where the construction certificate was issued on 22 May 2014, Mr Bell expected that project management services were required on a fulltime basis from then onwards, until the period covered by the bank statements. In total, 93 weeks of project management services were required.
3. In Mr Bell's experience, project management of construction works involves long hours, typically in the order of 56 hours a week, being 5,208 hours for the project in total. Whilst the hourly rate for project management services can vary significantly depending on the nature of the project and the qualifications, skills and experience of the individuals involved, Mr Bell considered that the level of skill and experience necessary to perform these tasks would be similar to those of the builder engaged in the works. Where the builder charged $85 an hour plus GST for Director / Principal, in his opinion, this was a reasonable rate for project management services. At this rate, a reasonable fee for 316 Group was $442,680. Mr Bell accepted that the fact that Youssef was in the process of obtaining his building licence at the time may be relevant to his skill level, it was more about licencing and compliance and "doesn't really tell me what his skill level is … only that he was seeking licencing as a builder." Mr Bell did not attach any particular significance to this fact when carrying out his task.

Conclusion

1. It is only necessary to consider this claim in the event that there was no agreement between Rabah and 316 Group to pay 316 Group for its project management services. If my findings in respect of the agreement are wrong, "It is the very fact that there is no genuine agreement … that provides the occasion for (and part of the circumstances giving rise to) the imposition by the law of the obligation to make restitution": Equuscorp Pty Ltd v Haxton [2012] HCA 7; (2012) 246 CLR 498 at 529 (per French CJ, Crennan and Kiefel JJ); Pavey & Matthews Pty Ltd v Paul at 227 (per Mason and Wilson JJ).
2. In order to establish a quantum meruit claim, it is necessary to prove that the defendant has received or retained a benefit, the benefit was obtained at the plaintiff's expense; and, there is an element of recognised injustice that demonstrates that it would be unjust for the respondent to fail to make restitution: Hegarty v Keogh (No 2) [2023] SASCA 30 at [183] (per Livesey P, Doyle and Bleby JJA). Whether the failure to make restitution would be unjust is not determined by a subjective evaluation of what is unfair or unconscionable; there must be some qualifying or vitiating factor falling into some particular category which renders the retention of the benefit unjust: Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [150] (per Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ). The 'free acceptance' of a benefit from a service provider, where the recipient has made an express or implied request for that benefit and the service provider would expect to be paid, is one such category: see Lampson (Australia) Pty Ltd v Fortescue Metals Group Ltd (No 3) [2014] WASC 162 at [56]-[90] (per Edelman J) (noting that there remains some debate as to whether 'free acceptance' is an unjust factor where no request has been made: N C Seddon and R A Bigwood, Law of Contract (11th edition) at [26.8]).
3. In determining whether the service provider expected to be paid, the Court is not concerned with actual state of mind of the parties but whether the recipient, as a reasonable person, should have realised that a person in the service provider's position would expect to be paid: Vasco Investment Managers Ltde v Morgan Stanley Australia Ltd [2014] VSC 455 at [347] (per Vickery J); Hegarty v Keogh (No 2) at [198]; Angelopoulos v Sabatino (1995) 65 SASR 1, 12-13 (per Doyle CJ). Further, the unenforceable contract may be relied on as evidence demonstrating whether what was done was done gratuitously: Hegarty v Keogh (No 2) at [186].

ORDERS

1. For these reasons, I make the following orders: 1. Judgment in the sum of $14,800,000, together with interest calculated in accordance with section 100 of the Civil Procedure Act 2005 (NSW). 2. Otherwise dismiss the Amended Summons. 3. Defendant to pay the plaintiff's costs of the proceedings. 4. Direct the plaintiff to provide a calculation of the interest referred to in Order 1 within seven days, preferably agreed with the defendant, so that the amount of the judgment may be varied accordingly. 5. Direct the parties to notify any errors or omissions within seven days.

Amendments 13 June 2023 - [113] - "Family Court" amended to "Federal Court" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 June 2023