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[2020] VSCA 282
Court of Appeal (Vic)
2020-11-16
Mr P, Leish JA, Niall JA, Sifris JA
Original judgment source is linked above.
CONTRACT - Rectification for common mistake - Sale of motel business and freehold effected by sale of units in unit trust - Sale of units deed omitted proposed term transferring intercompany loans on books of corporate trustee to related entity borrower - Whether omission common mistake permitting rectification - ; , applied - Whether judge erred in finding sufficiently clear common intention to exclude loans from sale - No error shown - Common intention sufficiently specific to be capable of reduction to legal form - Differences in form of pleaded term, proposed term, and ultimate formulation insignificant - , ; , applied - Whether term involved legal impossibility because provided for assignment of debt to creditor - No impossibility - Assignment of debt to creditor would have legal operation as release - , considered - Appeal dismissed.
1 This application for leave to appeal principally concerns rectification of a contract for common mistake. The applicants seek to set aside orders for rectification made by a judge in the Trial Division. For the reasons that follow, the appeal should be dismissed.
2 The first applicant ('Queenfield') is the proprietor of the Travel Inn Motel in Carlton and the trustee of the Travel Inn Motel Unit Trust ('the Trust'). The Trust owns the land on which the motel is situated and it conducts the motel business. The second respondent ('Gordon Nominees') was the sole shareholder in Queenfield and sole unitholder in the Trust until 1 July 2015, when it executed a deed transferring to the second applicant ('TLP Nominees') half of the units in the Trust.
3 At that time, Queenfield's books recorded two intercompany loans to entities associated with its director, Moishe Gordon: a loan of $4,347,611 to the first respondent ('Gordon Finance') and a loan of $2,000,786 to Gordon Nominees. In 2017, after TLP Nominees and related entities had acquired majority ownership of Queenfield and the Trust, Queenfield demanded repayment of those intercompany loans. Ultimately, Queenfield brought a proceeding in the Trial Division seeking their repayment.
4 A judge in the Trial Division dismissed Queenfield's claim.[1] The judge considered that TLP Nominees and Gordon Nominees had a common intention that the deed include a term that the intercompany loans be assigned to Gordon Nominees as trustee for the Gordon Family Trust. He ordered that the deed be rectified accordingly.
5 The applicants seek leave to appeal from the judge's decision. The respondents, by a notice of contention, seek to uphold the decision on the alternative ground that the judge should have found that they had established a common law estoppel by convention preventing Queenfield from claiming an entitlement to the loans as assets of the Trust.
6 For the reasons that follow, leave to appeal will be granted but the appeal will be dismissed. As will be explained, it is not necessary to address the notice of contention.
7 Mr Gordon and his former wife divorced in 2014. On 18 February 2015, the Family Court ordered Mr Gordon and Gordon Nominees to pay Mr Gordon's former wife a settlement sum of $7,350,000. That sum was secured by a registered mortgage over the motel freehold.
8 The next month, Mr Gordon caused Queenfield to engage real estate agents to sell the motel business and freehold. The Paolacci family were identified as potential purchasers. On 22 April 2015, there was an initial meeting at the motel relating to the proposed sale, between the general manager of the motel, Helen Williams, Lina Paolacci, and the Paolacci family's long-time accountant, Dennis Beed. On 8 May 2015, there was a subsequent meeting at which John Paolacci put a 'ball park' offer to Mr Gordon. That offer was not accepted. There were further meetings between
Mr Gordon and Mr Paolacci, and they also continued to correspond.
9 On 13 May 2015, Mr Paolacci emailed Mr Gordon with another offer. The offer was that an entity controlled by the Paolacci family, TLP Nominees (or its nominee) pay $11 million for a 50 per cent interest in the motel business as a going concern and a 50 per cent interest in the freehold. The terms of the offer included that the purchaser assume 50 per cent of the 'liability, repayment of existing mortgage payments and provide a company and director guarantee' for 50 per cent of a roughly $11.5 million NAB registered mortgage.
10 Later that day, another potential purchaser emerged: Jinshan Assets Investments Pty Ltd ('Jinshan').
11 In the ensuing four days, there was another meeting at the motel between Mr Paolacci, Ms Paolacci, Mr Gordon and Ms Williams. Mr Paolacci stated that the freehold and business had been valued at $22 million. Factoring in the mortgage of $11.5 million, this left a net value of $10.5 million. This yielded an offer of $5.25 million for a 50 per cent interest in each of the freehold and the business. Mr Gordon responded that this amount was insufficient to meet his obligation to pay the Family Court settlement sum of $7.35 million. Mr Gordon invited Mr Paolacci to increase his offer. At the meeting, Mr Paolacci declined to do so.
12 On 18 May 2015, Mr Paolacci emailed Mr Gordon with an amended offer. In contrast to the previous offer, this offer was for TLP Nominees or its nominee to pay $12.75 million to acquire a 50 per cent interest in the freehold and 100 per cent of the motel business. In his email, Mr Paolacci described the offer as an '[a]mended offer as discussed to include [the] business ... delivering the figure circa 7 mil as suggested.' Mr Gordon rejected the offer. This was the only occasion on which a sale of the whole of the business was raised.
13 On around 26 May 2015, there was another meeting at the motel between Mr Paolacci, Ms Paolacci, Mr Gordon and Ms Williams. Mr Gordon gave evidence that he raised a proposal that the purchase proceed by Mr Paolacci acquiring units in the Trust.
