Woods v McKinlay

Indexation of joint endeavour contributions

1. One of the issues debated between the parties following the trial was whether it was appropriate to make an order to impose a constructive trust which would result in the surplus resulting after the repayment of the parties' contributions being divided equally. I was of the view that it should. I stated (at [275]-[277]): To my mind, an order in the Muschinkski form best reflects the rationale for equity's involvement, namely to deal with a capricious outcome of the breakdown of the relationship between the parties, being an outcome which they did not anticipate in their earlier agreement. In the present case, the parties did not, on my findings, consider how the equity in the Telopea property, if there was to be any, would be shared. In my opinion the fairest way to deal with this is, subject to a point I will make in a moment, to split the equity equally. Such an equal splitting must, however, take account of timing issues. The largest contribution by either party was Antoinette's payment of $130,000, which was made almost twenty years ago. As a result of the fact that the loan repayments have largely kept pace with interest, the remainder of the debt is in nominal terms similar to what it was then. But in terms of purchasing power, particularly power in purchasing property, it is massively less. … in the present case, where the parties' contributions were made out of after-tax earnings, I think that the appropriate way to adjust the contributions for the purpose of the calculation is to index them so as to produce an indexed capital sum. Given that I am dealing with the acquisition of a residential property, the index used should, if possible, reflect movements in property prices rather than just consumer prices … I will leave the selection of the appropriate index for further debate, and if necessary evidence, if that is required.
2. This reasoning applied to the contributions made by both parties (Antoinette on the one hand and Orlene and David on the other). But Orlene and David had borrowed the monies which they used to purchase the property. The loan was still outstanding and was to be discharged from the proceeds of sale of the Telopea property. Accordingly, I contemplated that only Antoinette's contribution would be indexed (J2 [278]).
3. After delivering my November 2021 judgment, and while the parties were engaged in the process of sale of the property and the informal accounting, I dealt with another similar case. In that case, I likewise concluded that the circumstances warranted the imposition of a constructive trust as a result of a failed joined endeavour which had involved an acquisition by the defendant of a residential property for the plaintiff to live in. In that case, unlike the present, I made final orders following the delivery of my principal judgment. Those orders defined the terms of the trust to be imposed and the nature of the accounting to be undertaken to determine the parties' contributions: Makaritis v Makaritis (No 3) [2023] NSWSC 409.
4. The question of indexation of contributions was one of the issues which arose in formulating the final orders. Referring to J2, I stated (at [30], [32]-[33]): In Woods I proposed that the parties' contributions should be indexed (in that case, the joint endeavour, which involved the acquisition of a residential property for one of the parties to live in, had lasted almost twenty years and the parties had made differing contributions at different times). I also proposed (at [277]) that the indexation factor be linked to property prices to reflect the nature of the joint endeavour. ... In the course of argument … there was some debate about the period of time over which indexation should take place. The debate took place in the context of the claim advanced by counsel for the defendants that [the plaintiff] should make allowance for occupation of the property during the joint endeavour period (this is addressed below). I suggested that indexation would arguably not apply during that period. On reflection, I do not think that it would be right to limit indexation in that way. In a sense, Bill had the benefit of the joint endeavour, in the form of rent-free accommodation, while it was operating. But the contemplation was that the endeavour would operate indefinitely (or at least so long as Bill wanted to live at the property), and its ending was premature. In such a case, the fundamental remedial principle is that the parties should have their contributions returned, in recognition of the fact that they did not receive what they understood they would receive when those contributions were made. The present case is a much less spectacular example than Woods was, but it seems to me that, in principle, indexation of the parties' contributions is desirable to achieve full restitution of those contributions, at least where they are unequal.
5. In the present case, the calculations presented on Antoinette's behalf applied an indexation rate for her capital contributions which was based on the actual increase in capital value of the property. The property was sold last year for 265% of its original purchase price. Spread over 21 years, this represents a 6.46% compound return, and this was the indexation rate which was applied to the figures presented on Antoinette's behalf.
6. My comments about indexation in my November 2021 judgment were preliminary, and counsel for Orlene and David contended that Antoinette's capital contributions should not, after all, be indexed. Counsel did not argue that indexation was wrong in principle, or invite me to reconsider my decision to index both parties' contributions in Makaritis. Rather, counsel submitted that the decision was distinguishable.
7. As counsel noted, in my November 2021 judgment I expressed the view that Antoinette's contribution should be indexed, whereas in Makaritis (quoted at [9] above) I spoke of the parties' contributions being indexed. Furthermore, counsel pointed out that, in Makaritis, one of the objectives of the joint endeavour was to provide the plaintiff with rent-free accommodation if possible. In the present case, counsel contended, Antoinette was given exclusive occupation of the Telopea property in return for her agreement to cover the holding costs: see J2 [283]. In these circumstances, to allow indexation in Antoinette's favour would be a form of "double-dipping". Antoinette had, in counsel's submission, already received a benefit from her capital contributions in the form of a reduction of the ongoing interest costs.
8. Counsel also observed that, if no indexation was applied, the parties' shares of the surplus on sale of the property after repayment of the capital amount of the contribution would be approximately equal. Counsel did not suggest that there was any contribution by Orlene or David which could, or should, be indexed. But counsel submitted that an equal division of the surplus after return of Antoinette's contributions would reflect the real justice of the case: see J2 [270]-[275].
9. I do not accept these submissions. In the first place, I am not sure that Makaritis is really distinguishable. It is true that I only proposed in my November 2021 judgment to index Antoinette's contribution, but that is because there was no relevant contribution by Orlene and David to index. If they had made any capital repayments on the loan, or made separate contributions outside the loan, then those contributions would be indexed at the same rate as Antoinette's. Nor is there a difference between the joint endeavours in the two cases which is as clear as counsel suggested. In Makaritis, it was hoped to derive income from renting out other rooms in the property to third parties. Nonetheless, in both cases, borrowing was part of the joint endeavour, the cost of which would, if necessary, be underwritten by the party occupying the property.
10. Counsel for Orlene and David conceded that Antoinette would recover her capital contributions before division of the surplus. Given that concession, in my view, indexation becomes necessary to ensure that Antoinette receives full restitution for the actual economic value of the capital contributions she made. Denying indexation would result in an inflation-generated windfall in favour of Orlene and David.
11. Nor, I think, does indexation result in some sort of double-dipping between Antoinette on the one hand and Orlene and David on the other. Paying off the loan in part reduced the interest, and this was, in a sense, to Antoinette's benefit. But it did not cost Orlene and David anything.
12. There was no dispute that, if (as I have concluded) Antoinette's contribution should be indexed, then the rate of 6.46% per annum should be used. Accordingly, it should now be possible for the parties to agree on the calculation of the final distributions to be made from the funds remaining from the sale of the Telopea property.

Orders

1. The proceedings will be adjourned to allow the parties an opportunity to make the necessary calculations, and reach agreement, if possible, on costs. If costs cannot be agreed, then I will hear further submissions in due course.
2. The orders of the court are: 1. Adjourn the proceedings to 9:30am on 12 May 2023 or such other date or time as may be arranged with my Associate. 2. Direct that the parties confer on the form of orders to be made to give effect to this judgment and to deal with costs, and, no later than 24 hours before the adjourned hearing, submit proposed orders for this purpose.

Amendments 20 June 2023 - Legal Representation added DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 June 2023