Agricultural Land Management Ltd v Jackson (No 2) - [2014] WASC 102

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: AGRICULTURAL LAND MANAGEMENT LTD -v- JACKSON [No 2] [2014] WASC 102

CORAM: EDELMAN J

HEARD: 27 NOVEMBER 2013, 2 DECEMBER 2013, 10 DECEMBER 2013, 16 DECEMBER 2013, 30 - 31 JANUARY 2014 & FINAL WRITTEN SUBMISSION ON 19 FEBRUARY 2014

DELIVERED : 28 MARCH 2014

FILE NO/S: CIV 1626 of 2008

BETWEEN: AGRICULTURAL LAND MANAGEMENT LTD
Plaintiff
AND
BRETT LESLIE JACKSON
First Defendant
GRAEME MICHAEL GOFF
Second Defendant
BUNBURY CENTRO PTY LTD
Third Defendant

Catchwords:

Equity - Fiduciary duties - Whether mere existence of conflict is actionable - Whether a breach of conflict rule requires a fiduciary actually to act in a position of conflict and pursue or prefer a personal interest - Judgment pars [263] - [275]

Equity - Fiduciary duties - Whether a clause of a constitution of a trustee company can exclude all fiduciary duties - Consistency with s 601FC Corporations Act 2001 (Cth) – Effect on fiduciary duties owed by directors to the company - Judgment pars [276] - [284]

Equity - Equitable compensation - Where fiduciary duties owed by directors to a company – Whether the company can sue its directors for loss if contract entered into at an undervalue by trustee company on behalf of beneficiaries - Misleading to ask whether fiduciary duties are owed to the company 'in its own right' or 'as trustee' - Irrelevance to the award of compensation of whether the trustee will hold any recovery on trust for beneficiaries - Judgment pars [300] - [331]

Equity - Equitable compensation - Difference between substitutive compensation and reparative compensation - When substitutive compensation is available - Judgment pars [333] - [385]

Equity - Equitable compensation - Causation - 'Common sense' test of causation - Scope of liability for consequences - Need to identify precisely the scope of duty owed - Judgment pars [390] - [399]

Corporations - Meaning of 'compensation' and causation requirements in s 1317H of the Corporations Act - Judgment pars [434] - [452]

Corporations - Effect of deregistration of a registered scheme on 'compensation' in s 1317H of the Corporations Act - Judgment pars [453] - [461]

Corporations - Meaning of 'knowingly concerned in' in s 79(c) of the Corporations Act - Requirement of 'practical connection' with at least one element of the contravention - Judgment pars [285] - [298]

Limitation of actions - Application of limitation period by analogy - Limitation period for breach of equitable duty of care and skill by analogy with breach of common law duty of care and skill and by analogy with s 180 of Corporations Act - Judgment pars [206] - [213]

Legislation:

Corporations Act 2001 (Cth)
Limitation Act 1935 (WA)

Result:

Claim dismissed in part; further consequential submissions required

Category: A

Representation:

Counsel:

Plaintiff:     Mr M L Bennett
First Defendant             :     Mr J C Vaughan SC
Second Defendant         :     Mr J C Vaughan SC
Third Defendant           :     Mr J C Vaughan SC

Solicitors:

Plaintiff:     Bennett & Co
First Defendant             :     Lewis Blyth & Hooper
Second Defendant         :     Lewis Blyth & Hooper
Third Defendant           :     Lewis Blyth & Hooper

Cases referred to in judgment:

ABB Service Pty Ltd v Hetherington [2001] WASCA 417
Adler v Australian Securities & Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1
Agricultural Land Management Ltd v Jackson [2013] WASC 464
Alexander v Perpetual Trustees WA Ltd [2004] HCA 7; (2004) 216 CLR 109
Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518
Allianz Australia Insurance Ltd v GSF Australia Pty Ltd [2005] HCA 26; (2005) 221 CLR 568
Amaca Pty Ltd v Booth [2011] HCA 53; (2011) 246 CLR 36
Armitage v Nurse [1997] EWCA Civ 1279; [1998] Ch 241
Ashbury v Reid [1961] WAR 49
ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963; (2007) 160 FCR 35
Australian Competition & Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; (2013) 304 ALR 186
Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) [2005] NSWSC 267; (2005) 53 ACSR 305
Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1996] UKHL 10; [1997] AC 191
Barker v Duke Group Ltd (in liq) [2005] SASC 81; (2005) 91 SASR 167
Barnes v Addy (1874) LR 9 Ch App 244
Beach Petroleum NL v Abbott Tout Russell Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1
Beach Petroleum NL v Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1
Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 39 WAR 1
Bennett v Minister of Community Welfare [1992] HCA 27; (1992) 176 CLR 408
BigTinCan Pty Ltd v Ramsay [2013] NSWSC 1248
Birtchnell v Equity Trustees and Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384
Bishopsgate Investment Management Ltd (In Liq) v Maxwell (No 2) [1994] 1 All ER 261
Bray v Ford [1896] AC 44
Brazel v Nicholls [2003] NSWCA 387
Breen v Williams [1995] HCA 57; (1996) 186 CLR 71
Brickenden v London Loan & Savings Co [1934] 3 DLR 465
Bristol & West Building Society v Mothew [1998] Ch 1
Buitendag v Ravensthorpe Nickel Operations Pty Ltd [2014] WASCA 29
Caffrey v Darby (1801) 6 Ves Jun 489; 31 ER 1159
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304
Canson Enterprises v Boughton [1991] 3 SCR 534; (1991) 85 DLR (4th) 129
Cassis v Kalfus [2001] NSWCA 460
Cavendish Bentick v Fenn (1887) 12 App Cas 652
Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178
Chappel v Hart [1998] HCA 55; (1998) 195 CLR 232
Commonwealth Bank of Australia v Smith (1991) 42 FCR 390
Coulls v Bagot's Executor & Trustee Co Ltd [1967] HCA 3; (1967) 119 CLR 460
Crawley v Short [2009] NSWCA 410; (2009) 262 ALR 654
CSR Ltd v Eddy [2005] HCA 64; (2005) 226 CLR 1
Dominion Natural Gas Company Ltd v Collins and Perkins [1909] AC 640
Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd [1987] FCA 332; (1987) 78 ALR 193
Ex parte Adamson (1878) 8 Ch D 807
Farrington v Rowe McBride & Partners [1985] 1 NZLR 83
Fazio v Fazio [2012] WASCA 72
Fitzgerald v Penn [1954] HCA 74; (1954) 91 CLR 268
Forge v Australian Securities & Investments Commission [2004] NSWCA 448
Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486
Fouche v Super Fund Board [1952] HCA 1; (1952) 88 CLR 609
Gregory v Williams (1817) 3 Mer 582; 36 ER 224
Gregson v HAE Trustees Ltd [2008] EWHC 1006; [2008] 2 BCLC 542
Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCA 296
Gunnersen v Henwood [2011] VSC 440
Hewitt v Henderson [2006] WASCA 233
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41
In the Matter of Auzhair Supplies Pty Ltd (in liq) [2013] NSWSC 1
Jacobus Marler Estates Ltd v Marler (1913) 114 LT 640
Kavanagh v Akhtar (1998) 45 NSWLR 588
Knott v Cottee (1852) 16 Beav 77; (1852) 51 ER 705
Knox v Gye (1872) LR 5 HL 656
Lamb v Vice (1840) 6 M & W 467
Libertarian Investments Ltd v Hall, FACV Nos 14 and 16 of 2012, Court of Final Appeal, Hong Kong, 6 November 2013
Lloyd's v Harper (1879) 14 Ch D 290
Lovell v Western Australian Police Union of Workers [2009] WASCA 34
Mackinlay v Derry Dew Pty Ltd [2014] WASCA 24
Madoff Securities International Ltd v Raven [2013] EWHC 3147 (Comm)
Magnus v Queensland National Bank (1888) 37 Ch 466
Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449
March v E & M H Stramare Pty Ltd (1989) 50 SASR 588
March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506
Marshall v Prescott (No 3) [2013] NSWSC 1949
McCann v Switzerland Insurance [2000] HCA 65; (2000) 203 CLR 579
Medlin v State Government Insurance Commission [1995] HCA 5; (1995) 182 CLR 1
Minister of State for the Army v Parbury Henty & Company Pty Ltd [1945] HCA 52; (1945) 70 CLR 459
Mobbs v Kain [2009] NSWCA 301; (2009) 54 MVR 179
Morgan v Banning (1999) 20 WAR 474
Motor Terms Co Pty Ltd v Liberty Insurance Ltd (in liq) [1967] HCA 9; (1967) 116 CLR 177
Mulkana Corporation NL (In Liq) v Bank of New South Wales (1983) 8 ACLR 278
Muller v Lalic [2000] NSWCA 50
O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262
Partington v Reynolds (1858) Drew 253; 62 ER 98
Peninsular and Oriental Steam Navigation Company v Johnson [1938] HCA 16; (1938) 60 CLR 189
Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187
Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2009] NSWCA 84; (2009) 76 NSWLR 195
Rafferty v Madgwicks [2012] FCAFC 37; (2012) 203 FCR 1
Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516
Re Cape Breton Company (1885) 29 Ch D 795
Re Dawson; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211
Re HIH Insurance Ltd; ASIC v Adler [2002] NSWSC 171; (2002) 168 FLR 253
Re International Vending Machines Pty Ltd and Companies Act [1962] NSWR 1408
Re Lands Allotment Co [1894] 1 Ch 616
Roads and Traffic Authority v Royal [2008] HCA 19; (2008) 82 ALJR 870
Settlement Agents Supervisory Board v Property Settlement Services Pty Ltd [2009] WASCA 143
Shell UK Ltd v Total UK Ltd [2010] EWCA Civ 180; [2011] QB 86
Short v Crawley (No 30) [2007] NSWSC 1322
South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541; (2000) 177 ALR 611
Stevens v Premium Real Estate Ltd [2009] NZSC 15; [2009] 2 NZLR 384
Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17; (2012) 278 ALR 291
Sullivan v Gordon [1999] NSWCA 338; (1999) 47 NSWLR 319
Tabet v Gett [2010] HCA 12; (2010) 240 CLR 537
Tableau Holdings Pty Ltd v Joyce [1999] WASCA 49
Target Holdings Ltd v Redferns [1996] 1 AC 421
The Duke Group Ltd (in liq) v Alamain Investments Ltd [2003] SASC 415
Tomlinson v Gill (1756) Amb 330; 27 ER 221
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Trade Practices Commission v Australia Meat Holdings Pty Ltd (1988) 83 ALR 299
Travel Compensation Fund v Tambree [2005] HCA 69; (2005) 224 CLR 627
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107
Wallace v Kam [2013] HCA 19; (2013) 297 ALR 383
Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544
Welker & Ors v Rinehart (No 2) [2011] NSWSC 1238
Westpac Banking Corporation v The Bell Group Ltd (In liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1
Young v Murphy [1996] 1 VR 279
Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484

Texts cited:

Allsop J 'Causation in Commercial Law' in Degeling S, Edelman J and Goudkamp J (eds) Torts in Commercial Law (2011)

Blackstone W, The Commentaries on the laws of England, RM Kerr (ed) (7th edn, Book III, 1775)

Elliott S, ‘Compensation Claims against Trustees’ DPhil thesis, University of Oxford (2002)

Elliott, S & Mitchell, C 'Remedies for Dishonest Assistance' (2004) 67 MLR 16

Getzler J 'Duty of Care' in Birks P and Pretto A Breach of Trust (2002)

Glister J 'Equitable Compensation' in Glister J and Ridge P Fault Lines in Equity (2012)

