Smith v Champion [2009] ACTCA 7

Court of Appeal (ACT)|2009-05-05|Before: Higgins CJ, Besanko JJ

[2009] ACTCA 7 (5 May 2009)

FAMILY LAW - de facto relationship - distribution of property of parties - two pieces of real property included in property of parties - whether trial judge failed to recognise appellant's financial contributions in relation to first piece of real property - whether appellant should have received capital appreciation of first piece of real property - whether trial judge erred in failing to find financial contributions by parties were equal - whether trial judge failed to consider whether respondent acted recklessly, negligently or wantonly with respect to property - whether trial judge failed to take into account in assessing financial contributions in relation to second piece of real property respondent's refusal to accede to appellant's requests to sell, respondent's sole occupation after end of relationship and respondent's failure to make mortgage payments

Caplice v Aroogah Investments Pty Ltd [2005] NSWSC 287

In Marriage of Money (1994) 117 FLR 372

In Marriage of Way (1995) 124 FLR 447

In the Marriage of Kowaliw and Kowaliw [1981] FLC 91-092

In the Marriage of Townsend [1994] FamCA 144; (1994) 18 Fam LR 505

Whiterod and Taylor [2006] FamCA 433; [2006] FLC 93-266

ON APPEAL FROM A SINGLE JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

Court of Appeal of the Australian Capital Territory

IN THE SUPREME COURT OF THE ) No. ACTCA 25 of 2007

ON APPEAL FROM A SINGLE JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

1. Each party has leave to file and serve within 7 days of the date hereof draft minutes of order reflecting the conclusions expressed in these reasons.

2. Each party has leave to file and serve within 7 days of the date hereof written submissions, not exceeding 10 pages, addressing:

2.1 the orders sought in the draft minutes of order;

2.2 the order sought as to the costs of the trial and the Court's power to make such an order; and

2.3 the order sought as to the costs of the appeal.

IN THE SUPREME COURT OF THE ) No. ACTCA 25 of 2007

ON APPEAL FROM A SINGLE JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

1. This is an appeal from orders made by a judge of this Court in an action under s 20 of the Property (Relationships) Act 1984 (NSW) ("the Act").

2. The action was commenced by the respondent, Ms Kaye Champion, against the appellant, Mr Wayne Smith, in the Supreme Court of New South Wales in February 2005. The action was transferred to this Court pursuant to a cross-vesting order and it was accepted by the parties that the law to be applied was the New South Wales Act.

3. The appellant and the respondent commenced a de facto relationship in February 1993, and the relationship came to an end in about the middle of 2003. A de facto relationship is a domestic relationship for the purposes of s 20(1) of the Act (s 5(1)(a)). In her action, the respondent sought an order from the Court adjusting the interests of the parties in their property, including property held solely in the name of the appellant. The Court's power to make such an order is contained in s 20(1) of the Act. Under that section, the Court may make such order as to it seems just and equitable, having regard to the contributions identified in s 20(1)(a) and (b). Section 20 is set out later in these reasons (at [33]).

4. The orders made by the trial judge which are under appeal are as follows:

The joint assets of the parties, being the proceeds of the sale of the Camden rural property and the rural property Dellwood, amount to $756,000.00, and that this be divided in the proportion of approximately 42% ($318,000.00) to the plaintiff, and approximately 58% ($438,000.00) to the defendant.
The proceeds of the Camden sale now held in trust, be released to the defendant in part satisfaction.
The parties be otherwise heard on giving effect to this distribution and as to costs.

5. The Camden property referred to in the first order is a rural property at 33 and 35 Nitta Drive, Murrumbateman, New South Wales, and was held by the parties as joint tenants. The property was sold after the action was commenced and at trial the net proceeds of the sale, being a sum of $296,000, were held in a solicitor's trust account. The Dellwood property is a rural property at 1657 Barton Highway, Hall, New South Wales, and it is held by the parties as joint tenants. The value of the Dellwood property was agreed by the parties to be $460,000.

6. In his notice of appeal, the appellant identifies errors said to have been made by the trial judge, and he asks this Court to make the following orders in lieu of the orders made by the trial judge:

(a) That the "Dellwood" property shall be transferred to the appellant;

(b) That the $296,000 Camden sale proceeds be divided between the parties as this Honourable Court deems fit.

(c) The parties be otherwise heard as to costs.

7. We turn now to summarise the trial judge's findings of fact and his reasons for making the orders which he made.

8. The appellant and the respondent met in 1991. At that time, both parties were employed by the Australian Federal Police ("AFP") and stationed in Canberra. They commenced to live together on a rural property, which was rented, and over time they acquired rural properties in New South Wales in close proximity to Canberra.

9. The trial judge said that the respondent was an accomplished horsewoman. "Horseland" was a franchise business involving the sale of clothing and accessories for those involved with horses and, in 1997, the appellant and the respondent made the decision to acquire a Horseland franchise at Fyshwick in the Australian Capital Territory ("ACT"). The respondent left her employment with the AFP to work in that business. The appellant remained a full-time employee of the AFP, although he devoted what the trial judge described as considerable part-time efforts to the franchise business. In 2001, the appellant and the respondent acquired a second Horseland franchise in Belconnen in the ACT.

10. The trial judge found that the de facto relationship ended in about the middle of 2003. The relationship had existed for a little over 10 years and there were no children of the relationship. Both the appellant and the respondent worked full-time during the relationship, either as police officers, or in the businesses. At the time of the trial, the respondent had returned to employment in the public service and, as the trial judge said, "there was no dispute as to any need to adjust or otherwise take into account retirement or superannuation matters".

