Agricultural & Rural Finance Pty Ltd v Atkinson (No 2)
[2014] NSWSC 1397
•14 October 2014
Supreme Court
New South Wales
Medium Neutral Citation: Agricultural & Rural Finance Pty Ltd v Atkinson (No 2) [2014] NSWSC 1397 Hearing dates: 18 to 21 and 25 August 2014 Decision date: 14 October 2014 Before: Ball J Decision: See paragraphs 143 to 145 of this judgment
Catchwords: CONTRACT - unjust contracts - proceedings on remitter from Wardle v Agricultural & Rural Finance [2012] NSWCA 107 - Contracts Review Act 1980 (NSW) - whether indemnity unjust in circumstances relating to agreements at time they were made - whether failure to disclose round robin funding arrangements unjust or misleading - whether loss of indemnity for late payment reasonably necessary for protection of plaintiff's interest - whether loss of indemnity grossly disproportionate to detriment suffered by plaintiff in accepting late payment
ESTOPPEL - whether plaintiff estopped from asserting that indemnity not valid and enforceable - where defendant did not make payments on time purportedly in reliance on a representation made to defendant that strict compliance with time stipulations not essential to obtain benefit of indemnity - where representation made by person with no actual or ostensible authority to make representation on plaintiff's behalf - whether defendant acted to his detriment in reliance on representationLegislation Cited: Contracts Review Act 1980 (NSW), ss 7, 9, 16
Corporations Law, Pts 7.11, 7.12Cases Cited: Agricultural & Rural Finance Pty Ltd v Atkinson [2006] NSWSC 202
Agricultural & Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570
Agricultural & Rural Finance Pty Ltd v Atkinson [2010] NSWSC 311
Agricultural & Rural Finance Pty Ltd v Atkinson [2010] NSWSC 425
Agricultural & Rural Finance Pty Ltd v Atkinson [2010] NSWSC 635
Agricultural & Rural Finance Pty Ltd v Atkinson [2014] NSWSC 948
Baltic Shipping Co v Dillon (1991) 22 NSWLR 1
Blacker v National Australia Bank Ltd [2000] NSWSC 805; (2000) 158 FLR 142
Conley v Commonwealth Bank of Australia [2000] NSWCA 101
Dunwoodie v Teachers Mutual Bank Ltd [2014] NSWCA 24
Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413; (2002) 11 BPR 20,841
Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50
Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
Gardiner v Agricultural & Rural Finance Pty Ltd [2007] NSWCA 235
Hogan v Howard Finance Ltd [1987] ANZ ConvR 317; (1987) ASC 55-594
Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; (2008) 77 NSWLR 205
May v Brahmbhatt [2013] NSWCA 309
Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41; (2005) 14 BPR 26,639
Provident Capital Ltd v Papa [2013] NSWCA 36; (2013) 84 NSWLR 231
Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153; (2008) NSW ConvR 56-198
Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389; (2011) 15 BPR 29,699
Wardle v Agricultural & Rural Finance Pty Ltd [2012] NSWCA 107
West v AGC (Advances) Ltd (1986) 5 NSWLR 610Category: Principal judgment Parties: Agricultural & Rural Finance Pty Ltd (Plaintiff)
Geoffrey Nevell Fredericksen (35th Defendant)
Nicholas Charles Rowe (75th Defendant)
Maria Francesca Russo (78th and 189th Defendant)
David James Wardle (95th Defendant)
Jennifer Dianne Wallace (124th Defendant)
Franco Giannuzzi (149th Defendant)
Gavin Winston Long (172nd Defendant)Representation: Counsel:
CJ Bevan with Ms I Sethi (Plaintiff)
S D Epstein SC with Ms A Tsekouras (35th, 75th, 78th, 95th, 124th, 149th, 172nd and 189th Defendants)
T Marskell (Second Cross Defendant)
Solicitors:
Evangelos Patakas & Associates (Plaintiff)
Abadee Dresdner & Freeman Pty Ltd (35th, 75th, 78th, 95th, 124th, 149th, 172nd and 189th Defendants)
Condon & Associates (Second Cross Defendant)
File Number(s): 2003/92819 Publication restriction: Nil
Judgment
Introduction
The defendants in these proceedings were investors in two tax-effective primary production projects concerned with the growing of tea trees and the production of tea tree oil known as the Port Macquarie Tea Tree Plantation Project No 1 (Project No 1) and the Port Macquarie Tea Tree Plantation Project No 2 (Project No 2), which were established by the second cross-defendant, Oceania Agriculture Ltd (OAL). OAL was a wholly owned subsidiary of Gerard Cassegrain & Co Pty Ltd (GCC). The managing director of GCC was Mr Claude Cassegrain (Mr Cassegrain). Originally, there were a large number of defendants in the proceedings, but now only seven remain.
The projects were "managed investment schemes" within the meaning of the then Corporations Law. Accordingly, an interest in the schemes was a "security" within the meaning of the Law and, therefore, subject to regulation under the prospectus provisions of the Law contained in Pts 7.11 and 7.12. The prospectuses for the two projects were lodged with the Australian Securities Commission (as it was then known) in 1997 (Project No 1) and 1998 (Project No 2).
The structure of the investment in both projects was substantially the same. Taking Project No 1 as an example, investors entered into a licence and management agreement with OAL (the Licence and Management Agreement) by which they licensed from OAL for a period of 17 years an area of land of approximately 0.5 hectares. OAL subleased the land from Australian Rural Group Ltd, a trustee company, which in turn leased the land from Endwise Holdings Pty Ltd, which was half owned by GCC and half owned by Mr Cassegrain. Investors paid an initial licence fee of $100 for each 0.5 hectare lot. They also agreed to pay a fee of $210 for germinated seeds. In addition, OAL agreed, for an initial fee of $23,750, to manage on behalf of investors the planting of no less than 18,000 tea trees on each lot and the development of a business of cultivating, harvesting and processing tea trees to produce tea tree oil. The investors had an option to enter into a loan agreement (the Loan Agreement) with the plaintiff, Agriculture & Rural Finance Pty Ltd (ARF), to borrow most of the initial investment. ARF was owned by members of the Sarks family, who were related by marriage to Mr Cassegrain. Originally, it had been intended that the money would be advanced by another company controlled by Mr Cassegrain. However, that company was involved in litigation at the time, and it was thought desirable for that reason to use a company unrelated to OAL. ARF in turn borrowed most of the money advanced to investors from OAL, which raised the money it advanced to ARF from prior investors. This feature of the investment, sometimes described as the "round robin arrangement", assumed some significance in the hearing.
For the payment of a fee of $250, an investor also had the option of entering into an indemnity agreement (the Indemnity Agreement) with OAL by which OAL agreed to indemnify the investor against their liability to repay their loans to ARF in certain circumstances. Under the terms of the Loan Agreements, in the event that the indemnity was enforceable, ARF agreed to look solely to OAL for repayment of the loan. One of the conditions for the availability of the indemnity was that the investor "punctually" pay amounts payable by them under the Loan Agreement.
As I have said, the structure of Project No 2 was substantially the same, although the amounts payable by and borrowed by investors were slightly different.
All the defendants in these proceedings borrowed money from ARF to fund their initial investment and entered into an Indemnity Agreement with OAL.
The projects were not successful, largely because of the collapse of the price of tea tree oil, and on 4 January 2003, the projects ceased to operate.
ARF then commenced these proceedings, originally against 216 investors, seeking to recover the outstanding amounts owing in respect of their loans. The investors sought to defend ARF's claims on a large number of grounds and filed cross-claims against OAL. The Court adopted a procedure by which the claims against one investor, Mr Gardiner, would be treated as a test case (the Gardiner Test Case), and the other defendants agreed to be bound by the outcome of that case subject to the right to raise certain contentions arising from their own particular circumstances.
Ultimately, ARF was successful against Mr Gardiner in the High Court in respect of three of the four loans it had advanced to him: see Agricultural & Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570. Mr Gardiner failed in respect of three of the loans because it was held that he had not "punctually paid" all of the interest payments and reductions of the principal sum required under the relevant Loan Agreements.
Prior to the hearing before the High Court, a number of investors, including the seven remaining defendants, amended their defences and cross-claims to allege that certain provisions of the Indemnity Agreement were unjust within the meaning of the Contracts Review Act 1980 (NSW) (the CRA) and that relief should be given under that Act in respect of those provisions. In addition, following the handing down of judgment by the High Court, two of the remaining defendants, the 95th defendant, Mr Wardle, and the 149th defendant, Mr Giannuzzi (Mr Wardle's accountant), amended their defences to raise a defence that ARF was estopped from asserting that amounts owing by them were not punctually paid.
The issues remaining in the case following the High Court's decision were heard by Einstein J. At the commencement of the hearing, ARF filed a motion seeking to strike out certain paragraphs of the defences and cross-claims, which raised the defence under the CRA and the estoppel defence raised by Mr Wardle and Mr Giannuzzi, on the basis that those defences were inconsistent with the agreement of the relevant defendants to be bound by the results of the Gardiner Test Case. Einstein J held that the estoppel defence and part of the defence based on the CRA should be struck out on that basis: Agricultural & Rural Finance Pty Ltd v Atkinson [2010] NSWSC 311. In a later judgment, Einstein J also rejected certain evidence said to be relevant to what remained of the defence based on the CRA: Agricultural & Rural Finance Pty Ltd v Atkinson [2010] NSWSC 425. He then proceeded to hear the remaining substantive issues in the case.
In a judgment delivered on 17 June 2010 (Agricultural & Rural Finance Pty Ltd v Atkinson [2010] NSWSC 635), Einstein J rejected what remained of the defence based on the CRA. He also held that none of the remaining defendants had paid amounts owed by them punctually. In reaching those conclusions, his Honour made findings on when the payments in question were received by ARF. Those findings were based largely on the records of ARF and his acceptance of evidence given by Ms Edwards, ARF's financial controller, concerning those records.