14 Meanwhile, also on 26 May 2015, Jinshan made an offer to pay $23.3 million to acquire both the freehold and business. The sale to Jinshan did not ultimately proceed.
15 On 1 June 2015, the solicitor for TLP Nominees, Alex Collins, emailed Mr Gordon's solicitor, Graeme Efron. He stated that TLP Nominees had achieved an 'in principle and verbal agreement with your client' to acquire a 50 per cent interest in the motel freehold and 50 per cent of the business.
16 Later that day, Mr Collins emailed Mr Paolacci, stating that Mr Efron had suggested that Mr Gordon may prefer to structure the acquisition as a transfer of 50 per cent of the units in the Trust due to 'stamp duty implications'.
17 The next day, 2 June 2015, Mr Collins emailed Mr Efron requesting a 'binding' letter setting out the structure and timeframe for completing the deal. Mr Efron emailed Mr Collins later that day. He stated that the structure of the deal would be that TLP Nominees acquire a 50 per cent interest in each of the motel freehold and the business by acquiring 50 per cent of the units in the Trust, and TLP Nominees and two members of the Paolacci family would guarantee half the NAB debt. One half of the shares in Queenfield would also be transferred for a nominal sum. Shortly afterwards, Mr Williams emailed Mr Paolacci financial statements of the Trust for each of the 2012-14 financial years, which Mr Paolacci forwarded to Mr Beed along with the trust deed the following day. Those statements recorded the intercompany loans.
18 Mr Collins replied to Mr Efron a short time later, stating that TLP Nominees was 'pleased to have agreed key terms with the vendor.' This marked the first point at which the parties agreed that the sale of the business would take place by a transfer of units and shares.
19 On 5 June 2015, Mr Paolacci emailed Mr Efron seeking confirmation of Queenfield's liabilities as well as assurances that all loans and liabilities other than the NAB mortgage would be discharged at settlement.
20 Following a meeting at the motel between Mr Paolacci, Mr Beed and Michael Langmaid, Queenfield's accountant, on 9 June 2015, Mr Langmaid emailed Ms Williams on 11 June 2015 setting out proposed terms. The email relevantly stated:
I have called Graeme, and left message to call me back.
Believe a deal can be structured as follows, which will meet everybody's requirements.
These are draft/estimated figures as I do not have any proposals in front of me.
Purchase price is $22.0m, to be paid as follows
per annum which under these formulae would mean a deduction of $12.25k a month from the profit distribution.
h) Any modification or change to structure will be by mutual agreement.
As will be seen, clause (i) of Mr Langmaid's email came to be particularly significant.
21 Later that day the terms were forwarded to Mr Beed and Mr Paolacci.
22 The next day, 12 June 2015, Mr Beed emailed Mr Paolacci, stating:
I have put together a combination of our thoughts. Interesting enough we all seem to be on the same page. I believe you should send to Efron our proposal so we can get this over the line.
23 On 15 June 2015, Mr Paolacci emailed Mr Gordon, Mr Efron and Ms Williams an offer said to have been amended to meet the six 'benefits' enumerated in Mr Langmaid's 11 June 2015 email. The amended offer described itself as an offer for TLP Nominees to pay $11 million for a 50 per cent interest in each of the motel freehold and the business as a going concern. Clause (i) was retained. The amended offer relevantly provided:
Payment of the Purchase Price paid as follows
a) Take over 50% of the debt of circa $11.5m,
h) Any modification or change to structure will be by mutual agreement.
24 The next day, 16 June 2015, Mr Gordon sent an email to Mr Efron, attaching the amended offer with annotations and asking Mr Efron to 'action accordingly'. The annotations included, relevantly:
(a) the word 'agreed' was added to clauses (a), (b), (f), and (h);
(b) '5%' was substituted for '10%' in clauses (d) and (e);
(c) the sentence 'This Loan is for two years in duration' in clause (c) was struck through;
(d) the phrase 'GD Efron to modify' was added after clause (g);
(e) the phrase 'Advice from Mort' was added after clause (i).[4]
25 Later that day, 16 June 2015, Mr Efron emailed Mr Paolacci attaching the amended offer, marked up with two relevant amendments: the $2.1 million loan described in clause (c) was amended to include an option for early repayment and a redraw facility; and the interest on the loan described in clause (e) was reduced from ten per cent per annum to the higher of five per cent per annum or the costs of the loan.
26 On 18 June 2015, Efron & Associates emailed Mr Paolacci, confirming that an 'agreement has now been reached'. Notwithstanding the various annotations and amendments, the terms set out were identical to the terms of the amended offer, with only one exception: clause (c) was amended to include the option for early repayment and a redraw facility on the $2.1 million loan. Significantly, the agreement was again described as the purchase of a 50 per cent interest in the motel freehold and a 50 per cent interest in the business as a going concern, and clause (i) was among the terms restated.
27 On 23 June 2015, Efron & Associates emailed Mr Paolacci with a draft sale of units agreement. It provided for a sale of 50 per cent of the units in the Trust, together with an option for TLP Nominees to purchase one of the two shares in Queenfield from Mr Gordon for a nominal sum. The next day, Mr Paolacci emailed Mr Efron, commenting on the agreement and insisting on more detailed vendor warranties.
28 On 1 July 2015, settlement occurred. The sale of units deed was executed by Gordon Nominees, TLP Nominees, Queenfield, Ms Paolacci, Torino Paolacci and Mr Gordon.[5] The executed sale of units deed did not include any term as to the intercompany loans.
