Swift v McLeary

Judgment 1McCOLL JA: I agree with Barrett JA's reasons. 2BASTEN JA: Prior to February 2009 the appellant (Martin Swift) and the respondent (Jeffery McLeary) carried on an air conditioning and refrigeration business. One of the companies through which the business was conducted was Teffcog Pty Ltd ("Teffcog"). Although Mr Swift's shares in Teffcog were transferred to Mr McLeary, the separation agreement provided that each would be liable to pay half of any tax liabilities of Teffcog assessed in relation to years prior to 30 June 2008. 3Upon receipt of an amended assessment from the Australian Taxation Office, Mr McLeary arranged for payment of one-half of the amount owing, which payment was made by the trustee of his family trust. Mr Swift did not pay his half, leading Mr McLeary to commence proceedings in the Equity Division for specific performance and damages. Windeyer AJ ordered that Mr Swift fulfil his obligations under the agreement: McLeary v Swift [2012] NSWSC 1403. 4Mr Swift brought an appeal from that judgment. Mr Swift submitted that the agreement involved mutual obligations in respect of the tax liability of Teffcog and that Mr McLeary had not met his obligation to pay half the debt, because, rather than making the payment himself, he had arranged for payment to be made from his family trust. Emphasis was placed on the allegation in the statement of claim that he had made such a payment. 5As more fully explained by Barrett JA, in reasons with which I concur, the agreement did not give rise to mutual obligations, so as to condition Mr Swift's liability upon Mr McLeary's performance of his obligation. In any event, Mr McLeary had performed his obligation by arranging for payment of one-half of the tax liability of Teffcog from resources under his control. These grounds were without substance. 6Mr Swift also sought to rely, in support of his appeal, upon events which had occurred after the hearing before Windeyer AJ. He sought to call further evidence to demonstrate that Mr McLeary had made a claim in damages against Teffcog's accountants and had received a payment. As explained by Barrett JA, this evidence was not relevant to any ground in the notice of appeal and sought to raise an entirely new issue which did not affect the basis upon which the liability of Mr Swift was determined at trial. The motion to adduce further evidence was rejected. The appeal therefore failed. 7Mr McLeary filed a cross-appeal claiming an entitlement to damages against Mr Swift, in addition to the order for specific performance of Mr Swift's obligations under the contract. As explained by Barrett JA, that claim was misconceived. 8For these reasons, and for the reasons provided by Barrett JA, I concurred in the orders made on 4 March 2014, dismissing the motion, the appeal and the cross-appeal (and the application for leave to appeal), in each case with costs. 9BARRETT JA: These are my reasons for joining in the making of orders as follows on 4 March 2014: "1. Dismiss summons seeking leave to appeal. Applicant/respondent to pay respondent/appellant's costs of that summons. 2. Dismiss notice of motion filed on 3 March 2014 with costs. 3. Dismiss appeal with costs. 4. Dismiss cross-appeal with costs." 10A summons seeking leave to appeal filed by Mr McLeary ("the respondent") was not pressed. The notice of appeal was filed by Mr Swift ("the appellant") with a notice of motion to adduce further evidence on the hearing of his appeal. The notice of cross-appeal was, of course, filed by the respondent. 11The appellant and the respondent were the defendant and the plaintiff respectively in Equity Division proceedings heard and determined by Windeyer AJ in November 2012. 12His Honour ordered that the appellant pay $822,595.47 to Deputy Commissioner of Taxation (referred to, for convenience, as "ATO") for the account of Teffcog Pty Ltd ("Teffcog"). That was order (1). The judge also made order (4) as follows: "For the avoidance of doubt, Order (1) is made for the benefit of both the Plaintiff and Teffcog and, in the event of the Defendant's failure to comply with Order (1), it may be enforced by either the Plaintiff or Teffcog or both." 13A claim by the respondent for damages, in addition to the order for the payment of money by the appellant to ATO, was dismissed. 14The appellant maintained on appeal that the judge's orders should be set aside and the proceedings should be dismissed (there was also an attempt at the hearing of the appeal to expand its scope in a way to be mentioned presently). The respondent, for his part, contended that the judge had erred in dismissing his damages claim. He cross-appealed accordingly. 15At the conclusion of the hearing the Court, having determined that none of the claims before it had merit, made the orders to which I have referred. 16Central to the judge's decision was a contract (which was styled "heads of agreement" and is sufficiently referred to as "the agreement") made between the appellant and the respondent on 27 February 2009. The individuals had been for some years associated together in a business of commercial and domestic air-conditioning and refrigeration. The business was conducted by or through corporate entities one of which was Teffcog. Upon sale of the business in July 2005, Teffcog received proceeds amounting to $3,234,000. That receipt was relevant to the computation of Teffcog's taxation liability for the year to 30 June 2006. ATO issued to Teffcog a notice of assessment of tax for that year. Subsequently (in 2008), however, ATO issued a notice of audit which focussed on the availability of concessions relevant to Teffcog's liability for capital gains tax in consequence of the sale of the business assets. The ATO audit had not been completed when the appellant and the respondent entered into the agreement of 27 February 2009. 