Nadinic v Drinkwater

Solicitors: Summer Lawyers Pty Ltd (Appellant) Hewitts Commercial Lawyers (Respondent) File Number(s): 2016/00381846 Decision under appeal Court or tribunal: Supreme Court Jurisdiction: Equity Division Citation: [2016] NSWSC 1364; [2016] NSWSC 1733 Date of Decision: 30 September 2016 Before: Pembroke J File Number(s): 2016/242022

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Headnote [This headnote is not to be read as part of the judgment] Ms Drinkwater and Mr Nadinic were the co-directors and co-shareholders of Brooks Parade Pty Ltd, which contracted with a builder to develop land in Belmont, NSW. Mr Nadinic was the sole director of the builder engaged to carry out the construction works. Ms Drinkwater and Mr Nadinic fell out, and on 24 November 2015 they executed a Deed of Settlement. Brooks Parade and the builder were also parties to the Deed of Settlement. Relevantly, by the Deed of Settlement, Ms Drinkwater agreed to buy out the interests of Mr Nadinic, including his one share in Brooks Parade, for $2,050,000; Ms Drinkwater granted a registered second mortgage over the land in favour of Mr Nadinic as mortgagee to secure her obligation to pay the $2,050,000; and Mr Nadinic agreed to resign as a director of Brooks Parade. The Deed of Settlement also contained various releases as between the parties. Ms Drinkwater did not make the payment of $2,050,000 by the date required. In July 2016, Mr Nadinic took steps to enforce the mortgage. In August 2016, Ms Drinkwater commenced proceedings seeking interlocutory orders restraining Mr Nadinic from enforcing the mortgage, and seeking final relief setting aside or varying the Deed of Settlement and the mortgage. The trial was expedited, and proceeded without pleadings. The primary judge found in favour of Ms Drinkwater. His Honour found that Mr Nadinic had participated in a dishonest scheme to manipulate the GST system. This scheme was said to involve the builder rendering inflated invoices to Brooks Parade, and Brooks Parade paying GST input tax credit refunds to a third party. His Honour found that Mr Nadinic had deliberately concealed this scheme from Ms Drinkwater, and had she known of the dishonest scheme, she would not have entered into the Deed of Settlement. His Honour made orders setting aside the mortgage and setting aside most of the Deed of Settlement insofar as it operated between Ms Drinkwater and Mr Nadinic. Mr Nadinic appealed against the orders of the primary judge. He raised 5 issues in relation to the decision of the primary judge: 1. Fraud was not pleaded, nor opened upon, nor something with which Mr Nadinic had been squarely confronted in cross-examination; 2. The inference that invoices had been fraudulently inflated should not have been drawn; 3. The relevant GST payments had in fact been disclosed to Ms Drinkwater and her former solicitors in negotiations in the months leading up to the Deed of Settlement; 4. The primary judge had ordered partial rescission of a Deed without joining all of the persons who were parties to it, and without hearing from those who were adversely affected; and 5. Even if there had been any fraud, it had not been brought home to Mr Nadinic, who was exercising rights under a registered mortgage. Held, allowing the appeal, and ordering a retrial: In relation to (i) 1. Per curiam: an allegation of fraud (in the strong sense of deliberate falsehood or reckless indifference to the truth) is required to be pleaded specifically and particularised: at [1], [45], [152]-[156]. Lazarus Estates Ltd v Beasley [1956] 1 QB 702; Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486; [2012] HCA 39; applied 1. The seriousness of a finding of fraud does not permit of other than a specific finding that the fraud has in fact occurred: at [1], [49], [155]. Sgro v Australian Associated Motor Insurers Ltd (2015) 91 NSWLR 325; [2015] NSWCA 262, applied 1. Absent an adequately pleaded allegation of fraud, a judge cannot make findings of fraud consistent with, but going beyond, a pleaded case of misleading and deceptive conduct or innocent or negligent misrepresentation, and which has not been put to the party: at [1], [105]-[117], [155]. Banque Commerciale SA en liquidation v Akhil Holdings Ltd (1990) 169 CLR 279; Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11; Bale v Mills (2011) 81 NSWLR 498; [2011] NSWCA 226; State of New South Wales v Hunt (2014) 86 NSWLR 226; [2014] NSWCA 47, applied In relation to the remaining issues: 1. By Leeming JA, Beazley P agreeing: the reasoning of the primary judge was insufficient to ground a finding of fraudulently inflated tax invoices: at [1], [119]-[122]. 2. Throughout the protracted negotiations leading up to the execution of the Deed of Settlement, Ms Drinkwater had the benefit of professional assistance. It is unlikely that her solicitor and accountants could have been unaware of Brooks Parade's entitlement to substantial refunds of GST input tax credits from the ATO: at [1], [123]-[126]. 3. Rescission in equity is discretionary, and may be declined if an equitable defence is established. This is true even in the case of fraudulent misrepresentation or fraudulent non-disclosure: at [1], [32]-[33]. Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218; Civil Service Co-operative Society of Victoria Ltd v Blyth (1914) 17 CLR 601; Henjo Investments Pty Limited v Collins Marrickville Pty Ltd (1988) 39 FCR 546; Spence v Crawford [1939] 3 All ER 271; Alati v Kruger (1955) 94 CLR 216, applied 1. In cases of fraud in the sense of dishonesty or reckless indifference to the truth, equity is more open to making orders effecting restitutio in integrum so as to enable rescission: at [1], [34]. Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102; Spence v Crawford [1939] 3 All ER 271, applied 1. The aphorism "fraud unravels everything" is not universally true and it is dangerous to apply it literally. There is no broad discretion in equity to rewrite a contract, even if it has been entered into as a result of fraudulent misrepresentation, by reference to what seems just. Instead, the question is whether, by the orders available to a court of equity, "practical justice" can be achieved so as to authorise the rescission of the contract and restore the parties to the position they previously enjoyed: at [1], [37]-[44], [137]-[142]. SZFDE v Minister for Immigration and Citizenship (2007) 232 CLR 189; [2007] HCA 35, applied Henjo Investments Pty Limited v Collins Marrickville Pty Ltd (1988) 39 FCR 546; Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; 44 ACSR 21, considered

Judgment

1. BEAZLEY P: I have had the opportunity to read in draft the reasons of Leeming JA with which I agree. I also agree with the additional observations of Sackville AJA. As is apparent from Leeming JA's analysis, the very serious findings the primary judge, Pembroke J, made in relation to fraud were not open as a matter of principle, nor were they supported by the evidence analysed by his Honour. Nor was the relief granted by his Honour appropriate or available. The hearing therefore clearly miscarried and there must be a retrial. As Leeming JA points out, the issues that might be raised and the evidence adduced at any rehearing, should there be one, is a matter for the parties.
2. I also join with the comments by each of their Honours as to the desirability of the parties engaging in mediation in an attempt to resolve the issues between them before the costs of a retrial are incurred. It follows that I agree with the orders proposed by Leeming JA.
3. LEEMING JA: Ms Cheryl Drinkwater and Mr Andrew Nadinic were the natural persons involved in a property development. Broadly speaking, Ms Drinkwater (as trustee of a testamentary trust) supplied the land and Mr Nadinic (through a company of which he was the sole director) supplied construction services. They became directors and equal shareholders in the company undertaking the development. The pair fell out. Ms Drinkwater agreed to buy out the interests of Mr Nadinic, including his one half share in the development company, for a deferred consideration of $2,050,000, payable no later than 30 June 2016. That agreement was contained in a Deed of Settlement between them and the two companies. Ms Drinkwater also granted a registered second mortgage over the land in favour of Mr Nadinic as mortgagee, securing her obligation to pay the $2,050,000.
4. Ms Drinkwater failed to make payment, and commenced proceedings when Mr Nadinic took steps to enforce the mortgage. The primary judge set aside the mortgage, and part of the Deed of Settlement, on the basis that Ms Drinkwater was unaware of what his Honour described as bearing "the hallmark of naked dishonesty": Drinkwater v Nadinic [2016] NSWSC 1364 at [23]. His Honour said that Ms Drinkwater "did not expect perfidy and crookedness" and that, had she known the true position, "[t]he stench of dishonesty would have corroded the plaintiff's trust in the defendant": at [30]-[31]. The dishonesty found by his Honour was the rendering of inflated invoices by the builder to the developer of land, something for which "[t]here was no conceivable justification", and which in turn gave rise to an apparent right in the developer to receive payments of input tax credits from the Australian Taxation Office which were remitted to a different company with a similar name: at [20]-[23]. Following a further hearing, the primary judge gave a second judgment on remedy, in which he said that "[t]he plaintiff's decision to enter into the deed of settlement, and agree to the payment of this sum, was induced by the defendant's deliberate concealment of the dishonest scheme by which the sum of $923,589 in GST refunds was transferred to Maxstra Constructions [the company with a similar name]": Drinkwater v Nadinic [2016] NSWSC 1733 at [16].
5. Mr Nadinic, who had been the sole defendant at first instance, identified five basic difficulties with the judgments of the primary judge. One was that fraud was not pleaded, nor opened upon, nor something with which he had been squarely confronted in cross-examination. The second was that the inference that the invoices had been inflated should not have been drawn, even if it had been an issue in the litigation, because there was indeed a justification for them. The third was that the GST payments had in fact been disclosed to Ms Drinkwater and her former solicitors in negotiations in the months leading up to the Deed. The fourth was that the judge had ordered partial rescission of a Deed without joining all of the persons who were parties to it, and without hearing from those who were adversely affected. The fifth was that even if there had been any fraud, it had not been brought home to Mr Nadinic, who was exercising rights under a registered mortgage.
6. For the reasons which follow, the appeal must be allowed, because findings of fraud were not available. The consequence is that there must be a retrial.

Parties and factual background: the period prior to June 2016

1. Ms Cheryl Drinkwater, in her capacity as the trustee of a trust established under her father's will known as The Cheryl Drinkwater Trust, at relevant times owned land in Belmont south of Newcastle. She entered into a Joint Venture Agreement with Brooks Parade Pty Ltd (Brooks Parade) in 2011. From around July 2013 until the Deed of Settlement, Brooks Parade was a company with two shares and two directors. Ms Drinkwater was one of the directors and members, and the defendant, Mr Andrew Nadinic, was the other director and member.
2. The Joint Venture Agreement described Ms Drinkwater as the Owner and Brooks Parade as the Developer. Its details may be passed over. Its essence was that Ms Drinkwater would contribute the land, and the Developer would contribute "certain building works, funds and its expertise" with a view to the land eventually being sold and the net proceeds being distributed in accordance with its terms (broadly, repayment of the construction loan, then payment of fixed amounts to the parties, then to reimburse certain Project Costs, and then with the balance to the Developer).
3. In May 2013, Brooks Parade entered into a Building Contract with Maxstra NSW Pty Ltd (Maxstra NSW). The contract sum was $6,398,542. The contract was handwritten on a standard form. Perhaps because the printed form had been drafted prior to the introduction of the GST, the contract did not specify whether that amount was inclusive or exclusive of GST. Maxstra NSW was a company of which, at the time, Mr Nadinic was the sole director.
4. In April 2014, Australia and New Zealand Banking Group Ltd (ANZ) made an offer of construction finance which was accepted by Brooks Parade. The facility limit was $6,350,000, which comprised three components: $5,420,000 for construction funding, $639,561 for project contingencies and $290,439 for interest.
5. From June 2014, funds were drawn down upon the ANZ facility. The drawdown notices included large amounts to be deposited directly into Maxstra NSW's bank account (for example, and without being exhaustive, $373,067 on 7 August 2014, $484,910 on 8 September 2014, $324,593 on 30 September 2014, $444,284 on 31 October 2014, $327,303 on 1 December 2014, $435,762 on 19 December 2014, $355,189 on 30 January 2015 and $309,940 on 4 March 2015). Each notice made it clear that funds borrowed by Brooks Parade were being transferred to Maxstra NSW. Each of those notices was signed by both Mr Nadinic and Ms Drinkwater.
6. In March 2015, Mr Nadinic ceased being a director of Maxstra NSW and his father, Mr Frank Nadinic, became the sole director. The company changed its name, in May 2015, to Commercial Builders NSW Pty Ltd, but it will be convenient to refer to the company by its original name, Maxstra NSW, throughout these reasons.
7. In the second half of 2015 there were negotiations between the parties which led to the execution of the Deed of Settlement on 24 November. The parties to that deed were Ms Drinkwater personally and in her capacity as trustee, Brooks Parade, Mr Andrew Nadinic and Maxstra NSW. The Deed recited that Maxstra NSW alleged that it had claims against Brooks Parade, that Brooks Parade alleged that it had claims against Maxstra NSW, that the two companies had agreed to terminate the Building Contract and that "[v]arious disputes have arisen between the parties". The substantive provisions included Maxstra NSW withdrawing progress claim 21, promising that it would make no further claims on Brooks Parade under the Building Contract and granting a release of such claims (cl 1(d) and (e)). Maxstra NSW also assigned all its right, title and interest in any "Claims" it had or might have against Brooks Parade to Ms Drinkwater (cl 2(a)). (It is a little difficult to reconcile the assignment in cl 2(a) with the release in cl 1(d) and (e), although "Claims" is more broadly defined; nothing turns on this.)
8. Mr Nadinic promised to resign as a director of Brooks Parade and transfer his share to Ms Drinkwater upon Ms Drinkwater granting him a second mortgage over the land for the sum of $2,050,000, procuring a priority agreement with ANZ and registering the second mortgage. Clause 9 provided that if Ms Drinkwater, either personally or as trustee, failed to do what was necessary to register the second mortgage, then each agreed to indemnify Mr Nadinic for the sum of $2,050,000.
9. The second mortgage, which was attached to the deed and was in registrable form, required payment of the amount of $2,050,000 no later than 30 June 2016. On 10 December 2015, the solicitors acting for Ms Drinkwater (who had lodged a caveat) confirmed that they permitted its registration. The mortgage was registered at some stage thereafter.
10. In late 2015, Maxstra NSW ran into difficulties. A search records that one application to wind it up was dismissed on 2 November 2015, but that a winding up order was made on around 10 February 2016 on the application of P J S Plumbing Pty Ltd, a company with an address in Broadmeadow (which is near Newcastle). A liquidator was appointed. Mr Frank Nadinic appears to have resigned as a director on 26 November 2015, and was replaced by a director who resided in Victoria.
11. A strata plan was registered on 13 July 2016. Searches of the individual lots thereby created disclose each being subject to that (same) registered mortgage, although it could no longer extend over the common property created upon registration of the plan: Strata Schemes Development Act 2015 (NSW), s 24(2)(b). Presumably, the registration of the mortgages over the newly created lots occurred with the agreement of ANZ. In what follows, it will be convenient to refer to the single mortgage originally created after execution of the Deed of Settlement.