A number of the defendants in the hearing before Einstein J appealed. The Court of Appeal delivered its judgment in relation to their appeal on 26 April 2012: see Wardle v Agricultural & Rural Finance Pty Ltd [2012] NSWCA 107. The leading judgment was delivered by Campbell JA, with whom Barrett JA and Sackville AJA agreed. The Court of Appeal upheld Einstein J's judgment that none of the remaining defendants had paid amounts payable by them punctually. However, the Court of Appeal held that Einstein J erred in striking out part of the defence based on the CRA and the estoppel defence raised by Mr Wardle and Mr Giannuzzi. It also held that it would be necessary to reconsider Einstein J's rulings in relation to the admissibility of evidence in the light of the broader case based on the CRA. For that reason, the Court of Appeal was not in a position to deal finally with the CRA defence itself: at [337]. Consequently, the Court of Appeal ordered that the matter be remitted to this Division for further hearing.
In a judgment I delivered on 18 July 2014 (Agricultural & Rural Finance Pty Ltd v Atkinson [2014] NSWSC 948), I held that, on the proper interpretation of the order for remitter, the remaining defendants were limited to raising as a defence to ARF's claim the defence based on the CRA and Messrs Wardle and Giannuzzi's estoppel defence. In particular, I held that it was not open to the defendants to re-agitate the question whether they had paid punctually and that they were bound by the findings of Einstein J in that regard.
Since that judgment, Mr Giannuzzi has abandoned his estoppel defence. Consequently, what remains to be determined is each of the remaining defendants' CRA defence and Mr Wardle's estoppel defence.
Background Facts
Before setting out the relevant background, it is necessary to make an observation about the evidence relied on by the parties. The defendants prepared no new evidence for the hearing before me. Instead, they relied on affidavit evidence prepared for the hearing before Einstein J. That evidence consisted of an affidavit from Mr Lloyd, who gave evidence concerning the background to the projects and what he did as Managing Director of OAL. It also consisted of evidence given by each of the remaining seven defendants, other than Mrs Wallace. In Mrs Wallace's case, evidence was given on her behalf by her husband, Dr Wallace. Evidence given by or on behalf of the remaining defendants was, to a substantial degree, prepared to address issues that were different from the issues now before the Court. In particular, much of the evidence from each defendant was originally directed at establishing that they had paid punctually. That evidence consisted of evidence of the steps the individuals had taken to pay the amounts owed by them to ARF. That evidence was not relevant to the question whether clauses of the Indemnity Agreement were unjust since, as I will explain, that question is to be decided by reference to the circumstances as they existed at the time the contract was made. It was only relevant to whether it would be just to grant relief assuming that the relevant provisions are found to be unjust. ARF, on the other hand, relied on no affidavit evidence at all. Instead, it sought to draw inferences from the documents that were tendered and relied heavily on issue estoppels said to arise from earlier judgments. ARF tendered part of the transcript of the evidence before Einstein J, and no objection was taken to that.
OAL and ARF
OAL was incorporated in late 1996 as a public company to be the developer and manager of the scheme. Mr Lloyd was appointed Managing Director of OAL on 18 November 1996 and remained in that position until 9 August 1999. He was the principal architect of the two schemes and the only director of OAL to take an active role in the preparation of the scheme and investor documents and in marketing the project to investors.
Originally, it was intended that Agricultural Project Finance Pty Ltd (APF), a company associated with Mr Cassegrain, would provide funding to investors in the project. However, as I have said, that company was involved in litigation in the Federal Court, and at a meeting held on 26 March 1997 of the Due Diligence Committee established in connection with the prospectus, it was decided that, because of that litigation, APF should be replaced as lender with a new company that would not be owned or managed by members of the Cassegrain family, making it unnecessary to disclose the litigation in the prospectus. Subsequently, it was decided at a board meeting of OAL to establish ARF as the lender to the project. It is not clear who made the decision, but Mr Tony Sarks, Mr Cassegrain's father-in-law, and Mr Sarks' son, Anthony Sarks, became the directors of that company. Mr Anthony Sarks and his younger brother, Mr Richard Sarks, were the shareholders. Mr Lloyd says, and I accept, that Mr Tony Sarks did not have any relevant financial administration qualifications or experience and was not involved with the administration of the loans. Mr Anthony Sarks became an employee of OAL and was appointed a farm manager of a tea tree plantation in 1997 and, in that position, reported to Mr Lloyd. OAL and ARF shared an office and together had a staff of about four. Mr Lloyd says that he supervised the staff who did work for ARF and that he initiated correspondence from ARF, which would be signed either by one of ARF's directors or, if it was innocuous correspondence, by "one of the girls". Mr Lloyd also says that he made decisions when dealing with investors. However, none of this evidence establishes that he was given any actual authority to do anything on behalf of ARF. The only evidence that Mr Lloyd was given authority to do anything on behalf of ARF is a board resolution passed on 28 June 1997 authorising him to operate ARF's bank account by means of telephone banking on 30 June 1997. There is no other resolution or any other documents suggesting that Mr Lloyd had actual authority to act on behalf of ARF. All correspondence to investors from ARF was signed by Ms Edwards or one of its directors, which suggests that OAL and ARF were careful to maintain a distinction between the two companies. That, and the limited nature of the board resolution passed on 28 June 1997, indicates that Mr Lloyd had no actual authority to do anything on behalf of ARF except what was set out in the resolution.
The prospectuses and the agreements
The prospectus for Project No 1 was dated 10 April 1997 and lodged with the Australian Securities Commission on 28 April 1997. The prospectus stated on the front page:
Investment in this project should be considered speculative.
Please read this prospectus carefully and seek independent financial advice.
The prospectus described each lot as a "farm" and the investor as a "farmer".
The prospectus contained a brief summary of the Loan Agreement and the Indemnity Agreement in Section 2 and a more detailed summary in Section 5. The following is the material from Section 2:
2.5.3 Loan Availability
Each investor has the opportunity to apply for a loan from the Lender. The Lender will, upon acceptance of an application from an intending Farmer, provide a loan of $22,750 to assist in the payment of the initial management fees. Provided that the Farmer has complied with the terms of the Loan Agreement (which terms include the obligation to pre-pay interest for the first two years, and to make a principal reduction of $8,750 by 31 October 1997), the Lender will also provide a subsequent loan of $1,854 on 30 June 1998 to pay the licence fees and management fees due in advance for the year ending 30 June 1999. After the first two years interest and principal repayments are deducted from the proceedings of oil sales. Subject to compliance with the terms of the Loan Agreement the rate of interest on the loan is fixed at 8.5% per annum for the term of the loan. Please refer to Section 5 for details of the terms of the loan. The Loan Agreement is reproduced in full in Section 7.
2.5.4 Indemnity
Farmers who apply for a loan from the Lender have the option (but not the obligation) of taking out an indemnity to protect against the situation where returns from the Farm are insufficient to repay loan principal and interest over the term of the Project. Subject to compliance by the borrower with the terms of the Loan Agreement and the Licence and Management Agreement, the Indemnity can be called upon to repay amounts due to the Lender if the Farmer ceases to carry on the business as a result of certain events or if there is an amount owing to the Lender at the expiry of the Project. A once-only indemnity fee of $250 per Farm is payable. The Lender is a party to the Indemnity Agreement and agrees to rely solely upon the Indemnifier to receive the balance of the loan if the indemnity is effective and enforceable. The terms of the indemnity are set out in Section 5. The Indemnity Agreement is reproduced in full in Section 7.
It is plain from what is said in Section 2 (and in Section 5) that investors needed to comply with their obligations under the Loan Agreement in order to obtain the benefits of the indemnity. Neither section, however, specifically said that investors had to comply punctually with their obligations under the Loan Agreement to obtain the benefit of the indemnity, although that might well be thought to be implicit in the statement that the indemnity was "[s]ubject to compliance by the borrower with the terms of the Loan Agreement ...".
Copies of the Loan Agreement and Indemnity Agreement were attached to the prospectus. Clauses 3.2 and 3.3 of the Loan Agreement provided for the payment in advance of interest payable in the first two years. The payments were to be made on or before 30 June 1997 and on or before 30 June 1998. Under cl 4.1 of the Loan Agreement, a borrower was required to pay the sum of $8,750 per allotment in respect of the principal sum on or before 31 October 1997 or, if the agreement was executed after that date, the date which is three calendar months after the date of execution.
Clause 5 of the Loan Agreement provided that, if the borrower defaults in "the due and punctual payment of interest or the Principal Sum", the whole of the Principal Sum remaining outstanding "shall become immediately repayable at the option of the Lender". In addition, the borrower became liable to pay a default rate of interest.
Clause 7 of the Loan Agreement provided:
The Lender acknowledges and agrees that the Borrower shall have no liability to repay any part of the Principal Sum outstanding or any interest thereon if the indemnity granted under the Indemnity Agreement as defined in the Project Deed is effective and enforceable in accordance with Clause 2 of the Indemnity Agreement.
By cl 1 of the Indemnity Agreement, OAL agreed to indemnify the borrower against any demand by the lender for repayment of the principal or interest payable under the Loan Agreement. Clause 2 goes on to state that:
The Indemnity referred to in Clause 1 shall be effective and enforceable if:
(a) the Borrower has punctually paid the interest payable pursuant to Clauses 3.2 and 3.3(a) of the Loan Agreement; and
(b) the Borrower has punctually paid the reductions of the Principal Sum set forth in Clause 4.1 of the Loan Agreement; and
(c) ...
(d) the Borrower has ceased to carry on the Business as a result of:
(i) any event described in Clause 31(a) of the Licence and Management Agreement; or
(ii) ...
Clause 31 of the Licence and Management Agreement sets out various force majeure events that prevent the performance of the duties and obligations of the parties to the agreement under the agreement for any causes beyond their control.
