Brady Queen Pty Ltd v Austhome Developments Pty Ltd
[2021] VSC 18
•29 January 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2017 00204
IN THE MATTER OF 280 QUEEN PTY LTD (ACN 600 087 741)
(IN ITS OWN CAPACITY AND AS TRUSTEE OF THE 280 UNIT TRUST)
| BRADY QUEEN PTY LTD (ACN 600 268 817) (IN ITS OWN CAPACITY AND AS TRUSTEE OF THE BRADY QUEEN UNIT TRUST) & ORS | Plaintiffs |
| v | |
| AUSTHOME DEVELOPMENTS PTY LTD (ACN 140 051 387) (IN ITS OWN CAPACITY AND AS TRUSTEE OF THE WU FAMILY TRUST) & ORS | Defendants |
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JUDGE: | Sifris JA |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 17 August – 26 August, 30 September 2020 |
DATE OF JUDGMENT: | 29 January 2021 |
CASE MAY BE CITED AS: | Brady Queen Pty Ltd & Ors v Austhome Developments Pty Ltd & Ors |
MEDIUM NEUTRAL CITATION: | [2021] VSC 18 |
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CONTRACT – Joint Venture Heads of Agreement – Each joint venture party alleges breach of numerous obligations by the other – Some breaches found – Breaches did not cause any loss – Each party’s claim dismissed.
EQUITY – Fiduciary Duty – Joint venture party alleges that other joint venture party in breach of fiduciary duty by undertaking competing project.
EQUITY – Existence of fiduciary duty – Extent and scope of fiduciary duty in the circumstances – No fiduciary duty in all of the circumstances – Alternatively, if fiduciary duty, limited in scope - Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; Adventure Golf Systems Australia Pty Ltd v Belgravia Health & Leisure Group Pty Ltd (2017) 54 VR 625; Chickabo Pty Ltd v Zphere Pty Ltd [2019] VSC 73; Howard v Commissioner of Taxation (2014) 253 CLR 83.
EQUITY – Breach of fiduciary duty – No breach of fiduciary duty in all of the circumstances - Howard v Commissioner of Taxation (2014) 253 CLR 83.
EQUITY – Causation – Any breach of fiduciary did not cause any loss - Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited (2018) 92 ALJR 918.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr A Schlicht and Ms C Dawes | Capstone Koroneos Legal |
| For the Defendants | Mr L Armstrong QC and Mr N Kaskani | Aptum Legal |
HIS HONOUR:
A INTRODUCTION[1]
[1]The procedural background is taken from my previous Judgment in this proceeding: Brady Queen Pty Ltd v 280 Queen Street Pty Ltd & Anor (No 3) [2019] VSC 307 (Third Judgment).
The first plaintiff, Brady Queen Pty Ltd (Brady Queen) and the second defendant, Austhome Developments Pty Ltd (Austhome) were shareholders in a company, 280 Queen Pty Ltd (the Company or 280 Queen). The Company is the registered proprietor of the land situated at 272-282 Queen Street (280 Queen Street).
The Company is the trustee of the 280 Queen Unit Trust (the Unit Trust). The Unit Trust was created in order to undertake the development of a multi-storey, multi-use high rise tower at 280 Queen Street by a joint venture comprising Brady Queen, a company associated with Mr Anthony Brady (Brady) and Austhome, a company associated with Mr David Wu (Wu) (the Project or the Development). Each of Brady and Wu were directors of the Company.
Brady Queen held a two-thirds interest in the shares in the Company and units in the Unit Trust. Austhome held a one-third interest in the shares and units.
The proceeding initially involved competing claims of conduct said to constitute oppression under section 232 of the Corporations Act 2001 (Cth) (the Act) (the Oppression Case).
