Sydney Water Corporation v Makucha & Ors

Supreme Court of NSW|2010-02-25|Before: White J, Sydney Water P

CITATION : Sydney Water Corporation v Makucha & Ors [2010] NSWSC 114 This decision has been amended. Please see the end of the judgment for a list of the amendments.

Order that the defendants' notice of motion dated 16 February 2010 be dismissed with costs. DECISION : 2. Exhibit 2 may be returned to the defendants forthwith. 3. The remaining exhibits are to be returned after 28 days.

CATCHWORDS : PRACTICE AND PROCEDURE - interlocutory application - whether serious question to be tried that defendant entitled to enforce clause in agreement requiring plaintiff to provide financial assistance to defendant in respect of proceedings between them - CORPORATIONS - statutory corporations - whether agreement signed by employee of statutory corporation binding on statutory corporation and if binding whether statutory corporation validly rescinded agreement - whether defendant entitled to rely on statutory assumptions in s 20ZD(3) of State Owned Corporations Act 1984 - AGENCY - whether employee had ostensible authority to bind statutory corporation to agreement - agreement purported to commit statutory corporation to transactions of substantial financial magnitude, covered diverse and exotic field of activities, contained onerous and financially disadvantageous terms to statutory corporation, provided for statutory corporation to engage in activities outside principal functions and conferred benefit on employee -employee only made representations to defendant as to extent of delegated authority - defendant did not check terms of instrument of delegation - defendant put on inquiry by very nature of transaction - defendant's awareness of employee's authority in other dealings consistent only with employee's position and far removed from such kind of agreement - AGENCY - agreement conferred promise of financial reward to employee - conflict between personal interest and duty to employer - no informed consent by employer to conflict - statutory corporation entitled to rescind agreement

LEGISLATION CITED : Sydney Water Act 1994 State Owned Corporations Act 1989

Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; 218 CLR 451 Jacobs v Morris [1902] 1 Ch 816 Suncorp Insurance & Finance v Milano Assicurazioni SpA [1993] 2 Lloyd's Rep 225 CASES CITED : Northside Developments Pty Ltd v Registrar-General (1989) 170 CLR 146 Morris v Kanssen [1946] AC 459 Keogh v Dalgety & Company Ltd (1916) 22 CLR 402 Hovenden & Sons v Millhoff (1900) 83 LT 41 Industries & General Mortgage Co Ltd v Lewis [1949] 2 All ER 573 Harrington v The Victoria Graving Dock Company (1878) 3 QBD 549 Logicrose Ltd v Southend United Football Club Ltd [1988] 1 WLR 1256

TEXTS CITED : FMB Reynolds, Bowstead and Reynolds on Agency, 17th ed (2001) Sweet & Maxwell

Plaintiff: Sydney Water Corporation PARTIES : 1st Defendant: Paul Makucha 2nd Defendant: Paul Makucha Holdings Pty Ltd 3rd Defendant: Sydney Water P Pty Ltd

Plaintiff: D P Robinson SC COUNSEL : 1st Defendant: In person 2nd & 3rd Defendants: G D McDonald