Gummow W 'Compensation for Breach of Fiduciary Duty' in T G Youdan (ed) Equity, Fiduciaries and Trusts (1989)

Heydon J D 'Are the duties of company directors to exercise care and skill fiduciary?' in Degeling S and Edelman J, Equity in Commercial Law (2005)

Heydon J D, 'Causal relationships between a fiduciary's default and the principal's loss' (1994) 110 LQR 328

Hoffmann, L 'Causation' (2005) 121 LQR 592

Lewin T A Practical Treatise on the Law of Trusts and Trustees (1837)

Meagher R, Heydon J D, Leeming M, Meagher Gummow and Lehane's Equity Doctrines and Remedies (4^th ed, 2002)

Millett P 'Equity's place in the law of commerce' (1998) 114 LQR 214

Mitchell C, 'Equitable Compensation for breach of fiduciary duty' (2013) 66 CLP 307

Rickett C, ‘Equitable Compensation: Towards a Blueprint?’ (2003) 25 Sydney L Rev 31

Smith L, 'The measurement of compensation claims against trustees and fiduciaries' in Bant E and Harding M (eds) Exploring Private Law (2010)

Stapleton J, 'Reflections on Common Sense Causation in Australia' in Degeling S, Edelman J and Goudkamp J (eds) Torts in Commercial Law (2011)

Table of Contents

1. Introduction
2. The parties

2.1 The plaintiff: Agricultural Land Management (as responsible entity)
2.2 The Kalgoorlie Apartment Hotel Syndicate (the Kalgoorlie Scheme)
2.3 The first and second defendants: Messrs Jackson and Goff
2.4 The third defendant: Bunbury Centro

3. The facts: acquisition and development of the Kalgoorlie Property
4. The evidence from Mr Catlin and Mr Nuttall

4.1 Mr Catlin's 29 April 2002 valuation of the Kalgoorlie Property 'as if complete'
4.2 The Licence was not a sham

4.2.1 The method for calculation of the Licence fee
4.2.2 The handwritten memorandum

4.3 The substantial value of the Licence independently of Mr Catlin's 29 April 2002 valuation
4.4 The relevance of the $18.5 million Project Management Agreement
4.5 The underestimation of the 24 June 2002 value of the Kalgoorlie Property in Mr Catlin's April 2002 report

4.5.1 Mr Catlin's underestimation of the value based on the date of valuation
4.5.2 Mr Catlin's underestimation of the construction cost

4.6 The value of the Kalgoorlie Property on 24 June 2002
4.7 Conclusions from Mr Catlin's evidence
4.8 Mr Nuttall's evidence

5. The inferences which Agricultural alleged should be drawn
6. Agricultural's pleaded case

6.1 The plea concerning loss arising from the costs of construction
6.3 The pleading of duties breached by Bunbury Centro

7. The admissions by Messrs Jackson and Goff
8. The first group of alleged breaches: entering the Contract when it was not in the best interests of Agricultural to do so
9. The second and third groups of alleged breaches: failure to take all necessary steps to ensure that Agricultural complied with the Replacement Compliance Plan
10. The fourth group of alleged breaches: misuse of position as company officers
11. The fifth group of alleged breaches: 'common law duty of reasonable care'
12. The sixth and seventh group of alleged breaches: fiduciary duties

12.1 The types of fiduciary duty pleaded
12.2 The nature of the breaches of fiduciary duty
12.3 Whether the fiduciary obligations were excluded

13. The alleged breaches by Bunbury Centro
14. Conclusions in relation to all pleaded breaches
15. Is there a 'disconnect' in Agricultural's equitable compensation claim?

15.1 The disconnect argument
15.2 The flaws in the disconnect argument
15.3 The decision in Young v Murphy

16. Equitable compensation: 'substitutive' and 'reparative' compensation

16.1 Two different types of 'compensation' for breach of trust
16.2 Youyang Pty Ltd v Minter Ellison Morris Fletcher
16.3 Agricultural's claims for substitutive and reparative compensation
16.4 Awards of substitutive compensation against company directors

17. Agricultural cannot succeed in a claim for substitutive compensation
18. Agricultural cannot succeed in a claim for reparative compensation in equity

18.1 Agricultural's claim for loss on the purchase of the Kalgoorlie Property and Licence

18.1.1 No loss was proved
18.1.2 Any loss was not proved to have been caused by the breaches
18.1.3 Any loss arising from the Licence cannot be severed from the Contract

18.2 Agricultural's loss from the sale of the Kalgoorlie Property (including the hotel)

18.2.1 The loss is outside the scope of the defendants' liability for consequences for their pleaded duties
18.2.2 Agricultural did not prove that the breaches caused the loss
18.2.3 The novus actus interveniens (intervening cause) argument

19. Agricultural's claim for 'compensation' under s 1317H of the Corporations Act

19.1 The terms of s 1317H of the Corporations Act
19.2 The 'curiosities' in s 1317H of the Corporations Act
19.3 The defendants’ objections based on Agricultural's unregistered status
19.4 The reasons why Agricultural cannot recover compensation under s 1317H

20. Can Agricultural succeed in a claim for disgorgement of profits?

20.1 Agricultural's claims for an account and disgorgement of profits
20.2 No profit was proved to be made by Bunbury Centro
20.3 No profit was proved to be made by Messrs Jackson and Goff

21. Conclusion
Appendix 1: The place of the parties in the Kareelya Group structure

EDELMAN J:

1. Introduction

This case involved a number of factual disputes and an array of legal issues. Some of the many legal issues raised in this case are as follows.
(i)The nature of duties owed by a director to a company which is a corporate trustee and responsible entity: [300] ‑ [331].
(ii)The scope of a claim for breach of fiduciary duty based on a potential conflict of duty and duty: [263] ‑ [275].
(iii)The exclusion of fiduciary duties: [276] ‑ [284].
(iv)The meanings of 'equitable compensation': [333] ‑ [359].
(v)Principles of substitutive compensation in relation to company directors: [363] ‑ [375].
(vi)The operation of principles of causation in equity: [390] ‑ [399].
(vii)The effect in equity of new intervening acts: [421] ‑ [430].
(viii)The meaning of 'concerned in' for the requirement of 'knowingly concerned in' in s 79(c) of the Corporations Act 2001 (Cth): [285] ‑ [298].
(ix)The operation of causation principles in relation to s 1317H of the Corporations Act: [439] ‑ [452].
(x)The effect of deregistration of a registered scheme on a claim for compensation under s 1317 of the Corporations Act: [453] ‑ [461].
(xi)The operation of principles of limitation by analogy: [206] ‑ [213].
The plaintiff, Agricultural, is the responsible entity (and trustee) of a managed investment scheme. The first and second defendants, Messrs Jackson and Goff, are directors of Agricultural. The third defendant, Bunbury Centro, is a related party to Agricultural.
On 24 June 2002, Bunbury Centro sold a property in Kalgoorlie to Agricultural. That Contract, which I capitalise for clarity, was at the heart of the trial. The sale price was $2,250,000. An additional amount, based on calculation of various costs, but to a maximum of $1,665,051, was payable for a non‑exclusive Licence (which I also capitalise for emphasis) to use 'all of the information and know how in the possession' of Bunbury Centro necessary for development of the property as a hotel.
Messrs Jackson and Goff signed the Contract on behalf of Bunbury Centro (as vendor). They also signed on behalf of Agricultural (as purchaser). As Messrs Jackson and Goff were aware, Agricultural planned to develop the Kalgoorlie Property into a hotel.
The development of the Kalgoorlie Property was a failure. Agricultural entered an all‑inclusive 'turnkey' contract, described as a Project Management Agreement, for the development of the Kalgoorlie Property at a cost of $18.5 million. But the hotel was sold on 21 June 2007 for $10.15 million.
There were years of delay before this action in relation to the 2002 Contract was brought on 4 June 2008. Further delay ensued before the matter was admitted to the Commercial and Managed Cases list in 2012. The pleadings were inherited by the current solicitors and counsel for Agricultural. Some of the amendments that they made to the pleadings involved matters which were time‑barred. The time‑barred matters included new allegations that Messrs Jackson and Goff breached their duties by entering into the 'turnkey' contract for the development which was alleged to have only marginal and speculative profitability.
A vast number of breaches were pleaded. The focus of many of them was upon the entry into the Contract and the value which Agricultural received in exchange for the purchase price and Licence fee. The process of analysing the statement of claim has been like battling the Lernaean Hydra. As soon as consideration of a breach is completed, another alleged breach, sometimes nearly identical, appears to rise from the same facts. A further difficulty is that many facts asserted in submissions relied upon documents which, by consent of the parties or by ruling, were not admitted for proof of the truth of their contents.[1]
[1] For example, exhibits 3, 35, 36, 39, 41, 44, 45, 46, 47, 49, 50.

My consideration of the myriad of alleged breaches by each of the defendants leads to the conclusion that Messrs Jackson and Goff, directors of Agricultural, breached the following duties:
(i)Duties under the Corporations Act ss 180, 601FD(1)(f)(i) and 601FD(1)(f)(iv) were breached by Messrs Jackson and Goff by their failure to take all steps that a reasonable person would take, if he or she were in the officer's position, to ensure that Agricultural complied with the Corporations Act related party provisions, and the scheme's compliance plan.
(ii)Messrs Jackson and Goff also breached their fiduciary duties to Agricultural to avoid placing themselves in a position in which their duties to Agricultural conflicted with duties to another principal (Bunbury Centro).
Bunbury Centro was knowingly concerned, within s 79(c) of the Corporations Act, in each of the contraventions of the Corporations Act by Messrs Jackson and Goff.
Despite these findings of breach, Agricultural's claim for compensation, either in equity or under the Corporations Act, must fail. Agricultural failed to prove that the purchase price or Licence fee under the Contract were at an undervalue. Rather, the expert evidence from the only expert to give evidence establishes that the purchase price paid by Agricultural was substantially less than the value of the Kalgoorlie Property. The significant gaps in the evidence mean that the value of the Licence is impossible to determine.
Agricultural has also failed to prove that any of the defendants profited from the transaction.

2. The parties

2.1 The plaintiff: Agricultural Land Management (as responsible entity)

The plaintiff in this case, Agricultural Land Management Ltd, was previously known as Westralia Property Management Ltd and Kareelya Investments Ltd.[2] For clarity, in these reasons I will refer to the plaintiff consistently as Agricultural even if, at various times, it had one of these other names.
[2] Re-amended substituted statement of claim [1.1]; Seventh amended defence [1].
From 2001, Agricultural was:
(i)a public company;
(ii)the responsible entity of the Kalgoorlie Apartment Hotel Syndicate; and
(iii)the responsible entity of the Agricultural Land Trust (formerly the Westralia Property Trust).[3]
[3] Exhibit 61 (Statement of agreed facts) [1].
From May 2002 until early January 2004 Agricultural had four directors: Mr Jackson, Mr Goff, Mr Anderson, and Mr Hinton.[4]
[4] Seventh amended defence [2].
Agricultural sues in its capacity as the Responsible Entity of the Kalgoorlie Apartment Hotel Syndicate. This 'Kalgoorlie Scheme' had only one unit holder. The unit holder was Agricultural in its capacity as Agricultural Land Trust.

2.2 The Kalgoorlie Apartment Hotel Syndicate (the Kalgoorlie Scheme)

From 7 September 2000 to 23 July 2006 the Kalgoorlie Apartment Hotel Syndicate was a registered managed investment scheme pursuant to Part 5C of the Corporations Act.[5]

2.3 The first and second defendants: Messrs Jackson and Goff

[5] Exhibit 61 (Statement of agreed facts) [2].

