Benzlaw & Associates Pty Ltd v Medi-Aid Centre Foundation Ltd
[2007] QSC 233
•3 September 2007
SUPREME COURT OF QUEENSLAND
CITATION:
Benzlaw & Associates P/L v Medi-Aid Centre Foundation Ltd [2007] QSC 233
PARTIES:
BENZLAW & ASSOCIATES PTY LTD ACN 071 381 452
(plaintiff)
v
MEDI-AID CENTRE FOUNDATION LIMITED
ACN 001 313 853
(first defendant)
2040 LOGAN ROAD PTY LTD ACN 112 994 242
(second defendant)
148 BRUNSWICK STREET PTY LTD ACN 117 914 664
(third defendant)FILE NO/S:
BS10416/05
DIVISION:
Trial Division
PROCEEDING:
Trial
ORIGINATING COURT:
Supreme Court at Brisbane
DELIVERED ON:
3 September 2007
DELIVERED AT:
Brisbane
HEARING DATE:
30, 31 July 2007, 1, 2 and 3 August 2007
JUDGE:
Muir J
ORDER:
As per minutes of order to be settled
CATCHWORDS:
EQUITY – GENERAL PRINCIPLES – FIDUCIARY OBLIGATIONS – PARTICULAR CASES – where plaintiff mortgaged property to first defendant and was unable to meet repayments – where plaintiff and first defendant also entered into agreement to develop said property – where 1st defendant desired to terminate said agreement and sold mortgage to 2nd defendant – where 2nd defendant exercised mortgagee’s power of sale and sold mortgage rights to 3rd defendant – whether 1st defendant breached its fiduciary duty to the plaintiff – whether fiduciary relationship existed between plaintiff and 2nd defendant – whether a relation of confidence is conclusive of existence of a fiduciary relationship
EQUITY – GENERAL PRINCIPLES – FIDUCIARY OBLIGATIONS – PARTICULAR CASES – where plaintiff mortgaged property to first defendant and was unable to meet repayments – where plaintiff and first defendant also entered into agreement to develop said property – where 1st defendant desired to terminate said agreement and sold mortgage to 2nd defendant – where 2nd defendant exercised mortgagee’s power of sale and sold mortgage rights to 3rd defendant – whether 2nd and 3rd defendants were in receipt of trust money and whether the rule in Barnes v Addy satisfied – whether plaintiff proved dishonest and fraudulent design
MORTGAGES – MORTGAGES AND CHARGES GENERALLY – REMEDIES OF THE MORTGAGEE – SALE UNDER POWER – MODE OF EXERCISE OF POWER – REMEDIES OF MORTGAGOR – SETTING ASIDE THE SALE – where plaintiff mortgaged property to first defendant and was unable to meet repayments – where plaintiff and first defendant also entered into agreement to develop said property – where 1st defendant desired to terminate said agreement and sold mortgage to 2nd defendant – where 2nd defendant exercised mortgagee’s power of sale and sold mortgage rights to 3rd defendant – where 2nd defendant mortgagee called for tenders but had no intention to sell to successful tenderer – whether mortgagee breached its duty under s 85 Property Law Act – whether relevant that the mortgagee did in fact sell for market value – whether tender offers must be ignored when assessing the market value of the property – whether mortgagee breached its equitable duty of good faith – whether equitable duty of good faith co-exists with duty under s 85 – whether defendants breached s 51AA of the Trade Practices Act by engaging in unconscionable conduct
Land Title Act 1994 (Qld), s 184
Property Law Act 1974 (Qld), s 84, s 85, s 88
Trade Practices Act 1974 (Cth), s 51AAANZ Banking Group Ltd v Bangadilly Pastoral Co Ltd (1978) 139 CLR 195, cited
Apple Fields Ltd v Damesh Holdings Ltd [1901] NZLR 586 (CA); [2004] 1 NZLR 721 (PC), applied
Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd (2002) 10 BPR 19, 565; [2002] NSWSC 16, cited
Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51, applied
Australian Competition and Consumer Commission v Samton Holdings Pty Ltd [2002] 117 FCR 301, cited
Baden v Société Générale pour Favoriser le Dévelopment du
Barnes v Addy (1874) LR 9 Ch App 244, applied
Barns v Queensland National Bank Ltd (1906) 3 CLR 925, cited
Bropho v Western Australia (1990) 171 CLR 1, cited
Cameron v Brisbane Fleet Sales Pty Ltd [2002] 1 Qd R 463, compared
Coco v A N Clark (Engineers) Ltd [1969] RPC 41; (1968) 1A IPR 587, cited
Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, applied
Commerce et de l'Industrie en France SA [1992] 4 All ER 161, applied
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, cited
Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2004] FCAFC 48, cited
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 81 ALJR 1107, applied
Farrar v Farrars Ltd (1888) 40 Ch D 395, cited
Forsyth v Blundell (1973) 129 CLR 477, cited
Fractionated Cane technology Ltd v Ruiz-Avila [1988] 1 Qd R 51, cited
Freestone v Parramatta City Council (1974) 34 LGRA 35, cited
Goold v Commonwealth (1993) 114 ALR 135; (1993) 79 LGERA 407, citedGregory v Commissioner of Taxation (Cth) (1971) 123 CLR 547, cited
Heavey Lex No 64 Pty Ltd v Chief Executive, Department of Transport [2001] Qld Land Appeal Court A97-43, cited
Hospital Products Limited v United States Surgical Corporation & Ors (1984) 156 CLR 41, considered
Hurley v McDonald’s Australia Ltd (1999) FCA 1728, cited
James Patrick & Co Pty Ltd v Minister of State for the Navy [1944] ALR 254, cited
McDonald v Deputy Federal Commissioner of Taxation (1915) 20 CLR 231, distinguished
McKean v Maloney [1988] 1 Qd R 628, cited
Mir Bros Unit Constructions Pty Ltd v Roads and Traffic Authority of New South Wales [2004] NSW LEC 612, cited
MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167, cited
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191, applied
Pilmer v Duke Group Ltd (In liq) (2001) 207 CLR 165, applied
R v Snow (1915) 20 CLR 315, cited
Smith v FAI Leasing Finance Pty Ltd [2002] QSC 270, distinguished
Stockl v Rigura Pty Ltd [2004] NSWCA 73, cited
United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1, distinguished
Yates Property Corp Pty Ltd v Darling Harbour Authority (1990) 70 LGRA 187, citedCOUNSEL:
K C Fleming QC with him R G Fryberg for the plaintiff
P J Dunning SC with him N Ferrett for the first defendant
M M Stewart SC with him S S Monks for the second and third defendantsSOLICITORS:
Morgan Conley Solicitors for the plaintiff
Hopgood Ganim for the first defendant
Lillas and Loel for the second and third defendants
Introduction
The plaintiff, Benzlaw & Associates Pty Ltd, was at times material to these proceedings the proprietor of land situated at the corner of Brunswick Street and St Paul’s Terrace, Fortitude Valley, Brisbane, on which was constructed five commercial buildings, three of which were interconnected. Benzlaw financed the acquisition of the property in September 1996 by means of a secured loan from the first defendant, Medi-Aid Centre Foundation Limited.
The mortgage in favour of Medi-Aid was varied from time to time. On 4 February 1997 Benzlaw and Medi-Aid agreed that the amount of the loan be varied to $4,065,000 and that Benzlaw authorise and direct payment of rent by the major tenant Suncorp direct to Medi-Aid. On 30 October 1998 Medi-Aid served a notice of exercise of power of sale on Benzlaw. Suncorp vacated the premises in about November 1998 and the direct payments to Medi-Aid by way of rent ceased.