SOLICITORS : Plaintiff: Mallesons Stephen Jaques Defendants: n/a

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EXPEDITION LIST

2010/025631 Sydney Water Corporation v Paul Makucha & Ors JUDGMENT 1 HIS HONOUR: This is an unusual application. The defendants seek orders that the plaintiff, Sydney Water Corporation, pay them $25,000 in respect of costs incurred to date, $200,000 in respect of costs estimated to be incurred in the proceedings, and a further $25,000 per month for six months to meet costs including photocopying, office rent, printing, stationery, secretarial costs, wages for the first defendant, Mr Paul Makucha, accounting fees, banking charges, travel costs, incidentals and other overhead expenses. 2 The defendants are Mr Paul Makucha, Paul Makucha Holdings Pty Ltd ("PMH") and Sydney Water P Pty Ltd ("Sydney Water P"). Mr Makucha owns the shares in PMH. PMH holds the shares in Sydney Water P. 3 The basis of the defendants' claim is clause 13.3 of an agreement called a Confidentiality and Business Implementation Agreement ("the Agreement") said to have been entered into between Sydney Water Corporation and the defendants on 3 December 2009. That clause provides: " 13.3 Sydney Water acknowledges that PMH, Makucha and Sydney Water P do not presently have the financial resources to fairly instigate or defend proceedings involving them and Sydney Water (' Proceedings '). In order to address this imbalance, Sydney Water agrees to provide financial assistance to PMH, Makucha and/or Sydney Water P where such Proceedings have been commenced and Sydney Water agrees to ensure that they have the same level of financial backing as Sydney Water does in the Proceedings. " 4 The Agreement was executed for Sydney Water Corporation by a Mr Ed Harvey. He signed the Agreement against an execution clause which stated: " Signed by SYDNEY WATER CORPORATION by its authorised representative who has delegated authority to sign for and on behalf of Sydney Water Corporation (SWC) and to bind SWC and under instrument of delegation (Book Number ) ." 5 In these proceedings, Sydney Water Corporation seeks a declaration that it did not enter into a valid and binding agreement with the defendants. Mr Harvey was employed in a position with the title "Property Asset Manager". Sydney Water Corporation claims he had no actual authority, nor did he have ostensible authority, to sign the Agreement on its behalf. Sydney Water Corporation also alleges that if the Agreement were otherwise binding, it was entitled to rescind the Agreement because, to the knowledge of the defendants, Mr Harvey had a conflict between his duty to his employer and his personal interest. It says that it did not know of or consent to his purportedly contracting on its behalf. Sydney Water Corporation claims that if the Agreement were binding on it, it rescinded the Agreement and associated agreements on 29 January 2010. 6 The defendants' application is for interlocutory relief requiring the payment of money. The application was conducted on affidavits and through the tender of documents, without cross-examination. There has not been a final hearing. In a practical sense, the present application will determine on a final basis the defendants' right to enforce clause 13.3. It is clear that if Sydney Water Corporation is ordered to pay the money the defendants seek, but succeeds on a final hearing in establishing that it is not bound by the Agreement, the money it pays will be irrecoverable. Mr Makucha deposes that the defendants are without any financial resources and that he has approximately $10 in cash available to pay for living expenses. There is evidence that bankruptcy proceedings are pending against him. Mr Makucha deposes that the second and third defendants, PMH and Sydney Water P, are companies incorporated to carry out the terms of the Agreement and that they have not otherwise carried on business. The defendants did not argue that if the relief sought were granted, but it was ultimately held that the Agreement was not binding on the plaintiff, the moneys paid would be recoverable. 7 By the same token, if an order is not made requiring Sydney Water Corporation to fund the defendants' legal costs of the proceedings, but it is held at a final hearing that the Agreement is binding on Sydney Water Corporation, the defendants would irretrievably have been denied the benefit of clause 13.3. 8 On the application for interlocutory relief, it is necessary to assess the strength of the parties' cases in order to determine whether there is a serious question to be tried that the defendants are entitled to enforce clause 13.3. If there is a serious question to be tried, it will also be necessary to consider the strength of the defendants' claim to enforce that clause, and as a corollary the strength of the plaintiff's claim to final relief, to see where the balance of convenience lies (Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535-536). Accordingly the submissions of both the plaintiff and the defendants focused on the strength of the claim of Sydney Water Corporation that the Agreement never became binding on it, or has been rescinded. 9 Ultimately, there was no dispute that Mr Harvey did not have actual authority to sign the Agreement for Sydney Water Corporation. As a Property Asset Manager he had delegated authority to approve payments of up to $100,000 in connection with transactions involving real estate. He was also one of five individuals given a power of attorney which authorised them to do acts as might be necessary or expedient to transfer both real and personal property from and to Sydney Water Corporation. That power could only be exercised by any two of the individuals jointly. Mr Harvey did not purport to exercise the power under the power of attorney. 10 Mr Sesel, the Manager, Internal Audit, at Sydney Water Corporation, deposed that no information about a proposal for a joint venture between Sydney Water Corporation and Mr Makucha and the other defendants contained in the Agreement was raised in any board paper. He gave evidence that he had spoken to the directors who attended the board meeting of Sydney Water Corporation on 17 February 2010, including the chairman and the managing director. He deposed that he had been told and believed that no matter concerning a joint venture with Mr Makucha had been brought to their attention prior to 26 January 2010, in the context of the commencement of these proceedings. There is also evidence on information and belief that Mr Harvey's immediate superior, a Mr Gary Inberg, who holds the position of Manager of the Property Group with Sydney Water Corporation, was unaware that Mr Harvey had had any negotiations or dealings with Mr Makucha about trademarks or any joint ventures between Sydney Water Corporation and Mr Makucha or companies controlled by him. 11 Mr Makucha and counsel for the other defendants contended that Mr Harvey had ostensible authority to bind Sydney Water Corporation to the Agreement. Sydney Water Corporation is a corporation established under the Sydney Water Act 1994. Section 4(2) of the Sydney Water Act designates Sydney Water Corporation to be a statutory State owned corporation ("statutory SOC"), also governed by the State Owned Corporations Act 1989. The defendants relied upon s 20ZD of the State Owned Corporations Act. It provides: " 20ZD Persons having dealings with statutory SOCs or property

(1) A person having dealings with a statutory SOC is entitled to make, in relation to those dealings, the assumptions referred to in subsection (3). In any proceedings relating to those dealings, any assertion by the SOC that the matters that the person is so entitled to assume were not correct must be disregarded. ... (3) The assumptions that a person is, because of subsection (1) or (2), entitled to make are: (a) that, at all relevant times, the SOC's foundation charter and this Act have been complied with, and (b) that, at all relevant times, the SOC's constitution has been complied with, and (c) that a person who appears from publicly available information to be a director, the chief executive officer or a secretary of the SOC has been duly appointed and has authority to exercise the functions customarily exercised by a director, by the chief executive officer or by a secretary, as the case may be, of a body carrying on a business of the kind carried on by the SOC, and (d) that a person who is held out by the SOC to be an officer or agent of the SOC has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by an officer or agent of the kind concerned, and (e) that an officer or agent of the SOC who has authority to issue a document on behalf of the SOC has authority to warrant that the document is genuine and that an officer or agent of the SOC who has authority to issue a certified copy of a document on behalf of the SOC has authority to warrant that the copy is a true copy, and (f) that a document has been duly sealed by the SOC if it bears what appears to be an impression of a seal of the SOC and the sealing of the document appears to be attested by a person who, because of paragraph (c), may be assumed to be a director of the SOC or the SOC's chief executive officer, and (g) that the directors, chief executive officer, employees and agents of the SOC have properly performed their duties to the SOC. (4) This section does not entitle a person to make an assumption, and does not prevent an assertion being made in relation to an assumption, if: (a) the person has actual knowledge that the assumption is not correct, or (b) the person's connection or relationship with the SOC is such that the person ought to know that the assumption is not correct. (5) If, because of subsection (4), a person is not entitled to make a particular assumption: (a) if the assumption is in relation to dealings with the SOC - subsection (1) does not apply to any assertion by the SOC in relation to the assumption, or (b) if the assumption is in relation to an acquisition or purported acquisition from the SOC of title to property - subsection (2) does not apply to any assertion by the SOC or another person in relation to the assumption. " 12 Counsel for the second and third defendants relied in particular on s 20ZD(3)(d). The defendants contended that Sydney Water Corporation held out Mr Harvey to be a Property Asset Manager and to have the authority to exercise the powers and perform the duties customarily exercised or performed by an officer in that position. I accept that. The question is whether in signing the Agreement on behalf of Sydney Water Corporation Mr Harvey was exercising a power or performing a duty customarily exercised or performed by an officer in his position. I will deal with this and related questions concerning Mr Harvey's ostensible authority after attempting to describe the Agreement.

