Balmedie Pty Ltd v Russo, Nicola
[1997] FCA 467
•2 MAY 1997
CATCHWORDS
PRACTICE AND PROCEDURE - strikeout application - letter of credit issued for repayment of investors in film - whether amount paid for issue of letter of credit impressed with a trust - whether company issuing letter of credit engaged in joint venture - whether members of joint venture liable to outsiders
EQUITY - letter of credit issued for repayment of investors in film - payment for issue of letter of credit - whether impressed with trust - whether principle in Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567 applicable
CONTRACTS - joint venture - liability to outsiders - whether evidence of subsequent conduct available as an aid to construction
Administration of Territory of Papua and New Guinea v Daera Guba (1974) 130 CLR 353
Dey v Victorian Railways Commissioners (1949) 78 CLR 62
Equus Corporation Ltd v Perpetual Trustees WA Limited No. VG 3415 of 1996
FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343
General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
James Miller & Partners Ltd v Whitworth Street Estate (Manchester) Ltd [1970] AC 583
Keech v Sandford (1726) Sel. Cas. T. King 61, 25 ER 223
L Schuler A G v Wickman Machine Tool Sales [1974] AC 235
News Ltd v Australian Rugby Football League Ltd (1996) 139 ALR 193
Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567
Salomon v Salomon & Co Ltd [1897] AC 22
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332
Spunwill Pty Ltd v Bab Pty Ltd (1994) 36 NSWLR 290
Toovey v Milne (1819) 2 B & A 683
United Dominions Corporation Limited v Brian Pty Ltd (1985) 157 CLR 1
White v Australia and New Zealand Theatres Ltd (1943) 67 CLR 266
Balmedie Pty Ltd & Anor -v- Nicola Russo & Ors
(No. 716 of 1996)
Judge: Heerey J
Date: May 1997
Place: Melbourne
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY No. VG 716 of 1996
GENERAL DIVISION
B E T W E E N:
BALMEDIE PTY LTD
(ACN 007 358 634)
First ApplicantKAMISHA CORPORATION LIMITED
(ACN 009 267 850)
Second Applicant
- and -NICOLA RUSSO
First RespondentEQUUSCORP PTY LTD
(ACN 006 012 344)
Second Respondent
BENEFICIAL FINANCE CORPORATION LIMITED
(ACN 007 597 202)
Third Respondent
TARGRIDGE PTY LTD
(ACN 006 751 220)
Fourth Respondent
JOLANE PTY LTD
(ACN 007 404 953)
Fifth Respondent
JUDGE: Heerey J
DATE: 2 May 1996
PLACE: Melbourne
MINUTES OF ORDER
The Court orders that:
The amended statement of claim be struck out;
The proceeding be stayed insofar as it raises causes of action based in whole or in part on contentions that the payment of $5,025,000 to Jolane and/or Balmedie on 29 June
1990 was impressed with any trust or that any respondents are liable on the basis of having entered into a joint venture with EquusSubject to the foregoing, the applicants have leave to file and serve a further amended statement of claim within 21 days; and
Adjourn summons for directions to a date to be fixed.
The applicants pay the respondents' costs of this application direct pursuant to O. 62 r 3 that such costs be paid forthwith.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY No. VG 716 of 1996
GENERAL DIVISION
B E T W E E N:
BALMEDIE PTY LTD
(ACN 007 358 634)
First ApplicantKAMISHA CORPORATION LIMITED
(ACN 009 267 850)
Second Applicant
- and -NICOLA RUSSO
First RespondentEQUUSCORP PTY LTD
(ACN 006 012 344)
Second Respondent
BENEFICIAL FINANCE CORPORATION LIMITED
(ACN 007 597 202)
Third Respondent
TARGRIDGE PTY LTD
(ACN 006 751 220)
Fourth Respondent
JOLANE PTY LTD
(ACN 007 404 953)
Fifth Respondent
JUDGE: Heerey J
DATE: 12 May 1997
PLACE: Melbourne
REASONS FOR JUDGMENT
This proceeding is further litigation arising out of the financing of the film "Night of the Leopard". I have this day delivered judgment in Equus Corporation Ltd v Perpetual Trustees WA Limited No. VG 3415 of 1996, an application under s 459G of the Corporations Law to set aside a statutory demand. By agreement with counsel in the present case, I shall treat the factual background disclosed in my reasons for judgment in VG 3415 of 1996 as being incorporated by reference in the present reasons. However some additional aspects will need to be mentioned.