Brady Queen alleged that Austhome and Wu engaged in conduct contrary to the interests of members as a whole and/or conduct oppressive, unfairly prejudicial or unfairly discriminatory by, amongst other things:
(a) failing to negotiate a joint venture agreement;
(b) failing to pay necessary expenses or sign cheques;
(c) attempting to exclude Brady Queen from the management of the Development;
(d) failing to provide books and records;
(e) failing to agree to a feasibility study and engage relevant experts;
(f) seeking to impose various conditions on the joint venture.
Brady Queen sought orders under s 233 of the Act that it purchase Austhome’s shares in the Company and units in the Unit Trust or, alternatively, that the Company and Unit Trust be wound up.
Austhome contested these allegations, and counterclaimed, alleging Brady Queen and Brady engaged in conduct that was oppressive, unfairly prejudicial or unfairly discriminatory in various respects, not dissimilar to those raised by Brady Queen.
Austhome sought orders under s 233 of the Act, that Brady Queen buy Austhome’s shares in the Company and units in the Unit Trust, or in the alternative, such orders under s 233 of the Act that the Court considered appropriate.
The parties agreed that the relationship between them had broken down. This is an understatement. The parties had failed to negotiate a joint venture agreement[2] and disagreed about numerous aspects, mainly relating to the operation and management of the Development, as set out hereunder. On 15 June 2016, a planning permit was issued for the redevelopment of the Property as a 67 level mixed use building (Permit). The Permit has 31 conditions and, unless extended, would have expired if the Development was not completed within five years from the date of the permit.[3]
[2]The parties entered into Heads of Agreement on 2 June 2014. The units were issued in early July 2014. Since then the parties have been unable to negotiate and agree on a more detailed joint venture agreement as contemplated by the Heads of Agreement. Each blames the other.
[3]Or if the Development was not commenced within two or three years of the date of the Permit. It is not clear which timeframe applies. In any event, Wu without any reference to the other directors, made application to extend the Permit for a 2 further years. An extension of only 1 year was granted.
As is evident from the pleadings, the parties were in agreement that the only appropriate remedy in the Oppression Case would be for Austhome’s shares in the Company and units in the Unit Trust to be purchased by Brady Queen. The parties however disagreed on the value of the shares and units, and in particular the value of the Development and the methodology by which the Development, and consequently the shares and units, were to be valued.
In my earlier judgment, I considered that it was unnecessary to conduct a trial in order to determine whether the particular conduct, as alleged, constituted oppressive conduct. The matters referred to in paragraph 9 above and the parties’ respective pleadings ‘all clearly evidence[d] the inability of the contemplated joint venture to proceed. This is not in the interests of the company, the trust, the shareholders or unit holders, as indeed has effectively been conceded [by the parties].’ Accordingly, on 10 August 2018, I declared that ‘the conduct of the affairs of 280 Queen Pty Ltd is, and has been contrary to the interests of the members as a whole’.[4]
[4]Brady Queen Pty Ltd v 280 Queen Street Pty Ltd & Anor (No 2) (Unreported decision of Sifris J, 10 August 2018, Supreme Court of Victoria) (Second Judgment) [26]-[28].
I ordered that Brady Queen purchase the shares held by Austhome in the Company, and the units held by Austhome in the Unit Trust at a price to be determined by the Court.
For the purposes of such determination, and given the different approaches of the parties to the valuation methodology, I appointed John O’Grady as Special Referee , pursuant to r 50.01 of the Supreme Court (General Civil Procedure) Rules 2015, and referred five questions for his determination. The questions were set out in Annexure 1 to my order of 10 August 2018 (Questions). The report is dated 6 February 2019 (Report).
The Questions and answers which form the basis of the Report are as follows:
Question 1: What is the most appropriate valuation methodology to determine the market value of the property situated at 280 Queen Street, Melbourne (‘the Property‘)? Is it:
a) The direct comparison approach; or
b) The discounted cash flow approach; or
c) Some other, and if so what approach?
Answer:In my opinion, the correct valuation methodology is the Direct Comparison approach with sales evidence of other comparable properties.
Question 2Based on the answer to Question 1, what is the market valuation of the Property?