The Confidentiality and Business Implementation Agreement 13 The Agreement is complex and requires execution of numerous additional agreements. A company called Sydney Water M Pty Ltd is defined as the Parent Company. Clause 7.2(g) provides that PMH and Sydney Water Corporation will sign a Parent Company Shareholders Agreement within 14 days and at that time Sydney Water Corporation will pay PMH between $100,000 and $1 million (as agreed between them before the date of the Agreement) for the issue of 100 shares to Sydney Water Corporation in the Parent Company, giving it a 50 percent equity interest in the Parent Company. There is no evidence of what is said to have been agreed between PMH and Mr Harvey for Sydney Water Corporation as the price (between $100,000 and $1 million) for the acquisition of the 50 percent equity interest in the Parent Company. 14 Clause 7.2(c) provides that the Parent Company must acquire all of PMH's shareholdings in each "Project Entity" within three months. The clause provides that for the avoidance of doubt Sydney Water Corporation agrees to pay for, and neither PMH nor Mr Makucha are required to contribute any funds to, the acquisition of the Project Entities by the Parent Company. Thirty-one companies are listed as Project Entities. The Agreement provides for PMH to assign any "Makucha Intellectual Property" to that Project Entity relating to its proposed activities (clause 7.2(d)(ii)(1)). At the completion of the acquisition by the Parent Company of PMH's shares in each Project Entity the Parent Company is to pay an "entry fee" of between $100,000 and $1 million as agreed by PMH and Sydney Water Corporation as consideration for the applicable "Makucha Intellectual Property". In addition, the Parent Company is to pay $25,000 for associated goodwill and $25,000 for the shares (clause 7.2(d)(ii)(2)). 15 Two of the Project Entities are Sydney Water Bonds Pty Ltd and Sydney Water Banking Pty Ltd. On the acquisition by the Parent Company of PMH's shareholding in those companies, clause 7.2(e)(ii)(2)(D) provides for the payment of additional consideration by way of annual royalties. There is to be a minimum annual royalty of $100,000 in the case of Sydney Water Banking Pty Ltd. In the case of Sydney Water Bonds Pty Ltd, there are to be royalties of between 1.6-2% of the total of all funds to be raised from the issue of Sydney Water Bonds during a financial year. The definition of Sydney Water Bonds provides that they are to be municipal bonds or similar bonds to be issued by Sydney Water Bonds Pty Ltd and guaranteed and underwritten by the majority shareholder in Sydney Water Corporation. Clause 7.6(a) provides that Sydney Water Bonds will be issued by a company called Sydney Bonds Pty Ltd on such terms as PMH and Sydney Water Corporation agree from time to time. I infer from the use of the defined term "Sydney Water Bonds" that the reference in clause 7.6(a) to Sydney Bonds Pty Ltd contains a typographical error and the reference should be to the Project Entity, Sydney Water Bonds Pty Ltd. 16 Clause 7.8 provides that Sydney Water Banking Pty Ltd (a Project Entity) will conduct a banking business predominantly providing finance in the home unit market. 17 Clause 7.11 records that the parties intend that Sydney Water Computer Billing Internet and Telephone Pty Ltd (a Project Entity) will issue computers to all customers of Sydney Water Corporation for free, and that this will facilitate the electronic payment of Sydney Water Corporation and other supplier accounts. 18 Clause 7.2(i) provides that Sydney Water P (the third defendant) will primarily conduct the activity of registering the "Water Trade Marks" and granting a licence to Sydney Water B Pty Ltd (a Project Entity) to use the Water Trade Marks. Clause 7.2(j) provides that Sydney Water B Pty Ltd will primarily conduct the activities of the manufacture, marketing and sale of bottled and packaged "SW Water" (defined as "Water supplied by Sydney Water Corporation including Drinking Water and Water produced by desalination plants") using environmentally-friendly plastics, including "the exploitation and commercialisation of the associated brand value and Goodwill and adoption and implementation of associated business methods by Sydney Water B as developed by PMH and Makucha". 19 For the licence to use the "Water Trade Marks" registered by the third defendant, Sydney Water B Pty Ltd is to pay the third defendant (Sydney Water P) $16 million in royalties. Three million dollars are to be paid in cash to PMH as the sole shareholder of Sydney Water P. The balance is to be paid "in the form of a dividend" and to be lent back by PMH to Sydney Water B on terms "agreed" by those parties, with repayment of the loan to PMH being subject to Sydney Water B Pty Ltd's profitability (clause 7.2(a) and (b)). 20 Clause 7.2(l) provides that upon Sydney Water Corporation becoming a shareholder in Sydney Water B Pty Ltd, it and PMH will capitalise Sydney Water B to $2 million each "if such action is required as reasonably determined by PMH and Sydney Water [Corporation]". It is not clear to me how Sydney Water Corporation, as distinct from the Parent Company, is to become a shareholder in Sydney Water B Pty Ltd, but clause 7.2(l) contemplates that it will do so. Clause 7.2(l) also provides that PMH's contribution of $2 million of capital to Sydney Water B Pty Ltd is to be made by way of a loan to PMH from Sydney Water Corporation. 21 Clause 7.2(n) provides that Sydney Water P (the third defendant) and Sydney Water Corporation agree to sign the "Sydney Water P Share Option Agreement" within 14 days. That agreement is one of 51 annexures. It provides that Sydney Water Corporation is to have the option to acquire 50 percent of the shares in Sydney Water P for $10,000. The option can be exercised within six months of Sydney Water P receiving $16 million of royalties in full. If the option is not exercised Sydney Water Corporation is required to pay Sydney Water P a sum equal to 50 percent of the "value of the Makucha Intellectual Property as determined under clause 10 of the Confidentiality and Business Implementation Agreement" (clause 5(f)). Whilst this agreement provides for Sydney Water Corporation to have the option to acquire a 50 percent shareholding in Sydney Water P, clause 16.1 of the Agreement (that is the Confidentiality and Business Implementation Agreement) confers an option on PMH to sell some or all of its shares in Sydney Water P to Sydney Water Corporation. Clause 16.1 provides that Sydney Water agrees to buy those shares "at their fair market value based on a Valuation". 22 A "Valuation" is to be conducted in accordance with clause 10. A valuation conducted in accordance with clause 10 is to be carried out by an independent expert using valuation methods in an article which is an annexure to the Agreement and using such method as yields the highest value. A valuer is required to take into account, amongst other things, a prediction by the North Western University of the USA that Water utilities are poised to jump 150 percent in the next 20 years and that Water will be more important than oil in that period, and is required to have regard to the assumption that average price to earnings ratio for profitable Water utilities at this time is 23 (clause 10.6). A valuer is also required to take into account matters said to have been identified by Mr Makucha including that: " (a) current Water charges (including SW Water) are under market value and will increase by 150% in the next 10-15 years;