29 On 2 February 2017, the $2.1 million loan to Gordon Nominees was discharged and Gordon Nominees transferred 20 per cent of the units in the Trust to an entity associated with the Paolacci family, giving the Paolacci family majority ownership of the Trust.
30 As mentioned, Queenfield subsequently brought a proceeding in the Trial Division seeking repayment of the intercompany loans.
31 In the Trial Division proceeding, the present respondents denied that Queenfield held the intercompany loans, contending that at the time the sale of units deed was executed there was:
(a) a common intention that the sale of units would exclude any interest of the Trust in the intercompany loans, and that the loans would instead be held by Queenfield on trust for the benefit of Gordon Nominees as trustee of the Gordon Family Trust; or, alternatively
(b) a common assumption between the parties to the same effect.
32 On that basis, Gordon Nominees sought by counterclaim:
(a) a declaration that Queenfield held the intercompany loans on trust for Gordon Nominees as trustee for the Gordon Family Trust; or
(b) rectification of the deed to include a term acknowledging that Queenfield held the intercompany loans on a separate trust for Gordon Nominees as trustee for the Gordon Family Trust.
33 The judge ordered rectification, albeit not in the precise form pleaded, and dismissed Queenfield's claim.
34 The judge's reasons addressed two main issues. The first, the 'rectification issue', was whether the parties shared the common intention contended for and, if so, whether the deed should be rectified accordingly. The second, the 'conventional estoppel issue', was whether the parties shared the common assumption contended for and, if so, whether Queenfield was estopped from demanding repayment of the intercompany loans.
35 On the 'rectification issue', the judge began by describing the doctrine of rectification by reference to well-established principles, which were not then (and are not now) in dispute. The judge identified three questions: (a) whether there was an 'agreement' in the sense that the parties shared a 'common intention'; (b) if so, whether the parties intended that the written instrument conform to that agreement; and (c) if so, whether the written instrument failed to reflect that agreement because of a common mistake.[6]
36 As to the first question, the judge accepted that there was the common intention contended for. The common intention was communicated between the parties in the form of proposed clause (i), which provided 'intercompany loans, to be transferred to the Gordon Family Trust, with any balance to be treated as an equity adjustment'.[7] Clause (i) was formulated by Mr Langmaid, Queenfield's accountant. It first emerged in his email to Mr Paolacci on 11 June 2015. Clause (i) was then included in:
(a) the 15 June 2015 offer from Mr Paolacci to Mr Gordon;
(b) the 16 June 2015 further amended offer from Efron & Associates to Mr Paolacci; and
(c) the 18 June 2015 confirmation of the agreement from Efron & Associates to Mr Paolacci.[8]
37 The judge considered that clause (i) was properly understood to mean that Queenfield transfer the debts constituted by the intercompany loans to Gordon Nominees as trustee for the Gordon Family Trust. The judge rejected the alternative interpretation of clause (i) advanced by Queenfield, that clause (i) was properly understood to mean that liability in respect of only one of the intercompany loans - the loan to Gordon Finance - be transferred to Gordon Nominees to better secure repayment of that loan.
Unfortunately, my recollection is very clear on the matter, I told them no intercompany loans would be recoverable and that's why they should be moved off the balance sheets.
39 As a result, his view was that an equity adjustment would be required as part of the sale. He expressed this view using somewhat different terminology, stating that the 'whole lot' needs to be 'written off for sale purposes'.[11]
40 The judge considered Mr Langmaid to be an honest witness, who was insistent that at the 9 June 2015 meeting he: (a) stated that the intercompany loans should be transferred to the Gordon Family Trust; and (b) did not suggest novating to Gordon Nominees the liability of the intercompany loan to Gordon Finance.[12]
41 Further, Mr Langmaid's evidence was that at the 9 June 2015 meeting, he had not been told the identity of the potential purchaser, the details of any prior sale negotiations, or the particulars of the potential sale. Without that information, the judge considered it 'inherently unlikely' that Mr Langmaid would have volunteered that the intercompany loans be included as part of the sale, or suggested some method of better securing repayment of the intercompany loan to Gordon Finance.[13]
42 The judge preferred Mr Langmaid's evidence about the 9 June 2015 meeting to the evidence of Mr Paolacci and Mr Beed, aspects of whose evidence he considered unsatisfactory and lacking credibility.[14] But the judge also considered that Mr Langmaid's evidence was more consistent with, and better supported by, other evidence. For example, he considered that Mr Langmaid's account better accorded with the words of clause (i). The clause used the plural phrase 'intercompany loans', suggesting that it referred to both intercompany loans, and it contained a reference to an equity adjustment, which would be unnecessary unless what was contemplated was a transfer of debts rather than the novating or 'securing' of a liability.[15]
43 Further, the judge considered that Mr Langmaid's account better accorded with the contemplated structure of the deal. As it emerged over the course of the negotiations, the transaction involved the purchase of a 50 per cent interest in the motel business and freehold for $11 million, to be paid for by a cash payment of $5.25 million and the assumption of half of the roughly $11.5 million NAB debt. Given that structure, Mr Langmaid's understanding of clause (i) would avoid the 'inherently improbable' result that TLP Nominees acquire a 50 per cent interest in the intercompany loans without consideration, and on payment of the $5.25 million cash component be entitled to recover intercompany loans exceeding that amount.[16] In making that observation, the judge plainly meant to refer to Queenfield, now jointly owned, being entitled to recover the loans.