11. The trial judge found that at the time the action was commenced (that is, in early 2005), the two franchise businesses were prosperous and thriving, and of substantial value. Initially, the parties had carried on the businesses in partnership; later the businesses were carried on by a company, Stormarn Pty Ltd, under licence from the partnership. The appellant and the respondent were directors of Stormarn Pty Ltd. Mr Henry Kazar, a partner of Sims Partners, chartered accountants and business advisors, was appointed receiver of Stormarn Pty Ltd on 9 December 2005 and receiver and manager of the partnership on 13 December 2005. By the time of trial, the businesses had been disposed of by the receiver for what the trial judge described as little real benefit to the parties.

12. The Dellwood property was purchased by the parties in 1995 and the Camden property was purchased by the parties in 2001. The trial judge made orders pursuant to which the Camden property was sold on 6 December 2006 and a net sum of $296,000 was realised. As we have said, the value of the Dellwood property was agreed at a figure of $460,000. This gives the total figure of $756,000 referred to in the trial judge's first order.

13. There was one other piece of real property which was the subject of dispute at the trial. It is a residential property at Palmerston, ACT, and it was said to be worth approximately $250,000. The property was held solely in the name of the appellant, but the respondent claimed that it was part of the property which fell within the terms of s 20 of the Act. The trial judge found that the Palmerston property was acquired by the appellant before the de facto relationship commenced. The purchase of the Palmerston property was financed by an interest-only loan taken out by the appellant, which was repaid from the rent received from letting of the property. The balance of the rent was used as part of the joint assets of the parties. The trial judge found that the Palmerston property was owned solely by the appellant and was not part of the property of the parties for the purposes of s 20 of the Act. The trial judge must be taken to have found that the respondent made no contributions to the acquisition of the property, or the equity in the property. The trial judge's findings in relation to the Palmerston property are not challenged on the appeal.

14. The trial judge referred to the following passage in the reasons for judgment of Hodgson JA (with whom Ipp and McColl JJA agreed) in Howlett v Neilson [2005] NSWCA 149; (2005) 33 Fam LR 402 ("Howlett") at 407 [25]:

It is accepted that the exercise of jurisdiction under s 20 of the Act involves three steps:

(1) identification and valuation of the property of the parties;

(2) identification and valuation of the respective contributions of the parties, of the types referred to in s 20;

(3) determination of what if any order is just and equitable having regard to these contributions.

The trial judge found that the "property of the parties" available for distribution pursuant to an order under s 20 of the Act consisted of the Dellwood property and the net proceeds from the sale of the Camden property.

15. The trial judge also quoted another passage from the reasons for judgment of Hodgson JA in Howlett (at 407 [27]-[29]). The passage is important to an understanding of the trial judge's reasons and we set it out in full.

As regards the second and third steps, it is established that, whereas in determining an appropriate order for property settlement under s 79 of the Family Law Act 1975 (Cth) the Family Court can take into account a wide range of circumstances relevant to the justice of the case, a court in making an order under s 20 of the Act is limited to considering what is just and equitable having regard to the contributions of the parties, in all the circumstances: Evans v Marmont [1997] NSWSC 331; (1997) 42 NSWLR 70; 21 Fam LR 760. In the leading judgment in that case, Gleeson CJ and McLelland CJ in Eq noted that there were at least two major reasons for such difference, and they continued (at NSWLR 78- 79; Fam LR 767):

"The first relates to the limited purpose of the New South Wales Act, which will be explained below. The second relates to the essential legal nature of marriage, which is referred to in the Family Law Act (s 43) as an institution, and which is given by that Act its common law meaning as being "the union of a man and woman to the exclusion of all others voluntarily entered into for life". Marriage involves matters of legal status and public commitment. Included in the formal commitment undertaken by people who marry, and reflected in s 72 of the Family Law Act, is a mutual undertaking by each party to maintain the other to the extent of their respective abilities and needs. No such commitment need be involved in a de facto relationship; hence the substantial differences between the way in which the two Acts address the subject of maintenance."

Accordingly, since the contributions are so central to the decision, it is particularly important in the reasons for making or refusing an order to identify and evaluate these contributions.

This is not a narrow or purely mathematical process. In many cases, it may be appropriate simply to treat the contributions of the parties during the relationship as equal, even though the nature of the contributions are different, although of course there is no presumption of law to that effect, and this assessment depends on a judgment being made that the quality of the contribution of each, in his or her own sphere, deserves to be considered as equal: Mallett v Mallett [1984] HCA 21; (1984) 156 CLR 605; 52 ALR 193; 9 Fam LR 449. However, that judgment is one that often may be readily reached: In the Marriage of Ferraro [1992] FamCA 64; (1992) 16 Fam LR 1; In the Marriage of Clauson (1995) 18 Fam LR 693; Jones v Grech_._

16. The trial judge said that a good deal of evidence had been led concerning "various bank statements, credit card accounts, lunches, trips and other minutia [sic]", but that evidence did not persuade him that "the general equality proposition" referred to by Hodgson JA was not the appropriate starting point. He appears to have reached that conclusion because both parties had worked full-time during the relationship and they had both contributed financially and, during the course of the relationship, "they were able to build up a substantial equity in two rural properties, as well as two successful businesses". The trial judge then considered the hobbies of the parties, which he said involved not insubstantial expenditure. He found that, to the extent more was spent on the respondent's equestrian hobbies compared with the appellant's aviation hobbies, there was an offsetting benefit to the businesses. The trial judge said that he did not see any merit in examining the credit card and bank statements for the period 1997 to 2003 in order to ascertain, if possible, which party spent more money on his or her hobby.