17The main purpose of the agreement was to terminate the individuals' financial and business relationship. To that end, the agreement provided for transfer to the respondent of certain assets, including the appellant's interest in Teffcog. As a result of the transfer of that interest, the respondent became the sole shareholder of Teffcog. Other aspects of the overall separation effected by the agreement will be mentioned presently. 18The provisions of the agreement of particular relevance to the proceedings are clauses 5.9, 8.2 and 8.3, as follows: "5. Mutual Acknowledgments The parties mutually acknowledge and agree that: . . . 5.9 the financial statements for the Joint Entities being Annexures A, B, C, D, E and F to this Heads of Agreement will be signed by each of them as necessary and will be submitted by Davidson Accountants to the Australian Taxation Office and the Australian Securities and Investments Commission as appropriate and they further acknowledge and agree that they will each be liable for one half of the taxation liability assessed as payable by the Australian Taxation Office for the Joint Entities up to an[d] including the financial year ended 30th June 2008. Upon receipt of the assessment issued by the Australian Taxation Office ("ATO") Jeffrey [the respondent] must cause a copy of the assessment to provided to Martin [the appellant] promptly and upon receipt of the ATO assessment Martin will be liable to pay one half of the assessment as a debt due and payable by not later than the due date for payment allowed by the ATO." "8. Indemnity . . . 8.2 For a period of three (3) years after the Completion date, and, subject to sub-clause 8.3 Martin [the appellant] agrees to indemnify Jeffrey [the respondent] for up to one half of any fines or penalties that may be imposed on any of the Joint Entities arising out of any ATO audit conducted in respect of the activities of the Joint Entities prior to the Completion date PROVIDED that Martin will be at liberty to make any submissions he or his advisors deem appropriate to the ATO in respect of any fines or penalties imposed or sought to be imposed by the ATO, it being acknowledged that such submissions may be made by Davidson Accountants on Martin's behalf by reason of Davidson Accountants having prepared and lodged the financial statements in respect of the Joint Entities for the relevant periods. 8.3 The indemnity in sub-clause 8.2 does not extend to any fines or penalties levied or imposed on any of the Joint Entities by the ATO by reason of Jeffrey not meeting the requirements of the retirement exemption provisions of the small business capital gains tax rollover relief arising from the sale in 2005 by Teffcog Pty Ltd of the business known as M&H Air Conditioning." 19The appellant successfully resisted at trial the respondent's claim based on clauses 8.2 and 8.3. That result was not challenged on appeal. Although there was an attempt by the appellant to rely upon the existence of mutual indemnities arising from shared liabilities, clauses 8.2 and 8.3 did not support such a claim and may accordingly be ignored. 20The "Joint Entities" were defined in the agreement as Teffcog in its own right and that company in its capacity as trustee of certain trusts, including a superannuation fund. 21The result of the ATO audit became known in July 2010, some eighteen months after the agreement had been entered into, when ATO issued to Teffcog a notice of amended assessment indicating a liability for a futher amount of $1,485,864 (inclusive of penalty) in respect of the year to 30 June 2006. It will be convenient to refer to this as simply "the additional tax". 22The respondent, as plaintiff below, maintained that, in consequence of the issue of the notice of amended assessment and the imposition of the additional tax, the appellant was required by clause 5.9 of the agreement to pay to ATO an amount equal to one-half of the additional tax. The alleged obligation of the appellant to pay ATO for the account of Teffcog, sourced as it was in the agreement between the individuals, was a contractual obligation owed by the appellant to the respondent. The claim made by the respondent against the appellant was accordingly characterised as a claim for an order for specific performance. 23It was submitted on behalf of the appellant as defendant at trial that the respondent was not entitled to an order for specific performance because he had not discharged his own obligation to pay an equivalent amount to ATO and that the maxim "he who seeks equity must do equity" was not satisfied. His Honour did not uphold that defence which, he said, was neither pleaded nor consistent with the agreement 24The judge then turned to the question "whether the defendant can be ordered to pay the ATO, a third party, in fulfilment of his obligation under cl 5.9". His Honour answered that question in the affirmative. 25The respondent's claim for damages for breach of contract was dismissed because the judge was of the view that, except in some rare instances (of which the case before him was not one), no damage or, at most, nominal damage only is suffered upon breach of a promise made to a person not for that person's benefit but for the benefit of a third party. 26The grounds on which the appellant appealed were, in substance, that the judge erred in relying on the absence from the defence of the ground that the respondent had not performed his promise and in holding that it had not been shown that the respondent had failed to perform his own promise to pay one-half of the relevant sum to ATO for the account of Teffcog. 27The respondent alleged by his cross-appeal that the judge erred in dismissing his claim for damages and in failing to find that the respondent suffered substantial damage by reason of the breach of contract. 