Answer:In accordance with prevailing market conditions as at 31 January 2019, the current market value of the freehold interest in the subject property at 280 Queen Street Melbourne is $41,500,000 (Forty One Million, Five Hundred Thousand Dollars) excluding GST.
Question 3Further to Question 1, what is the most appropriate methodology to determine the value of shares in 280 Queen Street Pty Ltd and the units in the 280 Queen Street Unit Trust.
Answer:The units in the 280 Queen Street Unit Trust should be valued by reference to the realisable value of its net tangible assets.
Question 4In determining the value of the shares and units as referred to in question 3, is the fact that, such shares and units are to be acquired by the majority shareholder and majority unitholder, with the opportunity to develop the Property, a relevant factor?
Answer:In providing a value for the shares and units no premium has been added for majority control nor has any discount been applied for minority ownership. The reason for this being is that the project will require an extended time to procure all endorsed plans and construction permits to enable construction to commence but most importantly an unknown but lengthy period will be required to procure sufficient qualified pre-sales in order to obtain construction funding. As such, the anticipated commencement date for the proposed residential tower complex remains difficult to estimate given the current disruption to the apartment market in inner Melbourne. It requires too much speculation to ascertain the value of the development opportunity with reference to the tenure of the current market conditions.
I accept paragraph 75(c) of the Plaintiff’s submissions dated 26 October 2018 that the acquisition of the Shares and Units by the majority shareholder has no bearing on the appropriate methodology to be applied to the valuation.
Question 5Further to Question 2 and based upon the answers to Questions 3 and 4, what is the value of the shares and units.
Answer:The net asset value of the Shares and Units is assessed at $37,645,299, which when divided by the 35,500,000 shares on issue a proportional value per unit of $1.06 is confirmed and adopted by myself.
Austhome did not accept the Report on numerous grounds and submitted that it should be rejected or substantially varied. After a further hearing I delivered the Third Judgment and rejected the submissions made on behalf of Austhome. I accepted and adopted the whole of the Report.[5]
[5]Third Judgment [69]–[71].
In the result I valued the shares and units at $37,645,299. At a value of $1.06 per unit, I valued Austhome’s interest at $12,417,900. Orders were made accordingly, settlement took place and Brady Queen Interests obtained the entire interest in the shares, units and consequently the Development.
That was the end of the Oppression case, but unfortunately not the end of the proceeding. Each party remained dissatisfied.[6]
[6]There was no appeal from the decision and Reasons in the Third Judgment.
Claims are now made against each other, essentially for breach of contract, that is the Heads of Agreement (HoA) as varied, referred to and set out in detail below. I deferred the hearing of these issues in light of the approach taken in the oppression part of the proceeding. The contractual claims were unlikely to have any effect on the valuation issues and as part of the intensive case management of this proceeding, the different issues were to be dealt with sequentially.
Claim and counterclaim are set out in Part D of this judgment. Brady Queen makes claims against Austhome and Wu essentially for breach of the HoA. The Company also makes a claim against Wu for breach of fiduciary duty as a director. Austhome and Wu make claims against Brady for breach of the HoA, against Brady and Simon Pethica (Pethica) directors of the Company for breach of fiduciary duty and against Brady Queen for knowing receipt.
B HEADS OF AGREEMENT
The HoA was entered into on 2 June 2014. The relevant terms are as follows:
7.4The parties agree that the payment of every expense incurred as part of the Development Costs, and for which QT is liable, must be jointly approved and jointly authorized for payment by DW and AB or his nominees on the board of QT.
7.5DW and AB covenant with each other and with QT that, and for so long as is necessary, to fund QT on loan account and in the Proportions so as to enable QT to promptly pay the Development Costs. DW, AB and QT anticipate that funding by DW and AB shall only be required until the Development Facility is in place but excepting any future Development Costs not funded under the Development Facility or for which the Development Facility is insufficient.