17. The trial judge then cited with approval the following passage from the reasons for judgment of Brereton J (with whom Basten JA and Hunt AJA agreed) in Kardos v Sarbutt [2006] NSWCA 11; (2006) 34 Fam LR 550 ("Kardos") at 561 [36]:

Third, in proceedings under s 20, the court is not required to undertake a reductionist process analogous to the taking of partnership accounts by examining every alleged "contribution" of the kinds described in the section with a view to putting a monetary value on each in order to reach an accounting balance one way or the other, then to be eliminated by the requisite financial adjustment; rather, the court is required to make a holistic value judgment in the exercise of a discretionary power of a very general kind: Davey v Lee (1990) 13 Fam L R 688; (1990) DFC 95-084 (McLelland J).

18. The trial judge found that the parties generally pooled their incomes during the course of the relationship, or at least from 1995, when the respondent agreed to the appellant taking charge of their joint finances.

19. Subject to one contribution made by the appellant, the trial judge said that he did not consider it appropriate to make the type of adjustments for mortgage repayments or deductions from the incomes of one or other of the parties sought by the appellant. The one contribution which he considered should be distinctly recognised as a contribution made by one of the parties was a payment of $120,000 made by the appellant. That amount was part of a compensation payment received by the appellant for injuries suffered by him in a workplace accident in 1990 and was ultimately used by the appellant to discharge the mortgage over the Dellwood property. The trial judge said the sum of $120,000 should be regarded as the appellant's asset. He summarised his conclusions on this point in the following way:

It seems to me that, while there have been various payments into the mortgage account over the years and various drawings by both parties, the substantial payment in [sic] which I accept amounted to at least $120,000.00 which was originally the defendant's compensation payment, should be regarded as his individual asset, which he brought into the relationship, and which must be recognised in these proceedings.

20. The trial judge said, with respect to the sum of $120,000, that it was not appropriate to apply the erosion doctrine developed by the Family Court in proceedings under the Family Law Act 1975 (Cth) ("Family Law Act"): In Marriage of Way (1995) 124 FLR 447; In Marriage of Money (1994) 117 FLR 372. The trial judge then said:

In Howlett v Neilson and Kardos v Sarbutt _(supra), the Court of Appeal, where it has identified a significant and discrete contribution by one party to the acquisition of joint assets, has taken the view that an appropriate exercise of the discretion can be to "return to each party the value (as at the date of commencement of cohabitation) of the property that that party had contributed initially, but to apportion equally between them the increment in the value of their net property since then" (_Kardos at [56]). I propose to adopt this approach and consider that the defendant should have credit for this capital contribution.

21. As to contributions made during the course of the de facto relationship, the trial judge said, "[i]t seems to me that during the course of the relationship they both put in, and they both took out, effectively pooling resources and income...".

22. The appellant submitted to the trial judge that he should receive the property of the parties which was available for distribution because, by reason of certain conduct of the respondent, the property, or the value of the property, of the parties had substantially diminished between the date of the end of the de facto relationship and the date of assessment. The appellant submitted that the respondent's conduct had diminished the available asset pool by approximately $600,000. The conduct consisted of action and inaction, and included excessive drawings from the businesses and the running down of assets. The particular assets said to have been adversely affected by the respondent's conduct were the Camden property and the two franchise businesses. In relation to this submission, the trial judge made a number of findings. First, he found that the de facto relationship between the appellant and the respondent ended in the middle of 2003. Secondly, he found that, following the end of the relationship, and particularly after the commencement of the action in early 2005, there had been very little cooperation between the parties with respect to matters concerning their joint finances. The repayment of interest had ceased, and borrowings had increased. Thirdly, he found that, from a point in time early in the history of the action, the appellant had pressed for the realisation of all the assets. The respondent had opposed that because she had wished to maintain the two franchise businesses and the Dellwood property. The trial judge said, "This was a somewhat unrealistic assumption as to the appropriate distribution of a property pool." Fourthly, he found that the appellant had made withdrawals from the business accounts since the end of the relationship and that, for her part, the respondent had increased drawings and credit card debts. In addition, the trial judge found that the viability of the businesses declined, with quite significant reductions of trade figures. Fifthly, the trial judge considered that the bushfires in the ACT in January 2003, and the drought in the Canberra region, had also had an adverse effect on the value of the Camden property. Sixthly, the trial judge found that the sale of the two franchise businesses required the approval of the franchisor. This had, said the trial judge, further complicated the sale of the franchise businesses. He found that the appellant had done all that was needed to achieve the sale of the businesses by executing subrogation agreements, but the respondent "delayed her consent to these procedures for considerable periods". Seventhly, he found that a receiver was eventually appointed to the businesses and they were sold. There were considerable transaction costs and, after some loans were repaid, there was little net benefit from the sale of the businesses. Finally, the trial judge noted that the parties were agreed that it would be futile to embark on further litigation with respect to the partnership and the businesses.

23. Having made these findings, the trial judge said that there was authority under the Family Law Act that what the trial judge called a "conscious running down of an asset" could be relevant to the type of discretionary judgment he was required to make. He referred to the reasons for judgment of Baker J in In the Marriage of Kowaliw and Kowaliw [1981] FLC 91-092 ("Kowaliw"). The trial judge said:

In Kowaliw v Kowaliw (1981) FLC 91-092 (76,645), Baker J held that if a party has acted either by:

"(a) embarking upon a course of conduct designed to reduce or minimise the effective value or worth of matrimonial assets, or

(b) acting recklessly, negligently or wantonly with matrimonial assets, the overall effect of which has reduced or minimised their value,

then such conduct in my view and the economic consequences which flow therefrom are clearly matters to which the Court may have regard ..."

in the exercise of its discretion pursuant to the Family Law Act.

24. The trial judge addressed the appellant's submission by examining the effect of the respondent's conduct on the amounts realised for the Camden property and the two franchise businesses respectively.

