These proceedings arise out of a dispute between two couples who have fallen out over a property development.
The property in question is at Wentworthville, in western Sydney. In October 2013 the defendants entered into a contract to buy the property from the then owner. The purchase was financed with a loan from Westpac Banking Corporation. Subsequently the purchase was completed and the defendants were registered as proprietors of the land, with Westpac holding a registered mortgage.
The arrangement between the defendants and the plaintiffs for the development of the land was recorded in a formal written agreement, styled "Joint Venture Agreement" ("the Agreement"). The Agreement was dated 6 October 2013 (the same date as the contract to purchase the property), but the date of signature was 18 October 2014, a bit more than a year later.
In outline, the Agreement provided for the defendants to complete the purchase of the property with the property then being redeveloped as a duplex consisting of two units, described in the Agreement as Unit 1 and Unit 2. The plaintiffs were to contribute the funds needed for the development work. After the development had been completed, the defendants would live in Unit 2 and Unit 1 would be sold to repay the monies contributed by the plaintiffs and their share of the profit from the venture.
Relevant clauses of the Agreement were as follows:
10. The parties mutually agree that the Unit 1 shall be sold immediately after obtaining the subdivision certificate and [the defendants] will settle all the dues to [the plaintiffs]. In any event; if Unit 1 is not sold after completion of the construction, [the defendants] will transfer the ownership and rental income to [the plaintiffs].
11. If the net sales proceeds from Unit 1 are insufficient to settle the total payable to [the plaintiffs], then [the defendants] will settle the dues either by borrowing from the Bank or by selling Unit 2 at the same time.
12. In the event of any disagreement or dispute between the Parties about whether the Property should be sold and if sold at what price, the [the defendants] will accept the determination or direction made by the [the plaintiffs] in relation to this issue and act accordingly provided however that the [the plaintiffs] in making such direction or determination [act] reasonably in forming the opinion that it is likely that a sale and a sale at the market price.
In September 2015, the parties fell into dispute. The defendants complained about the amount of money which the plaintiffs were spending on the development.
By this stage the building works had a few months to go. Despite the dispute, the works were completed in December 2015, a final occupation certificate was issued in January 2016 and the subdivision certificate was registered in March. In about July the defendants moved into Unit 2. In the meantime, the parties attempted to resolve the dispute. Each side engaged solicitors. There was also an attempt to have the dispute informally mediated by an accountant who was a friend of the parties. This came to nothing. The sum of $111,500, described in the Deed of Settlement and Release referred to below as a "deposit", was received as a result of an "aborted sale" of Unit 1, no further details of which appear in the evidence.
The plaintiffs commenced these proceedings by Summons filed in October 2016, seeking relief in the nature of specific performance. In particular the plaintiffs sought orders compelling the defendants to sell both Unit 1 and Unit 2; to pay the proceeds into a jointly controlled account or into court; and to have an account taken to determine the amount due to the plaintiffs.
After the proceedings were commenced, negotiations took place between the solicitors for the parties with a view to settling the dispute. In December 2016 the parties executed a deed styled "Deed of Settlement and Release" ("the Deed"). The Deed's recitals included (strike-out in original):
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B. [The plaintiffs were] responsible for financing the development (Construction Contribution) and building the Units.
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E. Disputes arose between the parties in respect of [the plaintiffs'] entitlements for the Construction Contribution (Construction Dispute). The disputes have been protracted, with a number of offers and counter-offers having being made in an attempt to resolve the dispute.
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I. The parties have agreed to compromise the Dispute in accordance with the terms set out in this Deed.
The Deed provided for the sale of Unit 1 in accordance with arrangements to be determined by the plaintiffs, under which Unit 1 was to be "irrevocably listed for sale" by no later than 31 January 2017. The defendants were to "purchase" Unit 2 out of the venture at a valuation to be determined by a valuer selected by agreement between the parties. The proceeds of Unit 1 and Unit 2 were to be paid into a jointly controlled bank account ("the Joint Trust Account") with certain payments made out of the account to the plaintiffs and the defendants. Clause 1.9 of the Deed then provided:
Determination of the Payment of the Balance of the Monies held in the Joint Trust Account ("Trust Balance")
1.9 The parties agree that in relation to the Trust Balance and the entitlements of each party:
(a) an auditor is to be appointed by the Institute of Chartered Accountants (Auditor) as soon as possible, but not later than 31 January 2017, to determine how the Trust Balance is to be disbursed between the parties having regard to the Dispute;
(b) The Auditor so appointed will be acting as an Expert for the determination of the Dispute and his or her decision will be final and binding on the parties:
(i) The costs of the Auditor will be paid as per the JV Agreement.
