Stokes v Greenup

Supreme Court of NSW|2021-07-21|Before: Cavanagh J

History of the development

The plaintiff and the defendant were principals in corporate entities/trusts through which they invested in a corporate joint venture vehicle, known as Brighton Toronto Pty Ltd ("BT") as trustee for the Brighton Toronto Trust ("BTT") for the purposes of a property development at Cameron Park in Newcastle ("the project").
The plaintiff and the defendant became acquainted through their mutual involvement with a development company. The plaintiff has extensive history as an educator and as a businessman. The defendant is a builder and developer.
In 2007, the plaintiff and the defendant agreed to pursue a development at Cameron Park. The defendant was an equal shareholder in BT and an equal unitholder in BTT with Mr Anthony Wharton. According to the defendant, Mr Wharton wished to end his association with the two entities which gave rise to an opportunity for the plaintiff to become involved. The plaintiff acquired 50% of the shares in BT and 50% of the units of BTT.
The parties agreed that BT would act as the trustee of BTT and that the entities would undertake development of the site and that they would each contribute 50% of the equity loan funds required for the development.
In late 2007 or early 2008, the parties agreed to purchase the lot adjacent to the existing parcel of land which was going to be developed. BT obtained a loan in the amount of approximately $700,000 to purchase the land which was secured by way of a mortgage over the property as well as director guarantees from the plaintiff and the defendant.
In 2011, the parties entered into an agreement that all monies contributed by the plaintiff over and above the monies contributed to by the defendant would attract interest of 15% per annum from the date of contribution.
The parties entered into an equity loan and subscription agreement with an entity known as the Lime Group in 2011. The effect of the agreement was that the Lime Group would contribute loan capital totalling $1,350,000 which consisted of $350,000 for part repayment of the existing bank loan with the remainder to be released once BT received a development loan.
The parties were unable to arrange a development loan and, as a result, the Lime Group withdrew from the agreement. Throughout 2007 to 2017, the parties incurred costs related to the development. These included loans, interest repayments and penalties which were applied by the bank because BT was forced to request several loan repayment extensions. The plaintiff says that by the end of the 2012 financial year, he had loaned a total of $1,395,854.
In 2013, the plaintiff arranged a further loan of $920,000 from his cousin on behalf of BT. These funds were used to pay out the remaining bank loan balance.
The plaintiff says that by the end of the 2015 financial year, the total loan balance contributed by him was $2,019,778.
After several unsuccessful attempts to finance the project, the parties were put into contact with a number of investors who were collectively known as the "Wagga Group" in early 2017.
Throughout the first half of 2017, the parties negotiated with the Wagga Group. The final agreement between BT and the Wagga Group consisted of the following: 1. the Wagga Group would pay $2,430,000 for a 50% share in BT and BTT; and 2. the plaintiff would be repaid approximately 50% of his equity loan.
The plaintiff and the defendant issued shares in BT and units in BTT to the Wagga Group equivalent to 50% of the total shares and units.
The $2,430,000 received as consideration for that transfer was distributed as follows: 1. $49,356 for the shares and units in BT and BTT; 2. repayment of the loan from the plaintiff's cousin in the sum of $920,000; 3. repayment of $1,180,000 owing to the plaintiff; and 4. the balance as working capital.
Throughout 2017 and 2018 problems emerged with the development which the plaintiff says culminated in a meeting in January 2018 where the defendant and members of the Wagga Group held a meeting and resolved to remove the plaintiff from his role and responsibilities with the development.

Entry into the deed

Subsequent to the plaintiff withdrawing from any active role in the project, the plaintiff and the defendant entered into the deed which is the subject of these proceedings.
As is plain from the terms of the deed, the parties intended that the deed would govern their rights and obligations in respect of the interest payable to the plaintiff on the excess contributions of the plaintiff. The earlier agreement in respect of interest ceased to have any effect.

Events subsequent to the March 2018 deed

On 5 March 2019, the plaintiff resigned as a director of BT.
On 3 June 2019, a shareholders meeting was held. At that meeting, it was decided that the Wagga Group would buy out the interest of the plaintiff and the defendant in the development.
In late June or early July 2019, the plaintiff entered into an agreement with the Wagga Group pursuant to which: 1. the plaintiff transferred his shares and units to the Wagga Group; and 2. BT agreed to repay the outstanding loan amount owing to the plaintiff (Sorobe) at the end of the project with interest, if the project made any profit.
The defendant also agreed to sell his shares and units to the Wagga Group and their entities. Further, a deed of release was entered into between BT and the defendant's building company, Able, which dealt with the amounts to be paid by Able to BT for commissions on sale of properties in the project.
Unlike the plaintiff, the defendant was able secure the upfront repayment of his equity loan of $452,000 as part of the agreement to transfer his shares and units to the Wagga Group.
According to the plaintiff, he did not know (at least initially) that the defendant had also entered into an agreement with the Wagga Group to sell his shares and units.
On becoming aware of the details of the defendant's agreement, the plaintiff unsuccessfully attempted to re-negotiate with the Wagga Group for his equity loan to be repaid but, according to the plaintiff, he was told that there were no funds left to repay his loan after the defendant's loan had been repaid.
So although the Wagga Group paid the amount of the defendant's outstanding loan balance to the defendant on the transfer of the defendant's shares, it only agreed to pay the plaintiff's loan balance at the end of the project.
The principal sum owing to the plaintiff under the loan agreement was ultimately paid by BT as anticipated by the plaintiff's agreement with the Wagga group.
This case relates only to the outstanding amount said by the plaintiff to be owing by the defendant under the terms of the deed.
The plaintiff says that the defendant has made payments in the amount of $129,914. There is some disagreement between the parties as to how much interest is owing. The plaintiff says that $844,724 is the correct figure and the defendant's position is that the outstanding amount is $822,103. The significance of this dispute may depend on my findings in this judgment.
Although the plaintiff and the defendant each had a separate sale agreement to sell their interests to the Wagga Group, these agreements were interdependent as the agreements had a clause to the effect that should either agreement not be completed for any reason, then the Wagga Group could not be called upon to complete the agreements.
It follows that if either the plaintiff or the defendant did not proceed with the sale of their shares and units to the Wagga Group, the Wagga Group would not proceed with the purchase of the other person's shares and units.