On 22 November 1999 Medi-Aid and Benzlaw entered into a joint venture agreement in respect of the property. The terms of the agreement are central to the dispute between Benzlaw and Medi-Aid and will be discussed later. Benzlaw borrowed $5,800,000 from Perpetual Nominees Limited (“Perpetual”) in December 2003. The loan was secured by a mortgage over the property and Perpetual, Medi-Aid and Benzlaw entered into a priority agreement under which it was agreed that Perpetual’s mortgage would rank ahead of the mortgage. From the proceeds of the loan, Benzlaw paid $5,000,000 to Medi-Aid in reduction of the monies owing under the mortgage.
On or about 26 May 2005, Medi-Aid served on Benzlaw a notice of exercise of power of sale alleging failure on the part of Benzlaw to pay principal of $5,870,977.38 on 23 December 2004 and interest thereon of $3,154,025.94.
Service of this notice precipitated a meeting between Mr Bennelli, a director and the guiding force of Benzlaw, Dr Knight, a director of Medi-Aid, and his son, Peter, at Brisbane airport on 7 June 2005. It is common ground that an agreement was reached at the meeting but what was agreed is disputed.
Prior to the meeting Mr Bennelli, through his finance broker, Mr McKenzie of Balmain Commercial, had been attempting, without success, to raise sufficient money to pay out the mortgage. Mr McKenzie had known Mr Bennelli since 2003 when he had procured the $5,800,000 loan referred to earlier. It is the undisputed evidence of Mr McKenzie that Benzlaw had no assets apart from the property to provide by way of security. Consequently, the sum which could be borrowed was dependent on the property’s value. It was Mr McKenzie’s belief at the time that it was unlikely that a lender would be prepared to lend more than 70%, or perhaps in the case of a first mortgagee 75%, of valuation.
Dr Knight deposed to a recollection that an agreement was reached on 7 June 2005 between himself and Mr Bennelli to the effect that:
(a) Mr Bennelli would attempt to obtain finance in order to bring the mortgage payments up to date; and
(b) If unable to do so, he would pay Medi-Aid $3,500,000 by 30 June 2005 in discharge of Benzlaw’s obligations to Medi-Aid.
Finance could not be raised and the $3,500,000 was not paid by 30 June 2005.
On 1 July 2005, Ray White valuers produced a valuation report for Benzlaw which valued the property at $11,500,000. It then became apparent, having regard to the monies owing to the first mortgagee, that Benzlaw would be unable to borrow the $3,500,000 on the security of the property necessary to pay out Medi-Aid.
In June and July 2005, Mr McKenzie had extensive contact with Dr Knight who was pressuring him about the payment out of the second mortgage. For some months Mr McKenzie had been attempting to get a long-standing customer of his, Mr Smith, interested in the property. His attempts were unsuccessful until 7 September 2005 when Mr McKenzie arranged for Mr Smith to meet with him and Mr Bennelli at the property. Before inspecting the property Mr Smith insisted on seeing a valuation of the property and one was provided on 5 September.
In the conversation between Mr Smith and Mr McKenzie which led to the 7 September meeting, Mr McKenzie informed Mr Smith that the property had potential for somebody in Mr Smith’s position, that Mr Bennelli could not raise the money to discharge the second mortgage and that Medi-Aid was pressing for its money. Mr McKenzie also told Mr Smith that the property was undervalued in as much as there were substantial vacancies in tenantable spaces in the property. In dealing with Mr Smith, Mr McKenzie was acting as agent for Benzlaw and also for Mr Smith.
In the course of the discussions on 7 September Mr Smith mentioned to Mr Bennelli that he wanted to “understand the full financial ramifications” of Benzlaw’s position and Mr Bennelli intimated the Benzlaw wished to stay in the property. Mr Bennelli advised that Medi-Aid wanted its money back urgently.
Mr Smith asserts that he was asked by Mr Bennelli at the meeting if he would do a joint venture with him to which he responded that he would not entertain a joint venture unless he owned the mortgage. He said that he told Mr Bennelli that Mr McKenzie had given him a copy of the valuation and that he would like to see copies of leases and property management reports. I accept Mr Smith’s evidence in this regard except that, whilst I consider it likely that Mr Smith expressed interest in acquiring the mortgage, I am not satisfied that he asserted that its acquisition was a condition of his entering into a joint venture agreement.
A further notice of exercise of power of sale was served on Benzlaw on about 8 September 2005. It alleged failure to pay $2,195,636.16 principal and interest of $9,387,105.33 on 23 December 2004. Also on 8 September Mr Smith collected from Mr McKenzie property reports in respect of the tenancies prepared by the letting agents.
With a view to attempting to acquire the mortgage Mr Smith telephoned Dr Knight on 29 September 2005. It was arranged that Mr Smith fly to Sydney to meet Dr Knight and discuss the proposed transaction. In the course of their conversation Dr Knight complained about Benzlaw’s failure to meet its obligations under the mortgage and its broken promises to repay. He complained also that Mr Bennelli had not honoured an agreement made in June that year to pay $3,500,000 in return for a discharge of the mortgage. Mr Bennelli telephoned Mr Smith and told him that he had received another notice from Dr Knight. Mr Smith swears that from this time he often received telephone calls from Mr Bennelli.
Mr Smith and Dr Knight met in Sydney on 4 October 2005 and discussed the purchase price of Medi-Aid’s interest in the mortgage. Mr Smith gave evidence that on 5 October, in a telephone conversation with Mr Bennelli, Mr Smith said that he was entering into an agreement with Dr Knight concerning the purchase of the mortgage. He reported Mr Bennelli as saying “I will be a very good partner for you and act in good faith”. Mr Smith says that he did not respond. A further discussion between Mr Bennelli and Mr Smith concerning Smith’s acquisition of Medi-Aid’s interest in the mortgage took place on 6 October. In the course of that conversation Mr Smith claims that he said words to the effect that he was not talking about a joint venture until he had “signed a deal with the doctor”. On 6 October 2005 Mr Smith’s solicitors forwarded to Medi-Aid’s solicitors a draft deed of assignment of mortgage for their consideration.
Mr Bennelli and Mr Smith met on 7 October. Mr Smith’s version of events is as follows. During the meeting Mr Bennelli asked Mr Smith how much he had paid for the mortgage. Mr Smith declined to answer. There was discussion about leases. Mr Bennelli said that he wanted a 50/50 joint venture. Mr Smith’s response, again, was that he would discuss options when he had a signed agreement with Dr Knight. He asked for cash flow figures for the building but Mr Bennelli declined to provide them saying that he would not provide more details until there had been a meeting with solicitors to “structure a deal”.
On 11 October 2005 there were discussions between Mr Smith’s solicitors and the solicitors for Benzlaw with a view to arranging a meeting to discuss a possible joint venture between Benzlaw and Mr Smith or an entity of his. A file note of 11 October 2005 of a solicitor in the employ of Benzlaw’s solicitors recorded Mr Bennelli as saying that “he had not said anything to Smith at this stage” as to the terms of a prospective joint venture and that Mr Bennelli would be guided by his solicitors as to the terms and conditions. On 14 October 2005 the solicitors for Medi-Aid forwarded to the solicitors for 2040 Logan Road Pty Ltd (the second defendant and a corporate vehicle directed by Mr Smith which he selected to acquire Medi-Aid’s interest in the mortgage) a deed of assignment of the mortgage executed by Medi-Aid. The solicitors for Benzlaw wrote to the solicitors for Logan Road on 18 October 2005 stating their instructions that there could not be a meeting about a possible joint venture until there was “full and frank disclosure …of all matters conveyed and discussed with Medi-Aid concerning the property”. That email was in response to a written communication from Logan Road’s solicitors stating that Logan Road had acquired the mortgage pursuant to a transaction which was due to “settle shortly”.
