Smith v Wood

Factual overview 6 The background to this matter is complicated and is set out in detail at [14] in the trial judge's reasons. The facts relevant to the issues on the appeal may be considered more briefly. Mr. James and Mr. Christian were real estate agents who, in about 1990, formed a company, James Christian Pty. Limited (James Christian) which carried on business as Raine & Horne Caringbah. 7 In late 1996, James Christian Pty. Limited, purchased a small real estate agency, I.G. Martyn Real Estate Pty. Limited (I.G. Martyn), borrowing approximately $1 million from Macquarie Bank to fund the purchase. In 1999, Messrs. James and Christian decided to purchase a large real estate agency in Cronulla known as Chris Burke & Co. Pty. Limited (Chris Burke & Co) for $1.7 million. At that time, James Christian was still indebted to Macquarie Bank for the moneys borrowed in 1996 to purchase I.G Martyn. 8 As Messrs. James and Christian were unable to finance the proposed purchase of Chris Burke & Co, they decided to seek the interest of other investors in the proposal. Three investors were attracted: Mr. Palmieri, Mr. Mortimer and Mr. Wilson. These persons and/or their companies are referred to as the investors. An agreement was reached, whereby, through their various corporate entities, the investors would join with Messrs. James and Christian (who, with the investors, will be called the venture parties) to purchase the business of Chris Burke & Co through a new corporate vehicle, Surf Road Nominees. This will be referred to as the new venture. Messrs. James and Christian were to contribute the assets of James Christian which, in essence, comprised the rent roll of I.G. Martyn, to the new venture. The investors were to contribute cash in amounts proportionate to the asset contribution of Messrs. James and Christian. 9 The legal structure of the new venture was somewhat complicated. In addition to the new company Surf Road Nominees, in which the venture parties held shares, a unit trust, the Surf Road Unit Trust, was established, Surf Road Nominees being the trustee. The venture parties also held units in the Surf Road Unit Trust. 10 Surf Road Nominees acquired all the shares in Chris Burke & Co, which remained the operating company conducting the real estate businesses. Surf Road Nominees also held all the shares in I.G. Martyn. The intention was that any profits in Chris Burke & Co were to be funnelled into Surf Road Nominees and thence into the Surf Road Unit Trust for distribution. 11 This exercise required that the business of I.G. Martyn be valued so as to determine the amount of cash contribution required by the investors. The existing debt of James Christian to Macquarie Bank was quarantined from the valuation exercise. 12 The financial arrangements between James Christian, I.G. Martyn and the Macquarie Bank were also restructured. Under the new arrangements, I.G. Martyn took over responsibility for the $1 million debt owed by James Christian by way of a fully drawn advance facility granted on 25 June 1999 for the amount of the debt. The terms of the fully drawn advance required the payment of monthly instalments and the repayment of the outstanding balance on 30 June 2002. The advance was secured by fixed and floating charges over the assets of I.G. Martyn; James Christian and Surf Road Nominees in its own capacity and in its capacity as trustee for the Surf Road Unit Trust; and Chris Burke & Co in its own capacity and in its capacity as trustee for the Burke Unit Trust. In addition, personal guarantees were given by the James and the Christians and Deeds of Covenant and Indemnities entered into with the Surf Road Unit Trust and the Burke Unit Trust. 13 Thirty-six units were issued in the Surf Road Unit Trust, valued at $110,000.00 per unit. That amount represented the amount to be contributed by the venture parties in cash or kind in accordance with their unit entitlements. The initial unit holdings, after one rearrangement not relevant for present purposes, were:

(i) New South Head Road Nominees Pty. Limited (New South Head Road Nominees) as trustee for the J. James Trust (Mrs. James' trust) - 13 units. (ii) Cottenham Nominees Pty. Limited (Cottenham) as trustee for the M & K Christian Family Trust - 13 units. (iii) DJZ Constructions Pty. Limited (DJZ) - a Palmieri interest - 7 units. (iv) WIT Investments Pty. Limited (WIT) - a Wilson interest - 1 unit. (v) D & A Mortimer Pty. Limited (Mortimer) - a Mortimer interest - 2 units. 14 The shareholding in Surf Road Nominees Pty. Limited was:

(i) Mr. Wilson - 1 share. (ii) Mr. Christian - 6 shares. (iii) Mr. James - 6 shares. (iv) Mrs. Christian - 7 shares. (v) Mrs. James - 7 shares. (vi) Mr. Mortimer - 2 shares. (vii) Mr. Palmieri - 7 shares. 15 The investors held A Class units which entitled them to preferential distributions from the Trust. 16 At the time that the new venture was established, a Deed of Guarantee, dated 1 July 1999, was entered into between the parties. As already mentioned, the principal issue on the appeal is whether Mrs. James remains liable under the Deed of Guarantee. 17 Difficulties soon arose in the management of the business and Messrs. James and Christian were accused of fraud and misappropriation. Mr. James was dismissed as manager of Surf Road Nominees. In February 2001 the Christians and their family company, Cottenham, entered into a Deed (the February 2001 Deed) whereby any liability they might have under the Deed of Guarantee was varied. It appears that immediately prior to that agreement being entered into, Mortimer transferred its 2 units in the Trust: one to DJZ to hold as trustee for Silvano Sicuro (Sicuro) and the other to Cottenham. Sicuro had been brought in as a financial adviser when Palmieri, Wilson and Mortimer became concerned about the conduct of the business affairs of Surf Road Nominees. It was his investigations into the business' financial affairs that led to Mr. James' dismissal. 18 The February 2001 Deed was entered into with Surf Road Nominees, Chris Burke & Co, I.G. Martyn, WIT and Wilson, and DJZ and Palmieri. The absence of the Mortimer interest is explained by the transfer of its shares and units. The Deed recited that allegations of fraud and misappropriation had been made against Messrs. James and Christian and that it would be in the best interests of the parties and the Surf Road Unit Trust if Mr. Christian was given a release in relation to the allegations against him. The Deed also recited that the investors were entitled to exercise their power of sale under cl.8 of the Deed of Guarantee over the New South Head Road Nominees and Cottenham units in the Trust. 19 It should be noted however that at that time the investors had not given a Notice of Default under the Deed of Guarantee to New South Head Road Nominees or Cottenham. That was not given until 4 May 2001 and was addressed to both. 20 On 3 August 2001, Surf Road Nominees, Chris Burke & Co, I.G. Martyn, WIT and DJZ commenced the subject proceedings against Mr. and Mrs. James (the James) and New South Head Road Nominees seeking to enforce the Deed of Guarantee. Essentially three claims were made:

(i) Surf Road Nominees claimed that the James and New South Head Road Nominees were liable to Surf Road Nominees as trustee for the Surf Road Unit Trust for the Macquarie Bank debt of $1 million - see cl.5(1)(a) of the Deed of Guarantee;

(ii) WIT and DJZ claimed that the James and New South Head Road Nominees were liable to WIT and DJZ for the preferential distributions - see cl.5(1)(b) of the Deed of Guarantee

(iii) WIT and DJZ claimed that the James and New South Head Road Nominees were liable to WIT and DJZ for the loss and damage suffered by them in consequence of the failure to ensure payment of the Macquarie Bank debt - cl.5(2) of the Deed of Guarantee. 21 The monthly payments on the Macquarie Bank debt were not being met and the advance was not repaid in accordance with the provisions of the draw down facility. On 22 October 2002 the investors exercised the power of sale in respect of the New South Head Road Nominees units. In December 2002, Surf Road Nominees sold the rent roll of Chris Burke & Co and on 28 February 2003 it discharged the Macquarie Bank debt. The loss and damage thereby suffered by the investors from the failure to repay the Macquarie Bank debt crystallised at that time in the sum of approximately $1 million. 22 Subsequently, on 5 November 2003, the Christians and Cottenham entered into another agreement (the 5 November 2003 Agreement) whereby Cottenham purchased the remaining real estate business of Chris Burke & Co. Under cl.25 of the agreement, the Christians and Cottenham were given a "release" of any liability they might have to the investors to Surf Road Nominees and to others who were parties to the 5 November 2003 Agreement or referred to in it.

23 The question, raised by the release issue and the security issue, as to whether Mrs James was discharged from liability under the Deed of Guarantee, requires consideration of the terms of the Deed of Guarantee, the February 2001 Deed and the 5 November 2003 Agreement.

The Deed of Guarantee 24 There were five groups of parties to the Deed of Guarantee. The first group were the investors, that is, Mortimer, WIT and DJZ. The second party was James Christian (the guarantor). The third group comprised the James and the Christians (the indemnifying parties). The fourth group comprised Cottenham and New South Head Road Nominees (the unit holders). Surf Road Nominees (as Trustee) was the fifth party. 25 The Deed of Guarantee had two essential purposes. First, it provided in cl.1 that James Christian would pay the Macquarie Bank debt notwithstanding that I.G. Martyn had taken over that liability pursuant to the June 1999 restructuring facility. 26 Secondly, under cl.5, the James, the Christians, their companies and James Christian guaranteed: (a) James Christian's obligation under cl.1 to pay the Macquarie Bank debt; and (b) the payment of the preferential distributions. It also provided for an indemnity to the investors in respect of any loss that might result if James Christian did not pay the Macquarie Bank debt. 27 As the question whether Mrs. James has any liability under cl.5 is the central issue on the appeal, its terms should be set out in full. "5 (1) The guarantor, unit holders and the indemnifying parties jointly and severally guarantee: (a) payment of the [Macquarie] bank debt … (b) that the Trustee will pay the preferential distribution to the investors, (2) The Indemnifying parties, the guarantor and the unit holders jointly and severally indemnify the investors for any loss or damage suffered by the investors should the Indemnifying parties, the guarantor and the unit holders fail to ensure payment of the [Macquarie Bank debt] …" 28 The trial judge construed cl.5(1) and cl.5(2) of the Deed of Guarantee as a promise by the guarantors to the new investors. That finding is not challenged. 29 Clauses 6 and 8 are also relevant. Clause 6 provided for Cottenham and New South Head Road Nominees to deliver their certificates in the Surf Road Unit Trust to the solicitors for the investors by way of security for the obligations of the relevant parties under cl.5. Clause 8 provided a power of sale in the case of default.