The deed

Throughout February 2018, the parties exchanged emails negotiating the amount of interest that was payable to the plaintiff. These negotiations culminated in the deed which was dated 6 March 2018.
The recitals to the deed were as follows: "A. In April 2007 Greenup and Stokes entered into an agreement to develop the Cameron Glen and Cameron Park Sites…into a seniors accommodation and facilities complex at Cameron Park, Newcastle through the owner Brighton Toronto Pty Ltd ATF the Brighton Toronto Trust in which they would hold 50% each of the shares and units respectively and to [organise] the necessary bank loan(s) for up to 100% of the total development project costs including refinancing the existing land loan(s). It was agreed that Stokes and Greenup would each contribute 50% of the equity loan funds required for the project. Greenup was unable to provide 50% of the funds required. It was further agreed that Stokes would contribute a sum of $360,000 and Greenup would refund fifty per cent of that sum as soon as Greenup had the necessary funds. B. In August 2011 Greenup and Stokes agreed that all monies in the form of loans contributed by Stokes over and above monies in the form of loans contributed by Greenup would attract interest of 15% p.a. from the date of contribution and together with the interest would be paid to Stokes after repayment of the bank loan and any other expenses, first before the balance of loan monies were repaid to Greenup and Stokes. C. In July 2017 Greenup and Stokes caused the issue of shares and units in Brighton Toronto Pty Ltd and the Brighton Toronto Trust respectively to themselves and a group of new investors to the level whereby Greenup and Stokes retained 50% (25% each) of the total shares and units issued. At this time the loan balance contributed by Stokes was $2,296,131 and the loan balance contributed by Greenup was $450,523 as per the July 2017 Balance Sheet of the Brighton Toronto Trust. D. In August 2017 the new investors collectively contributed a total of $2,430,000 which in part was used to repay a loan of $920,000 owing to the 1st mortgagee and a loan amount of $1,180,000 owing to Stokes, which was part of the total loan balance of $2,296,131 contributed by [Stokes.] E. The parties have agreed to record the terms of their agreement as to payment of interest by Greenup to Stokes."
The deed imposed an obligation on the defendant to accrue and pay interest on the loans contributed by the plaintiff over and above the loans contributed by the defendant, which was to be calculated using loan balances contained in a balance sheet at the end of each financial year. The interest to be paid was the amount calculated in a spreadsheet which was attached as schedule 1 to the deed and was to be "updated from time to time until the Greenup and Stokes loans have been repaid."
The deed contained a clause as to payment of interest: "3 Payment of Interest 3.1 The 'Net Interest' is the amount of interest to be paid by Greenup to Stokes as per the 'Interest to be paid by Greenup to Stokes' spreadsheet attached as Schedule 1 and updated from time to time until the Greenup and Stokes loans have been repaid. 3.2 The 'Net Interest' will be paid as follows: (a) Greenup will pay to Stokes 50% of the sales commissions he receives from the sale of the leasehold of villa units in the Cameron Glen Village…as and when Greenup receives the commission monies. (b) The balance of the 'Net Interest' after receipt of monies as per 3.2 (a) will be paid by Greenup to Stokes from Greenup's 25% share of net profits from the development and sale of the leaseholds of the villa units in the Cameron Glen Village…as and when Greenup receives the net profit monies. (c) If Greenup's 25% share of net profits from the development and sale of the leaseholds of the villa units in the Cameron Glen Village…is not sufficient to pay the balance of the 'Net Interest' Greenup will pay the remaining balance of the 'Net Interest' from Greenup's 25% share of Deferred Management Fees as and when Greenup receives the Deferred Management Fees."
The deed contained a clause to the effect that the agreement was the final one between the parties and superseded all other agreements and arrangements relating to the defendant's obligation to accrue and pay interest to the plaintiff.
The deed contained the following provisions in the event of a default: "5. Default Events 5.1 If any of the following default events occur before Greenup has paid to Stokes the full amount of 'Net Interest', Greenup will immediately assign to Stokes that portion of Greenup's 25% of the total shares and units issued in Brighton Toronto Pty Ltd and the Brighton Toronto Trust respectively, calculated by expressing the amount of 'Net Interest' not paid to Stokes at the time of the default event as a percentage of the 'Net Interest' amount. a) Greenup is in breach of this agreement and in particular clause 3 Payment of Interest. b) An Insolvency Event occurs to Greenup. c) Greenup is prohibited by law from holding shares and/units. d) Greenup attempts to transfer or sell any of its Shares or Units. e) A change of Control of Greenup occurs without the prior written consent of Stokes (such consent not to be unreasonably withheld or delayed). 5.2 To support the obligations of Greenup under clause 5.1 Greenup and each of them charge all of their right title and interest in Greenup's Shares and Units in Brighton Toronto Pty Ltd and the Brighton Toronto Trust respectively and agrees that Stokes may register a general security interest over them in the PPSR."
There is a dispute as to the proper construction of the deed and as to whether further terms should be implied into the deed.