Nevertheless, a meeting between Mr Smith, Mr Bennelli and their respective solicitors took place on 20 October 2005 for the purposes of discussing a joint venture. On 25 October 2005 Benzlaw’s solicitors wrote to the solicitors for Logan Road referring to the “without prejudice discussions” on 20 October and recording Benzlaw’s requirements for the “key features” of the proposed joint venture. The letter concluded by stating that if there was agreement in relation to those matters, the solicitors could commence preparation of a draft joint venture agreement subject to outstanding issues concerning the assignment of the mortgage.
In a letter dated 26 October 2005 from Medi-Aid’s solicitors to Benzlaw’s solicitors it was asserted that the Joint Venture Agreement was at an end. On 7 November 2005 Benzlaw’s solicitors wrote to Logan Road’s solicitors noting that a reply had not been received to their facsimile of 25 October 2005. The letter asserted instructions that the clients of the firms had met and broadly agreed on commercial terms relating to the redevelopment of the site. It attached an explanatory memorandum in relation to a “hybrid family unit trust” which was a suggested “alternative to the partnership of discretionary trusts” referred to in previous correspondence.
On 10 November 2005 Benzlaw’s solicitors forwarded a draft joint venture agreement to the solicitors for Logan Road stating that the document “incorporates the commercial arrangement that our clients have reached relating to their intention to create a Joint Venture Agreement to improve and sell the abovementioned property”. The solicitors for Medi-Aid on 14 November 2005 wrote to the solicitors for Logan Road stating that they had advised their client not to enter into an agreement to sell the property by private treaty to Logan Road. They suggested that “the most logical method of proceeding would be for [Logan Road] to acquire the mortgage and then proceed to foreclose”.
It was part of Benzlaw’s pleaded case that a joint venture agreement between it and Logan Road had been concluded. The point was not pressed in final addresses. The evidence did not disclose the existence of an agreement as to any terms of the proposed joint venture, let alone as to the central or critical terms. I find that there was no concluded agreement for a joint venture between Benzlaw and Logan Road.
Settlement of the transaction under which Logan Road acquired Medi-Aid’s interest in the mortgage occurred on 30 November 2005. Also on that day receivers and managers were appointed to the property by Logan Road. On 2 December 2005 Benzlaw was served with a notice of exercise of power of sale under s 84 of the Property Law Act.
Mr Smith swears that by early November he had decided that he “wanted to sell the property as mortgagee in possession” and that Mr Loel, his co-director, agreed with him. With a view to the sale of the property, the receivers obtained marketing submissions and estimated sale prices from four firms of real estate agents. Based on the price estimates Mr Smith formed the view that the market value of the property was to the order of $15 million. A tender process was engaged in between about 19 January and 1 March 2006. Nevertheless, an agreement for the sale of the property by Logan Road to 148 Brunswick Street Pty Ltd (another of Mr Smith’s and Mr Loel’s companies) for a sale price of $13,100,000 was entered into on 27 January 2006.
The sale price was equal to the market value attributed to the property by Mr Bremner, a valuer, in a valuation report dated 12 January 2006 obtained by prospective lenders to Brunswick Street.
Despite the sale of the property the tender process was not terminated and no notice of the sale was given to tenderers. Mr Smith’s evidence was to the effect that if an offer was made under the tender process which was higher than the price paid by Brunswick Street, Brunswick Street probably would have sold the property to the offeror. I find that Brunswick Street would have been unlikely to have sold the property in the short term unless it stood to make a substantial profit as Mr Smith was reasonably confident that he could increase the market value of the property substantially through the exercise of his skills as a developer and property manager. The prices offered by tenderers ranged from $7.5 million to $14 million. The price of $14 million, offered by Valad Funds Management Limited, included a term that there be an “income guarantee totalling $700,000 to be held at settlement and used at Valad’s discretion.” Mr Smith, correctly in my view, regarded the offer as one for $13,300,000. He was also concerned about the genuineness of Valad as a result of recent experience of dealings with it in relation to another development and considered also that its offer to provide the deposit of 5% by bank guarantee suggested that Valad was not as serious as it could have been.
The next highest offer was $13,500,000 by Trinity Consolidated Group. It required a 45 days due diligence period. After consultation with the marketing agent, Mr Smith was concerned that the defects in the property which due diligence investigations would reveal would result in Trinity’s seeking a reduced purchase price. He was informed by the marketing agent and accepted that Trinity “frequently resorted to litigation and threats of litigation against parties with whom they were negotiating purchases”. I find that having regard to the terms of the Valad and Trinity offers, they were no more favourable than the $13,100,000 which Brunswick Street had agreed to pay.
Solrift Pty Ltd offered $12,750,000 with a deposit of $10,000. It sought a 30 day finance period and offered settlement within 90 days of the contract date. Mr Smith did not regard Solrift as a “serious bidder”. The next highest offer was $12,500,000 by Adnam Pty Ltd. It was seeking a 30 day due diligence period and a settlement date of 1 June 2006. An additional condition was that the contract be subject to the approval of the board of Ariadne Australia Limited.
Benzlaw’s case against Medi-Aid, Logan Road and Brunswick Street
Benzlaw alleges that under the Joint Venture Agreement Medi-Aid owed Benzlaw a fiduciary obligation:
(a) to observe good faith and to keep Benzlaw advised of all matters relevant to the joint venture known to Medi-Aid; and
(b) not to benefit itself at the expense of Benzlaw, in particular, during any dissolution or attempted dissolution of the joint venture.
At a meeting at Brisbane airport between Mr Bennelli and Dr Knight it was agreed that:
(a) Medi-Aid would accept $3,500,000 in settlement of the account between mortgagor and mortgagee;
(b) Medi-Aid would release its mortgage over the property; and
(c) the Joint Venture Agreement would be terminated.
What is said to flow from the alleged agreement did not emerge either from the pleading or from Counsel’s final address.
Logan Road owed a duty of good faith and a duty not to benefit itself at the expense of Benzlaw as “a joint venturer or proposed joint venturer”.
Medi-Aid and Logan Road acted in breach of their respective fiduciary duties in:
(a) negotiating concerning an acquisition by Logan Road from Medi-Aid of the latter’s interest in the second mortgage;
(b) agreeing that Logan Road pay Medi-Aid $3 million for the assignment of the second mortgage, and agreeing that Medi-Aid at Logan Road’s request would appoint a receiver over Benzlaw;
(c) Medi-Aid assigning its interest in the second mortgage to Logan Road and Logan Road accepting such assignment;
Logan Road, in order to obtain the property for itself and to dispossess Benzlaw:
(a) obtained a valuation of the property of $13.1 million on a forced sale basis without informing the valuer of the prospect of further tenancies which would have significantly increased the valuation;
(b) sold the property in a private sale to Brunswick Street at a valuation of $13.1 million; and
(c) sold to Brunswick Street on terms under which Logan Road lent to Brunswick Street the balance of the purchase price on an unsecured basis after payment out of the monies owing under the second mortgage.