The first defendant, Mr Jackson,[6]
(i)from 15 February 1996 until 14 April 2005, was a director of Agricultural;
(ii)from 15 February 1996 to 11 December 2002, was company secretary of Agricultural; and
(iii)from at least 2001 onwards was, and is, a director of Bunbury Centro.
[6] Exhibit 61 (Statement of agreed facts) [4].
The second defendant, Mr Goff,[7]
(i)from 16 February 1999 to 14 April 2005, was a director of Agricultural;
(ii)between September 2000 and April 2005, was the compliance officer of the Kalgoorlie Scheme; and
(iii)from at least 2001 onwards was, and is, the company secretary of Bunbury Centro.

2.4 The third defendant: Bunbury Centro

[7] Exhibit 61 (Statement of agreed facts) [5].

The third defendant is Bunbury Centro Pty Ltd. Its previous names were Kalgoorlie Chambers Pty Ltd and also National Hospitality Solutions Pty Ltd. For convenience, I will refer to the third defendant at all times as Bunbury Centro.
At all material times, Bunbury Centro was a related party of Agricultural and the Kalgoorlie Scheme pursuant to s 208 of the Corporations Act as modified by s 601CA of the Corporations Act.[8] The relationship between the parties can be seen in the diagram at Appendix 1.
[8] Exhibit 61 (Statement of agreed facts) [3].
Appendix 1 to these reasons is an aide memoire produced by Agricultural which shows the relationship between Bunbury Centro and Agricultural. This appendix was common ground between the parties.[9] In broad summary, Bunbury Centro and Agricultural have the same parent company, Kareelya Ltd.[10] Mr Jackson and Mr Goff are both directors of Bunbury Centro and also of Agricultural. And Mr Jackson is also a director of Broadwater Hospitality Pty Ltd which was the proposed operator of the hotel.[11]
[9] ts 80, 339 (27 November 2013).
[10] Exhibit 8.
[11] Exhibit 8.

3. The facts: acquisition and development of the Kalgoorlie Property

The trial was almost entirely documentary. The only oral evidence was given by a valuer, Mr Catlin. Additional affidavit evidence, which added little to Agricultural's case, was given by Mr Nuttall.
The following are my findings of the essential facts relevant to the matter in issue.
In 1999, Bunbury Centro purchased the Kalgoorlie Property at Lot 4, 21 Davidson Street, Kalgoorlie.[12] In closing written submissions,[13] Agricultural referred to a statement in a report on 29 April 2002 by Mr Catlin of Ray White & Co that '[w]e are aware that the proponents purchased the subject site for $750,000 in July 1999'.[14] This was not an admitted fact, nor does this 'awareness' amount to evidence of the purchase price.
[12] Exhibit 61 (Statement of agreed facts) [6].
[13] Agricultural's closing submissions [4].
[14] Exhibit 43 (Trial bundle page 680).
On 22 August 2000 (with a typographical error on the document of 2002),[15] Agricultural adopted a Constitution which established it as a Syndicate for a principal purpose which was 'acquiring, developing and holding the Kalgoorlie Property'.[16] Unless otherwise provided in the Constitution, the Syndicate was to endure for 10 years from the date of acquisition of the Kalgoorlie Property.[17]
[15] ts 75 (27 November 2013).
[16] Cl 3.2(a)(i) (Exhibit 6, Trial bundle page 111).
[17] Cl 3.3, and Schedule 1 (Exhibit 6, Trial bundle pages 111, 182).
On 31 January 2002, a meeting of the directors of Agricultural was held. Mr Jackson was in the chair and Mr Goff attended as a director and compliance officer.
Mr Jackson advised the meeting that the success of the Syndicate was dependent upon construction of the hotel as a whole.[18]
[18] Exhibit 13 (Trial bundle page 260).
Mr Jackson explained that the introduction of the Goods and Services Tax in June 2000 effectively increased the purchase price by 10% which made it difficult to achieve the yield required to attract strata titled investors. Mr Jackson tabled an alternative proposal by which the Syndicate would become a Managed Investment Scheme to acquire the hotel which would have Goods and Services Tax advantages.
Mr Jackson advised that if the land and work in progress could be transferred into the Syndicate prior to construction, and the Syndicate undertook the construction, then a significant saving in stamp duty could be achieved.
On 29 March 2002, a further meeting of Agricultural was held with Mr Jackson and Mr Goff in attendance.[19] Mr Goff advised the meeting that an offer of mezzanine funding had been received. The lender would be Hawaiian Investments Ltd with terms of an annual interest rate of 16% and a $90,000 application fee. Mr Jackson said that although this was expensive, it would see the project started and the project was costing more while it was sitting idle. He said that it was the developer's profit which would be reduced.
[19] Exhibit 13 (Trial bundle page 261).
On 19 April 2002, Mr Gary Catlin of Ray White & Co provided a valuation of the Kalgoorlie Property under instructions from the Kalgoorlie Scheme.[20] Mr Catlin's report and his oral evidence are considered in detail separately below.
[20] Exhibit 61 (Statement of agreed facts) [7].
On 20 May 2002, Agricultural established, by its deed poll, a constitution for the Kalgoorlie Apartments Hotel Syndicate Managed Investment Scheme.[21] On the same day Agricultural also established a replacement compliance plan for the Kalgoorlie Apartment Hotel Syndicate.[22] Both the constitution and the replacement compliance plan were adopted at a meeting of the directors of Agricultural, including Messrs Jackson and Goff, on 22 May 2002.[23]
[21] Exhibit 6.
[22] Exhibit 2.
[23] Exhibit 13 (Trial bundle page 262).
The constitution for the Managed Investment Scheme again provided that the Syndicate was established for purposes including 'acquiring, developing and holding the Kalgoorlie Property'.[24] It was to continue in operation for 10 years after the date of acquisition of the Kalgoorlie Property.[25]
[24] Clause 3.2(a)(i) (Exhibit 6, Trial bundle page 111).
[25] Clause 3.3 (Exhibit 6, Trial bundle page 111).
The constitution provided that Agricultural, as responsible entity, was entitled to receive a fee of up to 5% of the on completion value of the Kalgoorlie Property at the date that Agricultural acquires the Kalgoorlie Property.[26]
[26] Clause 12.1(a) (Exhibit 6, Trial bundle page 133) and Schedule 1 definition of 'portfolio' (Exhibit 6, Trial bundle page 186).
The replacement compliance plan established various compliance procedures including the following:[27]
(i)The responsible entity must conduct due diligence on any proposal to buy or sell any real property of the Syndicate during the term of the Syndicate.
(ii)Any proposal to buy or sell any real property at any time during the term of the Syndicate must be tabled at a directors' meeting with a due diligence report prepared by the Trust Manager.
(iii)The due diligence report must also be tabled at a compliance committee meeting for review. The compliance committee is to report to the responsible entity on any objections to the purchase or sale.
(iv)Notwithstanding the above procedure, if the responsible entity determines that it would be in the best interests of the investors to proceed with the purchase or sale then it may do so without receiving the compliance committee report.
(v)All investments made must be Authorised Investments in accordance with the Constitution.
[27] Exhibit 2 (Trial bundle page 36).
The replacement compliance plan also required compliance with various procedures in relation to related parties:[28]
(i)All Disclosure Documents must disclose all actual or contemplated transactions with related parties of the responsible entity, whether or not the transactions are on normal commercial terms.
(ii)The Compliance Officer is to provide to the compliance committee the details of any proposed transaction with a related party for review.
(iii)Any transaction with a related party must be in a written agreement between the responsible entity and the related party.
(iv)The compliance committee is to provide a sign‑off to the Compliance Officer on all proposed transactions with a related party.
[28] Exhibit 2 (Trial bundle page 45).
On 24 May 2002, a further meeting was held of the directors of Agricultural, including Messrs Jackson and Goff. Mr Jackson advised that the purpose of the meeting was to provide an update on the progress of the Syndicate and funding.[29]
[29] Exhibit 13 (Trial bundle page 263).
The meeting was informed that the reason for the transaction was for Agricultural (as trustee of the Westralia Property Trust) to acquire the investment at a wholesale price and to receive a 20% bonus issue, to be funded from the developer's profit, prior to the introduction of other investors.
The meeting was also informed about the 'on completion' valuation from Mr Catlin at Ray White Valuers which valued the completed hotel at $19.5 million. Mr Goff advised that finance applications had been lodged.
On 13 June 2002, an internal memorandum was sent to people including Mr Jackson and Mr Goff which included an information paper on the Kalgoorlie Hotel Apartments Syndicate. The memorandum was authored by Mr Turner. It was admitted only as a matter relevant to the state of mind of Messrs Jackson and Goff. In it, Mr Turner made observations as follows:[30]
(i)The manager of the Kareelya Group considered that it was preferable for the Kalgoorlie Property not to be strata titled and for the property to be developed on a single lot by a syndicate.
(ii)For stamp duty and taxation purposes the manager of the Kareelya Group considered that it was preferable for Bunbury Centro to transfer the Kalgoorlie Property to the Syndicate at its current market value prior to construction commencing.
[30] Exhibit 39 (Trial Bundle page 584).
To obtain finance for the project the options included (a) raising equity in either Bunbury Centro or Agricultural before construction, or (b) introducing a new investor immediately. The new investor was Westralia Property Trust which has significant assets. Westralia Property Trust had arranged borrowings from Hawaiian Developments Pty Ltd. From the point of view of investors the rate of return on the initial cash investment of $2.55 million must exceed the relatively high cost of debt (16%) during the construction phase (emphasis added).
Some time prior to 24 June 2002, Agricultural prepared an application for finance for the construction of the 'Broadwater Resort Apartments Hotel'.[31]
[31] Exhibit 3.
The application, which was only admitted for the state of mind of Mr Jackson and Mr Goff, said that the estimated construction funding required was $11.250 million.[32] The application said that the directors 'believe the Hotel will be valued in the range of $19.5 to $21.5 million'.[33] It appears from the finance application that the intention was for the hotel to be managed by Broadwater Hospitality, a related company.[34]
[32] Exhibit 3 (Trial bundle page 69).
[33] Exhibit 3 (Trial bundle page 69).
[34] Exhibit 3 (Trial bundle page 69).
The application also proposed that the Kalgoorlie Property and work in progress would be purchased from Bunbury Centro for $3,637,000.[35]
[35] Exhibit 3 (Trial bundle page 71, 75).
On 22 and 23 June 2002, Agricultural (as responsible entity of the Westralia Property Trust) agreed to invest $2,250,000 in the Kalgoorlie Apartment Hotel Syndicate and was issued with 3,600,000 syndicate lots.[36]
[36] Exhibits 4 and 5.
The money was paid on 25 June 2002. It was recorded in the accounts of Bunbury Centro as an unsecured loan to the Westralia Property Trust.[37]
[37] Bunbury Centro Notes to Financial Statements (Exhibit 51, Trial bundle page 799).
On 24 June 2002, Bunbury Centro entered into the Contract to sell the Kalgoorlie Property to Agricultural, as Responsible Entity for the Kalgoorlie Scheme.[38]
[38] Exhibit 27.
The Contract was a standard REIWA offer and acceptance, with the Joint Form of General Conditions for the Sale of Land and various special conditions.
The Contract was signed by Mr Goff and Mr Jackson on behalf of the vendor. It was also signed by Mr Goff and Mr Jackson on behalf of the purchaser. The purchase price of this Kalgoorlie Property was $2,250,000.[39]
[39] Exhibit 27; Exhibit 61 (Statement of agreed facts) [9].
The Contract included the following Special Conditions.[40] Although submissions were made (based on exhibit 41 which was not admitted for the truth of its contents and is discussed at [115] - [120]) that the Special Conditions were agreed and backdated some time after 29 July 2002, neither counsel suggested that anything turned on this.
7.The Vendor grants to the Purchaser a non‑exclusive licence to use all of the information and know how in the possession of the Vendor at settlement necessary for the continued project development of the Property as the Broadwater Resort Apartments Kalgoorlie including, without limitation, development approvals issued by the City of Kalgoorlie‑Boulder, architect's plans, subdivisional approvals of the Western Australian Planning Commission, finance applications, marketing and prospectus documentation, project feasibilities, draft building contracts, tenders received from builders, reports from quantity surveyors and other consultants, project costings, liquor licence applications, and original site plans and demolition approvals.
8.The licence conferred under clause 7 is personal only and is not capable of assignment. The Purchaser agrees to maintain confidentiality in any of the information that the licence permits the Purchaser to use and which the Purchaser knows or ought to know is of a confidential nature.
9.In consideration for the grant of the licence in clause 7, on 2 January 2004, the Purchaser will pay to the Vendor a licence fee of an amount equal to the costs, expenses and fees incurred by the Vendor in relation to the holding, development and management of the Property and the development of the information and know how since the acquisition of the Property by the Vendor including, without limitation, bank interest and management fees, up to a maximum amount of $1,665,051.
[40] Exhibit 27 (Trial bundle page 462); Exhibit 61 (Statement of agreed facts) [10].
An undated register of related party transactions for the Kalgoorlie Apartment Hotel Syndicate provided that the acquisition of the Kalgoorlie Property by Agricultural from Bunbury Centro was a related party transaction.[41]
[41] Exhibit 11.
On 24 June 2002, the same day as the Contract, Agricultural (as borrower) entered a loan facility with Hawaiian Developments Pty Ltd (as lender) as well as Bunbury Centro (as 'Developer') and Kareelya Investments Ltd (as 'Project Developer').[42] The interest rate was 16% per annum.[43] The facility permitted a drawdown of $2,300,000 for Agricultural to pay Bunbury Centro which Bunbury Centro must use to discharge a mortgage on the Kalgoorlie Property and reimburse costs,[44] and to pay 'Funded Non Building Costs' of $250,000.[45] The latter are costs payable by either Agricultural or Bunbury Centro in connection with the construction and development of the Project.
[42] Exhibit 54.
[43] Clause 5.1(a) (Exhibit 54, Trial bundle page 105).
[44] Clause 2.4(a)(i) (Exhibit 54, Trial bundle page 104).
[45] Clause 2.4(a)(ii) (Exhibit 54, Trial bundle page 104).
On 1 July 2002, Agricultural entered a Project Management Agreement with Kareelya Property Group Pty Ltd. The purpose of the Project Management Agreement was for Kareelya Property Group to be responsible for matters including the construction of the hotel on the Kalgoorlie Property, selling or leasing any part of the proposed apartments and hotel premises, and managing the development.[46]
[46] Clause 1.1 'Project' (Exhibit 58, Trial bundle 343-344).
Clauses 4.5, 4.6 and 4.7 of the Project Management Agreement have the effect of fixing the price payable for the Project Costs at $18.5 million.
The Project Management Agreement defines 'Project Costs' as the costs of acquiring and developing the Kalgoorlie Property including:
(i)the purchase price of the Kalgoorlie Property;
(ii)the amount of stamp duty payable on the purchase of the Kalgoorlie Property;
(iii)the property acquisition fee payable to Agricultural;
(iv)the costs of the Works;
(v)the fees, and
(vi)the Reimbursable Costs.
Hence, all of these items are included in the $18.5 million price.
The Works is, in summary, all the work to be done under the Project Management Agreement for the purposes of undertaking and completing the Project.
Although the Project Management Agreement post-dated Agricultural's acquisition of the Kalgoorlie Property by six days, the general terms of this Project Management Agreement must have been in the contemplation of Messrs Jackson and Goff at the time the Kalgoorlie Property was acquired on 24 June 2002.