25. The trial judge seems to have found that, on the sale of the Camden property in late 2006, the sum realised was approximately $128,000 less than a valuation of the property in 2005. The trial judge found that, although there was minimal maintenance on the property, there was no conduct by the respondent in relation to the property which amounted to "acting recklessly, negligently or wantonly with the asset, or indeed embarking on a course of conduct designed to minimise the value of the asset". The trial judge found that the fall in value of the Camden property was principally caused by a general decline in rural property values caused by the drought. He then said:

It seems to me that it is hard to say that a reluctance to sell a joint asset so that the sale is delayed means that, should the market fall, the party who delayed the sale must take all of the loss. I am sure that had the market in fact risen, the defendant would not be content to take as his share only his proportion of the valuation as at 2005, leaving all of any capital gain to lie with the party who delayed the sale.

The trial judge rejected the appellant's submission in relation to the Camden property.

26. The trial judge said that the position was more complex with respect to the two franchise businesses. He found that, had the respondent adopted a more cooperative approach to the sale of the assets, the businesses could have been disposed of for a significantly greater sum than was ultimately realised. Nevertheless, he said that the evidence fell well short of the evidence necessary for a finding of "a conscious effort [by the respondent] to reduce a joint asset such that would justify" an exercise of the discretion to reduce further the respondent's entitlement to a share of the joint assets.

27. The conclusions of the trial judge may be summarised in the form of five propositions First, the Palmerston property was the appellant's property and not part of the property of the parties for the purposes of an order under s 20(1) of the Act. Secondly, the property of the parties for the purposes of s 20(1) of the Act was the proceeds of the sale of the Camden property ($296,000) and the agreed value of the Dellwood property ($460,000). Thirdly, the appellant should receive the sum of $120,000 contributed by him and used to reduce the mortgage over the Dellwood property. Fourthly, subject to the third proposition, there was no reason to recognise, in the orders to be made, particular contributions made by either party. Fifthly, there was no proper basis to reduce the respondent's entitlement on the ground that since the end of the de facto relationship she had, by her conduct, caused a reduction in the value of the joint assets of the parties.

28. The trial judge concluded that the appellant should receive the sum of $120,000 and one half of the balance (that is, $318,000) and the respondent should receive the other half of the balance (that is, $318,000).

29. There are five grounds of appeal. The first two grounds relate to the trial judge's approach to the Dellwood property. The first ground of appeal is that the trial judge failed to recognise the appellant's contributions to the acquisition of the Dellwood property, being the payment by the appellant of the deposit on the purchase of the property and the payment by the appellant, some years after the purchase of the property, of approximately $35,000 towards the reduction of the mortgage over the Dellwood property. The second ground of appeal is that the appellant, having made what he said was the bulk of the contributions towards the acquisition of the Dellwood property, being the deposit, the sum of $35,000 and the sum of $120,000, should receive the capital appreciation of the property, or at least a substantial part of it.

30. The third ground of appeal is that the trial judge erred in finding that the financial contributions by the parties were equal, save and except for the payment of $120,000 by the appellant. The appellant contends that, having regard to a report on the partnership and company accounts prepared by the receiver, Mr Kazar, the financial contributions of the parties were not equal, and the appellant made substantially greater contributions than the respondent.

31. The fourth and fifth grounds of appeal relate to the appellant's submission to the trial judge that the respondent's conduct after the de facto relationship ended had led to a significant diminution in the value of the property of the parties and that, by reason of that fact, the award to her under s 20(1) of the Act should be substantially reduced. The fourth ground of appeal is that the trial judge failed to consider whether the respondent acted "recklessly, negligently or wantonly" with respect to the property of the parties. The fifth ground of appeal is that, in relation to the Camden property, the trial judge failed to take into account, in assessing the parties' respective financial contributions, the respondent's refusal to accede to the appellant's requests to sell the property, her sole occupation of the property after the end of the de facto relationship, and her failure to make mortgage repayments with respect to the property.

32. Before turning to consider each ground of appeal, we identify some basic principles about the operation of the Act.

33. Section 20 of the Act provides as follows:

20 Application for adjustment

(1) On an application by a party to a domestic relationship for an order under this Part to adjust interests with respect to the property of the parties to the relationship or either of them, a court may make such order adjusting the interests of the parties in the property as to it seems just and equitable having regard to:

(a) the financial and non-financial contributions made directly or indirectly by or on behalf of the parties to the relationship to the acquisition, conservation or improvement of any of the property of the parties or either of them or to the financial resources of the parties or either of them, and

(b) the contributions, including any contributions made in the capacity of homemaker or parent, made by either of the parties to the relationship to the welfare of the other party to the relationship or to the welfare of the family constituted by the parties and one or more of the following, namely:

(i) a child of the parties,

(ii) a child accepted by the parties or either of them into the household of the parties, whether or not the child is a child of either of the parties.

(2) A court may make an order under subsection (1) in respect of property whether or not it has declared the title or rights of a party to a domestic relationship in respect of the property.

34. In exercising the jurisdiction under s 20(1) of the Act, the first step for the Court is to identify the property of the parties or either of them at the time the Court is considering the order which should be made. The concept of "property" is defined in s 3 of the Act and the definition is a wide one. The relevant property for the purposes of s 20 is not only property held jointly by the parties, but also property held by one of the parties alone. Whilst the Court has the power under the Act to declare the title or rights of either party to a domestic relationship with respect to property, it is not a pre-requisite to an adjustment order under s 20(1) that it do so: s 8 and s 20(2). An adjustment order under s 20(1) may include or be given effect to by an order that property be sold and the proceeds of sale distributed in a particular way: s 38(1)(b). The Court is given the power in s 38 to make a wide range of orders including an order or injunction for the protection of or otherwise relating to the property or financial resources of the parties to an application or either of them: s 38(1)(h)(i).