Four out of the five respondents in the present case have applied for orders that the applicants' proceeding be stayed or dismissed or alternatively that their statement of claim be struck out. Reliance is placed on O 11 r 16 and O 20 r 2, although primarily on the latter. The standard to be applied is laid down in the leading authorities Dey v Victorian Railways Commissioners (1949) 78 CLR 62 and General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125. It is a high standard.
The respondents making the present application are Mr Russo, Equus, Targridge (a company controlled by Mr Russo and a 46 per cent shareholder in Equus) and Jolane (an associate of Equus also controlled by Mr Russo). The third respondent Beneficial Finance Corporation Limited (a 40 per cent shareholder in Equus) has not made any application. It was represented by senior and junior counsel on the first day of the hearing on what was said to be a watching brief.
The present proceeding, like VG 3415 of 1996, springs from the failure of Equus to honour in full the letter of credit which it issued to Perpetual on 29 June 1990. In the present proceeding the applicants seek to raise various causes of action with the aim of making not only Equus but the other respondents liable for
the Equus default. The applicants' amended statement of claim is a complex document of 45 pages. Rather than attempt a detailed summary of it at the outset, I shall turn immediately to the attacks which counsel for the respondents made on the various causes of action pleaded. Unless the context otherwise indicates, I use the term "respondents" as meaning the four respondents who are bringing this application, that is to say the respondents other than Beneficial.
Breach of Trust
Paragraphs 19, 20 and 21 of the amended statement of claim allege as follows. Balmedie, Equus and Jolane on or about 29 June 1990 entered into an agreement ("the Facility Agreement") that Equus would provide a letter of credit in favour of Perpetual in respect of Balmedie's obligation to pay the Base Production Services Fee. Under the Facility Agreement Balmedie was to lodge a "security deposit" of $5,025,000 with Equus or its nominee. The security deposit "was to be invested by Equus" and the deposit and income earned thereon were to constitute a "trust fund" which was to be "applied and used by Equus exclusively for the purpose of enabling Equus to meet its obligations under the standby letter of credit to Perpetual". Equus would draw down from the trust fund "such sums as would be sufficient to meet its obligations under the standby letter of credit to Perpetual". If Equus did not hold or use the trust fund in accordance with the foregoing conditions, Equus and/or Jolane "would hold the trust fund on a resulting trust for Balmedie".
In para 47 it is alleged that Equus and/or Jolane held the "trust fund" on trust for (a) the Equus investors and/or Perpetual and (b) "if Equus did not hold the trust fund or failed to use the trust fund for the exclusive purpose of enabling Equus to meet its obligations under the Letter of Credit to Perpetual, on a resulting trust for (Balmedie)". Paragraph 48 alleges that Equus and Jolane owed various fiduciary duties relating to the trust fund. Paragraph 49 alleges that Equus and/or Jolane failed to hold the "trust fund" on trust, to hold or apply it exclusively for the purpose of enabling Equus to meet its obligations under the letter of credit to Perpetual, to "preserve and protect" it, to refrain from mixing it with Equus and Jolane's own monies, to invest it and accumulate the income thereon in order for Equus to be able to pay $10,468,750 to Perpetual under the letter of credit from the "trust fund", and to account to Balmedie for the use and application of it.
Paragraph 50 alleges that as a result of the failure to hold the "trust fund" as trustee and to apply it exclusively for the purpose of enabling Equus to meet its obligation under the letter of credit, Equus and/or Jolane thereby held the "trust fund" on a resulting trust for Balmedie. Paragraph 51 alleges that as a result Balmedie has suffered loss and damage. Paragraph 52 is a claim for equitable compensation. Paragraphs 52A to 52G allege that the balance of the "trust fund" after the authorised drawings totalling $5,459,990 should have grown to at least $5,008,760 by 29 June 1996 and that Equus and/or Jolane is liable to account for the balance of the "trust fund" or its traceable
product. Paragraphs 53 to 55 allege participation and assistance in breach of trust by Mr Russo and Beneficial. Paragraphs 56 to 58C allege wrongful receipt of trust property by Beneficial and claim an entitlement to trace.