On 5 July 2002, there was a meeting of the directors of Agricultural. Mr Jackson and Mr Goff were present.[47] This was the first board meeting after the Contract. No board meeting before the Contract had approved the entry by Agricultural into the Contract.
[47] Exhibit 13 (Trial bundle page 265).
Mr Jackson said that funds had been advanced to Agricultural by Hawaiian Investments Ltd on 24 June 2002.
Mr Jackson also explained that a report had been commissioned on market demand. The report was undertaken by Mr Alan Boys and it was seen as a 'worst case scenario for the operations of the hotel'. He said that the report did highlight that there would be a greater risk in managing the food and beverage operations and that the Syndicate would be better off if those operations were leased to an external operator on a turnover rent.
Mr Goff said that feasibility studies had been prepared for investors on the basis of the greater risk advised and that although there was a reduction in the estimated cash returns for investors, it still 'stacked up'.
The meeting also discussed building tenders which had been received. The lowest tender was from Devaugh Pty Ltd. A review by Ashton Associates recommended the appointment of Devaugh Pty Ltd. The contract price tendered by Devaugh Pty Ltd was $9,014,533.
The Devaugh contract documents were tendered as an exhibit.[48] They contain a 5 July 2002 letter of acceptance of the offer by Devaugh to build the hotel for $9,915,986 (inclusive of GST). Exclusive of GST this amount was $9,014,533. The contract price included an amount for Kitchen Fit Out, Bar Equipment, Coolrooms, and Laundry Equipment. That amount was $253,800.
[48] Exhibit 65.
On 16 July 2002, in a company record made by Mr Turner, he recites the progress of the development and observes that the 'service contract between [Bunbury Centro] and Kareelya Property Group Pty Ltd will need to be assigned by [Bunbury Centro] to KAHS [and Agricultural as responsible entity]'.
On 26 July 2002,[49] the minutes of a meeting of the directors of Agricultural, attended by Mr Jackson and Mr Goff, record that the Westralia Property Trust had invested $2.55 million in purchasing a $3.6 million Syndicate interest in the Kalgoorlie Apartment Hotel Syndicate. The funds for the investment were described as having been borrowed from Hawaiian Developments Pty Ltd at an interest rate of 16%, repayable on or before 30 June 2003.
[49] Exhibit 16 (Trial bundle page 319).
On 29 August 2002, a further meeting of the directors of Agricultural was held with Mr Jackson (as chairman) and Mr Goff in attendance.[50] A report was attached to the minutes including detail of a related party transaction. The related party transaction record explains that Agricultural and Bunbury Centro are related parties. It records the issue to Westralia Property Trust (for which Agricultural is the responsible entity) of a $3.6 million interest in the Kalgoorlie Apartment Hotel Syndicate for $2.55 million. It records that Agricultural, as responsible entity, had entered a loan agreement, borrowing $3 million from Hawaiian Developments Pty Ltd to enable Westralia Property Trust to invest in the Kalgoorlie Apartment Hotel Syndicate.
[50] Exhibit 13 (Trial bundle page 267).
An unsigned lease dated 23 September 2002 was also tendered as an exhibit. That unsigned lease provided for the Kalgoorlie Property to be leased by Agricultural to Dunsborough Hotel Management Ltd.[51] The lease was conditional upon a grant of a liquor licence before 31 December 2003. The annual rent was $800,000 per annum plus an additional amount which was based on operating profit.
[51] Clause 3 (Exhibit 28, Trial bundle page 471).
On 26 September 2002,[52] the minutes of a meeting of directors of Agricultural attended by Mr Jackson and Mr Goff record that Agricultural entered a lease of the completed hotel to Dunsborough Hotel Management Pty Ltd. The lease was conditional upon the grant of a liquor licence. Annual rent would be $800,000 per annum plus an amount of 'Additional Rent' based upon net operating profits. The period of the unsigned lease was five years with two further options of five years.
[52] Exhibit 13 (Trial bundle page 270).
The meeting was also advised of the fixed price contract with Devaugh Pty Ltd for construction of the hotel and a variation of the loan agreement with Hawaiian Developments Pty Ltd.
From 1 October 2002 to 31 October 2002,[53] Ashton and Associates reported that work completed to date on the hotel was $1,031,480 excluding GST. The Commonwealth Bank had provided a Bill Facility of $10 million at 5.82% with first drawdown on 30 June 2003 and maturing on 30 June 2006.
[53] Exhibit 13 (Trial bundle page 279).
From 1 November 2002 to 31 December 2002,[54] work to date on the hotel was $2,695,823 and the estimated cost to complete was $8,685,536.
[54] Exhibit 13 (Trial bundle page 282).
By 31 May 2003, the value of work in progress on the hotel had increased to $9,343,271.[55]
[55] Exhibit 13 (Trial bundle page 292).
By 30 June 2003, the value of work in progress on the hotel had increased to $11,754,060.[56]
[56] Exhibit 13 (Trial bundle page 295).
Prior to August 2003, the construction of the hotel on the Kalgoorlie Property was completed. The hotel opened for business on 1 August 2003.[57]
[57] Exhibit 20 (Trial bundle page 358).
On 2 January 2004, Agricultural paid to Bunbury Centro:
(i)the purchase price; and
(ii)at least $1,665,051 in respect of the Licence fee.[58]
[58] Exhibit 61 (Statement of agreed facts) [14].
Although Agricultural pleaded that $1,763,260 was paid for the Licence fee there was no clear evidence led about the amount of payment by Agricultural.
Counsel for Agricultural submitted, contrary to the Agreed Facts,[59] that payments for the Licence fee were made in the year ended 30 June 2003.[60] He submitted that the payments made exceeded the maximum possible amount due for the Licence under cl 9 of the Contract which was $1,665,051. Counsel relied upon the notes to Agricultural's Financial Statements for that year. Those notes refer to a cost of acquisition of the Kalgoorlie Property of $3,250,000.[61] Counsel apparently assumed that this amount included $1 million for the Licence fee. He then referred to a note which said that at 30 June 2003, the total value of the land and work in progress purchased was $3,915,051 (which appears to be the purchase price of $2,250,000 plus the maximum Licence fee of $1,665,051) and that $1,599,700 remains unpaid.[62] Counsel never explained how these figures somehow meant that more than $1,665,051 had been paid for the Licence.
[59] Exhibit 61 [14].
[60] ts 99 (27 November 2013).
[61] Exhibit 20 (Trial bundle page 354).
[62] Exhibit 20 (Trial bundle page 357).
The case can only proceed on the basis of the agreed fact that 'at least' $1,665,051 was paid.
Even if $1,763,260 had been paid for the Licence fee on 2 January 2004, the effect of this would be that Agricultural had paid $98,204 more than the contractual maximum for the Licence fee. But there was no evidence of any demand or claim for restitution of that allegedly overpaid amount being made by Agricultural against Bunbury Centro. Nor was there any allegation that Messrs Jackson and Goff caused loss to Agricultural by making any overpayment in breach of duty and failing to ensure that Agricultural reclaimed the money or litigated within the limitation period to recover the alleged overpayment.
On 23 July 2006, the Kalgoorlie Scheme for which Agricultural is the responsible entity was deregistered on Agricultural's own application.[63]
[63] Re-amended substituted statement of claim [1.2]; Seventh amended defence [3(1)].
On 21 June 2007, Agricultural (acting for the Westralia Property Trust) sold the Kalgoorlie Property including the hotel. The sale price was $10.15 million.[64]
[64] Exhibit 62 (Westralia Property Trust Annual Report 30 June 2007, page 3); Exhibit 63 (Agricultural Land Trust Annual Report 30 June 2008, page 3).
On 5 September 2007, the settlement occurred for Agricultural's sale of the Kalgoorlie Property.[65]
[65] Exhibit 62 (Westralia Property Trust Annual Report 30 June 2007, page 3).
On 4 June 2008, these proceedings were commenced by writ with indorsed statement of claim.[66]
[66] Exhibit 59.