(b) global Drinking Water 'value' will increase by 100% each 10 years. " 23 Clause 15.5(e) provides: " In partial consideration for PMH and Makucha devleoping the Makucha Intellectual Property and associated Goodwill and introducing such to Sydney Water for its benefit on a 50/50 basis with PMH, Sydney Water agrees to pay the Introduction, Establishment and IP Royalty Fees to PMH as follows: (i) $350,000.00 within 21 days of the Commencement Date; and (ii) an amount equal to 10% of the Valuation of the total (100%) value Makucha Intellectual Property (on a pre-issue of Shares to Sydney Water in Sydney Water P or member of the Group basis) including but not limited to the Water Trade Marks and associated Goodwill, royalty streams and securitisation provided by BNP, which shall be payable within 21 days of such Valuation being presented to Sydney Water, which is expected to occur by April 2010, subject to Makucha meeting with Kelvin King and BNP Paribas in December 2009 and January 2010 as noted in this Agreement, which fees are, in the view of the Parties, consistent with what a merchant bank might be entitled to having regard to the nature of the deal that PMH and Makucha now bring to Sydney Water and is otherwise considered by the Parties as fair consideration." 24 Additional projects contemplated by the Agreement to be conducted through different Project Entities include the analysis of narcotics from sewage, diabetes analysis, the operation of offshore desalination plants in ships operated by nuclear power or liquid gas, water trading, and the purchase and resale of drinking water around the world using ships specially designed according to specifications of Mr Makucha. 25 Other clauses deal with topics as diverse as the Parent Company's paying Mr Makucha's health insurance premiums and arranging his transport and admission to the Mayo Clinic or St Vincent's Hospital if seriously injured or sick (clauses 8.20 and 8.21) and Sydney Water Corporation promising that if Mr Makucha becomes aware of a proposed or actual terrorist attack, it will ensure that his concerns are properly investigated by relevant authorities (clause 11.11). 26 Clause 5.4 contains an acknowledgment that other agreements contained in annexures 24-26 to the Agreement, and an Exclusivity Agreement, are already in force and legally binding. The Exclusivity Agreement comprised four letters from Hall Chadwick addressed to the managing director of Sydney Water Corporation, but marked for the attention of Mr Harvey whereby Mr Makucha agreed to deal exclusively with Sydney Water Corporation in relation to the transaction to deliver a $10 million benefit to Sydney Water Corporation. In return for that undertaking, he was to be paid $100,000. The letters are signed by Mr Harvey. 27 Another agreement acknowledged to be binding is called the "Karcher Agreement". It is also signed by Mr Harvey for Sydney Water Corporation. It is dated 17 November 2009. It provides for the payment of Mr Makucha's costs for attending a water pilot bottling plant in Germany. A third agreement acknowledged to be binding is called the "Sitka Blue Lake Agreement". This is also signed by Mr Makucha and by Mr Harvey and dated 17 November 2009. It provides for Sydney Water Corporation to pay Mr Makucha's costs of attending a meeting in Alaska to negotiate a long-term water supply contract in respect of very large volumes of water to be transported to Sydney in large specially designed ships. The fourth agreement acknowledged to be binding is called the "BNP Paribas Agreement", also signed by Mr Harvey and Mr Makucha and dated 17 November 2009. This provides for Sydney Water Corporation to meet Mr Makucha's costs of attending a meeting at the offices of BNP in London to negotiate terms for their services and instructions for providing valuations of intellectual property and goodwill as contemplated by clause 10.2 of the Agreement. 28 Other notable provisions include clauses purportedly providing how damages for breach of the Agreement by Sydney Water Corporation should be assessed. Clause 4.3 provides that if Sydney Water Corporation obtains any financial benefit from the use of Makucha Intellectual Property, without the written consent of PMH and Mr Makucha, it will be liable to pay damages. Clause 4.6 provides that any damages shall be assessed having regard to the Valuation, that is, a valuation conducted in accordance with clause 10 referred to in para [22] above. Clause 4.4 provides: "Subject to clause 4.6, the Parties agree that when assessing any damages due to PMH, Makucha or Sydney Water P, as contemplated by clause 4.3 or other clauses of this Agreement, such shall be based on the market value of the Makucha Intellectual Property, if such was exploited and commercialised in the world market, and on a Valuation and such shall have regard to the earnings of the top ten producers and suppliers of Drinking Water throughout the World and shall include reference to the actual or potential profits or earnings derived, or to be derived, from the commercialisation and exploitation of the Makucha Intellectual Property and the Sydney Water Projects. " 29 As noted in para [19] above, Sydney Water B Pty Ltd was to pay Sydney Water P $16 million in royalties for the licence to use the "Water Trade Marks". These were defined as being "new or additional trade marks to include SW Water, including bottled and packaged SW water in class 32 and related classes as set out in the Application, which will also include the Water Symbol and the other marks as agreed by PMH and Sydney Water." 30 In other words, Sydney Water Corporation is to provide the capital for Sydney Water B Pty Ltd to pay $16 million in royalties to a company whose shares are owned by PMH, but in which Sydney Water Corporation could acquire 50 percent interest on payment of another $10,000. That payment is to be made for a licence to use its own name, Sydney Water, and its associated logo. 31 On 26 August 2009 Sydney Water P had applied to register the Water Trade Marks with the Registrar of Trade Mark Filings for class 32. The goods or services described in its application as class 32 comprised "Water; drinking water; natural water; bottled water; aerated water; aerated mineral waters; mineral water; carbonated water; spring water; still water; table water." Evidently, Sydney Water Corporation had not registered its trademarks, which have been registered in respect of other classes of goods or services, in respect of this class. Sydney Water P claimed to be the owner of the Water Trade Marks. Sydney Water P's solicitors, Eakin McCaffery Cox, enclosed with the application a letter from the firm of accountants, Hall Chadwick, dated 6 August 2009 and a handwritten note dated 20 May 2009 signed by Mr Harvey and Mr Makucha. Hall Chadwick's letter of 6 August 2009 was addressed to the managing director of Sydney Water Corporation, but marked for the attention of Mr Harvey. The letter stated that in earlier correspondence of 3 August 2009 Mr Harvey had indicated that Sydney Water Corporation had appointed Mr Makucha to act on its behalf in relation to the Water Trade Marks. The letter noted that Mr Makucha had advised from conversations with Mr Harvey that the letter of 3 August 2009 incorrectly inferred that the ownership of the intellectual property belonged to Sydney Water Corporation and incorrectly inferred that Mr Makucha was acting as agent for Sydney Water Corporation. It continued: " I understand from Mr Makucha that SWC is in the process of issuing a corrected letter that indicates that the ownership of the intellectual property is with Mr Makucha, in addition to other items as requested by Mr Makucha to clarify items with respect to the joint venture. I also note from discussions with Mr Makucha that SWC have agreed to the signing of a confidentiality agreement that will protect the intellectual property, including business method patents, trademarks, etc, of Mr Makucha, and other confidential information exchanged between Mr Makucha and SWC.