Mr Lloyd gave evidence that the OAL projects were deliberately structured as "full recourse arrangements because [he] considered that non-recourse loans offered by other promoters were at risk of being attacked by the ATO as they lacked a commercial purpose". That evidence is consistent with Mr Lloyd's correspondence with the ATO. In a letter dated 12 May 1998 to OAL, the ATO raised queries in relation to the project and suggested that participants were not carrying on a business. Mr Lloyd responded to that letter on 15 May 1998 saying:
The effect of the indemnity is not the same as non-recourse finance ... as Farmers are still exposed to business risk, and the risk of the indemnity is taken by the Manager (who is familiar with the risks involved in the business and who has commercial incentives to assume that risk) not the financier. The indemnifier takes a position not dissimilar to an insurance company. The indemnity, like a loss-of-profits insurance policy, covers only some of the risks of the business. It is not, for example, effective if the production of tea tree oil becomes unviable to the point where the project is terminated by virtue of Clause 46.2(c)(ii) of the Project Deed which provides that the Manager and the Trustee can agree to terminate the project if any event occurs which has the effect of materially diminishing the amount available for distribution to Farmers. The indemnity would also be ineffective if the Farmer ceased to carry on the business as defined in the loan agreement without terminating the project, or if the Farmer was in default under the L&M Agreement or the loan agreement.
Mr Lloyd's position was ultimately accepted by the ATO.
The prospectus for Project No 2, which was dated 16 February 1998, was in similar terms to the prospectus for Project No 1. It contained the same warning concerning the speculative nature of the investment on the front page. The description of the Loan Agreement and Indemnity Agreement in Section 2 was substantially the same, except the amount advanced was $23,700, not $22,750, and a principal payment of $9,800 was said to be due by 30 October 1998. Clause 2.4.4 recorded that ARF would provide a subsequent loan of $1,958 on 30 June 1999 to pay the licence fee and management fees due in advance for the year ending 30 June 2000. The rate of interest was said to be fixed at 7.75% per annum for the term of the loan. Apart from those changes, the agreements themselves were in substantially the same terms.
OAL issued a number of supplementary prospectuses in relation to Project No 2, including one dated 9 June 1998. That supplementary prospectus was issued following a review of Project No 1 conducted by the ATO. The supplementary prospectus recorded the fact that the ATO had concluded that investors were carrying on a business but considered that part of the management fee, including expenditure relating to maintenance and planting of seedlings, was capital or capital in nature. The Licence and Management Agreement was varied to allocate specific amounts of the licence fee to expenditure of that type, and the prospectus attaches a table setting out the cash flow and tax effect if the ATO's position was correct.
The marketing of the projects
OAL held a number of seminars to market the projects. A number of those were held at the offices of Ord Minnett. Mr Lloyd attended a number of the seminars and spoke at them. He said that, at each of the seminars he gave, he always said words to the following effect:
The loan to be made under the Loan Agreement is a full recourse loan. However, the Indemnity, which is optional, provides investors with protection if the project is terminated as a result of any event beyond the control of farmers (investors) provided they comply with the terms of the Loan Agreement and the Licence and Management Agreement. The operation of the indemnity is like an insurance policy.
Mr Lloyd also gave evidence that the Indemnity Agreement was always the subject of interest at these seminars and that prospective investors invariably asked questions regarding the operation of the indemnity. In answering those questions, Mr Lloyd says he said words to the following effect:
The indemnity is effective and enforceable provided that you comply with the terms of the agreement and these terms include an obligation to make the payments required under the loan agreement in a timely manner.
Mr Lloyd said that, on some occasions, investors asked what would happen if a payment was a day or two late. Mr Lloyd says his response was always to the following effect:
In those circumstances you would be technically at risk but we would be reasonable and commercial. As a practical matter we are seeking to retain you has [sic] a long-term client and there would be no benefit to us in alienating you by being bloody-minded. Having said that we would expect you to act in good faith and not to muck us around.
Mr Lloyd came across as an honest witness. His evidence of what occurred at the seminars was largely consistent with what the prospectus said; and I accept it.
The round robin arrangement
It is not easy to understand the precise nature and effect of the round robin arrangement. It was not disclosed in the prospectus for Project No 1. In their submissions, the defendants point to OAL and ARF's bank accounts showing that GCC made an initial deposit of $400,000 in ARF's bank account on 27 June 1997 to provide it with liquidity and showing that, as soon as OAL was provided with funds from ARF, OAL lent the funds back to ARF to enable it to make advances to additional investors. Those advances were used by investors to pay OAL only then to be lent by OAL back to ARF. The result was that OAL did not end up with a large amount of cash from investors. Rather, it ended up with a substantial amount owing to it by ARF. Its ability to recover that amount depended on ARF recovering the amount owed to it by the investors.
Unlike the prospectus for Project No 1, the prospectus for Project No 2, in an investigating accountant's report prepared by Court & Co dated 1 February 1998, did disclose that OAL had current receivables of $1,059,169, which included an amount owed by ARF of $1,058,750, and a non-current receivable consisting of a loan owed by ARF of $1,391,250. In the Court of Appeal in the Gardiner Test Case, Handley AJA (with whom Spigelman CJ agreed on the point) said, in relation to Mr Gardiner's claim that he had been misled because the prospectus did not disclose the round robin arrangement (see Gardiner v Agricultural & Rural Finance Pty Ltd [2007] NSWCA 235 at [468]), that:
A person of commercial experience who read the accountant's report with a minimum of attention who regarded the alleged funds subscribed representation as material could not fail to notice that OAL had lent funds subscribed by investors to ARF which had used them to fund loans to other investors.
Handley AJA also held that the round robin arrangement was immaterial to Mr Gardiner's decision to invest: at [471]ff. The remaining defendants are bound by these findings, as is clear from the judgment of Campbell JA ([2012] NSWCA 107 at [330]):
In any event, it is not as though there is a finding in the Gardiner Test Case that will be controverted if the aspect of the Contracts Review Act claim that is sought to be raised were litigated. That is because there was a finding in the Gardiner Test Case that the ARF Funding Arrangements (ie the round robin arrangements) were proved, and were not disclosed in the prospectus relating to Project No 1 ([87] above). A limitation under which the Appellants would labour in running their Contracts Review Act case is that they could not seek to disprove the findings that Handley JA had made about the extent of disclosure of the round robin arrangements in the prospectus relating to Project No 2 ([87] above). However the existence of that limitation would itself provide a reason why the running of the Contracts Review Act defence will not result in any different finding to the ones that have been made, concerning the round robin arrangements, in the Gardiner Test Case. Further, the essential reason why Mr Gardiner failed in the part of his case that alleged that the statements in the prospectus were misleading and deceptive was that he did not establish that he had relied on the prospectuses. Necessarily, whether Mr Gardiner relied on anything will not be an issue in any litigation that the Appellants bring.
The defendants also submit that the round robin arrangement had a considerable negative impact on the possibility of the venture obtaining commercial success. It is certainly true that, as a result of the arrangements, OAL had far less money immediately available to it for the projects. But it is not at all clear what it could have done to avert the failure of the project if the money had been available immediately. The evidence is that the land was prepared, seedlings were planted, tea trees were harvested and some tea tree oil was produced. The finding of Young CJ in Eq (see Agricultural & Rural Finance Pty Ltd v Atkinson [2006] NSWSC 202 at [134]), which was not challenged on appeal, was that:
There is no secret about the fact that some monies which investors might reasonably have supposed would be used in the Projects found their way via round robin transactions back into the hands of the plaintiff or Mr Cassegrain, but the bulk of the material suggests that this was not the cause of the Projects failing but rather it was the dramatic fall in the price of tea tree oil.
Even assuming that the defendants were free to challenge that finding, they have filed no evidence from which it is possible to conclude that the round robin arrangements affected the viability of the projects.
Moreover, the evidence suggests that GCC had invested approximately $3.3 million in the project up until 30 June 1997. The calculations justifying that assertion are set out in a letter dated 26 May 1998 from Mr Lloyd to the ATO, which had raised a query in relation to the round robin arrangements. The defendants do not take issue with those calculations, and they appear to have been accepted by the ATO.
Mr Fredericksen
Mr Fredericksen is the 35th defendant. Mr Fredericksen swore two affidavits. The first was sworn on 1 September 2008, and the second was sworn on 22 March 2010. At the time he swore his later affidavit, he was employed as an information technology executive manager with Westpac Banking Corporation. It is unclear whether he continues to hold that position, although he continues to work as an IT contractor. Mr Fredericksen was a client of Mr Giannuzzi. In about May or June 1998, at Mr Giannuzzi's invitation, he attended an investment seminar at which Project No 2 was promoted. He did not give admissible evidence concerning what was said at that seminar. However, the likelihood is that he obtained information from Mr Lloyd concerning the indemnity. Following the seminar, he met with Mr Giannuzzi and had a further discussion with him concerning a possible investment in the project. Mr Giannuzzi gave him a copy of the prospectus at that time.
Following discussions with Mr Giannuzzi, Mr Fredericksen decided to invest in one farm. His loan agreement is dated 30 June 1998.
On 12 October 1998, ARF sent him a letter reminding him that he was due to make a principal repayment of $9,800 on 30 October 1998. Mr Fredericksen posted a cheque for that amount by ordinary post to ARF on Wednesday, 28 October 1998. On the findings made by Einstein J, ARF did not receive that cheque until 3 November 1998, four days and two business days late. Mr Fredericksen was not late in making any other payments due under his loan agreement.
