Adaz Nominees Pty Ltd v Castleway Pty Ltd
[2023] VSC 129
•22 March 2023
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2019 02312
| ADAZ NOMINEES PTY LTD (ACN 006 228 119) ATF THE RADO NO 2 TRUST (and others according to the Schedule) | Plaintiffs / Defendants by Counterclaim |
| v | |
| CASTLEWAY PTY LTD (ACN 131 870 481) ATF THE CASTLEWAY TRUST (and another according to the Schedule) | Defendants / Plaintiffs by Counterclaim |
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JUDGE: | NIALL JA |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 10–14, 17 October 2022 |
DATE OF JUDGMENT: | 22 March 2023 |
CASE MAY BE CITED AS: | Adaz Nominees Pty Ltd v Castleway Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2023] VSC 129 |
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CONTRACT – Construction of contract – Determination of profit by reference to income or loss ‘as per income tax returns’ – Whether figures for income or loss from tax returns should be varied – Natural reading of obligation to take figure from tax returns – Audit and dispute processes do not contemplate change to figure from tax returns other than through amended assessment.
CONTRACT – Construction of contract – Treatment of calculation by nominated accountant in dispute resolution process – Whether determination by nominated accountant has effect of expert determination – Where determination by nominated accountant taken to be agreed in absence of dispute notice – Open to Court to make determination in light of evidence before it.
CONTRACT – Construction of contract – Properties held as trading stock not included in calculation of termination adjustment on basis of not being ‘unrealised capital gains’ – Whether ‘unrealised capital gains’ relates to all assets – Intention of parties determined objectively according to language of agreement – Adjustments to profit suggest awareness of distinction between capital gains and income on revenue account – Agreement made by sophisticated commercial actors with developed appreciation of accounting practices – ‘Unrealised capital gains’ applies only to capital assets.
CONTRACT – Construction of contract – ‘Unrealised capital gain or loss’ and cost base for interest in land – Whether unrealised capital gain or loss based on recorded value or land value – Where interest in land held by unusual trust structure – Land acquired for purposes of development and profit – Interest valued according to land value.
REAL PROPERTY – Valuation of land – Valuer revised valuation after communication from party – Whether change in valuation justified – Revised valuation reasonable and not due to urging, pressure or influence – Revised valuation accepted.
REAL PROPERTY – Valuation of land – Land previously valued for GST margin scheme – Whether to rely on prior valuation for subsequent valuation – Prior valuation happened before critical events relevant to subsequent valuation – Independent subsequent valuation relied on.
CONTRACT – Construction of contract – Whether outstanding loans give rise to ‘unrealised capital gain’ – Revenue from loans treated as revenue when received – Outstanding loans not included in ‘unrealised capital gain’.
REAL PROPERTY – Valuation of land – Income of sale of property subject to good faith negotiations – Whether agreement made to adjust income – Agreement not conditional on other agreements being made – Income of sale of property adjusted.
INTEREST – Entitlement to interest – Some aspects of Service Fee disputed – Whether interest payable on undisputed aspects – Issuance of dispute notice necessarily identified undisputed amount – Undisputed amount a sum certain – Interest payable on undisputed amount.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs / Defendants by Counterclaim | Mr RM Garratt KC, Ms F Cameron and Mr N Guenther | Maddocks |
| For the Defendants / Plaintiffs by Counterclaim | Mr MT Flynn KC and Mr BG Mason | Kyriacou Lawyers |
HIS HONOUR:
INTRODUCTION AND OVERVIEW
This proceeding relates to a dispute between, on the one hand, Gerard Keeghan and a company related to his interests Castleway Pty Ltd (‘Castleway’) and, on the other, a group of companies that may collectively be described as the TPC Group.
The TPC Group evolved from a road construction business commenced by Rinaldo (Ron) Rado and operated through various corporate entities. Over time, the business of the TPC Group, which initially involved civil construction, asphalt production and quarrying, became to principally involve property development. In many cases, that involved the acquisition of broad acre land and the subsequent subdivision and sale of residential lots. Properties were acquired in Victoria and Queensland.
Mr Keeghan commenced working with Mr Rado in 1982, the year that Mr Keeghan and one of Mr Rado’s daughters were married. In 1994, Mr Keeghan was appointed as Chief Executive Officer of Standard Roads, one of the entities within the TPC Group. Mr Rado died in April 2001, and his widow, Agnes (Nancy) Rado became the ultimate shareholder of the TPC Group. According to his evidence, from April 2001 Mr Keeghan was solely responsible for running the TPC Group’s property acquisition, development and management business as its Chief Executive Officer.
On 7 December 2010, Castleway, Mr Keeghan and the companies comprising the TPC Group entered into a written agreement entitled the ‘Property Development Services Agreement’ (‘PDSA’). Although he had held a Chief Executive Officer position within the TPC Group before December 2010, under the Executive Services Agreement (‘ESA’) which was made on the same day as the PDSA, Mr Keeghan was appointed as Chief Executive Officer of the TPC Group’s central operating company. This agreement regulated the terms of his employment including providing for his remuneration.
In broad compass, the PDSA provided that, in return for providing property development services to the TPC group, Castleway would be entitled to an annual ‘service fee’ calculated as a sliding percentage of the profit of the group. In the final year of the term of the PDSA, the service fee was to be adjusted by a ‘termination adjustment’ which involved adjusting the group profit to take into account ‘unrealised capital gains’ and ‘unrealised capital losses’ which were to be calculated as at the date of the termination of the PDSA.
In addition to the annual service fee (which included the termination adjustment in respect of the final year), Castleway was also entitled to commission on ‘introduced projects’, being a project that the TPC group was made aware of by Mr Keeghan or Castleway before the termination of the PDSA for the purpose of acquisition, development or management.
The PDSA also provided for the means by which the annual service fee would be calculated. That process involved the appointment of a ‘nominated accountant’ who, acting on behalf of the TPC Group, would be tasked with performing the calculation of the annual service fee. In each of the years in dispute, the firm of accountants Grant Thornton was the nominated accountant.
From perhaps as early as 2012, the parties have been in dispute about various matters including the calculation of the annual service fee. Arising from that dispute, on 30 October 2015, the TPC Group commenced proceedings in this Court in relation to the service fee payable in respect of the 2014, 2015 and 2016 financial years and in relation to commission payable on certain disputed introduced projects. A central issue in that proceeding came to include an argument in relation to the 30 June 2017 year. Shortly before the end of the 2017 year, the TPC Group made a $20 million donation to a charitable foundation associated with the Rado family. The effect of that donation was to reduce the taxable income and in turn the net profit of the TPC Group which resulted in a corresponding reduction in the amount payable to Castleway as its share of the profit.
I note that on 29 June 2016, the TPC Group (through one of its entities) gave notice under the ESA terminating Mr Keeghan’s employment with effect from 30 June 2017.
On 28 December 2016, Castleway gave notice of its intention to terminate the PDSA, with effect from 29 June 2017. It follows that the year ending 30 June 2017 was the final year of the term of the PDSA and a termination adjustment was required to be made in respect of the Service Fee payable in that year.
The first proceeding, which included the donation dispute, resulted in a number of decisions by Robson J and the Court of Appeal.[1]
[1]Re Adaz Nominees Pty Ltd (No 2) [2017] VSC 578; Re Adaz Nominees Pty Ltd (No 5) [2018] VSC 624; Re Adaz Nominees Pty Ltd (No 6) [2019] VSC 14; Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201 (‘Court of Appeal reasons’).
On 5 October 2017, Robson J delivered judgment addressing many of the substantive issues on liability.[2] The parties however remained in dispute over various items and subsequently Robson J appointed a special referee to address various accounting issues.[3] The special referee provided a report to the Court and the parties.
[2]Re Adaz Nominees Pty Ltd (No 2) [2017] VSC 578.
[3]Re Adaz Nominees Pty Ltd (No 5) [2018] VSC 624.
On 22 August 2018, the nominated accountant issued a Service Fee Report in respect of the 30 June 2017 year to the TPC Group and Castleway which stated that the Service Fee due to Castleway was $15,107,923 (exclusive of GST). The Service Fee Report was prepared following the special referee’s report and, in respect of items that had hitherto been contentious, reflected the conclusions reached by the special referee.
On 29 August 2018, the TPC Group served a dispute notice in relation to the Service Fee Report. In its notice, the TPC Group took issue with the decision of the nominated accountant to add back the $20 million charitable donation that the TPC Group had made just before the end of the 2017 financial year. As mentioned above, the effect of the donation was to reduce the taxable income of the TPC Group by $20 million. I note that, for different reasons, both Robson J and the Court of Appeal held that the donation should be ignored for the purpose of determining the TPC Group’s profit.
On 31 August 2018, Castleway served a dispute notice in respect of the Service Fee Report.
Following a further judgment of Robson J,[4] on 11 February 2019, the nominated accountant served a Revised Service Fee Report which provided that the sum of $15,521,722 (exclusive of GST) was due to Castleway.
[4]Re Adaz Nominees Pty Ltd (No 6) [2019] VSC 14.
Both Castleway and the TPC Group issued a dispute notice in respect of the Revised Service Fee Report, on 18 and 19 February 2019 respectively. The TPC Group revised its dispute notice on 21 February 2019. By its revised dispute notice, the TPC Group disputed the refusal of the nominated accountant to allow certain deductions (in effect by adding the payments back). Those deductions were:
(a) the $20 million donation;
(b) $115,240 of directors’ fees in excess of an allowed amount of $140,000;
(c) $406,458 for legal fees in the remitted proceeding;
(d) $99,317 for accounting fees in connection with the remitted proceeding;
(e) $18,537 for accounting fees in negotiating proposed variations to the PDSA;
(f) $1,492 for accounting fees for members of the Rado family; and
(g) $24,995 for accounting fees for ‘excluded entities’.
As part of the dispute resolution mechanism required by the PDSA, good faith discussions were held between the parties attended by Mr Keeghan and Mr Ian Lee (a director of the TPC Group and a former partner of Grant Thornton) on 7 and 18 March, 15 April and 16 May 2019. Some items of dispute were resolved.
On 27 May 2019, the TPC Group commenced this proceeding seeking declaratory relief in relation to amounts owing under the PDSA in respect of the 2017 year.
On 19 August 2019, Castleway issued three tax invoices to the TPC Group consequent upon the provision of the Revised Service Fee Report:
(a) Tax Invoice 1901 in the sum of $15,521,722 (exclusive of GST). The invoice was said to relate to the 2017 financial year PDSA Service Fee as calculated by Grant Thornton on 12 February 2019 in the Revised Service Fee Report. It was said to be ‘Without prejudice to Castleway’s rights and remedies pursuant to the [PDSA]’. On the same day, Castleway filed a defence and counterclaim in the proceeding. This invoice corresponded to the amount reported by the nominated accountant;
(b) Tax Invoice 1901A which was described as a supplementary invoice ‘consequent on additional [2017 financial year] TPC Group Profit, not included in the [nominated accountant’s] report’. This invoice was in the amount of $2,366,791.03 (exclusive of GST);
(c) Tax Invoice 1901B in the sum of $10,294,568.22 (exclusive of GST) and which related to the calculation of the termination adjustment including the omission of certain properties owned by the TPC Group as at the date of termination but excluded from the termination adjustment on the basis that there were held as trading stock on revenue account and therefore did not give rise to an unrealised capital gain.