The February 2001 Deed 30 The parties to the February 2001 Deed were: WIT, Wilson, DJZ and Mr. and Mrs. Palmieri, Cottenham and the Christians, Surf Road Nominees, Chris Burke & Co, I.G. Martyn and Sicuro. The James and New South Head Road Nominees were not parties. 31 The February 2001 Deed provided for certain payments to be made by the Christians and Cottenham by way of capital contribution to the Surf Road Unit Trust (cl.1 and cl.3). An amount was also to be paid to Mr. Mortimer and an amount of $20,000.00 was to be paid to Palmieri (cl.3). Clause 4 provided that in consideration of the payments made to the Surf Road Unit Trust, the Christians and Cottenham were "jointly and severally release[d] … from any and all claims, actions, suits, demands, costs, damages and/or expenses which they … may have had but for the execution of [the] Deed … arising out of [Mr. Christian's] involvement as a Director of [the businesses] and/or [arising out of their receipt] of funds improperly or unlawfully paid to them … from Chris Burke & Co, I.G. Martyn or the [Surf Road Unit Trust]". 32 Clause 5 provided that no action would be taken to sell Cottenham's 13 units in the Surf Road Unit Trust. It was further agreed that no action would be taken "against [the Christians and/or Cottenham] arising out of [breach] of … their obligations pursuant to the … 1999 Deed [of Guarantee] except as [provided in this Agreement] … and the provisions of this Clause may be used as a bar to any proceedings by the aforementioned parties against [the Christians or Cottenhams] …". 33 The exception referred to in cl.5 was provided for in cl.6. Under cl.6(a), WIT, DJZ, Cottenham and Sicuro agreed to waive any rights to receive a preferential distribution of the profits to which they were entitled under cl.2 of the Deed of Guarantee. Under cl.6(b), WIT, DJZ, Cottenham, Sicuro and Surf Road Nominees agreed to limit any claim they might have against the Christians or Cottenham under the Deed of Guarantee in respect of the Macquarie Bank debt to a maximum of $300,000.00.

5 November 2003 Agreement 34 The parties to the 5 November 2003 Agreement were: Chris Burke & Co. and Cottenham as vendor and purchaser respectively; Vincent Palmieri and DJZ Constructions Pty. Limited as vendor guarantors; and the Christians as purchaser guarantors. Under the agreement, Chris Burke & Co. agreed to sell its business to Cottenham. Clause 25 of the Agreement provided: "25. COURT CASE AGAINST TASS JAMES 25.1 The parties to the Agreement acknowledge New South Wales Supreme Court proceedings 50108 of 2001 ('Supreme Court proceedings') is on foot and involves the parties to the Agreement. 25.2 Subject to the Purchaser paying to Pritchard Law Group the sum of Fifty Two Thousand Dollars ($52,000.00) pursuant to Clause 9.1 and Schedule 11, the Vendor, Vincent Palmieri and Silvano Sicuro acknowledge and agree that they are liable and responsible for all fees, disbursements and any other monies past, present and future owing on any account in respect of the Supreme Court proceedings to the Vendor's Solicitor and any Counsel, Accountant or Expert retained by either or all of the Vendor, Vendor's Solicitor, Silvano Sicuro and Vincent Palmieri and that the Purchaser shall have no responsibility or liability for the payment of any such monies. 25.3 The Vendor, Silvano Sicuro, Vincent Palmieri and DJZ Constructions Pty Limited release the Purchaser, Michael Christian and Katherine Christian from any and all claims, debts, costs, damages, judgments, orders, awards or liabilities they may have or had against the Purchaser, Michael Christian or Katherine Christian arising directly or indirectly out of the Supreme Court proceedings subject to the Purchaser paying to Pritchard Law Group the sum of Fifty Two Thousand Dollars ($52,000.00) pursuant to Clause 9.1 and Schedule 11." (emphasis added) 35 The focus in this case is on the terms of cl.25. The Supreme Court proceedings referred to in cl.25.1 are the proceedings the subject of this appeal. The Christians and Cottenham were never defendants in those proceedings, although they were cross-defendants to the James' cross-claim. The status of Sicuro should also be noted. He was not named as a party to the Deed, although he signed it and undertook obligations under it. Presumably in those circumstances he is properly to be treated as a party to the Deed. He is not and never was a party to the proceedings. 36 Clause 26 provided for a number of releases of different obligations between various of the parties to the 5 November 2003 Agreement. There was also a release of obligations between Sicuro, and a company, Liscott Investments Pty. Limited. Like Sicuro, Liscott Investments was not named as a party but signed the Agreement. The releases are not confined to matters arising out of the new venture, but include releases relating to other business arrangements. These comments are made by way of observation only. The importance of cl.26, however, is whether it aids in the construction of cl.25.

37 The first question in issue on the appeal is whether Mrs. James remains liable under the Deed of Guarantee having regard to the operation of cl.25 of the 5 November 2003 Agreement. The trial judge found that she remained liable on the basis that upon its proper construction, cl.25 was not a release but a covenant not to sue the Christians under the Deed of Guarantee.

Release or Covenant not to sue: the relevant principles 38 The starting point in the consideration of the circumstances in which a joint or joint and several guarantor may be discharged from liability under a guarantee is the principle that the discharge by the principal of the co-guarantor discharges the other co-guarantors. The old authorities explain this principle in terms that "the [guarantee] is not or ceases to be that which [was] guaranteed": Re Wolmerhausen (1890) 62 LT 541; Smith v Wood [1929] 1 Ch 14; Hancock v. Williams & Anor (1942) 42 SR (NSW) 252 at 255; Walker v Bowry (1924) 35 CLR 48. 39 The modern statement of the rule is that the undertaking of a joint or several obligation usually involves an implication the co-guarantees will remain in place for the duration of the guarantee. There may of course be an express provision to that effect. In either case, a release of one guarantor will release the other guarantors from all liability, as otherwise there will be a breach of the relevant condition of the guarantee: see generally O'Donovan and Phillips, The Modern Contract of Guarantee 3rd Eng. ed, at [8-21], p.424 . 40 However, the principle that a joint or joint and several guarantee will usually involve an obligation that the all parties remain parties to the guarantee, the courts have not required that all parties remain liable on the guarantee: see O'Donovan and Phillips at [8-22], p.424 where the authors state: "On this traditional approach the creditor can avoid releasing the remaining guarantors if the agreement with a co-guarantor is worded as a covenant not to sue rather than a release" 41 It is a question of construction whether a covenant operates as a release or a covenant not to sue. If, upon its proper construction, in the context of the whole document in which the covenant is found, an intention is found not to release all joint and several promisors, that will point to a covenant not to sue. In that case, a co-promisor will not be discharged from liability. 42 These principles are uncontroversial. The controversy that usually arises, as it did in this case, is whether a particular provision in a releasing document amounts to a release in law or whether, properly construed, it is a covenant not to sue. The question of construction is not always easy to resolve, leaving the court to search for factors that may determine the matter one way or the other.

43 A number of common threads emerge from the cases. First, where there is a joint obligation, a covenant which is expressed in terms of a release, is usually construed as such: Re Wolmershausen, per Stirling J at 545. Secondly, even where there are joint obligations, the terms of the document containing the release may indicate that what was intended was a covenant not to sue. If any intention to reserve rights against the other co-promisors is found expressly or impliedly in the document containing the release, then it is most likely that the parties intended a covenant not to sue. 44 Thirdly, the court may have regard to the surrounding circumstances in determining whether what was intended was a release or a covenant not to sue the party who bears a joint or joint and several liability. See generally Smith v Wood at 28-32 and Re Wolmershausen at 545. The 5 November 2003 Agreement: the proper construction of cl.25 45 The 5 November 2003 Agreement appears to have effected a resolution of the now failed business venture of Surf Road Nominees as between the investors who remained and had not sold their units and the Christian interests. Under this Agreement, Cottenham purchased the real estate business which was operated through Chris Burke & Co, the vendor company. In addition to the purchase price, Cottenham transferred its units in the Surf Road Unit Trust to Enzo Developments Pty Limited, a Palmieri company, and also transferred its shares in Surf Road Nominees. 46 It is also apparent from cl.26 that various parties, including Sicuro and Liscott Investments who had become involved in a number of business dealings that were not part of the new venture, wanted to part company. Hence, the releases contained in that clause. 47 As has already been explained, the 5 November 2003 Agreement followed upon other arrangements made in the February 2001 Deed. Under that Deed the plaintiffs in these proceedings, as well as Palmieri, Wilson and Sicuro, entered into a covenant not to sue the Christians or Cottenham in respect of their obligations under the Deed of Guarantee. They also released them from any liability arising from the misappropriations from Chris Burke & Co. 48 It should be remembered that in these proceedings the respondents not only sought to enforce the obligations of the James and New South Head Road Nominees under the Deed of Guarantee, but also sought relief against Mr. James for breach of his duty as a director and the recovery of moneys borrowed from Chris Burke & Co or the Burke Unit Trust. In other words, the appellants are seeking to recover from the James' interests, moneys arising from their alleged liability in respect of those matters that were the subject of agreement with the Christians in the February 2001 Deed and for which the Christians would otherwise have borne a joint and several liability with the James' interests. 49 The 5 November 2003 Agreement has to be construed against that background.

50 Clause 25 bears the heading 'Court case against Tass James'. Clause 25.1 provides that the parties acknowledge that the proceedings are on foot and that they "involve the parties to the Agreement". That statement was presumably intended to extend both to the proceedings constituted by the Statement of Claim as well as the Cross-Claim. This is because Chris Burke & Co, DJZ and Palmieri are parties to the agreement and are parties (plaintiffs) in the proceedings (although DJZ is not a party to the appeal). The Christians and Cottenham are not parties to the original proceedings but were joined as cross-defendants by the James' cross-claim.