7.6All management services provided either by DW or AB in support of the Development shall not be (further) charged to QT, or at all, except that Paragon Real Estate Pty Ltd, a company in which DW has a substantial interest, shall be appointed as the inaugural owner’s corporation manager of the Development, subject to agreement by the board of directors of QT about its remuneration therefore, and which remuneration shall be negotiated for a term of three years in good faith, on the basis of prevailing market rates.
8.DEVELOPMENT FACILITY
8.1DW and AB covenant with each other to do all things reasonable and necessary to procure the Development Facility for the benefit of QT.
8.2Clause 8.1 preceding shall oblige each of DW and AB to promptly provide to a prospective lender all relevant information, documentation, and consents and such as may be reasonably be required to procure the Development Facility.
8.3Clause 8.1 preceding shall oblige each of DW and AB to personally guarantee the performance of QT under the Development Facility, but neither DW or AB shall be obliged to secure the Development Facility by any real estate security save for the title to the Property, and which shall be provided for that purpose by QT.
8.4Each subclause in this clause 8 shall be subject to clause 14 following.
9.CONSTRUCTION
9.1DW, AB and QT covenant with each other that the construction incidental to the Development shall be put out to tender to three experienced construction companies.
9.2DW, AB and QT covenant with each other that, when the result of the tender shall be known, the contract for the construction must be effected by QT in writing to Brady Construction (Vic) Pty Ltd (a company in which AB has a substantial interest) and that company shall have the option to contract with QT to perform the tendered works at a price equal to the lowest complying tender. The option must be accepted within 60 days of the offer being made or it shall be deemed to have lapsed.
9.3Each sub clause in this clause 9 shall be subject to clause 14 following.
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15.2Notwithstanding the previous sub clause, the parties shall use their best endeavours to proceed to a more detailed joint venture agreement to be prepared and executed ideally within 30 days of the date hereof.
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17.DEFAULT
17.1If either DW or AB shall default in the performance of any of their financial obligations under this Deed the other of them (“the non-defaulting party”) must give the defaulter (“the defaulting party”) a notice in writing specifying the default and requiring the default to be remedied within 7 days of service of the notice.
17.2If the default specified in the notice given under sub clause 17.1 preceding is not remedied within 7 days after service of the notice, the non-defaulting party may at his election:
(a)require the joint venture and QT to be dissolved and wound up and the assets sold;
(b)commence a legal proceeding against the defaulter seeking an order for specific performance of his obligations in default and/or damages; or
(c)purchase the shares held by QT by the defaulter or his nominee;
(d)pay and discharge the financial obligations of the defaulting party under this Deed for the residue unexpired of the Development.
17.3The election to be made under sub clause 17.2 preceding must be made within 60 days of the expiry of the notice period. If it is not made within that time, the non-defaulting party shall be confined to the remedy referred to in sub clause 17.2(b) preceding.
17.4If the non-defaulting party elects to buy the shares as provided for in sub clause 17.2(c) preceding, he must pay the Price therefore within six months of the date of his election to do so, and the defaulting party must thereupon Makeover the shares to the non-defaulting party.
17.5(a) the Price shall be fixed by an independent chartered accountant acting as an expert (“the Expert”) and appointed by DW and AB or in default of the agreement by the President for the time being of the Institute of Chartered Accountants Australia (Victorian Branch) or his delegate.
(b)the Expert shall determine his own processes and each of the parties to this Deed must afford him and his agents access to all the relevant books and records and provide him with their prompt Co-operation in all things.
(c)the Price to be fixed by the Expert shall be the net realisable value of the assets of QT as at the date of the election, and shall be fixed by the Expert having regard to market conditions, the state of the Development, and the value of the underlying real estate.
(d)the Expert may engage a real estate valuer of his choice to assist him to determine the value of the underlying real estate as at the date of the election.
(e)the costs and fees of the Expert shall be paid by the defaulting party unless the Expert shall otherwise direct.
(f)the decision of the Expert shall be final and not open to review in the absence of fraud or manifest and reckless error.
