TOMKO v PALASTY

TOMKO v PALASTY - [2007] NSWCA 258 - NSWCA 2007 case summary — Zoe

[21]

1 MASON P: I agree with Basten JA and Einstein J. 2 BASTEN JA: The Appellant was a partner in a firm of solicitors who represented the Respondent in extensive litigation in which the Respondent and others were involved with the ANZ Banking Group Ltd. These complex proceedings, which were settled in December 2001, were described by the Appellant as having involved "Mr Palasty, certain of his family members, and …, I think, approximately 32 of his companies": Tcpt 22/08/06, p 95. The Appellant gave evidence that he became involved with the Respondent's business ventures in order to assist him in setting himself up again. He also introduced the Appellant to a Mr Dominic Lambrinos, a financial consultant and accountant. 3 The trial judge held that the Respondent, the Appellant and Mr Lambrinos engaged in a business venture which involved at least three companies, Liverpool Hotels Pty Ltd, Railway Square (Liverpool) Pty Ltd and a holding company, Hotel Assets Group Australia Pty Ltd: Judgment, pp 12-13 and 16. Her Honour also accepted that the Appellant provided financial accommodation to the business venture in an amount of approximately $625,000. The central question in the proceedings was whether these funds were supplied by way of working capital or as a loan. If the funds were supplied by way of loan, the consequential question was to whom were they supplied and by whom were they repayable? 4 The trial judge held that the funds supplied by the Appellant were by way of loan and that issue is not now in contention. 5 Following discussions between the Appellant and the Respondent, the Appellant arranged for a loan facility with the National Australia Bank in an amount of $300,000. Amounts totalling $267,452.50 were supplied in 16 separate drawdowns on the facility. The first appears to have been provided on 8 March 2002 and the last major payment on 4 June 2002, although there appears to have been a final smaller payment on 1 August 2002. None of the payments was made directly to the Respondent, the majority being made to Liverpool Hotels Pty Ltd or its creditors. 6 The second agreement was for the payment by the Appellant of $360,000 to allow for the purchase of premises adjacent to the hotel at 265 Bigge Street, Liverpool. The trial judge found that this second loan was also made to Liverpool Hotels Pty Ltd (or possibly Railway Square (Liverpool) Ltd) and there is no challenge to that finding. However, she also found that in negotiating the second loan, the Respondent represented that he would procure the company to give a mortgage over the land to be acquired at Bigge Street to secure the financial accommodation provided by the Appellant. The Appellant did not obtain the security, but nevertheless advanced the funds. The trial judge found that the Respondent had engaged in misleading and deceptive conduct within the meaning of the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW) and awarded damages in the amount of the loan against the Respondent. That judgment is not in dispute in the present proceedings. 7 The only question now in contention is whether her Honour erred in finding that the advances made by the Appellant pursuant to the first agreement were advances made to or at the direction of the company, Liverpool Hotels Pty Ltd, and not at the direction of the Respondent personally. 8 The Appellant gave evidence (affidavit, 7 November 2005) to the effect that the Respondent and he had a conversation on Christmas Day, 25 December 2001, in which the Respondent had said: "John, I trust you and want you to be part of the organisation I'm setting up to purchase hotels and carry out property developments. If you come in with me I will give you 15% of the companies." 9 The second part of the conversation took place in mid or late January 2002, at which stage the Respondent told the Appellant that he had found a hotel in Liverpool, the Commercial Hotel, which he wished to renovate and said: "I would like you to become a director with my son Justin for the company I am setting up to purchase the hotel."

[23]