(ii) the Auditor will determine the parties' entitlements;
(iii) The Auditors' scope of works can include any matter relating to the Dispute or the JV Agreement;
(iv) The Auditor will be entitled at his/her discretion to obtain assistance in determining the Dispute from any appropriately qualified person independent of the parties;
(v) The Auditor will be instructed by the parties that the determination of the Dispute shall occur as soon as possible and the Auditor shall be entitled to achieve that objective by giving directions to the parties concerning the filing of written submissions.
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(d) The parties in making written submissions to the Auditor:
(i) Agree that they will comply with any time limits set by the Auditor; and
(ii) Will be entitled to make such written submissions as they may be advised including as to whether any party has suffered loss or damage in relation to the Dispute and the Auditor will be entitled as he/she sees fit to take into account the matters raised in those written submissions.
(e) Upon the Auditor issuing his/her determination the solicitors for the parties are irrevocably authorised by the making of this Deed to cause the Trust Balance to be disbursed in accordance with the terms of that determination.
Some of the steps contemplated in the Deed were taken. Unit 2 was sold and the parties agreed that William Buck Business Recovery Services Pty Limited ("William Buck") would act as the Auditor. But issues remained about how the accounting was to be undertaken. In February 2018 William Buck sent the parties an engagement letter containing proposed terms of retainer, including a proposed scope of work. Negotiations continued but the scope of work could not be agreed. In the meantime the valuation of Unit 2 and its "purchase" by the defendants did not proceed.
The proceedings came before me as a result of an application by way of Notice of Motion filed by the plaintiffs in June 2018. By that application, the plaintiffs sought a declaration that the Deed constituted a valid and binding settlement agreement and an order that the defendants specifically perform it and carry it into effect. In particular, the plaintiffs sought an order that the defendants execute the engagement letter provided by William Buck and a declaration that William Buck was the person responsible for determining the scope of work in order to make the determination described in cl 1.9 of the Deed.
The plaintiffs' application for specific performance of the Deed came before me for hearing on 2 July. It was clear that the parties intended by the Deed to resolve all outstanding disputes between them and that, if possible, the Court should uphold this bargain by granting specific performance. But as the argument proceeded, it became apparent that the Deed contained deficiencies of drafting.
The Deed did not define the scope of William Buck's engagement in the detail required. The defendants wanted an audit of the monies expended on the construction at the instance of the plaintiffs. The plaintiffs wanted an allowance to be made by the defendants' occupation of Unit 2. There may well have been other disputes. But the Deed said only that the Auditor was required to determine the parties' entitlements "having regard to the Dispute". Strictly speaking, the term "Dispute" was not defined in the Deed. Arguably recital I in its context (see above [9]) suggests "Dispute" should be equated with "Construction Dispute". That term was defined in recital F as disputes which arose between the parties "in respect of [the plaintiffs'] entitlements for [sic] the Construction Contribution". As a result of the strikeout by the parties the term "Construction Contribution" was undefined, but on any view the term would appear not to cover all the issues the parties wished to debate. Nor did I think that the plaintiffs' contention that the scope of the task could be determined by William Buck itself was likely to be sound. William Buck could only determine the "Dispute", and it seemed doubtful that this would include the construction of the Deed itself.
Moreover, a calculation of the parties' entitlements depended upon the realised value of Unit 2 and this in turn depended upon the valuation of Unit 2 being undertaken, but this had not yet happened. The parties had also failed to clothe William Buck with authority to complete other tasks required to wind up the venture, such as the preparation of accounts and tax returns. It seemed to me that the terms of the Deed were unworkable and likely to lead to further disputes and delays even if the terms of William Buck's retainer were determined by the Court.