The Facility Agreement is alleged to be partly in writing and partly implied. Insofar as it was written it was constituted by a letter dated 29 June 1990 [sic, the date in fact was 28 June] from Equus to Balmedie, a document entitled "Standard Terms and Conditions re Letters of Credit (EQ6/90)" and an agreement, called "the Tripartite Agreement", made on 29 June 1990 between Equus, Balmedie and Jolane.
The letter offered to Balmedie a letter of credit facility for $10,468,750 representing an amount being 125 per cent of the total principal sums that Equus had agreed to advance to investors to subscribe for units in the Second Multiple Prospectus Trust. The facility was to be used for the purpose of issuing a letter of credit to Perpetual. The form of the letter of credit was annexed. The facility was to terminate on 29 June 1996. The monies outstanding under the facility were to be repaid on the following dates:
29 June 1994 $ 183,915
29 June 1995 217,080
29 June 1996 4,624,005
but in any event before the termination date. Equus was authorised to withdraw from the "Deposit Account" the above mentioned amounts on the above mentioned dates. To secure Balmedie's obligations under the facility,
a fixed charge (would) be created by Balmedie in favour of Equus in respect of Balmedie's entitlement to a deposit amount ("the Deposit Account") representing 60% of the total principal which shall be deposited with Equus in such a manner to ensure that a charge can be granted to Equus by Balmedie in respect of Balmedie's entitlement to that deposit.
The Tripartite Agreement recited that by a letter of credit facility of the same date Equus at the request of Balmedie had agreed to provide credit to Balmedie by way of issuing a letter of credit to Perpetual as trustee for the Second Multiple Prospectus Trust, that pursuant to the letter of credit Perpetual was entitled to demand payment by Equus of certain monies on certain dates, that as and when Equus made payments to Perpetual pursuant to the letter of credit Balmedie would become liable to pay certain monies to Equus pursuant to the credit facility, that pursuant to the credit facility, and as a precondition to the issue of the letter of credit, security in the form of a deposit in the sum of $5,025,000 must be lodged with Equus, that Balmedie had agreed to deposit with Jolane that sum on the terms of the agreement and that Jolane agreed in turn to deposit that sum with Balmedie. By cl 2 Balmedie agreed to deliver to Jolane a bank cheque for $5,025,000 (called "Deposit 1") "by way of an interest free deposit repayable by Jolane to Balmedie on the dates specified in the credit facility for repayment of all monies owing by (Balmedie) to Equus thereunder". Clause 3 provided that Jolane was to endorse the bank cheque in favour of Equus and lodge it as "Deposit 2" with Equus on the same terms. By cl 4 Jolane agreed with Equus that when Perpetual demanded payment by
Equus under the letter of credit on the drawing dates and Equus made such payments, Equus should be entitled to draw down out of Deposit 2 the amount of its drawdown specified in the schedule to the clause. The schedule to the clause is as follows:
SCHEDULE
Date of Amount Drawn Amount of
Drawing under Letter of Drawdown from
under Letter Credit Deposit 2
of Credit
29/6/1994$ 382,740 $ 183,915
29/6/1995 $ 452,250 $ 217,080
29/6/1996 $9,633,760 $4,624,005
By cl 5 Equus agreed to make drawdowns out of Deposit 2 in satisfaction of any amounts which became payable by Balmedie to Equus and that when Deposit 2 had been fully drawn down Balmedie should be released from its obligations to Equus. By cl 6 Jolane agreed with Equus that as Deposit 2 was drawn down by Equus Jolane's entitlement to repayment would be correspondingly reduced. By cl 7 Balmedie agreed with Jolane that as Deposit 2 was drawn down by Equus, Deposit 1 should be reduced by an equivalent amount. Clause 8 is as follows:
(Balmedie) acknowledges that its right title and interest in and to Deposit 1 are personal and that save and except for the charge in favour of Equus given by (Balmedie) pursuant to the Credit Facility, such right title and interest and Deposit 1 are incapable of assignment mortgaging charging or otherwise being dealt with and agrees not to attempt to do so.