Respondent: "No problems. I'll give you that." 11 Taking the conversations as recounted by the Appellant, a reasonable observer would infer that the Appellant and Respondent were engaged in a joint venture, possibly with the Respondent's son, Justin Palasty, to carry out a specific property development. The funds required were for that purpose and were therefore intended to pay bills incurred by the company owning the hotel and carrying out the renovations. That company was Liverpool Hotels Pty Ltd. The money was not for the Respondent personally nor for any other activity. Despite the vagueness of the arrangements between the parties, the preferable inference is that a loan was being provided by the Appellant to the company. 12 It would have been entirely proper for the Respondent to arrange for the company to give a charge to secure a loan payable to it. Given the arrangements made pursuant to the first and second conversations, the provision of security by the company was consistent with an intention to make financial accommodation available to the company for its business purposes, which were the mutually intended purposes of the informal partnership. 13 It is not necessary in this case to consider the extent to which subsequent conduct of the parties, or indeed of the company, is admissible to determine the existence and nature of the contractual arrangements in question. Except to the extent that they constitute admissions by one or other party, they are largely equivocal. Accordingly, there is no need to take any further the matters left open by this Court in Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154 at [2] and [59]. 14 There are, however, clear and unequivocal statements, made by the Appellant which constitute admissions and which support the conclusion that the company was the entity to which the funds were provided. On 26 February 2003, the Respondent had a conversation with the Appellant following which he wrote, as managing director of the Lewisham and Liverpool Commercial Hotels, on Liverpool Hotels Pty Ltd letterhead. That letter set out details of "the process of debt reduction onto your loan account". 15 On 27 February 2003 the Appellant in turn wrote to the Respondent "C/- Liverpool Hotels Pty Limited", the letter being headed "Reduction of my loan account". The letter referred to the conversations of 26 February and stated: "As a result of our final discussion at about 7.20pm yesterday, I have become extremely concerned as to the capacity of Liverpool Hotels Pty Limited to fund the repayment of my loan account which totals approximately $670,000. … I note that in relation to 265 Bigge Street, Liverpool I have provided at the request of Liverpool Hotel Pty Limited the sum of $400,000 for the purchase of that property, which in fact was the entirety of the purchase price. I further note that you took it upon yourself, without consulting with me, to provide this property as loan security to a third party. Despite your protestations, your conduct in this matter has further jeopardized my position and in effect places me in a situation where I can see no security for the monies I have advanced to Liverpool Hotels." 16 There was a further letter to Mr John Palasty, the Respondent, dated 3 March 2003 in which the Appellant had sought information as to the ability of the company to exercise an option to finalise the purchase of the hotel, which was to fall due on 7 March 2003. On 4 March 2003, the Appellant wrote to "The Director Liverpool Hotels Pty Limited, Attention Justin Palasty". As noted above, Mr Justin Palasty was the son of the Respondent and a co-director (with the Appellant) and thereafter a continuing director of Liverpool Hotels Pty Ltd. This letter stated in part: "I am disturbed by the reaction of John Palasty to my reasonable request for information and documentation pertaining to the repayment schedule for my loan account which has been promised to me for some time. … In view of the fact that I have, at the request of the Company advanced to Liverpool Hotels Pty Limited loans in excess of $660,000 without being provided any security, I believe I have every right to seek the information sought. In the circumstances, I am left with no option but to require that the Company repay to me forthwith all monies presently owing to me. Accordingly, I hereby demand that the Company immediately repay to me all of those monies. I note that these presently total $665,315.71." 17 Following his inability to obtain the information sought in relation to the capacity of the company to exercise the option, the Appellant commenced proceedings on 5 March 2003 in the Equity Division seeking the appointment of a provisional liquidator to preserve the assets of the company, namely the option to purchase the hotel. In an affidavit sworn in support of those proceedings, the Appellant set out the conversations with the Respondent, referred to above, explained that he had arranged a loan facility with the National Australia Bank and stated (par 18): "Over the next few months, I made the following payments at the request and direction of John Palasty on behalf [of] the Company …"

[88]

"However, in large measure, the extensive post-contractual discussions traversed in the evidence before me was irrelevant. In the main, those discussions were to the fore only as to matters of credit. The issue in this case is not whether [the respondent] should be believed; or whether [the appellant] should be believed. The evidence of each is highly unreliable in various respects. The issue rests upon whether there is reliable evidence as to the relevant contracts, in a context where [the respondent's] credit is slight to the point of wraithlike; and [the appellant's] evidence is manifestly unreliable in many respects." 61 Her Honour then made clear that the issue concerning the alleged contract of guarantee in substantial part rested upon a chronology with which she then dealt in a fashion which has not been shown to have been in error, treating as it did with the facts found. 62 The representational case in relation to the first loan was dismissed on the evidence. The findings included that the appellant had not relied upon any representations made by the respondent as pleaded. The findings were that the first loan was made by the appellant because, for his own reasons, he decided to do so. Further and insofar as the plaintiff had alleged particular representations, the finding was that no such representations were made. Ultimately the finding was that the first loan was made in reliance upon nothing more than the appellant's own hopes, beliefs and expectations as to the prospect of the business venture upon which he was embarking and secured by nothing but those hopes, beliefs and expectations. It is readily apparent that this finding also supports the trial judge's conclusion that the loan was made to Liverpool Hotels. Evidence of post-contractual conduct 63 In Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154 Campbell JA [with whose reasons Beazley JA agreed] made the following observations in relation to the use of evidence of post-contractual conduct at [59]:

[89]

There was some argument about whether it was permissible to have regard to subsequent communications for the purpose of deciding with whom the contract was entered. 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: see the authorities cited in Cheshire and Fifoot's Law of Contract, 8th Australian edition, p 392-393 ; Cross on Evidence, 7th Australian edition, para [39290]; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 at 318 [109], per Kirby J. The more restrictive view, favoured in this Court, is 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 at all: Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 163-164; [2001] NSWCA 61 at [25]-[26]; Magill v National Australia Bank Ltd (2001) Aust Contract R 90-131 at 91,609-91,610, [2001] NSWCA 221 at [50]-[53] per Ipp AJA (with whom Meagher and Heydon JJA agreed); Walker v Andrew (2002) 20 ACLC 1476 at 1483-1484 , 116 IR 380 at 388, [2002] NSWCA 214 at [39]; Independent Timber Importers (Aust) Pty Ltd v Mercantile Mutual Insurance Ltd (2002) 12 ANZ Ins Cas 61-543 at 76,367, [2002] NSWCA 304 at [17]; El-Mir v Risk [2005] NSWCA 215 at [66]. It was argued that, in the present case, even on that more restrictive view, it is permissible to look to the subsequent communications, because the question of whether the contract was entered into with the Appellant, or with Torpoint, is, in substance, no different to a question of whether there was a contract entered into with the Appellant at all. It is not necessary to form a view about the correctness of the argument I have just mentioned. That is because, even if one did look to the subsequent communications, they would not lead to any different conclusion. 64 Basten JA who also agreed with the reasons of Campbell JA observed that he too would not wish to form a concluded view as to whether it is "permissible to look at" subsequent communications and conduct, in order to determine whether a contract with a particular party existed. His Honour added at [2]:

[92]

The second relevant principle is that post-contractual conduct is admissible on the question of whether a contract was formed : Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 at 77; Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 at 668, 669 and 672; B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 at 9149 and 9154-9156; Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 at 9255. The third relevant principle is that post-contractual conduct is not admissible on the question of what a contract means as distinct from the question of whether it was formed. As explained by Priestley JA (Meagher JA agreeing) in Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 326-330, the status of the relevant High Court authorities is unclear: hence unless it is demonstrated that the later decisions of the Victorian Full Court and Court of Appeal against admissibility, Ryan v Textile Clothing & Footwear Union of Australia [1996] 2 VR 235 and FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343, are clearly wrong or they are overruled, they should be followed in New South Wales. No attempt was made to demonstrate that they are clearly wrong. The fourth relevant principle is that the construction of a contract is an objective question for the court, and the subjective beliefs of the parties are generally irrelevant in the absence of any argument that a decree of rectification should be ordered or an estoppel by convention found." See John R Keith Pty Ltd v Multiplex Constructions (NSW) Pty Ltd [2002] NSWSC 43 at [234]; ABB Engineering Construction Pty Ltd v Abigroup Contractors Pty Ltd [2003] NSWSC 665 at [37]; Hudson Investment Group Pty Ltd v Australian Hardboards Ltd [2005] NSWCA 716 at [285]. 68 Hence subsequent communications may legitimately be used against a party as an admission by conduct of the existence or non-existence, as the case may be, of a subsisting contract, where an issue concerns whether a particular person was a party to that contract. 69 In the circumstances before the trial judge the so-called 'post-contractual conduct' evidence which was adduced on the question of whether or not a contract of loan was formed as between the appellant and the respondent was admissible. The appellant's challenge to such use of this material in the particular circumstances which obtained during this trial is without substance.

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