The original Agreement between the parties for the development of the property, and the relief sought by the plaintiffs in their Summons, both used the language of joint venture. Legally the term "joint venture" is used to denote a business relationship which may or may not strictly speaking be a partnership: United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 10.
But under the Agreement the plaintiffs and the defendants would seem to have been "persons carrying on a business in common with a view to profit" within the meaning of that term in the Partnership Act 1892 (NSW), s 1. Legally their relationship was that of partners not merely joint venturers.
Ordinarily in a partnership context, a dispute such as the present results in a suit for the dissolution of the partnership. The Court is asked to declare the existence and (to the extent disputed) the terms of the partnership, whether it has been dissolved, and if it has not been dissolved, to order its dissolution. The Court then has the power under Partnership Act, s 39 to make directions for the winding up of the partnership's business. Frequently a receiver is appointed for the purpose of such a winding up. Of course, if the parties are able to agree on the form of the winding up directions, the Court will generally give effect to their agreement. But the important point for present purposes is that the process does not depend upon agreement between the parties. The Court can make appropriate directions for the winding up, including the appointment of a receiver or other third party to conduct that process, whether or not the parties both consent.
An essential step in the winding up of the partnership is the taking of accounts. This task can be undertaken by the Court itself but it is common to appoint as receiver an accountant who can then undertake the work, subject to the direction of the Court which can determine any points of controversy. Again if the parties do not agree the Court can impose a solution if that becomes necessary.
It seemed to me that the difficulties which the parties had encountered were the result of attempting to follow an agreement among themselves as to what should be done to wind up their partnership venture when in fact the agreement was not comprehensive and there were some issues upon which the parties still disagreed.
I put these views to the parties' legal representatives, and suggested that the proceedings should continue along the lines of conventional partnership dissolution suit, as described above. I proposed that I would make declarations concerning the subsistence and termination of the partnership and directions for its winding up. Those directions would generally follow the mechanisms agreed by the parties where agreement had been reached, but would not be limited to matters upon which the parties had agreed. The parties accepted this approach. The proceedings were adjourned to 4 July to allow the parties to formulate their positions.
On 4 July the parties agreed that I should make a declaration that a partnership had been constituted between the parties in terms of the Agreement. At that point, the parties did not necessarily agree that the partnership had been terminated or when it had been terminated. But they agreed that if not already terminated, the partnership would now terminate and that I should reserve for further consideration the question whether it had been terminated earlier. It was also agreed that I should appoint two of the directors of William Buck as receivers for the purpose of winding up the partnership. William Buck would then retain the agreed valuer to undertake the valuation of Unit 2, with the date or dates as at which the valuation was to be undertaken to be reserved for later determination by the Court. The parties then formulated consent orders to this effect which were made on 10 July.
The parties returned to Court on 27 July to resolve two consequential matters. The first was whether the partnership came to an end prior to the agreed fall-back date of 10 July, and if so, when. Counsel for the plaintiffs argued that the partnership came to an end when the parties entered into the Deed in December 2016. Mr Hodges, the solicitor-advocate for the defendants, argued for two earlier dates. The first was June 2016, approximately three months after the failed attempt at an informal mediation by a friend of the parties. The second was October 2016, when the plaintiffs' Summons was filed.
Mr Hodges referred to the Partnership Act, s 32(b) which provides:
Subject to any agreement between the partners, a partnership is dissolved:
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(b) If entered into for a single adventure or undertaking, by the termination of that adventure or undertaking:
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Mr Hodges submitted that by June 2016 "all activity" had ceased. His argument, as I understood it, was that this meant the partnership had terminated by force of s 32(b).
When a partnership for a "single adventure or undertaking" terminates for the purposes of s 32(b) depends upon the nature of the undertaking in question, as defined by the agreement between the partners. In the present case, the completion of the actual development can be fixed as the date on which the subdivision certificate was registered (March 2016). But the Agreement contained provisions which continued to operate after that date, requiring the sale, first, of Unit 1, and then, if insufficient funds were received, Unit 2. In my view, the "undertaking" for the purpose of s 32(b) is not properly characterised as just the completion of the development; it was the development of the property followed by the sale of the units in accordance with the terms of the Agreement. The units had not been sold by June 2016 and accordingly, the partnership remained on foot at that time.