The cheque that Mr Fredericksen said he posted on 28 October 1998 was drawn on the account of Crestmaze Pty Ltd. The relevant cheque butt has on it the date 30 October 1998. Mr Fredericksen says that it was his practice to write on the cheque butt the date when payment was due, not the date on which the cheque was drawn or posted. The cheque itself is dated 28 October 1998. Although the practice described by Mr Fredericksen is somewhat unusual, the likelihood is that he dated the cheque the date on which he drew it. That evidence is consistent with the fact that he drew a cheque for interest due on 30 June 1999, which was held by Einstein J to have been received by ARF on 30 June 1999. The cheque was dated 26 June 1999, although the cheque butt for that cheque had on it the date 30 June 1999. If the cheque had been posted on the date of the cheque butt, it would not have been received punctually by ARF. Consequently, receipt of that cheque on time corroborates Mr Fredericksen's evidence that he posted cheques on the date the cheque bore rather than the date written on the relevant cheque butt.
Mr Rowe
Mr Rowe is the 75th defendant. In an affidavit sworn on 22 September 2008, he described his occupation as an investment banker and, in an affidavit sworn on 22 March 2010, as a banker. When giving evidence, he described his current occupation as country manager for an investment business comprising an advisory "shop" and a stockbroking business.
Mr Rowe invested in two farms in Project No 1. He attended an investment seminar held in about May 1997 at the offices of Ord Minnett. The speakers at the seminar were Mr Lloyd and Mr John Atkinson from Structured Securities, one of the authorised representatives through whom many of the investments in the projects were made. In his affidavit evidence, Mr Rowe says that Mr Lloyd said words to the following effect at the seminar:
If the investor pays the $250 indemnity fee OAL (referring to Oceania Agricultural Limited) ("OAL") will indemnify the investor from any further liability to the lender (referring to the Plaintiff) beyond the single principal repayment and the pre-paid interest payment for the second year of Project 1.
However, when cross-examined, Mr Rowe accepted that Mr Lloyd said words to the effect of those that Mr Lloyd said he invariably used. Mr Rowe also said that he could not recall one way or the other whether Mr Lloyd qualified his statements concerning what would happen if an investor were late in making a payment. In my opinion, the likelihood is that Mr Lloyd did. Mr Rowe gave evidence of what Mr Lloyd said at the presentation almost 13 years after the presentation occurred. It is unlikely that Mr Rowe could remember what Mr Lloyd said so long after the event. As I have said, Mr Lloyd's evidence is consistent with what is said in the prospectus; and the likelihood is that Mr Lloyd did not depart significantly from what the prospectus said on the subject.
Following the seminar, Mr Rowe raised some questions with Mr Atkinson in relation to the Loan Agreement and the indemnity. One issue was that cl 4.4 of the Loan Agreement referred to cl 4.5, which did not exist. Another issue concerned the reference in the Indemnity Agreement to the effluxion of time. In response to the questions Mr Rowe asked, Mr Atkinson sent Mr Rowe a fax dated 21 June 1997 attaching a copy of a memorandum dated 21 June 1997 from Mr Lloyd to Mr Atkinson, which answered the queries that Mr Rowe had raised. In relation to the question concerning the Indemnity Agreement, Mr Lloyd's response said:
The reference in the Indemnity Agreement to the effluxion of time is correct. The indemnity is intended to provide protection for investors if, for any reason, their loan is not repaid during the term of the project. Thus, at the end of the project, an investor may rely upon the indemnity to repay any loan balance outstanding.
It is clear that this response is directed to the question whether the indemnity was available if the project came to an end due to the effluxion of time. I do not think that the response could be read as making a statement about what would happen if an investor did not comply with the obligations under the Loan Agreement.
Mr Rowe does not say in his affidavit that he read the prospectus. However, his detailed questions concerning the Loan Agreement and Indemnity Agreement suggest that he did.
On the findings made by Einstein J, Mr Rowe was four days late in making the repayment of principal of $17,500 due on 31 October 1997. ARF sent a letter to Mr Rowe on or about 2 October 1997 reminding him that that payment was due on that date.
Mr Rowe gave evidence that he drew the cheque (for $17,500) on 28 October 1997 and placed it in an envelope addressed to ARF in an out tray at work. It is reasonable to assume that the envelope was collected on the day the cheque was put in the out tray, although whether it was actually posted on that day or the following day is unclear. Nothing, however, turns on the answer to that question.
Ms Russo
Ms Russo is the 189th defendant in the proceedings. In her affidavit sworn on 22 March 2010, she said she was a half owner in a wholesaling business at Brookvale. At the time she invested in Project No 1, she was a sales director at Roadshow Entertainment, which is a wholesaler of entertainment products. When giving evidence, she said that her occupation was as a director of a company in the distribution business.
Ms Russo invested in two farms in Project No 1 with her then partner, Mr Thompson. She invested in one farm on her own in Project No 2.
Ms Russo says that, at the time she and Mr Thompson invested in Project No 1, she had never invested in any kind of managed investment scheme and that she had only bought some shares in blue chip companies which were held as long-term investments.
No claim is made against Ms Russo in respect of her investment in Project No 2.
It is unclear how Ms Russo and Mr Thompson came to invest in Project No 1. Ms Russo says that, at the time they invested in the project, Mr Atkinson was their accountant and prepared their tax returns. She says that, in or about May or June 1998, Mr Atkinson invited Mr Thompson and her to attend an investment seminar in the city at which the project was being promoted. It is possible that the reference to "1998" is an error and that it should have been a reference to "1997". In any event, Ms Russo does not give any admissible evidence of what occurred at the seminar and gives no evidence that she read the prospectus. Mr Thompson did not give evidence.
Einstein J held that Ms Russo and Mr Thompson were a day late in making an interest payment of $2,696 due in respect of Project No 1 on 30 June 1998.
At the trial before Einstein J, there was some confusion about how Ms Russo and Mr Thompson paid the amount of $2,696. Ms Russo originally gave evidence that she posted a cheque for that amount. However, it subsequently emerged that ARF had sent a reminder to Ms Russo and Mr Thompson on 18 June 1998 that the amount of $2,696 was payable on or before 30 June 1998 and that Mr Thompson had written on that letter the words "posted 26-6-98". On the findings made by Einstein J, the cheque was received by ARF on 1 July 1998. A significant amount of evidence was given by Ms Russo describing Mr Thompson's and her practice in paying cheques to rebut any suggestion that the note had been written on the letter subsequently. It is not necessary to go into that evidence in any detail. I accept Ms Russo's evidence that the note on the letter was discovered by her after she swore her original affidavit; and the likelihood is that the note accurately records when the cheque was posted.
Mr Wardle
Mr Wardle is the 95th defendant. He said in his affidavit sworn on 12 March 2010 that he owned a 3,000 acre property in the Hunter Valley and, in addition, has a number of investments in agricultural products, such as pulpwood, and agricultural ventures, such as Kayinga Vineyard. He is now retired. Mr Giannuzzi was his accountant.
Following a conversation with Mr Giannuzzi in May or June 1998, Mr Wardle attended a seminar in relation to Project No 2 on or about 17 June 1998 with Mr Giannuzzi. At that time, he received a copy of the prospectus for Project No 2 and a supplementary prospectus dated 9 June 1998. He also received a copy of a newsletter dated January 1998. Mr Wardle recalls that a Mr Glover spoke at the seminar and said that the tea tree industry was an up-and-coming one. Mr Wardle does not recall the specific details of the financial aspects of Mr Glover's presentation except that he recalls Mr Glover saying that he recommended the investment as a good one.
Following the seminar, Mr Wardle read the prospectus and, after consulting with Mr Giannuzzi, he decided to invest in Project No 2. He subscribed for 31 allotments. He paid the full subscription price from his own finances in relation to six allotments and applied for a loan from ARF in relation to the remaining 25 allotments.
In or about June 1999, Mr Wardle decided to make a further investment in Project No 2 and, at that time, he subscribed for an additional ten allotments. Mr Wardle borrowed money from ARF to make that investment. He says he made the investment because he formed the view that Project No 2 continued to be a good investment. He said in his affidavit evidence that the plantation appeared to be successful, to be growing tea trees, to be producing oil and to be fulfilling the purposes for which it was intended.
On the findings made by Einstein J, Mr Wardle was late by four days in repaying the principal amount of $245,000 in respect of the loan he obtained in June 1998 (which was due on 30 October 1998) and was twelve days late in repaying $98,000 in respect of a principal repayment (which was due on 30 September 1999) in respect of the loan he took out in June 1999. He was not late in making any interest payments.
The supplementary prospectus and the newsletter said nothing about the Loan Agreement or Indemnity Agreement. I have described the supplementary prospectus earlier. The newsletter sets out the progress of the project.
On 30 July 1998, ARF sent Mr Wardle a letter (signed by Ms Edwards) enclosing a schedule setting out when payments were due from Mr Wardle in respect of his initial 31 allotments, including the payment of $245,000 due in respect of principal on 30 October 1998.
Mr Wardle planned to be overseas when the payment of the $245,000 fell due. Before travelling overseas, he says that he met with Mr Giannuzzi and, during that meeting, told Mr Giannuzzi that he would be away and that he would make the payment from his AGC account, which was an interest bearing account. He said that he did not want to take the money out too early because he did not want to lose interest and that there may be a short delay because of the difficulties in arranging a transfer from England. Mr Wardle asked Mr Giannuzzi to make arrangements "with OAL/ARF to make sure that there is no problem if there is a delay of a few days in the money getting to them". According to Mr Wardle, Mr Giannuzzi replied in words to the effect:
No problem. I will get in touch with them and make sure that's okay.
Mr Giannuzzi gives a somewhat different account of this conversation. According to him, Mr Wardle told him that he wanted to make the payment due to ARF out of the funds invested with AGC and that he needed to give them a fax direction to make the payment by direct deposit. According to Mr Giannuzzi, Mr Wardle said that he needed Mr Giannuzzi to make sure that the payment went through. Mr Giannuzzi said that he replied "Yes I'll make sure it's done". According to Mr Giannuzzi, Mr Wardle then gave him a signed fax addressed to AGC to make the payment to ARF's bank account.