It is requested that the front page of this letter be initialled and the acknowledgment on the second page be signed, with a copy of this letter returned to this office as an acknowledgment that the items indicated in this letter are in accordance with your understanding. " 32 The terms of the letter were acknowledged by Mr Makucha and also by Mr Harvey signing for Sydney Water Corporation. 33 The handwritten note signed by Mr Harvey of 20 May 2009 included the following statements: " The objective of the engagement is to register the trade mark of the Sydney Water brand of bulk water as transmitted and communicated by pipes, valves etc etc and also registration of the trade mark for bottled water using its own brand of water as delivered by its own transmission, pipes and delivery system, communication system etc. Bottled Sydney Water/packaged case only be sold by the licensee of the Sydney Water brand being Sydney Water P Pty Ltd.

SWC confirms that the intellectual property in relation to these trade marks for the use of Sydney Water for bottled/packaged water sales is the IP of Paul Makucha of [sic] the IP to the joint venture company which is to be owned by Paul Makucha and Sydney Water Corporation. The same applies to Sydney Water osmosis-produced water. " 34 Mr Harvey also signed a memorandum on the letterhead of Sydney Water Corporation addressed "To whom it may concern". The memorandum stated that: " Sydney Water Corporation wishes to amend existing Trade Marks to include the water that is provided and owned by Sydney Water Corporation ...

I wish to confirm that Sydney Water Corporation hereby appoints Mr Paul Makucha to instruct selected lawyers to register all classes of water by way of amendments to the following existing trade marks etc. Trade Mark 1164718 word Sydney Water with image showing wave that forms part of letter E (see above right hand side of logo) Trade Mark 1164716 word Sydney Water

It is intended that the amended trade marks will only be used by the authorised licence holder of the trade marks the proposed licence holder is a joint venture company of Sydney Water Corporation name Sydney Water P Pty Ltd ...