44 As to the second question (whether the parties intended that the written instrument conform to the common intention), the judge held that the parties intended the deed to reflect the common intention. He considered it 'inherently unlikely' that the parties would agree to a substantial change to their agreement without further negotiations or discussions, of which there was no evidence.
45 As to the third question, in light of the answers to the previous questions, the judge was satisfied that the absence of a term reflecting clause (i) in the deed was the result of a common mistake.
46 As a result, the judge made orders rectifying the deed to include the following clause, which differed somewhat from clause (i):
The intercompany loans, being the loans to [Gordon Finance] and [Gordon Nominees], be assigned to [Gordon Nominees] as trustee for the Gordon Family Trust ...
47 Next, the judge addressed the 'conventional estoppel issue'. As the estoppel contended for arose from pre-contractual communications, a threshold question was whether pre-contractual communications can found an estoppel by convention. The judge held that they could not. He considered that he should not diverge from the clear, albeit obiter, statement of this Court to that effect in Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd.[17] Accepting that the state of the authorities in Australia is somewhat unsettled, the judge considered that statement to accord with the predominant view that pre-contractual communications may be relied on in support of equitable estoppel but not common law conventional estoppel.[18] Accordingly, the judge dismissed the estoppel by convention claim.
48 The applicants advance the following four proposed grounds of appeal, each of which relates to the issue of rectification:
Ground 1
1. The learned trial judge erred in finding at that:
(a) the parties had a common intention that the Sale of Units Deed would include a term that 'The intercompany loan, being the loans to Gordon Finance and Gordon Nominees, be assigned to Gordon Nominees as trustee for the Gordon Family Trust'; and
(b) the Sale of Units Deed should be rectified to reflect that Common Intention.
49 The respondents, by their notice of contention, advance the following ground, relating to the issue of conventional estoppel:
The learned trial judge:
(a) erred in holding that common law estoppel by convention cannot arise from pre-contractual communications or negotiations;
(b) ought to have held that that common law estoppel by convention can arise from pre-contractual communications or negotiations; and
(c) ought to have found that an estoppel by convention arose, such that the plaintiff was estopped from recovering the debts the subject of the plaintiff's claims against the defendants;
(d) ought to have dismissed the plaintiff's claims against the defendants on the basis of estoppel by convention.
50 Before turning to the arguments, it is convenient briefly to refer to the principles by which a contract may be rectified, which were not in dispute between the parties either at trial or in this Court. The purpose of rectification is to correct the written instrument so that it conforms to the true agreement between the parties, which the instrument mistakenly fails to express. Gageler, Nettle and Gordon JJ explained in Simic v New South Wales Land and Housing Corporation:[19]
For relief by rectification, it must be demonstrated that, at the time of the execution of the written instrument sought to be rectified, there was an 'agreement' between the parties in the sense that the parties had a 'common intention', and that the written instrument was to conform to that agreement. Critically, it must also be demonstrated that the written instrument does not reflect the 'agreement' because of a common mistake. Unless those elements are established, the 'hypothesis arising from execution of the written instrument, namely, that it is the true agreement of the parties' cannot be displaced.
The issue may be approached by asking - what was the actual or true common intention of the parties? There is no requirement for communication of that common intention by express statement, but it must at least be the parties' actual intentions, viewed objectively from their words or actions, and must be correspondingly held by each party.[20]
51 Displacing the presumption that the executed agreement reflects the true agreement of the parties requires 'convincing proof'.[21] Anything less would subvert the objective theory of the interpretation of contracts. One aspect of that proof is that the divergence between the common intention of the parties and the terms of their written agreement must be clearly identified.[22]
52 In varying ways, the submission of the parties addressed the application of each of the above legal principles to the evidence in this case.
Proposed grounds 1 and 2 - common intention as to clear and unequivocal term
53 It is convenient to address the first two proposed grounds together. They raise the related issues of the existence of the common intention and the degree of precision required in identifying that intention.
54 The applicants submitted that only Mr Gordon, Mr Paolacci and Mr Efron could give evidence of the intentions of the parties regarding the intercompany loans, and none of them had given that evidence. It was submitted that the judge rejected the evidence of Mr Paolacci, gave no weight to the evidence of Mr Gordon and likewise gave little weight to the evidence of Mr Beed. Mr Efron did not give evidence. Mr Gordon had stated that he did not understand the proposition put forward by Mr Langmaid in his email dated 11 June 2015.[23] As to the evidence of Mr Langmaid, it could not make up for the absence of evidence of the parties to the agreement. Mr Langmaid was not in a position to bind Gordon Nominees and
Mr Gordon had not even been present at the meeting on 9 June 2015. Mr Langmaid took no part in negotiations after sending his email.
55 The applicants submitted that Mr Gordon gave evidence that he did not understand clause (i) of the email from Mr Paolacci dated 15 June 2015. Instead, he had noted that he wanted '[a]dvice from Mort' Schwartzbord.[24] There was no evidence that such advice had been obtained. The applicants submitted that an adverse inference should have been drawn from the failure of the respondents to call evidence from Mr Efron, his employee solicitor Oren Polichtuk, Ms Williams or Mr Schwartzbord. In the end, it was said, there was no evidence that Mr Gordon understood the Langmaid proposal embodying clause (i) in the terms of the deed as rectified by the judge.