On 7 August 2020, the Court of Appeal allowed an appeal from Robson J and made final orders on 20 November 2020 remitting that proceeding for an assessment of damages. It is unnecessary at this point to refer to the reasons of the Court of Appeal. As will appear they were concerned with the construction of the PDSA and in particular the $20 million donation. The remitted proceeding was subsequently resolved.
On 10 December 2020, Riordan J gave directions in this proceeding which included the following:
As soon as practicable, the plaintiffs make any request (as it is so advised) that Grant Thornton (being the nominated accountant under the PDSA) prepare an amended Service Fee Report for the financial year ending 30 June 2017 in accordance with the orders of the Court of Appeal made 20 November 2020 and the reasons delivered on 7 August 2020 and 20 November 2020 in proceedings S APCI 2019 0014 and S APCI 2019 0024, with such report to be provided to the parties by 22 January 2021.
Riordan J also ordered on that date that the plaintiffs and the defendants both file and serve a list of all questions arising out of the remitted proceeding, the Revised Service Fee Report, or otherwise in this proceeding.
On 16 December 2020, the nominated accountant served a Second Revised Service Fee Report providing for an amount of $15,521,722 (exclusive of GST). The Second Revised Service Fee Report proceeds on the basis of the Court of Appeal’s orders, and is apportioned for the incomplete year.[5] There is no amendment to the Termination Adjustment.
[5]Recalling that the PDSA was terminated on 29 June 2017.
On 31 December 2020, Castleway served a dispute notice to the Second Revised Service Fee Report.
On 30 June 2021, the solicitors for the TPC Group wrote to the solicitors for Castleway taking issue with Castleway’s continued reliance on the 2019 invoice. In that letter, it was noted that since the Service Fee Report was issued on 22 August 2018 there had been revisions following the decisions of Robson J and then the Court of Appeal resulting in the Revised Service Fee Report and the Second Revised Service Report.
The letter invited Castleway to issue a new invoice for the undisputed component of the 2017 financial year Service Fee in the sum of $7,415,653 (exclusive of GST), being $7,255,653 (exclusive of GST) as set out in the Second Revised Service Fee Report plus a further amount of $160,000 (exclusive of GST). It said that Castleway could issue the tax invoice on a without prejudice basis.
Castleway did not issue a further invoice.
On 19 July 2021, the TPC Group paid the sum of $8,157,218.30 (being the sum of $7,415,653 plus GST) representing what it contended was the undisputed component of the 2017 financial year Service Fee. The TPC Group requested that Castleway issue an invoice for the purpose of, so it appears, dealing with its GST obligations and in order to obtain an input tax credit for the amount of GST payable.
As the above chronology exposes, there have been a number of iterations of the Service Fee Report prepared by the nominated accountant for the 2017 year. The following table sets them out:
No Name of Report Date Castleway served Result reported (excluding GST) Result reported (including GST) 1 First Service Fee Report 23 August 2018 $15,107,923 $16,618,715.30 2 Revised Service Fee Report 12 February 2019 $15,521,722 $17,073,894.20 3 Second Revised Service Fee Report 23 December 2020 $7,255,653 $7,981,218.30 The parameters of the current dispute
Notwithstanding that Robson J at first instance and the Court of Appeal have been required to examine in some detail the construction of the PDSA, the parties remain in dispute about how it is intended to work in some fundamental respects.
As noted, this proceeding was commenced by the TPC Group seeking declaratory relief. Subsequently, by counterclaim, Castleway sought the payment of amounts that it claimed were owing to it under the PDSA in respect of the 2017 year and in respect of commission on introduced projects. The preparation of both the claim and counterclaim proceeded by way of pleadings. As already noted, Riordan J directed the parties to formulate questions reflecting the issues in dispute.
Although some of the issues have been resolved (and for which the parties deserve some credit) there remain a significant number of issues to be determined. The resolution of most of the issues, certainly the most significant by amount claimed, depends on disputed questions of construction of the PDSA. As will appear, the dispute about the meaning of the PDSA can be reduced to a series of questions that serve to isolate the particular constructional issue. Atomising the contractual dispute in that way can, no doubt, be useful. However, I would make two observations.
The first is that the device of articulating the contractual dispute into a series of questions referable to specific terms can risk ignoring, or at least undermining, a foundational principle of construction that the instrument must be construed as a whole giving the contract a harmonious operation, as best can be achieved, having regard to the objective theory of contract. So that, for example, questions about what might reasonably be described as machinery provisions may assume a different tenor when divorced or examined apart from the agreement as a whole.
The second observation is that the invitation to identify questions in dispute has, as it appears to me, encouraged rather than dissuaded the parties from putting matters in issue. That observation derives some support from the number of issues in dispute and that the parties still quibbled over the form of some of the questions, the fact that some items of dispute have a value of as little as $6,265,[6] that Castleway relied on written closing submissions of over 200 pages and the TPC Group relied on written opening submissions of 80 pages not including annexures and an additional summary in tabular form of 47 pages and a tender bundle of more than 8000 pages.
[6]Concerning Brew Road.
I should not be misunderstood. I have found the written submissions generally helpful, albeit unduly long. However, I have not found it necessary to refer to every argument, many of which are contingent, in seeing to explain my reasons for decision.
The questions remaining are as follows:
1. The Remitted proceeding
1.1 …
1.2 …
1.3 …
(a) …
(b) …
2.Questions arising from the Second Revised Service Fee Report served 23 December 2020 in respect of the period ending 29 June 2017
Are the questions for determination in relation to the calculation of the FY2017 Service Fee under the PDSA in this proceeding limited to those which:
(a)arise out of the Second Revised Service Fee Report served on 23 December 2020; and
(b)were disputed by Castleway in its Dispute Notice issued on 31 December 2020 [irrespective of whether the relevant item was reported or disclosed]?
2.1 The 2016-17 Service Fee Report
2.1.1 Was the TPC Group obliged to:
(a) [issue, or] procure that the nominated accountant issue a Service Fee report for the 2016-17 financial year by 30 April 2018; and/or
(b) [issue, or] procure that the nominated accountant issue a Service Fee report for the 2016-17 financial year which ‘correctly’ calculated the amount payable to Castleway, [including any Termination Adjustment]?
2.1.2If the answer to either [2.1.1(a)] or [2.1.1(b)] is ‘yes’, and given the answers to questions [2.3] and [2.4] below, did the TPC Group breach either of these obligations?
2.1.3 If so, what loss and damage has Castleway suffered?
2.1.4 Is interest payable on that loss and damage?
2.1.5 If so:
(a) what interest rate applies?
(b) from what date does interest accrue?
2.2 The invoice, the undisputed Service Fee component and interest
2.2.1Was the Invoice deprived of legal consequence as a result of the Court of Appeal’s judgment in Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201 and the issuance of the Second Revised Fee Report by the nominated accountant [at the TPC Group’s request] [pursuant to the Court’s orders dated 10 December 2020]?
2.2.2Is Castleway estopped from relying on the invoice in light of its [alleged] agreement, alternatively its [alleged] acquiescence, [both of which Castleway disputes,] in the nominated accountant replacing the Revised Service Fee Report with the Second Revised Service Fee Report, and in [allegedly] thereafter treating the Second Revised Service Fee Report as valid in its dealings with the TPC Group [which Castleway also disputes]?
2.2.3Was there an ‘undisputed’ Service Fee component’ of the Invoice which the TPC Group was obliged to pay?
2.2.4Did the TPC Group breach the PDSA by failing to pay any part of the Invoice?
2.2.5 If so, what loss and damage has Castleway suffered?
2.2.6 Is interest payable on that loss and damage?
2.2.7 If so
(a) what interest rate applies?
(b) from what date does interest accrue?
2.3 Calculation of the Service Fee
2.3.1In disputing the calculation of the Service Fee, is Castleway entitled to depart from and challenge the accounting treatment or amount of items of invoice or expenditure reported in the TPC Group’s income tax returns? Are the matters which may be disputed pursuant to clause 3.3(c) of the PDSA limited to the correctness of the calculations made by the nominated accountant in accordance with Schedule 2 to the PDSA on the basis of the income tax returns there referred to?
2.3.2Subject to resolution of issue [2.3.1] above, did the nominated accountant err in calculating the amount of the Service Fee, not including the Termination Agreement, for the 2016-17 financial year? In particular, did the nominated accountant err by taking into account”
2.3.2.1a cost base in respect of the TPC Group’s interest in Gumbuya Park of $1,649,409 rather than $602,879, or alternatively $82,501, being the actual acquisition of the Gumbuya Park land settled on 20 July 2006?
2.3.2.2 …
2.3.2.3the proper treatment of the outstanding annual leave and long service leave entitlements which had accrued to Mr Keeghan before the Term of the PDSA commenced on 1 July 2007?
2.3.3 …
2.3.4 …
2.3.5If the answer to any part of issue [2.3.2] to [2.3.4] is ‘yes’, and subject to the answer to issue [2.3.1], above, what is the correct calculation of the Service Fee for the 2016-17 financial year before applying the Termination Adjustment?
2.4 Termination
Unreported projects
2.4.1The calculation of the Termination Adjustment in [each of the reports in Table 1 including] the Second Revised Service Fee Report did not report any ‘unrealised capital gain or losses’ in respect of various properties held by the TPC Group at the Termination Date. The TPC Group contends that this was correct on the basis that they were properties held on current account. On the proper construction of the PDSA, are ‘unrealised’ capital gains or losses’ in respect of any one or more of the following properties that were held by the TPC Group on current account as at the Termination Date to be take into account when calculating the Termination Adjustment?
2.4.1.1 360 Princes Highway, Officer, Victoria 3809 (Officer);
2.4.1.2 27 Highwood Drive, Hillside, Victoria 3037 (Hillside);
2.4.1.3Hillcrest Park Estate, Tallowwood Street, Maleny, Queensland 4552 (Maleny);
2.4.1.4120-130 Alma Road, Dakabin, Queensland 4503 (Alma Road);
2.4.1.5Lot 29, Central Boulevard, Birtinya, Queensland 4575 (Kawana Waters);
2.4.1.6 Hallam South Road; and
2.4.1.7Pacific Highway, Valla, New South Wales 2448 (Pacific Highway, Valla).
2.4.2On the proper construction of the PDSA, are ‘unrealised capital gains or losses’ in respect of any one or more of the following assets to be taken into account when calculating the Termination Adjustment?
2.4.2.1Interest accrued pursuant to a facility operated by Tynong Pastoral Unit Trust (Tynong Interest);
2.4.2.2Interest accrued pursuant to a facility operated and provided to the Chauffer joint venture (Chauffer Interest);
2.4.2.3Interest accruing to the TPC Group from a finance facility made available by the TPC Group to the IBIS Care joint venturers, which as at the Termination Date had accrued in the amount of $1,952,192.32 (IBIS Care Interest); and
2.4.2.4Interest accrued in at call or term deposits or in treasuries, bonds or debentures held, controlled and/or legally or beneficially constituting an entitlement of any TPC Group entity which have not been discovered and/or reported to date.