28It is necessary to say a little more about the purpose and effect of the agreement. A large number of companies and trusts were mentioned as vehicles through which assets were held and activities conducted for the benefit of the two individuals. I have already mentioned the definition of "Joint Entities" which referred to the status of Teffcog as trustee of certain trusts, including a superannuation fund. Coolbrew Pty Ltd and Sun Find Pty Ltd are identified as companies in which each of the individuals held one half of the issued shares. Astbury Enterprises Pty Ltd was identified as the trustee of the Swift Family Trust and Star Mind Pty Ltd as the trustee of the McLeary Unit Trust, each of which held units of other trusts referred to as the "Associated Entities". 29In broad terms, the agreement effected two transactions. The first was acquisition by the respondent (referred to as "Jeffrey") or the McLeary Family Trust of the interests of the appellant ("Martin") and the Swift Family Trust in the "Joint Enterprises" (which included Teffcog), payment out to another fund nominated by the appellant of the balance standing to the appellant's account in the superannuation fund of which Teffcog was the trustee and the payment of substantial sums by the respondent and the McLeary Family Trust to the appellant and the Swift Family Trust. The second transaction was similar. It involved acquisition by the appellant and the Swift Family Trust of the interests of the respondent and the McLeary Family Trust in the Associated Entities. In that case, the payments to be made by the appellant and his family trust to the respondent and his family trust were nominal. 30Upon implementation, therefore, the respondent became the sole owner or controller of the Joint Enterprises, including Teffcog; the appellant became the sole owner or controller of the Associated Entities; and what the parties obviously recognised as disparity in value between the two sets of assets was accommodated by substantial cash payments by the respondent and his interests to the appellant and his interests, as against merely nominal payments by the appellant and his interests to the respondent and his interests. 31Teffcog thus came under the sole ownership and control of the respondent, so that all economic benefits enjoyed by Teffcog and all economic detriments incurred by it were reflected directly in the financial position of the respondent, to the exclusion of the appellant. Things stood in that state when Teffcog's liability for the additional tax for the year to 30 June 2006 came into existence in July 2010. 32The appellant caused the half of the additional tax to be paid in a way described by the primary judge as follows (at [12]): "The plaintiff arranged for payments to the ATO to be made through entities he controlled. In fact, payments were made by the McLeary Family Trust ("the Trust") out of distributions debited in the books of the Trust to Teffcog, that company being a beneficiary of the Trust. The defendant has not made any payment towards Teffcog's taxation liability arising out of the amended assessment in spite of requests to do so." 33The appellant contended both at trial and on appeal that, under the agreement, the levying of the additional tax brought into operation promises by each of the appellant and the respondent to pay to ATO a sum equal to one-half of the additional tax; and that, in the absence of personal performance by the respondent of his promise by the payment of money of his own, the appellant was not bound to perform his promise. 34That contention is simply not borne out by the terms of the agreement. 35Clause 5.9 dealt with the possibility that action by ATO might cause one or more of the Joint Entities to become indebted to ATO for further "taxation liability". If additional "taxation liability" arose, each of the appellant and the respondent was "liable for one half of" that "taxation liability". In addition and upon delivery to him of a copy of the notice of assessment, the appellant became "liable to pay one half of the assessment as a debt due and payable". The expression "taxation liability" was obviously accepted by the parties as extending to any obligation to pay money to ATO, whether for tax, for interest or for penalty. 36Clause 5.9 makes liberal use of the words "liable" and "liability". In Smalley v Motor Accidents Authority of New South Wales [2013] NSWCA 318 at [47], Leeming JA referred to an observation of Windeyer J in Ogden Industries Ltd v Lucas [1967] HCA 30; (1967) 116 CLR 537 at 584 that "liable" and "liability" are chameleon-hued. Each word takes its meaning from the context in which it is used. Where, as here, the context is a commercial contract, the court must adopt a businesslike interpretation and pay attention to "the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure": McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 at [22] per Gleeson CJ. 37In the present case, the commercial circumstances and the objects sought to be secured are clear. The indebtedness for any additional tax would fall upon Teffcog. From ATO's perspective, Teffcog alone would be the person obliged to pay. And, of course, the advent of the indebtedness of Teffcog would operate to the financial and economic detriment of the respondent since Teffcog was wholly owned and controlled by him. Leaving to one side the requirements of the agreement, it was meaningful in a financial and economic sense for the respondent to be viewed as "liable for" the whole of any debt arising from an amended taxation assessment simply by reason of the issue of the assessment against the company he owned. 38The parties' agreement that each of them was to be "liable for" one-half of the "taxation liability" carried within itself acknowledgement that the respondent was not to be "liable for" the whole of the burden that, in the commercial sense just mentioned, would fall upon him by reason of his sole ownership of the company subjected to the additional impost. He was to be "liable for" only one-half. 39Once that position is recognised, the portion of clause 5.9 stating that the appellant was "liable to pay one half of the assessment" (which was not matched by any like provision concerning the respondent) can be seen to involve actual payment by the appellant so as to cause Teffcog's debt to ATO to be satisfied as to one-half, leaving the balance of the debt to lie where it had fallen, that is, upon the entity all economic interests in which are with the respondent alone. 