The evidence

The plaintiff read four affidavits dated 5 January, 23 March, 1 July and 16 July 2021. The defendant read two affidavits dated 1 March and 19 April 2021.
Both the plaintiff and the defendant were cross-examined. The effect of the cross-examination of the plaintiff was an acknowledgment that: 1. he received repayment of approximately $2 million as a result of the arrangement with the Wagga Group including sale of his shares and units; 2. he would receive some further interest arising from that arrangement; 3. he actually sold his shares for $1.00 each and his units for $17,500; 4. he was aware that the sale of his shares and units to the Wagga Group was dependent upon the defendant entering into an agreement to sell his shares and units to the Wagga Group; 5. he was aware that the defendant would be selling his shares to the Wagga Group and did not attempt to prevent him from doing so. He did not take a charge over the shares before the shares were sold; 6. he agreed that he wanted the defendant's sale to proceed; and 7. he agreed that the defendant had made payments in accordance with the deed which reduced the net interest amount.
The effect of the cross-examination of the defendant was an acknowledgment that: 1. although the parties intended that they would contribute equally, it was always the position that the defendant would not be in a position to contribute the same amount of money to the project as the plaintiff; 2. in those circumstances, as set out in the heads of agreement, they agreed that the additional contribution of the plaintiff would attract interest; 3. by 2011 there was a vast discrepancy in the amount of funds that had been contributed; 4. the agreement in 2011 was an acknowledgment that the additional contribution of the plaintiff was something that the defendant would not obtain for free i.e. interest would be payable; 5. neither the plaintiff nor the defendant were represented by a solicitor in the course of the negotiations leading to the signing of the deed; 6. during the course of the negotiations he sent an email stating: "I totally acknowledge that there is interest payable to you for my half of the loans that were made by you/Sorobe to the project and I am committed to that." 1. in the circumstances which existed at the time of the trial: 1. he was no longer involved in selling any more residential units and thus would receive no further sales commissions; 2. as he had exited the investment he has no entitlement to any profits; and 3. he has no further entitlement to deferred management fees. 1. he did not tell the plaintiff when he was negotiating with the Wagga Group that his equity loan would be paid out in full.
In the end, I gained the impression that the point of cross-examination of both the plaintiff and the defendant was merely to: 1. clarify matters which were apparent from the documentation in any event; 2. confirm that both parties knew and recognised that the plaintiff had contributed a significantly higher sum than the defendant towards the project; 3. emphasise that, in recognition of that, it had always been both parties' intention that the defendant would pay interest to the plaintiff; and 4. confirm that the interest would be calculated having regard to the amount of the difference on an ongoing basis.
The extent to which any of this evidence could be treated as anything other than background remained in issue. It might depend upon the extent to which I accept the plaintiff's submissions that evidence of surrounding circumstances or post-contractual conduct should be admitted having regard to the suggested ambiguity in the deed.

The plaintiff's contentions

The primary contention of the plaintiff is that clause 1 of the deed imposes an obligation on the defendant to pay interest on the difference between the contributions of the plaintiff and the defendant to the project financing. That obligation remains until all of the interest, calculated in accordance with the other terms of the deed, has been paid.
On the plaintiff's case, clause 3.2 does not limit the primary obligation to pay interest arising under clause 1. It merely sets out some non-exhaustive circumstances in which payments must be made.
In those circumstances, the plaintiff submits that it is necessary to imply a term into the deed that the payment of interest as required by clause 1 would be made within a reasonable time. It is necessary to imply the term because on the plaintiff's case there are no dates for payment of interest. Where no time for performance of any contractual obligation is specified, the law would imply a term that performance must be effected within a reasonable time: Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd. [1]
Alternatively, there should be a term implied into clause 3.2 to the effect that if the defendant sold his interest in BT and BTT prior to the full amount under the deed being paid, the obligation to pay that full amount would be immediately payable in whole at the time of the sale of the shares and units.
The plaintiff's case is thus dependent upon the implication of terms into the deed so as to give effect to the objective intention of the parties and so as not to render the deed "a solemn farce", that is, meaningless.

The defendant's contentions

The defendant says that the deed must be read as a whole. Whilst clause 1 specifies the principal obligation to pay interest (consistent with the plaintiff's approach), clause 3.2 identifies the means by which and when the net interest must be paid. Indeed, clause 3.2 provides the only means by which the plaintiff has an entitlement to be paid.
There has been no failure to pay the net interest with reference to the three events set out in clause 3.2 and thus there is no obligation on the defendant to pay interest.
As the deed contains a provision for when and how performance is to occur (clause 3.2) then there is no basis on which the terms sought by the plaintiff would be implied. Further, such implied terms would be inconsistent with the express terms of the agreement.
Further, there is a provision which sets out the rights and obligations of the parties in the event of default by the defendant.
Finally, the defendant relies on a waiver and estoppel argument. The defendant submits that the plaintiff was aware that the defendant was selling his shares and units and is taken to have consented to the sale of the shares and units and waived any assertion of breach and is estopped from asserting that the sale was an event of default.