The sale by Logan Road to Brunswick Street constituted a fraud on the mortgagee’s power as it was not for the purpose of s 84 of the Property Law Act. Logan Road breached its obligations to Benzlaw by failing to properly exercise its power of sale as mortgagee.
Brunswick Street was party to and had knowledge of the conduct alleged against Logan Road, the conduct of which was “contrary to ordinary conceptions of honesty and fair dealing between joint venturers and amounted to fraud for the purposes of s 184 of the Land Title Act 1994”.
Logan Road obtained a benefit from its breaches of fiduciary duty “to the extent if any that [Logan Road] purchased the debt owing by [Benzlaw] to [Medi-Aid] at a discount” and the exercise of its purported rights as mortgagee without being bound by the terms of the Joint Venture Agreement”. Brunswick Street knowingly assisted Logan Road in respect of the alleged breaches of fiduciary duties and is equally liable.
The conduct of each of Medi-Aid, Brunswick Street and Logan Road is “unconscionable”, “misleading and deceptive” within the meaning of the Trade Practices Act 1974.
Logan Road and Brunswick Street are liable for knowingly assisting Mr McKenzie in breaches of his fiduciary duties to Benzlaw.
Credibility
I did not form the view that either Mr Bennelli or Mr Smith had particularly reliable recollections of the events in question. I concluded that much of Mr Bennelli’s professed recollections resulted from unintentional reconstruction and that, generally, his evidence was likely to be less accurate than that of Mr Smith. I considered also that neither Mr Smith nor Mr Bennelli was capable of giving a completely objective account of events. I concluded that Mr McKenzie’s evidence was generally reliable and that, subject to express observations about Dr Knight’s evidence in these reasons, Dr Knight gave his evidence carefully, considered matters objectively and made concessions where concessions were due.
The Joint Venture Agreement
The Joint Venture Agreement recites that Benzlaw had mortgaged the property to Medi-Aid, that Benzlaw was in default under the mortgage and had received a valid notice pursuant to s 84 of the Property Law Act 1974. Recitals D, E and F provide:
“D.Medi-Aid and Benzlaw have agreed to enter into this Agreement to permit Benzlaw to more effectively develop and/or sell the Property and to repay all monies owing under the Mortgage (“the monies due”) to Medi-Aid.
E.Medi-Aid and Benzlaw have agreed to form a Joint Venture for the performance of the Building Works.
F.Medi-Aid and Benzlaw desire to enter into a Joint Venture Agreement in order to fix and define between themselves their respective interests and liabilities in connection with the Joint Venture.”
The scope of the joint venture is defined in clause 2 of the Joint Venture Agreement as follows:
“2.(1)Medi-Aid and Benzlaw hereby associate themselves as Joint Venturers upon the terms and conditions herein for the purpose of carrying out the Building Works and the Development Project, with a view to profit.
(2)The Joint Venture shall be deemed to have commenced on the date hereof and shall continue until the completion of the Building Works and the Development Project and the
distribution of the Net Profits (if any) to the Parties and shall be a venture restricted to the carrying on and carrying out of these matters and nothing in this Agreement or otherwise
shall be construed as constituting a Party a partner or agent or representative of another Party hereto or to create any trust or partnership between or amongst the Parties.”
“Building works” and “the Development Project” are defined terms. The “Building Works” are defined as “the Works to be performed under the Building Contract”. The “Building Contract” is a Building Contract to be entered into between Benzlaw and a named contractor.
Clause 3 of the Joint Venture Agreement provides that upon sale of the property the Net Profit as defined is to be divided equally between Medi-Aid and Benzlaw. Until sale of the property Medi-Aid is to receive 25% of the Gross Income from the Property for a maximum of five years from the Date of Completion of the Building Works. The sale of the property was to occur within five years from the date of completion of the Building Works.[1]
[1]Joint Venture Agreement, Clause 3.
“Net Profits” is defined as the excess of joint venture income over “the total costs of the Joint Venture”.
“Costs of the Joint Venture” means:
“all costs paid or payable and all costs and charges incurred by the Joint Venturers for the purposes of or in connection with the Joint Venture and including but without limitation the following:
(i)all reasonable legal costs (on a solicitor and own client basis), stamp duty and other proper disbursements incurred by Medi-Aid relating to, inter alia, preparation and execution of this Agreement, carrying out the Joint Venture, any matter relating to the Joint Venture in any other manner, the Mortgage, Benzlaw's default under the Mortgage and the provision of any further finance facility, bank guarantee or otherwise in connection with the Building Works or the Development Project including all bank interest, charges or fees payable by Medi-Aid (but expressly excluding any such costs, charges, interest or other expenses incurred by Benzlaw;
(ii)Any charges, tax or other fees payable to any Governmental or statutory authority in connection with the Development Project;
…
(v)All monies due to Medi-Aid by Benzlaw under the Mortgage together with any monies advanced, finance facilities arranged, bank guarantees or other securities provided or monies or monies worth in any other manner owed by Medi-Aid or for which Medi-Aid is or may become liable relating to the Joint Venture.”
Clause 3(1) provides:
“3.(1)The Net Profit (if any) arising from the Joint Venture shall be divided as follows:-
(a)After payment to the Builder under the Building Contract the Net Profit shall be ascertained and for that purpose the costs of the Joint Venture shall expressly not include any costs, charges, interest or other expenses incurred by Benzlaw unless expressly authorised in writing by Medi-Aid;
(b)If the Property is sold (as hereinafter provided) the Net Profit shall be divided equally between Medi-Aid and Benzlaw.
(c)Until the sale of the Property, Medi-Aid shall receive twenty-five per cent (25%) of the Gross Income from the Property to a maximum of five (5) years from the Date of Completion of the Building Works as defined in the Building Contract PROVIDED THAT:
(i)such payment shall not be a deduction from the share of the Net Profit to be paid to Medi-Aid; and
(ii)such payment shall terminate upon payment by Benzlaw or a financier of all of the monies due under the Mortgage;
(d)Sale of the property must occur within five (5) years from the date of completion of the Building Works as defined in the Building Contract unless Medi-Aid agrees otherwise in writing;
…”
Clause 5(5) provides:
“(5)Medi-Aid shall defer recovery proceedings against Benzlaw under the Mortgage provided Medi-Aid is at all times satisfied that Benzlaw is proceeding with its obligations under this Agreement expeditiously.”
Clause 6(8) provides:
“If Benzlaw is in default under any of the provisions of this Agreement or is at any time in default under the terms of the finance facility referred to in clause 5(6) and (7) above, Medi-Aid shall be entitled to forthwith require Benzlaw to sell the Property by such means and upon such terms and conditions and for a price reasonably stipulated by Medi-Aid.”
Clause 8 provides:
“Neither Party shall lease, sell, assign or in any other way transfer, mortgage, deal with or in any way encumber its interest in the Joint Venture or any part thereof without first obtaining the written consent of the other Party, which consent shall not be unreasonably withheld in the case of a mortgage, charge or encumbrance where the same is created for the purposes of this Agreement or any obligation hereunder.”
Construction of the Joint Venture Agreement
Benzlaw contends that the consequence of including “all moneys due to Medi-Aid by Benzlaw under the Mortgage…” in the definition of “Costs of the Joint Venture” was to “crystallise the amounts then owing under the mortgage” so that interest under the mortgage no longer accrued. In aid of its argument Benzlaw points to Recital D in which “all monies owing under the mortgage” are defined as “the monies due”. It is also pointed out that the instrument distinguishes between present and future liabilities in other places.[2]
[2]Clause 1.1(vi).