17.6If the non-defaulting party elects to pay and discharge the financial obligations of the defaulting party as aforesaid, then the defaulting party must progressively Makeover to the non-defaulting party his shares in QT to the extent that it is commensurate and with the disproportionate financial contributions made between them as against the (agreed) Proportions. This must be done at the expiry of each month after the default occurs, and for so long as it continues. For example, if AB defaults and DW elects to pay and discharge AB’s financial obligations for the residue unexpired of the Development, and, at the end of the month in which the notice of default expires, and by reason of DW’s election, the respective financial contributions of AB and DW are AB 63% and DW 37% (and not 67% and 33%) AB must transfer 4% of the issued capital in QT to DW.
17.7If the defaulting party resumes payment of his financial obligations under the Deed he shall thereupon cease to be liable to Makeover any part of his shareholding to the non-defaulting party unless he shall again default, and excepting any Makeover necessary to adjust shareholdings consistently with clause 17.5 for the month in which he resumes observing his financial obligations. For the avoidance of doubt, in no event shall a defaulting party be entitled to recover any shares previously made the subject of a Makeover to a non-defaulting party by reason of a prior default.
17.8As a separate and independent obligation any party in default under this Deed shall Indemnify the other parties to this Deed in respect of any Claims suffered or incurred by any of them by reason of that default.
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18.1Each part to this Deed covenants with each other of the other parties to this Deed to provide all necessary Co-operation and do all things reasonable and necessary to carry and Execute the obligations in this Deed, and otherwise to faithfully and effectively observe its terms.
18.3Each party to this Deed covenants with each other party to the Deed to exercise and in every Capacity that they have or may hereafter have such powers as are available to him or her consistently with the obligations and purposes of the proceeding provisions of the Deed.
On 6 June 2014, the HoA was amended to deal with various nominations and matters not directly relevant to the present dispute.
C RELEVANT BACKGROUND
It is not productive to provide a detailed chronological and unstructured factual background. The evidence and detailed chronology appears to traverse the entire relevant period in microscopic detail without the necessary structure or focus. This is not helpful and is prone to obscure and obfuscate the real issues, that is, the specific breaches alleged. The background provided in this section will be more general in order to understand the timeline, relevant context and claims made by the parties. The detail will be dealt with if and where necessary and relevant.
The HoA was entered into on 2 June 2014. On 6 June 2014, the HoA was varied to provide for, amongst other things, the nomination of 280 Queen as purchaser and the nomination of the shareholder and unitholder entities.
On 15 July 2014, settlement took place. 280 Queen became the registered proprietor of 280 Queen Street.
Early on there was disagreement about whether companies or entities associated with the joint venturers were entitled to provide services for reward. In particular Robert Giano (Giano) of Brady Constructions (Vic) Pty Ltd (BC Vic) undertook work during the period October 2014 to December 2015 and charged for that work. Wu objected. If the work was embraced by Development Costs, Wu did not approve or authorise the work as required by clause 7.4. If the work was management services BC Vic were not entitled to charge (clause 7.6). Brady took a different view. The dispute lingered on and was never resolved.
On 21 December 2015, there was a meeting of directors. There is some dispute as to what was discussed and resolved at the meeting. To the extent that this is relevant it is discussed later. However, having agreed to do so, it was resolved that Wu would prepare a Feasibility Study by early March 2016. It was also resolved that Strongman and Crouch (S&C) would prepare a Joint Venture Agreement (JVA) as contemplated by the HoA. These matters, the incurring of expenses, and a confused conflict of interest issue are central to each parties’ breach of contract case. Each issue is dealt with in detail below. At this time, A&J Brady Pty Ltd, a Brady company, was negotiating entering into a heads of agreement in relation to another property at 380 Lonsdale Street, Melbourne.