Approach to construction

The task of identifying the meaning of terms in a deed involves identifying the intention of the parties on an objective basis by reference to the text, construed in light of its context and purpose. [2]
Evidence of the subjective intentions of the parties is not relevant. In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [3] the High Court said: "…It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe…"
As is often said, the starting and ending point for the construction of a document is the language chosen by the parties to record their bargain. [4]
The Court must give effect to the language used by the parties unless to do so would give the contract an absurd operation. [5]
As Bathurst CJ observed in McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liq): [6] "In considering this issue it is important to bear in mind the extent to which the context and surrounding circumstances can be used as an aid in the construction of a written agreement. Whilst it is correct in my opinion that context and the surrounding circumstances known to both parties can be taken into account (see Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 350, 352) even in cases where there is an absence of apparent ambiguity (Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [8]; Park v Brothers [2005] HCA 73; (2005) 80 ALJR 317 at [39]; Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 at [14], [63], [305]) that does not permit the Court to depart from the ordinary meaning of the words used by the parties merely because it regards the result as inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109."
In the end, both parties accepted that the proper approach to the construction of the deed would be as I have just outlined.
However the parties differed on the extent to which I should have regard to extrinsic evidence, being evidence relating to the surrounding circumstances, pre-contractual negotiations and post-agreement conduct.
On the defendant's case, there is no scope for having regard to such material in construing the deed. The plaintiff says that, if I find ambiguity in the deed, evidence of the pre-contractual negotiations would be admissible as would evidence of alleged post-deed admissions.
It is appropriate that I say something about that issue at the outset.

The pre-contractual negotiations

As far back as 2011 the parties agreed that the defendant would pay interest to the plaintiff on the plaintiff's additional contributions to the project.
However, events moved on and the plaintiff sought to evidence the defendant's agreement to pay him interest, particularly once he had ceased to be actively involved in the project.
On 1 February 2018 the plaintiff wrote to the defendant referring to his earlier email confirming cessation of any role and responsibility in respect of the project stating: "You will recall discussions we have had many years ago and more recently about the arrangement we reached in regard to interest being charged and payable by you to Sorobe on the difference each year between the monies we contributed as equity loans, instead of reducing your equity proportionately to the equity loans. I always wanted you to be able to maintain your equal share of equity so you could one day share equally with me in the development profits and ongoing deferred management fees. That day has come and the project will eventually be successful and generate significant development profits and ongoing deferred management fees for all the investors. However unfortunately for various reasons, that you are aware of, it is unlikely that I will be part of that future success and I therefore ask you to now honour our arrangement to compensate me for the differential in our equities according to the interest calculated thereon."
The defendant did not respond immediately but responded on 5 February 2018 seeking further information about the quantum of the interest owed. After further exchanges, the defendant wrote to the plaintiff on 7 February 2018 at 9.27am stating: "I totally acknowledge that there is interest payable to you for my half of the loans that were made by you/Sorobe to the project and I am committed to that. The agreement however, was written at a time when there was a very specific event happening, i.e. the forced sale of the land. The agreement deals with that impending transaction and the immediate sale. The length of time envisioned for that to occur was very limited. This was also at a time of very high interest rates. My recollection is that BT was being charged interest at the rate of 13 ¾ % and this is why an interest rate of 15% was not unreasonable. The agreement is also quite specific about the situation and the timing of the sale. The agreement never dealt with an ongoing situation where the site was held for many years, as has turned out to be the case. I feel that under the circumstances that a more realistic/commercial rate of interest should be applied, especially given the record low interest rates that have been in place for the last 4 - 5 years. I am totally open to discussion around this."
Thereafter there were further email exchanges as to the rate of interest which should be applied but no further statements or comments about the suggestion that the defendant would be paying interest on the excess contributions.