51 Clause 25.2 deals with the costs of the proceedings. It provides that subject to Cottenham paying $52,000.00 to Pritchard Law Group, Chris Burke & Co., Palmieri and Sicuro were to be responsible for all costs associated with the proceedings owed to the solicitors acting for the plaintiffs in the proceedings. The amount of $52,000.00 is referred to in Schedule 11 as "agreed portion of legal costs and disbursements due to Pritchard Law Group in [the] Supreme Court proceedings".

52 Clause 25.3 by its terms "releases" a variety of potential or supposed legal obligations, namely "any and all claims, debts, costs, damages, judgments, orders, awards or liabilities" that Chris Burke & Co, DJZ, Palmieri and Sicuro may have or had against the Christian interests "arising directly or indirectly out of the Supreme Court proceedings". Two matters are to be noticed about the clause. First, as a matter of construction, it does not refer to any liability under the cross-claim. Secondly, contrary to the submission of senior counsel for the respondents, to which reference is made below, it goes further than protecting the Christian interests from any claim for costs of the proceedings. "Damages" are not costs. "Debts" is not a word usually engaged to refer to a liability for costs, although an unsatisfied order for costs results in a debt. "Claims", "judgments" "orders" and "liabilities" may include costs but are all wider concepts. 53 To the extent that cl. 25 extracts $52,000.00 on account of legal costs from the Christians and Cottenham, it is understandable, given the allegations that Mr. Christian had been involved in the misappropriation and James Christian had failed to pay the Macquarie Bank debt. Had it not been for those matters, the legal proceedings, at least in the form they took, may not have been necessary. 54 Senior counsel for the respondents submitted however, that the purpose of cl. 25 as a whole was to protect the Christians and Cottenham from the costs of the proceedings as between the parties to the 5 November 2003 Agreement. He said that even though they were not parties to the claims the respondents were pursuing against the appellants in the Supreme Court proceedings, they were "directly involved" in the proceedings because Mr. Christian was a director of 3 of the respondents, Surf Road Nominees, Chris Burke & Co and I.G Martyn. Mrs. Christian was also a director of Surf Road Nominees and secretary of I.G. Martyn and both were shareholders of Surf Road Nominees. Mrs. Christian had management shares in I.G. Martyn. Finally, Cottenham held units in the Surf Road Unit Trust. Senior counsel said that given that the Christian interests were "involved" in the proceedings in the way explained, it was not surprising that Cottenham "was obliged to pay legal fees to the respondents' solicitors". 55 As a matter of strict legal principle these submissions cannot be correct. The Christian interests had no legal liability in the proceedings as they were not parties to the statement of claim and effectively could not be made parties to it. Although there are some differences between the parties to the February 2001 Deed and the 5 November 2003 Agreement, the plaintiffs in the proceedings were all parties to the February 2001 Deed. Accordingly, any attempt to join the Christians and Cottenham as parties in the proceedings would have been met by a defence that they had the benefit of the release in cl.4 of the February 2001 Deed in respect of liability for the defalcations in Surf Road Nominees and the covenant not to sue in cl.5 of that Deed relating to their obligations under the Deed of Guarantee except in respect of a maximum liability of $300,000.00 in relation to the Macquarie Bank debt: cl.6. 56 Although the Christians were directors and shareholders of some of the plaintiff companies, that did not, of itself, give rise to personal liability for the debts of those companies. If cl.25 was intended to relieve the Christians and Cottenham from any obligation for the costs of the proceedings arising by virtue of their status as shareholders, that obligation could only have arisen as a result of some intra-party arrangement. The obligation under the Agreement to pay $52,000.00 on account of the costs may indicate there was some such arrangement, although there was no evidence before the Court to support counsel's submission. 57 Leaving that aside, and accepting senior counsel's submission for the moment as correct, then, presumably,cl.25.3 was intended to extinguish any further "call" by the other directors and shareholders on the Christians for further contribution to the cost of the litigation. Again, if that is correct, it is probable that cl.25.3 was a release of any "obligation" arising from internal arrangements, or pressures to which the Christians might have had to respond as part of the overall severance of the business arrangements between the parties. The Court has no way of knowing, however, whether there was any binding legal arrangement to that effect. The respondents did not argue that the clause was ambiguous so that extraneous evidence could be considered to determine its meaning: Codelfa Constructions Pty. Limited v. State Rail Authority (NSW) (1982) 149 CLR 337. 58 Accordingly, cl.25.3 must be construed, having regard to its terms, within the context of the contract as a whole and having regard to the principles discussed above. Clauses 4, 5 and 6 of the February 2001 Deed are also relevant to its construction as they define the legal rights and entitlements of the parties as at the date of the 5 November 2003 Agreement.

59 In determining whether cl.25.3 is a release or covenant not to sue, there are considerations that point in different directions. First, the obligations of the parties under the Deed of Guarantee were joint and several. Secondly, the language used was that of release. Those factors support a construction of release. Additionally, the Christians and Cottenham, under the February 2001 Deed, had already been released from any liability arising out of the misappropriation and had the protection of a covenant not to sue in respect of their obligations under the Deed of Guarantee other than in respect of a maximum liability of $300,000.00 for the Macquarie Bank debt. That makes it more likely that cl.25.3 provided something additional, namely, a release. 60 Interestingly, senior counsel for the respondents seemed to recognise in his argument to the Court that cl.25.3 was a release but argued that it was not a release of the Christians' obligations under the Deed of Guarantee, but of their obligation to pay costs to which I have referred earlier. He was prepared to embrace, as an alternative proposition, the trial judge's finding that the provision was a covenant not to sue. 61 As has already been observed 25.3 uses the language of release. The matters "released" are of a wide order: claims, debts, costs, damages, judgments, orders, awards or liabilities. Given those broad terms, the clause could not be limited to costs. Although the extent of the "release" does not point in one direction rather than the other, senior counsel for the respondents submitted that the construction of cl.25.3 as a covenant not to sue was aided by cl.26 in the sense that the cl.26 is a specific provision in the agreement that deals with releases and that there was no relevant difference in the language of cl.25.3 and cl.26. It was not argued that cl.26 provided for other than true releases. On this view, as cl. 26 dealt with releases, it was argued that the provisions of cl.25.3 would be found in cl.26 if the parties intended it to be a release. The shortcoming of that argument however is that there is equally an argument that the point of cl. 25 was to deal with matters that arose from the new venture whereas cl. 26 dealt with other arrangements. 62 That leaves the final matter for consideration. At the time the 5 November 2003 Agreement was entered into, the present proceedings were on foot. This is expressly referred to in cl.25.1. Of the respondents who brought the proceedings, only two were parties to that Agreement: Chris Burke & Co and DJZ, although, we indicate later, they were the only parties who had any ongoing interest in matters arising out of the new venture. The fact that clause 25.1 expressly stated that the proceedings were on foot (and impliedly that they were to continue) indicates that those parties intended to reserve their rights against the co-guarantors; that is, against the James. That consideration has to be weighed against the fact that unless cl. 25.3 is construed as a release, it has no work to do as the Christians already had the benefit of a limited covenant not to sue from all the respondents. An agreement will usually be construed so as to give it some operation. Having regard to the principles which govern in this area, and on slight balance, the Court considers that properly construed, cl.25.3 released the Christians from their obligations under the Deed of Guarantee. That being so, Mrs James was also released. 63 However, even if the clause was a covenant not to sue, there is still the question whether Mrs James was released because the investors failed to maintain the security and dealt with it other than in accordance with the requirements of the Deed of Guarantee. The Security Issue Effect of release of the security 64 The 5 November 2003 Agreement not only provided for the "release" under cl.25 of the Christians and Cottenham of claims etc arising out of the Supreme Court proceedings, it also effected the sale of the Chris Burke & Co real estate business to Cottenham. Upon completion of the Agreement, Cottenham was required to deliver up to Chris Burke & Co duly executed transfers of its units in the Surf Road Unit Trust. Those units were, of course, security for the guarantees given by the James and the Christians under the Deed of Guarantee.