35. The second step for the Court under s 20(1) is to identify the contributions made by the parties. The word "contribution" is not defined in the Act. Under s 20(1)(a) the contributions may be either financial or non-financial and they must be made (either directly or indirectly) by the parties to the acquisition, conservation or improvement of any of the property of the parties or either of them, or to the financial resources of the parties or either of them. The term "financial resources" is defined in s 3 of the Act. Under s 20(1)(b), contributions include contributions to the welfare of the other party to the relationship or to the welfare of the family including children. As we have said, there were no children of the relationship between the appellant and the respondent.

36. The third step for the Court under s 20(1) is to make such order as seems to the Court just and equitable, having regard to the contributions made by the parties. The question of the extent to which the Court may have regard to matters other than the contributions made by the parties was considered in Evans v Marmont [1997] NSWSC 331; (1997) 42 NSWLR 70 (see also Manns v Kennedy [2007] NSWCA 217; (2007) 37 Fam LR 489).

37. The Court is, so far as is practicable, to make such orders as will finally determine the financial relationships between the parties to a domestic relationship and avoid further proceedings between them: s 19.

38. In the course of submissions on the appeal, reference was made to other issues which have arisen in cases under s 20 of the Act. It is necessary to make brief reference to these issues.

39. First, reference was made to the "erosion" principle, which is a principle recognised as being of application in disputes under the Family Law Act. The principle, which involves a court concluding that an initial contribution by the party is eroded to a greater or lesser extent by the later contributions of the other party, was discussed by Hodgson JA in Howlett, and by Ipp JA (with whom Giles and McColl JJA agreed) in Bilous v Mudaliar (2006) 65 NSWLR 615 ("Bilous") at 625-628 [53]-[68]. We propose to follow the observations of Ipp JA in Bilous (at 625 [55]) that the erosion principle should not be applied in cases under s 20(1), as it tends to distract the mind from the exact words of s 20.

40. Secondly, reference was made to the circumstances in which a Court will award the capital appreciation of a property introduced into a relationship by one of the parties either to that party or to each of the parties in a certain proportion. That issue has been considered in a number of cases including Burgess v King [2005] NSWCA 396; (2005) 64 NSWLR 293 ("Burgess"); Kardos; Bilous. In Burgess, Hodgson JA (with whom Mason P and MW Campbell A-JA agreed) held that a party who had made a particular contribution to the acquisition of a property was entitled to share in the capital appreciation of the property over the course of the relationship. In Kardos, Brereton J said that there was no general rule that a contribution made by a party was only to be valued as at the time it was made, and without regard to capital appreciation. In Bilous, Ipp JA said that there was no rule that, for the purposes of determining the order to be made under s 20(1), any increase in value in assets initially contributed should be regarded, in all circumstances, as entirely a contribution by the party who contributed the assets. His Honour went on to say (at 627 [63]):

Determinations as to what orders should be made under s 20 are to be made solely on the grounds of the justice and equity of the case. The justice and equity of the case may derive from the fact that the party who owns the family home or other property was able to retain that property, while the market value increased, because "of joint efforts of wage earning, homemaking and parenting, and mutual support". In some instances the non-financial contributions of one party may result in property of the kind in question not having to be sold. In other instances, the non-financial contributions of one partner may allow the other to advance his or her career and earn a high income that enables the property in question to be maintained and retained. Thus, an increment in capital value may well result, indirectly, from "joint efforts of wage earning, homemaking and parenting, and mutual support".

41. Thirdly, reference was made to what was said to be a principle or rule that, in determining what order is just and equitable under s 20(1) of the Act, a Court may have regard to conduct of a party (if sufficiently culpable) which has led to the loss of, or diminution in, value of the assets which would otherwise be property for the purposes of s 20(1) of the Act. The trial judge and the parties on the appeal proceeded on the basis that the principle stated by Baker J in Kowaliw was to be applied to determinations under s 20(1) of the Act. We are able to decide this appeal on the basis that that assumption is correct because the appellant's contentions fail on the facts. This Court did not have the benefit of detailed submissions on precisely how the principle operates under the Family Law Act (see, for example, In the Marriage of Townsend [1994] FamCA 144; (1994) 18 Fam LR 505; AJO v GRO [2005] FamCA 195; (2005) 191 FLR 317; Whiterod and Taylor [2006] FamCA 433; [2006] FLC 93-266). Nor did the Court have the benefit of detailed submissions on how such a principle is accommodated under s 20(1) of the Act and how it operates under that section. Finally, the Court did not have the benefit of detailed submissions on whether, assuming such a principle operates under s 20(1) of the Act, it is accurately expressed in the words used by Baker J in Kowaliw. We will proceed on the basis that there is such a principle and that it applies to applications under s 20(1) of the Act, subject to one qualification or, perhaps, observation; the principle is only engaged by the negligence of one of the parties if that negligence is of a high order or, to use a somewhat imprecise term, is gross negligence.

42. Finally, as a result of transactions entered into by parties to a de facto relationship, rights and obligations between them at law may arise. As we said earlier, in determining an application under s 20(1) of the Act, the Court is, so far as is practicable, to make orders which will finally determine the financial relationships between them: s 19. That important principle has been recognised in the cases (see, for example, Vitali v Stachnik [2001] NSWSC 408; (2001) 28 Fam LR 142; Caplice v Aroogah Investments Pty Ltd [2005] NSWSC 287; Waring v Ellis [2005] NSWSC 467; (2005) 13 BPR 24,459).

43. In this case, the trial judge's identification of the property available for distribution under s 20(1) of the Act is not under challenge. His identification of the contributions made by the parties and his conclusion as to the orders which were just and equitable are under challenge.