Procedural background to the litigation: July - September 2016

1. No payment as required by the Deed of Settlement was made by 30 June 2016. A notice under s 57(2)(b) of the Real Property Act 1900 (NSW) dated 3 July 2016 was served on Ms Drinkwater, who commenced proceedings by summons filed 11 August 2016 seeking interlocutory orders restraining Mr Nadinic from relying on that notice. The summons also sought directions "to enable the Plaintiff and the Defendant to file and serve pleadings in respect of" the final relief sought. The final relief sought included (a) six declarations to the effect that the s 57 notice was invalid or could not be relied upon for various reasons, (b) orders pursuant to s 243 of the Australian Consumer Law or in equity setting aside or varying the Deed of Settlement and the Mortgage "on grounds that the Defendant induced the Plaintiff to enter into the Deed of Settlement and the Mortgage by engaging in misleading, deceptive and/or unconscionable conduct", alternatively (c) damages "pursuant to section 236 of The Australian Consumer Law, and/or in equity or the general law" and (d) all necessary inquiries be held and accounts taken to determine whether amounts were owing under the mortgage.
2. Ms Drinkwater sought and obtained orders for short service. On the return date, directions were made for an exchange of affidavits to prepare for a contested application for an interlocutory injunction on 24 August 2016, with an undertaking from Mr Nadinic in the meantime. On that date, the primary judge, sitting as Duty Judge, set down the matter for final hearing before himself on 20 September 2016, with a consensual extension of an interlocutory regime. Orders 3 and 4 made on that day directed the service of a statement of issues by 2 September 2016, with any response to be served by 9 September 2016.
3. Thus it was that the matter came to be listed for final hearing without being pleaded.

Fraud

1. The first complaint made by Mr Nadinic will make it necessary to set out in some detail the course of the trial and what preceded it. Before doing so, and in light of the issues arising on appeal, it is convenient to restate some basal matters concerning the meaning of "fraud" at law and in equity, the ways in which fraud permits the rescission of contracts at law and in equity, the occasions when rescission is not available and the procedural consequences of alleging and finding fraud.

Fraud at common law and in equity

1. First, as Gleeson CJ said in Magill v Magill (2006) 226 CLR 551; [2006] HCA 51 at [17], "the concept of 'fraud' is wider in some legal contexts than in others". For present purposes, it will suffice to distinguish the two senses in which "fraud" is used in civil litigation which correspond to different meanings at law and in equity. The difference turns on the state of mind of the person said to have committed fraud. At common law, "fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false": Derry v Peek (1889) 14 App Cas 337 at 374. The contrast with equity was explained by Viscount Haldane LC in Nocton v Lord Ashburton [1914] AC 932 at 953-954: "[i]n Chancery the term 'fraud' thus came to be used to describe what fell short of deceit, but imported breach of a duty to which equity had attached its sanction". His Lordship emphasised that a person who misconceived the extent of the obligation which a court of equity imposed upon him or her, "however innocently because of his ignorance", was taken to have violated an obligation which he was taken by the Court to have known, and with the result that the conduct was labelled fraudulent. He said of fraud in this sense at 954 that: "What it really means in this connection is, not moral fraud in the ordinary sense, but breach of the sort of obligation which is enforced by a Court that from the beginning regarded itself as a Court of conscience". The distinction must be taken to be settled law. For example, a unanimous High Court said (albeit in a statutory context) that establishing equitable fraud "does not require that an actual intention to cheat must always be proved": Polyaire Pty Ltd v K-Aire Pty Ltd (2005) 221 CLR 287; [2005] HCA 32 at [35].

Rescission for fraud at common law and in equity

1. Secondly, save in the special case of insurance (and even then subject to statute), it must now be taken to be settled that a contract may only be rescinded at law for fraudulent misrepresentation, while in equity, rescission is available for innocent misrepresentation. English authorities spoke with divergent voices in the second half of the nineteenth century, as explained in Professor Lobban's article "Nineteenth century frauds in company formation: Derry v Peek in context" (1996) 112 Law Quarterly Review 287. Once again Nocton v Lord Ashburton settled the position. Viscount Haldane distinguished cases of fraudulent misrepresentation from cases where equity would intervene for innocent misrepresentation, explaining that in the latter, at least where the contract had not been fully performed, the contract could be rescinded, on condition that the plaintiff was willing and able to make restitutio in integrum, "however free the defendant might have been from any intention to deceive".
2. Thus, rescission in equity for innocent misrepresentation does not involve a finding of fraud in the "ordinary sense". The reason that was so, and the principle upon which equity acted, was stated by Sir George Jessel MR in Redgrave v Hurd (1881) 20 Ch D 1 at 12-13: "According to the decisions of Courts of Equity it was not necessary, in order to set aside a contract obtained by material false representation, to prove that the party who obtained it knew at the time when the representation was made that it was false. It was put in two ways, either of which was sufficient. One way of putting the case was, 'A man is not to be allowed to get a benefit from a statement which he now admits to be false. He is not to be allowed to say, for the purpose of civil jurisdiction, that when he made it he did not know it to be false; he ought to have found that out before he made it.' The other way of putting it was this: 'Even assuming that moral fraud must be shewn in order to set aside a contract, you have it where a man, having obtained a beneficial contract by a statement which he now knows to be false, insists upon keeping that contract. To do so is a moral delinquency: no man ought to seek to take advantage of his own false statements.'"
3. The latter way in which equity regarded it to be a "moral delinquency", in insisting on a contract obtained by a representation now known to be false, was endorsed by the joint judgment of the High Court in Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315; [2003] HCA 57 at [25].
4. Thus, in cases where there was deliberate falsehood, rescission would be available both at common law and in equity. I pass over the ways in which the remedies interacted in such cases of concurrent jurisdiction (see for example Hoare v Bremridge (1872) LR 8 Ch App 22 at 26-27), because the rescission sought by Ms Drinkwater, which involved the revesting of one of the two shares in Brooks Parade, could not occur at law (see [28] and [31] below.)
5. Essential to rescission both at law and in equity was the idea, expressed in the language of restitutio in integrum, of restoring the parties to the position they were in prior to the entry into the rescinded contract. Thus the validity of a purchaser's rescission for fraudulent misrepresentation in Alati v Kruger (1955) 94 CLR 216 "depended, therefore, only upon the question whether restitutio in integrum was possible": at 223 (Dixon CJ, Webb, Kitto and Taylor JJ). But the different natures of the two remedies led to significant differences in their availability.

Differences between rescission at law and in equity

1. Rescission at law was the act of the party disaffirming a contract, which of itself gave rise to the recovery of money paid (by an action for monies had and received) and which might (where law recognised the possibility, such as in the case of a chattel) effect the revesting of property transferred. However, where the revesting of legal title required further acts (such as the registration of an ordinary share) then rescission at law was not available.
2. Rescission was more widely available in equity than at law, because in equity, rescission was effected by court order and equity had the means to make more extensive orders so as to achieve restitutio in integrum. That included the reconveyance of property, the taking of accounts and the granting of relief on terms. The classic statement of principle is that of Lord Blackburn in Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218 at 1278-9. After stating that a Court of Equity could give no damages, and, unless it could rescind the contract, could give no relief, his Lordship said: "[O]n the other hand, it can take accounts of profits, and make allowance for deterioration. And I think the practice has always been for a Court of Equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract."
3. Dixon CJ, Webb, Kitto and Taylor JJ explained the position in Alati v Kruger (1955) 94 CLR 216 at 223-224: "[E]quity has always regarded as valid the disaffirmance of a contract induced by fraud even though precise restitutio in integrum is not possible, if the situation is such that, by the exercise of its powers, including the power to take accounts of profits and to direct inquiries as to allowances proper to be made for deterioration, it can do what is practically just between the parties, and by so doing restore them substantially to the status quo ... The difference between the legal and the equitable rules on the subject simply was that equity, having means which the common law lacked to ascertain and provide for the adjustments necessary to be made between the parties in cases where a simple handing back of property or repayment of money would not put them in as good a position as before they entered into their transaction, was able to see the possibility of restitutio in integrum, and therefore to concede the right of a defrauded party to rescind, in a much wider variety of cases than those which the common law could recognize as admitting of rescission. Of course, a rescission which the common law courts would not accept as valid cannot of its own force revest the legal title to property which had passed, but if a court of equity would treat it as effectual the equitable title to such property revests upon the rescission."
4. Relevantly for present purposes, the revesting of one of the two shares which had been transferred from Mr Nadinic to Ms Drinkwater as part of the consideration under the Deed of Settlement was only available in equity.
5. Fourthly, rescission in equity is discretionary, and may be declined if an equitable defence is established. Thus, immediately after the reference in Erlanger v New Sombrero Phosphate Company to a Court of Equity granting relief where, by the use of its powers, it can do what is practically just, Lord Blackburn added at 1279: "And a Court of Equity requires that those who come to it to ask its active interposition to give them relief, should use due diligence, after there has been such notice or knowledge as to make it inequitable to lie by."
6. For example, in Civil Service Co-operative Society of Victoria Ltd v Blyth (1914) 17 CLR 601, delay was sufficient to deny rescission to plaintiffs who had taken up shares in the society in reliance upon a representation: see at 608-9 (Griffith CJ), 610 (Barton J) and 614-5 (Isaacs J). That was a case of innocent misrepresentation, but in Henjo Investments Pty Limited v Collins Marrickville Pty Ltd (1988) 39 FCR 546, a case evidently regarded by the Full Court of the Federal Court as one of fraudulent misrepresentation or fraudulent nondisclosure, delay was also significant. It is clear that the purchaser's delay was the principal factor relied upon in the leading judgment of Lockhart J (at 562-6). Burchett J, who agreed with Lockhart J that rescission should be refused although liability had been made out, said (at 568): "[T]his is simply not a matter in which the remedy for rescission is appropriate on any footing. Too long had elapsed and too much had happened, attributable to the actions and neglect of the respondent purchaser, for it to be right to attempt a disentanglement so dilatorily asked, and fraught with so many possibilities of injustice to other parties."