From February to April 2016, there was much activity in relation to the JVA. On 4 February, Pethica, without any input from Wu, gave instructions to S&C in relation to the preparation of the JVA. On 10 February, Andrew Joseph (Joseph) of S&C emailed a draft of the JVA to Pethica and Wu. On the same day Wu sent an email contending that the JVA was premature as there was a need to first agree on the terms. During March and April there were further drafts, correspondence and an endeavour to convene a meeting with Joseph. The meeting did not take place. Further emails were sent by Wu on 10 and 21 March and 16 and 19 April raising a number of matters. Wu said that he never agreed to engage S&C, did not agree to replace the HoA, and that the JVA was premature because the parties needed to agree on terms and to this end the Brady Group needed to prepare a Commercial Plan setting out a whole range of practical matters relating to the Development, a request repeated during 2016 and 2017. Further, Wu said that he could not do the Feasibility Study without this plan and it was also necessary for the JVA. The Feasibility Study was not done. The JVA was not even discussed. Like the expenses issue, these issues lingered on, were never resolved and created more anxiety and tension between the parties.
On 15 June 2016, the Planning Permit was issued. Wu was only told on 19 July. During June 2016, the Brady interests, as detailed more fully hereunder, proposed development at 380 Lonsdale street also commenced the design phase.
In August 2016, Wu refused to provide the tender documents for the Project to Brady and Pethica at a directors meeting. Wu said that he was concerned about a conflict of interest on the part of the Brady interests. He was concerned that they would tender for the non-construction aspects of the Project, and in particular architectural services, not specifically excluded by the HoA. The parties then agreed to exchange relevant information but this never happened (the Conflict Issue). On 4 August Wu repeated that it was premature to do the Feasibility study. There was also the ongoing dispute as to whether 280 Queen was liable for work done and fees rendered by BC Vic. On 5 August Pethica asked Joseph for advice on this matter. Wu had refused to authorise payment. Wu continued to assert that 280 Queen had no authority to incur costs without his approval. On 9 August there was a board meeting of 280 Queen Street. Wu did not attend. Brady and Pethica attended and passed resolutions requiring Wu to provide details of all tenders and also requiring the parties to exchange the relevant conflict information. Pethica noted that the Brady Group[7] were ready to exchange such information. At a board meeting on 23 August Pethica repeated that the Brady Group were ready. Wu said he could give an oral report but this was not accepted and he was asked and agreed to put it in writing. The Conflict Issue was never resolved. By August 2016, it was clear that the relationship had broken down. None of the issues had been resolved.
[7]The Brady Group and the Brady interests are used interchangeably. The terms have no legal significance and are simply used to refer to relevant companies controlled by Brady.
In late 2016 Brady Lonsdale Pty Ltd (Brady Lonsdale), the company undertaking the development at 380 Lonsdale Street commenced sales.
Brady Queen claims that in October 2016, Wu said that Brady and Pethica did not want to be involved in the management of the Project and indeed attempted to exclude them from management. Wu says that he continued to request their involvement and refers to many emails to this effect during the period October 2016 to January 2017.
During the period late 2016 to early 2018 Wu says he repeatedly requested Brady to appoint an architect for the Project but Brady did not take reasonable steps to do so. In this regard, Wu refers to about 20 emails and a meeting in March 2017. He also sought the appointment of other solicitors. During this period the construction, and sales of apartments at 380 Lonsdale street had commenced.
The events surrounding the Conflict Issue further polarised the parties and this affected their already fragile working relationship. During the period September to December 2016, Wu sent about 10 emails requesting consent to the appointment of Peddle Thorpe as architects. By 24 October, Wu was desperate and by email said that if he did not hear from Brady Queen within 48 hours he would make the appointment. By email a week earlier, on 17 October, he had recorded the non-response of Brady Queen and assumed this was because of a conflict. In this email he said that he would appoint the architects.
Concerned that Wu was threatening to act unilaterally, Brady Queen engaged Arnold Bloch Leibler (ABL) as solicitors to act on its behalf. Correspondence between Wu and ABL then followed during October. Then on 14 November, Pethica sought clarification from Wu about the appointment of the architects. At this time Wu remained concerned about the marketing of 380 Lonsdale street.
