The plaintiff (Mr Rizk) was sued by the defendant (Link Commercial Mortgages Pty Ltd ('Link')) in the Local Court of New South Wales.
Magistrate Brender found in favour of the defendant on 15 December 2022.
The plaintiff filed a summons in this Court on 13 January 2023. The plaintiff says that the learned magistrate made errors of law; the decision should be set aside, and judgment entered for the plaintiff.
Under s 39 of the Local Court Act 2007 (NSW), a dissatisfied party has a right of appeal to the Supreme Court, "… but only on a question of law". Section 40 provides for appeals subject to leave of this Court. Leave is required for a "… question of mixed law and fact …" and "… an order as to costs".
Section 41 of the above Act gives the Supreme Court wide powers in respect of the judgment. It may be changed, set aside or the matter may be sent back to the Local Court.
The summons is supported by an affidavit of Mr Muhammed Badarne dated 21 March 2023. Other than annexing relevant documents, Mr Badarne says:
"The Magistrate of the Local Court in this matter did not give reasons of his decision in the form of a judgment. Rather, his Honour gave reasons on the transcript on 15 December 2022."
The defendant relies on an affidavit of Mr Claudio Venegas dated 12 April 2023.
Mr Badarne's affidavit annexes the transcript of the decision of the magistrate.
The following is a short background. The defendant company was a purveyor of financial services.
The plaintiff had previously had an interest in a company called HD Squared Developments Pty Ltd. After some changes in shareholdings the company had been placed in administration. I will refer to the company as 'HD Squared'.
HD Squared, as at June 2021, had been taken out of administration and was under the control of a Mr Benjamin Nasser. On 11 May 2021 Mr Nasser had executed a deed whereby, upon payment to him of $644,000 by the plaintiff and another person, he would transfer control and all of his shares in the company to the plaintiff.
The plaintiff had three objectives in contacting Link: to raise the money to pay Mr Nasser, to discharge or re-finance a debt over the property owed to the National Australia Bank ('NAB') and to finance a development on land owned by HD Squared in Leura. Notably, the debt to the NAB was owed by HD Squared, not by the plaintiff.
The plaintiff and the defendant (through its principal Mr Jean-Pierre Alouan) met and discussed the above financial needs on 28 April 2021. There was then an exchange of information
The next step was the defendant sending the plaintiff an "Engagement Letter" dated 24 June 2021. This letter provided, inter alia, for certain fees to be paid to the defendant for the services it provided.
The Engagement Letter was returned to the defendant on 21 July 2021, now containing the signature of the plaintiff. On the same day an amount of $1500 was transferred to the defendant, apparently as an advance in respect of a tax invoice for $5,500 that had been sent to the plaintiff on 24 June 2021.
The balance of fees, together with other fees said by the defendant to have been owed to it by the plaintiff, were not paid, thus generating the claim in the Local Court.
The magistrate described the issues in the dispute as follows:
"This claim related to a fee under an agreement styled 'Engagement Letter' whereby the plaintiff was retained to procure an offer of finance for Mr Rizk or interests associated with him. The issues are who is the counterparty to the contract and whether the finance offer was within the required scope".(Tcpt 1.17).
A little later in his reasons, the Magistrate restated the issues in this way:
"The questions, as I have mentioned, are whether the defendant is a party to the contract and, if so, whether the term sheet is sufficiently within the scope of the requirements in the engagement letter to require payment of a fee." (Tcpt 2. 33)
The parties agree that the magistrate's characterisation of the issues was correct. The magistrate went on to find that the plaintiff was a party to the contract and that the fees claimed by the defendant arose from the agreement.
The plaintiff contests both of the above findings.
[2]
Was the plaintiff a party to the contract?
The Engagement Letter describes the purpose of the 'engagement' as follows:
"The acquisition of 100% Ordinary Shares in HD Squared developments Pty Ltd ACN 621 704 069 and subsequent construction finance facility to develop the company's land at 43-51 Great Western Highway, Leura NSW 2780 according to Development Consent".