44. It should be noted that, in considering the second step, the trial judge made no reference to contributions of the type identified in s 20(1)(b) of the Act, and it may be assumed that he considered that such contributions were equal, or not of such a nature as to affect the outcome of the case. Furthermore, subject to the appellant's payment of $120,000, the trial judge found that the financial contributions and non-financial contributions of the parties within s 20(1)(a) were equal. He appears to have reached that conclusion, not by identifying every item of income and expense over the period of the relationship, but by taking a broader approach which he considered appropriate in the circumstances. He considered that he was entitled to take that approach, having regard to the statements in the authorities to which he referred.

45. We turn now to deal with each ground of appeal.

46. The relationship between the parties commenced in February 1993 and the trial judge found that the parties commenced pooling their incomes by no later than 1995, when the appellant took charge of their joint finances. The Dellwood property was purchased at auction in August 1994 for the sum of $160,000 and settlement took place in March 1995. The parties became joint tenants of the property. The purchase of the property was financed by the payment of a deposit of $16,000 and the provision of funds by a lender whose loan was secured by a mortgage over the property. The deposit was paid by the appellant in August 1994. He also paid other expenses apparently associated with the sale and these other expenses totalled $560. The loan was obtained by the appellant and the respondent from Perpetual Trustees Australia Limited trading as Aussie Home Loans, and the parties were jointly liable for the repayment of the loan. In 1997, the loan was refinanced through the National Australia Bank Limited and a new loan account, referred to in submissions to this Court as the Dellwood Mortgage account, was established. The parties lived in the Dellwood property from 1995 to 2001.

47. In August 1998, the Dellwood Mortgage account was in debit in the sum of approximately $135,000. By July 1999, that sum had been reduced to approximately $100,000. During that period, the appellant paid his salary as an employee of the AFP into the Dellwood Mortgage account and most of the credits to the account during that period resulted from the payments of the appellant's salary into the account.

48. Shortly thereafter, the sum of approximately $120,000 was paid into the Dellwood Mortgage account by the appellant and that payment brought the account into credit. We will need to return to that payment when considering the second ground of appeal.

49. The trial judge made no reference in his reasons to the fact that the appellant had paid the deposit on the purchase of the Dellwood property. In our respectful opinion, he erred in not doing so because it was a clear and distinct contribution to the acquisition of the property and it needed to be considered. It is not known how he would have dealt with it had he addressed it. On the one hand, he may have made an allowance for it in the same way as he made an allowance for the sum of $120,000 paid by the appellant. On the other hand, he may have considered that, having regard to the fact that it is a relatively small sum, it did not warrant separate recognition in light of his other findings. This Court must do the best it can in the circumstances. An order for a retrial based on an error with respect to such a small sum would not be justified.

50. In our opinion, the sum of $16,000 should be recognised as a separate and distinct contribution which stands apart from the equal contributions made by the parties during the course of their relationship. It is a distinct amount used in connection with the acquisition of the Dellwood property. It was provided solely by the appellant, apparently from his own resources. The balance of the purchase price was obtained by way of a loan in the name of both parties. The deposit was paid at a time at which the parties were not pooling their resources, or, at least, there is no finding by the trial judge that they were pooling their resources at that time. The circumstances surrounding the payment of expenses of $560 are unclear and we are not satisfied that it is appropriate to include that sum, albeit paid by the appellant, in the sum he contributed to the acquisition of the Dellwood property.

51. The trial judge made no specific reference in his reasons to the payments totalling approximately $35,000 made by the appellant in reduction of the loan and mortgage over the Dellwood property between August 1998 and July 1999. He did say, however, that he would not make the type of adjustments the appellant sought in relation to "whose income various mortgage deductions were taken from over the years" and we take this to be a reference to (among other things) the payments made by the appellant from August 1998 and July 1999. In our opinion, there is no sufficient basis to interfere with the trial judge's conclusion. It is not entirely clear that only the appellant's salary was being used to reduce the loan and mortgage, as the account statements show other moneys being paid into the account, apparently, the Court was told, from one of the accounts relating to the business. However, even if that is put to one side, we think that, in light of his other findings, and, in particular, his finding that the parties were pooling their incomes from at least 1995, the trial judge was entitled to find that the payments made by the appellant were not contributions over and above those made by the respondent.

52. This ground of appeal is upheld, but only in relation to the deposit of $16,000.

53. The Dellwood property was purchased for $160,000 and its agreed value at trial was $460,000. The capital appreciation in the value of the property from the date of acquisition in March 1995 to the date of trial was $300,000. The effect of the trial judge's orders was, subject to the repayment of $120,000 to the appellant, to allocate this capital appreciation in the value of the property equally between the appellant and the respondent.

54. The appellant submits that he had contributed a good deal more than half of the costs of the acquisition of the Dellwood property and he points to the payment of the deposit of $16,000 and the payment of $120,000 in July 1999. He also pointed to the payment by him of approximately $35,000 between August 1998 and June 1999, but for the reasons we have given in relation to the first ground of appeal, the submission he makes cannot be sustained in relation to this amount because that sum is part of the equal contributions made by the parties. The submission which needs to be considered is whether, in addition to the sums of $16,000 and $120,000, the appellant should have been awarded such proportion of the capital appreciation of the Dellwood property as is attributable to those amounts. In our opinion, there should be no such award in relation to either amount.