The significance of fraud in equity

1. Fifthly, rescission in equity for fraud in the sense of dishonesty or reckless indifference to the truth differs from cases of rescission where such fraud had not been made out. For one thing, in cases of fraud, equity is more open to making orders effecting restitutio in integrum so as to enable rescission. In Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 at 114, a unanimous High Court endorsed what Lord Wright had said in Spence v Crawford [1939] 3 All ER 271 at 288: "The court will be less ready to pull a transaction to pieces where the defendant is innocent, whereas in the case of fraud the court will exercise its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying the benefit of his fraud at the expense of the innocent plaintiff."
2. Moreover, as part of the adjustments effected by equity to restore the parties to the previous position, in cases of fraud equity had power to include an indemnity for loss directly caused by the fraud. That was recognised by Bowen LJ in Newbigging v Adam (1886) 34 Ch D 582 at 592, in a passage reproduced and endorsed by Jordan CJ in McAllister v Richmond Brewing Co (NSW) Pty Ltd (1942) 42 SR (NSW) 187 at 192: "Common law recognised a rescission if the case shaped itself so that a Court of Common Law had jurisdiction to decide whether there should be rescission or not, but, besides this, the common law gave damages for deceit, and in my opinion gave them, not as an alternative remedy, but as an alternative or cumulative remedy as the case might be. The Court of Chancery had a concurrent jurisdiction, and in cases of fraud, so far as I know, there can be no doubt that complete indemnity could be given by a Court of Equity to the person who had been defrauded, so as to protect him as fully in equity as he could have been protected in law."
3. These and other decisions were analysed by a unanimous Full Court of the Federal Court in Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274 at 284-6, observing that the indemnity was confined to cases of rescission for fraudulent misrepresentation and for that reason was not in substance doing what could not (prior to Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465) be done at common law, namely, awarding damages for innocent misrepresentation. The joint judgment of Brennan CJ, Gaudron, McHugh and Gummow JJ in Maguire v Makaronis (1997) 188 CLR 449 at 467-468 endorsed the proposition that equity could award an indemnity for losses directly occasioned by the fraudulent misrepresentation as part of the decree for rescission.

Fraud does not unravel all

1. Sixthly, it is sometimes said (and it was repeatedly said by the primary judge) that "fraud unravels everything". It is dangerous to apply that aphorism literally. Few legal propositions are universally true, and a moment's consideration demonstrates that this is not one of them.
2. Equity's protection of a bona fide purchaser of a legal estate for value and without notice is an obvious exception. Another arises in connection with the fifth issue arising on this appeal: the effect of s 42(1) of the Real Property Act 1900 (NSW) is that a registered proprietor is not deprived of his or her title, even if it be obtained by fraud, unless the fraud is "brought home" to him or her: Assets Company Ltd v Mere Roihi [1905] AC 176 at 210; Cassegrain v Gerard Cassegrain & Co Pty Ltd (2015) 254 CLR 425; [2015] HCA 2 at [32] and [100].
3. More generally, in SZFDE v Minister for Immigration and Citizenship (2007) 232 CLR 189; [2007] HCA 35 at [16], a unanimous High Court wrote: "The vitiating effect of fraud is not universal throughout the law. The equitable doctrine protecting bona fide purchases for value and without notice is an important exception. Further, particular principles, or at least practices, have been developed with respect to collateral attacks in later litigation upon the outcome in earlier litigation where this was alleged to have been vitiated by fraud. It has been said in this Court that, except in very exceptional cases, fraud constituted by perjury by a witness or witnesses acting in concert is not a sufficient ground for setting aside a judgment. The precept engaged here has been identified as that favouring the finality of litigation."
4. Their Honours added at [29]: "Any application of a principle that 'fraud unravels everything', requires consideration first of that which is to be 'unravelled', and secondly of what amounts to "fraud" in the particular context. It then is necessary to identify the available curial remedy to effect the 'unravelling'."
5. Thus it has been said, criticising an English decision applying this aphorism, that: "[F]raud does not always and absolutely unravel all. ... The maxim that fraud unravels all gave no support to the Chancellor's reasoning in NCA v Robb. A substantial body of other authority is contrary to that reasoning": P Turner, "Rescission of the doctrine of rescission for fraud" [2016] Cambridge Law Journal 206 at 207.
6. The aphorism is not universally true even in the area directly relevant to the issues in this appeal, rescission for fraudulent misrepresentation. It is inconsistent with the qualification given by Lord Wright in Spence v Crawford, and endorsed by the High Court in Vadasz, in the passage reproduced above: a court will exercise its jurisdiction in full in a case of fraud "in order, if possible, to prevent the defendant from enjoying the benefit of his fraud ...".
7. Further, it was in the context of fraudulent non-disclosure that the rescission ordered by the trial judge in Henjo Investments Pty Ltd was overturned on appeal, although the findings as to liability at first instance were upheld. There had been considerable delay on the part of the purchaser of a restaurant, who had been led to believe that it was licensed to serve considerably more than it in fact was, in seeking rescission for misleading and deceptive conduct under s 87 of the Trade Practices Act 1974 (Cth). The majority of a Full Court of the Federal Court (Lockhart and Burchett JJ) addressed the question of review of the statutory relief by reference to equitable principles. Lockhart J observed that although under s 87 the court was not restricted by the limitations under the general law, in equity a court was more open to granting rescission where a contract had been induced by fraud. His Honour added at 565 that: "the longer the time elapsed since the agreement, and the more substantial any deterioration in the intervening period as a result of the purchaser's management of the business, the more difficult it will be to secure restitution in a manner which does 'practical justice' between the parties, in the phrase adopted by the majority in Alati v Kruger."
8. Lockhart J said that the approach required by statute was consistent with the approach adopted by the Privy Council in Senanayake v Cheng [1966] AC 63 at 83 (a case of rescission in equity for innocent misrepresentation) that the questions are "whether restitutio in integrum is substantially possible and whether rescission is timely and just and fair". His Honour set aside the relief ordered by the trial judge, stating at 562 that: "Restitution involves the handing back to the former owner of a business which has for some two years or so been in other hands and conducted in a different way, some of the differences being quite substantial. The restaurant trade is notoriously volatile." Burchett J's concurring judgment was to the same effect. Foster J dissented, but not on any question of principle, but on the basis that although the discretionary considerations "were, beyond doubt, capable of dissuading the trial judge from granting the discretionary relief he gave", he was not persuaded there was any appellable error: at 570-571.

Fraud and the civil process

1. Seventhly, an allegation of fraud (in the strong sense of deliberate falsehood or reckless indifference to the truth) is required to be pleaded specifically and particularised. The words immediately following Denning LJ's generalisation "Fraud unravels everything" in Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at 712 are "The court is careful not to find fraud unless it is distinctly pleaded and proved". Those words were replaced by ellipses in the passages from Denning LJ's judgment quoted by the primary judge in the first judgment at [31] and, again, in the second judgment at [5]. But their importance is considerable.
2. In Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 573 the High Court observed that it has "frequently been said that fraud must be pleaded distinctly and with particularity". More recently, in Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486; [2012] HCA 39 at [25]-[26], French CJ, Gummow, Hayne and Kiefel JJ said: "This is no pleader's quibble. It is a point that reflects fundamental requirements for the fair trial of allegations of contravention of law. It is for the party making those allegations (in this case ASIC) to identify the case which it seeks to make and to do that clearly and distinctly. The statement of claim in these matters did not do that. Contrary to ASIC's submissions in this Court, a case of fraud cannot properly be seen as a 'fallback' claim to be made against the possibility that the party accused of engaging in misleading or deceptive conduct by publishing notices in relation to a financial product may seek to characterise them as statements of opinion, not fact. It is fundamental, and long established, that if a case of fraud is to be mounted, it should be pleaded specifically and with particularity. A pleading of fraud will necessarily focus attention upon what it was that the person making the statement intended to convey by its making. And the pleading must make plain that it is alleged that the person who made the statement knew it to be false or was careless as to its truth or falsity. If an alternative case of misleading or deceptive conduct is to be advanced, it is necessary to identify that claim as separate from the allegation of fraud." [Footnotes omitted, emphasis added.]
3. Eighthly, a finding of fraud is a serious one attracting the strictures in s 140 of the Evidence Act 1995 (NSW). It is trite that s 140 provides for no new principle: see Bibby Financial Services Australia Pty Ltd v Sharma [2014] NSWCA 37 at [205]. As Gleeson JA there said, by reference to earlier authority, the requirement in s 140(2) that there should be clear and cogent proof of serious allegations reflects the principles stated in Briginshaw v Briginshaw. Dixon J's observations in Briginshaw v Briginshaw (1938) 60 CLR 336 at 361 and 362 that proof to reasonable satisfaction "should not be produced by inexact proofs, indefinite testimony, or indirect inferences" have been applied on very many occasions.
4. Ninthly, the seriousness of a finding of dishonesty or reckless indifference to the truth will ordinarily mean that it may not be made without an opportunity being given to deal with the criticism: Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11 at [67]; Bale v Mills (2011) 81 NSWLR 498; [2011] NSWCA 226 at [66]-[67].
5. Tenthly, a consequence of the three preceding points was stated by Beazley P in Sgro v Australian Associated Motor Insurers Ltd (2015) 91 NSWLR 325; [2015] NSWCA 262 at [54]: "The seriousness of a finding of fraud, including statutory fraud, does not permit of other than a specific finding that the fraud, or the contravening conduct, has in fact occurred."

Issues disclosed in advance of trial

1. It is now necessary to return to the way in which the litigation was conducted, and whether findings of fraud were available to be made.

The parties' affidavits

1. Although there were no pleadings, Ms Drinkwater swore no fewer than five affidavits during the six week period between commencement of proceedings and the final hearing. There was a deal of overlap in those affidavits. Common to all of them was a complaint that she had been unaware of the lodgement of business activities statements on behalf of Brooks Parade, and was unaware of GST refunds which had been paid to Brooks Parade.
2. Mr Christopher Hewitt, who had become the tax agent for Brooks Parade in December 2015, affirmed an affidavit which disclosed information provided by the ATO. That information showed "for the period June 2014 to December 2015 a claim of $10,974,662 as having been spent (purchased) by Brooks [Parade], with Brooks [Parade] receiving GST refunds of $923,589".
3. Ms Drinkwater said that: "I was not consulted by either Andrew Nadinic, Frank Nadinic, nor any employee of Maxstra, nor any tax agent alleged to be employed by Brooks in regard to these claims nor to the banking of the GST refunds." The same absence of awareness was maintained in her second affidavit, third affidavit, fourth affidavit, and fifth affidavit. In the fourth affidavit Ms Drinkwater said: "If I had known that Maxstra [Constructions] had received GST refunds of $923,589.00 that Brooks was entitled to from the ATO, before I signed the Deed of Settlement, I would not have agreed to pay to the Defendant the sum of $2,050,000.00 to be secured by a second mortgage over the Land."
4. It was quite plain that there were large issues of fact, extending at least to Ms Drinkwater's knowledge and reliance, but there was no pleading and no specific allegation of fraud or dishonesty.
5. Mr Phillip Hewitt, Ms Drinkwater's solicitor, affirmed an affidavit on 24 August 2016, which annexed a letter from the firm which had previously acted as Brooks Parade's accountant and tax agent. The letter confirmed that Brooks Parade accounted on an accruals basis, and that GST input tax credit refunds had been received from the ATO for each of the six quarters up to that ending 30 September 2015. The letter continued: "Under further instructions from a Director of Brooks Parade Pty Ltd, these monies were transferred to accounts in the name of Maxstra. Consequently, we can confirm that these monies were not transferred into a bank account held in the name of Mr Andrew Nadinic."
6. Shortly before the hearing, an affidavit executed by the liquidator of Maxstra NSW was served. It showed that a total of only $177,410.39 of GST had been paid to the ATO. At some stage (precisely when is difficult to determine from the record) Ms Drinkwater established that all of the GST refunds made by the ATO to Brooks Parade were remitted, at Mr Nadinic's direction, to Maxstra Constructions Pty Ltd (Maxstra Constructions). To be fair, there was understandable confusion because of the similarities of the names of Maxstra NSW and Maxstra Constructions. Ms Drinkwater's affidavit of 5 September 2016 takes care to state that references to "Maxstra" are references to Maxstra NSW and that affidavit complains of her not knowing that $923,589 of GST refunds had been received by that company.
7. In fact, general ledger records of the former tax agent, tendered by Mr Nadinic without objection, showed that the transfers within the former tax agents' trust account had been made to the credit of Maxstra Constructions and thereafter paid to a bank account in the name of Maxstra Constructions. The last transfer was made on 26 November 2015. A liquidator was appointed to Maxstra Constructions on 20 December 2015. Neither the financial statements nor the bank accounts nor the liquidator's reports were in evidence.
8. It was also quite plain that none of the affidavits served in advance of the hearing squarely alleged that Brooks Parade had acted improperly by accepting inflated tax invoices, lodging business activity statements, receiving input tax credits or remitting them. Nor was it alleged that Mr Nadinic had deliberately concealed information from Ms Drinkwater.