The evidence from Mr Catlin and Mr Nuttall

Mr Catlin was the only person to give oral evidence. Affidavit evidence was given by Mr Nuttall.
Mr Catlin has been a licensed valuer since 1987.[67] Although he no longer practises as a valuer, he has had many years of experience, including having conducted valuations of more than 20 to 30 accommodation hotels.[68] He was called to give evidence by Agricultural, solely for the purpose of tendering his 29 April 2002 valuation.[69] Subsequently, he was cross‑examined and re‑examined in detail in relation to matters relating to that valuation.

4.1 Mr Catlin's 29 April 2002 valuation of the Kalgoorlie Property 'as if complete'

[67] ts 352 (30 January 2014) (Mr Catlin).

[68] ts 353 (30 January 2014) (Mr Catlin).

[69] See Agricultural Land Management Ltd v Jackson [2013] WASC 464 [77] - [94].

Mr Catlin's 29 April 2002 valuation,[70] was conducted on the basis of an 'as if complete' development of the Kalgoorlie Property. He was instructed to, and did, value the Kalgoorlie Property on a 'hypothetical development' approach. That approach led to an assessment that if the Kalgoorlie Property were completely developed on 29 April 2002 it would have a value of $19.5 million, net of GST.
[70] Exhibit 43.
It must be reiterated that the focus of Mr Catlin's valuation was upon determining the 'as if complete' value of the Kalgoorlie Property. In determining the 'as if complete' value of the Kalgoorlie Property, Mr Catlin used two valuation methods:
(i)a capitalisation approach which assessed fair occupancy rates and capitalised the net returns;[71] and
(ii)direct comparison to recently recorded sales of quality hotels and resorts.
[71] Exhibit 43 (Trial bundle page 668).
Mr Catlin's 'as if complete' valuation was 58 pages long. In the course of that valuation, Mr Catlin also considered the fair market value of the 'land component' of the Kalgoorlie Property. That land component was assessed as a 'final check to value' for the assessment of the $19.5 million 'as if complete' valuation.[72] It involved a process by which Mr Catlin started with the $19.5 million figure for gross realisation and then deducted an allowance for selling expenses, legal expenses, advertising, profit and risk, loss of interest over the development and selling period, development costs, construction costs, rates and taxes and initial expenses. The end figure was then considered to be a realistic guide to the market value of the Kalgoorlie Property.[73]
[72] Exhibit 43 (Trial bundle page 677).
[73] Exhibit 43 (Trial bundle page 677).
In the crucial paragraphs of his 29 April 2002 valuation, Mr Catlin explained the following matters.
(i)Using the hypothetical development approach, and working backwards from the 'as complete' assessment of $19.5 million, he reached a conclusion of $2,250,000 land value for the Kalgoorlie Property.
(ii)The $2,250,000 assessment included[74]
costs incurred to date [emphasis added] in relation to demolition fees and site costs together with architectural drawings required to obtain approval for the subject development in accordance with the proposed development ...
[and including] approvals as obtained and pending ... [and] the costs associated with obtaining such approvals in relation to fees incurred regarding working drawings, engineers' costs and other preliminaries.
(iii)The $2,250,000 assessment did not include additional costs which meant that the Kalgoorlie Property could potentially be sold to the Syndicate for a value higher than this assessed value. Those additional costs were matters such as:
Interest and finance costs, sales and marketing costs, responsible entity fees and other scheme costs included.
(iv)The land value of $2,250,000 reflected a rate of $258 per square metre and $24,457 per hotel room.
[74] Exhibit 43 (Trial bundle page 679 - 680).
During cross‑examination of Mr Catlin by senior counsel for the defendants, a page of his calculations used was tendered which explained the process described and the conclusion in those four paragraphs.[75]
[75] Exhibit 43A.
One immediate point is that Mr Catlin's $2,250,000 valuation of the Kalgoorlie Property was dependent upon his assessment of his $19.5 million 'as complete valuation'. In opening submissions, some attacks were made by counsel for Agricultural upon the $19.5 million estimate based upon Mr Catlin's estimates of capitalised income.
There are four reasons why I reject counsel for Agricultural's submission that the $19.5 million assessment was inaccurate.
First, Mr Catlin was called to give evidence by Agricultural in order to tender his 29 April 2002 valuation. He was cross-examined by senior counsel for the defendants about his calculations in that valuation. He iterated, and re-iterated, his starting point in his calculations as the $19.5 million figure. But counsel for Agricultural asked no questions of Mr Catlin in examination or re-examination to suggest that any doubt should be cast upon the $19.5 million figure.
Secondly, counsel for Agricultural submitted that the reason why the $19.5 million figure was not accurate, and could not have been relied upon by any reasonable director, was because Mr Catlin had assumed a net operating profit from the hotel of $1.64 million for its first year of operations.[76] Counsel for Agricultural submitted that this figure was not justifiable because Agricultural's income from the hotel, based on an unsigned and unstamped lease, was limited to rent received from the operator. He submitted that Agricultural had entered a lease of the hotel to Dunsborough Hotel Management Ltd which had fixed the rent at $800,000.[77]
[76] Exhibit 43 (Trial bundle page 646).
[77] ts 110 - 111 (27 November 2013).
This submission is incorrect. The unsigned and unstamped lease agreement tendered provided for a rent of $800,000 per annum in addition to an 'Additional Rent'. The Additional Rent was to be calculated by a formula of the excess of Net Operating Profit over a Base fee (a nominal $50,000 adjusted for inflation). So, if the hotel had a net operating profit of $1.6 million then the rent received by Agricultural would be around $750,000 more than the $1.6 million which Mr Catlin estimated. However, other costs to take into account are $400,000 promised under the lease from Agricultural to Dunsborough Hotel Management Ltd for marketing, fit out costs, and working capital.[78]
[78] Clause 4 (Exhibit 28, Trial bundle page 471).
Thirdly, as Mr Catlin explained in his written valuation, the capitalised income basis of assessing the value of the Kalgoorlie Property indicated an average room rate of $211,936. Using a direct comparison approach with other completed hotels the value was $200,000 to $225,000 per room.[79]
[79] Exhibit 43 (Trial bundle page 677).
Fourthly, counsel for Agricultural also relied upon criticisms and queries about Mr Catlin's 29 April 2002 valuation.[80] The criticisms and queries were made by Mr Boys.[81]
[80] Agricultural's opening submissions [84].
[81] Exhibits 44 and 45.
The documents containing those queries and criticisms were admitted only for the state of mind of Mr Jackson and Mr Goff. As for Mr Goff, there was no evidence that Mr Goff saw the documents at the date of the Contract. As for Mr Jackson, his knowledge of the criticisms[82] does not make them true or false. It does not make them likely.
[82] Exhibit 46.
Mr Jackson's knowledge of the criticisms also does not establish any bad faith or recklessness on his part. Mr Jackson's conclusion was that the trading figures provided by Mr Boys were a 'worst case scenario'.[83] Those trading figures involved cash flow from operations for 2004 of $1.115 million rising to $1.331 in 2006.[84] No submissions were made, and no evidence led, which compared these figures with those used by Mr Catlin which were concerned with forecast returns and assessed surpluses. The latter figures, before adjustments, were $762,362 rising to $964,850. But there was no evidence or submissions concerning the relationship between these amounts and the cash flow figures of Mr Boys.
[83] Exhibit 46 (Trial bundle page 697).
[84] Exhibit 45 (Trial bundle page 695).
In opening submissions, counsel for Agricultural also made reference[85] to criticisms made by Mr Boys of a 43‑page market demand study into the hotel by Mr Bird and Associates[86] upon which Mr Catlin may have relied.[87] Once again, none of these criticisms was raised with Mr Catlin in his oral evidence. Further, there was no evidence that Mr Goff saw the market demand study by Mr Bird.
[85] Agricultural's opening submissions [83].
[86] Exhibit 49.
[87] Exhibit 43(Trial bundle page 661).
For these four reasons I reject the attack by counsel for Agricultural on Mr Catlin's $19.5 million, 'as complete' valuation. I also reject the submission, and the associated pleading,[88] that Messrs Jackson and Goff were aware, at the later date of Contract (24 June 2002), that the cost to completion of the hotel would substantially exceed the costs in Mr Catlin's valuation. As I explain in section 4.4 below, the Project Management Agreement contemplated by Messrs Jackson and Goff on 24 June 2002 was a 'turnkey' deal. It fixed the total costs to completion at $18.5 million. Messrs Jackson and Goff could reasonably have expected that the project would result in approximately $1 million profit to Agricultural. The submission by counsel for Agricultural that a profit in the region of this amount was too marginal or speculative to justify a reasonable director engaging in the project was not the subject of any expert evidence. It is sufficient to say that it was reasonable for Messrs Jackson and Goff to cause Agricultural to proceed with the project on the basis of an apparently detailed and comprehensive opinion from a qualified valuer.

4.2 The Licence was not a sham

[88] Re-amended substituted statement of claim [23] - [26].

It is important to observe that there was no pleaded case that the Licence was a sham, involving deliberate deception,[89] or that it was disguised goodwill. Senior counsel for the defendants also made it clear that the defendants did not apprehend any pleading of sham against them.[90]
[89] Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 5166, 531 [35] (Gleeson CJ, Gummow & Crennan JJ).
[90] ts 395 (30 January 2014).
Counsel for Agricultural made it clear that his case was that the Licence was either worthless to Agricultural or worth substantially less than the amount paid.[91] The submission that the Licence was worthless was based upon a proposition that the items of value in the Licence had already been accounted for in the assessment of the $2.25 million purchase price for the Kalgoorlie Property.[92]
[91] ts 448 - 449 (31 January 2014).
[92] ts 454 (31 January 2014).
Nevertheless, two matters asserted by counsel for Agricultural might be perceived as raising allegations of sham. The remainder of this section deals with two issues raised by Agricultural involving
(i)the calculation of the Licence fee, and
(ii)a handwritten memorandum.

4.2.1 The method for calculation of the Licence fee

Agricultural alleged that the 'intention of [the defendants] in a related party transaction was to reimburse the costs of the land and the work in progress for [Bunbury Centro]'.[93]
[93] ts 457 (31 January 2014).
I accept that the manner of calculation of the Licence fee concerned various costs incurred by Bunbury Centro. In that sense, the Licence fee was intended to recoup costs up to the maximum amount provided. Clause 9 of the Contract set the fee for the Licence by reference to Bunbury Centro's costs, expenses and fees of holding, development and management of the Kalgoorlie Property and the development of the information and know how since its acquisition (up to a maximum amount of $1,665,051). But this intention to recoup costs does not assist Agricultural's case for three independent reasons.