Reported items – calculation dispute
2.4.3Taking into account the answer to issues [2.4.1] and [2.4.2], what is the Termination Adjustment to be applied to Castleway’s 2016-17 Service Fee? In particular, did the Termination Adjustment calculation correctly:
2.4.3.1take into account an unrealised capital gain or loss (as applicable) in respect of the TPC Group’s interest as at the Termination Date in the following [properties]:
(a)[40-72 Rokeby Street and 33 Rupert Street, Collingwood (Rokeby Street), based on a recorded value of the TPC Group’s interest of -$1,703,866, rather than what Castleway contends was a relevant valuation as at 30 June 2017 of $17,000,000 for the Rokeby Street property];
[Rokeby Street based on a recorded value of the TPC Group’s interest in the Rokeby Street Fixed Trust of -$1,703,866, rather than what Castleway contends as a percentage share in the value of the property based on a valuation of the whole of property as at 30 June 2017 of $17,000,000];
(b)14 Barker Road, Garfield (Garfield), based on a valuation as at 29 September 2016 of $2,200,000, which Castleway does not accept as being correct as it did not take into account what Castleway contends was an unrealised capital gain accruing from a margin scheme benefit to the TPC Group of $1,821,361;
(c)11 Abbotsford Road, Bowel Hills, Queensland (Bowen Hills), based on a valuation as at 30 June 2017 of $1,400,000, rather than the sale price of the Bowen Hills property on or about 5 October 2017 of $1,850,000 which Castleway contends is the relevant value;
(d)Lot 13 Ellis Beach, based on a valuation by Herron Todd White as 30 June 2017 of $830,000 (given on 6 June 2018), whereas Castleway contends that the calculation ought to have been upon a valuation by Knight Frank as at 30 June 2017 of $1,500,000 (given on 31 May 2017); and
2.4.3.2not take into account any unrealised capital gain from the contracted sale of lots which had not settled as at the Termination Date at:
(a) Pacific Highway, Valla;
(b) Officer;
(c) Alma Road;
(d) Garfield; and
(e) Maleny.
2.4.3.3account for the cost base [in accordance with the financial records of the relevant TPC Group entity, including the general journals], as at the Termination Date in respect of:
(a) Officer;
(b) Maleny;
(c) Pacific Highway, Valla;
(d) Alma Road;
(e) Rokeby Street;
(f) Brew Road;
(g) Garfield;
(h) Bowen Hills;
(i) Lot 13 & 22, Ellis Beach;
(j) 2505 Princes Highway, Tynong North;
(k) 11-21 Walker Street, Dandenong; and
(l) IBIS Care.
2.4.3.4take into account alleged accrued increases in cost bases by estimated construction costs and contingencies, such as refundable municipal, infrastructure and landscaping bonds, unutilised to completion of the respective projects at the Termination Date, including for:
(a) Officer;
(b) Alma Road; and
(c) Maleny.
2.4.4On the proper construction of the PDSA, should the unrealised gain on the Garfield development include the amount of $200,000 that the purchaser paid to reimburse the vendor’s GST liability?
2.4.5 …
2.4.5.1 …
2.4.5.2 …
2.4.6What is the proper treatment of unrealised bank, Treasury and debenture interest for funds deposited before the Termination Date, but which investments mature after the Termination Date for the purposes of calculating the Termination Adjustment? In particular:
2.4.6.1Do the unrealised bank, Treasure and debenture deposits constitute current assets as at 29 June 2017?
2.4.6.2Is the interest that had accrued on those deposits as at 29 June 2017 an unrealised capital gain for the purposes of calculating the Termination Adjustment?
2.4.6.3If the answer to issue [2.4.6.1] and/or [2.4.6.2] is yes, what is the value of:
(a) Chauffer Interest;
(b) Tynong Interest; and
(c)[Interest accrued in] term deposits [and other interest-bearing assets] held by TPC Group entities [which had not been discovered and/or reported as at 31 December 2020 (being the date of Castleway’s 31 December 2020 Dispute Notice)].
2.4.7 Given the answers to [2.4.1] to [2.4.6] above:
2.4.7.1what value is to be given to the relevant projects when calculating the Termination Adjustment;
2.4.7.2what cost is to be attributed to the relevant projects when calculating the Termination Adjustment;
2.4.7.3what was the proportion of the TPC Group’s interest in respect of the relevant projects when calculating the Termination Adjustment; and
2.4.7.4accordingly, what is the correct amount of the Termination Adjustment payable to Castleway?
3. Matters arising otherwise in this proceeding no S ECI 2019 02312
Commission
3.1What amount of Commission is payable, if any, by the TPC Group to Castleway under the PDSA for any Introduced Project sold after the Termination Date, including:
3.1.1 Rokeby Street, whose sale was settled on about 15 January 2020;
3.1.211-21 Walker Street, Dandenong, whose sale was settled on about 19 October 2018;
3.1.3 Brew Road, whose sale was settled on about 30 April 2018;
3.1.4Bowen Hills, whose sale was settled on about 26 November 2017; and
3.1.5 any other Introduced Project sold after the Termination Date.
3.2By what date was the Commission calculated in issue [3.1] due to be paid to Castleway, pursuant to clause 4.5(c) of the PDSA?
3.3 What interest, if any, is due on the Commission?
The entries that are italicised represent disputed versions of the questions. I have not found the dispute on the form of the questions of any significance to the issues I need to determine or necessary to resolve.
Grouping the issues as best I can my conclusions are as follows.
For the 2017 year, the TPC Group was required to furnish a Service Fee Report by 31 March 2018. It failed to do so, this was a breach of the PDSA, but Castleway did not issue an invoice and has suffered no loss by reason of the breach. The TPC Group was not contractually required to issue a Service Fee Report with the ‘correct figure’.
The invoice served by Castleway was valid and there was an undisputed amount which the TPC Group was obliged to pay. It paid the amount on 19 July 2021, and its failure to pay within the time stipulated by the PDSA, namely 30 days from receipt of the invoice, was a breach of the PDSA. Castleway is entitled to interest. I will hear further from the parties on the interest rate, having regard to clause 3.7 of the PDSA in so far as that clause may be relevant.
In calculating the Service Fee:
(a) The profit is the amount specified in the TPC Group tax return and there is no basis to depart from that figure in the absence of agreement or an amended assessment;
(b) Of the two items remaining in dispute, Gumbuya Park and Mr Keeghan’s termination payment:
(i) Gumbuya Park was the subject of an agreement;
(ii) The deduction for the termination payments is as set out in the tax return for the 2017 year and was properly taken into account.
In calculating the termination adjustment:
(a) assets held on revenue account are not included in the concept of unrealised capital gain. Officer, Hillside, Maleny, Alma Road, Kawana Waters, Hallam Road South and Pacific Highway, Valla were all correctly excluded from the calculation.
(b) The interest payments accrued in respect of Tynong, Chauffer, and Ibis Care and term deposits did not give rise to an unrealised capital gain and were correctly excluded from the calculation.
In relation to specific calculation of reported items for the termination adjustment:
(a) Rokeby Street was wrongly valued. The valuation adopted by the nominated accountant did not reflect the task in the PDSA. It should have been valued on land value. Doing so also resolves the dispute about the cost base so that amounts paid by the investors should have been excluded;
(b) Garfield was wrongly valued. The nominated accountant used an out of date valuation that predated actual sales that had been made (but not settled) before the termination date. I accept the evidence of Mr Sutherland other than in respect of a deduction of 12% for profit and risk;
(c) Bowen Hills was correctly valued;
(d) Brew Road was correctly valued; and
(e) Ellis Beach was wrongly valued. I accept the evidence of Mr Coates that the value of lot 13 is $1,500,000 (and not $830,000 as used by the nominated accountant). The cost base correctly included an additional amount of $502,829 in respect of lot 13 with a total cost base at $2,359,454. Lot 22 wrongly included an allowance for motor vehicles, furnishings and fittings and goodwill in the cost base.
The Service Fee will need to be adjusted having regard to my conclusions in respect of Gumbuya Park, Rokeby Street, Garfield and Ellis Beach.
I will hear the parties on the question relation to commission on introduced projects in light of these reasons.
The text of the PDSA
The PDSA appointed Castleway as the ‘Manager’ to provide property development services to the TPC Group. Castleway was to be remunerated by a ‘Service Fee’, being a scaled percentage of the ‘TPC Group Profit’ calculated as set out in a schedule to the agreement. Provision was made for the termination of the PDSA which triggered a termination adjustment in respect of the final year and Castleway had an entitlement to further payment, called ‘Commission’, after termination in relation to what the PDSA defined as ‘Introduced Projects’.
For present purposes, the three critical elements of the PDSA concern the obligation to pay, the method of calculation and the dispute mechanism.
The obligation to pay an annual Service Fee and the definition of ‘TPC Group Profit’
The obligation to pay is cast in clear terms. Relevantly, cl 3.1 requires the TPC Group to pay Castleway the Service Fee in respect of each Financial Year during the term of the PDSA.
Clause 3.2 provides:
The parties agree that the Service Fee shall be calculated by the TPC Group’s nominated accountant based on TPC Group Profit in each Financial Year during the Term in the manner set out in Schedule 2.
‘TPC Group profit’ is defined to mean:
the net profit… of the TPC Group calculated in accordance with Schedule 2, and any references to calculation of TPC Group Profit shall include the calculation of the net profit… for the TPC Group.
The PDSA does not, as the Court of Appeal made clear, adopt a definition based on some ordinary commercial understanding of ‘net profit’, rather the term is as defined in sch 2.
Schedule 2 has eight sub-clauses. Sub-clause 1 provides that the Service Fee ‘shall be determined based on TPC Group Profit for that Financial Year’, and provides for an incremental scale expressed as a percentage of the ‘TPC Group Profit’.
Sub-clause 2 is headed ‘Calculation of TPC Group Profit’ and defines the TPC Group Profit to mean ‘adjusted taxable profit before income tax on a consolidated basis’ and calculated in accordance with the table attached to sub-cl 2. The table is as follows:
Total Taxable Income (loss) as per income tax returns for the TPC Group Entities and associated entities set out in Annexure A to this Agreement Less Inter-entity current year taxable dividends or taxable trust distributions declared Less Non inter-entity current year franking credits Add Non assessable component of CGT capital gains Add (Less) Notional non assessable gain (loss) on pre-CGT assets (See Note 1 below) Less Current year post CGT capital losses not otherwise offset in taxable income (loss) Add Carried forward capital losses offset against current year capital gains Add Any post 1 July 2007 dividend paid from profits for shares in any TPC Entity sold or disposed of to external parties Add Carried forward income losses offset against current year taxable income (loss) Less Percentage share owned by external parties of non wholly owned TPC Entities (See Note 3 below) Less Any carried forward TPC Group Loss (See Note 2 below) TOTAL TPC GROUP PROFIT /TPC GROUP LOSS
The parties acknowledge that the calculation of TPC Group Profit for the Financial Year ending 30 June 2008 is attached as Annexure C to this Agreement. The parties agree that if there is any dispute regarding calculation of TPC Group Profit in any subsequent Financial Year the calculation shall (where practicable) be undertaken in accordance with the principles and standards reflected in the calculation of TPC Group Profit for the 2008 Financial Year.