The Engagement Letter, at first sight, seems to contain an assortment of mixed messages concerning the identity of the person engaging with the defendant. For example, on the one hand:
1. The letter is addressed to the plaintiff, without reference to any company or the plaintiff's status within any company.
2. Under its "Purpose" the latter states: "while we intend to do everything, we can to find you the best possible finance solution, it is important for us to proceed with you on an exclusive basis, or to be in a position to recover our costs and lost earnings in the event that you proceed with an alternative means to obtain finance". Seemingly, the "you" referred to is the plaintiff.
But then conversely:
1. Under the next heading "Scope & Associated Conditions", the paragraph begins: "The Borrower hereby engages LINK to source and procure finance on the borrower's behalf to assist funding the Project over two stages as set out in this Engagement Letter (the Scope)".
2. Clause 2.2 describes the "Borrower Details":
"The Borrower is a private company to be wholly acquired and under the sole directorship of Danny Rizk.
The Company shall be both Borrower and mortgagor in its own right and not as trustee of a trust.
Should this not be the case, please notify LINK as soon as possible: the Borrower may then need to re-sign this Engagement Letter in its own right and/or as trustees of a trust with personal guarantees from unit holder(s) or beneficiary/ies."
1. Clause 3 sets out the services to be provided by the defendant. They include:
"Link will assist the Borrower in sourcing the finance….."
1. Clause 4 provides for acknowledgements and warranties to be provided by the borrower.
2. Clause 5 relates to information to be provided by the borrower.
3. Fees are the subject of cl 6. This clause sets out the fees to be paid to Link by the borrower, including an initial engagement fee and then a fee linked to any funding amount procured by the defendant. There is also a "Break Fee", defined as a fee that arises if the engagement is cancelled by the borrower.
4. Clause 7 provides for a guarantor to guarantee the obligations of the borrower to the defendant.
5. Finally, there is the provision for the signing of the Engagement Letter. The signature box states, "Executed by HD Squared Pty Ltd (in accordance with section 127 of the Corporations Act 2001 (Cth)". This is followed by the signature of the plaintiff under which it is stated "Danny Rodney Rizk, incoming Sole Director & Shareholder". Alongside this box is another signature box headed "Danny Rodney Rizk Personally as Guarantor under Clause 7". This box is also signed by the plaintiff.
In respect of 23, the defendant suggested that the two borrowers mentioned in the paragraph refer to different persons or entities. I disagree. I do not see how such an interpretation can be reached on the straightforward wording of the sentence.
The defendant further suggested that the document was so rife with errors that it demanded an interpretation seemingly inconsistent with its wording. For example, while the full name of the relevant company is HD Squared Developments Pty Ltd, it is sometimes referred to as HD Squared Pty Ltd and, on the final page, where this error is repeated, the ACN number of the company is also incorrect.
I agree that there are errors concerning the company name and its ACN, but I regard these errors as essentially typographical and capable of correction in the manner described in Wilson v Wilson [1854] 5 HL Cases 40; 10 ER 811, at 822:
"Now it is a great mistake if it is supposed that even a Court of Law cannot correct a mistake, or error, on the face of an instrument: there is no magic in words. If you find a clear mistake, and it admits of no other construction, a Court of Law, as well as a Court of Equity, without impugning any doctrine about correcting those things which can only be shown by evidence to be mistakes-without, I say, going into those cases at all, both Courts of Law and of Equity may correct an obvious mistake on the face of an instrument without the slightest difficulty."
My conclusion about the errors being typographical is consistent with Mr Alaoun's affidavit, in which he says that he drafted the letter by using a previous engagement letter as a template. He said:
"Due to time restraints and lack of sleep because of my heavy workload, I made errors in the engagement letter sent to the Defendant on 24 June 2022".
Also consistent with his propensity for typographical mistakes is his reference in the above quoted sentence to the letter having been sent in 2022, instead of 2021.