40In short, clause 5.9 imposed upon the appellant an obligation, owed to the respondent, to make a payment to ATO in fulfilment of his contractual promise to be liable for one-half of the impost suffered by Teffcog but the clause did not subject the respondent to any like payment obligation, he having suffered the full financial impact of the impost in any event by virtue of his position as the sole owner of Teffcog. 41Because the clause did not impose on the respondent any contractual duty to make a payment to ATO, it was not open to the appellant to seek to resist, on the basis of default or lack of performance by the respondent, specific enforcement of his own contractual promise to do so. 42These observations concerning clause 5.9 are sufficient to make it clear that the judge correctly construed the agreement and was fully justified in holding the appellant to his promise to make a payment to ATO, even though the respondent made no such payment. It is for that reason that the appeal could not succeed. 43I turn now to the appellant's notice of motion. The appellant sought leave to tender evidence going to proof of certain events that occurred after the primary judge had delivered judgment and made orders. That evidence showed that Teffcog and the respondent had, in 2013, received certain moneys from a firm of accountants upon compromise of proceedings alleging that defective services had been provided or defective advice given by the accountants in connection with preparation of taxation returns for the 30 June 2006 year. The proposition the appellant sought to advance was that the receipt of those moneys by Teffcog and the respondent should somehow be taken into account to the benefit of the appellant in the form of a reduction of his liability under his contractual promise to the respondent to make good one-half of the additional tax for that year assessed in July 2010. 44That contention was, for obvious reasons, not before the primary judge and played no part in the case his Honour tried. Nor did it find any place in the notice of appeal. There was accordingly no basis on which this Court could consider what impact, if any, the receipt of moneys by Teffcog and the respondent in 2013 might have had on the position established by the parties' agreement. Several possibilities suggest themselves but none can be more than speculative unless and until the issue is aired and investigated in properly constituted proceedings along with such other issues as it may raise - including, perhaps, issues in which the accountants have an interest. The appeal proceedings in this Court are an obviously inappropriate forum for that inquiry. 45It remains to refer to the respondent's cross-appeal. In contending that he was entitled to damages as against the appellant, the respondent relied on the proposition that the imposition on Teffcog of liability for the additional tax directly reduced the value of the respondent's interest in Teffcog and that that diminution represented loss suffered by the respondent and caused by the appellant's breach of his promise to bear and make good one-half of the additional impost. 46The proposition only has to be stated to be rejected. Any failure by the appellant to pay money to ATO as required by his agreement with the respondent was not causative of diminution in the value of the respondent's interest as sole owner of Teffcog. That diminution occurred because the liability for the additional tax was imposed by legislation upon Teffcog. The respondent then had a right to require the appellant to pay to ATO, as promised, one-half of Teffcog's taxation liability, thereby eliminating one-half of the diminution suffered by the respondent. The court, by its order for specific performance, vindicated that right. Having obtained the benefit of that order, the respondent had achieved the position the agreement intended him to have. There was simply no room to argue that he was then suffering loss by reason of breach of contract by the appellant. 47Counsel for the respondent suggested that if his client was ultimately unsuccessful in obtaining the full fruits of the order for specific performance, he might wish to return to the Equity Division with a view to further attention being given to his claim for damages against the appellant. Such an approach is entirely misconceived. The respondent's cause of action based on breach of the agreement ceased to have any independent existence when he obtained the order for specific performance. The cause of action merged in the judgment. The basis for the making of an order for specific performance was, in words used by Kindersley V-C in Falcke v Gray (1859) 4 Drew 651; 62 ER 250 at 252, that "a mere compensation in damages is not a sufficient remedy and satisfaction for the loss of the performance of the contract". If, having been awarded specific performance, the respondent fails in the long run to achieve full satisfaction (because, for example, the appellant simply does not have the money necessary to comply with the order), that circumstance represents no basis whatsoever for attempting some form of retrospective revival of an alternative claim said to arise from the wrong for which a remedy had been provided by the order actually made. It might, of course, permit other steps to enforce the court order. 48As to costs, the several orders made by this Court represented no more than routine application of the rule that costs follow the event, there being no submission that any departure from that rule was warranted.