In January 2017, the parties exchanged correspondence about an existing tenancy and the need to engage solicitors. This matter is of very little relevance. However, in a response Wu asks ‘What is your overall program to the Development’. In March 2017, a meeting took place between Wu and Brady. According to Brady the meeting achieved nothing.
In April 2017 there was an exchange of emails between Pethica and Wu. On 6 April, Pethica circulated an urgent resolution relating to a proposed Foreign Investment Review Board (FIRB) application which Pethica considered was urgent and necessary as the rules were about to change. In emails of 10 and 12 April, Wu agreed that the costs associated with the application (about $22,000) could be paid subject to conditions. One of the conditions was the preparation of a detailed unitholders agreement. The parties were still operating under the HoA, a totally inadequate document.
On 23 August 2017, this proceeding commenced.
On 10 August 2018, I ordered that the Brady interests acquire Wu’s interests in the Company and the Unit Trust.
On 15 November 2018, it is alleged that Wu interfered with the Planning Permit.
On 21 March 2019, I restrained Wu from acting as a director of the Company.
On 24 May 2019, the buy-out was completed. All that remained were these claims.
Even from this brief chronology it is clear that the parties did not get on. Their entire relationship as joint venturers may, not unfairly, be characterised as troublesome and difficult. They were almost like ships passing in the night. Brady Queen was a majority shareholder and controlled the board of 280 Queen. However, this controlling interest was restricted by the HoA which required, amongst other things, expenses to be ‘jointly approved and authorised for payment’ (clause 7.4), a matter that has surprisingly been a not insignificant part of this case. The parties had different ideas and were working at a different pace without any structure or timeframe, the general best endeavours clauses providing very limited impetus.
Although each party is blaming the other, neither utilised the default provisions of the HoA during the course of their troubled relationship. The parties have themselves to blame and the court should not be left to work out the mess. It is a very difficult and in my view a pointless exercise. There were problems and disagreements every step of the way: the expenses; the JVA; the Feasibility Study; the Conflict Issue and the approval of the architect issue and matters arising from this.
The case can only be resolved by a detailed consideration of the specific claims and counterclaims advanced. Ultimately this is an unproductive exercise and a waste of time and considerable expense incurred by the parties given my firm view on causation. However, these issues remain and as the matter may go further I am obliged to deal with these issues, some of which are petty and highlight the extent of the disagreement and, for the most part, total lack of co-operation trust and loyalty between the parties.
D SUMMARY OF ISSUES AND FINDINGS
Claims made by Brady Queen
Brady Queen makes the following allegations of breach of contract[8] against Wu and Austhome:
[8]All allegations are of breach of the HoA.
(a) Failure to use best endeavours to enter into a more detailed joint venture agreement (JVA or Unitholders Agreement) (breach of clauses 15.2, 18.1-18.3).
(b) Failure to authorise payment of necessary expenses (breach of clauses 7.4 and 9.1).
(c) Falsely stating that 280 Queen Street did not have authority to authorise expenses (breach of clauses 7.4 and 18.1). This issue was not pressed.
(d) Attempting to exclude Brady and Pethica from management and falsely asserting that they did not wish to be involved (breach of clause 18.1).
(e) Failure to provide books and records, in particular tender documents on the grounds of an alleged conflict of interest (breach of clauses 18.1-18.2).
(f) Failure to use best endeavours to provide a feasibility report as undertaken.
(g) Attempting to impose conditions and costs in order to authorise payments (breach of clauses 7.4, 18.1-18.3).
(h) Making allegations that Brady and Pethica breached their duties as directors of the Company (breach of clauses 18.1 and 18.3).
(i) Interference with the Permit, by obtaining a limited extension of time without discussion with the other directors (see fn 4) (breach of clauses 18.1 and 18.3). This claim was not pressed.