The parties' Statements of Issues

1. Ms Drinkwater's Statement of Issues is a moderately elaborate document of 37 paragraphs which contains a "summary of facts and plaintiff's contentions" (paragraphs 1-27) as well as a "statement of issues" (paragraphs 28-37). Consistently with her affidavits, the document fell short of any allegation of knowing misconduct by Mr Nadinic or any third party. The document stated that the GST input tax credit refunds that "Brooks was entitled to receive" were transferred into accounts held in Maxstra's name under instructions from "a director of Brooks who is not Cheryl" (paragraph 21) and then stated: "Cheryl asserts that the contract sum of $$6,398,352 [sic] provided for in the construction contract between Maxstra and Brooks was silent as to GST, (being based upon a 1997 Australian Standard), and thus GST inclusive. However, even [if] that is not correct, Brooks' new accountant (CM Hewitt) gives evidence that Brooks has incurred and spent costs totalling $10,974,662 (including sums that were paid directly to subcontractors), which significantly exceeds the contract sum under the construction contract with Maxstra, and raises the question as to Maxstra's entitlement to: a) all or part of this overpayment of $4,576,120 (the difference between $10,974,662 and $6,398,542); and b) Brooks' GST input tax credit refunds of $923,589."
2. Under the heading "Statement of Issues", Ms Drinkwater alleged that there had been misleading and deceptive conduct in Mr Nadinic's failing to disclose to her, before she entered into the deed of settlement and the mortgage, that GST input tax credit refunds that Brooks Parade was entitled to had been transferred into accounts held in Maxstra's name (paragraph 28). Another issue was: "30 Whether Cheryl relied upon the following state of affairs that she assumed existed as at November 2015, to enter into the Deed of Settlement and the Mortgage, namely that: … b) Brooks did not have or receive any entitlements for credits for GST refunds in the amount of $923,589 of which she was aware; c) Maxstra had not received payment, or the benefit of, Brooks' GST refunds and overpayments under the construction contract with Brooks that it was not entitled to … 31 Whether, under section 243 of The Australian Consumer Law or in equity, the Deed of Settlement and the second mortgage should be set aside and / or varied: a) on grounds that Andrew Nadinic induced Cheryl to enter into the Deed of Settlement and the second mortgage by engaging in misleading, deceptive and / or unconscionable conduct; and / or b) in the circumstances described in paragraph 30 above."
3. The statements of issues of both parties proceed on the basis that the GST refunds were paid by Brooks Parade to "Maxstra", by which was meant Maxstra NSW. Ms Drinkwater placed reliance upon the document provided by Mr Nadinic in response, which included the statement that: "Much is made of the contention that Brooks, either unlawfully or unconscionably, paid amounts equal to those received by Brooks from the ATO to the builder (Maxstra)." [Emphasis added.]
4. Mr Nadinic's document thereafter explained, in simple language, that Brooks Parade accounted on an accruals basis, that it had claimed the input tax credits, and that the refund it received from the ATO was paid to "Maxstra" to discharge Brooks Parade's continuing indebtedness to the builder.
5. Three things are plain from the issues formulated by the parties in advance of the trial. 1. On the one hand, it was clear that Ms Drinkwater was complaining about the fact - which ultimately was uncontroversial - that substantial amounts of money reflecting input tax credits claimed by Brooks Parade had been transferred, without (so she maintained) her knowledge or approval, to one or other of the Maxstra companies. 2. On the other hand, it was not alleged that the making of those claims for input tax credits or the transfer of refunds from the ATO to one of the Maxstra companies was a fraud upon the ATO, nor something which had been fraudulently concealed by Mr Nadinic to her. 3. The reference in Mr Nadinic's document to "unlawfully" does not assist Ms Drinkwater. A natural person or a corporation whose conduct misleads or deceives in trade or commerce will contravene s 18 of the Australian Consumer Law (formerly s 52 of the Trade Practices Act 1974 (Cth) and s 42 of the Fair Trading Act 1987 (NSW)) and may enliven the statutory remedies of injunction, damages and other orders. The contravention is not of itself made unlawful by statute, as Emmett JA noted in HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479; 306 ALR 53 at [132]. Although the reference to unlawfulness was somewhat inapt, it falls short of an acceptance by Mr Nadinic that he was defending a trial in which there was an allegation of fraud.

The hearing on 20 and 21 September 2016

1. The plaintiff's written outline of opening submissions in the court below was provided to this Court after the appeal was heard (at the Court's request). That document reiterates the matters in the statement of issues as to there being "misleading and deceptive conduct and/or unconscionable conduct … in breach of ss 18, 20 and 21 of the UCL [sic]". In one respect, this document went further, and alleged a breach of fiduciary duty: "Finally, in failing to keep proper accounts as director of Brooks Parade and making GST payments to Maxstra without any legally binding obligation to do so (given that the lump sum price under the building contract was GST inclusive ...) the defendant caused Brooks Parade to breach the fiduciary duties it owed to the plaintiff as joint venturer to keep proper accounts and perform the obligation of not making payments to Maxstra other than those it was legally obliged to make ... As a result, the defendant is liable to account in equity to the plaintiff for monies paid to Maxstra which it was not entitled to receive (overpayments) and the plaintiff is entitled to have that same sum set-off against the sum owed under the mortgage (if any) as part of the necessary inquiries and accounting sought in Prayer 17." [Citations omitted.]
2. Three things may be noted from this document. 1. First, there had been no allegation of breach of fiduciary duty in the Statement of Issues. The written submissions raised a fiduciary duty issue, but the duty alleged - one owed by Brooks Parade to Ms Drinkwater - is, with respect, obviously untenable. Directors owe fiduciary duties to their companies, not vice versa. That may account for the forensic decision taken by Mr Nadinic not to oppose its being raised, but to insist that he would not permit Ms Drinkwater further to expand the case beyond what was in the Statement of Issues and written opening submissions. 2. Secondly, the written opening submissions referred to "GST payments" being made to "Maxstra", and did not distinguish between Maxstra NSW and Maxstra Constructions. However, it is clear from the inclusion of the general ledger records in the court book, and the cross-examination of Mr Nadinic that counsel was aware of the distinction between the building company which supplied the tax invoice upon Brooks Parade and the company to which the GST refunds had been remitted. 3. Thirdly, the document reflects a further issue, namely, whether the Building Contract was inclusive or exclusive of GST. The primary judge did not resolve this issue, and it will not be necessary for the purposes of this appeal to do so.
3. There were no oral openings in light of the written submissions. Counsel for Ms Drinkwater called on a notice to produce dated 16 September 2016, which appears to have extended to the tax invoices rendered by Maxstra NSW. No documents were produced, with Mr Nadinic's counsel advising that the notice had been served "well after business hours on Friday afternoon".
4. A further call was made for the tax invoices during Mr Nadinic's cross-examination, in response to which nothing was produced. Mr Nadinic gave evidence that "I have no involvement with Maxstra whatsoever, don't work for them, with them". He also gave evidence as to how the payments from the ANZ were made: "The ANZ paid the building company direct for a period of time. So the quantity surveyor assesses a claim, which is submitted by the building company and when that claim has been verified, the ANZ pays the building company direct. I think that's common practice."
5. He added that he was sure what Maxstra was being paid at any particular time because, "every month I would have to sign, as Cheryl would, the drawdown notices, which was the certified amount which was paid by the ANZ to the building company, so I was aware of the amounts."
6. Mr Nadinic was cross-examined about an alleged breach of the Deed of Settlement, to which objection was taken. After a series of exchanges, the primary judge concluded: "HIS HONOUR: Yes, well, you've been allowed some latitude by Mr Martin, who is prepared to go along with your statement of issues, Mr O'Brien. O'BRIEN: Yes, your Honour. HIS HONOUR: Which is wider than your amended summons but I don't think we should be going beyond the statement of issues and I think Mr Martin is correct in that the statement of issues does not include the claim that you now seek to deal with by the most recent question. I reject the question."
7. Mr Nadinic was cross-examined on a summary table prepared by Ms Drinkwater's accountant, which showed that Brooks Parade had purchased over $10 million worth of goods and services in connection with the development. Mr Nadinic accepted, by reference to the document, that he had authorised payments of $893,000 of GST refunds. Immediately thereafter, there was the following exchange: "HIS HONOUR: You keep going, but I'm just not sure how helpful this is or where we're going, but you probably know more than I do at this stage. O'BRIEN Q. I suggest that you were using Brooks Parade as a vehicle by which to make false claims- OBJECTION. QUESTION ALLOWED. Q. And that that's what this document shows, is that correct? A. No. MARTIN: This is not a case about the accuracy or otherwise of the GST records that the tax agent for Brooks Parade lodged, or claims contained therein for purchases made and GST collected. There's no statement of issue or anything to do with the accuracy of these documents. HIS HONOUR: The answer is no, so the answer is harmless, but Mr Martin is right, you seem to be going down a path that is not part of your case. O'BRIEN: It's the accounting case. HIS HONOUR: The case that I am dealing with is a claim that the GST refunds of $923,589 which Maxstra was entitled to receive and did receive, were not disclosed prior to the deed of settlement. O'BRIEN: Where the evidence shows that the moneys haven't been properly accounted for in relation to the GST payments, and that gives rise to a liability to account. HIS HONOUR: But Mr O'Brien, and I have a terrible feeling that your client has not had this fully explained to her, the starting point is that she has solemnly agreed in a deed to release the defendant from all claims and obligations. She can't get anywhere unless and until she establishes some ground for setting aside the deed. To talk merely about some sort of desire for accounting doesn't get you to the point where a deed of release, which public policy suggests should be not easily set aside, should be ignored. O'BRIEN: Certainly there are other claims in play that this will also go to, but it's a matter which is, in my submission, a live issue, the accounting issue ..."
8. The primary judge then clarified, by reference to paragraphs 28-37 of the statement of issues, as to what was meant by "the accounting issue". Counsel then appearing for Ms Drinkwater referred to the account sought in prayer 18 of the amended summons, and asserted that "there's a fiduciary relationship involved here in the joint venture" with a corresponding obligation to account. There was then the following exchange: "HIS HONOUR: But your statement of issues does not plead or does not outline a breach of fiduciary duty. O'BRIEN: I appreciate that. It's been expanded since then. There was a change of counsel. I adopted that statement of issues, and to the extent that I'm going by it, I can't say anything. However- HIS HONOUR: The claims in 17 and 18 of the amended summons, are the sorts of standard claims for relief that a plaintiff includes in an equity case on the assumption that he or she succeeds in the principal allegations. So if you prove misleading conduct or some other ground for setting aside the deed of release, or setting aside the mortgage, then it may be that you get to the question of accounting or damages. I said I'd deal with those issues later. O'BRIEN: And an obligation to disclose. HIS HONOUR: The obligation to disclose is part and parcel of your claim for misleading conduct. In fact your misleading conduct claim is basically a non-disclosure claim. O'BRIEN: Yes."
9. Counsel then appearing for Ms Drinkwater was correct to accede to each of those observations by the primary judge. The "accounting case" was properly to be understood as consequential relief in the event that the primary case of misleading or deceptive conduct or unconscionability was made out.
10. The parties closed their cases on the afternoon of the first day and moved to addresses. At the conclusion of the first day there was a further exchange between the primary judge and counsel for Ms Drinkwater on the subject matter of the accounting which was sought by the last prayer of the summons, in which his Honour again observed that there could be no accounting until there was a basis established for setting aside the deed of release. His Honour observed: "HIS HONOUR: So accounting is getting the cart before the horse. O'BRIEN: Yes, your Honour. HIS HONOUR: Because she can't say 'I want an accounting' while there is an extant legal obligation to release Mr Nadinic from and against all claims arising from or in any way connection with the project. O'BRIEN: Yes, and the plaintiff says that there was an unconscionable dealing in that Mr Nadinic was in a far stronger position, as far as his knowledge of the accounts and responsibility for those accounts goes for Brooks Parade. HIS HONOUR: So was there some breach of duty in connection with the entry into the deed of settlement because of those facts, was there? O'BRIEN: Yes. HIS HONOUR: I don't actually see that that issue is clearly raised, by the way. O'BRIEN: It has arisen since the statement of issues and- HIS HONOUR: Yes, well, you just can't- O'BRIEN: I opened on it, your Honour, and that's the best I can do. HIS HONOUR: Yes, but Mr Martin made it quite clear that he was addressing, in fairness to you, the statement of facts and issues, and acknowledged that they went further than the amended summons and he was prepared to accept your statement of facts and issues. Well, you just can't, you know - you can ask for an adjournment and amend your claim, but you haven't done that. O'BRIEN: If I'm bound by the statement of issues, then I have nothing further to say."
11. The first day concluded shortly thereafter. On the second day, Ms Drinkwater was represented by her solicitor, who had supplied a further short additional submission shortly beforehand. Most of that submission was directed to GST, and referred to "the alleged non-disclosed GST at the heart of the plaintiff's case". In the course of submissions that morning, there was the following exchange: "HIS HONOUR: I couldn't help getting the feeling when I read your written submissions this morning that part of your complaint is a complaint on behalf of Brooks Parade in relation to claims it may have against Maxstra or the Nadinic gentleman and that's not- HEWITT: That is implied, your Honour, yes. HIS HONOUR: Yes, well that's not the case that's before me; it's another case. As I said, Brooks Parade is not a party. So I can possibly understand that there may be reasons why Brooks Parade might want to investigate moneys received by Maxstra to which it says it was entitled, but that's not for me to determine. I'm here to determine Mrs Drinkwater's claim, seeking to extricate herself from the deed of release and settlement."
12. Thereafter the solicitor advanced a claim that Maxstra had issued invoices which were greater than could possibly relate to the actual project, the wharf apartments, which was the only project in which it was involved, saying: "So it can't be getting invoices for in excess of the value of the projects."
13. As will be seen, this submission ultimately found favour with the primary judge. It was advanced by reference to the maximum borrowed funds of $6.5 million. The solicitor encapsulated his submissions as follows: "So what we've got, here, is we've got no verification, no documents, no tax invoices have ever been produced for Brooks Parade. We don't know where they are. They're certainly not with Cheryl Drinkwater, otherwise she would have been able to produce them to show you what has gone on. We've got, on the face of it, over $10 million spent on a project that had a budget of $6.5 million."
14. Towards the conclusion of his submissions, his Honour summarised the position as follows: "HIS HONOUR: It really boils down to misleading conduct by nondisclosure of the $923,000 payment. HEWITT: On the GST issue? HIS HONOUR: Yes. HEWITT: That's the nub of it, yes."
15. Counsel for Mr Nadinic maintained his position at the outset of his submissions: "MARTIN: As I indicated yesterday during one of my objections, this is not, has never been and cannot be a case about the accuracy of the GST claimed, refunded or invoiced. The transcript reference for that is 65.46. That is a claim that either the ATO can bring if it was not satisfied with the lodgements that had been reported by the relevant agent of the ATO, or as I have said, Ms Drinkwater as a director takes the view that a former director has done something on Brooks' behest which he ought not to have done, and similarly that's a derivative suit, or potentially at the shareholder level an oppression suit. But neither of those are this suit. ... HIS HONOUR: No, I think she is really saying that if she had been aware of the facts relating to the payment of the $923,000 to Maxstra Constructions she would have been concerned about the honesty of Mr Nadinic and that would have persuaded her not to agree the deed of settlement. MARTIN: I haven't turned to those matters at the moment because I'm only addressing my friend's GST points. There is much - and I will be finished by 12.30 - to say about the general responses to the plaintiffs claim. HIS HONOUR: Yes. MARTIN: But all I'm dealing with is the GST issue and the contention that somehow this figure was - or the lack of reporting or the payment of it or something to do with the transactions involving those figures is somehow a ground upon which the plaintiff can rely to obtain the relief it seeks."
16. The exchange continued: "MARTIN: That's why I say if anything is untoward in any of that, it's a claim by Brooks Parade against Maxstra for overcharging in relation to the building contract. HIS HONOUR: But I don't think I have seen a tax invoice from Maxstra Constructions which justifies the payment to it of the $923,000. MARTIN: That's probably because that's not the case that the defendant has been asked to answer."
17. By this stage it had become plain that Brooks Parade had obtained GST refunds from the ATO, which had been remitted not to Maxstra NSW but to Maxstra Constructions. It is convenient to note that the elements of the matters to which the primary judge drew attention were (a) the fact that an application for a refund by Brooks Parade was made to, and acceded by, the ATO, (b) the transfer of the refund to Maxstra Constructions, (c) the non-disclosure by Mr Nadinic of those facts and (d) the idea that those matters either were dishonest or at least would have given concerns as to Mr Nadinic's honesty. Counsel for Mr Nadinic maintained consistently that these were outside the (already expanded) case he was prepared to meet.
18. Finally, very shortly before the conclusion of submissions, there was debate concerning the basis on which equity would grant rescission, including the following: "HIS HONOUR: I think general equitable principles do not require you to go so far as to prove fraud. MARTIN: No and that may well be a reference to equitable fraud, rather than fraud as it's known in the common parlance. HIS HONOUR: Yes, yes. Well, the plaintiffs case, if its right, amounts to equitable fraud, so I don't have a - they're alleging dishonesty, in effect. None of this has been very satisfactorily presented or put to your client but that's the nub of the case, is it not? MARTIN: It is and the submission that flows from that is quite simple. Is that conduct sufficiently heinous to warrant the intervention of this Court in equity to set aside what is otherwise a valid deed."
19. This exchange, as recorded in the transcript, is difficult to understand. If the closing words of what was said by the primary judge are to be taken as recorded, then the "nub of the case" was said to include an allegation of dishonesty. However, that is at odds with formulation of the "nub of the case" put by his Honour to the solicitor then appearing for Ms Drinkwater earlier that day, as well as the steadfast insistence by counsel for Mr Nadinic that the case was much more narrowly confined. It is also at odds with the reference to "equitable fraud" by both counsel and the primary judge immediately beforehand. It is also plain that the sentence in which the judge was recorded as saying "they're alleging dishonesty" was either imperfectly formulated or imperfectly recorded (or, perhaps, both); the gravamen of the exchange appears to be the contrast between equitable fraud and dishonesty. During the appeal, the parties were unable to elucidate the matter beyond the face of the transcript. Although it is quite possible that the transcript fails to capture the true import of the exchange, I proceed on the basis which is most favourable to Ms Drinkwater, namely, that the primary judge and counsel agreed that an allegation of dishonesty was the nub of the plaintiff's case.
20. The review of the history of the litigation demonstrates that: 1. fraud was neither pleaded nor particularised; 2. fraud was not opened upon; 3. one single question was put to Mr Nadinic in cross-examination, based on a document which was not his own, to the effect that he was using Brooks Parade as a vehicle by which to make false claims, which was answered (negatively), immediately after which the primary judge stated that it was outside Ms Drinkwater's case; 4. at the very end of the defendant's closing submissions, the primary judge stated that an allegation of dishonesty was at the nub of Ms Drinkwater's case, a proposition which counsel for Mr Nadinic accepted.