First, merely because the manner of calculation of the Licence fee showed a concern to recoup costs does not mean that the amount charged for the Licence fee was more than it was worth, or that the Licence was a sham. The elements of cost used to calculate the Licence fee are not the same as the rights conferred by the Licence. Hence, they are not the same as the value of the Licence. The value of the Licence is independent of the manner in which the fee was calculated. The Licence could have been much more valuable or much less valuable.
Secondly, in assessing breaches by Messrs Jackson and Goff in relation to the entry by Agricultural into the Contract, the focus must be on the Licence fee which was due to be paid. This was the amount of the various costs and expenses in cl 9 of the Contract up to a maximum amount of $1,665,051.
If the amount of the Licence fee which was actually paid on 2 January 2004 by Agricultural to Bunbury Centro exceeded the amount which was due under the Contract then this overpayment was not a consequence of any breach by Agricultural in entering the Contract. For instance, an excess payment might have involved a miscalculation by Agricultural. Or it might have involved a mistaken assumption about various costs by officers of Bunbury Centro or Agricultural. None of these matters were issues in this litigation.
If Agricultural's payment of the Licence fee exceeded the amount properly due then a loss would not necessarily arise even if the payment somehow amounted to a breach of duty by some person who procured it. A loss from that excess payment would only arise if restitution were not possible from Bunbury Centro. Whether restitution was (or is) possible would depend on matters which were not the subject of evidence. For instance there was no evidence concerning any demand from Agricultural from Bunbury Centro for restitution of any overpayment based upon any overpayment of the Licence fee. There was no evidence concerning whether any action had been commenced by Agricultural against Bunbury Centro for restitution of any overpayment. And there were no submissions made concerning whether such an action, if brought now, would be time‑barred. That question might itself depend on whether an action for restitution of unjust enrichment accrues at the date of payment or at a later date of inequitable retention.[94]
[94] Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2009] NSWCA 84; (2009) 76 NSWLR 195, 221 [128] (Allsop P & Handley AJA; Campbell JA agreeing).
Thirdly, and in any event, on the evidence before the Court it cannot be concluded that, on 24 June 2002, the costs incurred by Bunbury Centro under cl 9 of the Contract would necessarily be less than the maximum amount payable for the Licence fee.
Some of the costs relating to the calculation of the Licence fee appear from a document, on plain paper without letterhead, entitled '[Bunbury Centro] Allocation of Transfer Costs as at 8 April 2002'.[95] The document contains costs in five categories, each of which is broken into sub-categories. The five main categories, and the total, are:
(i)Land and Holding Costs $1,992,760
(ii)Finance Costs $428,695
(iii)Construction and Design Preliminaries $821,190
(iv)Syndication Expenditure $243,347
(v)Marketing Expenditure $154,715
Total $3,640,707
[95] Exhibit 34.
Counsel for Agricultural observed that when the purchase price for the Kalgoorlie Property is added to the Licence fee then the total ($3,915,051) exceeds these 'transfer costs' (which include 'Land' the price for which is not a component of the Licence fee). But the evidence did not establish the total costs of Bunbury Centro at the date of the Contract on 24 June 2002. The 'transfer costs' concerned only those costs at 8 April 2002.
Further there was no evidence which related the transfer costs document directly to a calculation of all elements of the Licence fee. For instance, I am not satisfied that the five categories of 'transfer cost' in April 2002 exhaust all the costs incurred by Bunbury Centro by 24 June 2002 in relation to the 'holding, development and management of the Property and the development of the information and know how since the acquisition of the Property by [Bunbury Centro] including, without limitation, bank interest and management fees'.

4.2.2 The handwritten memorandum

Another matter relied upon by counsel for Agricultural, apparently to cast suspicion upon the Licence, was a document which was admitted on the basis that it was evidence of matters which might be known to Mr Jackson or Mr Goff. It is a handwritten memorandum from 'Paul' (Turner) to 'Ray' (Anderson), and a response from Mr Anderson. Mr Anderson is one of the directors of Agricultural.
The memorandum and response are as follows:[96]
Ray,
Could you please consider the special conditions. Are you comfortable that the sale of land and the licence in condition 7 constitute a supply of a business.
I want to express clause 7 as a licence to try to keep it away from being a sale of goodwill that would attract duty at conveyance rates.
The licence in clause 7 should attract duty at mortgage rates (40c/$100)
Regards,
Paul
[96] Exhibit 41.
The response was as follows:
Paul,
I am comfortable that the arrangement outlined should be accepted as the sale of a going concern.
There could be an argument that the 'business' of the vendor was the 'acquisition of land, the construction of strata titled units and the sale of those units (this was the initial intent)' or alternatively the development of the land and the sale of the development in whatever form the company decided. If so, it could be argued that KAHS is not acquiring 'that' business but rather it is acquiring the land and everything else to finish construction and retain.
This could be construed as 2 different businesses (sic) and that KAHS did not contract to purchase the company's business or enterprise.
Despite this possible argument, I believe that the going concern approach is appropriate and the clauses as drafted are acceptable.
Ray
There is no evidence sufficient for an inference to be open that anything in this memorandum or response was seen by, and known to, Mr Jackson or Mr Goff.
Counsel for Agricultural submitted that this inference was open because the content of the communication concerned an amendment to the Contract. But the fact that the amended Contract was signed by Mr Jackson and Mr Goff is not a sufficient foundation from which an inference can be drawn that they were privy to the discussions between others concerning the purpose for amendments to the Contract.[97]
[97] Fazio v Fazio [2012] WASCA 72 [138] (Murphy JA); Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 39 WAR 1 [1003] - [1004] (Owen J).
Nor is it sufficient for this inference to be open that prior to the Contract there were suggestions (such as in in the undated finance application document: see above at [42] - [44]) that the price payable by Agricultural to Bunbury Centro be a single amount of $3,637,000 for the Kalgoorlie Property and work in progress. Contrary to the submission by counsel for Agricultural,[98] this does not establish that the directors intended that the Licence should disguise part of the goodwill to the extent of $1,387,000. All that can be concluded in relation to the figure of $3,637,000 is that it was the estimate by the unknown author of the finance application, at the unknown date of that document, of the combined value of the Kalgoorlie Property and work in progress at the estimated date of sale.

4.3 The substantial value of the Licence independently of Mr Catlin's 29 April 2002 valuation

[98] ts 109 (27 November 2013).

One issue which arose in cross-examination was the extent to which the Licence replicated matters which had already been included in Mr Catlin's valuation of the Kalgoorlie Property.
Counsel for Agricultural submitted that Messrs Jackson and Goff entered into a transaction to pay $2.25 million for the Kalgoorlie Property, based on a $2.25 million valuation of that Kalgoorlie Property, and then agreed to pay an additional $1.65 million for a Licence which either concerned matters already included in the $2.25 million valuation or involved matters of no value to Agricultural.
To reiterate, the terms of the Licence in cl 7 of the Contract concerned:
all of the information and know how in the possession of the Vendor at settlement necessary for the continued project development of the Property as the Broadwater Resort Apartments Kalgoorlie including, without limitation, development approvals issued by the City of Kalgoorlie‑Boulder, architect's plans, subdivisional approvals of the Western Australian Planning Commission, finance applications, marketing and prospectus documentation, project feasibilities, draft building contracts, tenders received from builders, reports from quantity surveyors and other consultants, project costings, liquor licence applications, and original site plans and demolition approvals.
For four reasons, I do not accept the submission by counsel for Agricultural that all the matters of substantial value to Agricultural in the Licence were included in the written valuation of the Kalgoorlie Property.
First, in cross‑examination Mr Catlin was asked whether his 29 April 2002 valuation of the Kalgoorlie Property sought to value the Licence under clause 7 of the Contract. Mr Catlin said, and I accept, that it did not.[99]
[99] ts 361 (30 January 2014) (Mr Catlin).
Mr Catlin's explanation of what he subjectively intended by his 29 April 2002 valuation is not relevant to what a reasonable director would have understood the written valuation to mean. But it is relevant to ascertain the actual value of the Kalgoorlie Property because it is Mr Catlin's opinion, both written and oral, which is relevant to the question of the actual value.
Mr Catlin said that his April 2002 valuation had not included the following:[100]
(i)costs that might have been incurred in relation to advertising, marketing and promotion fees;
(ii)marketing and prospectus documentation;
(iii)the benefit of finance applications;
(iv)the benefit of any draft building contracts;
(v)the benefit of tenders received from builders;
(vi)the benefit of reports from quantity surveyors and other consultants; and
(vii)the benefit of project costings subsequent to 29 April 2002.
[100] ts 360 - 361 (30 January 2014) (Mr Catlin).
Each of the above falls within the terms of the Licence. The Licence, in cl 7 of the Contract, contains express reference to (ii), (iii), (iv), (v), (vi), and (vii) (both before and after 29 April 2002). The general terms of the Licence also includes (i). The Licence also includes reference to 'project feasibilities' but Mr Catlin said that he wasn't sure what that meant so he didn't know if it was included in his April 2002 valuation.[101]
[101] ts 361 (30 January 2014) (Mr Catlin).
I accept Mr Catlin's evidence that none of the enumerated matters above was included in his valuation. Mr Catlin's evidence on this point was honestly given and I consider him to be a reliable witness generally.
Secondly, it is misleading to segregate each of the enumerated matters in the list and then ask whether that matter was of real value to Agricultural or whether it had already been included in Mr Catlin's 29 April 2002 valuation.
The reason why this approach is misleading is because each of the enumerated items was only an example, without limitation, of information and know how in the possession of the Vendor at settlement necessary for the continued project development of the Kalgoorlie Property as the Broadwater Resort Apartments Kalgoorlie.
It is immediately apparent that the information and know‑how for the continued development of the Kalgoorlie Property is likely to have had real value. More accurately, that information would have been perceived by a reasonable director of Agricultural, on 24 June 2002, as having real value and it was reasonable to acquire a licence to use it. The Kalgoorlie Property was acquired by Agricultural on 24 June 2002. Barely a year later, in August 2003, there had been completed, as contemplated, a fully constructed hotel which Mr Catlin described as 92 apartments, licensed bar and restaurant, swimming pool and spa, car parking, and extensive landscaped surrounds.
The proper approach for Agricultural to prove that the Licence was of no value, or less value than the cl 9 cost (to a maximum of $1,665,051), would have been for Agricultural to lead expert evidence of:
(i)the relevant information and know‑how for the development of a hotel;
(ii)those matters of information and know‑how which were imparted from Bunbury Centro to Agricultural; and
(iii)those matters which were included in Mr Catlin's 29 April 2002 valuation.
From these three issues there could be discerned the value to a reasonable purchaser of information and know how possessed by Bunbury Centro on 24 June 2002 which had not been included in the 29 April 2002 valuation.
Thirdly, there were some of the enumerated matters in the list of matters covered by the Licence that might have been of real value, subject to expert evidence on the subject. For instance, matters of real potential value to a purchaser could have been advertising, marketing and promotion documentation, finance applications, draft building contracts, tenders received from builders, reports from quantity surveyors and other consultants, and project costings subsequent to 29 April 2002. There was no evidence led from Agricultural that in the subsequent development of the hotel it obtained no benefit from any of these matters.
Nevertheless, the enumerated matters may have included some examples which were not of value to Agricultural. One example is the liquor licence application. This application was not made by Bunbury Centro. It was made by Broadwater Hospitality Pty Ltd, the proposed operator of the hotel, and granted conditionally on 1 November 2001.[102] If this was the only liquor licence application relevant to the proposed hotel on 24 June 2002 then information and know how relating to that liquor licence might not have been a matter of value which Bunbury Centro could provide to Agricultural. But there was no evidence that the 1 November 2001 liquor licence was still extant at 24 June 2002. One question arising from this is if this was the only liquor licence application made (and granted) then why was the later unsigned 23 September 2002 lease, upon which Agricultural relied, expressed to be conditional upon the grant of a liquor licence?
[102] Exhibit 55.
Other material in the list of examples contained in the Licence which was of little value to Agricultural was marketing and prospectus material concerning the Broadwater Hotel dated 22 May 2000.[103] The value that this material might have had is substantially reduced by the fact that it was concerned with the strata title plan which was later superseded by the development of the Kalgoorlie Property and hotel as a Managed Investment Scheme. More fundamentally, that prospectus was produced for Agricultural, not for Bunbury Centro.[104] But, once again, there was no evidence of the extent of any benefit available to Agricultural from Bunbury Centro from other marketing and prospectus material. The absence of evidence is not evidence of absence.
[103] Exhibit 56.
[104] Exhibit 56 (Trial bundle page 208).
Fourthly, I do not accept the assertions of counsel for Agricultural that the matters of substantive worth to Agricultural enumerated in the Licence had already been included by Mr Catlin in his written valuation of the Kalgoorlie Property at $2.25 million. For instance, counsel referred to references in Mr Catlin's 29 April 2002 written valuation to the inclusion of 'approvals as obtained and pending' and 'costs associated with obtaining such approvals in relation to fees incurred regarding working drawings, engineers' costs and other preliminaries'.
Counsel submitted that:
(i)'draft building contracts' fell within 'preliminaries';[105] and
(ii)'project costings' fell within 'approvals' in the 29 April 2002 valuation.[106]
[105] ts 455 (31 January 2014).
[106] ts 455 (31 January 2014).
Even if this submission were correct, it would only apply to draft building contracts and project costings as at 29 April 2002. Any further draft building contracts and project costings between 29 April 2002 and 24 June 2002 would not be included.
In any event, I reject the submission. It is not immediately obvious that the scope of 'preliminaries' and 'approvals' extends to draft building contracts and project costings. And the evidence given by Mr Catlin, which I accept and set out above in [127], is that they do not.
I conclude that Mr Catlin's April 2002 valuation did not include items from the Licence which were potentially of real value to Agricultural. The absence of any sufficient evidence concerning the value of those items makes it impossible to conclude that the value of the Licence was less than the Contract fee for it. Even if the costs in the Contract fee, cl 9, amounted to the maximum of $1,665,051 there is insufficient evidence to conclude that the Licence was worth less than $1,665,051.