65 Mrs. James contends that under the Deed of Guarantee, the security was provided on the basis that the whole security would be maintained by the respondents. 66 The principles to which we have referred above in relation to the release issue apply to the security issue. Again the principles themselves are not in issue and are comprehensively stated by Jordan CJ and Halse Rogers J in Hancock v Williams & Anor at 255. So far as is relevant to this issue the principles are these. If a contract of guarantee provides that a security will be taken and the obligor subsequently releases the security, the guarantor is discharged because the obligation is not, or ceases to be, the obligation guaranteed. See also Smith v Wood at 23. This principle is sometimes described in slightly different terms, namely, if there is a contractual obligation contained in the guarantee that the security will be maintained by the creditor, a failure to perform this obligation will operate to discharge the guarantor completely because the creditor has breached the contractual bargain. The obligation may be expressed or implied. See generally O'Donovan and Phillip: and cases cited at p.434 67 This principle is subject to the qualification that if the security has been released by the obligee in a manner that involved no breach of the contract of guarantee and there is no change in the nature of the obligation guaranteed, then the guarantor is not discharged: Taylor v Bank of NSW (1886) 11 App Case 596; Hancock v Williams & Anor at 255. 68 Even where there is no contractual obligation to maintain the security, the creditor remains under an equitable obligation to maintain the securities and a failure to do so will result in a discharge of the guarantor to the extent to which the value of the securities has been impaired: Smith v Wood at 30; Hancock v Williams & Anor at 256; O'Donovan and Phillips at 443 ff. 69 Mrs James contended that under the Deed of Guarantee the investors were obliged to maintain the security and that the transfer of the Cottenham units under the 5 November 2003 Agreement constituted a breach of that obligation. In that circumstance, she submitted that her obligations under the Deed of Guarantee had been completely discharged. The respondents accepted that Mrs James was entitled to be discharged if there was such an obligation and if it had been breached, but they denied both the obligation and any breach. The concession was subject to the respondent's further contention that as WIT was not a party to the 5 November 2003 Agreement, it was not party to a breach, if any, of the obligation to maintain the security. We deal separately below with the entitlement of WIT to bring any claim against the appellants. 70 There was no express provision in the Deed of Guarantee that the securities be maintained. The question is, therefore, whether properly construed, there was an implied covenant to that effect. It is necessary to return to the provisions of the Deed to determine that question. 71 To bring the matter back to mind, the "unit holders", namely Cottenham and New South Head Road Nominees were the parties of the "4th part" to the Deed. The "guarantor" under the Deed was James Christian and the "indemnifying parties" were the James and the Christians. Recital I provided: "The guarantor, the indemnifying parties and the unit holders have agreed to indemnify the investors for any loss or damage suffered by them in respect of: (a) failure to pay the bank loans (b) failure to pay the preferential distribution and the unit holders have agreed to grant this mortgage of their units in the Surf Road Unit Trust in support of the obligations hereunder of the unit holders, the guarantor and the indemnifying parties." (emphasis added) 72 Under cl.5 of the Deed, the guarantee given by James Christian, the James and the Christians and Cottenham and New South Head Road Nominees jointly and severally guaranteed the payment of the Macquarie Bank debt and jointly and severally indemnified the investors for any loss or damage suffered by the investors should the bank debts and preferential distributions not be paid. 73 Clause 6 provided that "The unit holders shall deliver … the Certificates for 26 Units in the Surf Road Unit Trust (all of which Units are hereinafter called 'the said Units') … as security for the obligations" [referred to in cl.5] "and the unit holders hereby charge the said units with the due performance of the [cl.5] obligations". (emphasis added) 74 Clause 8(1) permitted the investors on default to sell "the said units or any of them". 75 These provisions therefore provided for a single mortgage of the units in support of the joint and several obligations of, relevantly, the James and the Christians. The mortgage was effected by delivery of all of the scrip. There was no provision for release of any of the scrip and the only entitlement to deal with the scrip was upon default by exercise of the power of sale. That right was vested in the investors. 76 The effect of these provisions, in our opinion, was that the security was to be maintained and that there was no entitlement in the investors, who had the benefit of the security, to dispose of the security other than by way of exercise of their power of sale, or to come to any separate arrangement in respect of the security with one of the security owners to the exclusion of the other. There is nothing else in the provisions of the Deed, in my opinion, that leads to any other conclusion, so that there was, as a matter of construction, an implied covenant to maintain the security. The fact that cl.8 provided that the investors may exercise their power of sale in respect of "the units or any of them" is simply a recognition that those with the benefit of the security needed only to sell so many of the units as were required to satisfy the loss: see Smith v. Wood at 25. That did not negate or give some different right to the investors other than the right to exercise the power of sale. The security was to be maintained for that purpose and that purpose only, unless and until the principal obligation under the Deed of Guarantee was satisfied. 77 The investors however, dealt with the securities other than by way of exercise of their power of sale. In the February 2001 Deed, it was agreed that the investors would not exercise any right of sale pursuant to the Deed of Guarantee in respect of Cottenham's units in the Surf Road Unit Trust. In the 5 November 2003 Agreement, the investors agreed to the disposal of those units as part of the sale agreement and not by way of the exercise of the power of sale. There was thus a breach of the implied covenant to maintain the security. In my opinion, the breach first occurred under the terms of the February 2001 Deed, although Mrs. James did not rely upon that breach. But in any event, there was an independent breach arising out of the provisions of the 5 November 2003 Agreement.

78 The respondents contended, however, that even if there was such an implied obligation to maintain the security, this only subsisted until the occurrence of a cl.8(1) sale of all or some of the units. They submitted that that event occurred on 22 October 2002 when the investors sold the New South Head Road units. It followed on this argument, and I will quote from the respondents' submissions at 4.4-4.5: "4.4 If, however, such a term was to be implied, it could only operate until the occurrence of a clause 8(1) sale of all or some of the said units . Thereafter, the investors could no longer hold the said units as security pursuant to clause 6. Any rights Cottenham had to be subrogated to the security held by the investors over NSHR's units, in the event of Cottenham satisfying the clause 5 obligations, were lost when the NSHR units were sold pursuant to clause 8(1) on 22 October, 2002. Following the sale, the investors had the right to sell the remaining units owned by Cottenham (default notice having been served on both NSHR and Cottenham), whilst the clause 5 obligations remained outstanding. This was still the position on 5 November, 2003. The right to sell the units must bring to an end any obligation to maintain and preserve the security for the duration of the guarantee. 4.5 The Units owned by Cottenham were not sold until 5 November, 2003, because of the 2001 Deed. The parties in recital I acknowledged the default and by clause 5 WIT and DJZ agreed not to sell these units. All the Sale Contract did, however, was to facilitate the sale of these units, in circumstances where the investors had the right to sell them anyway, as the clause 5 obligations remained unfulfilled . The mechanism for sale provided for in clause 8(1), was surely subject to the investors and the unit holder who provided security, agreeing to an alternative means of sale." (emphasis added) 79 We do not agree. A creditor is entitled to exercise its rights under the guarantee against one, some or all of the guarantors, or it may have recourse to some or all of the security. A creditor may also exercise a combination of those rights. In doing so, the creditor does not and cannot affect the rights of the guarantors and/or sureties inter se. Those rights include the rights as between the guarantors to seek contribution from the other guarantors and the right of marshalling in respect of the securities. The fact that a creditor, pursuant to and in accordance with the contract of guarantee, exercises a right against one guarantor or one part of the security does not mean the remaining guarantors or the securities are thereby released. In this case, the dealing with the New South Head Road Nominees Units on 22 October 2002 was pursuant to the Deed of Guarantee. Thereafter, whilst the principal obligation remained outstanding, the investors were only entitled to deal with the Cottenham units under the Deed of Guarantee. The fact that they had exercised the power of sale in respect of the New South Head Road Nominees units and could do so in respect of the Cottenham units did not release them from the contractual obligation to maintain the security for the purposes of the Guarantee. 80 The submission also overlooks the arrangement effected by the February 2001 Deed that the investors would not exercise the power of sale under cl.8 against Cottenham's units. On the respondents' approach, the investors could execute against the New South Head Road Nominees units. They could also come to a separate arrangement not to exercise the power of sale against Cottenham. They could then enter into a separate arrangement not to sue the Christians and as part of that arrangement take the Cottenham units, not in reduction of the guarantee obligations, but in part satisfaction of some other commercial transaction between the parties. The consequence of the foregoing would be that Mrs. James as a joint and several guarantor and New South Head Road Nominees as a joint surety would have no right of contribution and no right to have the securities marshalled. Such a result is contrary to law: see Smith v. Wood at pp. 21-22; Hancock v. Williams & Anor. at 256.

Conclusion on the securities issue 81 It follows that by requiring that the Cottenham units be transferred as part of the sale of Chris Burke's real estate business under the 5 November 2003 Agreement, and not pursuant to the exercise of the power of sale under the Deed of Guarantee, Mrs James was completely discharged from her obligations under the Deed of Guarantee. 82 Given our conclusion that Mrs. James was completely discharged it is not necessary to deal with any partial discharge of her liability in equity.

Position of WIT 83 That leaves outstanding the position of WIT, which was not a party to the 5 November 2003 Agreement. The respondents contend that even if Mrs. James' liability is discharged as against the other parties to the Deed of Guarantee, her liability to WIT remains because it was not a party to the 5 November 2003 Agreement. In order to resolve this issue, it is necessary, in the first instance, to return to the various transactions that the parties, or some of them, entered into from time to time. 84 Under the Deed of Guarantee, the units held by Cottenham and Surf Road Nominees were lodged with the solicitors for the investors by way of security for performance of the cl.5 obligations of the James and Christian interests. 85 Thereafter, the following occurred. Under the February 2001 Deed, the Christian interests became the beneficiaries of the limited covenant not to sue in respect of their obligations under the Deed of Guarantee. More relevantly for present purposes, they reached agreement with the investors, including WIT, that the power of sale under the Deed of Guarantee would not be exercised against the Cottenham units. 86 On 4 May 2001, the investors caused a Notice of Default to issue to Cottenham and New South Head Road Nominees in respect of non-payment of the Macquarie Bank debt and the preferential dividends and specifying that unless the default was made good within seven days, the investors proposed to exercise their power of sale under cl.8. 87 On 1 September 2001 WIT agreed under a Deed of that date to sell its one unit in the Surf Road Unit Trust to Chris Burke & Co for $110,000.00. I will refer to this Deed as the WIT Deed. 88 On 22 October 2002 New South Head Road Nominees' 13 units were transferred pursuant to the exercise by the investors of the power of sale under cl.8 of the Deed of Guarantee. Of these units, 9 were transferred to Sicuro and 4 to Palmieri for a stated consideration of $1.00 per unit. It was subsequently contended by the investors that this was the then value of the units although they conceded that the question of value was a matter for determination by the Court. 89 On 25 February 2003, I.G. Martyn and Chris Burke & Co paid the Macquarie Bank debt. 90 The 5 November 2003 Agreement was the next relevant transaction. 91 In another Deed of 5 November 2003 between Sicuro, Enzo Developments, Palmieri, DJZ Constructions and Surf Road Nominees (the Sicuro Deed), Sicuro transferred his 9 units in the Surf Road Unit Trust (acquired from New South Head Road Nominees) to Enzo Developments for $70,000.00. The Sicuro Deed whereby this transaction was effected recited that the transfer of New South Head Road Nominees' units to Sicuro occurred following default by New South Head Road Nominees of its obligations under the Deed of Guarantee. It also stated that no other units were transferred. The respondents contend that this is evidence that the transfer of the WIT unit to Chris Burke & Co under the WIT Deed never occurred. 92 The purpose of the Sicuro Deed appeared to be twofold. First, it provided for the sale of Sicuro's units in the Surf Road Unit Trust to Enzo Developments (a Palmieri company) with the effect that the Palmieri interests (Enzo Developments and DJZ) became the holders of all units in the Surf Road Unit Trust. It also provided for the distribution of any moneys ordered to be paid in these proceedings. Both of these objects are relevant to WIT's position vis-a-vis Mrs. James. 93 I will deal first with the ownership of the units. Before doing so, however, it should be observed that neither WIT nor Wilson were parties to the Sicuro Deed. 94 Recital E of the Sicuro Deed stated that an agreement was entered into on 17 October 2002 whereby it was agreed that the units in the Surf Road Unit Trust were to be held equally by Sicuro, Christian through Cottenham and Palmieri through his corporate entities. DJZ and Enzo are Palmieri entities. It also recited that Sicuro, Palmieri, Wilson (WIT) and Christian were present at the meeting. Recital E states that Sicuro was to obtain his 12 units as follows: 9 from New South Head Road Nominees; 1 from Cottenham and 1 from WIT "when that unit was paid for by Chris Burke & Co". This is a clear reference to the WIT Deed in which WIT agreed to sell its unit to Chris Burke & Co. 95 Recital F recorded that the 9 units were transferred by New South Head Road Nominees pursuant to default under the Deed of Guarantee. It then states "No other transfers were made." 96 Recital G referred to the arrangement under the 5 November 2003 Agreement, whereby Cottenham was to transfer its 14 units to Enzo Developments, that one of those units may be held in trust for Sicuro and that Sicuro agreed to the transfer of that unit to Enzo. 97 Recital I recited the agreement whereby Sicuro was to transfer all his units in the Trust to Enzo Developments. 98 Clause 3(v) then provided that there will be deducted from the proceeds of these proceedings "any monies payable to WIT Investments Pty. Limited or Terry Ian Wilson whether payable pursuant to the [WIT] Deed or whether as a dividend". (emphasis added) 99 Clause 3 further provided that the proceeds from the proceedings were not to be distributed until the position of WIT/Wilson as to their entitlement had been resolved. 100 The position as and from 5 November 2003 was, therefore, as follows: 1. New South Head Road's 13 units were transferred on 22 October 2002 pursuant to the exercise of the power of sale as follows: 9 to Sicuro 4 to Palmieri (or DJZ)