The magistrate gave three reasons for rejecting the company as a party to the Engagement Letter. The magistrate stated:
"It may be necessary to modify the strict wording or even reject words for whole provisions. And that Mr Rizk's preferred construction of the engagement letter would result in commercial nonsense. The company which he says he signed on behalf of did not exist. He was not an officer or agent of the company that did exist when he signed the engagement letter, so he could not have bound that company. The fundamental purpose of the transaction was to give Mr Rizk access to funding so that he could take control of the company. If he had control of the company the engagement letter would be purposeless and nonsensical". (Tcpt 4. 36)
The magistrate's first reason (the company did not exist) is overcome by viewing the name HD Squared Pty Ltd in the execution box as a typographical error, capable of correction in the manner envisaged in Wilson.
The second reason (the plaintiff was not an officer or agent of the company) is powerful, but as will be seen below, its power lies in excluding the company as a party, but not necessarily inserting the plaintiff in its stead.
The third reason (the funding was for the benefit of the plaintiff) is also of some substance. However, the benefit is not only for the plaintiff. The company, as an entity in its own right, would also be interested in discharging its debts and being able to pursue the development opportunities that were envisaged, in particular in regard to the property in Leura.
My assessment of the Engagement Letter is that it is designed to reflect an agreement between the defendant and the borrower. How else can words such as "The Borrower hereby engages Link…." be interpreted?
This raises the question of who is the borrower. The plaintiff, at least primarily, submitted that the borrower was HD Squared. The defendant said the borrower was the plaintiff.
In his affidavit Mr Alaoun says that he formed the view that the Mr Rizk personally required the funding to pay Mr Nasser, discharge the NAB mortgage and finance the development in Leura. The difficulty with this view is that two of the reasons for funding are clearly for the primary benefit of the company and the third (the payment to Mr Nasser) is arguably also for the company's benefit, namely, to enable it to discharge the debt and proceed with the development.
I accept that as the sole director and shareholder there was also a significant benefit to Mr Rizk, but I do not accept that the terms of the Engagement Letter reflect the asserted intention of Link to have Mr Rizk as a party.
Returning to the second reason given by the magistrate, as at June and July 2021 the ownership and control of HD Squared lay with Mr Nasser, and he was not going to give up his control or his shareholding, until he received the $644,000. But he could not receive this money until the finance envisaged by the Engagement Letter was arranged.
In other words, when the Engagement Letter was executed, the plaintiff was not able to bind HD Squared to any agreement with the defendant. He did not own the company, he was not a director, he was not a shareholder and there is no suggestion that he was acting as an agent of the company.
The defendant further submitted that if HD Squared was not the borrower, then it must have been the plaintiff who, after all, was to be the beneficiary of the finding of finance. The first tranche of finance (the $644,000) would enable the defendant to pay Mr Nasser and take control of HD Squared.
This reason for rejecting HD Squared as being the borrower is sound, as is the magistrate's finding that the contract could not have been with the company. It would follow that if the company was the intended party, then absent the capacity of the company to enter into the contract, the contract is rendered void.
The terms of the contract unquestionably relate to the company as the borrower and therefore a party to the contract. Where I differ from the magistrate is that he found that as a result of the company being unable to enter the contract, then the plaintiff was necessarily a party. I do not think that step can be taken.
The clear intention of the parties (meaning the plaintiff and defendant in these proceedings) was that HD Squared was to be a party to the contract. The parties, thus, erroneously proceeded on the basis that HD Squared was capable of being bound to the contract.
This is evident from the engagement by the borrower of the defendant to "source and procure finance", the provision of acknowledgements, warranties and information (cls 4 and 5) by the borrower, the payment of fees by the borrower (cl 6) and the necessity for a guarantor to be behind the borrower (cl 7).
In addition:
1. Clause 2 begins:" The Borrower hereby engages link…"
2. The borrower is described as a private company (cl 2.2).
3. The borrower (the private company) is to provide acknowledgements, information, warranties and a guarantor.
4. A person, other than the company, is needed to guarantee the obligations of the company.
5. The Engagement Letter is signed, albeit erroneously, on behalf of the company. The guarantor is the plaintiff as the guarantor of the company.