55. We have already set out the relevant principles (at [40]). In our opinion, it is not appropriate in this case to attribute a particular proportion of the capital appreciation of the Dellwood property to the payment of the deposit by the appellant. We have reached that conclusion for the following reasons. First, the contribution is a relatively small sum, being 10 per cent of the purchase price of the property. It is not a case of a party bringing the whole of the property into the relationship. Secondly, and this is related to the first point, in substance the property was acquired by funds (or, more accurately, the undertaking of obligations under a loan agreement) provided jointly by both parties in equal shares. Thirdly, the relationship between the parties lasted for over ten years and the Dellwood property was acquired early in the relationship. It was acquired as a home for both of them and they lived there from 1995 to 2001. Finally, the parties, on any view, had, at least for a substantial period of time, a very successful business relationship during which they acquired rural properties and two successful businesses. Throughout the period the appellant held full-time employment with the AFP. Even if it cannot be said that a particular contribution of the respondent prevented the Dellwood property from being sold, it can be said that the equal contributions of the parties (save and except for the sum of $120,000) enabled the personal and business structures to be maintained.

56. We turn now to consider the payment by the appellant of the sum of $120,000. We do not think this payment was a contribution to the acquisition of the Dellwood property, but rather it was a contribution to the property of the parties which happened to be used to repay the mortgage over the property. The payment was made over four years after the property was acquired and there is no suggestion that, had the money not been paid towards the mortgage, the property would have been sold in July 1999. The appellant was entitled to have his contribution of $120,000 recognised and the trial judge did this in his order. However, he was not entitled to any additional sum on the basis that part of the capital appreciation in the value of the Dellwood property should be attributed to the contribution of $120,000. We should add that, in any event, the appellant faced a significant evidentiary difficulty. As we have said, the payment of $120,000 was not made at the time of the acquisition of the property, but, rather, over four years later in July 1999. Even if, contrary to our earlier conclusion, the appellant was entitled to such proportion of the capital appreciation in the value of the Dellwood property attributable to the payment of $120,000, that could only be such capital appreciation as occurred after July 1999. There was no evidence before the trial judge of the value of the Dellwood property over the relevant period and, in particular, of its value in or about July 1999.

57. In our opinion, although the trial judge should have awarded the appellant the sum of $16,000 in recognition of the appellant's payment of the deposit, he did not err in not attributing a particular part of the capital appreciation of the Dellwood property to the appellant's payments of $16,000 and $120,000 respectively.

59. Mr Kazar conducted an investigation into the financial affairs of the company from 1 July 2003 to 9 December 2005. He also examined the drawings, salaries and superannuation payments of, or to, the parties from 1 July 1997 to 9 December 2005. Mr Kazar prepared a report dated 20 April 2006 and an addendum to his report dated 5 May 2006. We will refer to both documents together as Mr Kazar's report.

60. The significant conclusions of Mr Kazar for the purposes of the appellant's submissions in relation to the third ground of appeal are as follows:

1. From 1997 to 2006, the respondent was paid a salary by the partnership or the company totalling $314,059. By contrast, the appellant was not paid any amount by way of salary by the partnership or company.

The appellant contended that it followed that he had "contributed" $157,030 more than the respondent to the property or financial resources of the parties.

2. In the same period, the respondent received superannuation payments totalling $68,429. By contrast, the appellant did not receive any superannuation payments.

The appellant contended that it followed that he "contributed" $34,215 more than the respondent to the property or financial resources of the parties.

3. The directors' loan accounts with the company showed that the company was indebted to the appellant in the sum of $28,005.34 and to the respondent in the sum of $16,141.49. The appellant contended that it followed that he "contributed" $11,864 more than the respondent to the property or financial resources of the parties.

4. By reason of personal transactions undertaken by the respondent on the appellant's credit card, she owed the appellant the sum of $2,832.61.

61. The trial judge referred to Mr Kazar's report as "a complex report of the receiver in respect of both the business and the partnership". He then went on to say:

Counsel for both parties were in agreement that it would be futile for the parties to embark on a further course of litigation in respect of the partnership and business and, in effect, gave undertakings in Court that the parties would abide by the outcome of these proceedings and refrain from further seeking to litigate these issues. There would be nothing to gain from such an exercise.

62. The approach of the parties was a sensible one and accords with the injunction in s 19 of the Act and the authorities (see [42] above).

63. The appellant submits that, despite the trial judge's reference to the report, he failed to have regard to it in determining the respective contributions of the parties. He submits that the trial judge could not have concluded that the parties made equal financial contributions if he had had proper regard to Mr Kazar's report. Had he had proper regard to the report, he would have concluded that the appellant had made substantially greater financial contributions than the respondent.

64. We think that the trial judge took into account Mr Kazar's report and that he decided that it did not affect the conclusions he was otherwise disposed to reach. In our opinion, the trial judge did not err in taking that approach.

65. The fact that the respondent was paid a salary and superannuation, while the appellant was not, is explained by the fact that the respondent was employed in the two franchise businesses on a full-time basis, whereas, the appellant was employed by the AFP. It is true that the appellant assisted in the conduct of the businesses when he could, but there is no suggestion that the trial judge overlooked this fact, or that any attempt was made to quantify the value of the appellant's contributions in this regard, or to prove that they exceeded the non-remunerated contributions made by the respondent. The directors' loan accounts and the respondent's credit card transactions involve relatively small amounts of money. We are not satisfied that the trial judge overlooked them, or that he was not entitled, on taking them into account, to reach the conclusion that, other than the payment by the appellant of $120,000, it was appropriate to conclude that the respective contributions of the parties were equal.

66. The two franchise businesses were property of the parties for the purposes of s 20(1) of the Act. The trial judge found that the businesses were, as he put it, clearly prosperous and thriving businesses of substantial value at the time proceedings were commenced (that is, February 2005) but were ultimately disposed of by the receiver for little real benefit to the parties. It seems that the receiver disposed of the businesses in late 2005 or early 2006. The trial judge did not make a finding as to the sum which would have been realised had the businesses been sold in or about February 2005.