As the table makes clear, the calculation commences with the ‘Total Taxable income (loss) as per income tax returns for the [relevant TPC Group entitles]’. The entries in the table provide for certain adjustments to that figure to be made. The content of some of the adjustments is explained further in notes to the table.
For example, the PDSA proceeds on the basis that some of the property of the TPC Group may have been acquired before the commencement of the capital gains regime in September 1985. The gain realised on the disposal of such assets would not be brought to account as part of the taxable income. However, the table requires an adjustment to be made to bring those properties in, including by ascribing a notional market value for pre-CGT land.
Calculation process
Clause 3.3 of the PDSA stipulates the process to be adopted in calculating the Service Fee.
The first obligation is on the TPC Group and relates to the finalisation of financial statements and tax returns of the TPC Group entities. It requires the TPC Group to use ‘reasonable endeavours’ to finalise the statements and returns by 31 December in the following financial year and to ‘procure in any event’ that they are finalised by 31 March in the following year.
The next obligation on the TPC Group is to procure ‘the nominated accountant acting for the TPC Group’ to calculate the TPC Group Profit in the manner set out in sch 2 and report back to both the TPC Group and Castleway within 30 days of the finalisation of the tax returns. The report provided by the nominated accountant is described by the parties as a ‘Service Fee Report’. Several versions of the report were prepared for the 2017 financial year.
As will appear, the financial returns and accounts for the 2017 year were not finalised by 31 March 2018. Castleway contends that this constituted a breach of the PDSA and that as a result it delayed payment to it with the result that it suffered loss and damage. Castleway seeks to value this loss by seeking the payment of interest (at the penalty rate) for the period of the delay.[7]
[7]This issue is reflected in Question 2.1.
Dispute, revision and adjustment
As already noted, the task of the nominated accountant is required to be completed quite soon after the finalisation of the accounts and tax returns. The PDSA does not require that the nominated accountant be responsible for the preparation of these documents.
Clause 3.3 allows for either party to give to the other party a ‘Dispute Notice’ in accordance with cl 9 within 10 days of the nominated accountant reporting the Service Fee to the TPC Group and Castleway. If no Dispute Notice is given then the Service Fee is ‘deemed to be agreed’ by the parties. As will appear, that is not to say that the parties are bound by the Service Fee for all time and for all purposes.
Clauses 3.3(d), (e) and (f) contemplate that Castleway will issue an invoice as the trigger to pay the Service Fee. There is some awkwardness in how the provisions deal with the situation in which there is a Dispute Notice given in accordance with cl 3.3(c) which does not extend to the entire amount specified. The Court of Appeal held that where there is both a disputed and undisputed component of the Service Fee, an invoice could be issued identifying the undisputed amount so as to trigger an obligation to pay that amount even though the dispute as to the balance remains unresolved.[8]
[8]Court of Appeal reasons, [248]–[249] (Whelan JA and Riordan AJA).
Where an invoice is ‘correctly rendered’ by Castleway the TPC Group is required to pay within 30 days of receipt.[9] Clause 3(f) provides that the TPC Group may dispute an invoice if the amount is not equal to the amount of the Service Fee as set out in the applicable report from the accountant.
[9]PDSA, cl 3.3(e).
If either party disputes an invoice:
(a) the TPC Group will pay the non-disputed component (if any) of the invoiced amount in accordance with cl 3.3(e); and
(b) the TPC Group may withhold the disputed component until the dispute is resolved in accordance with cl 9, in part or in whole, in favour of the Manager and, subject to cl 3.3(g), shall pay any amount so resolved in favour of the Manager to the Manager within 30 days of resolution of the dispute.[10]
[10]Ibid cl 3.3(f)
Clause 3.7 expressly provides for the payment of interest in the event that the TPC Group defaults on payment, including by delay, in accordance with cl 3. Clause 3.7 provides that if the TPC Group defaults in payment of any monies due under cl 3 the TPC Group must, upon demand, pay interest at the rate of 2% higher than the current ANZ 90 day Bank Bill Swap Bid Rate on the amount in default from the time it fell due until that amount has been paid in full.
In order to understand what might legitimately be comprehended by a Dispute Notice it is necessary to refer to cl 9. Although cl 3.3(c) contemplates that the dispute resolution mechanism in cl 9 will apply where one or other of the parties disputes the Service Fee calculated by the nominated accountant, it is also plain that cl 9 is not confined to that circumstance. It is relevant to note that both Castleway and the TPC Group can dispute the Service Fee.
Clause 9.1 provides that if a dispute arises between any of the parties ‘in connection with’ the PDSA the dispute resolution procedures must be complied with before commencing any action or proceeding.[11] A party wishing to resolve a dispute must give notice in writing ‘specifying reasonable details’ of the dispute and ‘identify the matters in dispute’. The parties are then obliged to enter into good faith discussion. If the dispute remains unresolved 15 days after receipt of the notice, any disputing party may refer the dispute to an independent expert in accordance with cll 9.4 to 9.6. The expert determination is binding.
[11]An exception is provided for in respect of injunctive, declaratory or other interlocutory relief in cl 9.7.
It is also necessary to refer to cl 3.5 which allows Castleway to inspect and verify the accounts and the adjustment provisions in sch 2.
Clause 3.5 provides:
The TPC Group shall maintain, for a period of seven (7) years after the Financial Year to which they relate, accurate records and accounts to determine the Service Fee payable in respect of the relevant Financial Year. The TPC Group will permit an accountant or auditor of the Manager from time to time during ordinary business hours to inspect and verify all or any records required to be maintained by the TPC Group under this clause 3.5, provided that prior to inspecting such records and accounts, the accountant or auditor enters into a confidentiality agreement in favour of the TPC Group in a form approved by the TPC Group (acting reasonably).
Sub-clause 3 of sch 2 provides for adjustments to be made either because there is an amended income tax assessment or because an audit under cl 3.5 identifies an underpayment or overpayment of the Service Fee. It provides as follows:
Amended Income Tax Assessments
If for any Financial Year ending during the Term there is an amended income tax assessment for any TPC Entity the amount of the adjustment shall be offset (added or subtracted as the case requires) against the calculation of TPC Group Profit for the Financial Year in which the amended assessment is finalised.
Prior Year Errors
If an audit conducted under clause 3.5 of the Agreement reveals an underpayment or overpayment of the Service Fee for any Financial Year or the TPC Group and the Manager otherwise determine that there has been an overpayment or underpayment due to an error, omission or incorrect calculation of the Service Fee the amount of the underpayment or overpayment shall be adjusted (added or subtracted as the case requires) against the calculation of TPC Group Profit for the Financial Year in which the underpayment or overpayment was detected.
No Interest on Adjustments
The parties agree that any adjustment shall not be subject to default interest under clause 3.7 of this Agreement.
As already mentioned, in the final year of the PDSA, the service fee payable is required to be adjusted by reference to unrealised capital gains or losses. This is referred to as the termination adjustment. Sub-clause 4 provides for this further adjustment of the TPC Group Profit for the final year of the term. During the final year, the TPC Group Profit is to be adjusted as follows:
(a) TPC Group Profit shall be reduced by an amount equal to the unrealised capital losses as at the date of termination or expiry of the Agreement;
(b) TPC Group Profit shall be increased by an amount equal to unrealised capital gains as at the date of termination or expiry of the Agreement.
The parties agree that if the Term ends on a date other than at the end of a Financial Year, the Service Fee shall be reduced on a pro rata basis for the period between the date of termination and the end of the relevant Financial Year.
Broader context and commercial purpose
It is convenient at this point to mention some matters of context that were well known to the parties. At the time the PDSA was made, Mr Keeghan had been involved in the TPC Group business for 28 years and had been its Chief Executive Officer for 16 years. It must be accepted that in that role he had both responsibility for, and an understanding of, the accounting practices of the TPC Group. He had accounting qualifications.
Mr Keeghan did not have equity in the business. The effect of the PDSA, and one may infer, one of its purposes, was to allow him to share in the profits of the group.
The Court of Appeal referred to the purpose of the PDSA in the following way:
Objectively assessed, the purpose of the PDSA was, as Castleway and Mr Keeghan submitted, to provide for a long term relationship between the TPC Group on the one hand and Castleway and Mr Keeghan on the other whereby the TPC Group would combine its resources and Castleway and Mr Keeghan’s expertise to generate profits from property development opportunities. Whether the Service Fee provisions are characterised as a ‘sharing’ of profits or as a calculation ‘by reference to’ profits makes no difference. The parties determined that Castleway’s remuneration should be entirely dependent on the TPC Group Profit. This is explicable by the obligations of Castleway as Manager as provided for in the PDSA. It is Castleway’s work as Manager which will generate the profits. The purpose of the express promises in the PDSA, both Castleway’s obligation to source and manage projects to a profitable outcome, and the TPC Group’s obligation to pay the Service Fee, was maximisation of the TPC Group Profit.[12]
[12]Court of Appeal reasons, [137] (Whelan JA and Riordan AJA).
In such a context, when the parties were negotiating the PDSA, a critical issue would have been how profit was to be defined and what would be the process for its quantification and payment. At the time the PDSA was made, Mr Keeghan was familiar with the accounting and business processes adopted within the group. As a Chief Executive Officer he had access to, and oversight of, the accounts. On the other hand, without equity such as a shareholding or other form of interest his access to the books of accounts and his ability to verify them most likely depended on his continued employment. For that reason, another issue that would have been of importance to the parties was the means of verification of the profit in respect of which the PDSA was to provide a share to Castleway.
Of course, parties to commercial contracts often unwittingly inject ambiguities into contracts even in respect of central or critical clauses, yet the fact that the current disputed questions of construction largely focus on critical features of the PDSA and the parties were sophisticated and knowledgeable about the operations of the business and entities conducting it suggests that some care was exercised over the terms of the document.
Objections as to evidence
At this point it is convenient to refer to some evidence that Mr Keeghan sought to adduce about the negotiations leading up to the making of the PDSA. That evidence was objected to by the TPC Group on the basis that it was irrelevant and did no more than seek to prove Mr Keeghan’s subjective intentions or understandings.
In his amended witness statement dated 6 May 2022, Mr Keeghan sets out some of the background, as he sees it, and some aspects of the negotiations of the PDSA. He refers to various exchanges of correspondence. In one of the emails sent on 7 August 2009 which addressed including some projects into the profit figure for a period of time after the termination of the agreement, Mr Keeghan wrote:
Property developments take many years — 2 yrs is simply not enough. The profitability of the project and the development costs etc can be easily quantified, and the accounts can be audited for verification. 5 years would be required, and if sacked I would agree to continue to work on those property projects for no management fee
In response Mr Hockley, on behalf of the TPC Group wrote saying that:
If employment was to cease it would be inappropriate to continue within the organisation as per normal commercial employment conditions. However, as we have discussed it would be appropriate to consider the value created from these incomplete projects within the agreement. This would be along similar principles as that of the unrealised capital gains and losses at time of cessation (point 3 above). Your thoughts on how this calculation might be accommodated?