The first judgment of the primary judge

1. The primary judge set out the primary facts, and described the "painstaking" negotiations leading to the Deed of Settlement at [8]-[14]. His Honour rejected the allegation that the delays in rectifying window defects and obtaining occupation certificates had led to an understatement of the cost to complete (which had been one of two main ways in which Ms Drinkwater's case had been advanced) at [15]-[18]. His Honour then made the findings as to the fraudulent rendering of invoices by Maxstra NSW upon Brooks Parade referred to at the outset of these reasons, including at [22]-[23]: "Unknown to the plaintiff, Maxstra NSW issued invoices totaling $10,366,698 to Brooks in respect of the project. There was no conceivable justification for this. The value of the project was only approximately $6.5 million. The ANZ facility amount was $6.35 million and for the period from June 2014 to March 2016, drawdowns from the ANZ Bank totalled $6.1 million. The building contract price was $6.398 million. And this project was the only business of Brooks. It was not possible for Brooks to pay, and not possible for Maxstra NSW to justify issuing, invoices totalling $10,366,698. I am afraid to say that this was not merely creative accounting. It was behavior that bears the hallmark of naked dishonesty. Its apparent purpose was to generate an entitlement in Brooks to receive GST refunds. In one sense, given the correlative liability that accompanies a GST refund, this might not have mattered to the plaintiff - except for the fact that, when the GST refunds were received, they were not remitted to Brooks. The defendant directed PKF, the accounting firm then acting for Brooks, to transfer the monies to Maxstra Constructions. The defendant sought in vain to attribute responsibility for this instruction to his father but it is far more likely that he was the one who gave the direction to PKF, as he controlled Brooks, not his father. The defendant's answers to questions on this issue were equivocal and evasive. Not surprisingly, in the circumstances, the defendant did not inform the plaintiff of the direction to transfer the monies to Maxstra Constructions - although she had been his fellow director of Brooks since 2013."
2. His Honour concluded at [26]: "A total of $923,589 was transferred to Maxstra Constructions. That sum represented GST input tax credit refunds to which Brooks had become entitled after lodging business activity statements that were ostensibly predicated on the receipt from Maxstra NSW of invoices totalling $10,366,698. As I have indicated, the invoices must have been inflated or fabricated. And the defendant must have known it. He must have known that they contained false representations that were intended to induce the Australian Taxation Office to pay to Brooks a substantial sum representing GST input tax credit refunds."
3. The primary judge recorded Mr Nadinic's submission that such a claim was outside the scope of the proceedings at [27]-[28]. He rejected it, together with other submissions made by Mr Nadinic. The reasons given by his Honour were at [29]-[31]: "For the reasons that follow, I do not think the defendant's submissions are an answer to the plaintiff's claim that there was a failure to disclose that amounts to equitable fraud and entitles her to appropriate relief in respect of the deed of settlement and the mortgage. The plaintiff gave unchallenged evidence that: 'If I had known that Maxstra [Constructions] had received GST refunds of $923,589.00 that Brooks was entitled to from the ATO, before I signed the Deed of Settlement, I would not have agreed to pay to the Defendant the sum of $2,050,000.00 to be secured by a second mortgage over the Land.' I accept that evidence. It is understandable and reasonable in the circumstances. The plaintiff may have been anxious to finalise the negotiations but she did not expect perfidy and crookedness. She could not have anticipated that an apparently dishonest scheme had been created involving Brooks and both Maxstra companies; a scheme that appears to have perpetrated a fraud on the Australian Taxation Office. The defendant's concealment from the plaintiff of his knowledge and involvement in the scheme was a deliberate choice made by him. It was the product of the conflict between his duty to the plaintiff and his interest in the payment of the GST refunds to Maxstra Constructions. The matter clearly required investigation. If revealed to the plaintiff, let alone to her husband and her solicitor, the complexion of the negotiations would have changed. The outcome would probably have been different. The stench of dishonesty would have corroded the plaintiff's trust in the defendant. Fraud, as Lord Denning, once said, 'unravels everything ... it vitiates judgments, contracts and all transactions whatsoever': Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at 712."
4. Those reasons do not, with respect, supply any explanation for how an allegation of conscious fraud came to be part of Ms Drinkwater's case. Mr Nadinic's submission that such findings were not open having regard to the case that had been run was not addressed.
5. During the hearing, and without opposition, his Honour had separated questions of remedy. Accordingly, his Honour adjourned the proceedings for a separate hearing on the appropriate remedy in light of his findings, and restrained Mr Nadinic in the meantime from enforcing the Deed of Settlement and the mortgage.