2. Sicuro's 9 units were transferred on 5 November 2003 pursuant to the Sicuro Deed to Enzo Developments (Palmieri)

3. Cottenham's 13 units were transferred on 5 November 2003 pursuant to the 5 November 2003 Agreement to Enzo Developments.

Mortimer's 2 units were transferred prior to February 1999 as follows: 1 unit to DJZ on trust for Sicuro 1 unit to Cottenham possibly on trust for Sicuro.

The effect of the Sicuro Deed was for DJZ to hold the Mortimer unit beneficially.

Cottenham transferred its Mortimer unit to Enzo pursuant to the 5 November 2003 Agreement. 101 Taking stock at this point, DJZ or Enzo Developments (in other words the Palmieri interests) owned 35 of the 36 units. That left only the WIT unit. The position in relation to that was as follows. There is no doubt that WIT and Chris Burke & Co entered into the WIT Deed under which Chris Burke & Co purchased the unit. The respondents' position on the appeal was that there was no evidence that that agreement was completed and that to the extent there was any evidence on the matter, recital F of the Sicuro Deed was evidence that the agreement was not completed. On this reasoning, it could be concluded that the agreement was not completed so WIT still owned its unit. Further, as WIT was not a party to the 5 November 2003 Agreement it could not be affected by any release or discharge of Mrs. James' obligation under the Deed of Guarantee. 102 WeI consider that the respondents' position on this cannot be maintained. The WIT Deed in which WIT agreed to sell its unit to Chris Burke & Co provided for Chris Burke & Co to pay a deposit of $10,000 for the unit. The balance of $110,000 was payable within 12 months, with interest payable monthly on the balance. 103 Clause 2 provided: "In consideration of the payment of the aforementioned sum of Ten Thousand Dollars ($10,000.00) and the Purchaser's agreement, supported by Chris Burke & Company Pty. Limited's guarantee and indemnity, to pay the outstanding balance of One Hundred and Ten Thousand Dollars ($110,000.00) as aforementioned, the Vendor hereby assigns all his right, title and interest in the Unit in the Trust to the Purchaser and agrees to do all things necessary to vest in the Purchaser, full title in the Unit and the Trust AND Terry Ian Wilson, testified by his execution hereof, shall, for the consideration aforementioned, transfer to the Purchaser one (1) fully paid unit in Surf Road Nominees Pty Limited and, also for the consideration aforementioned, Wilson shall, on the date hereof, resign as a Director of Surf Road Nominees Pty Limited and Chris Burke & Co Pty Limited." (emphasis added) 104 Accordingly, by the express terms of the Deed, WIT's unit in the Surf Road Unit Trust was assigned to Chris Burke & Co on 1 September 2001 and all what remained was a debt owed by Chris Burke & Co to WIT, payable in the instalments specified in the agreement. 105 It would appear from Recital E and clause 3(v) of the Sicuro Deed that WIT may not have been paid the balance of the purchase price within the 12 months provided for in the WIT Deed and that WIT had not formally transferred the unit. That would explain why Wilson agreed, at a meeting on 22 October to transfer the unit to Sicuro when WIT was paid the purchase price by Chris Burke & Co. By that time of course, Sicuro, Palmieri and Christian, or their corporate entities, were the effective owners of the Surf Road Unit Trust. The Trust held all the shares in Chris Burke & Co. In their own fashion, and without complete regard for the precise legal arrangements in place, it appears that Sicuro, Christian and Palmieri were effecting a direction transfer of the unit from Chris Burke & Co to Sicuro once WIT was paid, notwithstanding that WIT was not party to the Sicuro Deed. How this was to be achieved at a practical level is a mystery. However, as the various transactions in this matter demonstrate, it was not unusual for the parties to "rearrange" their business and legal obligations in a way that did not always reflect existing obligations or engage with the necessary legal formalities. 106 It also appears from the terms of the Sicuro Deed that as at 5 November 2003, WIT had still not been paid and there was an agreement between the remaining principal players, Sicuro and Palmieri, that it would be paid out of the proceeds of the proceedings. It also appears that there may have been uncertainty or disagreement as to whether WIT was owed the purchase price or preferential dividends, or perhaps both. 107 However, given the terms of the WIT Deed whereby WIT assigned its interest in the unit to Chris Burke & Co, the failure of Chris Burke & Co to pay the purchase price did not leave WIT as the owner of the unit. Rather, it was an unpaid vendor. Nor can any uncertainty and disagreement inter partes as to the nature or extent of any moneys owed by one to the other affect or reverse the sale. There was no other evidence that the sale had been cancelled and the evidence was that it had not been. As WIT had assigned its unit to Chris Burke & Co, there was no basis for it to be a party to the 5 November 2003 Agreement. 108 There is one final matter to which we should refer by way of completeness. 109 During the course of the hearing, in cross-examination by senior counsel for the appellant, Mr. Palmieri said that he owned all the units in the Surf Road Unit Trust. Mr. Palmieri's statement reflected the legal position that we have explained above, although it was not an admission binding upon WIT and was of doubtful relevance in any event. However, senior counsel for the respondents argued little regard should be had to Mr. Palmieri's evidence as Mr. Wilson had not been cross-examined on this point. This omission was explained by senior counsel for the appellant on the basis that the WIT Deed was not produced by the respondents until after Mr. Wilson gave evidence. Although Mr. Wilson could have been recalled for further cross-examination, I do not consider that the failure by the appellant to do so has any significance. By the end of the evidence in the respondents' case there was in evidence the WIT Deed and Mr. Palmieri's agreement that he owned all the units in the Surf Road Unit Trust. If the respondents wanted to dispute this, it was equally open to them to recall Mr. Wilson, assuming that his evidence on this matter would be admissible.

Conclusion on the WIT issue 110 WIT's entitlement to relief against Mrs James depended upon it being the holder of a unit in the Surf Road Unit Trust. We have concluded that the unit was assigned to Chris Burke and Co pursuant to the terms of the WIT Deed in September 2001. Accordingly, the trial judge erred in holding that Mrs James was liable to WIT under the Deed of Guarantee.

Other issues 111 Because of the conclusion at which we have arrived on the securities question, it is not necessary to determine whether Mrs. James' liability should be reduced by the value of the units at the time they were transferred or whether Mrs. James was entitled to a set-off of her liability by the value of the New South Head Road Nominees' units. However, we make the following brief remarks in respect of both issues.

Valuation issue 112 The trial judge held that there was no evidence of the value of the units to enable any reduction in Mrs. James' liability. There are, of course, recognised methods of valuing units in a unit trust. However, no such evidence was forthcoming. Rather, Mrs. James relied upon a series of inter parties transactions as evidence of value. First, there was the sale of the Mortimer unit in February 2001 for $125,000.00. Secondly, the WIT unit was sold in September 2001 for $110,000.00, and on 5 November 2003, Sicuro sold 9 units for $70,000.00. It was submitted that on the basis of this last sale, the units should have been valued at best at $7,700.00. The trial judge held however, that that sale should be disregarded for the purposes of value because it was a "special type of contract". 113 In our opinion, each of those transactions was evidence of value. The parties who owned the units had, over a 2 year period, determined between themselves the value of the units. There was, therefore, some evidence of value. His Honour should have determined the value as best he could on that basis.