Clause 9 is a similar acknowledgment by Jolane. Under cl 11, the agreement is to be governed by the law of Victoria. The remaining clauses are not relevant for present purposes.
The terms of the letter of credit itself are set out in the reasons for judgment in VG 3415 of 1996.
At settlement on 30 June 1990, Balmedie gave to Jolane a bank cheque in its favour for $5,025,000. Jolane endorsed that cheque in favour of Equus. Equus gave a bank cheque to Beneficial for the same amount. Beneficial gave a bank cheque to Perpetual for $8,375,000. Equus delivered the letter of credit to Perpetual.
The argument advanced on behalf of the applicants against the strikeout application relied primarily on the decision of the House of Lords in Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567. In that case an annual general meeting of Rolls Razor on 2 July 1964 approved payment of a dividend to shareholders. The company was not in a liquid condition. Quistclose agreed to advance the funds required for the dividend. The Quistclose board on 15 July resolved that a loan of £209,719 8s 6d be made to Rolls Razor "for the purpose of that company paying the final dividend due on July 24 next". On the same day Quistclose drew a cheque for that amount in favour of Rolls Razor, who arranged with Barclays Bank to open a new account called "No. 4 ordinary dividend share account". Rolls Razor then sent the Quistclose cheque to the bank with a covering letter which included confirmation that "this amount will only be used to meet the dividend due on July 24, 1964". On 27 August, and before any payment of dividend was made to its shareholders, Rolls Razor went into liquidation. Barclays Bank sought to set-off the funds in the No. 4 ordinary dividend account against
debit balances in the company's other accounts.
The House of Lords upheld the argument of Quistclose that the money never became the beneficial property of Rolls Razor because it was impressed with a trust for the payment of the dividend or, if that purpose failed, on a resulting trust for Quistclose. Further, Barclays Bank took the money with notice of those trusts.
In a speech with which all other members of the House agreed, Lord Wilberforce (at 580-581) endorsed a line of cases going back to Toovey v Milne (1819) 2 B & A 683 which support the proposition that a loan for the specific purpose of payment of creditors of the borrower's gives rise to a primary trust in favour of those creditors and, if that trust fails, a resulting trust in favour of the lender. In so holding, his Lordship (at 581) saw
no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose ... : when the purpose has been carried out (i.e. the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose cannot be carried out, the question arises if a secondary purpose (i.e., repayment to the lender) has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor's assets) then there is the appropriate remedy for recovery of a loan. I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements, and other variations if desired: it would be to the discredit of both systems if they could not. In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it.
However the facts in Quistclose are a world away from the present
case. In Quistclose the lender provided the borrower with a specific sum on express terms that it was to be applied by payment to a specified class of creditors within a few days. It was beyond doubt in the mutual contemplation of Quistclose and Rolls Razor that the money would be earmarked and put aside for that purpose and no other.
In the present case, the objective circumstances point to the conclusion that Equus would have complete control over the money provided by Balmedie. As was put by counsel for Balmedie, "the commercial viability [of the transaction] depended on the trust fund accumulating and growing". In other words, Equus would have to achieve growth by turning the Balmedie money into shares, fixed interest securities, property and/or other forms of investment and realising those investments and reinvesting the proceeds where appropriate over the ensuing six years.
There was no suggestion at the time of any restriction as to the way Equus could invest the Balmedie money. The critical term of the Facility Agreement which it is said operated to prevent Equus from mixing Balmedie's "security deposit" with other funds is pleaded in para 20(e):
the security deposit and the income earned thereon ("the trust fund") was to be applied and used by Equus exclusively for the purpose of enabling Equus to meet its obligations under the standby letter of credit to Perpetual. [Emphasis added]
The particulars given of that term are that it was partly in writing, constituted by the Tripartite Agreement, and partly to
be implied "by the need to give the Facility Agreement business efficacy and by law". There is nothing in the Facility Agreement that I can see that would give rise to the suggested term. Still less was it required by business efficacy. On the contrary, business efficacy required a freedom for Equus to have as much flexibility as possible so that it could mix the Balmedie money with funds from other sources and manage its total funds so as to meet all its liabilities and make a profit.