Post-contractual conduct

On 28 June 2019 the plaintiff wrote to the defendant suggesting that he had just become aware that the defendant was receiving an immediate negotiated settlement for his shares and units and equity loan together with payment of commissions for sales up to and including May 2019.
The plaintiff noted that he would not be receiving payment of his equity loan for possibly two years, if at all. He sought confirmation from the defendant as to the amount that the defendant would be receiving and paying to the plaintiff stating that "otherwise I may have to reconsider whether or not to proceed with my arrangement to sell my shares and units."
The defendant wrote back seeking to clarify some matters, though acknowledging that he would be receiving the loan repayment at that time but referring to his expectation that he would receive some payments from settlements which would enable him to make payments under the deed. He stated: "There are a few settlements coming up at the village and this will pay out that balance and then I will start receiving commissions. As soon as I start receiving those commissions I [will] start paying you 50% of the net commission I receive in line with our agreement. I am, at this date, in full compliance with our agreement."
The plaintiff responded asking "Are you saying that Geoff is incorrect and that you are not intending to pay me any part of the Equity Loan monies that you will be receiving now?".
The defendant responded stating his view that "I am saying that I am in full compliance with our agreement which clearly states that I MUST pay you 50% of all commissions received as and when I get them."
There followed a further email from the plaintiff again seeking to clarify whether the defendant would be paying commissions irrespective of whether the money was received personally by the defendant or his company, Able Builders Pty Ltd, and drawing the defendant's attention to clause 5 of the agreement (relating to default events), in particular noting that if the defendant sought to transfer or sell any of his shares or units, that would trigger a compulsory, immediate assignment of the defendant's shares and units to the plaintiff.
The defendant responded immediately stating that he fully intended to pay the plaintiff 50% of all commissions that he received regardless of to whom they were paid stating "You will get 50% of all comms".
On 1 July 2019 at 11.58am the defendant wrote to the plaintiff (obviously following a conversation) in the following terms: "Hi Greg I am writing this to confirm our phone conversation just now …. I agree to pay you the 50% share of commissions from BTT received to date as soon as the funds clear thru my solicitors trust a/c. I agree to pay you 50% of the $120,000 payment from BTT for the future commissions (i.e. post May 9th) as soon as the funds clear thru my solicitors trust a/c. I agree to pay you 50% of the commissions that I received from the 'pre May 9th' settlements as they occur and the funds are paid to me. I am trying to work out a way to settle the total debt in the shortest possible time. I still believe that there is a profit in the total project. From my 'back of the envelope' numbers I feel that there will be a $4mil surplus, maybe more. Thx Paul"
On the same day the defendant sent two further emails to the plaintiff. The plaintiff submits that the email of 2.19pm is particularly significant: "Hi Greg I am bound by our agreement. That is clear. I cant say to you in exact detail, at this time the source of funds other than to say that that I am making two large payments to you this week. Then I will be paying the balance in the immediate future via the commissions that I will be receiving [as] each unit settles. You will be getting 50% of those amounts at each settlement as per our agreement. After that, the remaining amounts will be coming from the Tuncurry project. I cannot give you a fixed time frame for that. Our original agreement does not have a fixed time frame on it either but it did envisage full repayment by the end of the Cameron Park project or from the DMF income. I can assure you that I want to get this out of the way ASAP. Thx Paul"
The plaintiff submits that in these emails the defendant said that he would pay the interest via commissions but any remaining amounts would be coming from a different project, being the Tuncurry project. This email was in response to the plaintiff's email of 2.05pm on 1 July 2019 stating "I need your commitment to pay this balance from sources other than from the project profits and DMF fees. I need this commitment in these words in an email from you before I go back to Geoff with the go ahead and we only have a couple of hours before the deadline."
The plaintiff says that the defendant's statement that he would pay the interest from another source is an admission by the defendant that he was required under the deed to pay all of the interest irrespective of how much he received from the three sources set out in clause 3.2. He refers to being bound by the agreement and then confirms that he will pay the total amount of interest from sources other than those referred to in the deed.
On 14 July 2019 the plaintiff wrote to the defendant setting out his view as to the ongoing obligations of the defendant, referring to the breach by the defendant of the deed in that he divested himself of his shares and units; and suggesting that he had a clear and continuing obligation to pay interest as specified in schedule 1 to the deed and that this obligation continued regardless of the source of payment.
On 18 July 2019 the defendant responded: "Hi Greg Thank you for your email last Sunday night. Whilst I do not agree with your interpretation of the payments re commissions due to you/Sorobe, I have decided, as a sign of good faith, to pay Sorobe the sum requested in your email. I have just transferred $40,000 to Sorobe. See EFT receipt below. I will transfer the remaining $6,869.63 tomorrow. ($40k is the maximum that I can now transfer) I am working on a response to the other queries in your email and will get back to you ASAP. Regards Paul"
There followed a number of emails from the plaintiff to the defendant seeking further confirmation from the defendant that he would paying all of the interest. The defendant did respond by email, making some further payments on receipt of commissions and ultimately responded saying that he would be seeking legal advice on the plaintiff's views as to the obligations under the deed. It does not seem to me that this latter correspondence takes the matter any further.
It is the defendant's statement that he would be paying all of the interest, not just from the receipt of the moneys referred to in clause 3.2 but from other sources, that the plaintiff relies on as some form of post-agreement admission consistent with the plaintiff's construction of the deed. That is, the defendant has admitted that under the terms of the deed he is obliged to pay all of the net interest, irrespective of whether he receives sufficient funds from the sources specified in clause 3.2 to do so. The obligation to pay remains until the full amount of the net interest is paid.
The defendant objects to the admissibility of the emails to which I have just referred and says that: 1. such post-agreement communications cannot be considered as an aid to construction; and 2. there is no admission in any event.