Set Off 114 The set off issue arose in the following way. As already explained the investors exercised their power of sale over New South Head Road Nominees' units. At the time they did so they specified a nominal value on the transfer of the unit of $1.00 but accepted that the value of the units, if they had a value, were properly to be brought to account in reduction of the liability guaranteed. This concession was made by the solicitor for the investors at the time of the exercise of the power of sale. The concession was repeated at the commencement of the hearing by senior counsel for the respondents. We will deal with that more fully below. 115 His Honour found (at [25]) that on the expert evidence the value of the 13 units as at the date of the exercise of the power of sale was $189,326.00. 116 The next matter of relevance is that the James and New South Head Road Nominees brought a cross-claim against, amongst others, Surf Road Nominees, the Christians, Cottenham and the investors. The detail of the claims made in the cross-claim are not relevant for present purposes. In his judgment on the cross-claim the trial judge ordered that Surf Road Nominees was liable to New South Head Road Nominees in the sum of $189,326.00 in respect of the sale of the units. His Honour did so notwithstanding that no claim to that effect was made against Surf Road Nominees. The reason why no such claim was made is obvious. Surf Road Nominees did not have the benefit of the guarantee or the security, or the right under cl.8 to exercise the power of sale. Nor did it exercise the power of sale. Those rights belonged to the investors. There was no basis therefore for the order made by his Honour. The respondents did not ultimately cavil with this reasoning, but still sought to support his Honour's order. They argued that the rationale behind that order was to effect an overall fair accounting between the parties, particularly in circumstances where the value of $189,326.00 ascribed to the 13 units was based upon a recoverable debt in excess of $600,000.00 from Mr. James. It was submitted that whether New South Head Road Nominees (a James' entity) was able to recover from Surf Road Nominees depended upon whether Mr. James paid to Surf Road Nominees the amount it owed to it arising out of his own defalcation. 117 It was also submitted as part of this argument that the respondents' concession that the value of the units would and should be brought to account in the proceedings was not a concession that that value had to be set off against the guaranteed liability. 118 It was said that his Honour's overall approach in making an order against Surf Road Nominees was the only way the value of the units could be brought to account in the proceedings. It was argued that the approach was justified and principled for the following reasons. WIT and DJZ in fact received no benefit from the exercise of the power of sale because the units were transferred to third parties, Sicuro and Palmieri for $1.00 per unit. Accordingly, a set off against WIT and DJZ would be unjust especially as Mr. James had not satisfied his liability to Surf Road Nominees, Chris Burke & Co and I.G. Martyn arising from the defalcation and the valuation assumed that he would. 119 This proposition assumes that WIT had a right in relation to the units at this time. We have found it did not. It also assumes that Sicuro and Palmieri were the direct beneficiaries of the exercise of the power of sale. They were not. They acquired units in the Surf Road Unit Trust as a result of the exercise of the power of sale. The investors, that is, the remaining investors as at October 2002, were the beneficiaries of the exercise of the power of sale. Further, the trial judge found the value of the units as at 22 October 2002. Even though that value included a recoverable debt from Mr. James, there is no challenge to his Honour's finding in respect of that valuation. 120 The respondents next contended that there were no nett proceeds of sale for the investors to apply in accordance with cl.8.1 of the Deed of Guarantee. The respondents also relied upon cl.8.3 which provided: "… [NSHR] would be credited only with so much of the purchase money as shall be received in cash by the Investors …. and all purchase money left outstanding on credit or otherwise shall until actually received by the Investors in cash be deemed as not to have been received by the Investors." (emphasis added) 121 Again this is beside the point. The fact that the investors chose, at that time, to transfer the units for $1.00 did not mean the value of the units was $1.00 or that the real value did not have to be brought to account. This was expressly acknowledged by the investors through their solicitors at the time of the exercise of the power of sale. 122 The concession that the value of units was properly to be brought to account probably amounted to a waiver of cl.8.3. Although the appellant did not argue waiver in terms, that is the effect of the submission at para. 38 of the submissions in reply. 123 Finally, it was submitted that under cl.8.1 of the Deed of Guarantee, any moneys received upon the exercise of the power of sale had to be applied "in satisfaction of the obligations and thirdly, in reduction of all or any of the bank debts, interests and other monies (if any) payable to the bank". It was said that at 22 October 2002 the loss and damage suffered by the investors had not crystallised so that the value of the units could not be applied or notionally set off under cl.8.1. 124 Again this is beside the point. What was guaranteed was, inter alia, the Macquarie Bank debt. The investors were indemnified against any loss or damage suffered as a result of a failure to ensure the bank debt was paid. At the time the power of sale was exercised the investors should have applied the proceeds of sale of the units at their true value to the reduction of the bank debts. In this way the indebtedness to the bank would have been reduced and any subsequent loss and damage to the investors consequently reduced. In this sense the true value of the proceeds of the units should have been brought to account and the failure by the remaining investors to do so entitled the appellants to a set off as each was entitled to the reduction of their liability in respect of the guaranteed obligation and the indemnified amount. The ultimate financial result whereby the debt due by Mr. James became irrecoverable did not translate the entitlement of New South Head Road Nominees to have the value of the units applied to reduce the Macquarie Bank debt into a debt owed to it by Surf Road Nominees. 125 In our opinion, his Honour erred on the set off issue.

The Station Constructions claims 126 These claims of Mrs James are independent of her other claims in the appeal. They concern the sale of some properties owned by Station Constructions Pty Limited (Station) in its capacity as trustee for the Station Unit Trust (the Trust) in which Mr and Mrs James, amongst others, were investors. The maximum amount in issue with respect to the claims is the sum of $69,970.78 of which Mrs James, if successful, would at most be entitled to one half, namely, $34,985.39. She alleges that each of the second and fifth respondents were knowingly concerned in a breach of trust by Station in its failing to pay Mr and Mrs James their pro rata share according to their unit holding in the Trust of the net proceeds of sale of the properties (the first Station claim). 127 Alternatively, Mrs James claims the same amount from the second respondent alleging that it was in breach of trust in failing to account to Mr and Mrs James for that sum. The second respondent was said to have received the net proceeds of sale on behalf of the beneficiaries of the Trust and then to have appropriated at least Mr and Mr James' share thereof to pay its own creditors (the second Station claim). Thirdly, she claims that the fifth respondent was knowingly concerned in that the second respondent's breach (the third Station claim).

The facts relevant to the claims 128 By deed dated 29 October 1998, as varied by deed dated 30 November 1998 (the Trust Deed), the Trust was created pursuant to which Station was authorised to acquire the properties known as 85-89 Cronulla Street, Cronulla and 74 Croydon Street, Cronulla (the properties) for and on behalf of the Trust. By clause 3(a) of the Trust Deed the Trust Fund was constituted by a fund comprising 200 units and by clause 3(b) the initial subscription price for each unit was $1. All 200 units were subscribed for of which the fifth respondent and his wife held 50, Mr Christian held 35, Mr and Mrs James held 35, each of their sons Christopher and Alexander held 15 and 5 respectively and a Mr and Mrs Schreiber held 60 (the investors). 129 It would appear that the properties were purchased from Mr and Mrs Schreiber in or about June 2000 for $2,150,000. The total costs of the purchase according to the settlement sheet prepared by the purchaser's solicitor, Mr Halpin, was $2,286,981.68 of which $1,600,000 was advanced by the Arab Bank Australian Limited secured by first mortgage, $200,000 was advanced by Mr and Mrs Schreiber secured by a second mortgage and the investors funded the balance of $479,386.68. 130 The properties were sold for $2,300,000, the sale being completed on 8 August 2001. After allowances for adjustments, the final purchase price was $2,320,899.05. After the payment of agent's commission to the second respondent of $50,600, $1,603,657.37 to the Arab Bank, $193,852 to discharge Mr and Mrs Schreiber's second mortgage, $17,850 to the fifth respondent in repayment of loans made by him to the Trust and the payment of other expenses, the net proceeds of sale were $399,833.04. 35/200ths of that amount is $69,970.78, the sum originally claimed by Mr and Mrs James. 131 On settlement of the sale of the properties on 8 August 2001, 60/200ths or 30% of the net proceeds of sale, being an amount of $119,949.91, was paid to Mr and Mrs Schreiber. The other 70%, namely, $279,883.13 was paid by bank cheque to Station. There was no evidence that those monies were distributed to any of the other investors in accordance with their respective unit holding although, at the trial, a copy of the two page settlement sheet which identified the net proceeds of sale as $399,833.04 was produced by Mr Christian on which appeared the following handwriting: "Our share 35 units X $399,83.04 200 units" 132 It was submitted that the Court should infer that the handwriting was that of Mr Christian and revealed his understanding that he was entitled to 35/200ths of the net proceeds of sale. 133 There are two other parts of the documentary evidence to which we should refer at this point. The first is the financial statements of the Trust for the year ended 30 June 2001 that formed the basis of the Trust's income tax return for that financial year (the 2001 accounts). These accounts revealed an operating loss for the year of $12,349.51 and accumulated losses of $27,801.92. The balance sheet revealed a negative Trust equity of $27,601.92 and current liabilities of $768,463.70 of which part was attributed to "Borrowings" of $565,339.70. According to "Note 5 - Borrowings" to the accounts, $557,460.43 was attributed to "Beneficiaries Accounts" being loans by the unit holders to the Trust. I say that because the balance sheet in the 2001 accounts identifies as "Settlement Capital" under the heading "Trust Equity" the sum of $200 being a reference to the 200 units subscribed for by the investors at $1 per unit. It is to be noted that the balance date was prior to the sale of the properties in August 2001. 134 The second document is a trial balance of the Trust as at 30 June 2002 apparently prepared in January 2004 presumably by the Trust's accountants (the trial balance). That part of the document that appears to be a trial profit and loss account shows a net loss for the year of $29,873.85 and accumulated losses of $57,675.77. For reasons unexplained in the evidence, it also shows under the heading "Property Plant and Equipment", an amount of $52,724.70 attributed to "Land & Buildings at Cost". Under the heading "Current Liabilities" it shows the sum of $540,010.43 attributed to "Beneficiaries Accounts". The trial balance sets out under that heading the credit balance of each of the beneficiaries for both the 2001 and 2002 financial years as follows: Palmieri Developments Pty Ltd 215,148.52CR 229,998 M Christian 59,598.52CR 62,199 T.A. & J.M. James 63,137.53CR 63,173 C. James 18,500.00CR 18,500 A. James 20,528.19CR 20,528 K.W. & A.F. Schreiber 163,097.67CR 163,098 540,010.43 CR 557,460

135 It will be noted from the foregoing that the credit balance of Mr and Mrs Schreiber as at 30 June 2002 according to the trial balance was the same as it was at 30 June 2001. Yet Mr and Mrs Schreiber received 30% of the net proceeds of sale in the sum of $119,949.91 in August 2001 which for some unexplained reason is not reflected in the trial balance figures. Furthermore, under the heading "Non-Current Liabilities" in the trial balance there is shown under the sub-heading "Suspense" an amount of $399,833.04 being the precise amount of the net proceeds of sale of the properties.