Similar observations apply to Mr Hodges' other suggested date, the date of commencement of the proceedings. At that date, Unit 2 and Unit 1 still remained unsold. The plaintiffs had not purported to terminate the Agreement. To the contrary, by their proceedings they were effectively seeking to obtain specific performance of it.
The submission by counsel for the plaintiffs that the partnership terminated on entry into the Deed gives rise to different considerations. The Deed did provide for the Auditor to calculate the amounts due to the parties pursuant to the original Agreement. But it substituted a new mechanism for the sale of Unit 1 and for the defendants to account for the value of Unit 2, or at least purported to do so. The parties thus agreed to exchange, or purportedly agreed to exchange, their rights and obligations under the Agreement for a new set of rights and obligations under the Deed.
Clauses 2 and 3 of the Deed provided for the proceedings to be stayed pending the Auditor's determination and discontinued fourteen days after the Auditor's determination and the payment of each parties' entitlements pursuant to clause 1.9(e). Clause 3 provided for the parties to release each other from any claims arising out of the Agreement or the transactions which are the subject of the proceedings upon discontinuance of the proceedings; cl 3 also provided that the Agreement would be dissolved when the proceedings were discontinued. Clause 4 provided for the parties to be able to obtain specific performance of the Deed in the event of any default.
Sometimes a settlement agreement provides for an immediately effective compromise whereby the parties surrender their rights in exchange for new rights created by the settlement agreement. But the Deed was not an agreement of this character. The proceedings were to remain pending and the parties were to only release each other on payment of the amounts provided for under the Deed. It was only at that point that the parties' rights and obligations under the Agreement (together with any rights and obligations flowing from the proceedings) were to be surrendered. Had the process followed by the Deed been carried out, and the payments made in accordance with cl 1.9(e) of the Deed, the partnership would have been dissolved, but only at that point. It follows, in my view, that, the Deed being unenforceable, the parties' relationship as partners formally continued and that relationship was only terminated as a result of the agreement recorded in my orders of 10 July. Accordingly, I do not accept the submission for counsel for the plaintiffs and will declare that the partnership dissolved on 10 July.
The other matter debated at the hearing on 27 July was the question of obtaining a valuation. Counsel for the plaintiffs contended that the date of the valuation of Unit 2 should be 13 March 2017. Following further discussion, it became apparent that Mr Hodges did not dispute this; rather, he was seeking to have the Court order an additional valuation of the property at an earlier date, namely, the date of the Agreement (6 October 2013) or the date on which the Agreement was actually signed (18 October 2014).
Mr Hodges' contention was that the defendants had effectively contributed the property to the partnership and it was necessary for the property to be valued for the purpose of assessing the profit from the redevelopment and the parties' respective entitlements to the proceeds of sale. I understood Mr Hodges to submit that the appropriate date was October 2014, being the date the Agreement was actually signed.
I do not think that it is necessary for the purpose of the winding up to value the property at either of the dates suggested. At the time the partnership was entered into, the defendants did not actually own the property; they had entered into a contract and had a right to complete that contract. All of the costs associated with completing the contract, and the subsequent financing costs, are recognised by the Agreement as expenses of the venture. Counsel for the plaintiffs confirmed that his clients accept that this is so. It follows that all of the expenses incurred by the defendants in acquiring and holding the property will have to be taken into account in assessing the profit, and the contributions by the defendants to the venture. In the circumstances, I think there is no room for the defendants' contribution to be assessed otherwise than by reference to their actual expenditure; even if the property had increased in value by October 2014 (or, for that matter, if the property was actually worth more in October 2013 than the price specified in the contract), I do not think that the defendants are entitled to have that gain credited to themselves for the purposes of including in the accounting exercise.
Accordingly, there being no disagreement about the date at which the valuation of Unit 2 must be undertaken, I will make an order specifying that date, but I will make no other provision for any other valuation.
For these reasons the orders of the Court are as follows:
Declare that the partnership between the parties was dissolved by agreement of the parties on 10 July 2018.
Direct that, for the purposes of the valuation to be conducted in accordance with paragraph 5(c) of the orders made on 10 July 2018, the date of valuation shall be 13 March 2017.
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Decision last updated: 13 August 2018