56 As to Mr Paolacci, it was submitted that the judge, having found his evidence to be unsatisfactory, could not conclude that he had contemplated a contractual term in the form ordered, which, as mentioned, differed from clause (i). Such a term was not put to him in evidence. Only clause (i) was put to him, and he assumed that it had been omitted from the deed deliberately.
57 The applicants submitted that Mr Beed's evidence was also significant. He pointed to tax implications of removing the loans from the balance sheet. These issues had not been resolved. It was submitted that there could not have been a meeting of minds when such critical matters had not been the subject of any agreement.
58 The applicants submitted that the judge had also erred in speculating about the structure and purpose of the transaction, rather than looking at what the parties actually intended. An analogy was drawn with the construction of commercial contracts, where it is not appropriate to speculate as to the commercial purpose of the agreement divorced from its terms.[25]
59 Next, the applicants submitted that there was particular difficulty understanding what clause (i) meant. In particular, the 'equity adjustment' could have referred to an adjustment in price or the allocation of equity, or it could have been a reference to an accounting treatment. Mr Langmaid himself thought that an equity adjustment equated to a reduction in the purchase price.
60 The applicants submitted that the lack of clarity in the evidence was borne out by the fact that the relief granted did not correspond to either the pleaded relief or the form of relief ultimately sought at trial. The pleading contended that the deed should be varied by incorporating a declaration that Queenfield held the loans on trust for Gordon Nominees. But no such term was put to the witnesses and there was said to be no evidence of the parties having intended it to form part of their agreement. Instead, the trial was ultimately run on the basis that the first part of clause (i) - that the intercompany loans be transferred to the Gordon Family Trust - reflected the relevant common intention. But the form of rectification ordered by the judge differed even from that formulation, including by introducing the concept of an assignment rather than a transfer.
61 The respondents submitted that the evidence, viewed as a whole and in context, amply supported the findings of the trial judge. That context included considerations of what was commercially likely or justifiable. Having regard to such considerations did not amount to substituting speculation for evidence.
62 The respondents noted that the judge had not set Mr Gordon's evidence wholly aside on grounds of credit. He had said he accorded it little or no weight except where it was corroborated by other evidence. Mr Gordon had consistently said, according with the probabilities of the case, that the intercompany loans were not part of the sale and that he understood and intended that this would be achieved by clause (i). It did not matter that he did not understand precisely what those words meant.
63 It was said to be inherently unlikely that Mr Gordon would have intended to enable the loans to be called up after the sale, effectively swallowing nearly the whole of the purchase price and making him unable to pay the Family Court settlement sum.
64 The common intention found by the judge was also said to be consistent with the sale of units being indistinguishable in commercial effect from the sale of the land and motel business. It was said to be an important part of the context that all the written offers were based on the premise that the unencumbered value of the land and business, and the unencumbered value of the assets of the unit trust, was $22 million.
65 The respondents submitted that the fact that none of Mr Efron, Mr Polichtuk, Ms Williams or Mr Schwartzbord gave evidence had no bearing on the fact-finding task. Mr Efron and Mr Polichtuk were legal practitioners at Efron & Associates, which was being sued by the respondents in negligence. Neither side called their respective lawyers as witnesses. Ms Williams was an employee of Queenfield. Each of these people could have been called by Queenfield.
66 In relation to the evidence of Mr Paolacci, the respondents submitted that the judge was right to reject his evidence of a contrary common intention. Mr Paolacci had said that the parties intended to 'transfer' the Gordon Finance loan so that it would be due from Gordon Nominees and thereby recoverable from the Gordon Family Trust. However, this was inconsistent with clause (i), which referred to a transfer, not what was in truth a novation, and referred to loans in the plural rather than just the Gordon Finance loan. Moreover, on any view, a novation would not call for any equity adjustment. Queenfield's case was therefore that clause (i) meant something different altogether and that it was never adopted. Once that positive case was rejected, in favour of the directly contrary evidence of Mr Langmaid,[26] it was said to be a short logical step to find on the basis of the email Mr Paolacci sent proposing clause (i) that he thought that the loans were not part of the sale and they would be moving off the balance sheet.[27]
67 The applicants based their primary argument regarding evidence of common intention on the evidence of the protagonists in the transaction. On this foundation, they argued that the judge had erred in placing weight on the evidence of Mr Langmaid, who was not involved in negotiations after he sent the email which first contained clause (i). However, the argument purported to operate on something of a blank canvas. Instead, the evidence regarding clause (i) needed to take account of the context of the overall negotiations regarding the transaction.
68 It clearly emerged from the evidence of those negotiations that, except for one brief period when a sale of the whole business was raised,[28] the parties were of the same mind in pursuing a deal in which TLP Nominees would acquire half of the motel business as a going concern, including a half interest in the land. At a relatively early stage, the mechanism for achieving that transaction changed from a direct sale to a sale of units, but the underlying commercial arrangement remained the same and the parties continued to refer to the transaction as a sale of half the motel business as a going concern.[29] It is significant in that context that it was not in dispute that the intercompany loans had been applied by Mr Gordon for purposes unrelated to the motel business.
69 Once the sale of units structure had been agreed upon on 2 June 2015, the parties moved to document the transaction and inevitably questions of detail arose. The meeting of 9 June 2015 was the critical point at which the intercompany loans came into focus.