Admissibility and use of extrinsic evidence

Plainly, in cases such as this, there will be a substantial body of material which may be admitted on the basis that it is relevant to background. In any case, it is important that the Court understands the background to the commercial arrangement, at least so that the Court might form a view on an objective basis as to the purpose of the agreement and the context in which the parties decided to bind themselves to such an arrangement.
Much of the material provided by the parties and admitted into evidence really falls into a category of evidence which might be described as uncontested background. Indeed, the affidavit evidence and the oral evidence adduced under cross-examination merely clarified the background material. It does not seem to me that any of the oral evidence adduced by the parties could be described as evidence of subjective intention (which would not be admissible for the purposes of construing the deed).
In International Air Transport Association v Ansett Australia Holdings Limited [7] Gleeson CJ observed: "In giving a commercial contract a businesslike interpretation, it is necessary to consider the language used by the parties, the circumstances addressed by the contract, and the objects which it is intended to secure. An appreciation of the commercial purpose of a contract calls for an understanding of the genesis of the transaction, the background, and the market. This is a case in which the Court's general understanding of background and purpose is supplemented by specific information as to the genesis of the transaction. The Agreement has a history; and that history is part of the context in which the contract takes its meaning. Before considering that history, it is necessary to explain, by reference to the text, how the issue of construction arises."
Like the agreement referred to by the Chief Justice in that case, this deed has a history and the history leading up to the entry into the deed is admissible as part of the context in which the deed takes its meaning.
It is not necessary that a party demonstrate ambiguity in the deed so as to render evidence of the history of events leading up to the entry into the deed relevant and admissible.
However, that does not necessarily mean that evidence of pre-contractual negotiations is admissible.
In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [8] Mason J observed: "Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable."
In Angas Securities Ltd v Small Business Consortium Lloyds Consortium No. 9056 [9] Sackville AJA observed: "… the correspondence between the parties evidencing the arrangement is an objective fact that formed part of the surrounding circumstances that can be taken into account in construing the Deed of Release."
Evidence of surrounding circumstances is of assistance in construing the document. However, evidence of surrounding circumstances could not be used to give the deed a meaning contrary to the ordinary plain meaning of the words merely because the Court may consider the result is in some way unjust.
Just like in Codelfa and other cases such as Angas Securities I consider that the emails between the parties leading into the entry into the deed are admissible as part of the background and context in which the terms of the deed were agreed.
In Cherry v Steele-Park [10] Leeming JA observed that ambiguity is a conclusion rather than a pre-condition to the admissibility of evidence of surrounding circumstances.
In my view, irrespective of any finding as to ambiguity in the text of the deed, I can have regard to those emails as part of the consideration of context and for the purposes of discerning the objective intention of the parties.
Having said that, to the extent that there are statements made by either party as to the parties' subjective belief, intention or understanding as to what the effect of the deed might be, I would not have regard to that evidence.
As such, the documents constituting the pre-contractual negotiations are admissible but there is a limit on their use. They cannot be used for the purposes of establishing or considering the parties' understanding, belief or subjective intention as to what the text of the deed means or what the effect of the agreement that they entered into should be.
The post-deed emails may be in a different category.
In County Securities Pty Ltd v Challenger Group Holdings Pty Ltd & Anor [11] McColl JA stated: "… The present state of the law throughout Australia on whether, and if so when, it is possible to use post-contractual conduct as an aid to construction of the contract is not yet settled, the view, favoured in this Court, being that subsequent communications cannot be looked to as an aid to construction of a contract, but can be looked to as an aid to deciding whether a contract has been entered into: Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154; (2007) Aust Contract R ¶90-263 (at [59]) per Campbell JA (Beazley JA agreeing); Sagacious Procurement Pty Ltd v Symbion Health Ltd (formerly Mayne Group Ltd) [2008] NSWCA 149 (at [99] ff) per Giles JA (Hodgson and Campbell JJA agreeing). However it is permissible to have regard to the conduct of parties, even subsequent conduct, as constituting an admission of the state of the parties' rights: see Pitcher v Langford (1991) 23 NSWLR 142 (at 160); Grey v Australian Motorists & General Insurance Co Pty Ltd [1976] 1 NSWLR 669 (at 684-685); Jones v Sutherland Shire Council [1979] 2 NSWLR 206 (at 231); Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175 (at 188E), although care must be taken about identifying the fact said to have been admitted: Sagacious (at [106])."
In this matter there is no dispute that the deed was entered into. The question is whether these post-deed communications can be admitted as evidence aiding the construction of the deed, that is, leading to a construction of the deed in a way that compels the defendant to pay the total net interest within a reasonable time, irrespective of the receipt of funds from the sources specified in clause 3.2.
I do not consider that they can be. Indeed, I accept the defendant's contentions on the admissibility of these post-agreement communications.
Firstly, as was observed by Campbell JA in Lym International Pty Ltd v Marcolongo [12] there is a difference between the task that is involved in interpreting a wholly written contract and the task involved in finding what has been agreed in a contract that is not wholly in writing.
When the contract is wholly in writing, the admissibility of evidence is decided by reference to whether it is able to assist in ascertaining the meaning that the bystander who knows all the relevant surrounding circumstances would understand from the parties using those words.
Although post-contractual statements could be relevant in ascertaining what the parties have actually agreed, for example, the identity of the parties or whether the document contains all of the terms, it is not admissible as an aid to construing the express terms of the deed.
Describing the statements of the defendant as set out in the emails to which I have referred as admissions does not take the issue any further.
This agreement is not partly in writing and partly oral. Further, the plaintiff does not suggest that it is necessary to have regard to these post-agreement communications for the purposes of determining whether any terms should be implied into the agreement.
In any event, it does not seem to me that any of the emails from the defendant contain admissions of the type for which the plaintiff contends.
In a different case or in a claim for a different type of relief, the plaintiff might have relied on the content of the emails as some form of representation but there is no statement by the defendant in any post-agreement communication in clear terms that he was obliged to pay all of the interest including from sources not referred to in the deed.
The fact that he said that he would be doing so does not constitute an admission that he was obliged under the terms of the deed to do so. As McColl JA observed in County Securities at [162] care must be taken in identifying the facts said to be admitted.
I do not accept that any of the post-deed communications can be interpreted as an admission of the type relied on by the plaintiff. A statement that a person would pay an amount is not an admission that he was obliged under the terms of an agreement to pay that amount. Further, whilst the defendant consistently stated that he would comply with the agreement, what compliance means is obviously in issue. I would not have regard to post-deed statements by the parties as to what the deed required the defendant to do.
In the circumstances, whilst those post-deed emails may be admissible for the purposes of establishing when and in what circumstances interest payments were actually made, I would limit their use and not have regard to them as an aid to construing the deed. I would not admit them as to any admission.