4.4 The relevance of the $18.5 million Project Management Agreement

In re‑examination, counsel for Agricultural put a series of questions to Mr Catlin which focused upon two key matters:
(1)The Kalgoorlie Property, with an 'as complete' hotel constructed upon it, would be valued at $19.5 million; and
(2)Agricultural had entered a 'turnkey' contract, the Project Management Agreement, which was inclusive of all costs and which required Agricultural to pay $18.5 million for the construction of the hotel.
In section 6.1 of these reasons I explain the limitation bar which is faced by the premise of these questions. The premise for these questions appeared to be an endeavour to call into question the purchase price and Licence fee (which were the focus of the pleadings) by focusing on the terms of the Project Management Contract.
The combination of the purchase price and maximum Licence fee ($3,915,051) was paid by Agricultural for the Kalgoorlie Property. The premise of the questions was effectively that a reasonable director could not have believed that the Kalgoorlie Property and Licence fee could have a combined value of $3,915,051 when, after construction, the difference between the cost of construction and the 'as complete' value was only $1 million.
The immediate difficulty with such a premise is that in the Project Management Agreement the purchase price was expressly included as a Project Cost for which the $18.5 million price was paid. And, on its proper construction, the Project Cost also included the Licence fee. Although the Licence fee was not expressly included by the description 'Licence fee', the Project Cost included 'costs of acquiring and developing the [Kalgoorlie Property]'. The Licence fee was a cost of 'developing the [Kalgoorlie Property]' because the licence fee was expressly concerned with the use of 'all of the information and know how in the possession of the Vendor at settlement necessary for the continued project development ...'. A director could also reasonably have assumed that the Licence fee was included in the Project Cost.
It is, therefore, extremely difficult to see how the Project Management Contract, which incorporates the purchase price for the Kalgoorlie Property, could be relevant to an assessment of the value of the Kalgoorlie Property.This was the effective reason why Mr Catlin, in oral evidence, rejected the relevance of the $18.5 million Project Management Agreement to an assessment of the value of the Kalgoorlie Property on 24 June 2002.

The first is that an accounting exercise would be likely to be futile since I determined that no profit was made. Even putting to one side the boundaries of issue estoppel, there are systemic considerations of legal policy in permitting the same issue to be litigated twice in the same proceedings. As Lord Hoffmann has explained, these are considerations that a person should not be troubled twice for the same reason and the need to avoid duplication of determinations.[425]
[425] Arthur J S Hall & Co (a firm) v Simons [2002] 1 AC 615, 701.
Secondly, although the defendants are strictly accounting parties, and although it may have been open to Agricultural simply to seek an accounting, Agricultural ran its case as an attempt to prove loss and corresponding profit. To order an accounting would also give Agricultural a second bite at the cherry.
Thirdly, as I explained, I was not aware of any case where an accounting is ordered in circumstances in which a plaintiff has tried, and failed, to prove that any profit at all was made from the breach. Senior counsel for the defendants has also pointed to authorities that recognise the requirement that a plaintiff must plead that a profit has been made.[426] It follows from this that an account of profits should not be ordered where a plaintiff has pleaded, but failed to prove, that any profit was made.
[426] Hightime Investments Pty Ltd v Lungan [No 2] [2010] WASC 296 [36] (Beech J); Joyce v Palassis [No 4] [2008] WASC 45 [50] ‑ [51] (Le Miere J); Collie v Merlaw Nominees Pty Ltd (in liq) [2003] VSCA 40 [10] (Batt JA; Ormiston & Vincent JJA agreeing).
No order should be made for an account of profits.

The appropriate costs orders

Agricultural seeks various alternative orders as to costs. They are as follows.
(i)No order as to costs.
(ii)The defendants pay Agricultural's costs of the action to be taxed but with a reduction of 50% and various allowances.
(iii)Agricultural pay the defendants' costs of the action to be taxed but with (a) a reduction of 50% of those costs, (b) no allowance for preparation of witness statements or expert reports for witnesses not called by the defendants, (c) a set off for costs thrown away by reason of the defendants' amendments to the defence and the abandonment of issues at trial of matters pleaded in the defence, (d) a set off for reserved costs orders that should be made in favour of Agricultural, (e) a set off for the costs of the defendants' security for costs application, and (f) a set off for the costs of hearings on 18 September 2013, 6 November 2013 and 8 November 2013.
As to the first two proposed orders, the starting point is that the defendants were successful in the action. The relief sought by Agricultural against each defendant was compensation under s 1317H of the Corporations Act, equitable compensation or an account of profits. Each claim for relief failed.
Although an award of costs is discretionary, the success of the defendants means that the Court will generally order that they recover their costs.[427] Fairness dictates that the unsuccessful party typically bears the liability for the costs of the unsuccessful litigation.[428]
[427] Supreme Court Act 1935 (WA) s 37; Rules of the Supreme Court 1971 (WA) O 66 r 1(1).
[428] Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72, 97 [67] (McHugh J).
Agricultural argues in favour of its proposed orders (i) and (ii) above (no order as to costs, or for the defendants to pay Agricultural's costs) because it says that it was partly successful at trial. Plainly, it was not successful in obtaining any of the relief it sought. But Agricultural says that it was partly successful on the discrete issue of liability. Agricultural says that it succeeded on the discrete issue of liability but failed on 'damages' which precluded any relief.[429]
[429] Agricultural's short costs submissions [11] ‑ [13].
In Bowen v Alsanto Nominees Pty Ltd,[430] in a passage recently reiterated,[431] the Court of Appeal explained the reasons why such orders are not made as a matter of course when a plaintiff succeeds on a discrete issue:
[430] Bowen v Alsanto Nominees Pty Ltd [2011] WASCA 39 (S) [6] ‑ [7] (the Court).
[431] Carey v Commissioner for Consumer Protection [2013] WASCA 195 (S) [3] (the Court).
The court may, in the exercise of its discretion, order that a successful party recover only a portion of its costs where that party has been unsuccessful in respect of certain discrete issues. But that should not be done as a matter of course. To embark as a general practice upon an analysis of which party was successful on each issue, or necessarily to deprive a successful party of some portion of its costs if it has lost on a particular issue, would be likely to add further uncertainty and complexity to the outcome of litigation, derogate from the prospect of settlement, and oblige the court to hear lengthy and frequent arguments in relation to costs as an additional burden on its resources and the costs of the parties: see MacKinnon v Petersen (Unreported, NSWSC, 19 April 1989) (Cole J); Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 [67] ‑ [68] (McHugh J). Litigation is time-consuming, expensive and burdensome enough already.
In addition, while parties should be encouraged to consider carefully what matters they put in issue, justice may not be served if by too ready a resort to deciding questions of costs according to success on particular issues, parties are dissuaded by the risks of costs from canvassing all issues which might be material to the decision in the case: Doric Products Pty Ltd v Lockwood Security Products Pty Ltd [2002] FCA 282; NRMA Ltd v Morgan (No 3) [1999] NSWSC 768 [24].
In this case, as a matter of general impression, these considerations mean that this is not an appropriate case in which there should be any departure from the general rule that the successful party is entitled to its costs.
In any event, in O'Rourke v P & B Corporation Pty Ltd,[432] the Chief Justice said that the Court should only adjust a costs order by reference to particular issues if 'it is clear that [(i)] those issues were significantly discrete, [(ii) they] raised costs that can be separately and specifically determined, and [(iii) they] were issues upon which the unsuccessful party has demonstrably failed'.[433]
[432] O'Rourke v P & B Corporation Pty Ltd [2008] WASC 36 (S) [13] (Martin CJ).
[433] O'Rourke v P & B Corporation Pty Ltd [2008] WASC 36 (S) [13] (Martin CJ).
I do not accept the submission by counsel for Agricultural that the issues of liability were significantly discrete from those concerning compensation or the account of profits. One reason for this is that it is, at least, strongly arguable that loss is an element of an action for negligence in equity. A second reason is that the extent of any loss on the sale of the Kalgoorlie Property or Licence is a matter which would be relevant to any inference drawn concerning liability issues such as whether the directors acted in good faith or in the best interests of Agricultural.
Nor do I accept that the evidence to which the liability issues and the compensation issues related was independent. The expert evidence concerning the value of the Kalgoorlie Property and Licence was not merely relevant to a quantification of any alleged loss that was suffered. As I have explained, it was also relevant to the question of liability in a number of ways such as whether the directors acted in the best interests of Agricultural, or whether they acted in good faith, or whether they acted for proper purposes.
Nor do I accept that these were issues upon which the defendants demonstrably failed. One significant part of Agricultural's case in relation to liability was its claim concerning losses in relation to the Project Management Agreement. Agricultural failed in that part of its case because it was time barred and lacking in a factual basis.[434] Agricultural also failed to prove numerous contraventions and breaches alleged against the defendants. All of the first group of alleged breaches failed.[435] All of the contraventions within the fourth group of alleged breaches failed.[436] All of the contraventions within the fifth group of alleged breaches failed.[437] A number of the breaches in the sixth and seventh group of alleged breaches failed.
[434] Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102 [191] ‑ [215].
[435] Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102 [233].
[436] Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102 [256].
[437] Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102 [258].
Finally, I do not accept that any of the issues upon which Agricultural succeeded appreciably increased the costs of the trial. The point could be tested by asking whether the trial would have been abbreviated if the defendants had conceded all of the issues on which Agricultural succeeded. My conclusion is that any reduction in trial time would have been almost non‑existent. For instance, as senior counsel for the defendants submitted, the only issue upon which I found for Agricultural that was not conceded by the defendants, or based upon a matter conceded by the defendants, was in relation to breach of fiduciary duty. My finding in relation to breach of fiduciary duty involved no different factual basis from issues raised in relation to the remainder of the trial and the submissions on this point occupied only nine lines of Agricultural's lengthy closing submissions.
Counsel for Agricultural pointed to seven matters about which he said the defendants abandoned. In relation to all but one of those matters it is more accurate to say either that no positive case was advanced by the defendants or that they were irrelevant to the central issues at trial. The matter abandoned was that there were no members of the Kalgoorlie Scheme at the relevant time. In relation to all matters, none of them had any substantial effect on the length of trial, nor were any of them clearly discrete issues about which costs could be specifically determined.
For these reasons, the proper order is that Agricultural pay the defendants' costs to be taxed if not agreed.