As I have said, the learned magistrate found the plaintiff was a party to the contract. These factors favour that result:
1. The Engagement Letter is apparently addressed, without qualification, to the plaintiff.
2. The plaintiff could not bind HD Squared to the contract as a party.
3. The plaintiff was the sole director and shareholder of HD Squared.
4. If the company was unable to pay fees, then logically the person behind the company, should have that capacity.
The magistrate has effectively, and understandably, interpreted the letter to achieve a just result. The difficulty is that he has given the letter content it does not have.
His Honour relied upon the decision of the High Court in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 256 CLR 104 ('Mount Bruce'), specifically quoting [46]-[50].
The difficulty with relying on Mount Bruce is evident from the first paragraph quoted by his Honour:
"The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose".
It is immediately apparent that Mount Bruce is concerned with the construction of the terms of a contract. It does not necessarily assist with determining the parties to the contract. But even if it did, the text and context of the contract do not permit the magistrate's conclusion.
The defendant submitted that "the court must construe the contract so as to avoid it "making commercial nonsense or working commercial inconvenience", the latter quote taken from Mount Bruce at [51].
The goal of justice, making commercial sense and achieving commercial convenience, can of course play a part in interpretation. In ASSK Investments Pty Ltd v AMA Group Limited [2020] NSWSC 1756 Hammerschlag J (as his Honour then was) said this:
"The HOA is a commercial contract which is to be given a business-like interpretation. Interpreting it requires attention to the language used by the parties, the commercial circumstances which it addresses, and the objects which it is intended it secures. The meaning of the words chosen is determined objectively by reference to its text, context, and purpose, the question being what a reasonable person would have understood them to mean. Preference is given to a construction supplying a congruent operation to the various components of the whole and so as to avoid commercial inconvenience. Where language is open to more than one construction, the Court will prefer a construction which avoids consequences which are capricious, unreasonable, inconvenient or unjust: see Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99 at 109 ; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589 [22]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22] ; Zhu v Treasurer of the New South Wales (2004) 218 CLR 530 at 559 [82]; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 528 [15]; Electricity Generation Corporation Ltd v Woodside Energy Ltd (2014) 251 CLR 640 at [35] ; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 117."
The difficulty here is that the question is not one of interpretation and construction. Rather, the words in the Engagement Letter are plain to the effect that the borrower, and therefore the entity bound by its terms, is HD Squared. As I have said, there is a large difference between construing the terms of a contract between two capable parties compared to deciding who are the parties to a contract.
In Air Tahiti Nui Pty Ltd v McKenzie [2009] NSWCA 429; 77 NSWLR 299, at [28], the New South Wales Court of Appeal said:
"The identity of the contracting party is to be determined looking at the matter objectively, examining and construing any relevant documents in the factual matrix in which they were created and ascertaining between whom the parties objectively intended to contract. This is, to a point, a process of construction similar to the task of identifying whether a clearly contractual document (such as a bill of lading) is made with one party or another (such as a shipowner or time charterer): The Starsin at 770 and the cases considered in Wilford et al Time Charters (5th Ed Informa Publishing 2003) Ch 21. Where the documents are silent or ambiguous, but there is undoubtedly a contract, the identity of the parties must be determined objectively from the surrounding circumstances: see Barroora Pty Ltd v Provincial Insurance Ltd (1992) 26 NSWLR 170 at 174; Protean (Holdings) Ltd v American Home Assurance Co (1985) 4 ANZ Ins Cas 60-683 at 74,055-74,056; Coulls v Bagot's Executor and Trustee Co Ltd [1967] HCA 3; 119 CLR 460 at 477 at 478-479 and 486."
Looking at the matter objectively and taking into account the surrounding circumstances to the creation of the document, I am of the view that it was the intention of the plaintiff and the defendant that HD Squared was to be the borrower under the contract.