The second judgment of the primary judge

1. There was a subsequent hearing on 1 December 2016, leading to the second judgment delivered the following week: Drinkwater v Nadinic [2016] NSWSC 1733. All the paragraph numbers to which reference is made below are those in the versions of the judgment published on CaseLaw (and AustLII and Jade), which is different from that in the version in the appeal books (to be clear, the substance is the same).
2. Prior to the hearing, the parties exchanged written submissions. Once again, Mr Nadinic maintained that the case was more narrowly confined. He observed at the outset that: "as the defendant pointed out during the course of argument, the plaintiff's case was not, had never been and could not be a case about the accuracy of the GST claimed, refunded or invoiced". [Original emphasis.]
3. The submission then (accurately) identified the nature of the case advanced by Ms Drinkwater, and the failure to rely on or cross-examine on the matters found by the primary judge as to dishonestly inflating and concealing tax invoices. It was said that: "In those circumstances and particularly given the serious nature of the allegations made, the defendant very strongly takes a Browne v Dunn point concerning each of the above allegations. It is patently unfair for the plaintiff to attempt to latch onto the purported examples of fraudulent conduct when fraud was never a part of the plaintiff's case nor was the defendant ever challenged about any of the above matters as being evidence of fraud during cross-examination."
4. There may have been a question whether, given the findings on liability, it was too late for Mr Nadinic to complain before the primary judge about unfairness, which could only be cured on appeal. However, that was not how the most prominent submissions advanced by Mr Nadinic were dealt with. Instead, the reasons made no mention of them. Mr Nadinic's submission suffered the same fate as the words, "The court is careful not to find fraud unless it is distinctly pleaded and proved", which, once again, were omitted from the "Fraud unravels everything" quotation from Denning LJ's judgment in Lazarus Estates Ltd v Beasley.
5. After reciting the procedural history, the second judgment under the heading "Fraud Unravels Everything" reiterated the authorities said to be to that effect on which the primary judge had previously relied, and which his Honour then supplemented "[b]ecause the nature and legal effect of fraud are central to the question of the relief which the plaintiff seeks": at [8].
6. His Honour then identified that he had heard further evidence and submissions on whether Ms Drinkwater was entitled to have the Deed of Settlement and the mortgage set aside in whole or in part. His Honour referred to Spence v Crawford [1939] 3 All ER 271 and Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 and then directed the balance of his reasoning to the conclusion that "as between the plaintiff and the defendant, the deed of settlement and the mortgage should be set aside". His Honour dealt with the absence from the litigation of some of the parties to the Deed by accepting a submission from Ms Drinkwater that the "provisions applicable to Maxstra NSW are not of such importance that substantial restitution cannot be achieved" and that the "mutual releases of Brooks Parade and Maxstra NSW under the Deed are subsidiary matters and are unlikely to be significant if the Deed and the Mortgage are rescinded, given that Maxstra NSW is now in liquidation".
7. His Honour's primary focus was on whether the order sought by Ms Drinkwater would operate unfairly to Mr Nadinic. The primary judge stated at [31] and [32] that the releases given by Maxstra NSW in respect of progress claim No 21 and other claims on Brooks Parade: "will not be affected by the orders I propose to make, which will be confined to an adjustment of rights as between the plaintiff and the defendant. As a result, there will be no injustice to the defendant" and likewise: "The releases given by Brooks pursuant to the deed of settlement in favour of the plaintiff, the defendant and Maxstra NSW will not be affected. I see no injustice to the defendant from that outcome."
8. His Honour rejected submissions that restoring Mr Nadinic as a 50% shareholder of Brooks Parade was unjust on a variety of bases, of which the most substantial was that his Honour was not persuaded that the project would have been more profitable had Mr Nadinic and Maxstra NSW remained involved. His Honour concluded at [38]-[40]: "The defendant has only himself to blame. He negotiated a handsome financial benefit to himself and caused the plaintiff to agree to it by his concealment of material facts relating to the dishonest scheme in which he participated. His dishonesty in his dealings with the plaintiff was twofold - both in relation to the conduct of the GST scheme involving Brooks, Maxstra NSW and Maxstra Constructions and in relation to his concealment of that scheme during his negotiations with the plaintiff leading to the deed of settlement. The effect of my orders will be to set aside the plaintiff's obligations to the defendant pursuant to the deed of settlement, to set aside and cancel the mortgage and to restore both parties to the position - vis à vis each other - in which they found themselves immediately before the deed. The effect of such restoration to the status quo ante will be to deprive the defendant of a valuable benefit but the benefit is one which he procured by fraud - by his deliberate dishonesty intended to conceal and deceive. Instead, he will receive the benefits to which he is entitled pursuant to the joint venture agreement. There is no unfairness in such an outcome. Nor is there a good basis for contending that it is not practically just in the circumstances. Finally, I should observe that this is not a case of 'rescission' in the strict sense. My orders are intended to operate personally as between the parties, without there being any collateral effect on third parties. I have moulded what I consider to be appropriate orders in accordance with the exigencies of this particular case. As Lord Wright said in Spence v Crawford at 77: '... in the case of fraud, the court will exercise its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying the benefit of his fraud at the expense of the innocent plaintiff'."
9. On that basis, his Honour ordered that the mortgage be set aside, cancelled and delivered up, and: "as between the plaintiff and the defendant, the deed of settlement dated 24 November 2015 be set aside, with the intent that the plaintiff be relieved of her obligations to the defendant pursuant to clauses 5(b), (c), (e), the second (g) and (h), 6, 7 and 9 of the deed". His Honour also ordered that Ms Drinkwater transfer to Mr Nadinic one issued ordinary share in Brooks Parade, and take all reasonable steps to facilitate the re-appointment of him as a director, if he is willing to consent to such appointment, and that Mr Nadinic pay Ms Drinkwater's costs.
10. His Honour granted a short stay of 7 days. On 16 December, his Honour refused a further stay. On 20 December, a notice of appeal was filed, and the following day, this Court granted a stay of the orders made on 9 December until the determination of the appeal: Nadinic v Drinkwater [2016] NSWCA 377.
11. Mr Nadinic's appeal is from the final orders made on 9 December 2016, and is as of right, and extends to challenging the interlocutory decision made on 30 September 2016, which, plainly enough, affected the final result: Gerlach v Clifton Bricks Pty Ltd (2002) 209 CLR 478; [2002] HCA 22 at [6]-[8]. There were more grounds of appeal than the five matters identified at the outset of these reasons, but it is convenient to follow the course taken in oral submissions and address those issues in turn.

Findings of fraud were not available

1. It is appropriate to address Mr Nadinic's grounds based on whether findings of fraud were available first. The question whether the litigation has been determined in a way which was procedurally fair is logically anterior to the question whether the findings of primary fact by the primary judge can be sustained: see Drew v State of New South Wales [2015] NSWCA 159 at [21], and the decisions there cited; another example is Kubovic v HMS Management Pty Ltd [2015] NSWCA 315 at [106] (McColl JA, dissenting in the result, but not in this respect); see also Roos v Director of Public Prosecutions (1994) 34 NSWLR 254 at 257. There may be little point determining whether a challenged finding of fact can stand if the trial itself was conducted in a way which was procedurally unfair and necessitates a retrial. That said, in any particular case, the appropriate order in which to resolve issues may turn on the nature of the appeal, and the nature of the other grounds: see Goodwin v Commissioner of Police [2012] NSWCA 379 at [15]-[25].
2. Senior counsel for Ms Drinkwater, who had not appeared below, advanced three submissions: (a) that the substance of the claim concerning the GST was disclosed in the points of claim, (b) that the findings of fraud were "ancillary" to the findings of non-disclosure, and (c) that although the primary judge went further than was necessary, the findings could nevertheless stand. All three submissions must be rejected.
3. First, neither the points of claim nor the written submissions alleged a case of fraud in the sense of dishonesty or reckless indifference to the truth. Conspicuous by its absence was any allegation about Mr Nadinic's state of mind. There was no sense in which there was compliance with the rules stated in Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486; [2012] HCA 39 at [25]-[26] at [26] that "the pleading must make plain that it is alleged that the person who made the statement knew it to be false or was careless as to its truth or falsity." It is no answer to rely, as counsel for Ms Drinkwater sought to rely, on the allegations amounting to "equitable fraud". The question was whether fraud in the sense of dishonesty or reckless indifference to the truth as found by the primary judge had been alleged.
4. Secondly, in order to explain the submission about the findings of fraud being "ancillary", it is best to reproduce how it was put orally: "ASHHURST: It is important to separate out what is an ancillary finding and what was the critical finding. The critical finding is at paragraph 22. It's ancillary, the fraud finding is ancillary. SACKVILLE AJA: Fraud is an optional extra? ASHHURST: If your Honour wants to use language of that type yes. It was ancillary. But what was alleged and what was established is-- SACKVILLE AJA: Sorry, what's the significance of paragraph 31? LEEMING JA: Yes, another way of putting it is that if 23 is ancillary, don't you fail on reliance on the findings of paragraph 30? ASHHURST: No we don't fail on the findings of paragraph 30. Sorry, perhaps I may have not made myself clear. The finding of fraud that appears involving [the ATO] at paragraph 30 is ancillary to the findings of paragraph 22 and paragraph 23. That's the important distinction, what was alleged and what the trial judge found was that there had been an over-claiming of the sums for the work performed by the builder."
5. The finding made by the primary judge that, over and beyond a mere case of non-disclosure to Ms Drinkwater, Mr Nadinic was aware of conscious deception of the ATO, was not "ancillary". It was expressed to be essential to his Honour's reasoning process on reliance (at [30] and [31] reproduced above). It was also regarded by his Honour to be essential to the exercise of discretion in his second judgment. His Honour said that "the nature and legal effect of fraud are central to the question of the relief which the plaintiff seeks": at [8]. His Honour said that "The plaintiff's decision to enter into the deed of settlement, and agree to the payment of this sum, was induced by the defendant's deliberate concealment of the dishonest scheme by which the sum of $923,589 in GST refunds was transferred to Maxstra Constructions": at [16]. The citation of authority to the effect that fraud unravels all in both judgments was clearly the foundation for the orders made by the primary judge.
6. The third submission advanced on behalf of Ms Drinkwater was put as follows: "ASHHURST: Can I put it this way, the fact that his Honour may have gone further than was necessary -- SACKVILLE AJA: I see. ASHHURST: -- doesn't mean that the elements of what was alleged hadn't been made out. What had been alleged is that there had been a material non-disclosure of a substantial difference between what was the expected GST payable to this company and what had actually been payable. The fact that the judge found that is sufficient for our purposes. The judge can go further and say 'I also think that the ATO was the subject of a fraud here'."
7. The exchange continued: "SACKVILLE AJA: There's no allegation in the statement of issues of actual dishonesty at all [is] there? ASHHURST: It's put as to the veracity of the entitlement to be paid this, is the way it's described. SACKVILLE AJA: Is there an allegation in the statement of issues of actual dishonesty or fraud? ASHHURST: With respect, no, and neither is it necessary to have one."
8. This third submission made on behalf of Ms Drinkwater must likewise be firmly rejected. It is contrary to principle and authority.
9. In light of the submission, it may be reiterated that a finding of fraud is a serious matter. It is not lightly to be made. Section 140 of the Evidence Act 1995 (NSW) is to be applied. And if such a finding is made, it is to occur in a way which is procedurally fair.
10. Mr Nadinic was both a witness and a party. As a witness, a finding of dishonesty could not be made without his first having been given an opportunity to deal with the criticism: Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11 at [67]. This is not a case where the pleadings or the affidavits or the openings put Mr Nadinic squarely on notice of the dishonesty which the primary judge ultimately found. In the absence of cross-examination on the point, fairness dictated that the primary judge refrain from making findings of dishonesty: Bale v Mills (2011) 81 NSWLR 498; [2011] NSWCA 226 at [67]; State of New South Wales v Hunt (2014) 86 NSWLR 226; [2014] NSWCA 47 at [32]-[44].
11. As a party, Mr Nadinic was entitled to be informed of the way in which it was said he had been party to the fraud. Ordinarily, that is done by the pleadings. In theory, it is possible that a party may forego that right, and may do so by acquiescence rather than express election, but such acquiescence is not easily inferred.
12. The principles were stated by Mason CJ and Gaudron J in Banque Commerciale SA en liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 at 287 in respect of a comparable situation: "Ordinarily, the question whether the parties have chosen some issue different from that disclosed in the pleadings as the basis for the determination of their respective rights and liabilities is to be answered by inference from the way in which the trial was conducted. It may be that, in a clear case, mere acquiescence by one party in a course adopted by the other will be sufficient to ground such an inference. In the present case, the Bank not having been present at the hearing, there could be no acquiescence by it in such course, if any, by which Akhil might have attempted to extend the issues at the hearing to encompass a case of fraud as against the Bank. Nor, in our view, can acquiescence be inferred from the Bank's failure to participate in the hearing coupled with its knowledge that an allegation of fraud on its part had been raised in the amended reply to the defence filed against Mr Messara. That was a bare and unparticularized assertion. In that context, a choice by the Bank to have its liability determined on the basis of fraud would be tantamount to a decision to forego the right to be informed of the case to be made against it. The facts will not support such an inference. Accordingly, Akhil was entitled only to such relief as was available on the pleadings. In particular, it was not entitled to relief on the basis that the Bank was party to a fraudulent breach of trust." [Emphasis added.] The judgments of Brennan J at 288-290 and Toohey J at 302-305 are to substantially the same effect.
13. Thus, the submission that a judge can go further and make serious findings of fraud consistent with, but going beyond, a pleaded case of misleading or deceptive conduct or innocent or negligent misrepresentation is quite wrong. It mistakes one of the functions of pleadings.
14. The approach adopted by the primary judge and defended by Ms Drinkwater on appeal may also be unfair to the plaintiff. Civil litigation is often undertaken in circumstances where the parties consciously choose not to allege fraud or dishonesty, notwithstanding there being a sufficient basis for doing so. They may choose that course because of a desire to leave open the possibility of compromise, or in order to prevent a plaintiff's success carrying with it a finding which will prevent a defendant trustee or agent relying on an indemnity or insurance policy. Even if the trial judge reaches an actual persuasion of dishonesty, it is not open to the court in ordinary cases to make such a finding without first according procedural fairness.
15. In the trial before the primary judge, there were no pleadings, and the statement of issues and opening written submissions did not come close to alleging, let alone particularising, dishonesty. The conduct of the hearing does not permit the conclusion that Mr Nadinic acquiesced in its expansion to include an allegation of dishonesty or fraud.
16. The single question asked of Mr Nadinic in cross-examination, which was not completed by the cross-examiner, and was immediately followed by statements by the primary judge to the effect that this was outside Ms Drinkwater's case, to which proposition her counsel acceded, did not come close to giving Mr Nadinic a fair opportunity to deal with the criticism. It corresponded to the "bare and unparticularized assertion" held to be insufficient in Banque Commerciale SA en liquidation v Akhil Holdings Ltd.
17. As Mason CJ and Gaudron J observed in the passage extracted above, it requires a clear case to conclude that the parties acquiesced in an expansion of a case so as to extend to fraud. That is not this case. That is best seen from the absence of an allegation of fraud in the statement of issues and opening, and, when the primary judge made it clear to Ms Drinkwater's legal representative, shortly before the evidence closed, that she could apply to amend, his response was to the effect that he accepted that he was "bound by the statement of issues" and had "nothing further to say". The exchange between the primary judge and Mr Nadinic's counsel at the end of the trial as to dishonesty being "the nub of the case", even if it is taken at its highest, is insufficient to sustain a conclusion of acquiescence in an expansion of a case of misleading and deceptive conduct to one based on fraud, given all that had previously occurred in this litigation.
18. It follows that the primary judge was not permitted to make findings of fraud. Nor was his Honour permitted to exercise a discretion to order partial rescission applying the aphorism that fraud unravels all.
19. The result is that the judgment must be set aside and there must be a retrial (unless the parties can resolve their differences consensually). Even so, it is desirable to address the other criticisms advanced in respect of the primary judge's reasons, lest error be repeated. To be clear, none of what follows in relation to issues of fact is intended to curtail the findings at the retrial, which may well be conducted on the basis of different evidence and issues.