If the Balmedie money became subject to a trust, the elaborate restrictions on trustee investments then imposed by s 4 of the Trustee Act 1958 (Vic) would apply. And one might expect a provision for periodic reporting by Equus to Balmedie, and for annual audit of the "trust fund". No such provisions appear. Equus of course accepted under the letter of credit an obligation to pay to Perpetual certain sums on dates falling due in the fourth, fifth and sixth years thereafter. However Equus was obliged to make those payments irrespective of the fortunes it encountered in dealing with the money it received from Balmedie, or its fortunes generally.
The validity of the proposition that the Balmedie money and the income therefrom constituted a trust fund can be tested as follows. Assume that Equus invested the "trust fund" with all the care and skill of a prudent trustee but nevertheless the fund by 29 June 1996 had only grown to $9 million. Equus would still be liable to pay Perpetual amounts totalling $10,468,750 under the letter of credit. On the other hand, assume Equus managed
the "trust fund" with extraordinary luck, as well as care and skill, with the result that the "trust fund" grew to $12 million. As was accepted in the course of argument, Equus could meet its obligations under the letter of credit and pocket the difference, notwithstanding the strict rule against trustees profiting from the use of trust property: Keech v Sandford (1726) Sel. Cas. T. King 61, 25 ER 223. Such considerations point to a conclusion that the obligations of Equus were contractual only, were confined to the payment of fixed amounts on fixed dates, and were inconsistent with the creation of a trust in relation to the Balmedie money.
The contrast between the present case and Quistclose is perhaps best demonstrated by a passage in the reported argument of counsel for the successful respondent, [1970] AC at 573. Counsel was there dealing with the fundamental issue which arose in the case, that is to say the inter-relation between trust and contract. The appellant's case was based on the contention that trust and loan cannot co-exist. Counsel for the respondent advanced three possibilities: (i) contract but no trust, (ii) trust but no contract, (iii) contract and trust. As has been seen, the House of Lords accepted that the third category existed and that Quistclose's advance fell within it. However the example given by counsel of category (i), which was of course conceded to be one where no trust existed, was that of a payment to an insurance company for the purchase of an annuity. In my opinion, that is a good analogy to the present case. The only difference is that an insurer providing an annuity is obliged to
make annual payments for an uncertain period, the remainder of the annuitant's life, whereas Equus was obliged to make payments on certain dates in the fourth, fifth and sixth year after issue of the letter of credit. But in both cases the initial payment - the annuitant's premium and Balmedie's "security deposit" - are to be mixed with other funds to generate income and/or capital growth to meet future liabilities generally, and not just the liability to the particular annuitant or to Perpetual as holder of the letter of credit. In the case of the annuity, it could not be suggested that the insurer held the premium on trust for the annuitant, any more than a bank holds a deposit on current or term account on trust for its customer, or a general insurer holds a premium on trust for an insured pending the possible occurrence of the event insured against.
Counsel for Balmedie stressed that the deposit did not bear interest. But in my opinion, in the circumstances of this case, that is a factor weighing against any inference of an intention to create a trust. An annuitant does not expect to receive interest on his or her premium; the benefit comes in the form of the annuity payments. Likewise in the present case, the benefit contemplated for Balmedie by the parties was the receipt by Perpetual of payments in the fourth, fifth and sixth years contributing a much larger amount which would be used to discharge Balmedie's liability to investors. The price, as it were, of that benefit was the payment of the $5,025,000 which Equus would use to generate funds to meet that future liability and, as was doubtless also contemplated, to make a profit for
itself.
Moreover, the documentation is notable for omissions which are fatal to Balmedie's contention. Most importantly, if these parties engaged in a sophisticated commercial transaction with expert legal and accounting advice wished to adopt a trust vehicle with all its attendant rights and obligations, they presumably would have done so. When it was thought convenient to create a trust that was done so in unmistakable terms, as with the Second Multiple Prospectus Trust. References to the "deposit" by Balmedie and its "account" do no more to evidence an intention to create a trust than do the like terms used by a bank or other deposit-taking institution. Indeed cl 8 of the Tripartite Agreement explicitly states that Balmedie's right is to be personal only. The creation of a charge in favour of Equus is also inconsistent with the existence of a trust.