I prefer Mr Giannuzzi's account of what happened. Mr Giannuzzi has a copy of the fax to AGC on his file. It would have been natural for Mr Wardle to leave the fax with Mr Giannuzzi and to ask him to attend to payment.
Mr Giannuzzi says that Mr Wardle gave him a copy of the correspondence from ARF setting out details of how the payment was to be made. Again, Mr Giannuzzi has a copy of that correspondence on his file.
On 12 October 1998, ARF sent a letter (signed by Ms Edwards) reminding Mr Wardle that a payment of $245,000 was due on 30 October 1998. Mr Wardle did not receive that letter until he got back from overseas.
On 30 October 1998, which was a Friday, Mr Giannuzzi forwarded the fax that Mr Wardle had left with him to AGC. He rang the person to whom the fax was addressed to confirm that AGC had received it. That person (Ms Pierce) replied:
Yes, we received the fax and will forward the funds but it takes 24 hours.
Mr Giannuzzi then says he rang ARF and spoke to Mr Lloyd. Mr Giannuzzi says that they had a conversation to the following effect:
I am David Wardle's accountant. He has a payment of $245,000 due today. I have just instructed AGC to pay the payment to you by direct deposit but they tell me that it will take 24 hours to go into your bank account. Is that OK?
Mr Lloyd replied with words to the effect -
That will be ok.
I then said to Mr Lloyd -
On the same subject I should also tell you that I have a payment of my own due today in relation to my one farm. Would it be alright if you get that in a week or two?
Mr Lloyd replied -
Yes that will be okay as well.
Mr Giannuzzi's account of his conversation with Mr Lloyd is supported by a note that he made on the copy of the payment schedule that Mr Wardle had given to him at the time he asked Mr Giannuzzi to arrange for the fax to be sent to AGC. That note reads as follows:
Rang Steve Lloyd to advise that payment (via direct credit via AGC) was faxed to AGC today to arrange transfer. AGC advises that takes 24 hours to transmit funds so that with weekend included ARF shall get funds early next week.
30/10/98
Steve said that would be okay
On a second copy of the payment schedule, Mr Giannuzzi also wrote the following note:
I also spoke to Steve Lloyd about my personal investment & said I would be 1-2 weeks late. He said that would also be ok
I accept Mr Giannuzzi's evidence. It is consistent with his file notes, and there is no reason to doubt the authenticity of those notes.
As I have said, according to the findings made by Einstein J, Mr Wardle paid the sum of $245,000 on 3 November 1998 - that is, the following Tuesday.
In relation to the payment of $98,000 due on 30 September 1999, Einstein J found that that payment was made on 12 October 1999 - twelve days late.
In relation to that payment, on 7 July 1999, ARF sent Mr Wardle a letter dated 7 July 1999 (signed by Ms Edwards) enclosing a schedule setting out the payments due in respect of the loan obtained by Mr Wardle in relation to the investment he made in June 1999.
Mr Wardle says that he sent a fax to AGC on 1 October 1999 asking for a cheque for $98,000 in favour of ARF. The hard copy of the fax attached to Mr Wardle's affidavit has a date of 4 November 2009, which is the date on which the fax was printed. Mr Wardle says that, according to his computer records, the document was created on 1 October 1999. I accept that evidence. It is less clear whether the fax was actually sent on that day or a day or two later. The records of AGC indicate that the cheque requested by Mr Wardle was printed on 5 October 1999 and sent to him on 6 October 1999. I doubt that AGC would have taken so long to prepare the cheque. In my opinion, it is more likely that Mr Wardle sent his fax to AGC on 3 or 4 October 1999.
Mr Wardle says that he cannot recall any specific discussions with Mr Giannuzzi in relation to the possible late payment of the $98,000.
Mrs Wallace
Mrs Wallace is a nurse. She is the wife of Dr Brian Wallace, an orthopaedic surgeon. As I have said, Mrs Wallace did not give evidence. It appears that Dr and Mrs Wallace's financial affairs were managed by Dr Wallace. Both invested in Project No 2. Dr Wallace invested in six allotments, and Mrs Wallace invested in one. There is no evidence of how Mrs Wallace came to invest in the project. It appears that Dr and Mrs Wallace were introduced to the project by Mr Atkinson's company, Structured Securities.
Dr Wallace and Mrs Wallace invested in the same project at the same time. Due dates in respect of payments under their Loan Agreements with ARF were the same. On the findings made by Einstein J, Dr Wallace made all his payments punctually. On the other hand, Mrs Wallace was six days late in making the repayment of principal due on 30 September 1999 of $9,800 and one day late in paying interest of $1,229 due on 31 May 2000.
The evidence given by Dr Wallace both before Einstein J and in the hearing before me was that he was responsible for paying amounts due in respect of both his own loan and his wife's loan. He drew consecutive cheques for the relevant payments and placed them in the same envelope. Originally, he said that his wife had posted her cheques. However, in evidence before Einstein J and me, Dr Wallace said that he posted the cheques himself either on the way to or from work.
In considering the question whether Mrs Wallace paid punctually, Einstein J considered two possibilities. One was that Dr Wallace was correct when he said that both cheques had been placed in the same envelope, but that ARF had correctly recorded that Dr Wallace's cheques had been received on time and incorrectly recorded that Mrs Wallace's cheques had been received late or incorrectly recorded that Dr Wallace's cheques had been received on time and correctly recorded that Mrs Wallace's cheques had been received late. Alternatively, Dr Wallace placed the cheques in separate envelopes. Einstein J was not prepared to conclude from the evidence of Dr Wallace that ARF's record keeping was inaccurate. What happened could be explained by Dr Wallace placing his own and Mrs Wallace's cheques in separate envelopes. In those circumstances, Einstein J was not satisfied that Mrs Wallace had proved that she had paid punctually.
The findings of Einstein J operate as an issue estoppel in relation to the question whether Mrs Wallace paid late. Mr Epstein SC, who appeared for the defendants, accepted that, in view of that issue estoppel, the only finding open to me is that Dr Wallace placed the cheques in separate envelopes. Even accepting that conclusion, the likelihood is that Dr Wallace posted both cheques on both occasions at the same time. It is difficult to accept that he did not write the cheques out at the same time. That would be a natural thing to do; and it would be natural to post the cheques at the same time. The fact that two cheques relating to Mrs Wallace's loan arrived late supports the conclusion that the cheques were placed in separate envelopes.
Mr Giannuzzi
Mr Giannuzzi is a chartered accountant. He was introduced to Project No 2 by Mr Peter Fallon, who was then a senior financial planner with Westpac Banking Corporation. He read the prospectus and attended a seminar in relation to Project No 2 on 16 June 1998 at the NSW Cricketers Club. He attended a further seminar with Mr Wardle on 17 June 1998 at Ord Minnett.
Mr Giannuzzi does not set out in his affidavit evidence what was said at the seminars. However, he says that the discussion included information about the availability of finance from ARF and the availability of an indemnity for a relatively small fee from OAL. Following the seminars, Mr Giannuzzi considered the financial and tax aspects of the project in more detail. He decided to borrow funds from ARF to invest in one allotment prior to 30 June 1998 and to pay a fee to obtain the indemnity in respect of that loan.
On 12 October 1998, ARF sent a letter (signed by Ms Edwards) to Mr Giannuzzi reminding him that his principal repayment of $9,800 was due on 30 October 1998. On the findings made by Einstein J, Mr Giannuzzi was late by 18 days in making that payment.
On 2 June 1999, ARF sent a letter (signed by Ms Edwards) to Mr Giannuzzi reminding him that his interest payment of $1,229 was due on 30 June 1999. On the findings made by Einstein J, Mr Giannuzzi was 19 days late in making that payment.
I have already set out the circumstances in which Mr Giannuzzi was late in making the repayment of principal.
In relation to the payment of interest due on 30 June 1999, Mr Giannuzzi accepts that he received a reminder dated 2 June 1999. Mr Giannuzzi does not say when he posted his cheque for $1,229, but the likelihood is that it was posted some time after 30 June 1999 given that ARF did not receive the cheque until 19 July 1999.
Mr Giannuzzi says that he was impressed by the progress and development of Project No 2 and, in or about May 1999, decided to invest in a further two allotments, again with a loan and an indemnity. He says that, at that time, he had been given no indication that the indemnity in respect of his earlier loan was in any way ineffective or no longer enforceable and that he would not have made a further investment if he had known that to be the case. It is difficult to accept that evidence. Mr Giannuzzi says that he was impressed by the progress of the project. The investment had obvious tax advantages to him. If he had been told that he was not entitled to the indemnity because he had not paid punctually, that would have provided a strong reason for making punctual payments in relation to any future investment. But it is not so obvious why he would not have invested in the project at all.
On 1 September 1999, ARF sent a letter (signed by Ms Edwards) to Mr Giannuzzi reminding him that his principal repayment of $19,600 was due on 30 September 1999. On the findings made by Einstein J, Mr Giannuzzi was late by six days in making that payment. Again, Mr Giannuzzi does not give any particular reason for the delay. Mr Giannuzzi was not late in making the interest payment in respect of that loan.
Mr Long
Mr Long is the 172nd defendant. He is a stockbroker. At the time he made the investments, he was working for Ord Minnett.
He attended one or possibly two seminars given at Ord Minnett's offices in relation to Project No 1. According to him, there was no mention made at the seminars that the indemnity was subject to punctual payment of the amounts investors had to pay. Ord Minnett was promoting the investment. Consequently, Mr Long expected to receive a commission in respect of his own investment, which meant that he would more or less break even from a monetary point of view as well as have a long term investment in the project. He visited the plantation on a field day organised for investors.
Mr Long invested in two allotments in Project No 1 (in one case, with another investor). He paid punctually amounts due in respect of those investments and no claim is made by ARF in respect of them.