Recitals D and E of the Joint Venture Agreement explain the purpose of the parties in entering into the agreement. Recital E is only partly accurate as clause 2(1) provides that the parties “associate themselves … for the purpose of carrying out the Building Works and the Development Project, with a view to profit”. The “Net Profit” as defined is to be divided equally between the parties in the event that the property is sold. “Net Profits” means the excess of Joint Venture income over “the total costs of the Joint Venture”. The definition of “Costs of the Joint Venture” is set out above. The critical sub-paragraph of the definition is (v) which commences “All monies due to Medi-Aid by Benzlaw under the Mortgage…”
I accept that the words “monies …owed by Medi-Aid or for which Medi-Aid is or may become liable…” in sub-paragraph (v) provide support for the view that the words “monies due” refer to monies presently due. Any such indication, however, is slight. The definition’s introductory words include “all costs and charges incurred”. Those words are intended, quite plainly, to include future costs and charges. Elsewhere in the definition reference to charges costs or outgoings include reference to future charges costs and outgoings by necessary implication.
What other indications are there that “monies due” refers only to monies owing at the date of the Joint Venture Agreement? And, if this is so, why would it follow that Benzlaw is released from its obligation to pay interest which accrues after that date? One such possible indication lies in Medi-Aid’s right under sub-clauses 3(1)(b) and (c) to a half share of profits on sale and 25% of the Gross Income “from the Property”. On the face of things, it may seem unreasonable that Medi-Aid retain its right to interest and also share in profits and income.
Clause 5(2) provides that the value of the bank guarantee to be provided by Medi-Aid is to be added to the “Principal Sum under the Mortgage and shall form part of the monies due [under the mortgage]”. The provision acknowledges, implicitly, that the mortgage debt remains and may be increased. In contrast with this treatment, there is no deemed amendment to the mortgage to the effect that interest ceases to accrue.
Clause 5(5) is also consistent with the retention by Medi-Aid of its rights under the mortgage subject only to the qualification that recovery proceedings must be deferred whilst Medi-Aid is satisfied that Benzlaw is “proceeding with its obligations … expeditiously”. It is significant that sub-clause (5) does not limit the amount recoverable to the monies due and owing at the commencement of the joint venture. And it would be an unorthodox and somewhat surprising drafting technique to limit a mortgagee’s rights under the mortgage in respect of interest merely by providing in a joint venture agreement between mortgagee and mortgagor that only monies due under the mortgage at the date of the Joint Venture Agreement could form part of the costs of the joint venture. Without some compelling indication to the contrary such a provision would relate only to rights and obligations under the Joint Venture Agreement.
As there is nothing in the Joint Venture Agreement which expressly or by necessary implication prevents the mortgage from operating in accordance with its terms, Benzlaw can succeed only if it is possible for a term to be implied which prevents interest from continuing to run under the mortgage. Such a term would not meet the test for an implied term propounded in Codelfa.[3] It is not something which “goes without saying” or which is “necessary to give business efficacy to the contract”.[4]
[3]Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337.
[4]Ibid, at 347.
Medi-Aid seeks to advance its argument by reference to a deed of variation of mortgage executed by the parties on 22 December 2003 in which it is acknowledged that Benzlaw was in default under the mortgage and that the amount outstanding on 17 December 2003 was $12,459,749. The acknowledgement operates as an admission as to the mortgage debt and as to the existence of a default. Also the deed could have been relied on as grounding an estoppel by deed. Subsequent conduct cannot be relied on however as an aid to contractual construction.
Benzlaw contends also that it was a breach of Medi-Aid’s fiduciary duties for it to negotiate with Logan Road for the sale of its interest in the mortgage and for it to assign that interest. Contrary to Benzlaw’s contentions, clause 8 of the Joint Venture Agreement does not expressly restrict the right of Medi-Aid to deal with its interest under the mortgage: its interest in the mortgage is not its interest in the joint venture. Whether there is an implied term which prevents Medi-Aid from assigning its interest in the mortgage is not so clear. The fact that the Joint Venture Agreement contains restrictions on assignment[5] which do not relate to the mortgage makes the implication of a term more difficult. But unless such a term is implied Medi-Aid would be free to frustrate the Joint Venture Agreement by assigning its interest under the mortgage.
[5]Clauses 8 and 14.
If however a term is to be implied against the assignment of Medi-Aid’s interest in the mortgage it cannot be in absolute terms. As in the event of default by Benzlaw, Medi-Aid can require the property to be sold under clause 6(8) and, under clause 5(5) Medi-Aid can exercise its rights under the mortgage, it would not appear to “go without saying” or to be necessary to give business efficacy to the Joint Venture Agreement that it could never assign its interest under the mortgage whilst it remained on foot. Consequently, if a term is to be implied along the lines of that alleged it would be to the effect that Medi-Aid could not assign its interest in the mortgage unless it was entitled to bring recovery proceedings against Benzlaw or to exercise rights under clause 6(8). The evidence establishes that Benzlaw was in breach of its obligations under the Joint Venture Agreement and under the mortgage throughout 2005. For example, it failed to comply with clause 3(1)(c), 5(4), 6(1), 7(2) of the Joint Venture Agreement and had failed to pay interest due under the mortgage.
For the above reasons, I find that any term which could be implied does not assist Benzlaw as it would not have prohibited Medi-Aid from assigning its interest in the mortgage at the time it did so. For generally the same reasons, Medi-Aid’s conduct in and about the assignment of its interest in the mortgage did not breach its fiduciary duties to Benzlaw.
The 7 June Agreement
Dr Knight’s evidence concerning the 30 June payment requirement was shaken in cross-examination. He also appeared to be asserting that under the alleged oral agreement, payment of $3,500,000 would not extinguish Benzlaw’s obligation to pay arrears of interest.
In cross-examination Dr Knight, referring to that part of his diary note of the meeting of 7 June which dealt with payment of the sum of $3,500,000, said “these were my own notes for myself”. He added, “I think they were probably discussed with Mr Bennelli too…whether they are my thoughts or whether he used them … I don’t know…”. It was put to Dr Knight that Mr Bennelli said that “he couldn’t promise to give you money by the 30th June”. His response was “He always said he’d do his best and Luke McKenzie acted very quickly, giving me the impression that it could happen”. In response to it being put to him again that Mr Bennelli did not agree that he would pay the money by 30 June, Dr Knight said “He assured me that he would – he led me to believe that he possibly would”.
Mr Bennelli’s recollection was that the agreement was that Medi-Aid would accept $3,500,000 is discharge of the mortgage, the Joint Venture Agreement would be terminated but that no time for the payment of the monies had been agreed. In other words, Dr Knight agreed to accept considerably less than the amount due in return for an offer by Mr Bennelli to use his best endeavours to perform following years of failing to perform. That may be considered unlikely.
Dr Knight’s contemporaneous diary note offers strong support for Medi-Aid’s case provided that it is not merely a record of his “thoughts” as Dr Knight speculated in cross-examination. There is nothing about the note which suggests that Dr Knight was not attempting to set out the substance of what passed between Mr Bennelli and him in the course of the meeting. Dr Knight’s diary note receives support from Mr Peter Knight’s evidence. Peter Knight had the benefit of being able to refresh his memory from a contemporaneous diary note which includes: “must be wrapped by 30/6/05 … if not by 30.6.05 we will have no choice”.