Counsel for Balmedie sought to rely on various alleged subsequent statements by Mr Russo referring to the Balmedie deposit as trust funds. For example, Mr Russo said to a director of Kamisha in October 1992 that the 60 cents in the dollar (i.e. the $5,025,000) had "grown to 79 cents in our ledger" and that the funds
would probably be regarded by everyone as a constructive trust because Beneficial who received these funds from Equus was a majority shareholder in Equus and had two directors on the board of Equus.
There is high and clear authority in House of Lords decisions
that the subsequent conduct of parties is not admissible as an aid to the construction of a contract: James Miller & Partners Ltd v Whitworth Street Estate (Manchester) Ltd [1970] AC 583, L Schuler A G v Wickman Machine Tool Sales [1974] AC 235. Those authorities and two High Court decisions, White v Australia and New Zealand Theatres Ltd (1943) 67 CLR 266 and Administration of Territory of Papua and New Guinea v Daera Guba (1974) 130 CLR 353, were considered by the Appeal Division of the Supreme Court of Victoria in FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343. Brooking J, with whom Nathan and Eames JJ agreed, concluded that subsequent conduct is not admissible. In my respectful view Brooking J's judgment is entirely persuasive on principle and authority, and notwithstanding the subsequent decision of Santow J in Spunwill Pty Ltd v Bab Pty Ltd (1994) 36 NSWLR 290. After all, if a plaintiff is not permitted to say "I believed the contract meant such and such", equally he cannot say that the defendant said he believed the same thing. So it would seem to follow that the plaintiff cannot give evidence of conduct by the defendant indicating such a belief.
But in any case, even on the Spunwill approach, subsequent conduct can only be looked at in "the limited circumstances where conduct evidences a clear and mutual subjective intention as to what the contract originally meant": (1994) 36 NSWLR at 312, and even this limited use is not available "unless there is ambiguity in the language of the document" (at 310). The alleged admissions by Mr Russo do not satisfy either tests, and particularly the latter one.
I am satisfied that any cause of action based in whole or in part on a contention that the payment by Balmedie to Jolane and/or Equus of $5,025,000 was impressed with a trust would be "so clearly untenable that it cannot possibly succeed": General Steel, 112 CLR at 131.
Joint Venture
Paragraph 8 of the amended statement of claim alleges that at all relevant times Equus was the "joint venture vehicle for a joint venture between BFC [i.e. Beneficial], Mr Russo, Targridge and others". Particulars given are as follows:
Equus was incorporated by BFC, Mr Russo, Targridge and others pursuant to the joint venture. Under the joint venture BFC was to hold approximately 40 per cent of the shares in Equus and Targridge, Mr Russo and others were to hold the remaining shares. BFC was to provide finance for the joint venture. In 1989 BFC funded 100 cents in every dollar lent by Equus to investors in international films. Targridge and Mr Russo marketed the financial services of Equus to small corporations and private borrowers. Further particulars will be provided after discovery.
The joint venture allegation is woven into a number of the causes of action pleaded. Paragraphs 22 to 24 plead a breach by Equus of the Facility Agreement and the letter of credit and claims specific performance. Paragraph 25 alleges that Equus entered into the Facility Agreement and the letter of credit "as the agent of and for and on behalf of" Mr Russo, Beneficial and Targridge. The particulars given are as follows:
The agency of Equus arises by reason of the fact that it was the joint venture vehicle for the joint venture between BFC, Russo and Targridge referred to in paragraph 8 hereof. Further particulars will be provided after Discovery.
It is further alleged in para 26 that by reason of the matter set out in para 25 each of Mr Russo, Beneficial and Targridge are liable to specifically perform the facility and the letter of credit.
In a cause of action pleaded under s 52 of the Trade Practices Act 1974 (Cth) and its Victorian equivalent, agency allegations relied on to make parties other than Equus liable depend at least in part on the allegation of joint venture. Thus for example in particular D(c)(a) it is alleged that Mr Russo made certain statements and engaged in certain conduct "within the scope of his actual or apparent authority on behalf of the joint venturers, including Targridge".