Determination

I have regard to the pre-contractual communications between the parties as evidence of the surrounding circumstances known to both parties at the time of entry into the deed. I similarly have regard to the recitals of the deed as evidencing the context and circumstances in which the parties entered into the deed and as establishing the objective intention of the parties.
Recitals in a deed are generally not part of the operative part of the deed. However, they form part of the deed and may be considered when construing the deed as a whole and in context. In my view, the recitals provide a summary of the background to the entry into the deed. Indeed, the evidence of surrounding circumstances on which the plaintiff seeks to rely adds little to the context provided by the recitals.
Plainly the intent of the parties, assessed objectively, was that the deed would reflect their agreement being an agreement that the defendant pay interest to the plaintiff calculated in accordance with an agreed rate (clause 2.1) and accruing commencing on 30 June 2007 and finishing when the total of the loans from both the plaintiff and the defendant had been repaid.
The total of loans from both the plaintiff and the defendant has been repaid. Interest has thus ceased to accrue.
As set out in clause 3.1, the amount which the defendant was obliged to pay was the net interest calculated and specified in the schedule 1 spreadsheet. It must have been the intention of the parties that the defendant would pay all of the interest calculated in accordance with clause 2.
Clause 3.2 commences "The 'Net Interest' will be paid as follows". Neither party suggests that there is any ambiguity in the meaning of clause 3.2. It is a clause purporting to set out when the net interest will be paid. That is, the defendant will pay 50% of the sales commissions he receives as and when he receives the commissions. Thereafter, he will pay the balance (that is, any amount still outstanding after payment in accordance with clause 3.2(a)) from the net profits from the development and sale of the leaseholds of the units as and when he received the net profits money.
If the defendant's 25% share of net profits is not sufficient to pay the balance of the net interest then the defendant will pay the remaining balance from his 25% share of deferred management fees as and when he receives them.
In my view, the parties intended to specify when the interest would be payable through clause 3. It would be payable as and when the plaintiff received the amounts referred to in clause 3.2(a) and, if that was not sufficient 3.2(b) and, if that was not sufficient 3.2(c).
I do not accept the plaintiff's contention that the deed does not contain a term specifying the time for payment. The time for payment is specified as when the amounts referred to in clause 3.2 are received by the defendant.
It is apparent that the parties did not contemplate that there would be insufficient funds from the sources identified in clause 3.2 to pay the full amount of interest. Indeed, there is no evidence that there would not have been if the defendant had not sold his shares and units.
There is no ambiguity in clauses 1, 2 and 3. Clause 1 sets out the obligation to pay. Clause 2 sets out the rate at which interest will be calculated and clause 3 sets out when the interest must be paid.
The problem which leads to these proceedings is that the defendant sold his shares and units before he received sufficient funds to pay all the interest calculated in accordance with clause 2.
The plaintiff submits that, as the parties did not contemplate this, there is now no clause specifying the time for payment.
In reality what is in dispute is not what the terms of the deed mean but whether the deed is missing a term or terms. As was observed by Mason J in Codelfa, the question of implication raises an issue as to the meaning and effect of the agreement. Having said that, the question of whether a term should be implied is not really one of interpretation of the existing terms.
By implying a term, the Court is seeking to give effect to the presumed intention of the parties. It is not necessary that there be any ambiguity in the document. It is just that it is necessary to imply a term to give effect to the intention of the parties objectively assessed.
In BP Refinery (Westernport) Pty Limited v President, Councillors and Ratepayers of the Shire of Hastings [13] the Privy Council identified five conditions for the implication of a term in fact as follows: 1. it must be reasonable and equitable; 2. it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; 3. it must be so obvious that "it goes without saying"; 4. it must be capable of clear expression; and 5. it must not contradict any express term of the contract.
The plaintiff submits that all of the five conditions are satisfied for both of the terms he seeks.

Implication of a term specifying a time for payment

It is well established that, if the time for performance of contractual obligations has not been specified, a term will be implied that the obligation is to be performed within a reasonable time. [14]
What constitutes a reasonable time is a question of fact which must be determined by what is fair to both parties at the time of the exercise of the right. [15]
It is not necessary to specify what is a reasonable time in the circumstances of this matter. The defendant does not dispute that, if a term of the type sought by the plaintiff is implied into the contract, that time has long since passed. The issue is whether a term should be implied at all.
In my view, it is not permissible to imply a term specifying when payment is to be made, that is, within a reasonable time, for the following reasons.
Firstly, the implication of such a term is not necessary to give business efficacy to the agreement. There is already a clause specifying when payment of interest must be made, being when the events set out in clause 3.2 happen. Further, there is a default clause by which the parties identified events of default and what would happen in the event of a default. The agreement is not thus rendered ineffective or frustrated by the absence of a term requiring payment within a reasonable time.
Further, the implication of such a term would create an inconsistency with clause 3. [16]
This is because there is nothing in clause 3 which would require the defendant to pay the interest even if, for example, the delay in receiving profits or deferred management fees was extensive or unreasonable. The implication of a term requiring payment within a reasonable time may be inconsistent with the intention of the parties that the defendant need only pay the interest on receipt of funds from the sources set out in clause 3.2, whenever that might be.
In the circumstances, I do not accept the plaintiff's contention that the conditions for implication of a term that payment must be made within a reasonable time are satisfied.
In my view, they are not.

Implication of a term requiring payment in full on sale by the defendant of his shares and units