Mr Bennelli accepted, in cross-examination, that Dr Knight had stressed a number of times during the meeting that Medi-Aid needed the money before 30 June 2005. He claims to have said that he would do everything he could “to see if I can get it done by June the 30th”. His solicitor, Mr Barnes, swore that Mr Bennelli spoke to him on 7 June 2005 and advised him that “…he had agreed with Dr Knight to discharge the obligations between Benzlaw and Medi-Aid for $3.5M, which would discharge all obligations under both the mortgage and the joint venture, and that Benzlaw had until 30 June 2005 to discharge those obligations”. The effect of Mr McKenzie’s evidence is that Mr Bennelli told him that there was a 30 June 2005 deadline for payment of the agreed sum of $3,500,000. He also agreed that Mr Bennelli was endeavouring to get a valuation as early as possible and displayed “a degree of anxiety” as 30 June 2005 approached. The purpose of the valuation was to assist in financing the payment of the $3,500,000. I regard Mr Barnes’ evidence, which is against the interests of his client, as of considerable evidentiary force.
It was not until 20 July 2005 that Benzlaw’s solicitors raised with Medi-Aid’s solicitors the alleged agreement of 7 June. Their facsimile of that date asserted, wrongly, that Medi-Aid had refused payment of $3,500,000 offered by Benzlaw. On 20 July 2005 Medi-Aid’s solicitors wrote:
“Our client has not resiled from the agreement, as outlined in your facsimile.
Our client has not refused to take payment of the settlement sum. Payment has not yet been tendered.
Please advise when settlement will take place.”
The agreement asserted in Benzlaw’s solicitors’ letter of 20 July 2005 was that Benzlaw would pay to Medi-Aid $3,500,000 in return for which Medi-Aid would:
“1. Release the mortgage …; and
2.Terminate the Joint Venture Agreement …”
There was no mention of the 30 June 2005 time limit. Medi-Aid’s solicitors must therefore have been unaware of their client’s version of the terms of the agreement or, if aware, they must have carelessly overlooked the desirability of correcting the terms alleged by Benzlaw’s solicitors.
Benzlaw’s solicitors prepared a five page deed of release which, amongst other things, contained the terms of the agreement alleged by Benzlaw and forwarded it to Medi-Aid’s solicitors on 25 July 2005. Medi-Aid’s solicitors sought a number of amendments to the draft in a facsimile of 2 August 2005 and requested confirmation of “when settlement is to take place”. Negotiations then took place between the solicitors as to the wording of the document. On 11 August 2005 Medi-Aid’s solicitors wrote to Benzlaw’s solicitors stating that unless settlement occurred by 4pm on 19 August “all negotiations and offers” by Medi-Aid would be withdrawn and that Medi-Aid would proceed against Benzlaw in relation to its default under the mortgage. On 2 September 2005 Benzlaw’s solicitors wrote to Medi-Aid’s solicitors advising:
“Subsequent to the withdrawal of the notice of exercise of power of sale an agreement was reached between our clients, subject to Benzlaw being able to raise sufficient funds from a lender on the security of the property, to pay your client $3.5 million to:
(a) discharge the second mortgage; and
(b) buy out his interest in the Joint Venture.”
It may be seen that the letter introduces the further term or qualification that ‘Benzlaw be able to raise sufficient funds’.
The letter went on to advise that Benzlaw could not raise more than $2,100,000 on the security of the property and sought Medi-Aid’s acceptance of that sum in discharge of the mortgage. The response of Medi-Aid’s solicitors was a facsimile of 8 September accompanying a copy of a notice of exercise of power of sale served on Benzlaw that day. The communication also alleged that Benzlaw had failed to fulfil its obligations under the Joint Venture Agreement and that the agreement had ceased to exist. The letter concluded with the observation that Medi-Aid intended to list the property for sale.
On 23 September 2005 Medi-Aid’s solicitors sent a facsimile to Benzlaw’s solicitors stating their client’s requirement that the mortgage debt be repaid “forthwith”. Medi-Aid’s solicitors wrote to Benzlaw’s solicitors on 3 October 2005 withdrawing the notice of exercise of power of sale dated 8 September 2005 whilst reserving their client’s right in respect of monies owed.
I find that by 8 September 2005, at the latest, the 7 June Agreement was at an end. Benzlaw had manifested an intention not to be bound by it and Medi-Aid had accepted Benzlaw’s wrongful repudiation.
The existence of a fiduciary relationship between Benzlaw and Mr Smith
Counsel for Benzlaw relied on the following passage from the reasons for judgment of Mason, Brennan and Deane JJ in United Dominions Corporation Ltd v Brian Pty Ltd in support of the existence of a fiduciary relationship between Benzlaw and Mr Smith:[6]
“A fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangement between them. In particular, a fiduciary relationship with attendant fiduciary obligations may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled. Indeed, in such circumstances, the mutual confidence and trust which underlie most consensual fiduciary relationships are likely to be more readily apparent than in the case where mutual rights and obligations have been expressly defined in some formal agreement. Likewise, the relationship between prospective partners or participants in a proposed partnership to carry out a single joint undertaking or endeavour will ordinarily be fiduciary if the prospective partners have reached an informal arrangement to assume such a relationship and have proceeded to take steps involved in its establishment or implementation.”
[6](1985) 157 CLR 1 at 12.
For present purposes, it is unnecessary to distinguish between Mr Smith, Logan Road and Brunswick Street. Mr Smith was the guiding mind of those companies.
Whilst the above passage shows that a fiduciary relationship can exist between parties negotiating with a view to entering into a joint venture agreement, critical elements of the indicia relied on in it to establish the existence of a fiduciary relationship have no counterpart in the facts under consideration. The indicia to which I refer are the taking of steps towards the establishment or implementation of the venture, the embarking upon the conduct of the venture and the existence of mutual confidence and trust.
Reference was also made by counsel for Benzlaw to Smith v FAI Leasing Finance Pty Ltd[7] in which, borrowing from the reasons of Mason J in Hospital Products,[8] Dutney J said:
“The relationship between the parties must give the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.”
[7][2002] QSC 270 at [36].
[8](1984) 156 CLR 41 at 96-97.
This is not a case involving the exercise of a power or discretion.
In Hospital Products, Wilson and Dawson JJ warned against the undesirability of over readily importing fiduciary obligations into arms length commercial relationships.[9] Dawson J said in that regard:[10]
“The remarks of Bramwell L.J. in New Zealand and Australian Land Co v Watson (1881) 7 QBD 374, at p 382, have, I think, special application:
‘Now I do not desire to find fault with the various intricacies and doctrines connected with trusts, but I should be very sorry to see them introduced into commercial transactions, and an agent in a commercial case turned into a trustee with all the troubles that attend that relation.’”
[9]See the reasons of Wilson J at pp 118, 119 and the reasons of Dawson J at pp 149, 150.
[10]At 149-150.
Gibbs CJ, after discussing circumstances which had been held to give rise to fiduciary obligations expressed somewhat similar reservations:[11]
“On the other hand, the fact that the arrangement between the parties was of a purely commercial kind and that they had dealt at arm's length and on an equal footing has consistently been regarded by this Court as important, if not decisive, in indicating that no fiduciary duty arose: see Jones v. Bouffier; Dowsett v. Reid; Para Wirra Gold & Bismuth Mining Syndicate No Liability v. Mather; Keith Henry & Co. Pty. Ltd. v. Stuart Walker & Co. Pty. Ltd. A similar view was taken in Canada in Jirna Ltd. v. Mister Donut of Canada Ltd.” (citations omitted)
[11]At 70.