In my opinion the evidence of Mr Keeghan and the communications are inadmissible. The evidence reflects the subjective intention and understanding of Mr Keeghan, and the course of negotiations. It does not provide legitimate background evidence. In any event, even if it were admissible it does not assist the Court in deciding the construction of the disputed questions. It provides no sound reason to prefer one construction of the PDSA over another:
I reject other objections made by the TPC Group to the evidence of Mr Keeghan. To the extent they related to the incorporation of the earlier statement, the objection is one of form of the document, which is irrelevant given the adoption by the witness in his evidence and the content of the statement to which the objection relates is admissible.
Castleway objects to the expert evidence of Mr Cohilj on the basis that it contained opinions on questions of law. It did not object to receipt of the report as a submission. The distinction between matters of legitimate opinion and questions of law is not always difficult in the context of revenue law. I admit the report and have had regard to it. To the extent there are disputed questions of tax law, I have treated it as a submission as to the law. Given my construction of the PDSA, much of the report is of little relevance. It has not been significant to any disputed questions that I have had to resolve.
As will appear, the construction of the PDSA was not assisted by the witness evidence of the parties. Further, I have found the general criticisms of the process adopted by the TPC Group and the extent to which it sought to control the amount in the Service Fee Report to be largely irrelevant to the issues in dispute. Although Castleway complained that the nominated accountant acted as a cipher for the TPC Group it did not contend that the Service Fee Reports were invalid (perhaps in recognition of the fact that it sought to rely on its own invoice issued in response to establish an undisputed amount). Further, to the extent that there are valuations issues in dispute I have determined the questions on the evidence before the Court and have not accorded the decision of the nominated accountant any special weight or authority.
The principles of construction of commercial contracts
The general principles to be applied in the construction of commercial contracts were summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd in the following terms:[13]
The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice. ...
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties ... intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.
[13](2015) 256 CLR 104, 116–17 [46]–[51]; [2015] HCA 37 (citations omitted).
In Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd, Kiefel, Bell and Gordon JJ said:[14]
It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it.
[14](2017) 261 CLR 544, 551 [16]–[17]; [2017] HCA 12 (citations omitted).
In addition, the Court must have regard to all of the words used in the agreement ‘so as to render them all harmonious one with another’[15] and to ensure the ‘congruent operation [of] the various components [as a] whole’.[16]
[15]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109 (Gibbs J); [1973] HCA 36.
[16]Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, 529 [16] (Gleeson CJ, McHugh, Gummow and Kirby JJ); [2005] HCA 17.
In its reasons the Court of Appeal gave further guidance to the approach to a commercial contract. I have had regard to and endeavoured to apply that guidance.
DISPUTED QUESTIONS OF CONSTRUCTION
There are a number of disputed questions of construction concerning the PDSA, resolution of which will, in many respects, be critical to the outcome of the proceeding. In broad terms, the contested areas of construction concern:
(a) the nature of the TPC Group’s obligation to procure the nominated accountant to provide a Service Fee Report;
(b) the significance of the amount recorded in the income tax returns and the extent to which that amount can be challenged or revised;
(c) the role of the nominated accountant and effect of its calculation of the Service Fee; and
(d) the meaning of the phrase ‘unrealised capital gain’ in the calculation of the termination adjustment.
The obligation to calculate the Service Fee
The first contested issue of construction has both a procedural and a substantive aspect. It concerns the nature of the obligation on the TPC Group to complete financial statements and tax returns and to procure the nominated accountant to calculate the Service Fee. The issue is reflected in question 2.1.
Clause 3.3(a) requires the TPC Group to use ‘reasonable endeavours’ to procure that financial statements and tax returns for each entity are finalised on or before 31 December in the financial year following the relevant year. It must ‘procure in any event’ that the statements and returns are finalised by 31 March.
The TPC Group is also required to ‘procure’ the nominated accountant to calculate the TPC Group Profit in the manner set out in sch 2 and report the Service Fee payable within 30 days of the finalisation of the tax returns.
Castleway submits that the PDSA required that the 2017 financial year financial statements and tax returns be completed by 31 March 2018 with a Service Fee Report by 30 April 2018. The Service Fee Report was provided to Castleway on 23 August 2018. Castleway contends that this constituted a breach of the PDSA that sounds in damages in the form of interest.
I shall return to the factual position later in these reasons but deal here with the construction of the PDSA.
The first sub-issue is the nature of the obligation to procure the finalisation of the financial statements and tax returns for the entities within the TPC Group. Clause 3.3(a) is divided into two obligations. The first requires the TPC Group to use its best endeavours to finalise the accounts and returns by 31 December and the second to procure them ‘in any event’ by 31 March.
In my view, the distinction in language must be seen as deliberate and connotes different types of obligations. Whereas the first is expressed as an obligation to use best endeavours, the obligation to finalise the accounts by 31 March is a strict one, and the failure to do so constitutes a breach of the PDSA.
The second, related sub-issue concerns the obligation to procure the nominated accountant to calculate and report on the Service Fee. It is textually significant that cl 3.3(b) does not qualify the TPC Group’s obligation by requiring it to use best endeavours. The contrast with the first part of cl 3.3(a) must also be seen to be deliberate.
True it is that, perhaps unlike the accounts and tax returns, the time taken by the nominated accountant may to some extent be outside the control of the TPC Group. Although this should not be overstated since the preparation of the accounts and tax returns also involved external agents. However, there are a number of textual features that have led me to conclude that the obligations are in effect strict and that the failure of the nominated accountant to report within the 30 day period would constitute a breach of the obligation imposed on the TPC Group under cl 3.3(b).
The first indication is that the nominated accountant is ‘acting on behalf of the TPC Group’. This supports a conclusion that responsibility for any delay in the report, either due to a delay in commissioning the nominated accountant or a delay in the performance of the work, should lie with the TPC Group.
Second, the nature of the calculations will, in the ordinary course, be routine. As I explain below the starting point for ascertaining the TPC Group Profit is the amount in the tax returns of the various entities. The adjustments based on the table in sch 2 would not appear to be particularly complex. Of course, the final termination adjustment may well present some difficulty in valuing the unrealised capital gains and losses, however, such problems only arise in the final year and do not suggest that a strict construction is absurd or unintended.
Third, cl 3.3 is erected on an express sequential time frame. Clause 3.7 provides that if the TPC Group defaults in payment of any money due under cl 3, interest is payable on the unpaid portion at the rate of two per cent above the current 90 day Bank Bill Swap Bid Rate. This clause reinforces the theme of cl 3.3 that the TPC Group should abide by the temporal obligations contained within the clause and that the risk of delay should lie with the TPC Group, which, of course will be best placed to manage that risk.
Before leaving this aspect of the construction of cl 3 it is necessary to note a submission by Castleway that the obligation on the TPC Group is to obtain the ‘correct figure’ from the nominated accountant. I reject that submission for the reasons set out below.
Income as per the income tax returns
By way of an overarching theme, Castleway submits that the PDSA requires the identification of the true or correct taxable income and that the nominated accountant, and any expert appointed under cl 9 must arrive at the correct figure having regard to the underlying books of account and applying relevant principles drawn from accounting and taxation practice and law. So, for example, even though the tax return for one of the entities recorded a particular capital gain from the sale of an asset, Castleway submits that the PDSA requires the nominated accountant, the appointed expert, and the Court in the present context, to determine what the ‘correct’ cost base of the asset was for the purpose of determining the ‘correct’ income that should be, but was not, reflected in the tax return.
In support of that submission, Castleway notes that the PDSA allows for it to inspect and verify the financial records of the TPC Group which, it says, must be for the purpose of testing and, if necessary, correcting the figures in the tax returns. It submits that the calculation of the nominated accountant is not binding and the broad scope of the dispute clause is capable of correcting errors in the taxable income as stated in the tax returns.
Castleway submits that an income tax assessment can be varied up to four years after the assessment issues and there is therefore nothing to prevent a successful challenge by Castleway to the TPC Group’s calculation of taxable income being followed by an amendment to the relevant tax return.
It refers to what it describes as the absurd situation that the TPC Group could control the form of its tax returns despite Castleway contesting a particular expense and having its view ‘upheld’. It submits it would be absurd if errors in the tax return, including both inadvertent and deliberate errors, could not be corrected and a distribution of profit based on an erroneous taxable income would not be compatible with the PDSA’s profit sharing objective.
The TPC Group submits that the parties agreed to use the figure in the tax returns as the basis for the calculation and there is no means to alter the figures that are recorded in the returns. According to the TPC Group, the amounts in the tax return represent the immutable starting point for the profit calculation.
Decision
As a matter of text, the calculation of the Service Fee takes as its starting point the total taxable income ‘as per income tax returns’. The natural reading of that obligation is that the nominated accountant will take the figure set out in the tax returns. The PDSA does not say that the nominated accountant, or an expert acting under cl 9, must identify what, in its professional opinion, ought to be included in the total taxable income of the TPC Group. Nor can such an obligation be implied.
The definition and calculation of the TPC Group Profit is a central aspect of the PDSA. Indeed, it goes to the very heart of the agreement and would have been of central concern to the parties. As already observed, I infer that care was taken with its drafting.
Although the agreement provides that Castleway would be given a percentage of profit, there is no single or universal definition of profit. As a general concept, profit may be expressed as revenue less expenses, however which expenses may be brought to account or the timing in which that is to occur may vary depending on the particular context in which the issue arises. For example, income tax legislation may define profit for the purposes of determining eligible income in a way that differs from generally accepted accounting practice.[17]
[17]Federal Commissioner of Taxation v Whitfords Beach Pty td (1982) 150 CLR 355, 379–81 (Mason J); [1982] HCA 8.
In the PDSA the parties elected to define profit by reference to the taxable income or loss ‘as per income tax returns’. This is highly significant for at least two reasons:
(a) that which is required to be included in a return is determined by the operation of legislative rules that are capable of definite application and in general terms, do not depend on the individual accounting practice of the taxpayer; and
(b) there are obligations on taxpayers to lodge accurate returns, backed by sanctions enforced by the Commissioner of Taxation.
Although the amount returned lies in the control of the TPC Group as taxpayer, the obligation is to lodge an accurate return and the amount returned will, in the context of a self-assessment regime, be reflected in the issue of an assessment. Given Mr Keeghan’s role as Chief Executive Officer and his history with the TPC Group, it is not surprising that he was comfortable with the figure in the tax return as representing the critical means for the calculation of the TPC Group Profit.
It is important to recall that the PDSA was made at a time in which Mr Keeghan had a long and trusted role in the organisation and he was familiar with the accounting and taxation practices of the business. The decision to define profit by reference to the tax returns was obviously made in the context of identifying an objective figure, the reliability of which was backed by legal sanction.
I am unable to accept Castleway’s submission that the process of audit and review means that the relevant figure is not what the TPC Group chose to put in its tax returns but the figure that, in the application of taxation law and accounting principle, it should have put in. Despite the various ways in which the Service Fee calculation can be disputed and revised, in my opinion, none of them contemplate a change to the figure in the tax return other than through the process of an amended assessment.