67. In submissions before this Court, the appellant accepted that the businesses were insolvent by November 2005. The precise cause or causes of the deterioration in the businesses is not clear and, in any event, is not strictly relevant for the purpose of the submission the appellant puts in relation to ground 4. The appellant's submission is not that the respondent ran the businesses down, but rather that the respondent refused to cooperate in the sale of the businesses in 2004 and early 2005 and that, as a result, an opportunity to realise a substantial sum on the sale of the business was lost. The submission was that the respondent's refusal to cooperate was unreasonable and the "loss" caused by the respondent should be reflected in the orders made under s 20(1) of the Act. The appellant points to the following finding by the trial judge:

It seems to me that, had the plaintiff adopted a more cooperative approach towards realising the assets, the business could well have been disposed of for a significantly greater sum and, accordingly, the joint asset pool would have been greater.

68. The appellant acknowledges, and does not challenge, the trial judge's finding that the respondent's conduct in relation to the businesses did not amount to "a conscious effort to reduce a joint asset". However, the appellant submits that the trial judge erred in not asking a further question, namely, whether the respondent had acted negligently with respect to the proposed disposition of the two franchise businesses and that, had he done so, he would have concluded that she had acted negligently and that the diminution in value, or waste, of the two franchise businesses should be reflected negatively in her entitlement under s 20(1) of the Act.

69. We refer to our discussion of the principles relevant to this issue (at [41] above). For the following reasons, the negligence required to engage the relevant principle was not present in this case. First, it was accepted by the appellant that it was open to a party in his position to seek orders from the Court as a matter of urgency, if the circumstances warranted such a course. Ultimately, the appellant sought and obtained orders which led to the disposition of the businesses. Secondly, we have read the correspondence between the parties and their respective solicitors in late 2004 and the early part of 2005, to which the Court was referred by counsel for the appellant. The respondent appears to have changed her mind about selling the businesses and she was concerned that the appellant was taking money out of the businesses and that the businesses were suffering as a result. Thirdly, although no finding about the respondent's belief was made by the trial judge, it is not apparent that it would have been found that she knew, or had good reason to suspect, that the decline of the business was irretrievable. No doubt she could have been more cooperative, as the trial judge found, but her conduct cannot be described as negligence of the high order required. Fourthly, the alleged period of wrongful conduct is a very limited one. The businesses were insolvent by November 2005, and, as early as 7 March 2005, the solicitors for the respondent were writing to the solicitors for the appellant stating that the company was not "trading well". Having regard to these circumstances, we are not satisfied that the principle relied on by the appellant is engaged on the facts. The other difficulty for the appellant's submission is again an evidentiary one. There is no clear and satisfactory evidence of the value of the businesses at the time the appellant said the businesses would have been sold but for the respondent's failure to cooperate.

71. With respect, we had difficulty in following the appellant's submissions in relation to this ground of appeal. In oral submissions, counsel did not develop his argument beyond the three paragraphs in his written submissions. Both parties were liable under the mortgage and the trial judge found that the respondent had not engaged in any "wrongful" conduct in relation to the sale of the Camden property. The fact that the respondent was in sole occupation of the Camden property might have been a relevant consideration, but the submissions were not developed to an extent necessary to satisfy us that there is an appropriate basis for appellate intervention.

73. The appeal must be allowed and the first order made by the trial judge must be set aside. The appellant is entitled to the additional sum of $16,000. There would seem to be no reason why the second order should not stand. However, we think the Court should hear from the parties as to the appropriate orders.

74. No order was made by the trial judge as to the costs of the action. He heard submissions on costs, but died before he could make orders. The parties submitted that their understanding was that, if the orders of the trial judge were not disturbed on the appeal, then this Court would have no jurisdiction to make an order for costs in relation to the costs of the action. If, on the other hand, the orders of the trial judge were altered on the appeal, then the parties submitted that this Court would have jurisdiction to make orders as to the costs of the action.

75. Each party then went on to make submissions to this Court on the appropriate order in relation to the costs of the action. The appellant submitted that he should have the costs of the action on a party and party basis up to 17 March 2005 and on an indemnity basis from that date. He contended that, under the trial judge's orders, he had been the successful party, receiving 58 per cent of the assets of the parties, and, for the period after 17 March 2005, he relied on that contention and on the fact that he had made two offers to the respondent to settle the action, which were both refused and which the respondent did not better at trial. For her part, the respondent submitted that each party should bear his or her own costs of the action.

76. Although it would seem convenient for this Court to deal with the costs of the action, we are not presently convinced that the Court has power to do so, even in circumstances in which this Court is varying the orders of the trial judge and both parties consent to the Court taking that course. We would wish to be persuaded that this Court has jurisdiction to make such an order. In any event, it seems to us that the parties should be given the opportunity to make submissions on the costs of the action in light of the variation to the orders which will follow from these reasons. In doing that, and in addition to what they have already put, they may wish to identify any matters they contend are relevant to the circumstances under which the action was instituted.

77. In our opinion, the appropriate orders at this stage are the following:

1. Each party has leave to file and serve within 7 days of the date hereof draft minutes of order reflecting the conclusions expressed in these reasons.

2. Each party has leave to file and serve within 7 days of the date hereof written submissions, not exceeding 10 pages, addressing:

2.1 the orders sought in the draft minutes of order;

2.2 the order sought as to the costs of the trial and the Court's power to make such an order; and

2.3 the order sought as to the costs of the appeal.

I certify that the preceding seventy-seven (77) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Solicitor for the Appellant: Elrington Boardman Allport

Solicitor for the Respondent: David Lardner Lawyers

(Relationships) Act 1984

(2005) 33 Fam LR 402

(1994) 18 Fam LR 505

(2006) 34 Fam LR 550

(2007) 37 Fam LR 489

(2001) 28 Fam LR 142

(1995) 18 Fam LR 693

(1990) 13 Fam L R 688

At a glance

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Cases Cited (15)