70 There were competing accounts of that meeting. Mr Paolacci claimed that Mr Langmaid told him on that occasion that the loans made the deal an attractive one for TLP Nominees. He said that Mr Langmaid had told him that he should ask Mr Gordon to transfer the Gordon Finance loan to Gordon Nominees to give
TLP Nominees better 'security' and potentially a larger equity interest if the loans could not be repaid. Mr Beed's evidence was to similar effect. Mr Langmaid, in contrast, said that he had told Mr Paolacci and Mr Beed that the loans were not recoverable and should be moved off the balance sheet.
71 The judge preferred the evidence of Mr Langmaid on several grounds. He found him to be an honest and straightforward witness. He found the evidence of Mr Paolacci unsatisfactory, mainly because it was fundamentally different from evidence he had given in relation to statutory demand proceedings two years earlier. The judge also expressed scepticism about Mr Beed's evidence, noting his longstanding closeness to the Paolacci family and the close alignment between his affidavit and that of Mr Paolacci.[30]
72 As well as basing his findings on his impressions of the witnesses, the judge accepted Mr Langmaid's account of the 9 June 2015 meeting because it more closely reflected the terms of clause (i) which he put forward two days later. Clause (i) referred to loans in the plural, and an equity adjustment would not be required following a novation.[31]
73 Further, the judge found it inherently improbable that the parties agreed that the intercompany loans, being unrelated to the motel business which was the subject of the transaction, were to be part of the sale. If, as a result of the transaction being structured as the sale of half of the units rather than half the business, the loans had become part of the subject matter of the deal, the absence of additional consideration made such a result commercially unjustifiable.[32]
74 In our view, the judge was amply justified in approaching the matter this way. We do not accept that in doing so he substituted assumptions about what was inherently or commercially likely for evidence of the parties' intentions. Faced with two competing accounts of the critical meeting, he preferred that of Mr Langmaid, for reasons which included the broader commercial context in which the parties were operating.
75 The fact that Mr Langmaid had given evidence that he saw the clause (i) proposal as involving additional consideration does not undermine his evidence about the transfer of the loans. Mr Langmaid stated that the 'reduction in equity' corresponding to the transfer of the intercompany loans would reduce the consideration payable for half of the units, but he immediately added that the 'reduction, if any, would be determined by the valuation' and he did not know what valuation figure had been used or the calculation that would decide what amounted to half of the units. It is plain that Mr Langmaid's assumption that transferring the loans would result in a change to the consideration was itself based on an assumption that the loans had been factored in to the valuation of the business. If the latter assumption were wrong, the removal of the loans from the balance sheet would not affect the purchase price.
76 This was not a matter of construing a contract, or even clause (i), where assumptions about commercial purpose could have clouded the exercise. It was an analysis of the whole of the evidence on a question of fact. In our view, quite apart from the benefit the judge enjoyed from observing the witnesses, his conclusions accord with the documentary evidence to which reference has been made. They accord also with the fact that the parties negotiated throughout for the sale of an ongoing business for an agreed value, structured as a sale of the units in the Trust (together with the land), and the intercompany loans did not form part of that business.
77 Once Mr Langmaid's evidence on this issue is accepted, it is a short step to concluding that, when he prepared clause (i), and when Mr Paolacci proposed it to Mr Gordon, they were seeking to embody what had been discussed at the 9 June 2015 meeting, and not what Mr Paolacci later claimed had been discussed. It was not in doubt that Mr Gordon did not want the loans, which he had hitherto controlled through Queenfield, to pass to joint control with Mr Paolacci. In that context, while it is plain that Mr Gordon wanted accounting advice regarding clause (i) from Mr Schwartzbord, the fact that no evidence was adduced as to whether such advice was ever obtained does not justify inferring any doubt as to whether Mr Gordon intended to exclude the loans from the transaction.[33] To the contrary, the fact that Efron & Associates proposed terms including clause (i) on 18 June 2015, two days after the 'Advice from Mort' annotation was made, shows that Mr Gordon proceeded with the proposal after having ample time to obtain such advice.[34]
78 For these reasons, no error has been shown in the judge's conclusion that the parties had a common intention of excluding the loans from the sale. In our view, that finding was well supported by the evidence, to the necessary standard of satisfaction. The issue is then whether the evidence established a term of sufficient specificity.
79 In our view, it did. The concept of removing loans from a balance sheet, so as to exclude them from a sale of half the controlling interest of the entity that owns them, is not a complex one. Such a transaction, including in the absence of consideration being received by the entity for the loans, calls for a balancing accounting treatment. The documents, read in light of the evidence regarding the meeting of 9 June 2015, show that this was the transaction the parties intended. Just as it fell to be documented by the solicitors preparing the deed, since that did not happen, the task fell to the judge. In our opinion, the term he ordered suitably reflected the intention he had identified.
80 The fact that the evidence did not go so far as to show that a term in that specific form was intended by the parties is not a bar to the rectification claim. What is required is a common intention as to what was agreed. While that might be articulated in legal language or in the form of a draft contractual term, that is not essential. Conversely, the fact that different ways might be found of formulating the intention in legal terms does not deny that the intention exists. Similarly, the evidence that Mr Gordon shared the common intention is not undermined by his evidence that he did not understand, or fully understand, clause (i). The larger point is that he intended that the loans not form part of the sale. The common intention need not descend to consequential accounting, or taxation, treatment.