The PDSA confers on Castleway the ability to inspect and verify ‘all or any records’ of the TPC Group which are required by cl 3.5 to be kept for seven years. A dispute may take the form of a challenge to the calculations of the nominated accountant or it may go further. A broader challenge is plainly contemplated. There would be no point in conferring an ability on Castleway to inspect and verify the financial accounts if it could not use the information it obtains to seek a revision of the Service Fee. However, confining the calculation to the tax returns does not undermine the process of review.
The adjustment following an audit allows for an adjustment to be made if there is an underpayment or overpayment of the Service Fee. Since the Service Fee is defined by reference to the figure in the tax return, correctly relying on that figure could not produce an overpayment or an underpayment even if an audit shows that a different figure for taxable income ought to have been included. In such a case, unless the parties otherwise agree, or unless there is an amendment assessment, the parties are bound by the figure in the tax return.
Support for that approach can, in my respectful opinion, be gleaned from the reasons of the majority in the Court of Appeal.
The Court of Appeal held that there was no ambiguity or contradiction in the provisions that required the income to be ‘as per income tax returns’ which was ‘founded on’ the taxable profit as per the returns. The Court held that the clause refers to ‘a specific figure in income tax returns, not any other amount that, despite being a different figure, might somehow be “consistent with” the figure in the return in question, or which merely “has regard to” the latter figure’.[18]
[18]Court of Appeal reasons, [77].
Robson J had, at trial, held that the words ‘net profit’ appearing in the definition of ‘TPC Group Profit’ meant ‘net profit’ according to its ordinary usage. On that basis, ‘net profit’ was the figure arrived at after deducting from revenue ‘only expenses relevant to the calculation of the profit or loss in the sense understood by reasonable businesspersons should be taken into account in calculating the TPC Group Profit or Loss’.[19] For that reason, an extraordinary donation of $20 million to a charitable foundation was on the reasoning of Robson J excluded.
[19]Re Adaz Nominees Pty Ltd (No 2) [2017] VSC 578, [73].
The Court of Appeal rejected that construction. The majority held that the figure in the tax returns was ‘critical’ and the deductions required to be made included all tax deductible expenses. However, the making of the donation of $20 million was a breach of an implied term not to take any step that would deprive the counterparty to the benefit of the contract. The breach found by the Court of Appeal was antecedent to the completion of the tax return. However, the approach of the Court of Appeal is consistent with primacy being given to the form of the tax return for the purposes of making the calculation of the Service Fee.
Finally, I would add that the approach advanced by Castleway, which treats the amount in the tax returns as provisional, would be productive of disputation and uncertainty. Despite defining the profit by reference to the amounts in the tax returns, Castleway would give no or little significance to the tax returns. In my view, such a construction would run counter to the evident purpose of defining the income in the way that was chosen by the parties.
The effect of the nominated accountant’s determination
The next issue of construction relates to how a calculation made by the nominated accountant and reflected in a Service Fee Report is to be treated by the parties including in any dispute resolution process or in a proceeding in a court.
The TPC Group submissions
The TPC Group submits that a Service Fee Report is final and binding on the parties subject only to a dispute notice being served within the 10-day time period stipulated in cl 3.3(c) or on limited grounds that relate to whether or not it can be said the termination accorded with the statutory task reposed in the nominated accountant under the PDSA. It submits that the parties are bound by the determination if the nominated third party has addressed the task fixed by the contract for its determination.
The TPC Group submits that the role of the nominated accountant is akin to that of an expert third party determination. In AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd, Nettle JA articulated the principles in the following way:[20]
… the question of whether it is open to review an expert determination on the ground of error is in the first place to be decided according to whether the determination answers the contractual description of what the expert was required to determine. I also agree with the judge that the question of whether an error in determination deprives the determination of compliance with the contractual description of what the expert was required to determine is in the first place to be answered according to whether the error occurred in respect of a task which the contract entrusted to the expert. As Mason P explained in Holt v Cox, although mistake is not itself a ground for vitiation of a final and binding expert determination, a mistake may still be of such a nature that the resultant determination is beyond the realm of contractual contemplation — beyond anything which the parties may be supposed to have intended to be final and binding — and therefore susceptible to review.
The situation is analogous to that which faces a court in a cases of judicial review of administrative error. Just as an administrative decision maker has an area within which he or she may make mistakes without relevant consequence, so too an expert appointed under contract has an area within which the contract contemplates that he or she may make mistakes without relevant consequence. Similarly, just as there are some administrative mistakes which amount to jurisdictional error, and so expose a decision to judicial review, those appointed under contracts to make determinations may make errors which are beyond the area of tolerance which it is to be supposed the contract had in view.
Therein lies the distinction drawn in some of the authorities, and observed by the judge in this case, between an error in the exercise of a judgment, opinion or discretion entrusted to an expert, and an error which involves objective facts or a mere mechanical or arithmetical exercise. Subject to the contract in question, it is easier to suppose that parties to a contract contemplate that an error of the former kind be beyond the realm of review than it is to think that they intend to be fixed with errors of objective fact or in processes of mechanical calculation.
As this case demonstrates, however, matters are likely to be more complex where error occurs in the course of an exercise which is partly comprised of discretion, judgment or opinion and partly constituted of objective fact or mechanical calculation. In some such cases, the overriding discretionary or judgmental character of the exercise may so inform each step in the determination as to put even those steps which are matters of objective fact or mere mechanical calculation beyond the scope of permissible review. In other instances it may appear that, despite the overall character of the exercise, the various steps in the determination are severable, according to whether they are essentially discretionary or judgmental or simply matters of objective fact or mechanical calculation, and that those steps which are of the latter kind are within the scope of permissible review. The question in each case is what the parties should be presumed to have intended, and that is to be determined objectively from the terms of the contract, bearing in mind the context in which it was created.
[20][2006] VSCA 173, [51]–[54] (citations omitted).
The TPC Group submits that the adjustments that are required to be made from the taxable income ‘as per’ the income tax returns, including the termination adjustment, involve matters of judgment and degree and that in order to displace the calculation it is necessary to show that the calculation was not open to any accountant called upon to undertake the task. It says that the task of the nominated accountant is to start with the tax returns and use the management accounts to make the necessary adjustments, recognising that the adjustments would not otherwise be reflected in the tax returns. It says that the PDSA does not contemplate that the nominated accountant would go behind the management accounts but would use them as a basis for the required calculation.
Castleway submissions
Castleway submits that the report of the nominated accountant does not serve the role of an expert determination and has no special status. It submits:
(a) the nominated accountant is not independent but acts on behalf of the TPC Group;
(b) the PDSA does not say that the report is binding. It notes that in the event that no dispute notice is served it is deemed to be agreed, but gives it no status in the event of a dispute;
(c) the PDSA refers expressly to the determination of an expert appointed by the parties under cl 9 being ‘final and binding’. The absence of similar language in relation to the report of the Service Fee tells against any special status; and
(d) the limited timeframe, which would prevent the nominated accountant from having the opportunity to review the primary accounts, is inconsistent with a binding determination by the nominated accountant.
Castleway further submits that, in the case of the Service Fee Reports, the nominated accountant did not exercise independent judgment but was dictated to by the TPC Group through its solicitors. In that respect, it refers to a number of emails from the TPC Group solicitors in which the nominated accountant was told to use certain figures. For example, in relation to the termination adjustment for the 2017 financial year the TPC Group solicitors instructed the nominated accountant to use certain valuations for the purposes of the calculation. I shall return to this evidence in due course.
Decision
As already explained, the starting point for the calculation of the Service Fee is taken from the income tax returns. The adjustments required by the table in sub-cl 2 of sch 2 and the final adjustments in sub-cl 3 of sch 2 require the nominated accountant to perform some calculation that may not be apparent from the returns. Self-evidently, these items will represent a departure from the amount of taxable income stated in the return. The PDSA does not confine the nominated accountant to any particular source in making the required adjustments but it might be expected that the adjustments will be derived from the financial accounts. No doubt, it would be expected that the nominated accountant would employ its professional skill and judgment and undertake the exercise in accordance with generally accepted accounting practice.
The TPC Group practice was to accrue interest on a monthly basis and to record on a receipts basis for tax purposes.
In my view, the outstanding loans did not represent an unrealised capital gain. The revenue derived from the loans was treated, appropriately, as revenue when received. There was no occasion to bring forward or capitalise the future income stream as an unrealised capital gain. Although loans can be factored, there is nothing to suggest that this was a realistic possibility in respect of any of the loans held by the TPC Group. There was the possibility that the loans would be repaid, but on such a scenario there would be no gain on repayment of the principal.
The treatment by the nominated accountant accorded with the taxation and accounting practice of the TPC Group. It was both open to the nominated accountant and in my view correct not to include these so called financial assets in the calculation of the termination adjustment. That approach also accords with the approach taken in respect of Rokeby Street by reference to the purpose of the loan, the intended financial return and the existing accounting and taxation practice adopted by the TPC Group.
Even if, properly framed, the question is whether the Service Fee, in so far as it related to the gains from the properties, was reasonably open to the nominated accountant I would hold that in respect of Rokeby Street, Garfield and Ellis Beach, it was not.
It was not open or reasonable to regard the Rokeby Street property as being of no value. In relation to Garfield the nominated accountant used an out of date valuation that predated actual sales that had been made (but not settled) before the termination date and ignored relevant material that was available or could have been obtained with reasonable diligence. In relation to Ellis Beach, the evidence of Mr Leeson and Mr Coates was to the effect that the HTW valuation on which the nominated accountant proceeded was flawed. It did not provide a reasonable basis for the service fee in that respect.
CALCULATION OF THE SERVICE FEE (OTHER THAN TERMINATION ADJUSTMENT)
Gumbuya Park
Gumbuya Park comprised land at 2705 Princes Highway and 155 Brew Road Garfield, Victoria. The land was held by a TPC Group company called Standard Roads Pty Ltd. Standard Roads operated an asphalting and road construction business. In March 2002, the shares in Standard Roads were sold to Fulton Hogan Constructions Pty Ltd. Inadvertently, the sale of shares had the effect of transferring ownership of Gumbuya Park to Fulton Hogan. To reverse this unintended effect, Futon Hogan agreed to sell Gumbuya Park to Looilla Pty Ltd (‘Looilla’), a company within the TPC Group, for consideration of $1. Stamp duty was paid on the sale in the sum of $82,500 based on market value at that time.
On 22 September 2016 Looilla sold Gumbuya Park to an unrelated third party for the price of $3,650,000. As a result of the sale, Looilla received income, being the purchase price less cost base, which it was obliged to declare in its tax return. In its tax return Looilla returned income from the sale in the amount of $1,892,879. The parties agree that from this amount, it can be inferred that the cost base used by Looilla in its return was $1,649,409.
Castleway submits that the cost base used by the TPC Group in completing its tax return was wrong and that a different figure should be included as income. Specifically, it submits that the correct cost base was $602,879 as this was the figure recorded in the books of account and the net profit figure should be adjusted accordingly.