The first Station claim 136 The foundation for this claim before the primary judge was that Mr and Mrs James were entitled to 35/200ths of the net proceeds of sale being the realised profit from the sale of the properties. This contention was rejected by his Honour on the basis that the unit holders were only entitled under the Trust Deed to a distribution of the net income of the Trust, which was different to the net proceeds of the sale of the properties. His Honour held that the trial balance revealed accumulated losses in respect of both the years ended 30 June 2001 and 30 June 2002 in an amount of $57,675.77, thus demonstrating that there was no distributable net income for the year in which the properties were sold. He further relied upon oral evidence of Mr Palmieri (the fifth respondent) that there was no profit from the sale of the properties. 137 The legal foundation for the primary judge's finding was Clause 13(a) of the Trust Deed. It provided as follows: "13. INCOME OF THE TRUST FUND (a) At any time prior to the expiration of each Accounting Period until the Vesting Day the Trustee shall pay or apply or place to the credit in the books of account of the Trust Fund the whole of the net income of the Trust Fund for such Accounting Period to the Unit Holders in proportion to the number of units held in the Trust Fund." 138 As we have noted, the primary judge rejected the first Station claim as the trial balance did not reveal that there was any net income of the Trust Fund for the relevant accounting period. Accordingly, there was no breach of trust by Station as there was no obligation upon it to account to Mr and Mrs James for any part of the net proceeds of sale of the properties. 139 At all material times Mr Palmieri was the secretary and a director of Station. It appears that he was in control of the affairs of the Trust. He was cross-examined with respect to the matter presently under consideration by senior counsel for Mr and Mrs James on 19 December 2003. It would appear that at that time counsel had available to him the settlement sheet relating to the sale of the properties together with a letter of Mr Halpin to the Secretary of Station dated 9 August 2001 as well as the Trust Deed. We say this because it is apparent that Mr Palmieri was cross-examined on these documents. 140 It would appear that as a consequence of Mr Palmieri's cross-examination, other documents relating to Station and the Trust were subpoenaed and ultimately tendered including a letter from Mr Halpin to Mr Christian dated 7 August 2001, the 2001 accounts and the trial balance. Furthermore, during his cross-examination Mr Palmieri denied that there were any net profits of the Trust and asserted that there was "proof" of that. Although it was submitted to us on behalf of Mr and Mrs James that that proof was never forthcoming, we consider that the trial balance which was produced on subpoena by, we assume, Station, is evidence of that lack of profit. On its face, it shows a loss in respect of the 2002 financial year and there was no other evidence that the Trust made a net profit for that year. The onus was upon Mr and Mrs James to establish by admissible evidence that there was a net profit and, unless the net proceeds of sale represented that profit that onus was not discharged. 141 The subject litigation included claims by the second respondent against Mr James alleging misappropriation by him of the second respondent's funds. In cross-examination Mr Palmieri was asked as to what happened to the net proceeds of sale of the properties of $399,833.04. The following exchange took place: "Q. And if you go to page 4 the proceeds of sale are $399,833.04, is that right? A. Yes. Q. And pursuant to the deed of 30 November 1998 what each unit holder was entitled to was their pro rata entitlement by reference to their units over 200 to split up that profit? A. Yes. Q. And the James family were entitled to 55, two hundredths of the proceeds of sale, weren't they? A. I assume so, don't know. Q. Did you receive your 50 two hundredths of the proceeds of the sale? A. No, only part of it. Q. What happened to the rest? A. I paid the creditors that Mr James owed money while he was in charge of Chris Burke. Q. So you paid off some of Chris Burke's creditors" A. Yes. Q. Effectively that means that you received the money and you chose to use it in the way you did? A. Not chose. We paid Chris Burke otherwise the bank would have closed us down. Q. Did Mr and Mrs James receive any money on sale? A. No. Q. Did Christopher James receive any money? A. No. Q. Did Alexander James receive any money? A. No. Q. Did Mr and Mrs Schreiber received their 60 two hundredths? A. No. Q. Did Mr Christian receive his? A. No. Q. What happened? A. Went to pay off creditors. Q. Was that part of the arrangement he had come to pay back his money? A. Yes Q. He agreed to that of course? A. Yes. Q. Did you ever ask Mr and Mrs James whether they wanted this money or not? A. Can I answer that question? Q. You can? A. Right. Mr and Mrs… HIS HONOUR: If you hear the question, you can answer it. QUESTION READ HIS HONOUR: Q Can you answer that "yes" or "no"? A. No." 142 The negative answer given by Mr Palmieri to the question of whether Mr and Mrs Schreiber received their 60/200ths of the net proceeds of sale was in error. They had. Later in his cross-examination Mr Palmieri agreed that only Mr and Mrs Schreiber got paid out of the proceeds of sale pro rata with their unit holding. This is partially inconsistent with his response to the question as to whether he had received his 50/200ths to which he responded "no, only part of it". 143 Mr Palmieri agreed that his understanding was that Station as trustee of the Trust was obliged as a matter of law to deal with the proceeds of sale of the properties in accordance with the Trust Deed. He was then asked this: "Q. And you have no doubt now and no doubt in August 2001 that that trust deed required Station Constructions Pty Ltd as trustee to account to the unit holders pro rata with their shareholding? A. Yes. Q. For the proceeds of sale? A. Yes. Q. And Station Constructions did not do that, in relation to the James family? A. No, because Mr James never put any money in it. I borrowed the money for him. … ". 144 The cross examiner then followed up on the last answer referred to in the above exchange, Mr Palmieri insisting that neither Mr and Mrs James nor their sons put any money into the Trust. Although his evidence is somewhat confusing, Mr Palmieri appears to be asserting that he borrowed approximately $160,000 from the bank which was used, either in whole or in part, to fund the James' interests. In this respect, it is to be noted from the trial balance that both in respect of the years ending 30 June 2001 and 2002 the total amount standing to the credit of the James' family in the Beneficiaries Account was $102,165. 145 It is difficult to determine what the primary judge made of this part of Mr Palmieri's evidence. He does not refer to it in his judgment on the first Station issue because he merely adopted verbatim the submissions thereon of the second and fifth respondents. Furthermore, although his Honour dealt with the reliability of the witnesses including Mr Palmieri, particularly in [19], [20], [21] and [22] of his judgment, it seems that he mainly relied upon the documentary material for the purpose of making his findings of fact. Yet, there would appear to be no reason why he would not have accepted the concessions made by Mr Palmieri in the exchanges to which we have referred insofar as they favoured Mr and Mrs James. In particular, except for that part of the proceeds of sale of the properties paid to Mr and Mrs Schreiber, it seems that it was common ground that the balance was apparently utilised with the concurrence of the investors other than Mr and Mrs James and, presumably, their sons, for the purpose of paying off creditors of the second respondent which were then pressing. 146 In oral argument before this Court, Mrs James relied upon the fact, supported both by the documentary material and Mr Palmieri's oral evidence, that Mr and Mrs Schreiber were paid the sum of $119,949.91 being 60/200ths or 30% of the net proceeds of sale of the properties. It was submitted that if the Schreibers were so entitled then so were the James' to their pro rata share. Implicit in the submission was that it was a breach of trust by Station to fail to pay Mr and Mrs James that share. 147 In our opinion, the primary judge correctly held that for there to have been a breach of trust by Station in which the second and fifth respondents were knowingly concerned, it was necessary to first find a breach of trust on the part of Station by reference to the provisions of the Trust Deed. It was not contested that the only relevant provision of the Trust Deed was Clause 13(a): no other breach of trust by Station was alleged. 148 Assuming that the $69,970.78 being part of the net proceeds of sale was held by Station or by the second respondent on behalf of Station, the latter would only have committed a breach of trust if it wrongly failed to treat the net proceeds of sale as net income within the meaning of that provision. Given the trial balance, we can see no basis upon which it can be asserted that the two were equivalent or that his Honour erred in finding that they were not. In our opinion, the onus lying upon Mrs James, she has not discharged the burden of proving that in respect of the year ending 30 June 2002 the Trust made a profit rather than a loss. 149 We would note in further support of his Honour's no profit finding that the gross profit made on the sale of the properties, being the adjusted sale price, less the adjusted purchase price, was only $33,917.40. The net profit is clearly negative after taking account of stamp duty and legal fees on the purchase and agent's commission and legal fees on the sale. 150 Mrs James relied heavily on the fact that Mr and Mrs Schreiber had been paid 60/200ths of the net proceeds of sale as some form of admission by Station and/or the second and fifth respondents that they represented the net income of the Trust for the year ended 30 June 2002. There was no satisfactory evidence as to why that payment was made. The explanation may be that they were the only investors who were not involved, directly or indirectly, in the affairs of the second respondent. It may be, as the second and fifth respondent suggested, that it was considered that they should be repaid in priority to the other investors part of their loan account of $163,098 being the amount contributed by them to fund the acquisition costs of the properties. 151 Whatever the explanation, and it was not pursued with Mr Palmieri in cross-examination, the payment to Mr and Mrs Schreiber cannot be utilised to justify a similar payment to Mrs James upon the basis that to deny her that payment would constitute a breach of trust by Station in which the second and fifth respondents were knowingly concerned. Either the net proceeds of sale represented the whole or part of the net income of the Trust within the meaning of clause 13(a) of the Trust Deed or it did not. It did not. It was only if it did that Station would be in breach of trust by failing to make the distribution called for by that provision. 152 Accordingly, for the foregoing reasons we consider that the primary judge was correct to reject the first Station claim.