When Mr Alouan met the plaintiff on 28 April 2021 the deed with Mr Nasser had not yet been executed. How the plaintiff described the future plans is ultimately contained in the deed with some precision. In his affidavit of 2 September 2022 Mr Alouan relates the contents of a conversation with the plaintiff which took place on 28 April 2021. The plaintiff said to him:
"I have a DA approved development site in Leura for 24 units. I want to try and put another 10 units on this site. My architect thinks it is feasible. I found the site and bought it with a couple of guys but want to get full ownership and build it myself - I am a licensed builder. I want to explore the possibility of building an extra 10 units on it. The site is owned by HD Squared Developments Pty Ltd, which is currently under a deed of company arrangement. I was a former shareholder of this company. Harry put the company in administration because he wanted his money back. There is now a director, Benjamin, who is funding the deed of company arrangement. I have an agreement with Benjamin to repay him the monies he advanced to the administrator and on receiving repayment of these monies, Benjamin transfers 100% of the shares in the company to me. This is how I will regain control over the company for me to explore the possibility of adding another 10 units to the existing DA. Otherwise, once I have control, I want to start building straight away."
In addition, replacing HD Squared with the plaintiff as a party to the contract does not of itself render the contract commercially sensible. There are no doubt benefits to the plaintiff in the contract, but its terms are clearly evidence of an intended agreement between the defendant and HD Squared. How would it make sense, for example for the plaintiff to be a private company, to execute the contract on behalf of a company and at the same time be his own guarantor.
The magistrate said:
"Obviously, there are some contextual arguments the other way. For example, the execution box and the existence of the guarantee clause. There is also reference to the Borrower in the agreement in ways that are at least potentially confusing. However, reading it as a whole, including the purpose of the document itself, there is really only one sensible conclusion, and I accept the plaintiff's submissions at paras 33 and 34 of their submissions to that effect in which they referred to the decision of Taylor Woodrow v Coles Myer adopting Glynn v Margeston & Co to the effect that sometimes there are difficulties which make a consistent and harmonious operation of all words and phrases impossible, but that does not excuse the court from the need to ascertain the intention of the parties from the words used." (Tcpt 4.24)
His Honour is absolutely right, except that his task was not "to ascertain the intention of the parties" as to the content of the contract, but instead to decide who the parties were.
The resulting unjustness of the defendant not being recompensed for its efforts is not a product of an interpretation of the Engagement Letter but is a product of a very poorly drafted document, drafted I add, by the defendant. The defendant was aware of the details surrounding the company (such as being controlled by Mr Nasser) but drafted a letter specifically identifying the company as the borrower and, in turn, the contracting party.
Although not precisely as argued, I note the defence to the claim includes this paragraph:
"14. The defendant denies paragraph 14 of the ASC. In further answer to paragraph 14 of the ASC, the Defendant says:
(a) that the Engagement Letter is not a contract between himself and the plaintiff and therefore it is incapable of being breached as alleged…"
The above paragraph in the defence accords with my view that the plaintiff (in the court below) did not establish that there was a contract between it and Mr Rizk.
In summary, while the magistrate was correct to find that the contract made no commercial sense because it included, as a party, an entity incapable of being a party, he was in error in substituting the plaintiff for the company, thus achieving a result inconsistent with the terms of the Engagement Letter.
Another step that cannot be taken is for me to rectify the contract. Rectification is a remedy to enable the court to amend the contract so as to conform to the parties' intentions. This remedy is not available here because it would be impossible to make the company a party when that company never had the capacity to be a party. In addition, there has not been any application for rectification.
The above conclusion ends the matter, and it is not necessary to look at the second issue, concerning the fees. With respect, the magistrate has made an error (of law) which has resulted in the plaintiff becoming liable as a party to the contract. The action should have been dismissed. I intend to make orders accordingly.
[3]
Orders
1. The appeal is allowed.
2. The judgment given in favour of Link Commercial Mortgages Pty Ltd on 15 December 2022 in the sum of $27,195.06 is set aside.
3. In lieu of the judgment referred to in Order (2), judgment is given for Danny Rodney Rizk against Link Commercial Mortgages Pty Ltd.
4. Link Commercial Mortgages Pty Ltd is to pay the costs of Danny Rodney Rizk in the Local Court proceedings and in this Court.
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Decision last updated: 07 July 2023