Whether the costs order should be adjusted

The remaining question then is whether that order should be adjusted, or supplementary orders made, in relation to:
(i)preparation of witness statements or expert reports for witnesses not called by the defendants;
(ii)costs thrown away by reason of the defendants' amendments to the defence and the abandonment of issues at trial of matters pleaded in the defence;
(iii)reserved costs orders that should be made in favour of Agricultural;
(iv)costs of the defendants' security for costs application; and
(v)costs of hearings on 18 September 2013, 6 November 2013 and 8 November 2013.
Agricultural submitted that orders should be made in relation to any of these matters for which it was entitled to costs setting off those costs against costs orders in the defendants' favour. The term 'set-off' is sometimes used in different senses. Its primary, and correct, sense is to refer to cross‑demands. It appears that this is the sense in which counsel for Agricultural used it. It is in the discretion of the taxing officer to set‑off these cross‑demands in the taxation of costs.[438] No order of set off requiring the taxing officer to do so should be made.
[438] Rules of the Supreme Court 1971 (WA) O 66 r 59.

Preparation of witness statements and expert reports for witnesses not called

As to preparation of witness statements or expert reports for witnesses not called by the defendants, counsel for Agricultural sought orders that the defendants' entitlement to costs and disbursements not include 'any allowance or disbursements for the preparation of witness statements or expert reports of witnesses not called by the defendant at the trial of the action'.
The witnesses and experts to which counsel for Agricultural is referring are the defendants, Mr Jackson and Mr Goff, as well as the reports from Mr Catlin that were not tendered and a report from a quantity surveyor, Mr Bird.
I do not consider it appropriate to exclude these matters from the order for costs in favour of the defendants. It may turn out to be that the preparation of the witness statements and expert reports of any or all of these witnesses are not costs which are allowed. But the failure to call a witness is not automatically a disentitling factor for recovery of those costs. It might depend, for example, on the prudence and reasonableness of the decision to prepare the witness statements, and upon why the decision was said to have been made not to call the witness, and upon when that decision was made. I received no submissions on these points.
This is a matter that should be left to the taxing officer.

Costs thrown away by reason of the 20 September 2013 amended defence

As to these costs thrown away, an order has already been made in the terms sought by Agricultural. On 25 September 2013, I ordered that the defendants pay Agricultural's costs thrown away by reason of the amended defence dated 20 September 2013.

Costs that were reserved

As to the reserved costs orders upon which Agricultural sought its costs, these were orders made on 23 October 2009, 6 November 2009, 13 November 2009, 20 November 2009, and 15 January 2010.
All of these hearings were conducted long before the matter was admitted into my list in the Commercial and Managed Cases List. All hearings were status conferences conducted before a registrar. The orders made, and time recorded for each hearing in the Integrated Courts Management System, is set out below.
The orders on each occasion were as follows:
(a)23 October 2009 (12 minutes): adjourning the status conference to 6 November 2009;
(b)6 November 2009 (30 minutes): adjourning the status conference to 13 November 2009 and ordering that Agricultural serve a minute of amended statement of claim as soon as practicable and that there be conferral on that amended statement of claim;
(c)13 November 2009 (8 minutes): adjourning the status conference to 20 November 2009;
(d)20 November 2009 (20 minutes): adjourning the status conference to another day to be fixed and ordering Agricultural to make any application for leave to amend its statement of claim by 4 December 2009; and
(e)15 January 2010 (15 minutes): granting Agricultural leave to file and serve an amended statement of claim, consequential orders in relation to the defence, and leave for the defendants to withdraw an admission.
My associate has conducted an electronic search of ICMS and no recording of those hearings is available, nor was there any transcript on the court file. However, the solicitor for the defendants (who appeared at all of the status conferences above) made submissions before me this morning and also handed up copies of transcripts for the first four of those hearings. He submitted that all of the status conferences involved issues including deficiencies in Agricultural's statement of claim and proposed amendments to Agricultural's statement of claim. That submission is supported by the orders, the time taken, and the transcripts which I have read this morning.
The solicitor for the defendants submitted that the proposed amendment by Agricultural was concerned with the complaint that the defendants had about Agricultural's pleading which was that it did not explain the loss that had been suffered. I accept this submission. At the first status conference, the exchange was substantially concerned with this question of quantum. The Registrar concluded the hearing by saying that it was 'worrying' that the solicitors for Agricultural (who were not its solicitors at trial) had allowed the matter to proceed this far without considering what a reasonable fee would have been for the Licence.[439] Ultimately, it was pleaded that the Licence had no value, a claim that I rejected.
[439] ts 5 ‑ 6 (23 October 2009).
All of these matters are strong reasons for an order to be made that the costs of these status conferences be costs of the defendants or, which now amounts to the same thing, that the costs be in the cause.
However, on a number of occasions the necessity for a status conference, and the length of the status conference, appears to have been affected by delays by the defendants in responding to correspondence and absence of proper, timely conferral by the defendants. For instance, it was common ground that a minute of proposed amended statement of claim was provided to the defendants on 24 August 2009. The defendants did not respond to that minute until 20 October 2009. Counsel for Agricultural said that on 22 October 2009, Agricultural responded to that letter from the defendants. I was not told of the contents of that letter, but nothing was said at the status conference on 22 October 2009 to suggest that the point was conceded. At the status conference on 23 October 2009 the Registrar then observed that there were serious deficiencies with the statement of claim and that there needed to be conferral between the practitioners to sort out the problem.[440]
[440] ts 5 (23 October 2009).
Although the status conference was concerned with the deficiencies in Agricultural's statement of claim, in the circumstance of the long delay by the defendants in responding to Agricultural's correspondence, the appropriate order is that there be no order as to costs of the 23 October 2009 status conference.
As to the status conference on 6 November 2009, Agricultural submitted that the defendants' solicitors had again delayed in responding to the letter sent to them on 22 October 2009. A reply had not been received until 3 November 2009, shortly before the status conference on 6 November 2009. Nevertheless, the dispute appeared to be a simple point and Agricultural's solicitor had adequate time to consider the pleading issue which had been in dispute. At the status conference the solicitor who was then acting for Agricultural submitted that it was not necessary for Agricultural to plead what it said the Kalgoorlie Property and Licence were worth. The solicitor for Agricultural said that he could not plead that until he obtained an expert report and that it may be that the Licence was worthless.[441] No expert evidence was ever led in relation to the Licence. The status conference concluded with the submission by the solicitor for the defendants to the Registrar that the last time that this matter was adjourned was[442]
[441] ts 10 (6 November 2009).
[442] ts 14 (6 November 2009).
for 14 days ... for the purpose for these matters to be addressed. They haven't been quite addressed [by Agricultural] and my friend tells me that any issues can be attended to in the next few days...
The appropriate order is that these costs be in the cause which has the effect that Agricultural pay the defendants' costs of the status conference on 6 November 2009.
As to the status conference on Friday 13 November 2009, a minute of proposed amended statement of claim was provided by Agricultural to the defendants on 6 November 2009. At the hearing the solicitor for the defendants said that he had received it on Monday 9 November 2009. But, he did not advise Agricultural until 12 November 2009, that counsel would not be able to look at the minute until the following week. There is nothing on the Court file to suggest that the defendants informed the Court that they would not be able to confer prior to the status conference. The status conference before the Registrar had to be adjourned. The Registrar remarked that costs would be reserved because he had expected a response from the defendants in time.[443]
[443] ts 18 (13 November 2009).

The defendants should pay Agricultural's costs of the status conference on 13 November 2009.
As to the status conference on 20 November 2009, a number of matters were canvassed during this hearing. One of them concerned particulars of the minute of the proposed amended statement of claim. A letter seeking particulars had only been sent by the solicitors for the defendants one day before the status conference. The letter related, again, to the issue of quantum.
The solicitor for Agricultural also accepted before the Registrar that there was an error in the minute because it referred to the licence having no value. The defendants did not intend to plead that (at that time).[444] The Registrar refused leave to amend the pleading and said that 'it still needs another go'.[445] There was also a dispute about the absence in the proposed amended statement of claim of any reference to the document which required disclosure of the transaction. The Registrar reserved costs because 'we are dealing with proposed amendments'. He considered it appropriate to deal with them together with any application that is made.[446]
[444] ts 21 (20 November 2009).
[445] ts 25 (20 November 2009).
[446] ts 28 (20 November 2009).
In all the circumstances, the appropriate order is that the costs of the 20 November 2009 status conference be costs in the cause. This means that they will be the defendants' costs.
As to the status conference on 15 January 2010, counsel for Agricultural said that this 15 minute hearing was for Agricultural's application to amend its statement of claim which had been the subject of the difficulties discussed above. The application was allowed. No transcript of that hearing was available when counsel appeared before me this morning. However, one has been located in the archives. It will be provided to the parties prior to any formal order being entered but my preliminary conclusion is that the transcript from that hearing provides a strong basis for an order that Agricultural pay the defendants' costs of that status conference.
At the hearing, two applications were made: an application by Agricultural to amend its statement of claim and an application by the defendants to withdraw their admission that Agricultural was a registered entity. Neither application was opposed. The Registrar proposed making orders that Agricultural pay the defendants' costs of the application including reserved costs.[447] The solicitor for Agricultural opposed this. He said that some of the earlier directions hearings might have involved late communications from the solicitors for the defendants that made adjournment difficult.[448] So costs of the 15 January 2010 hearing were reserved.
[447] ts 10 (15 January 2010).
[448] ts 10 (15 January 2010).
In these circumstances, there is a strong basis for the appropriate order to be that the costs of the 15 January 2010 status conference be costs in the cause. This means that they will be the defendants' costs. However, since I have reached this preliminary view by relying upon material that counsel before me this morning has not seen, I will give counsel for Agricultural the opportunity of making any brief submission to the contrary if he wishes to do so.

Costs of the defendants' security for costs application

Senior counsel for the defendants submitted in writing that the orders had already been made on 16 May 2013 that the defendants pay Agricultural's costs of the security for costs application. This point was not pressed at the hearing this morning. I have confirmed from the court file that the submission by senior counsel for the defendants is correct. This order sought by Agricultural is therefore unnecessary.

Costs of hearings on 18 September 2013, 6 November 2013 and 8 November 2013

Senior counsel for the defendants submitted in writing that the Court has already ordered that the defendants pay Agricultural's costs of these hearings. I have confirmed from the court file that the submission by senior counsel for the defendants is correct. This order sought by Agricultural is therefore unnecessary.

Conclusion

Unless any further submission in relation to (2) is made by counsel for Agricultural before 7 May 2014, the appropriate orders are as follows:
(1)The action be, and is, dismissed.
(2)The plaintiff pay the defendants' costs of the action including the costs reserved on 6 November 2009, 20 November 2009 and 15 January 2010, to be taxed and paid forthwith (if not agreed).
(3)There be no order as to the costs of the status conference on 23 October 2009.
(4)The defendants pay the plaintiff's costs reserved on 13 November 2009, to be taxed if not agreed.