The second Station claim 153 Mr and Mrs James alleged that $69,970.78 (being their alleged entitlement in accordance with their unit holding to the net proceeds of sale) had been deposited into the trust account of the second respondent on trust for themselves. The primary judge rejected this contention upon the following bases:

(a) No amount of $69,970.78 had been deposited into the second respondent's trust account on the basis that it constituted Mr and Mrs James' share of the net proceeds of sale in accordance with their entitlement under the Trust Deed.

(b) The second respondent had held a 5% deposit on the sale of the properties in the sum of $115,000 and on settlement was entitled to retain $50,600 as its commission. According to a letter dated 9 August 2001 from Mr Halpin to Station, he had requested the second respondent to account direct to the trustee for the balance of the deposit monies in the sum of $64,400.

(c) Accordingly, at most $64,400 was the amount held in trust by the second respondent but that amount, being the balance of the deposits, was not held in trust for Mr and Mrs James but for Station. 154 His Honour considered that there was a strong inference that the amount of $64,400 was paid by the second respondent to Station in accordance with Mr Halpin's request foreshadowed in his letter to Mr Palmieri as Secretary of Station dated 9 August 2001. However, there does not appear to be any direct evidence that this request was met. 155 Mr and Mrs James submitted to the primary judge that if the only amount retained by the second respondent was the balance of the deposit in the sum of $64,400, it failed to pay that amount to Station but used it for the purpose of paying its own debts. For reasons that will become apparent, his Honour does not seem to have made any direct finding with respect to this submission although, as we have observed, he accepted the submissions of the second and fifth respondents that there was a strong inference that the amount was paid to Station in accordance with Mr Halpin's foreshadowed request.

156 As we have already indicated, his Honour found, adopting the submissions of the second respondent, that the monies, if any, held by the second respondent from the net proceeds of sale of the properties were held upon trust for Station and not for the unit holders. Further, at most the evidence established that the second respondent only held the 5% deposit of $115,000 which, after the payment of its commission, left a balance of $64,400, which it appears was utilised to pay its creditors without Mr and Mrs James' consent. The maximum that Mrs James would be entitled to out of this sum would be $5,635. 157 In our opinion, his Honour was correct in finding that at most the second respondent only ever held $64,400 in trust, being part of the net proceeds of sale. In his letter of 9 August 2001, Mr Halpin enclosed a bank cheque in favour of Station in the sum of $215,483.13. There is no reason to believe that that cheque did not find its way into the bank account of that company. Certainly, there is no evidence to support any inference that it found its way into the bank account of the second respondent. That cheque, when added to the $64,400, being the balance of the deposit which the second respondent was required to pay to Station, amounted to $279,883.13 which represented 70% of the net proceeds of sale, the other 30% having been paid by Mr Halpin to Mr and Mrs Schreiber. 158 The question then is: was the second respondent in breach of trust in failing to account to the beneficiaries of that trust for $64,400 and, if so, who were those beneficiaries? The primary judge held in accordance with the submissions of the second respondent that that beneficiary was Station and not the unit holders. In neither her written nor oral submissions did Mrs James challenge this finding. We see no reason to disturb it. It follows that although Station may have a claim against the second respondent for breach of trust, Mrs James does not.

The third Station claim 159 Mr and Mrs James also alleged that the fifth respondent was knowingly concerned in the breach of trust by the second respondent and as such liable to pay damages to Mr and Mrs James or, at their election, to account for any profits made by him. This claim was rejected by the primary judge upon the basis that it was founded upon the false premise that the second respondent was involved in a breach of trust of which the unit holder were the beneficiaries. Alternatively, his Honour found that any authorisation of the use by the second respondent of funds, which may have been in breach of trust, was made either by Mr Christian or Mr Sicuro and not by the fifth respondent. 160 Even if, contrary to the primary judge's acceptance of the alternative submission referred to above, it is the case that Mr Palmieri was knowingly concerned in the second respondent's breach of trust, and it appears to be so, nonetheless the remedy lies in the hands of Station and not Mrs James. 161 Further, even if Station recovered the $64,400 from the second respondent, it would not follow that Mrs James was entitled to a share thereof in her capacity as a unit holder. The $64,400 being part of the net proceeds of sale was not equivalent to the net profit of the Trust for the year ending 30 June 2002 for the reasons already adverted to.

A further consideration 162 We have already referred to the amount standing to the credit of the unit holders in the "Beneficiaries Accounts" itemised in the trial balance. That document records an amount of $63,137.53 owing to Mr and Mrs James to which Mrs James would be entitled to one half. That amount apparently represents a contribution by Mr and Mrs James by way of loan to the Trust. It appears from the trial balance that the Trust has funds represented in part by the net proceeds of sale, sufficient to meet at least some of each investor's loan account including that of Mr and Mrs James. To the funds actually held would need to be added the $64,400 originally held by the second respondent in trust for Station as trustee of the Trust but wrongly utilised by it to pay its creditors insofar as Mr and Mrs James had not consented thereto.

163 Mrs James would, in our opinion, be entitled to sue Station as trustee for repayment of the debt represented by the loan of $63,137.53. Whether there would be any point in doing so would, of course, depend upon whether the Trust in fact has funds to pay the unit holders the amount standing to their credit as loans in the "Beneficiaries Accounts". However, Mrs James' case was not pleaded in a manner which would permit her to pursue such a claim in these proceedings. There is also the claim by Mr Palmieri that he lent Mr and Mrs James the amount of that loan.

Were the primary judge's reasons adequate? 164 In her written submissions in chief in the appeal, Mrs James contended that the primary judge failed to deal with the submissions made on behalf of Mr and Mrs James and confined himself to adopting the submissions of the second and fifth respondents. The submissions made to the primary judge are set out in [69] and [72] of Mrs James' written submissions in the appeal. The thrust of those set out in [69] was that Mr and Mrs James were entitled to a distribution from the proceeds of sale of $69,970.78 upon the basis that to deny them that money would be a breach of trust. In our opinion, the primary judge clearly rejected these submissions by his adoption of the contrary submissions of the second and fifth respondent. So far as the submissions recorded in [72] are concerned (which stress more than just the position with Station), the thrust of them was not essentially different to those recorded in [69]. In particular, they contained allegations that the Trust Deed created Mr and Mrs James' entitlement to the amount of $69,970.78. If this is so, then the primary judge has adequately dealt with them for the reasons we have already adverted to. 165 The submissions further assert that the second respondent was in breach of trust in paying its creditors monies belonging to Station. Again, this can only be a reference to the $64,400 being part of the deposit retained by the second respondent belonging to Station. In our opinion his Honour dealt adequately with those submissions by adopting the respondent's submissions with respect thereto. 166 One of the complaints made by Mrs James with respect to his Honour's judgment upon the present claims is that it took the form of repeating the allegations in the relevant paragraphs of the pleading and then adopting verbatim the second and fifth respondent's submissions in response to those allegations. As his Honour said (at [212]): "The cross-defendant's submissions were of substance and are generally adopted in what follows, albeit with minor modification."

It is pertinent to observe that his Honour did not in terms either set out, summarise or otherwise directly deal with the submissions made by Mr and Mrs James in support of the allegations with respect to these claims contained in their pleading. 167 Mrs James therefore contended that the adoption by the primary judge of the respondents' submissions where those submissions did not themselves come to grips with her and Mr James' case, resulted in him falling into error by failing to provide adequate reasons. Reliance was placed upon what was said by Mahoney JA and McHugh JA respectively in Soulemezis v Dudley (Holdings) Pty Limited (1987) 10 NSWLR 247 at 268-270, 279-287. 168 For the reasons to which we have referred in [30] above, we cannot accept the submission of Mrs James that the methodology adopted by the primary judge in dealing with the issues raised by the Station claims resulted in his failing to provide adequate reasons in accordance with the principles referred to in Soulemezis. Adoption of one party's submissions by a judge, and so acknowledged, is one method of providing adequate reasons. It may not be the choice of every judge but it is impossible to say that it necessarily or in this case falls short of the judicial duty to provide reasons. 169 The focus of Mrs James' complaint however, seems to be that the respondents' submissions adopted by the primary judge did not themselves deal with the submissions of Mr and Mrs James but merely responded to the allegations in the pleadings. However, essentially those allegations were merely repeated in the form of assertions in the written submissions of Mr and Mrs James and, as such, they were responded to. We see no error in his Honour's approach and we do not regard his failure to specifically advert to the written submissions made to him on this issue as demonstrating a failure to provide adequate reasons. 170 Accordingly, in our opinion Mrs James' challenge to the findings of the primary judge with respect to the Station claims should be rejected.

Conclusion 171 It follows from our reasons that Mrs. James has both been discharged from her liability under the guarantee and has no liability to WIT Investments Pty. Limited, the fourth respondent. Accordingly, the appeal is to be allowed in part in respect of those matters. However, as we have found that Mrs. James has failed in relation to the Station claims, the appeal is to be dismissed in relation to those matters. 172 We direct the parties to bring in agreed Short Minutes of Order reflecting these reasons by 4 February 2005. If agreement cannot be reached the parties are to have liberty to apply to Beazley JA on or before 4 February 2005. 173 In relation to the costs of the trial, if the parties cannot agree as to the order that follows from these reasons, the parties are to file written submissions by 4 February 2005. 174 That leaves the question of costs on the appeal. Mrs. James has been substantially successful on the appeal. The issues on which she failed were discrete and did not take up a significant period of time on the appeal. In our opinion therefore, the respondents should pay 90% of the appellants' costs. 175 Accordingly the only orders we make at this stage are

1. The parties to bring in agreed Short Minutes of Order reflecting these reasons by 4 February 2005.

2. Liberty to apply on or before 4 February 2005 if the parties cannot reach agreement on the Short Minutes of Order.

3. The respondents are to pay 90% of the second appellant's costs of the appeal.

4. The respondents are to have a certificate under the Suitors Fund Act 1951 (NSW) if so entitled.

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