The alternative term sought by the plaintiff is a term requiring the defendant to pay all of the interest calculated in accordance with clause 2 on sale by the defendant of his shares and units in the project. The defendant did not pay all of the interest owing when he sold his shares and units.
The implication of such a term may have some attraction in the sense that it would enable the plaintiff to be paid in full and reflect what might have been the expectation of the parties that the plaintiff would be paid in full. It might be viewed as unfair that the defendant did not pay the full amount of interest to the plaintiff, particularly having regard to the background to the deed and the fact that, despite the original intention of the parties many years earlier, the plaintiff had contributed a significantly higher sum than the defendant.
However, whilst the Court might strive to avoid a result which might seem unfair to a particular party, the parties are bound by their agreement and it is not the function of the Court to rewrite the agreement.
The essential problem with the plaintiff's case is that the deed contains clauses that specify: 1. the obligation to pay; 2. when payment must be made; and 3. what constitutes an act of default and what happens upon default.
Despite this, the plaintiff seeks a judgment based on implied terms.
The implication of such a term is not necessary to give business efficacy to the deed. This is because the parties must be taken to have contemplated the very risk which came home, being the risk that the defendant might attempt to sell his shares.
The parties included a default clause and specified events of default. One default event was an attempt by the defendant to transfer or sell his shares and units. The parties then agreed on what would happen if there was an event of default, intending that the plaintiff would obtain the benefit of the defendant's shares. The plaintiff was entitled to register a charge to protect his interest in the defendant's shares.
The intent of the parties was that the defendant would not be able to simply sell all of his shares and units to defeat the principal obligation under the deed. He would have to assign a proportion of his shares to the plaintiff, presumably to ensure that there were sufficient funds from the sources set out in clause 3.2 to enable full payment to be made to the plaintiff.
In these proceedings, the plaintiff does not seek to enforce clause 5. Nor did he seek to enforce clause 5 when he became aware that the defendant would be selling his shares.
In my view, the parties contemplated what would happen if the defendant attempted to sell his shares and included a term in the deed setting out the rights and obligations of the parties should that event occur. It is thus not necessary to imply another term into the deed to specify what would happen if the defendant sold his shares. The parties have already included a term as to what would happen if the defendant attempted to do so.
The deed must be construed as a whole and in context. Obviously, the defendant could pay the net interest before receiving the amounts specified in clause 3.2 if he chose to but he was only obliged to pay the net interest as and when he received the amounts referred to in clause 3.2. This is what they agreed. The only reason he might not receive amounts from the development sufficient to pay the net interest payable under the deed would be if something happened which the parties agreed to describe as events of default.
The implied term sought by the plaintiff is in reality another form of default clause. That is, if the defendant sold his shares he must pay the full amount of interest immediately.
Having regard to the existing default clause, such a clause is neither necessary nor obvious. This is because the parties agreed on what would happen should events occur that would have the potential to frustrate the intent of the parties. Their intention was that the defendant would pay the interest from the sources specified in clause 3.2.
In my view, clause 5.1 provides a mechanism for the protection of the plaintiff's rights and interests under the agreement should the defendant act in default of the agreement or if any of the five default events occurred. This is important as the deed is not silent either as to when interest should be paid and what would happen if interest was not paid in accordance with clause 3.2.
In my view the conditions for implication of a term as set out in BP are not satisfied.
In the circumstances, I am not satisfied that either of the terms sought by the plaintiff should be implied into the deed.
This may be unfortunate for the plaintiff. He may view it as unfair but the parties included terms in the deed both as to when the interest would be payable and what would happen if the defendant did certain things which might frustrate or defeat the obligations arising under the deed. I do not consider that a term should be implied which would be inconsistent with that which the parties agreed in the first place.
My findings as to the construction of the deed means that the dispute between the parties as to quantum does not need to be resolved. However, for completeness, I will deal with that issue.
It is agreed between the parties that the defendant's loan was repaid on 2 July 2019. However, the financial statement for BTT for the financial year ending 30 June 2019 shows that there was no loan owing to the defendant. The defendant submits that because the payment was received in the next financial year, his loan balance should still be displayed in the trust's balance sheet.
The plaintiff's position is that clause 1.1 of the deed holds that the interest is to be calculated using the loan balances in the balance sheet of BTT at the end of each financial year. As the balance sheet shows that the loan had been repaid, the correct construction of the deed means that the interest has to be calculated based on the balance sheet. I prefer the plaintiff's contention. Therefore, had the plaintiff been successful I would have entered a judgment for him in the sum of $844,724.
The defendant also raises waiver and estoppel. Having regard to the plaintiff's case, I am not sure how such defences could run. The plaintiff is not now seeking to enforce clause 5 or seek damages based on a failure of the defendant to transfer the relevant portion of his shares to him. The plaintiff's case is based on implied terms. If the circumstances exist which permit the implication of the terms, it is difficult to understand how the plaintiff could be estopped from seeking them. In any event it is not necessary to consider these issues further.
The plaintiff's claim fails and I enter a judgment for the defendant.
I order the plaintiff to pay the defendant's costs.

Endnotes

(2019) 101 NSWLR 679; [2019] NSWCA 185 at [99]-[109] (Bell P).
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] (French CJ, Hayne, Crennan and Kiefel JJ); Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104; [2015] HCA 37 at [46]-[51] (French CJ, Nettle and Gordon JJ) and [108]-[109] (Kiefel and Keane JJ); Victoria v Tatts Group Ltd (2016) 90 ALJR 392; [2016] HCA 5 at [51]-[75] (French CJ, Kiefel, Bell, Keane and Gordon JJ); Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [18] (French CJ) and [78] (Gageler, Nettle and Gordon JJ).
(2004) 219 CLR 165; [2004] HCA 52 at [40] (Gleeson CJ, Gummow, Hayne, Callinan, and Heydon JJ).
Cherry v Steele-Park (2017) 96 NSWLR 548; [2017] NSWCA 295 at [72] (per Leeming JA, Gleeson JA agreeing); Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; [1973] HCA 36 (Gibbs J).
Jireh International Pty Ltd t/as Gloria Jean's Coffee v Western Exports Services Inc [2011] NSWCA 137 at [55] (per Macfarlan JA, Young JA and Tobias AJA agreeing).
(2011) 81 NSWLR 690; [2011] NSWCA 315 at [17] (Macfarlan JA and Sackville AJA agreeing).
(2008) 234 CLR 151; [2008] HCA 3 at [8].
(1982) 149 CLR 337 at 352; [1982] HCA 24.
[2016] NSWCA 182 at [112] (McColl JA agreeing).
(2017) 96 NSWLR 548; [2017] NSWCA 295 at [79] (Gleeson JA agreeing).
[2008] NSWCA 193 at [161]-[162] (Beazley JA agreeing).
[2011] NSWCA 303 at [141]-[142] (Sackar J agreeing).
(1977) 180 CLR 266 at 283 (Lord Simon of Glaisdale, Viscount Dilhorne and Lord Keith of Kinkel).
Donau at [99]-[109] (Bell P); Canning v Temby and Others (1905) 3 CLR 419 at 424; [1905] HCA 45 (Griffith CJ); Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1 at 13; [1946] HCA 48 (Dixon J).
Donau at [101] (Bell P).
Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226; [1986] HCA 14. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 November 2021

(2019) 101 NSWLR 679

At a glance

Court

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Judgment (16 paragraphs)

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Cases Cited (41)