Sydney Water will be responsible for payment of the agreed fees once my approval to the proposed engagement is provided. " 35 Mr Harvey had no delegated authority to authorise or consent to Mr Makucha or his company applying for the registration of Sydney Water Corporation's trademarks in respect of a new class of goods. The evidence on this application is that he had no authority derived from any other source to authorise or consent to that application. 36 The expression "Makucha Intellectual Property" was defined in the Agreement as follows: " Makucha Intellectual Property means all Intellectual Property of PMH relating to the Business Proposal and the Sydney Water Projects, including but not limited to the Confidential Information, the Executive Summary, the Sydney Water Trade Marks and Additional Patents including the inherent Goodwill attaching to such, their identification, valuation, securitisation, commercialisation, exploitation together with associated business methods described in this Agreement, the Flow Chart and in the Executive Summary including but not limited to the grant of licences to Resellers and includes any Improvements to them. " 37 The Flow Chart merely sets out the proposed corporate structure of Sydney Water P, the Parent Company and all Project Entities. The "Executive Summary" is defined as follows: " Executive Summary means the executive summary prepared by PMH and Makucha in consultation with their professional advisors, which addresses the cost to establish Sydney Water P and the Group and other related companies, their projected cash flows and profit forecasts, business methods, tax implications, components of this Agreement, financial and other benefits to Sydney Water, Goodwill value and royalty stream securitisation which may have a value of around $50Billion and related matters, a pro forma copy of which is set out in Annexure 51 which is contained in Volumes 4 and 5, as will be the final version of it. " 38 In the version of the Agreement tendered by the defendants, Annexure 51 in volumes 4 and 5 of the Agreement comprises 52 pages with headings, mostly the names of the Project Entities, but no other information, and another 30 pages, each of which contains simply the statement "SUPPORTING DOCUMENTS FOR THE STATEMENTS CONTAINED IN THE EXECUTIVE SUMMARY AS SET OUT IN VOLUME 4 OF THE CONFIDENTIALITY AND BUSINESS IMPLEMENTATION AGREEMENT." 39 In the version of the Agreement tendered by the plaintiff, the 52 pages with headings contain the following statement: " This Executive Summary and its entire contents will only be provided to Ed Harvey on behalf of the Sydney Water Corporation (SWC) upon the satisfactory execution of the draft Confidentiality and Business Implementation Agreement between SWC, Paul Makucha Holdings Pty Ltd and others, by SWC (Agreement). This is an essential term of the total of the Agreement and is non negotiable. Without limiting the terms of the Agreement, SWC cannot obtain a benefit from the contents of this Executive Summary unless the agreed financial benefits or consideration due to PMH or Paul Makucha in accordance with the Agreement, have been paid to them. " 40 In other words, by signing the Agreement for Sydney Water Corporation, Mr Harvey was purporting to commit it to paying the very large sums provided for in the Agreement in order to obtain the Makucha Intellectual Property, which was not to be disclosed until the Agreement was signed. 41 Finally, the Agreement named Mr Harvey as the "Key Employee". Clause 7.2(o) provides that Mr Harvey is appointed as a director of Sydney Water P when Sydney Water Corporation becomes a shareholder in Sydney Water P, and is to be appointed a director of the Parent Company and the Project Entities when Sydney Water Corporation becomes a shareholder of that group member. Clauses 16.8 and 16.9 record that Mr Makucha intends to establish a charitable trust and that it is proposed that Mr Harvey, together with a named representative of Eakin McCaffery Cox, and a named representative of Hall Chadwick, be the trustees of the trust and be remunerated for their services as trustees. The clause provides that a trust deed will be signed within 14 days. Clause 16.10 provides that: " Makucha agrees that, upon he [sic] obtaining sufficient income, the trustees shall each be paid an initial annual retainer of $25,000 while he is alive and it is intended by him that upon his death that the annual retainer will be increased to $75,000 plus other entitlements including a motor vehicle as determined by him prior to his death. " 42 In correspondence from Hall Chadwick addressed to the managing director of Sydney Water Corporation but marked for the attention of Mr Harvey, Mr Malacco of that firm stated that the transaction included Sydney Water Corporation receiving a benefit of at least $10 million. In Hall Chadwick's letter of 22 October 2009 Mr Malacco acknowledged that the $10 million benefit to be obtained by Sydney Water Corporation would only arise if the bottling company derived sufficient profits to pay the benefit. Ostensible Authority 43 Mr Makucha dealt only with Mr Harvey. Mr Makucha deposed that he had over 60 documents in his possession which had been signed by Mr Harvey. There is no doubt that Mr Harvey repeatedly signed documents purporting to act on behalf of Sydney Water Corporation to commit it to the transaction or different aspects of it, or to assist Sydney Water P's endeavour to be registered as owner of the Water Trade Marks. However, for a principal to be bound by authority ostensibly, but not actually, conferred on its agent, there must be a representation by the principal, and not by the agent himself, as to the extent of the agent's authority (Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 503; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; 218 CLR 451 at 466 [36]). In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd, Diplock LJ said (at 503-504): " The representation which creates 'apparent' authority may take a variety of forms of which the commonest is representation by conduct, that is, by permitting the agent to act in some way in the conduct of the principal's business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal's business has usually 'actual' authority to enter into. " 44 Mr Makucha's previous involvement with Mr Harvey was in about 2007 and 2008 when he was a tenant of Sydney Water Corporation and faced eviction proceedings. Mr Harvey instructed solicitors for Sydney Water Corporation in those proceedings. This is the kind of role one would expect to be carried out by a manager of Sydney Water Corporation's properties. It is far removed from making contracts of the kind of the Agreement. 45 Mr Makucha deposed that he was aware from enquiries that Mr Harvey had previously been employed as an adviser to the Minister for Environment and Water and to Ms Schott, now the managing director of Sydney Water Corporation. That involves no holding out by Sydney Water Corporation of any authority of Mr Harvey to act for it. 46 At the commencement of the hearing Mr Makucha tendered a two-page document dated 15 May 2009 bearing a stamp "Copy". The document was addressed to the attention of Mr Nicholas Smith, a lawyer with Mallesons Stephen Jaques, to the managing director Sydney Water Corporation, and to Mr Harvey. The document reads as follows: " INSTRUCTION 1 (ONE) SUBJECT: REGISTRATION - TRADEMARK OF WATER (H 2 O) ALL CLASSES IN JV COMPANY SYDNEY WATER P PTY LTD ACN 137 025 211 This letter confirms the following: 1. Paul Makucha the major shareholder and Managing Director is authorised to instruct Mallesons Stephen Jaques to register amended trademarks for the water (H 2 O) supplied by Sydney Water so that such and all waters including osmosis desalinated water is covered by the trademarks which are to be registered at this time by the only licence holder of the trademarks for the water being a Joint Venture Company Sydney Water P Pty Ltd. 2. Please register the trademarks of the water in every possible class globally. 3. It is intended that all the amended trademarks will only be permitted to be used by the authorised licence holder of the trademark being the Joint Venture Company owned by Paul Makucha and Sydney Water Corporation. 4. The Joint Venture Company will be able to sub-licence for a fee the water covered by the trademarks to any person or company for an appropriate payment as written contract between the parties agrees. 5. Paul Makucha at this time is the owner of the intellectual property to register the trademarks as he discovered that this trademark registration of the liquid called water is missing from all the trademark registration by F.B. Rice. 6. Paul Makucha will assign his intellectual property as described in paragraph 6 of this information to the Joint Venture Company for an agreed sum - Sydney Water P Pty Ltd ACN 137 025 211. 7. The business of the JV Company is the financial exploitation of the liquid supplied by Sydney Water in various ways including selling bottled water under the Sydney Water brand and bearing its logos, and also the sale of the water produced by Sydney Water Corporation. 8. Please find enclosed a copy of the Certificate of Registration for Sydney Water P Pty Ltd marked annexure 'A'. 9. Please find enclosed a copy of a letter marked annexure 'B' dated 14 May 2009 signed by Mr Ed Harvey. The letter undertakes payment of all the fees incurred in this matter by Paul Makucha. 10. Mallesons Stephen Jaques are to act in this trademark matter for Paul Makucha as their client and in further instructions for the shareholders agreement, and all other documents required by Paul Makucha to complete the documentation of all aspects of the JV bottling company and such IP which Paul Makucha will sell, assign and licence to the JV Company. All such fees will be paid by Sydney Water Corp. 11. Sydney Water Corp will also pay for any Senior Counsel advice which may be required. 12. Please provide Paul Makucha by Monday 12.00 noon with a fee proposal addressed to Mr Ed Harvey of Sydney Water Corporation, No 1 Smith Street, Parramatta NSW 2150. Yours faithfully Paul Makucha" 47 The letter was not included in Mr Makucha's affidavit served in advance of the hearing. There was no proof of delivery. Mallesons Stephen Jaques are the solicitors representing Sydney Water Corporation in these proceedings. I asked whether there would be an issue that the document had been delivered to that firm. At the conclusion of the hearing I was informed that that was in issue, and that the inquiries made that afternoon indicated that the document had not been received. There was no specific evidence from any officer of Sydney Water Corporation concerning the receipt of the document. It can be inferred from Mr Sesel's affidavit of 18 February 2010 in which he stated that he was informed by the managing director and believed that no matter concerning a joint venture with Mr Makucha had been brought to her attention, that there is an issue as to whether she ever received the document. 48 Mr Makucha said from the bar table that the instruction in the document had been responded to by the managing partner of Mallesons Stephen Jaques who declined to accept instructions. I was referred to a letter dated 15 May 2009 from the managing partner to Mr Makucha. It stated: " Further to your discussion with Nicholas Smith, I confirm that Sydney Water is a client of the firm. If we are to represent you in relation to registration of a brand name for your proposed joint venture with Sydney Water, we would need to receive confirmation from Sydney Water itself that it is happy for us to do so.