In United Dominions Corporation Limited v Brian Pty Ltd (1985) 157 CLR 1 at 10 Mason, Brennan and Deane JJ said:
The term "joint venture" is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture (or under Scots Law, "adventure") will often be a partnership. The term is however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership: such as a company, a trust, an agency or a joint ownership. The borderline between what can property be described as a "joint venture" and what should more properly be seen as no more than a simple contractual relationship may on occasion be blurred.
Their Honours go on to discuss the circumstances in which the relationship between joint venturers will become a fiduciary one. See also Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 and News Ltd v Australian Rugby Football League Ltd (1996) 139 ALR 193 at 310-314.
However, it will be apparent that their Honours in United Dominions were speaking in the context of the case before them, which was a dispute between parties to the alleged joint venture, as was Hospital Products and Rugby League. None of these was a case where an outsider sought to make one joint venturer liable on a contract entered into by another. Assuming the existence of a joint venture, in the sense of a relationship giving rise to fiduciary obligations between the joint venturers, the rights of outsiders as against the joint venturers are to be determined by the law applicable to the particular vehicle adopted by the joint venturers, be it company, partnership or trust, and the particular contractual relationship with the outsider.
A century ago Salomon v Salomon & Co Ltd [1897] AC 22 established that shareholders and directors are not liable for the debts of a company. Statutory inroads have been made on that principle in the insolvent trading provisions contained in Divisions 3, 4 and 5 of Part 5.7B of Chapter 5 of the Corporations Law. Nevertheless, it is beyond doubt that, in the absence of some such statutory provision or explicit contractual arrangement, the Salomon principle holds good today. In the words of Lord Herschell, [1897] AC at 45, "(t)he creditor has notice that he is dealing with a company the liability of the members of which is limited".
The applicants cannot in my view escape the rigour of the Salomon principle merely by showing that Mr Russo referred on a number of occasions to Equus embarking on a "joint venture" with others.
As was noted in United Dominions, the term "joint venture" is not a term of art. When two or more entities join forces for a particular business enterprise and adopt a company as the vehicle, in common commercial parlance the expression "joint venture" is often used. None of the statements attributed to Mr Russo amount to anything more than that. As was pointed out in United Dominions, there may or may not be fiduciary relationships between the joint venturers. As was pointed out in Rugby League, the precise content of the fiduciary obligations depend on the circumstances of the instant case. But there is no basis for a case that, vis-à-vis outsiders such as the applicants, the liabilities of Mr Russo and Targridge for any obligation of Equus can be based on any footing other than that of director and shareholder. Causes of action based in whole or in part on the allegations of joint venture are in my view untenable, within the meaning of Dey and General Steel.
Misleading and Deceptive Conduct
By para 27 it is alleged that prior to and in order to induce Balmedie to enter into the Facility Agreement and deposit the sum of $5,025,000 with Jolane and/or Equus and in order to induce Kamisha to enter into the Supervision Agreement and allow clients of Kamisha to enter into the loan contracts with Equus and pay interest to Equus, each of Equus, Mr Russo, Beneficial and Targridge represented and warranted, and until about 23 April 1996 continued to represent and warrant to Balmedie and Kamisha: (a) that Equus would pay to Perpetual the amount due under the letter of credit, (b) that Equus intended to meet its obligations
under the Facility Agreement and the letter of credit, and (c) was able to do so, (d) that it would hold and invest the security deposit for the purpose of ensuring that the investors received a guaranteed minimum return of 125 per cent, (e) that it intended to hold and invest the security deposit for the purpose of ensuring that the investors received such guaranteed minimum return, (f) that it was able to hold and invest the security deposit for that purpose and (g) that it had reasonable grounds for making those representations. The paragraphs following plead those representations were false and untrue as at 29 June 1990 or alternatively became false and untrue sometime during that date and 23 April 1996. It is further alleged that in reliance on such representation Balmedie and Kamisha acted to their detriment, and in particular took no steps to mitigate or avoid any loss that might be suffered by reason of Equus failing to meet its obligations under the Facility Agreement and letter of credit: para 29(c) (Balmedie), para 30(c) (Kamisha).