Mr Long invested in four allotments in Project No 2. He invested in two allotments in June 1998 and entered into a Loan Agreement and Indemnity Agreement in respect of those investments. Pursuant to the Loan Agreement, a principal repayment of $19,600 was due on 30 October 1998 and an interest payment of $2,458 was due on 30 June 1999.
Mr Long invested in a further two farms in June 1999. Pursuant to the relevant Loan Agreement, a principal repayment of $19,600 was due on 30 September 1999 and an interest payment of $2,458 was due on 31 May 2000.
On the findings made by Einstein J, Mr Long was two days late in paying interest under the earlier Loan Agreement but was otherwise punctual. In relation to the later loan, Mr Long was 228 days late in making the principal repayment and two days late in making the interest payment.
In relation to the interest payment due on 30 June 1999, Mr Long accepts that he received a letter from ARF (signed by Ms Edwards) enclosing a schedule setting out when payments were due under that loan up until 30 June 1999. He drew a cheque in payment of the interest on 28 June 1999 and posted it at that time.
In relation to interest due on 31 May 2000 in respect of the later loan, he says that he drew and posted a cheque on or before the due date of 31 May 2000. He gives no explanation for the delay in 228 days in paying the principal repayment due on 30 September 1999.
CRA defence
Relevant legal principles
Section 7 of the CRA relevantly provides:
(1) Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following:
(a) it may decide to refuse to enforce any or all of the provisions of the contract,
(b) it may make an order declaring the contract void, in whole or in part,
(c) it may make an order varying, in whole or in part, any provision of the contract,
(d) ....
(2) Where the Court makes an order under subsection (1) (b) or (c), the declaration or variation shall have effect as from the time when the contract was made or (as to the whole or any part or parts of the contract) from some other time or times as specified in the order.
(3) ...
Section 4 defines "unjust" to include "unconscionable, harsh or oppressive".
Section 9(1) provides:
In determining whether a contract or a provision of a contract is unjust in the circumstances relating to the contract at the time it was made, the Court shall have regard to the public interest and to all the circumstances of the case, including such consequences or results as those arising in the event of:
(a) compliance with any or all of the provisions of the contract, or
(b) non-compliance with, or contravention of, any or all of the provisions of the contract.
Without in any way affecting the generality of subs (1), s 9(2) specifies a non-exhaustive list of matters to which the court shall have regard to the extent that they are relevant to the circumstances. The defendants rely primarily on the following relevant subsections:
(c) whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract,
(d) whether or not any provisions of the contract impose conditions which are unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of any party to the contract,
...
(l) the commercial or other setting, purpose and effect of the contract.
Section 9 further provides:
(4) In determining whether a contract or a provision of a contract is unjust, the Court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made.
(5) In determining whether it is just to grant relief in respect of a contract or a provision of a contract that is found to be unjust, the Court may have regard to the conduct of the parties to the proceedings in relation to the performance of the contract since it was made.
Section 16 of the CRA provides:
16 Time for making applications for relief
An application for relief under this Act in relation to a contract may be made only during any of the following periods:
(a) the period of 2 years after the date on which the contract was made
(b) the period of 3 months before or 2 years after the time for the exercise or performance of any power or obligation under, or the occurrence of any activity contemplated by, the contract, and
(c) the period of the pendency of maintainable proceedings arising out of or in relation to the contract, being proceedings (including cross-claims, whether in the nature of set-off, cross-action or otherwise) that are pending against the party seeking relief under this Act.
The CRA is beneficial legislation and should be interpreted liberally: West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 611 per Kirby P (dissenting); at 621, 631 per McHugh JA (with whom Hope JA agreed); Blacker v National Australia Bank Ltd [2000] NSWSC 805; (2000) 158 FLR 142 at [159] per Young J.
The public interest requirement in s 9(1) involves the advancement of the general legislative purpose of the CRA: Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389; (2011) 15 BPR 29,699 at [269], [270] per Allsop P (with whom Bathurst CJ and Campbell JA agreed); Dunwoodie v Teachers Mutual Bank Ltd [2014] NSWCA 24 at [65] per McColl JA (with whom Basten and Ward JJA agreed). That general purpose has been identified by the authorities as the protection of people who are not able fully to protect themselves and who are preyed upon by dishonesty, trickery and other forms of predation: Tonto Home Loans Australia Pty Ltd v Tavares at [270]; Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; (2008) 77 NSWLR 205 at [102] per Campbell JA (with whom Hodgson and McColl JJA agreed); Provident Capital Ltd v Papa [2013] NSWCA 36; (2013) 84 NSWLR 231 at [7] per Allsop P (with whom Sackville AJA agreed). However, s 9(1) requires that legislative purpose to be balanced against the public interest in "keeping people to their freely entered bargains": Baltic Shipping Co v Dillon (1991) 22 NSWLR 1 at 9, and in maintaining certainty of contract: Blacker v National Australia Bank Ltd at [159].
As a general rule, a contract will not be unjust unless the contract is the product of unfair conduct in the terms imposed or in the means employed in procuring the entry into the contract by the party who claims that the contract is unjust: West v AGC (Advances) Ltd at 622. "Justness" and "fairness" are both general concepts, and inherently variable. They are notions "which Parliament undoubtedly intended to respond to contemporary community standards": May v Brahmbhatt [2013] NSWCA 309 at [36]. As a result, the general rule provided in West v AGC (Advances) Ltd will be informed by evolving community standards: Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41; (2005) 14 BPR 26,639 at [65] per Spigelman CJ; see Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413; (2002) 11 BPR 20,841 at [79]; May v Brahmbhatt at [36]. The question is ultimately one of fact, but the determination of that question involves broadly based value judgments and the normative evaluation of the totality of the relevant circumstances: Provident Capital Ltd v Papa at [7]; May v Brahmbhatt at [37] per Beazley P citing Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153; (2008) NSW ConvR 56-198 at [51]; Kowalczuk v Accom Finance Pty Ltd at [87]; Perpetual Trustee Co v Khoshaba at [34]-[40] per Spigelman CJ; at [106]-[111] per Basten JA.
The concept of unjustness was explained in these terms by McHugh JA in West v AGC (Advances) Ltd at 620-1:
Under s 7(1) a contract may be unjust in the circumstances existing when it was made because of the way it operates in relation to the claimant or because of the way in which it was made or both. Thus a contractual provision may be unjust simply because it imposes an unreasonable burden on the claimant when it was not reasonably necessary for the protection of the legitimate interests of the party seeking to enforce the provision: cf s 9(2)(d). In other cases the contract may not be unjust per se but may be unjust because in the circumstances the claimant did not have the capacity or opportunity to make an informed or real choice as to whether he should enter into the contract: cf s 9(2)(a), 9(2)(e), 9(2)(f), 9(2)(g), 9(2)(i), 9(2)(j). More often, it will be a combination of the operation of the contract and the manner in which it was made that renders the contract or one of its provisions unjust in the circumstances. Thus a contract may be unjust under the Act because its terms, consequences or effects are unjust. This is substantive injustice. Or a contract may be unjust because of the unfairness of the methods used to make it. This is procedural injustice. Most unjust contracts will be the product of both procedural and substantive injustice.
The definition of 'unjust' in s 4 is not exclusive. It is in my opinion a mistake to think that a contract or one of its terms is only unjust when it is unconscionable, harsh or oppressive. Contracts which fall within any of those categories will be 'unjust'. But the latter expression is not limited to the so called 'tautological trinity'. The Contracts Review Act 1980 is revolutionary legislation whose evident purpose is to overcome the common law's failure to provide a comprehensive doctrinal framework to deal with 'unjust' contracts. Very likely its provisions signal the end of much of classical contract theory in New South Wales. Any contract or contractual provision, not excluded from the operation of the Act and which the court considers is unjust in the circumstances existing at the time when it was made, may be the subject of relief under the Act. Moreover, the provisions of s 9(2) do not exhaustively indicate the criteria as to what can be taken into account in determining whether a contract or any of its provisions is unjust. The provisions of s 9(2) of the Act are concerned for the most part with matters of procedural injustice. But the court is entitled to have regard to all the circumstances of the case, subject to s 9(4), and the public interest. In an appropriate case gross disparity between the price of goods or services and their value may render the contract unjust in the circumstances even though none of the provisions of s 9(2) can be invoked by the applicant. Indeed, notions of unfairness and unreasonableness will, I think, generally be present when a contract or any of its provisions is declared unjust. This will particularly be the case where procedural injustice is relied on. If a contract or one of its relevant provisions is neither unfair nor unreasonable so far as the applicant is concerned, it is difficult to see how the existence of inequality in bargaining power or lack of independent advice, for example, can render the contract or a provision of the contract unjust.
His Honour went on to conclude that (at 621):
If a defendant has not been engaged in conduct depriving the claimant of a real or informed choice to enter into a contract and the terms of the contract are reasonable as between the parties, I do not see how that contract can be considered unjust simply because it was not in the interest of the claimant to make the contract or because she had no independent advice.
A contract will not, therefore, be unjust merely because it was not in the interest of the claimant to enter it: Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482 at 491 per Handley JA (with whom Santow and Simos AJJA agreed), or that it was inopportune or produced a loss: Elkofairi v Permanent Trustee Co Ltd at [78], or because the contract is very burdensome, a hard bargain, strongly preferring the interests of the party against whom relief is sought, or in some sense unreasonable: Conley v Commonwealth Bank of Australia [2000] NSWCA 101 at [96] per Heydon JA (with whom Handley JA agreed). Although McHugh JA suggested in West v AGC (Advances) Ltd that contracts falling outside the scope of the terms "unconscionable, harsh or oppressive" might still be unjust, it has been said that "it would only rarely, if ever, be the case that anything not of that general character would be unjust": Conley at [95].