In determining whether a fiduciary relationship has arisen out of unconcluded negotiations, an obviously important consideration is whether a fiduciary relationship would have resulted from a concluded agreement. In the passage from the joint reasons in United Dominions Corporation Ltd v Brian Pty Ltd relied on by Benzlaw it will be seen that the underlying assumption was that an agreement, if concluded, would result in a fiduciary relationship. Where the negotiations are commercial in nature, at arms length and if concluded will not result in an agreement under which the parties assume fiduciary obligations, the position is necessarily different. In such a case, if any fiduciary relationship is to exist, it must be as a consequence of the negotiations themselves.
There is nothing in the evidence which suggests that the agreement Messrs Bennelli and Smith had in mind was one which would give rise to fiduciary obligations. Indeed, Mr Bennelli had not considered the terms and conditions of any agreement with Mr Smith by 11 October 2005. Mr Smith was in the same position. It was not until 25 October 2005 that Benzlaw’s solicitors stated, on behalf of Benzlaw, its “key features” for the proposed joint venture. The draft Joint Venture Agreement submitted by Benzlaw’s solicitors to Mr Smith’s solicitors on 10 November 2005 did provide that a fiduciary relationship would be established by the agreement. But the evidence does not establish that Mr Smith would have accepted such a provision and it is likely that he gave no consideration at all to any of the draft’s contents.
If a fiduciary obligation then is to be imposed on either Logan Road or Brunswick Street through Mr Smith, it is necessary to identify those matters, in addition to the mere entering into of negotiations with a view to a joint venture, which caused the fiduciary relationship to arise. As appears from the following discussion, the most obvious factors suggestive of a fiduciary relationship are: the existence of mutual trust and confidence; reliance by one party on the other or reliance by the parties on each other and the obligation of one party to act in the interests of the other in the exercise of a power or discretion.
In Hospital Products, Gibbs CJ observed:[12]
“In the decided cases, various circumstances have been relied on as indicating the presence of a fiduciary relationship. One such circumstance is the existence of a relation of confidence, which may be abused: Tate v. Williamson (1866) LR 2 Ch App 55, at p 61, Coleman v. Myers, [1977] 2 N.Z.L.R., at p. 325.”
[12]At 69.
Dawson J placed emphasis on the role of reliance in establishing a fiduciary relationship. He said:[13]
“In ordinary business affairs persons who have dealings with one another frequently have confidence in each other and sometimes that confidence is misplaced. That does not make the relationship a fiduciary one. See Lloyds Bank v. Bundy [1975] 1 Q.B., at p. 341. A fiduciary relationship exists where one party is in a position of reliance upon the other because of the nature of the relationship and not because of a wrong assessment of character or reliability. That is to say, the relationship must be of a kind which of its nature requires one party to place reliance upon the other; it is not sufficient that he in fact does so in the particular circumstances.”
[13]Hospital Products at 147.
Dawson J had earlier stated the following broad proposition:[14]
“There is, however, the notion underlying all the cases of fiduciary obligation that inherent in the nature of the relationship itself is a position of disadvantage or vulnerability on the part of one of the parties which causes him to place reliance upon the other and requires the protection of equity acting upon the conscience of that other. See Tate v. Williamson (1866) 2 Ch App 55, at pp 60-61.”
[14]At 142.
Mason J, after observing that: “The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence …” explained:[15]
“The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions ‘for’, ‘on behalf of’’ and ‘in the interests of’ signify that the fiduciary acts in a ‘representative’ character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal.
It is partly because the fiduciary's exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed. See generally: Weinrib, ‘The Fiduciary Obligation’ (1975) 25 University of Toronto Law Journal 1, at pp.4-8. “
The above passage was referred to with implicit approval by McHugh, Gummow, Hayne and Callinan JJ in Pilmer v Duke Group Ltd (in liq).[16]
[15]At 96-97.
[16](2001) 207 CLR 165 at 196.
There is nothing about the relationship between Messrs Bennelli and Smith which suggests that either reposed confidence in the other, that either had undertaken to act in the interest of the other in the exercise of a power or discretion or otherwise, or that one relied on the other in any relevant sense. Mr Smith had not received favourable reports of Mr Bennelli’s abilities or judgment before first meeting with him. The evidence does not disclose what Mr McKenzie may have told Mr Bennelli about Mr Smith but Mr Smith was a stranger to Mr Bennelli. It may be assumed that Mr Bennelli was told by Mr McKenzie that Mr Smith was a successful property developer with access to sufficient funds to bring about the removal of any interest of Medi-Aid in the property. Each of Mr Smith and Mr Bennelli would have commenced discussions believing, had he turned his mind to the matter, that he would look to his own interests in any prospective negotiations and that the other person would do the same.
As Mason J pointed out in Hospital Products[17] “entitlement to act in one's own interests is not an answer to the existence of a fiduciary relationship, if there be an obligation to act in the interests of another”. But there is no basis for concluding that Mr Smith was obliged to act in Mr Bennelli’s interests.
[17]At 99.
It is desirable at this junction to return to Benzlaw’s pleaded case. It alleges that as a joint venturer or proposed joint venturer Logan Road owed Benzlaw a fiduciary obligation to observe good faith towards Benzlaw and not to benefit itself at the expense of Benzlaw.[18] For the reasons discussed above the mere status of Logan Road as a proposed joint venturer could not give rise to a fiduciary relationship.
[18]Paragraph 16.
Benzlaw’s case is not based on an obligation of confidentiality attaching to information imparted in the course of negotiations. If Benzlaw had based its case on the misuse of confidential information, as it appeared to be doing at some stages in the course of counsel’s submissions, it would have been necessary to identify the information relied on and establish that it had “the necessary quality of confidence about it”.[19] The details of tenancies and much information about the property and improvements are normally available to a mortgagee and much of it can be obtained by search of the Land Titles Register. Matters relating to tenancy vacancies and the performance of tenants may be capable of being considered as being of a confidential nature. However, it is also information of a kind commonly imparted, without any obligation of confidence being imposed, to prospective purchasers and financiers. In disclosing such information to Mr Smith, Benzlaw was in a generally similar position to the one it would have been in had it disclosed the information to some other prospective financier or purchaser. If it wanted any information disclosed kept confidential and not used except for specific purposes, it was open to impose such a condition before the information was imparted.
[19]Coco v A N Clark (Engineers) Ltd [1969] RPC 41; (1968) 1A IPR 587 at 590.
A fiduciary relationship does not arise between two persons merely because information of a confidential nature has been disclosed by one to the other. As Dawson J observed in Hospital Products:[20]
“Where a relationship is such that by appropriate contractual provisions or other legal means the parties could adequately have protected themselves but have failed to do so, there is no basis without more for the imposition of fiduciary obligations in order to overcome the shortcomings in the arrangement between them.”
[20]At 147.
In a somewhat similar vein, Gibbs CJ said in that case:[21]
“However, an actual relation of confidence - the fact that one person subjectively trusted another - is neither necessary for nor conclusive of the existence of a fiduciary relationship… an ordinary transaction for sale and purchase does not give rise to a fiduciary relationship simply because the purchaser trusted the vendor and the latter defrauded him.”
[21]At 69.
An example of an unsuccessful attempt to impose an obligation of confidence in respect of information disclosed without an undertaking to maintain confidentiality is provided by Fractionated Cane Technology Ltd v Ruiz-Avila.[22] In that case the plaintiff unsuccessfully sought to impose the obligation of confidence after the relevant information had been imparted.