On the proper construction of the PDSA, the income recorded in the tax return of $1,892,979 was required to be taken into account in identifying the ‘income per tax return’. It was not suggested that the insertion of this amount into the tax return was a breach of the PDSA or that it was anything other than genuine. This amount was taken into account in calculating the Service Fee. Subject to an argument that I will shortly address, there was no error in the approach taken by the TPC Group in this regard. Castleway’s argument proceeds on a misconstruction of the PDSA.
Castleway also submits that the figure was the subject of an agreement between Mr Keeghan and Mr Lee in the context of good faith discussions arising from Castleway’s notice of dispute.
The evidence of an agreement
Following service by Castleway of a notice of dispute, Mr Keeghan and Mr Lee met on a number of occasions pursuant to the obligation in cl 9 to engage in good faith negotiations to resolve the dispute. It is not in dispute that Mr Lee and Mr Keeghan met on 7 and 18 March, 15 April and 16 May 2019.
As will appear both gentlemen said that they had prepared documents at or about the time of those meetings for the purpose of recording what was discussed. In the case of Mr Keeghan, he said that he kept a spreadsheet setting out the issues in dispute and the position of the parties. His evidence about this document was somewhat unclear but in cross-examination he said that parts of the document were prepared in advance of a meeting and parts of it after the last meeting. Mr Lee took some brief handwritten notes.
On 29 May 2019, the solicitor for the TPC Group wrote to Castleway’s solicitor setting out their understanding as to the state of negotiations. In relation to Gumbuya Park, which was referred to by reference to Looilla, the letter stated:
The TPC Group maintains its position as set out in the TPC Group’s March Response, and expressly denies any breach of Order 4. Accordingly, this item remains in dispute.
Mr Keeghan said that the first meeting occurred on 7 June 2019. One of the issues discussed was Gumbuya Park. Mr Keeghan said that he told Mr Lee that the cost base that was used to derive the net income was higher than the cost base in the company accounts, which recorded a cost base of $602,000. He said that Mr Lee agreed to look at the issue and return to it at the next meeting.
At the next meeting, which he thought was on 17 June 2019, the issue was not discussed.
He said there was a third meeting at which they discussed Gumbuya Park. Mr Keeghan said that he told Mr Lee at that meeting that when the property was sold Mr Keeghan had discussed the issue with RSM, the auditors of Looilla, who advised him that the sale should be recorded in the accounts of Looilla with a cost base at $602,500 which is what occurred. According to Mr Keeghan, Mr Lee acknowledged the cost base had been recorded but that at the time of the preparation of the tax return it was decided to use a cost base calculated by reference to the stamp duty paid and, as the amount recorded in the tax return reflected that cost base, that would be the figure that would be used for the purposes of the PDSA.
Mr Keeghan said that he reached agreement with Mr Lee on Gumbuya Park but he could not remember whether it was at the third or the fourth meeting.
Mr Keeghan said that at the fourth meeting, Mr Lee was unhappy with him and the meeting was terminated shortly after it commenced. Mr Keeghan said that at this meeting, Mr Lee ‘rescinded all of his previous concessions’.
Mr Keeghan said that he took notes at the meeting and afterwards transcribed them into a spreadsheet. During the course of his evidence Mr Keeghan was permitted to refresh his memory by reference to that spreadsheet.
The first part of the spreadsheet, which contains the footer ‘TPC Group Profit FY17 amendments to ADJUSTED INCOME IL part review 150419.xlsx’ contains five columns. The column headings and entries for Gumbuya Park are as follows:
Entity/Project
Amendment required to FY17 adjusted income
Adjustments now made by GT; adjustments GDK included in Termination Fee
Comments and further clarification required
After 7 March and 18 March Meetings re DN
Outstanding queries on Adjusted Income
15/04/2019 – GDK adjustments
Sale of Gumbaya Park Land
Cost base has been incorrectly determined at $1,649,409 – the land is shown in Gumbaya Park P/L ledger at $602,879.
Profit on sale was $2,788,699.95 not $1,895,879
Adjustment required to reflect correct profit
$895,620
IL said ‘PDSA is calc based on taxable income’ and that is not what he is relying on.
See Looilla correct GG tab tab
GDK gave working sheet to IL 18/3/19
GDK – Sales Price was $3,650,000 less land cost, s’duty and legals/comm
Net margin is $2,788,699 per TPC schedule
Appears TPC have ‘manufactured’ a higher cost base to report less tax payable, and ignored history contained in the red property files.
A further iteration of the spreadsheet, containing the footer ‘TPC Group Profit FY17 amendments to ADJUSTED INCOME IL after 160519.xlsx’ contains six columns, with a sixth column headed: ‘16/05/19 DN meeting’. The first four columns of the entry for Gumbuya Park are identical to the previous iteration of the spreadsheet. The fifth and sixth columns are as follows:
Outstanding queries on Adjusted Income
15/04/2019 – GDK adjustments
16/05/19 DN meeting
GDK – Sales Price was $3,650,000 less land cost, s’duty and legals/comm
Net margin is $2,788,699 per TPC schedule
Appears TPC have ‘manufactured’ a higher cost base to report less tax payable, and ignored history contained in the red property files.
IL agreed to be adjusted as incorrect
IL rescinded his agreement 15/4/19 that this be adjusted. Says he will rely on the tax return as submitted as per PDSA
After referring to that entry in his evidence in chief, Mr Keeghan gave evidence that Mr Lee had agreed to the adjustment sought by Mr Keeghan at the meeting of 15 April.
In cross-examination, Mr Keeghan said that he had prepared the first form of the spreadsheet before the 15 April meeting and that he had given a copy to Mr Lee to guide the discussion. He said that after the final meeting on 16 May he inserted the last sentence to the entry for 15 April and at the same time the entry for 16 May so that he recorded both the agreement and its rescission at the same time although they had happened at different meetings.
In his evidence, Mr Lee said that he did not have much recall of the detail of the meetings. He said, with the exception of the last meeting, the meetings went for a couple of hours and that he and Mr Keeghan would work though the issues Mr Keeghan sought to raise. Again, with the exception of the last meeting, he said he kept very brief handwritten notes. The last meeting concluded shortly after it started, when Mr Lee got up and left the meeting without any progress being made. No notes were made by Mr Lee in relation to the last meeting.
The notes taken by Mr Lee at the first meeting on 7 March show that Mr Keeghan raised the cost base issue and that it was ‘to be reviewed’. The next entry for Gumbuya Park are in the notes of the meeting of 15 April where the following notation appears:
4 Accept Gumbuya Park, Adj $895
Mr Lee’s evidence was that at the meeting of 15 April, he was ‘potentially considering’ making a concession in relation to Gumbuya Park. In evidence in chief, Mr Lee was asked, after referring to his notes, whether he had made a concession or reached an agreement on Gumbuya Park, to which he replied ‘not a final agreement’. He accepted that the meeting had occurred a long time before and that ‘it may be a possible adjustment to the calculations depending on how everything else panned out’.
Having carefully considered the evidence of Mr Lee and Mr Keeghan I am satisfied that there was an agreement to adjust the income in the amount of $895,200. I reach that conclusion for the following reasons.
I accept that both Mr Lee and Mr Keeghan were endeavouring to recall the events as best they could. Neither had a recollection of much of the detail. Mr Keeghan was clear in his evidence that an agreement had been reached. Mr Lee appears to have accepted that there was some degree of consensus but that it was conditional and would depend on how things panned out.
The notes taken by both men support an agreement having been reached. The reference in Mr Lee’s notes to ‘Adj $895’ reflects the figure being sought by Mr Keeghan as shown in the second column of his spreadsheet. It provides some support for Mr Keeghan’s evidence as having provided the spreadsheet. In my view, the evidence of Mr Lee that the offer was tentative or was conditional on another agreements being made is implausible. The meetings proceeded on the basis of working though item by item as if they stood alone. I do not accept that there was any suggestion that no agreement would be reached until all items had been resolved. Indeed, that was not the course that was adopted with the TPC Group and Mr Keeghan both accepting various matters and giving effect to them.
I do not consider much weight should be placed on the solicitor’s letter of 20 May. By that stage it is clear that relations had broken down and the meeting of 19 May finished abruptly and without further discussion. The fact that Gumbuya Park was said to still be in dispute may have reflected Mr Lee’s view or be a product of general unhappiness with the state of affairs. I note that Mr Keeghan told Mr Lee that he did not trust him and no doubt this coloured Mr Lee’s view. However, I am satisfied that an agreement was reached at the penultimate meeting when relations were not as strained as they were to become.
It is true that Castleway did not dispute the solicitor’s letter which stated that Gumbuya Park had not been agreed. However, I would not draw an inference that Castleway was thereby conceding that to be reflecting of the state of affairs. There were many items at play; it is entirely plausible that the assertion could have gone unremarked. It is clear that putting Gumbuya Park to one side there were many items that were the subject of continuing dispute.
It follows that there was an agreement. The TPC Group accepted that if I found that an agreement was reached between Mr Keeghan and Mr Lee, it would follow that the termination adjustment would be adjusted take into account what was agreed. The agreement was to adjust the income by adding the amount of $895,620 to the profit.
Mr Keeghan’s employment entitlements
When Mr Keeghan’s employment was terminated, he was entitled to accrued entitlements under the ESA in relation to unused annual leave, long service leave and sick leave in the sum of $443,422. The TPC Group claimed this amount as a deduction in the 2017 financial year. It is recorded in the income tax returns and reflected in the taxable income. This deduction had the effect of reducing the TPC Group Profit for that year, with a corresponding reduction in the amount payable to Castleway in the Service Fee.
Castleway contends that it should have been claimed as a deduction in the 2018 financial year being the year in which it says the amount was paid.
Given my construction of the PDSA, I reject this argument. This component of the Service Fee correctly reflected the income ‘per the income tax returns’. No amended return has been lodged relating to this issue.
I note that, in any event, the amount was paid on 30 June 2017. I reject the argument advanced by Castleway that this was premature because Mr Keeghan remained employed as Chief Executive Officer until the end of 30 June 2017. The amount was deducted in the year it was paid.
INTEREST DISPUTES
Payment of the undisputed amount
The Court of Appeal held that where there is a dispute as to the Service Fee consequent upon the nominated accountant’s report, the Manager is not precluded from rendering an invoice containing non-disputed and disputed components, and, if it does so, the TPC Group is obliged to pay the non-disputed components in accordance with cl 3.3(e), that is, 30 days after receipt (subject to sub-cl (g), where that applies).[43]
[43]Court of Appeal reasons, [250].
As already observed, Castleway served an invoice on 19 August 2019. That invoice followed the Service Fee Report.
Castleway submits that, when regard is had to the Revised Service Fee Report and the TPC Group’s dispute notice served in respect of it, the undisputed amount owing to Castleway was $7,277,954.50 (exclusive of GST).[44] It says that this amount was a debt or sum certain that was payable on 19 September 2019, being 30 days after it issued its invoice.
[44]$8,005,749.95 including GST.