A factual determination under the provisions of s 9(2) favourable to an aggrieved party cannot, by itself, advance that party very far towards relief under s 7 since many contracts have s 9(2) characteristics without being unjust: Conley at [61]. In other words, a party is not necessarily entitled to relief merely by establishing circumstances that fall within the matters for consideration under s 9(2): Hogan v Howard Finance Ltd [1987] ANZ ConvR 317; (1987) ASC 55-594 at 57-539 per Hope JA (with whom Street CJ agreed); May v Brahmbhatt at [37]. The court is to apply the criterion of justice in considering the matters under s 9(2), with the result that relief will not be granted under s 7 unless the contract or provision is "unjust in the circumstances relating to the contract at the time it was made": Conley at [95]. That question can be answered by looking "not only to [...] the terms of the contract per se, to see if its terms are unjust, but to [the] circumstances in which the contract was made and its effect, having regard to those circumstances": Elkofairi v Permanent Trustee Co Ltd at [78] per Beazley JA.
The defendants' case
A feature of the defendants' case based on the CRA is that the pleading in each case is the same. None of the defendants rely on factors peculiar to his or her own circumstances as a source of injustice.
The pleading of the CRA defence stretches over a number of pages. Essentially, what is alleged is that cls 2(a) and (b) of the Indemnity Agreement were unjust in the circumstances relating to the Indemnity Agreement at the time it was made. Those circumstances include the following:
The provisions were part of a complex agricultural investment scheme that had as a central feature that OAL as indemnifier would assume the commercial risk that the projects would generate sufficient income to repay moneys owing by investors who borrowed money from ARF to invest in the projects;
The prospectuses misrepresented the funds that were available to the projects. In particular, contrary to what was suggested in the prospectuses, as a result of the round robin arrangements, the only funds that were available to fund the projects were an initial investment by OAL of $250,000, the actual cash paid by investors as part of their original subscription moneys and the amount of principal repayable by investors, which was substantially less than the projected expenditure as represented in the prospectuses;
The loss of the indemnity for any late payment was not reasonably necessary for the protection of the interest of OAL and ARF under the Loan Agreement or the Indemnity Agreement;
The loss of the indemnity was grossly disproportionate to any detriment suffered by OAL, which did not extend beyond a delay in receiving the amount paid through a repayment of the debt ARF owed OAL.
The defendants say that, in order to avoid as far as practicable the unjust consequences of cls 2(a) and (b) of the Indemnity Agreement, those clauses should be varied so that:
The indemnity was available provided that the payments were made prior to the date the indemnity is called upon and accepted by ARF; or
The indemnity was available where ARF had waived, or was estopped from relying on, the relevant default; or
The indemnity was available if OAL had not notified the investor following any default in the payment of principal or interest under the Loan Agreement that the indemnity had been cancelled by OAL.
ARF takes issue with the defendants' defences and cross-claims based on the CRA. It also submits that the claim is statute barred under s 16 of the CRA.
Consideration
It is not entirely clear what significance the defendants seek to attach to the fact that the indemnity provisions were part of a complicated agricultural investment scheme. The defendants were, to a greater or lesser degree, sophisticated investors, some of whom had financial advice concerning the investment and others of whom gave financial advice themselves. The only person who may not fall into that description is Mrs Wallace. However, she gave no evidence; and her husband, on whom she relied, was clearly an intelligent and sophisticated investor. Each of the persons who invested was no doubt attracted to the investment because of the tax advantages it offered.
The Indemnity Agreements were part of a scheme regulated by the Corporations Law. An aspect of that regulation was that investors had to be treated in the same way. Consequently, a necessary feature of the investment was that individual investors could not negotiate different terms on which they would invest. Investors chose to invest or not based on information contained in the prospectuses. The defendants must have understood that that was the case. The prospectuses made it clear that the investment was a speculative one.
There was some complexity in the structure of the investment. In part, that complexity was driven by tax considerations and, in particular, the need to convince the ATO that each individual investor was carrying on a business as a primary producer. One aspect of that was the need to convince the ATO that each investor took on some business risk in relation to the project. The Loan Agreement and the Indemnity Agreement were structured in a way that was designed to minimise the business risks to investors but, at the same time, to maximise the prospects that the ATO would accept that each individual investor was carrying on a business. It is not to the point to seek to reach a final conclusion on the significance of limits on the indemnity to the tax deductibility of the defendants' investment in the projects. The point is that those limits were one of the matters that investors would be able to point to in order to convince the ATO that they were carrying on a business. That is why Mr Lloyd chose to structure the indemnity in the way that he did; and one of the matters he relied on when the scheme was investigated by the ATO was the fact that investors had to comply with their obligations under the Loan Agreement in order to obtain the benefit of the indemnity.
The prospectus accurately described the Loan Agreement and the Indemnity Agreement. Both agreements were attached to the prospectus. Neither agreement was long. The text of the Loan Agreement took up three pages of the prospectus. The text of the Indemnity Agreement took up a little more than a page. The language of the agreements was not particularly complicated. The indemnity was only available if investors paid amounts due under the Loan Agreement "punctually". If investors had read the Indemnity Agreement, there could have been no real doubt in their minds that they needed to make their payments on time in order to obtain the benefit of the indemnity.
Investors were not obliged to enter into the Indemnity Agreement. If they wanted the benefits of the indemnity, they had to pay a modest fee of $250. It is to be expected, in those circumstances, that they would have looked at the terms of the indemnity to determine in what circumstances it would be available if that was a matter that was important to their decision to take up the investment.
None of the defendants gave evidence to the effect that they did not have adequate time to consider the prospectus or the terms of the agreements. Many investors invested on the last day of the financial year or shortly before then. But any pressure to invest came from their desire to obtain a tax deduction in the relevant year, not from OAL, let alone ARF.
Having regard to those matters, I do not accept that there was any procedural injustice in connection with the defendants' entry into the Indemnity Agreement.
The defendants plead that cls 2(a) and (b) of the Indemnity Agreement were unjust because of the failure to describe in the prospectus the financial arrangements between OAL and ARF and, in particular, the round robin arrangements. There is a suggestion in some of their submissions that the unjustness arises from, or is contributed to by, the fact that the defendants were misled into investing in the projects by the failure to disclose the nature of the round robin arrangements. However, to the extent that the complaint depends on the defendants being misled, as I have pointed out, that complaint cannot be maintained in relation to Project No 2 in light of the findings made by Handley AJA in the Gardiner Test Case.
The defendants do not seek to prove that, because of the round robin arrangements, they did not at the time the agreements were entered into get what they paid for or could not reasonably have expected at that time to get what they paid for. As I have said, the land was prepared, trees were planted and harvested, and some oil was produced. There is no suggestion that the quantities of trees that were expected to be planted were not, or that the trees were inadequately cared for or that the project was carried out in some other way that was deficient. It is pleaded that, as a result of the round robin arrangements, the funds available to OAL from investors were not sufficient to meet all the estimated expenses. However, the defendants produce no analysis or evidence that makes good that allegation. In addition, the allegation does not take account of the income that was expected to be generated by the project.
The defendants submit that the round robin arrangements had a considerable negative impact on the possibility of the venture obtaining commercial success. But again, they do not explain why that is the case. Relying on findings made by Handley AJA (at [461]), they point to the fact that the budget in the prospectus setting out the expenditure to be incurred by OAL does not refer to the round robin arrangements and that the budget would have been different if the round robin arrangements had been disclosed. However, they do not explain what expenditures could have been made that were not that would have affected the viability of the venture. As I have said, the finding of Young CJ in Eq which was not overturned on appeal was that the venture failed because of the collapse of the price of tea tree oil. That had nothing to do with the amount that was spent or was available to be spent on the project.
The defendants do not explain the connection between the round robin arrangements and the unjustness they say arises from cls 2(a) and (b) of the Indemnity Agreement. The injustice must take its character from the orders that are sought to relieve it. Here, the injustice is said to be relieved by orders that mean that the defendants are able to make claims on the indemnity even though they did not make payments due under the Loan Agreement punctually. But it is not clear how any injustice associated with the lateness of the payment and its consequences is affected by the round robin arrangements. What is it about the fact that OAL lent money it received from investors to ARF so that ARF could advance money to other investors that affects the injustice said to arise from the consequences of late payment under the Loan Agreement on OAL's obligation to indemnify?
As a result of the round robin arrangements, another way of looking at the indemnity is that its effect was that investors did not have to make future payments (indirectly) to OAL in respect of the project if they have made past payments on time. But why is that arrangement any more or less unjust than an arrangement where the true beneficiary of the payments is ARF and an investor is relieved of future payments to ARF (because OAL agrees to make them) if earlier ones are made on time? The only answer that the defendants seem to make to these points is to say that the loans from ARF were an illusion "as a matter of financial substance" and that, as a result, the projects were entirely dependent on the actual funds provided by investors from their own resources. This submission overlooks the fact that no investor was required to borrow money from ARF and that the investors were free to invest their own money or to borrow money from another source, as some did. More significantly, it does not explain the connection between what is alleged and the unjustness of the relevant clauses in the Indemnity Agreement. The suggestion seems to be that, because the loans from ARF were an illusion, the defendants should not have to pay the balance owing in respect of them, and that amount should be paid by OAL. But there are a number of problems with that submission. First, as I have explained, there is no evidence to suggest that the round robin arrangements affected the commercial viability of the projects. The investors were told that they were investing in a speculative venture of producing tea tree oil. They were told what they had to pay to make that investment. The project was established and operated substantially in the way that the investors were led to expect. Those who visited the project were impressed by what they saw. Second, it was essential for the tax deductibility of a large proportion of the investment that the management fee be paid by the investors. The Loan Agreement enabled investors to do that without having to pay a substantial amount from their own pockets at the time of the investment. That, no doubt, was part of the attraction of the scheme. To put these points another way, the investors, and the defendants in particular, got the investment they thought they were getting and largely got the tax benefits they sought. Why, in those circumstances, would it be unjust to require them to pay the amount that they were told they had to pay to get those benefits? Third, there is a disconnect between the relief they seek and the injustice they identify. If the injustice really arises from the fact that the loans from ARF were in substance an illusion, it might have been expected that they would seek to be relieved of the obligation to repay the balance of those loans or seek to have the indemnity varied so that they were entitled to an indemnity from OAL come what may. But they do not seek relief in those terms. Instead, they seek an order that the indemnity be varied to avoid what is said to be the harsh consequences of the failure to pay on time.