[22][1988] 1 Qd R 51.
For the above reasons, I conclude that Logan Road owed no fiduciary duties to Benzlaw as a result of the joint venture negotiations.
The pleaded case against Logan Road and Brunswick Street based on the “rule in Barnes v Addy”
In about September 2005 Mr Bennelli had “various meetings” with Mr McKenzie with a view to borrowing moneys from a financier or to entering into a joint venture with a developer to allow Benzlaw to terminate the joint venture and obtain a discharge of the mortgage.[23]
[23]Statement of Claim, paragraph 11.
Mr McKenzie informed Mr Bennelli that he would introduce Mr Smith for the purposes of entering into such a joint venture. Mr McKenzie had discussions with Mr Smith in which he and Mr Smith discussed a meeting with Mr Bennelli to canvass the opportunity of entering into “a transaction with Benzlaw in relation to the property”.[24] In such discussions, Mr McKenzie acted as agent for Benzlaw and did not intend that Mr Smith enter into a transaction “in relation to the property without the consent of or contrary to the interest of Benzlaw”.[25] Because of the foregoing, Mr McKenzie owed Benzlaw a duty of good faith, not to act to Benzlaw’s detriment and to use information received from Benzlaw solely for Benzlaw’s benefit.[26]
[24]Statement of Claim, paragraph 12A.
[25]Statement of Claim, paragraph 12B.
[26]Statement of Claim, paragraph 12C.
Whether in order to come within s 51AA the unconscionable conduct must be such as to support the grant of relief on the principles underlying specific equitable doctrines,[61] or whether the section may extend beyond such doctrines to include developments in common law principles[62] was left open by Gummow and Hayne JJ in Berbatis.[63] It is plain from the reasons of the majority in Berbatis however that in order to rely on s 51AA a plaintiff must establish more than inequality of bargaining power and legal or economic disadvantage flowing from a weak contractual position such as the impending expiration of a lease or the inability to remedy breach under a mortgage.
[61]Australian Competition and Consumer Commission v Samton Holdings Pty Ltd [2002] 117 FCR 301
[62]Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51 at 74.
[63]At 74.
If the conduct alleged against Medi-Aid was not in breach of contract or in breach of any fiduciary duty owed by it to Benzlaw there was nothing unconscionable about it. It was merely exercising its rights as the holder of the mortgage.
The unpleaded case against Logan Road is relevantly unparticularised and, consequently, cannot be identified with any degree of precision. It was not explained in addresses how the conduct described above came together to produce conduct in respect of which a court would grant equitable relief. Some persons may consider aspects of the conduct complained of harsh or even unscrupulous but it is not conduct which placed Benzlaw in a position of “special disadvantage”.
The reference to the conspiracy to starve Benzlaw of funds is a reference to the appointment of a receiver. It is probable that an object of the appointment was to deprive Benzlaw of funds and thus make it more difficult for Benzlaw to resist actions Mr Smith may wish to take with respect to the property. It must be recalled though that Logan Road acquired Medi-Aid’s interest in the mortgage. Benzlaw was in default and there was no reasonable expectation that default would be remedied. In those circumstances the appointment of a receiver to get in the income of the property and take over its management was an obvious commercial course for Mr Smith to follow.
Even if Mr Smith hid from Mr Bennelli his intention to acquire the mortgage, that would not seem to be productive of any consequences. It is not suggested that had Mr Smith been more open about his intentions that Mr Bennelli could have done anything to thwart them. There is no evidence that Mr Smith, in any relevant way, held out to Mr Bennelli that Mr Smith was acting for the benefit of both of them or that Mr Bennelli did or failed to do anything in response to any such holding out. In case it is relevant to this claim, I find that in the early discussions between Mr Smith and Mr Bennelli, Mr Smith did make it known to Mr Bennelli that he was interested in acquiring Medi-Aid’s interests in the mortgage and that he was taking steps towards achieving that objective. The confidential information point has been dismissed earlier. For these reasons, the claim based on unconscionable conduct fails.
Section 52 of the Trade Practices Act 1974
The conduct relied on to support the allegations of breach of s 51AA is relied on in the alternative to constitute a breach of s 52 of the Trade Practices Act by each of the defendants.
Conduct, in order to be “misleading or deceptive” for the purposes of s 52 must induce or be capable of inducing error.[64] If misleading or deceptive conduct is established, no damages are recoverable unless the plaintiff shows that the wrongful conduct was causative of loss. Section 82(1) of the Act operates where a person has suffered “loss or damage by conduct of another person”.
[64]Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 198 and the authorities collected in Miller’s “Annotated Trade Practices Act” 28th ed, para 1.52.25.
Benzlaw has identified no conduct on the part of Medi-Aid which can be said to be misleading or deceptive. Nor can it be said that any loss or damage claimed to have been suffered by Benzlaw was by any conduct of Medi-Aid in breach of s 52.
I find that at the time Mr Smith met Mr McKenzie at the property on 7 September he had an open mind as to how he would go about profiting from an investment in the property even though he then contemplated that he might acquire Medi-Aid’s interest in the mortgage. By the end of September he set about taking steps to that end but that is not necessarily inconsistent with his maintaining some interest in reaching agreement with Benzlaw. I am unable to find that Mr Smith had no intention of entering into a joint venture agreement with Mr Bennelli until on or about 20 October 2005. It is thus probable that for a short period in late October 2005 Mr Smith allowed Mr Bennelli to entertain the erroneous belief that Mr Smith continued to be interested in entering into a joint venture. It is not alleged however that Mr Bennelli did or refrained from doing anything in reliance on Mr Bennelli’s erroneous belief. Again, if there was any Benzlaw misleading or deceptive conduct on Mr Smith’s part it has not been shown that suffered any loss or damage by it.
Logan Road’s claims and counterclaims
Logan Road’s claims against Benzlaw in excess of $12 million in accordance with the calculations of a chartered accountant, Mr Knight, there was no challenge to Mr Knight’s calculations and, on the face of things, Logan Road is entitled to judgment for a sum established by those calculations updated to today’s date. There is also a claim by Logan Road against Medi-Aid for breach of a warranty contained in clause 7 of a deed of assignment dated 17 October 2005 entered into between Medi-Aid and Logan Road. Having regard to the above findings I apprehend that the claim against Medi-Aid will not be pursued. If there was a breach of warranty it is difficult to see that the breach was productive of any loss having regard to the value of the property and Benzlaw’s lack of assets.
Medi-Aid’s counterclaim against Benzlaw
Medi-Aid claims “an account of the … joint venture agreement” and payment of any amount shown by such account to be due to [Medi-Aid].
Nothing was said in final addresses about the counterclaim and I assume it was made as a precaution against a successful claim against Medi-Aid by Benzlaw. I can see no practical point in the counterclaim and unless persuaded otherwise by further submissions, I propose to make no order in respect of it.
Conclusion
None of Benzlaw’s claims against Medi-Aid succeeded.
Benzlaw failed to establish that a joint venture agreement had been entered into between it and Logan Road or that a fiduciary relationship arose in the course of negotiations for a joint venture.
Benzlaw also failed to establish any liability on Logan Road’s part under the rule in Barnes v Addy. Nor was it successful in its Trade Practices Act claims.
Logan Road in exercising its power of sale did not act bona fide for the purpose for which the power was conferred and it is appropriate that the sale to Brunswick Street be set aside.
I will hear submissions as to the appropriate form of order and costs.
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