Reasoning as to the builder's invoices being inflated

1. The submission advanced by Ms Drinkwater and seemingly accepted by the primary judge was a very simple one. The building contract was for a sum of $6,398,542; it followed, so it was said, that there was "no conceivable justification" for the builder rendering tax invoices amounting to $10,974,662, including GST of $923,589. "We've got, on the face of it, over $10 million spent on a project that had a budget of 6.5 million ... You have got Brooks having received [$923,000] in GST refunds, and paid it out to an essentially non-related company".
2. The entirety of the primary judge's reasoning on this point was at [22]: "Unknown to the plaintiff, Maxstra NSW issued invoices totaling $10,366,698 to Brooks in respect of the project. There was no conceivable justification for this. The value of the project was only approximately $6.5 million. The ANZ facility amount was $6.35 million and for the period from June 2014 to March 2016, drawdowns from the ANZ Bank totalled $6.1 million. The building contract price was $6.398 million. And this project was the only business of Brooks. It was not possible for Brooks to pay, and not possible for Maxstra NSW to justify issuing, invoices totalling $10,366,698."
3. That reasoning has the following difficulties. 1. First, the invoices themselves were not in evidence. Instead, the amounts invoiced by Maxstra NSW to Brooks Parade appear to have been inferred, from the GST returns lodged by Brooks Parade. 2. Secondly, the Building Contract was varied (no different from most building contracts), and there was evidence (in an email from ANZ to Ms Drinkwater and Mr Nadinic dated 30 October 2015) that ANZ was aware of some 49 variations, most of which had not been approved, but which totalled slightly more than $1.5 million. That email referred to a "Forecast final contract value of $7,910,806". 3. Thirdly, the cost of the project was greater than the cost of the works performed by the builder Maxstra NSW. Exhibit 6 included a schedule of some $1.2 million of costs other than construction costs (including costs for engineering works, loan approval fee, conveyancing, council contribution, marketing, surveying, architects and lawyers) which was sent to Ms Drinkwater's lawyers in around September 2015. It is true that the document was tendered on a limited basis, as proof of the disclosure of those amounts, and not the fact that those expenses were incurred. However, senior counsel for Ms Drinkwater properly accepted that Brooks Parade would have had to incur liability for GST for costs other than construction costs, and to that extent was entitled to a refund from the ATO referable to those costs (10 April 2017, T61.42-62.1). 4. Fourthly, neither Ms Drinkwater's submission nor the judge's reasoning had regard to the lending ratios imposed by ANZ. These included a condition that the Loan to Cost Ratio "does not at any time exceed 75%" (cl 6.2(a)(ii)). Argument on the appeal proceeded on the basis that the covenant meant that the amount lent should not exceed 75% of the total costs from time to time. 5. Fifthly, the finding was one of fraud - not merely that the invoices were larger than anticipated, but that they had been inflated so as to charge for work which had not been performed. Such a finding engaged s 140 of the Evidence Act 1995 (NSW), and was not to "be produced by inexact proofs, indefinite testimony, or indirect inferences". 6. Sixthly, Mr Nadinic had been cross-examined on the basis that he was not in control, but rather his father was: "Q. The person in control of Maxstra NSW was your father. Is that correct? A. He was a director, yes. Q. He was in control of the company effectively, wasn't he? A. He was a director of the company, yes. Q. He made all the decisions in relation to the Brooks Parade development as far as the building work was concerned? A. Yes. Q. Was he the one that issued invoices to Brooks Parade on behalf of Maxstra NSW? A. Not personally. He would have had an employee do it."
4. Because there must be a retrial, there is no utility in taking the analysis any further. The reasoning of the primary judge was, with respect, insufficient to ground a finding of fraudulently inflated tax invoices rendered by Maxstra NSW known to Mr Andrew Nadinic.

Reasoning as to disclosure of GST to Ms Drinkwater

1. The critical finding of reliance by the primary judge was his acceptance of Ms Drinkwater's evidence about not signing the Deed of Settlement "if I had known that Maxstra [Constructions] had received GST refunds of $923,589.00 that Brooks was entitled to from the ATO": at [29]-[30]. In his second judgment, this was described as "pivotal to my reasoning": at [3].
2. However, throughout the protracted negotiations leading up to the execution of the Deed of Settlement, Ms Drinkwater had professional assistance. Not only were drafts of the documents exchanged between the solicitors acting for each party, but the calculations supporting the various estimates of the cost to complete were exchanged between those solicitors. For example, on 16 September 2015, when the parties were in dispute as to settling the terms of the Deed of Settlement, Mr Hewitt was sent by Mr Nadinic's solicitors a "summary of the cost status of the project". That document contains two columns, headed "Profit & Loss" and "Tax Position". The first column commences with "Sales Revenue" of $11,327,272.73 and "Construction Costs" of $7,038,396.00, and states a balance of $4,288,876.73. The second column contains the same three entries, "Sales Revenue", "Construction Costs" and "Balance", with figures $1,132,727.27, $703,839.60 and $428,887.67 respectively. The entries in the second column are one tenth of the entries in the first column. It is plain from those entries alone that the "Tax Position" described in the second column related to GST. As much is confirmed by later references in that column to the Margin Scheme and the description of the ultimate figure as "TOTAL GST PAYABLE".
3. More generally, it is plain that Ms Drinkwater was aware that substantial amounts of construction finance were being drawn down by Brooks Parade in order to pay the costs associated with the property development. After all, she was a guarantor of the facility and had countersigned many drawdown notices. She must be taken to have known that the architectural services, consultancy costs, construction costs and all the other costs involved in the development included amounts of GST. She must have known that millions of dollars of funds drawn down by Brooks Parade pursuant to notices signed personally by her had been paid by Brooks Parade to Maxstra NSW and deposited to Maxstra NSW's bank account. She must also have known that the only revenue that would be derived by Brooks Parade (aside from deposits from any purchasers "off the plan"), would be upon completion - the fundamental and obvious nature of a development such as this is that very substantial costs are incurred before most of the revenue is derived. So much was plain by the need for construction finance, which included a substantial component for interest.
4. It is conceivable that Ms Drinkwater did not turn her mind to whether Brooks Parade would lodge business activity statements each quarter, even though she was one of two directors and shareholders of the company. But it seems unlikely that Ms Drinkwater's solicitor and accountants, acting in her interest when negotiating the terms on which she would buy out Mr Nadinic's interest in Brooks Parade, could have been unaware of Brooks Parade's obligations to lodge business activity statements, and that the result of doing so would be an entitlement to substantial refunds of GST input tax credits from the ATO.