Yours sincerely " 49 Mallesons Stephen Jaques were not retained by the defendants. Instead the defendants instructed a firm of patent attorneys and Eakin McCaffery Cox. It may be inferred that no confirmation from "Sydney Water itself" was forthcoming. The letter from Mallesons Stephen Jaques does not refer to the correspondence from Mr Makucha of 15 May 2009. Nonetheless I proceed on the basis that there is a serious question to be tried that Mr Makucha's letter was delivered to Mallesons Stephen Jaques and to the managing director of Sydney Water Corporation. 50 It is unnecessary to pursue the question whether any knowledge Mr Smith of Mallesons Stephen Jaques acquired from discussions with Mr Makucha or from the letter of 15 May 2009 (assuming he received it) should be imputed to Sydney Water Corporation. That is because I propose to deal with the issue on the assumption that there is a serious question to be tried that the document was sent to and received by the managing director of Sydney Water Corporation. 51 Mr Makucha did not give evidence that, having sent the letter to the managing director of Sydney Water Corporation, and to Mallesons Stephen Jaques he made any assumption that Mr Harvey was authorised to negotiate and contract on behalf of Sydney Water Corporation for the proposed joint venture in the absence of advice from Sydney Water Corporation that Mr Harvey was not so authorised. Even assuming that such evidence might be available at the final hearing, it does not seem to me that the evidence amounts to a holding out by Sydney Water Corporation that Mr Harvey was authorised not only to negotiate terms of a joint venture but to enter into the wide-ranging contract he purportedly did. It is also relevant that the letter misrepresented that the proposed licence holder of the trademark, Sydney Water P, was a "Joint Venture Company owned by Paul Makucha and Sydney Water Corporation." To the contrary, Sydney Water P was and remains wholly owned by PMH. 52 I cannot conceive that a person in the position of "Property Asset Manager" of Sydney Water Corporation, or of any State owned corporation, would be accustomed to committing the State owned corporation to transactions of such financial magnitude and covering such a diverse and exotic field of activity, and containing terms apparently so financially disadvantageous to the State owned corporation, as the Agreement. Certainly there was no evidence to that effect. 53 It is also relevant that the Agreement purportedly provides for Sydney Water Corporation to engage in activities which fall outside its principal functions. Under the Sydney Water Act, the principal functions of Sydney Water Corporation are to provide, construct, operate, manage, and maintain systems or services for: " (a) storing or supplying water, or

where it has been granted operating licences to enable it to do so." ( Sydney Water Act , s 5(2) and s 12). I doubt that the activity of holding 50% of the shares in a company which engages in the activities envisaged by the Agreement would fall within the principal functions described in s 12 of the Sydney Water Act . Plainly some of the activities envisaged by the Agreement, such as holding 50% of the shares in a bank or finance company, would not. 54 That is not to say that the activities described in the Agreement are necessarily outside a legitimate field of endeavour. Subject to the terms of any operating licence, the Sydney Water Corporation may conduct any business or activity that it considers will further its objectives (s 5(3)(b)). This includes operating a successful business to maximise the net worth of the State's investment in the Corporation (s 21). But such an endeavour would require the approval of the board. 55 The State Owned Corporations Act provides that all decisions relating to the operation of a statutory State owned corporation are to be made by or under the authority of the board. Subject to that, the chief executive officer is responsible for the day-to-day management of the operation of the State owned corporation in accordance with the general policies and specific directions of the board (s 20L). A chief executive officer may delegate any functions of the chief executive officer, that is, functions of day-to-day management, to an employee, subject to any directions of the board (s 20K(3)). 56 The Agreement did not deal with matters which are part of the day-to-day management of the operation of Sydney Water Corporation. It would not be within the power of the chief executive officer, let alone his or her delegate, to commit Sydney Water Corporation to the transactions envisaged by the Agreement. It was apparent to the defendants that Mr Harvey was purporting to exercise only a delegated power and that the terms of the delegation were contained within an instrument. Had the defendants checked the terms of the instrument, it would have been apparent that Mr Harvey had no authority to sign the Agreement. The case is analogous to one of an agent purporting to act under a power of attorney. A third party who is on notice that the agent is acting under a power of attorney and relies upon the agent's apparent authority, is obliged to examine the power (FMB Reynolds, Bowstead and Reynolds on Agency, 17th ed (2001) Sweet & Maxwell at [8-054]; Jacobs v Morris [1902] 1 Ch 816; Suncorp Insurance & Finance v Milano Assicurazioni SpA [1993] 2 Lloyd's Rep 225 at 233). 57 Moreover, the defendants were put upon inquiry of Mr Harvey's authority by the very nature of the transaction (Northside Developments Pty Ltd v Registrar-General (1989) 170 CLR 146 at 160; Morris v Kanssen [1946] AC 459 at 475). On its face the Agreement was one for the Sydney Water Corporation to embark on a joint venture in new areas of business and not as part of its existing business. The Agreement contains onerous terms for Sydney Water Corporation. Examples of onerous terms are clauses 4.3 and 4.4 dealing with the assessment of damages, clause 10 dealing with the valuation of Makucha Intellectual Property, the failure to specify the Makucha Intellectual Property, and the substantial payments running into millions of dollars (at least $16 million for the royalties payable by Sydney Water B) to be made for the use of Sydney Water Corporations's own name and logo, albeit in respect of a new class of goods. Those terms and the benefits to be provided to Mr Harvey all should have raised suspicion that the board would not approve, and had not approved, the transaction. 58 Counsel for Sydney Water Corporation submitted that Mr Makucha knew that Mr Harvey had no authority. In support of that submission counsel referred to various payments made to Mr Makucha or on his direction. In its statement of claim Sydney Water Corporation alleges that Mr Makucha submitted invoices using a description of services which were not in fact provided. Counsel submitted that it should be found that the invoices were submitted in that form because it was known that that was the only way in which invoices submitted through Mr Harvey would be approved. It is unnecessary to express any view on that submission. For the reasons I have given, I think it plain that Mr Harvey did not have ostensible authority to bind Sydney Water Corporation to the Agreement. I do not consider that there is a serious question to be tried that the defendants are entitled to enforce clause 13.3 of the Agreement. Breach of Fiduciary Duty 59 Even if the Agreement had otherwise been binding, the plaintiff was entitled to rescind it upon becoming aware that the Agreement contained a promise of financial reward to Mr Harvey through his proposed appointment as a trustee of the charitable trust, and gave him a personal interest in being appointed to directorships. Those provisions placed Mr Harvey in a position where his personal interest conflicted with his duty to his employer. A secret payment made to an agent of a person with whom the payer is dealing, or proposes to deal, when the payer knows that the payee is acting as agent, is, for the purposes of the civil law, a bribe. It requires no proof of corrupt purpose and it is immaterial whether the payment is by way of gift or whether it is for services rendered or is made for any other reason (Keogh v Dalgety & Company Ltd (1916) 22 CLR 402 at 418; Hovenden & Sons v Millhoff (1900) 83 LT 41 at 43; Industries & General Mortgage Co Ltd v Lewis [1949] 2 All ER 573 at 575). It is immaterial that the payment does not influence the agent to cause favour to be shown to the payer (Harrington v The Victoria Graving Dock Company (1878) 3 QBD 549). 60 The rules in relation to bribes and secret commissions are a particular application of the general principle that a fiduciary (the agent) must not, without the informed consent of the principal, place himself or herself in a position where his or her duty and interest may conflict. Where the third party knows of the agent's conflict, the contract entered into between the principal and the third party will be liable to be rescinded by the principal if the principal does not give its informed consent, although if the principal knows of the conflict and the agent's intention to contract on its behalf and does not object, it might be estopped from rescinding. A third party who pays money knowing it to be for the personal benefit of the agent, or promises the payment, cannot avoid rescission on the ground that he assumed that the agent would disclose the position to the principal. This was explained by Millett J (as his Lordship then was) in Logicrose Ltd v Southend United Football Club Ltd [1988] 1 WLR 1256 at 1260-1262. His Lordship said: " Rescission