Castleway notes that this amount is slightly less than the amount which the TPC Group said was undisputed in its letter of 30 June 2021 (being $7,415,653 excluding GST). The discrepancy arises from the inclusion by the TPC Group of $160,000 based on an amendment to the Tynong Pastoral tax return to exclude as a decision a payment to Partners in Property Queensland Pty Ltd.
Castleway seeks interest under s 58 of the Supreme Court Act1986 on the amount of $8,005,749.95.
The TPC Group submits that the invoice has no status under the PDSA because it was supplanted or displaced as a result of the service of the Second Revised Service Fee Report. It says that a Service Fee Report is the foundation of the Manager’s right to payment for the Service Fee.
The TPC Group says that:
(a) Robson J had held that the nominated accountant had not addressed the contractual task at the time it issued the Service Fee Report because it included certain expenses which Robson J held fell outside the deductions allowed for by the PDSA, which he held were limited to deductions that related to the ordinary course of business (rather than those claimed in the relevant tax return);
(b) The effect of Robson J’s decision was that the Service Fee Report had ‘no legal effect’ and led to the Revised Service Fee Report which replaced it;
(c) Castleway served a dispute notice in response to the Revised Service Fee Report;
(d) The Court of Appeal held that the construction of the PDSA adopted by Robson J in relation to what expenses should be deducted was wrong and that the profit was the profit contained in the relevant tax return;
(e) The effect of the reasons and orders of the Court of Appeal was that the nominated accountant had not properly addressed the contractual task required in assessing the 2017 financial year Service Fee in the Revised Service Fee Report, which was also then of no legal effect in determining the 2017 financial year Service Fee. The Revised Service Fee Report was accordingly a nullity as far as affecting the rights and liabilities of the parties was concerned. The TPC Group remained under an obligation to procure the nominated accountant to report as to the 2017 financial year Service Fee by all means within its power, which entailed the TPC Group requesting the nominated accountant to prepare a report which conformed with the orders of the Court of Appeal;
(f) The Second Revised Fee Report was procured as a result of the order of Riordan J which allowed for the parties to request a further Service Fee Report.
In short, the TPC Group submits that the steps taken before the Second Revised Service Report, including the issue of the invoice, are of mere historical significance.
Decision
The purpose of the nominated accountant procedure, including the provision of a Service Fee Report and invoice, is to allow for the prompt calculation and payment of the Service Fee for each year. The fact that a Service Fee Report contains an error or proceeds on a false basis does not mean that it is incapable of triggering an invoice. Indeed, the purpose of the provisions is to allow a winnowing of agreed amounts so as to focus attention on those areas that remain in dispute. It would subvert that purpose if an error as to one component of the Service Fee precluded the Manager from issuing an invoice and required the whole process to either miscarry completely or start from the beginning. It is also plain that Castleway should not have to wait until all disputes are finalised before it is entitled to be paid anything.
When a Service Fee is reported to the parties, both the TPC Group and the Manager have the opportunity to dispute the amount reported. As a matter of course, the Manager may initiate a dispute where it contends that the reported fee is less than it considers should have been reported, and conversely, the TPC Group may engage the dispute regime where it contends that the reported fee is too high. That is what happened in resolution to the Service Fee Report and the Revised Service Fee Report.
Although the PDSA does not contemplate that the nominated accountant would prepare and serve more than one Service Fee Report for a given period, there is no prohibition on doing so. There is nothing in the PDSA that would prevent the parties utilising the Service Fee process on more than one occasion as part of resolving a dispute. In my view, such a course is consistent with the purpose of the PDSA.
Where there is a dispute, the provision of a Service Fee Report may commence an iterative process, the first step of which is the serving of a dispute notice and the holding of good faith discussions. Although, as I have held, a critical component of the calculation is fixed by the amounts recorded in the TPC Group tax returns, other components may not necessarily admit of a single or precise answer. So for example, a termination adjustment may involve competing assessments of the hypothetical value of an asset at a point in time. It is unsurprising that the parties continued to utilise the nominated accountant process to work through their dispute. The process aided clarity and provided a mechanism for the payment of amounts that were once in dispute. As a result of decisions of the Court, some of the decisions have been shown to be in error.
Although dispute notices were served in response to the Service Fee Report and the Revised Service Fee Report, Castleway refrained from issuing an invoice until the Revised Service Fee had been provided. Again, this was not inconsistent with the PDSA. In particular I note that although there is a timeframe for the issuing of an invoice, the nature of that obligation is dealt with expressly in the following way:
Any failure or delay in submitting a Tax Invoice shall not be construed as a waiver of the Manager’s right to submit the Tax Invoice.
Conformably with the text of the PDSA, it was open to Castleway to issue an invoice in response to the Revised Service Fee Report. There was no obligation on the TPC Group to accept the amount owing and it could either dispute the Service Fee Report or dispute the invoice.
Through its dispute notice served in response to the Revised Service Fee Report, the TPC Group indicated the extent to which it did not agree with the reported fee. It also necessarily identified the undisputed amount. In my opinion, the TPC Group became obliged to pay the undisputed amount within 30 days. The amount of the reported Service Fee which it disputed was clear and the corresponding undisputed amount was a sum certain that the TPC Group became obliged to pay.
The TPC Group does not contend that the invoice was invalid or inoperative at the time it was issued. Rather, the TPC Group submits that it was rendered nugatory or became a nullity as a result of the orders made by the Court of Appeal. Alternatively, it contends that by acquiescing in the decision to issue the Second Revised Service Fee Report it is estopped from relying on the invoice.
I reject those submissions. The Service Fee Report provided by the nominated accountant on 22 August 2018, the Revised Service Fee Report and the Second Revised Service Fee Report were various iterations of the 2017 report. It was open to Castleway to issue an invoice consequent upon the service of the Revised Service Fee Report and for the TPC Group to dispute the invoice.
I do not accept the TPC Group’s submission that the Revised Service Fee Report was a ‘nullity’. In my opinion it represented the genuine professional opinion of the nominated accountant. The errors in the calculations that were subsequently exposed by the court process did not preclude the report being the foundation for the identification of the undisputed amount. Indeed, that is what occurred; the TPC Group accepted at the time it disputed the Revised Service Fee Report that at least $7,277,954.50 (exclusive of GST) was undisputed and owing.
Nor do I consider that any estoppel arises against Castleway. True it is, that Castleway had many complaints against the TPC Group and the nominated accountant. However, that did not preclude it from serving an invoice in order to at the least distil an undisputed amount. That is what occurred. The ongoing iterative process did not render the invoice inefficacious. Castleway did not elect to abandon the invoice and its conduct was not inconsistent with reliance on the invoice to trigger payment of the undisputed amount.
The process adopted by the parties of preparing a Second Revised Service Fee Report was not intended, and did not have the effect of, putting everything in dispute and returning the parties to the beginning of the process as if nothing had occurred before.
It follows that Castleway was entitled to be paid the undisputed amount within 30 days of receipt of the invoice. Payment was not made until 19 July 2021. I would reserve my decision on the quantum of the interest until hearing from the parties on the potential application of cl 3.7 of the PDSA before deciding whether Castleway is entitled to interest under s 58 of the Supreme Court Act 1986 for the period between 19 September 2019 and the date of payment on the undisputed sum of $7,277,954.50 (exclusive of GST).
Interest on late service of accounts, tax return and Service Fee Report
Earlier in these reasons I set out my conclusions on the obligation on the TPC Group to finalise accounts and procure a Service Fee Report from the nominated accountant.
Clause 3.3(a) required the TPC Group to finalise its accounts and tax returns by 31 March 2018. The accounts were finalised and provided to Castleway by 19 April 2018.
The TPC Group was required by cl 3.3(b) to obtain from the nominated accountant a Service Fee Report within 30 days from 19 April 2018, that is by 19 May 2018. The Service Fee Report was provided on 22 August 2018.
By reason of these breaches, there was a delay in the time in which Castleway could issue an invoice that would have triggered an obligation to pay any undisputed amount. However, there was no obligation to pay until Castleway served an invoice. In my view the delay in finalising the Service Fee Report did not result in any loss to Castleway.
As I have already explained, I reject the submission of Castleway that the TPC Group was required to ensure that the Service Fee Report was correct, with the consequence that it is entitled to damages by way of interest on the difference between the amount calculated by the nominated accountant and the amount this Court ultimately determines to be the correct Service Fee. The PDSA deals with errors in the Service Fee Report through the dispute resolution process. Although there were errors in the Service Fee Report in the sense that, in some respects, it did not answer the contractual description, nevertheless it discharged the obligation to procure a Service Fee Report and it was open to the parties to engage the dispute resolution process, which they did. The same holds true for the Revised Service Fee Report and the Second Revised Service Fee Report.
Claim for commission
Given that the commission payable on introduced projects depends on the extent to which there was any entitlement to payment for those projects as part of the Service Fee, the TPC Group submitted that the issue concerning commission can be deferred until after I have resolved the issues in relation to the Service Fee including the termination payment.
CONCLUSION
I will give the parties an opportunity to make submissions on the orders that should be made conformable with these reasons.
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SCHEDULE OF PARTIES
| S ECI 2019 02312 | |
| BETWEEN: | |
| ADAZ NOMINEES PTY LTD (ACN 006 228 119) ATF THE RADO NO 2 TRUST | First Plaintiff / First Defendant by Counterclaim |
| CORTEK DEVELOPMENTS PTY LTD (ACN 004 997 773) | Second Plaintiff / Second Defendant by Counterclaim |
| ASPHALT ROADS PTY LTD (ACN 005 374 247) | Third Plaintiff / Third Defendant by Counterclaim |
| ROADING GROUP PTY LTD (ACN 097 993 292) ATF THE RADO INVESTMENT TRUST NO. 2 | Fourth Plaintiff / Fourth Defendant by Counterclaim |
| ROADING INVESTMENTS PTY LTD (ACN 104 325 797) ATF THE RADO INVESTMENTTRUST NO 3 | Fifth Plaintiff / Fifth Defendant by Counterclaim |
| LOOILLA PTY LTD (ACN 092 067 322) ATF LOOILLA TRUST | Sixth Plaintiff / Sixth Defendant by Counterclaim |
| BELLONIC PTY LTD (ACN 092 015 828) ATF BELLONIC TRUST | Seventh Plaintiff / Seventh Defendant by Counterclaim |
| TYNONG PASTORAL CO PTY LTD (ACN 060 828 364) ATF TYNONG PASTORAL UNIT TRUST | Eighth Plaintiff / Eighth Defendant by Counterclaim |
| PIP MELBOURNE PTY LTD (formerly PARTNERS IN PROPERTY PTY LTD) (ACN 120 760 125) | Ninth Plaintiff / Ninth Defendant by Counterclaim |
| TYNONG PROPERTY DEVELOPMENTS PTY LTD (ACN 081 950 647) ATF AMARCO SERVICES TRUST | Tenth Plaintiff / Tenth Defendant by Counterclaim |
| - v - | |
| CASTLEWAY PTY LTD (ACN 131 870 481) ATF THE CASTLEWAY TRUST | First Defendant / First Plaintiff by Counterclaim |
| GERARD DAMIEN KEEGHAN | Second Defendant / Second Plaintiff by Counterclaim |
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