81 In this regard, McLelland AJA explained in Carlenka:
In general, the remedy of rectification of an instrument is available where it is established by clear and convincing proof that at the time of execution of the instrument the relevant party or parties as the case may be had an actual intention (if more than one party, a common intention) as to the effect which the instrument would have which was inconsistent with the effect which the instrument as executed did have in some clearly identified way. In this context 'effect' means the legal and factual operation of the instrument according to its true construction, but does not include legal or factual consequences of the operation of the instrument of a more remote, or collateral, kind (for example, its liability to stamp duty).[35]
82 As it was put by Simonds J in Crane v Hegeman-Harris Co Inc:[36]
It is of course, true for the purposes of rectification you must find that which was specifically intended, but the exact form of words in which the common intention is to be framed appears to me to be immaterial as long as in substance and in detail their intention is to be ascertained.[37]
83 Of course, there may well be no common intention if the parties are united in wanting to achieve an agreed objective but disagree as to the means of doing so. Had there been disagreement in the present case about different legal mechanisms for taking the loans out of the transaction, this might have pointed to a lack of the necessary common intention. But here the evidence fell well short of such a case. The evidence that Mr Beed was concerned about tax issues goes no further than pointing to a potential consequence in relation to clause (i). Once it is found that Mr Paolacci advanced the clause consistently with the explanation of Mr Langmaid, that concern is not relevant.
84 Similarly, ambiguity in clause (i) itself is not a bar to finding a common intention that the loans not form part of the sale. On any view of clause (i) it was plain that a transfer of the loans was contemplated. To the extent necessary to sustain the requisite common intention, clause (i) was therefore clear. As already discussed, the 'equity adjustment' represented only the consequences or working out of the transfer.
85 It is similarly not significant that the respondents formulated their proposed term differently in their pleading to the language ultimately crafted by the judge. It is evident that the case was run on the basis of a common intention reflected in clause (i), and this was the case that was found proven.
86 In Franklins Pty Ltd v Metcash Trading Ltd,[38] Campbell JA said:
Crafting a remedy in rectification involves close attention to the words of the document. However, in the prior step of making a finding about a common intention, for the purpose of a rectification order, it is important that the court not confine itself to a narrow focus on particular words of the document.[39]
87 Similarly here, the making of a finding about common intention did not depend on establishing a form of words upon which the parties were agreed. It sufficed to show a clear common intention that could be reduced to a legal form which could take its place in the contract between the parties by way of remedy so as to give that intention legal effect.[40] To the extent that the applicants criticised the judge for introducing the notion of assignment rather than transfer, no relevant distinction between the two concepts was identified. In our view, in the context of choses in action, the term 'assign' best described the legal effect of the common intention the judge identified.
88 Leave should be granted in respect of these proposed grounds but they should be rejected.
Proposed ground 3 - evidence as to common mistake
89 The applicants submitted that there was simply no evidence on the part of Mr Gordon or Mr Paolacci that clause (i) was mistakenly omitted from the deed, or evidence that the term found by the judge was mistakenly omitted. Numerous other matters suggested in the 11 and 15 June emails were also not included in the deed and, like the 'Advice from Mort' annotation, there was no explanation in the evidence as to what had happened.[41] It was submitted that inferences adverse to the respondents should be drawn from their failure to call evidence from Mr Schwartzbord or Mr Efron.
90 The respondents submitted that the judge's finding that the omission occurred as the result of a common mistake followed logically from the rejection of Mr Paolacci's evidence that he assumed that the omission from the deed of the relevant provision, as he understood it, was deliberate.
91 As mentioned, the intercompany loans were applied by Mr Gordon for interests unrelated to the motel business. It follows that they were not the subject of the proposed sale of business discussed from the outset. The fact that the loans remained as assets of the Trust when the structure was changed so that the transaction took the form of a sale of units, points firmly to a mistake on the part of both parties. There was no evidence that the change in structure was thought to change the underlying commercial transaction. No additional consideration was discussed, still else agreed, as the price of including the loans in the transaction once its form changed. When these matters are added to the finding that the parties had agreed to take the loans off the balance sheet in the manner contemplated by clause (i), the omission from the deed of a provision having that effect was inevitably the result of a common mistake.
92 Even inferring, for the sake of argument, that the evidence of Mr Schwartzbord or Mr Efron would not have helped prove the existence of such a mistake, the absence of evidence from those parties does not establish the contrary. The evidence of common mistake is ample without any assistance they might, or might not, have been able to provide.
93 Leave should again be granted in respect of this ground, but it too must be rejected.
Proposed ground 4 - assignment of debt to borrower
94 Under the fourth proposed ground, the applicants submit that the common intention found by the judge could not justify rectification because it was not possible for a creditor to assign a debt to the debtor. In so far as the term required Queenfield to assign to Gordon Nominees the debt owed by Gordon Nominees, this was said to be a legal impossibility.
95 The applicants relied on the following passage in the judgment of Millett J in Re Charge Card Services Ltd:[42]
A debt is a chose in action; it is the right to sue the debtor. This can be assigned or made available to a third party, but not to the debtor, who cannot sue himself.[43]
96 However, Millett J was not saying in this passage that an assignment of a debt to the debtor was impossible. He was saying that such an assignment takes effect as a release, extinguishing the debt. The point was that this meant that the assignment could not take effect as an equitable charge over the debt. Millett J explained:
[T]he essence of an equitable charge is that ... specific property of the chargor is expressly or constructively appropriated to or made answerable for payment of a debt, and the chargee is given the right to resort to the property for the purpose of having it realised and applied in or towards payment of the debt. The availability of equitable remedies has the effect of giving the chargee a proprietary interest by way of security in the property charged...