For these reasons, in my opinion, the round robin arrangements add nothing to the injustice said to arise from cls 2(a) and (b) of the Indemnity Agreement.
The heart of the defendants' complaint is that it is unjust that, even if they were only a day late through no fault of their own in making a single payment due under the Loan Agreement of however small an amount, they no longer have the benefit of the indemnity, which in events that could and have happened, will have a dramatic effect on their obligations arising from their investment in the scheme and, in particular, under the Loan Agreement.
Once again, the relief they seek is not directed, or at least is not limited, to curing apparent injustice of that sort.
However, leaving that point aside, the effect is one that can, and often does, arise from all essential time stipulations in contracts. Not all essential time stipulations are unjust. The question must be: what is it about this time stipulation that makes it unjust?
In my opinion, there is nothing. The time stipulation was included in contracts that it is to be expected, as was the case, would be entered into by sophisticated investors. The time stipulation was clearly spelt out in the relevant contract, which was made available to investors in advance as part of the prospectus. The prospectus itself alerted investors to the fact that they had to comply with the terms of the Loan Agreement if they wanted the benefit of the indemnity.
The time stipulation was not difficult to comply with. It simply required payment of money by a particular date. The time stipulation served a commercial purpose. The indemnity was part of a scheme that was designed to provide substantial tax deductions to investors in the year in which the investment was made; and it was thought, not unreasonably, that the risk of losing the benefit of the indemnity if amounts due under the Loan Agreement were not paid punctually would assist in convincing the ATO that investors were carrying on a business if it became necessary to do so, which it did. It also provided an incentive to investors to pay amounts payable by them to ARF on time. OAL had an interest in providing that incentive because the money paid to ARF would be paid by ARF to OAL in discharge of the loans that formed part of round robin arrangements and, as the defendants accept, was the principal source of funds available to OAL to enable it to carry on the venture. If a substantial number of investors were late in repaying amounts owing to ARF, that could have had a dramatic effect on OAL's ability to comply with its obligations under the Licence and Management Agreements.
In view of the conclusions I have reached, it is unnecessary to consider the question whether relief should be granted and, if so, the nature of that relief. It is also unnecessary to deal with the argument raised by ARF based on s 16 of the CRA. However, I should say something about those three questions.
As to ARF's defence to the defendants' cross-claims based on s 16 of the CRA, in my view the defence cannot succeed. The relief that is sought under the CRA is relief in relation to the Indemnity Agreements. In my opinion, proceedings to recover amounts due under the Loan Agreements are proceedings arising "in relation to" the Indemnity Agreements since the ability of ARF to recover amounts due under the Loan Agreements from investors depends, in part, on the investors' rights under the Indemnity Agreements. The claims under the CRA were brought while the proceedings by ARF to recover moneys under the Loan Agreements were on foot. It follows that the claims under the CRA fall within s 16(c) of that Act.
As to the question whether relief should be granted, the court may have regard to the defendants' conduct since they entered into the relevant contracts. Had I found the essential time stipulation unjust, I would have granted relief to those defendants who, despite a genuine attempt to comply with the time stipulation, failed to do so.
The defendants who fall into that category are Mr Fredericksen, Mr Rowe, Ms Russo, Mr Wardle (in respect of his first investment), Mrs Wallace and Mr Long (in respect of his first investment). It seems to me that, in each of those cases, the investor, or in the case of Mr Wardle, Mr Giannuzzi on his behalf, took reasonable steps to pay the amounts payable by them on time. Each posted a cheque or, in the case of Mr Giannuzzi on behalf of Mr Wardle, arranged to transfer funds at a time when they might have expected the cheque to arrive or the funds to be transferred within time. The same cannot be said in respect of Mr Giannuzzi or the second investments of Mr Wardle and Mr Long. In each of those cases, it appears that no attempt was made to make the payment until after the date for payment fell due. If the time limits were unjust because of the consequences of failing to comply with them strictly, then it seems to me appropriate to grant relief to those who reasonably sought to comply with them.
ARF submits that there is a difficulty in granting relief because there is no allegation that cl 7 of the Loan Agreements is unjust and no relief is sought in respect of that clause. However, it is not clear why that is a bar to granting relief in respect of the Indemnity Agreements. The Loan Agreements and Indemnity Agreements must be read together. Part of the circumstances in which the Indemnity Agreements operate includes the effect of cl 7 of the Loan Agreements. If the Indemnity Agreements are unjust because they impose an unjust time stipulation, it is difficult to see why that time stipulation cannot be varied under the CRA with the result that the variation will have consequences for the operation of cl 7 of the Loan Agreements. Having regard to the conclusions I have reached, it is not necessary to formulate the precise form of order that I would have made. It is sufficient to indicate that I would have varied the relevant Indemnity Agreements so that the indemnity that was provided under them was available notwithstanding the late payment that occurred in cases where I have concluded that it would be appropriate to grant relief.
Mr Wardle's estoppel defence
Mr Wardle's estoppel defence is pleaded as a conventional estoppel as well as an estoppel by representation. In each case, however, it depends on the conversation that Mr Giannuzzi had with Mr Lloyd on 30 October 1998 when Mr Giannuzzi said that it would take 24 hours for the direct deposit from Mr Wardle's AGC account to be paid into "your" bank account - meaning the bank account of ARF - and Mr Lloyd said that that would be "ok". It is pleaded that, as a result of that conversation, Mr Wardle assumed that strict compliance with the payment dates under the Loan Agreement was not essential to obtain the benefit of the indemnity. Mr Wardle also pleads that he made payments to ARF in reliance upon that assumption. The representation is said to have been made by Mr Lloyd on behalf of both OAL and ARF, and an essential aspect of each case is an allegation that ARF is estopped from asserting that the indemnity is not effective and enforceable merely because Mr Wardle did not make the relevant payments on time.
In my opinion, the estoppel defence must fail for three reasons.
First, I do not accept that Mr Lloyd's statement can be treated as a representation by him that Mr Wardle would be entitled to the benefit of the indemnity even if the payment was late. Mr Lloyd was informing Mr Giannuzzi of a fact - namely, that payment would be slightly late. He was not asking a question the answer to which would be relevant to the course of action that Mr Giannuzzi took. Mr Giannuzzi was not in a position to alter the conduct he took on behalf of Mr Wardle depending on the answer he got to his question. At most, Mr Lloyd's reply must be understood in the context as a statement that he did not propose to take any action if the payment was a day late. In fact, the payment was more than a day late. But leaving that point aside, I do not think Mr Lloyd could be understood as making a statement about the effect of the Indemnity Agreement rather than the action that he himself proposed to take on behalf of OAL and possibly ARF. What Mr Lloyd was saying was that, if payment was made a day late, ARF would not seek to accelerate repayment of the loan or impose penalty interest. I do not think he could be understood as saying that Mr Wardle could ignore the effect of the Loan and Indemnity Agreements. What Mr Lloyd said was correct. ARF did not take any action based on the late payment.
Second, assuming that Mr Lloyd's representation had the meaning contended for by Mr Wardle, I do not accept that Mr Lloyd had authority to make the representation he did on behalf of ARF. I have already found that Mr Lloyd did not have any actual authority to make a representation on behalf of ARF concerning late payment. Mr Wardle points to no evidence from which it could be concluded that Mr Lloyd had ostensible authority to make a representation on behalf of ARF. In order for Mr Lloyd to have had ostensible authority, there must have been some holding out by ARF that he had authority: Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 503 per Diplock LJ; Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 at 132 per Clarke and Cripps JJA. However, ARF did not make any representation to Mr Wardle or Mr Giannuzzi suggesting that Mr Lloyd had authority to make representations concerning the Loan Agreement on behalf of ARF. Mr Wardle relies on evidence from Mr Lloyd, who says that he was responsible for managing the office occupied by both OAL and ARF. But even accepting that evidence, there is no suggestion that ARF said or did anything to indicate that Mr Lloyd was an appropriate person to contact in relation to the Loan Agreement. The letters sent by ARF reminding Mr Wardle of his obligations under the Loan Agreement were signed by Ms Edwards, and there is nothing in those letters to suggest that Mr Lloyd was an appropriate person to contact in relation to the Loan Agreement. There is no other evidence of a holding out by someone with actual authority to act on behalf of ARF that Mr Lloyd also had authority to act on its behalf.
Third, I do not accept that Mr Wardle acted to his detriment based on anything that Mr Lloyd said. Mr Wardle does not suggest that he was in a position to pay earlier than he did or that he delayed payment relying on what Mr Lloyd had said to Mr Giannuzzi. In his defence, Mr Wardle says that he relied on the representation made to Mr Giannuzzi by Mr Lloyd to make payments to ARF. However, I do not accept that contention. Mr Wardle was obliged to make those payments irrespective of any representation made by Mr Lloyd. If he had not done so, ARF had a right to demand repayment of the whole loan and impose penalty interest. Mr Wardle made the payments because he was obliged under the Loan Agreement to do so, not because of anything Mr Lloyd said.
Orders
ARF is entitled to judgment in its favour on its claim against each of the remaining defendants, and each of the remaining defendants' cross-claims should be dismissed.
The parties should bring in short minutes of order within 14 days to give effect to this judgment. If the parties cannot agree on the terms of the short minutes of order, the matter should be relisted for argument in relation to any outstanding questions.
I will hear the parties in relation to costs if costs cannot be agreed.
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Decision last updated: 14 October 2014
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