A substantial part of the misleading and deceptive conduct cause of action is predicated on the contention that the contractual arrangements in June 1990 resulted in the $5,025,000 being impressed with a trust. Thus paras 27(d), (e) and (f) speak of Equus "hold(ing) and invest(ing) the security deposit". For the reasons already given, there is in my opinion no arguable case that this was in law the position or any evidence that Equus represented it as such at the time. Doubtless the parties in June 1990 considered the Equus letter of credit a copper-bottomed security, issued as it was by an apparently reputable financier
partly owned by Beneficial which was in turn connected with a bank, the State Bank of South Australia. It is much to be regretted that those reasonable commercial expectations were disappointed. But I do not think a remedy can be found by giving the legal relationships which came into force in June 1990 a character different from that which they actually bore.
By the same token, insofar as the respondents other than Equus are sought to be made liable, the applicants' case rests at least in part on the claimed existence of a joint venture which I also hold to be not arguable. Any repleading of the case would need to exclude the trust and joint venture elements of the various claims.
However, it may be open to the applicants to make out a case that they suffered loss and damage by subsequent reassurances allegedly given by Mr Russo as to the capacity of Equus to meet its obligations under the letter of credit. If such representations were made, there may be an arguable case that the applicants suffered loss by being deprived of an opportunity to take earlier steps to enforce their rights, such as, for example, appointing a provisional liquidator. The measure of their damage would be the loss of that chance, that is to say the prospects of success of that opportunity if it had been pursued: cf Sellars v Adelaide Petroleum NL (1994) 179 CLR 332.
Inconsistency and Conflict of Interest
The respondents claimed that there was an inconsistency between
the claims of Balmedie in the present case and the stand taken by Perpetual in VG 3415 of 1996. The same solicitors and counsel acted for Perpetual in that proceeding as appear for the applicants in the present proceeding.
As this argument carried with it overtones of suggested impropriety on the part of the solicitors and counsel who acted for the present applicants and Perpetual, I am glad to say that it is without foundation. As was made clear in a subsequent memorandum from counsel for the applicants, and was in any case implicit in the way the two cases were presented, the claims are put as alternatives. To the extent that the parties recover from Equus part or all of the monies due under the letter of credit to Perpetual, any damages or other claims in the present proceeding will be pro tanto reduced.
Primary Obligation
It was contended by counsel for the respondents that there was no breach of the Facility Agreement and letter of credit because the security provided by Equus was "a performance guarantee and not a strict letter of credit as alleged", that the obligation of Balmedie to pay the investors the Base Production Services Fee is primary and no action should be brought against Equus for the recovery until all remedies against Balmedie have been exhausted.
In VG 3415 of 1996 I rejected the argument that the letter of credit was anything other than what it purported to be, that is to say a letter of credit. For the same reasons, I reject this
argument of the respondents.
Orders
While I did not find that all the causes of the action raised in the amended statement of claim should be summarily struck out or stayed, it is plain that a fresh pleading is required. The claims based on trust and joint venture are inextricably bound up with the rest of the claims. I will order therefore that:
the amended statement of claim be struck out;
the proceeding be stayed insofar as it raises causes of action based in whole or in part on contentions that the payment of $5,025,000 to Jolane and/or Balmedie on 29 June 1990 was impressed with any trust or that any respondents are liable on the basis of having entered into a joint venture with Equus;
(iii)subject to the foregoing, the applicants have leave to file and serve a further amended statement of claim within 21 days; and
adjourn summons for directions to a date to be fixed.
Costs
Since the respondents have achieved substantial success on this application they should have their costs. The strikeout application raised discrete issues. Those costs should be payable forthwith under O 62 r 3.
I certify that this and the preceding twenty-three (23) pages are a true copy of the reasons for judgment of the Honourable Justice Heerey.
Dated:12 May 1997
Associate
Appearances
Counsel for the applicants: R McK Robson QC and J W Peters
Solicitor for the applicants: Madgwicks
Counsel for the first, second, F G A Beaumont QC and Ms
fourth and fifth respondents: Pamela Tate
Solicitor for the first, second Mark Leaker
fourth and fifth respondents:
Date of hearing: 23 and 24 April 1997
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