[I]n my judgment the benefit of a debt can no more be appropriated or made available to the debtor than it can be conveyed or assigned to him. The objection to a charge in these circumstances is not to the process by which it is created, but to the result. ... Once any assignment or appropriation to the debtor becomes unconditional, the debt is wholly or partially released. The debtor cannot, and does not need to, resort to the creditor's claim against him in order to obtain the benefit of the security; his own liability to the creditor is automatically discharged or reduced.[44]
97 In other words, giving effect to the term identified by the judge would cause Queenfield's intercompany loan to Gordon Nominees to be released.[45] While the assignment would not take effect as an assignment, in the sense that it would not cause Gordon Nominees to owe money to itself, it would still have legal operation as a release.
98 While the decision of Millett J was disapproved by the House of Lords in
Notice of contention - estoppel by convention
100 By their notice of contention, the respondents took issue with the judge's conclusion that evidence of pre-contractual negotiations cannot found an estoppel by convention. It is not necessary, in light of our conclusions as to rectification, to examine this question. The question could only arise if, despite not sustaining the rectification case, and in particular the requirement to show a common intention, the respondents were still able to establish a common assumption which could give rise to an estoppel by convention. That might be thought an unlikely scenario.[48] But in any event, we could only consider the issues raised by the notice of contention against a hypothetical factual background different to that we have found established. It is undesirable that we proceed down that path in this case.
101 Leave to appeal should be granted but the appeal must be dismissed.
QUEENFIELD PTY LTD (ACN 060 472 644) as trustee for the TRAVEL INN MOTEL UNIT TRUST (ABN 88 978 411 295)
GORDON NOMINEES PTY LTD (ACN 004 707 617) as trustee for the GORDON FAMILY TRUST (ABN 58 145 003 904)
[1] Queenfield Pty Ltd v Gordon Finance Pty Ltd [2019] VSC 857; (2019) 60 VR 118 ('Reasons').
[4] The reference to Mort is to Mort Schwartzbord, Mr Gordon's family accountant and Queenfield's tax accountant from 1994 until 2012.
[5] A unit holders' agreement was executed by Gordon Nominees, TLP Nominees and Queenfield as trustee for the Trust. A deed of loan was executed by Gordon Nominees,
TLP Nominees, Mr Gordon and Queenfield. A deed of guarantee and indemnity was executed by TLP Nominees and Mr Gordon, and a general security deed was executed by Gordon Nominees and TLP Nominees. The parties are agreed that the agreements other than the sale of units deed are not relevant for present purposes.
[17] [2012] VSCA 134; (2012) 37 VR 486, 522 [137] (Warren CJ, Harper JA and Robson AJA); Reasons [148].
[18] Reasons 159 [147]. See, eg, Johnson Matthey Ltd v AC Rochester Overseas Corp (1990) 23 NSWLR 190, 195 (McLelland J); Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2006] QCA 194 [30] (McPherson JA); cf Whittet v State Bank of New South Wales (1991) 24 NSWLR 146, 153 (Rolfe J).
[20] Ibid 117 [103]-[104] (citations omitted).
[21] Perpetual Ltd v Myer Pty Ltd [2019] VSCA 98 [115] (Whelan, Niall and Hargrave JJA); Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603, 713-14 [459]-[461] (Campbell JA, Allsop P and Giles JA relevantly agreeing at 620 [30] and 621-2 [42]).
[22] Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329, 345 (McLelland AJA) ('Carlenka').
[25] PCCEF Pty Ltd v Geelong Football Club Ltd [2019] VSCA 144 [55] (Whelan, McLeish and Emerton JJA).
[35] (1995) 41 NSWLR 329, 345 (emphasis added).
[40] Cape Schanck [2001] VSCA 2; (2001) 3 VR 526, 531 [14] (Tadgell JA).
[45] We were informed that the debt was owed by Gordon Nominees in its capacity as trustee of the Gordon Family Trust, being the same capacity in which it would take the assignment.
[46] [1998] AC 214, 225-8 (Lord Hoffmann); see Cinema Plus Ltd v Australia and New Zealand Banking Group Ltd [2000] NSWCA 195; (2000) 49 NSWLR 513, 518-20 [19]-[22] (Spigelman CJ), 539 [101] (Sheller JA).
[47] It is therefore not necessary to decide whether the decision in Re Charge Card Services Ltd reflects the law in Australia in this respect: see Broad v Commissioner of Stamp Duties [1980]
2 NSWLR 40, 46 (Lee J); Jackson v Esanda Finance Corporation Ltd (1992) 59 SASR 416, 418 (King CJ, Cox J and Matheson J agreeing at 419); Griffiths v Commonwealth Bank of Australia [1994] FCA 402 [56] (Lee J); Wily v Rothschild Australia Ltd [1999] NSWSC 915; (1999) 47 NSWLR 555, 564-5 (Windeyer J); Nourse v Fresh Express Australia Pty Ltd [2009] NTSC 73 [109] (Southwood J).
[48] The respondents accepted that, even if the notice of contention was upheld, the matter would need to be remitted to the trial judge to make findings of fact.
Queenfield Pty Ltd
Gordon Finance Pty Ltd [2020] VSCA 282
(2009) 76 NSWLR 603
(2012) 37 VR 486
(2000) 49 NSWLR 513
(2019) 60 VR 118
(2016) 260 CLR 85
(1990) 23 NSWLR 190
(1991) 24 NSWLR 146
(1995) 41 NSWLR 329
(2001) 3 VR 526
(1992) 59 SASR 416
(1999) 47 NSWLR 555