Reasoning as to rescission

1. At [34] of the first judgment, the primary judge said that: "I have reached the view that the plaintiff is entitled to succeed in a claim for equitable relief. However, she has no statutory claim. She is not a 'consumer' for the purpose of the Australian Consumer Law (Competition and Consumer Act 2010 (Cth) Sch 2) and the Contracts Review Act 1980 (NSW) has no possible application in her circumstances."
2. In the second judgment, his Honour reproduced principles as to the requirement of "what is practically just" from authorities dealing with rescission in equity at [10] and [11], under the heading "Remedy of Rescission". The gravamen of his Honour's reasons thereafter was to reject various submissions advanced on behalf of Mr Nadinic on the basis that "I do not see any injustice in this, in the circumstances of this case" (at [28]); "I see no injustice to the defendant from that outcome" (at [32]), "I see no injustice to the defendant in those circumstances" (at [34]) and "There is no unfairness in such an outcome. Nor is there a good basis for contending that it is not practically just in the circumstances" (at [39]).
3. However, his Honour proceeded to say, immediately thereafter, and as the last substantive paragraph of his reasons, that he was not ordering rescission "in the strict sense", but was making orders which operated personally, which were moulded "what I consider to be appropriate orders in accordance with the exigencies of this particular case".
4. There are, with respect, three difficulties with this reasoning.
5. First, the primary judge was asked to rescind the Deed of Settlement and the mortgage both under statute and in equity. Paragraph 31 of the statement of issues (reproduced above) invoked the Australian Consumer Law and equity, and paragraph 32 invoked the Contracts Review Act 1980 (NSW). Ms Drinkwater's opening written submissions had invoked ss 18, 20 and 21 of the Australian Consumer Law. The statutory claim appears to have been, in fact, her primary claim.
6. It is of course wrong to think that, although ss 18 and 20 are now found in the Australian Consumer Law, it is a section upon which only consumers can rely. Yet the primary judge's reasons included: "she has no statutory claim. She is not a 'consumer' for the purpose of the Australian Consumer Law ..."
7. If by that aspect of his reasons, the primary judge was rejecting the availability of statutory relief on the basis that Ms Drinkwater was not a "consumer", then that was wrong. Confusion such as this is the reason why, for example, Professor Finn referred repeatedly to "our misnamed Australian Consumer Law": see P Finn, "Common Law Divergences" (2013) 37 Melbourne University Law Review 509 at 520 and 534. A similar point was made by Moshinsky J in United Petroleum Pty Ltd v Pentaco Oil (Aust) Pty Ltd [2016] FCA 118 at [171]. Ms Drinkwater had no opportunity to be heard against that reasoning, because, so far as I can see, Mr Nadinic never submitted that she should be denied relief under statute because she was not a consumer.
8. Alternatively, if the primary judge intended something else by those words, then there is no other explanation in then rejecting the availability of statutory relief which was at the forefront of Ms Drinkwater's claim.
9. Secondly, turning to the equitable relief in fact ordered by the primary judge, his Honour said that the relief was equitable, but was "not a case of 'rescission' in the strict sense". It is clear that his Honour was conscious that the Deed of Settlement would remain in force in respect of Brooks Parade and Maxstra NSW, was of the view that there was no obstacle to that occurring, and was concerned thereafter to ensure that so far as the parties to the litigation were concerned, the position would be restored to the position they were in beforehand.
10. It seems therefore clear that his Honour was conscious of the unusual nature of the relief granted. But precisely what his Honour was doing is, with respect, less than clear.
11. If by the repeated references to fraud unravelling everything, his Honour was of the view that there was power to vary aspects of the bargain struck between Ms Drinkwater and Mr Nadinic, according to what in his view was unjust, then that discloses error. Care is required lest "fraud unravels everything" be used only as a "slogan stating an asserted conclusion"; cf Cassegrain v Gerard Cassegrain & Co Pty Ltd at [50].
12. A finding of fraud does not without more entitle a party to relief by way of rescission in equity. As is clear from Spence v Crawford, Alati v Kruger and Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd, relief may be denied on discretionary grounds, even in the case of fraudulent misrepresentation or fraudulent non-disclosure. Further, the passages upon which his Honour repeatedly relied, especially in Spence v Crawford, do not confer an unfettered discretion to vary parties' bargains. They reflect the more generous approach in equity to framing other orders so as to achieve restitutio in integrum, which may or may not be possible, so as to satisfy the prerequisite to rescission. On one reading of his Honour's reasons, rather than considering what ancillary orders were required so as to enable restitutio in integrum, his Honour instead identified the clauses of the Deed of Settlement which he considered operated unjustly in the circumstances. This seems to be the natural meaning of the language used by his Honour at the end of his judgment: "I have moulded what I consider to be appropriate orders in accordance with the exigencies of this particular case. As Lord Wright said in Spence v Crawford at 77: '... in the case of fraud, the court will exercise its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying the benefit of his fraud at the expense of the innocent plaintiff'."
13. If that is how the reasons are to be read, they represent, with respect, a misunderstanding of Lord Blackburn's reference to achieving "practical justice" and the way in which Lord Wright referred to the exercise of the equitable jurisdiction. It would not be the first time such an error has been committed. In O'Sullivan v Management Agency and Music Ltd [1985] QB 428 at 466 it was said that "[t]he question is not whether the parties can be restored to their original positions; it is what does the justice of the case require?"
14. That is not how equitable principle is to be applied. I agree with what is said in D O'Sullivan, S Elliott and R Zakrzewski, The Law of Rescission (2nd ed 2014, Oxford University Press) at p 277 on this issue: "This idea is inconsistent with the way in which the principles governing the relief given upon rescission have conventionally been understood, the central tenet of which is that the restoration of the parties to their original positions is the criterion on practical justice. From this conventional viewpoint the idea that practical justice should be done at the expense of restoring the parties to their original positions is difficult to understand. It is not clear what alternative criterion of justice is being proposed. The proposal may simply be that justice should be done according to the judge's personal conception of what seems fair in all of the circumstances."
15. There is no broad discretion in equity to rewrite a contract, even if it has been entered into as a result of fraudulent misrepresentation, by reference to what seems just. Instead, the question is whether, by the orders available to a court of equity, "practical justice" can be achieved so as to authorise the rescission of the contract and restore the parties to the position they previously enjoyed. Notwithstanding the breadth of orders available to achieve restitutio in integrum, there will be times when that cannot occur. In such cases, rescission is not available, and the plaintiff will be left to other remedies (including damages, if the misrepresentation was negligent or fraudulent).
16. That accords with what was said in this Court by Giles JA in Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; 44 ACSR 21 at [140]: "Where equitable relief is granted by setting aside a transaction which has been wholly or partly performed, restitution is required. The transaction is set aside ab initio, and the parties are to be returned to their positions prior to the transaction. Equity allows greater flexibility than common law, and if complete restitution is not possible may use its powers so as to 'do what is practically just between the parties, and by so doing restore them substantially to the status quo': Alati v Kruger (1955) 94 CLR 216 at 224. The notion of doing what is practically just is concerned with practicality. It does not deny that there must be restitution."
17. Thirdly, his Honour set aside part of the transaction, and only between some of the parties. Partial rescission is to be taken as part of the law of Australia, following what was said in Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 at 114. However, the way in which the discretion was exercised discloses the following difficulties. 1. First, even as between Ms Drinkwater and Mr Nadinic, the orders made did not restore them to the position before the Deed of Settlement. By cl 3(e), Mr Nadinic gave a release to Brooks Parade, and Ms Drinkwater (in her personal capacity and as trustee) "from all Claims arising from or in any way connected with the Project". 2. Secondly, while his Honour was conscious that there were parties to the Deed of Settlement which were not parties to the litigation, his Honour's analysis focussed on whether the orders he proposed were unjust to Mr Nadinic. But either Mr Nadinic's interests were aligned with those of Maxstra NSW or they were not. If they were aligned (and it may be noted that his Honour by expressly proceeding on the basis that Maxstra NSW was a "Nadinic family compan[y]" appears to have been of that view), then at least on one view it was necessary, in order to assess the "practical justice" to Mr Nadinic, to have regard to the fact that he was foregoing the promised consideration of $2.05 million for half of Brooks Parade, while at the same time Maxstra NSW's release of its progress payment and other claims remained in place. (What precisely was the magnitude of the final claim by Maxstra NSW was not clearly disclosed by the evidence.) 3. Alternatively, if the interests of Maxstra NSW and Mr Nadinic were not aligned, then prima facie it seems all the more appropriate to hear from the liquidator of Maxstra NSW as to whether the rescission ought to set aside all of the Deed of Settlement, including those aspects which were detrimental to Maxstra NSW. As it was put during submissions on behalf of Mr Nadinic: "If the deed is set aside, the first thing that's going to happen is the liquidator is going to put his hand out for a cheque for $150,000-odd." 1. Then there is the position of Brooks Parade. Brooks Parade was, on the case accepted by the primary judge, the direct victim of the fraud. Yet it too gave a release to Maxstra NSW. It is far from clear that, if his Honour's findings were to stand, that release should not be set aside.
18. There are two other matters which were not the subject of argument, but which may be mentioned as bearing upon the availability and terms of rescission. One is that the effect of the orders of the primary judge was to put in place as equal shareholders in a private company two persons one of whom regarded the other as dishonest. Considerations such as those expressed in Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10 at [49]-[50] would tend to point in favour of a monetary remedy, rather than one which requires the parties to continue to deal with each other after the breakdown of their relationship. Secondly, there is the question of delay. On any view, Ms Drinkwater became aware of the GST refunds which Brooks Parade had paid away shortly after she became the sole shareholder and director of the company, and her accountant became its tax agent. During the following 9 months, building work took place, there was a renegotiation with the ANZ, further funds were lent, the strata plan was registered and units were sold. Yet only after a s 57 notice was served by Mr Nadinic does it appear that Ms Drinkwater sought to set aside the Deed of Settlement.

Orders

1. The primary judge was confronted with a difficult position. The proceedings were urgent, and the final hearing had been expedited. There were no pleadings. The plaintiff's representation changed during the trial (the counsel who appeared on the first day indicated that he had only recently been briefed, and a solicitor appeared for her on the second day). Some of the factual and legal allegations advanced on her behalf were ill-founded. The primary judge did not receive the benefit of the submissions this Court has received. His Honour was unimpressed with the defendant as a witness, and concerned by the payments which had been made to companies that were being wound up. Even so, his Honour was not, with respect, entitled to make findings of fraud given the way the litigation had been conducted.
2. For those reasons, the appeal must be allowed, and the orders made by the primary judge set aside. Because there has not been a trial which was procedurally fair, there is no way of avoiding the misfortune of a further hearing, unless the parties can resolve their dispute consensually. Any retrial must, in light of the nature of the findings made by the primary judge, be held before another judge in the Equity Division. It will be clear from the foregoing that if Ms Drinkwater seeks to advance a similar case to that accepted by the primary judge, attention will need to be given to the pleadings and constitution of the proceedings.
3. The costs of the first trial should be in the discretion of the judicial officer who presides over the retrial, in accordance with the "general rule" considered in Hatziandoniou v Ruddy (No 2) [2015] NSWCA 277 and the cases there cited. However, costs of the appeal should follow the event, Ms Drinkwater having sought to maintain the judgment at first instance.
4. This Court was told that the building work is now complete and all the lots have been sold. It may be that, in light of the matters raised in these reasons, the parties can reach a compromise on the issues dividing them - which now turns principally upon the division of a fund. It is not clear whether there has been any attempt to mediate the proceeding to date, but in light of the high measure of expedition accorded to the trial, it may be that that did not occur. The finding of fraud and the misconception of the nature of GST would have been obstacles to any mediated resolution following the first judgment. I propose that the parties be directed to a court-annexed mediation, in the hope that they may, before they spend tens of thousands of dollars on a retrial, explore all possibilities of a negotiated settlement. I am conscious that this possibility was not raised when the appeal was heard. If for some reason either party is of the view that there are matters to which regard should be had before such an order is made, he or she may apply in accordance with UCPR r 36.16 to vary the orders made.
5. Finally, by oral application made without notice or process or evidence at the conclusion of the hearing of the appeal, Ms Drinkwater applied to be released from a contract whereby the net proceeds of sale were held in a joint interest bearing account in the names of the parties' solicitors. The basis of the application was that there was said to be more funds in the account than were necessary to meet her obligations to Mr Nadinic in the event he was successful. That was not established by evidence, and in any event, is not of itself a sound reason to discharge a contract voluntarily entered into by the parties. Further, a similar application was made by Ms Drinkwater, and refused by this Court at the time Mr Nadinic sought and obtained a stay: Nadinic v Drinkwater [2016] NSWCA 377 at [11]-[14]. There was no evidence adduced to demonstrate a material change of circumstance. Still further, by submissions filed, with leave, after judgment was reserved, Mr Nadinic said that he wished to adduce evidence going to the construction of the agreement. For all those reasons, Ms Drinkwater's oral application should be refused.
6. I propose the following orders:
7. Appeal allowed.
8. Set aside orders 1-4 made on 9 December 2016.
9. The parties are referred to court-annexed mediation. Such mediation is to occur by no later than 25 July 2017.
10. The parties are to attend upon the Principal Registrar of this Court forthwith to obtain a date for mediation.
11. After 25 July 2017 the proceeding is remitted to the Equity Division for a new trial before a judge other than Pembroke J. Such remitter to include the question of the costs of the first trial.
12. Ms Drinkwater to pay Mr Nadinic's costs of the appeal.
13. Ms Drinkwater's oral application made on 10 April 2017 for monies to be paid from the joint bank account is refused.
14. SACKVILLE AJA: I have had the advantage of reading Leeming JA's comprehensive reasons for judgment.
15. I agree with Leeming JA that it was not open to the primary Judge to find that the appellant (Mr Nadinic) participated in a dishonest scheme "to manipulate the GST system for the ultimate advantage of Maxstra Constructions [Pty Ltd]" [1] , and had been guilty of "naked dishonesty". [2] Nor was it open to his Honour to find that Mr Nadinic "must have known" that the invoices issued by Maxstra NSW Pty Ltd were inflated or fabricated presumably to the extent of approximately $4 million and that Mr Nadinic deliberately concealed from Ms Drinkwater his knowledge of and involvement in a scheme "that appears to have perpetrated a fraud on the Australian Taxation Office". [3]
16. As Leeming JA has explained, at no stage did the respondent (Ms Drinkwater) plead or formulate a case founded on fraud. Nor were allegations of fraud put to Mr Nadinic except in the form of one broad question which the primary Judge stated was outside the case advanced by Ms Drinkwater.
17. Mr Ashhurst SC, who appeared with Mr Corbett for Ms Drinkwater, made a valiant attempt to disentangle the findings of fraud and dishonesty from what he said were findings of equitable fraud short of actual dishonesty. The attempt was not successful because the primary Judge made it clear, both in the Primary Judgment and in the judgment on relief, that his findings that Mr Nadinic had engaged in deliberately dishonest conduct were central to his findings on liability and to the form of relief granted. [4]
18. One of the consequences of fraud not being pleaded or particularised is that, as Leeming JA points out, the primary Judge's findings of fraud lack specificity. [5] Moreover, the findings do not make it clear precisely which aspect of Mr Nadinic's "fraudulent" conduct caused Ms Drinkwater to execute the Deed of Settlement. But even if the findings had been expressed with greater specificity, the primary Judge was not entitled to decide the case on the basis of fraudulent conduct that had not been alleged or put to Mr Nadinic.
19. These conclusions are sufficient to require the appeal to be allowed and a new trial ordered.
20. As the parties may well adduce different evidence on a new trial and the issues may be refined and perhaps modified, I do not think it necessary to address the further arguments advanced on behalf of Mr Nadinic.
21. I agree with Leeming JA that this is a case where the parties would do well to attempt to resolve the dispute by agreement.
22. I agree with the orders proposed by Leeming JA.

Endnotes

1. Drinkwater v Nadinic [2016] NSWSC 1364 (Primary Judgment) at [21].
2. Primary Judgment at [23].
3. Primary Judgment at [26], [30].
4. Primary Judgment at [30], [31]; Drinkwater v Nadinic [2016] NSWSC 1733 at [8].
5. See above at [45].

Amendments 11 December 2017 - [4] "GST input tax credit refunds" replaced by "GST refunds"

[26] The case name "Brembridge" corrected to "Bremridge"

[111] pinpoint reference in the final sentence corrected

143 "... Maxstra NSW or they are not" replaced by "... Maxstra NSW or they were not" 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: 23 March 2018