It is well established that a principal who discovers that his agent in a transaction has obtained or arranged to obtain a bribe or secret commission from the other party to the transaction is entitled, in addition to other remedies which may be open to him, to elect to rescind the transaction ab initio or, if it is too late to rescind, to bring it to an end for the future: Panama and South Pacific Telegraph Co. v. India Rubber, Gutta Percha, and Telegraph Works Co. (1875) L.R. 10 Ch.App. 515 and Armagas Ltd. v. Mundogas S.A. [1986] A.C. 717, 742-743.

The remedy is not confined to cases where the agent has taken a bribe or secret commission in the strictest sense. It is available whenever, without his principal's knowledge and consent, the agent has put himself in a position where his interest and duty may conflict. A principal is entitled to the disinterested advice of his agent free from the potentially corrupting influence of an interest of his own. Any such private interest, whether actual or contemplated, which is not known and consented to by his principal, disqualifies him: see the Panama case, L.R. 10 Ch.App. 515, 528-529 and Parker v. McKenna (1874) L.R. 10 Ch.App. 96, 118. It is immaterial whether the agent's mind has been affected or whether the principal has suffered any loss as a result: 'the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that:' Parker v. McKenna , at pp. 124-125 per James L.J.; see also at p. 118 per Lord Cairns L.C. and Shipway v. Broadwood [1899] 1 Q.B. 369, 373 per Chitty L.J. The principal, having been deprived by the other party to the transaction of the disinterested advice of his agent, is entitled to a further opportunity to consider whether it is in his interests to affirm it.

... It is clear that, where one party to a transaction takes what Collins L.J. described as 'the hazardous course' of making a payment for the personal benefit of the other's agent, and does not disclose it to the principal, he cannot afterwards defend the transaction by claiming that he believed the agent to be an honest man who would disclose it himself: Grant v. Gold Exploration and Development Syndicate Ltd. [1900] 1 Q.B. 233, 249-250. Where, therefore, knowing that the agent has an interest of his own he does not himself disclose it to the other party, then in the words of Collins L.J., at p. 249: 'he must at least accept the risk of the agent's not doing so.' " 61 It is not suggested that Mr Makucha or his professional advisers disclosed to Mr Harvey's employer that Mr Harvey was promised personal benefits on the implementation of the Agreement. It is clear from the plaintiff's evidence that apart from Mr Harvey, nobody else at Sydney Water Corporation knew of the terms of the Agreement until 27 January 2010. 62 Counsel for the second and third defendants submitted that Mr Harvey had no right to be paid remuneration as a trustee of the charitable trust as he could not enforce Mr Makucha's statement of intention to establish such a trust. Counsel also submitted that the provisions of the Agreement providing a personal benefit for Mr Harvey could be severed. These submissions do not meet the point that the reason a principal is entitled to an opportunity to consider whether to affirm or rescind the transaction is that the principal has been deprived of the disinterested advice of its agent who has acted with a divided loyalty (Logicrose Ltd v Southend United Football Club at 1261). There is no doubt that Mr Harvey could be deprived of the benefit of any payment he received had the Agreement been performed. He would have held the amount of the payment on trust for his principal. But the vice of the transaction is not remedied merely by depriving Mr Harvey of any benefit he received when acting in a position of conflict of interest and duty. 63 Accordingly, even if the Agreement were initially binding on Sydney Water Corporation, on the materials before me there is no basis for the defendants to dispute the validity of Sydney Water Corporation's rescission. 64 For this reason also I am of the view that there is no serious question to be tried that the defendants are entitled to enforce clause 13.3. 65 For these reasons I order that the defendants' notice of motion dated 16 February 2010 be dismissed with costs. Exhibit 2 may be returned to the defendants forthwith. The remaining exhibits are to be returned after 28 days.

05/03/2010 - Correction to name of counsel for defendant - Paragraph(s) 0

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