Brady Queen alleges that the conduct referred to in paragraphs 45(c) to (h) stalled the Development and caused the following holdings costs or loss:
·Fees and interest to lenders — $1,535,552
·Fees and interest to unsecured lender (A & J Brady Pty Ltd) — $5,599,584
·Rectification caused by squatters — $30,278
·Outgoings (land tax, rates etc) — $909,682
In relation to the Permit (paragraph 45(i)) Brady Queen alleges that such conduct put the Development at risk and that as a consequence they failed to derive the full benefit of the Development. As noted earlier this claim was not pressed.
A further claim, based on the same allegations, is made by the Company (now under the control of the Brady Interests)[9] against Wu for breach of his duties as a director.
[9]In these reasons it is often convenient as previously noted to simply refer to the Brady Interests (or the Brady Group) or the Wu Interests as embracing entities associated with Brady or Wu as the case may be.
Claims made by Wu and Austhome
In addition to refuting the allegations and claims made by Brady Queen (and pleading other defences such as mitigation, contribution and set off), Wu and Austhome make the following allegations of breach of contract against Brady:
(a) Brady did not provide a JVA in accordance with and consistent with the HoA (breach of clause 15.2 and implied term of the HoA).
(b) Brady did not prepare a commercial plan in breach of the 2017 Agreement (breach of clause 15.2 and implied term of the HoA).
(c) Brady incurred or caused to be incurred expenses relating to the Development without Wu’s prior approval, including fees to S&C (breach of clauses 18.1 and 18.3).
(d) Brady failed to approve the necessary works (breach of clauses 18.1 and 18.3).
(e) Brady failed to disclose that he had other developments that were competitive with the Development and demanded that Wu provide commercially sensitive information (breach of clauses 18.1 and 18.3).
(f) Brady failed to approve consultants and architects from May 2016 (breach of clauses 18.1 and 18.3).
Wu and Austhome claim that as a result of breaches by Brady, Wu was unable to complete the Feasibility Study and progress the Development, thereby causing loss, being one-third of the value of the net profit from the Development. Alternatively, holding costs are claimed in the sum of $7,425,183.69, essentially interest on borrowings from Austhome Group Pty Ltd (Austhome Group), a Wu company.
Wu and Austhome make further claims against Brady and Pethica for breach of fiduciary duty. It is alleged that the fiduciary duty arises out of the joint venture relationship. The main element of the duty was not to be in a position of conflict. The breach, it is alleged, comprised the conflict of interest arising out of Brady and Pethica being directors of Brady Lonsdale and each holding an indirect interest in Brady Lonsdale. As noted earlier, Brady Lonsdale has since 2016 been involved in another residential apartment development in the Melbourne CBD, at 380 Lonsdale Street, around the corner from 280 Queen Street. It is alleged that those interests were preferred over the interests of 280 Queen Street.
It is alleged further that Brady Queen knowingly received the benefit of the breaches of fiduciary duty and as a consequence holds one-third of its interests in the shares of 280 Queen Street and one-third of its units in the 280 Queen Street Unit Trust, on trust for Austhome, alternatively is liable to pay equitable compensation.
The claim by Austhome for unpaid distributions and loans has been admitted and is no longer an issue in the case.
Critical observations and findings
The first critical matter is that this case is not about and does not involve any consideration or reconsideration of the value of the shares, as a result of the loss of opportunity to undertake the Development. The value of the shares has, as noted, been determined and any value associated with an opportunity to undertake the Development and make a profit thereby increasing the value of the shares (that is the discredited DCF Methodology) has been rejected. Another way of putting this is that because the Development did not literally get off the ground (irrespective of fault) such valuation, contemplating a completed project was far too uncertain or remote. The only relevant loss, if any, will be that which flows naturally from any breach of contract. To the extent that the Wu and Austhome claim loss associated with the diminution of the value of its shares and units, such claim must fail. By the same token, to the extent that Brady Queen claims loss as a result of the failure to derive the full benefit of the Development as a result of the suggested interference with the Permit, the claim must fail. Although as noted, this claim was not pressed. Further, to the extent that 280 Queen Street makes a claim against Wu for breach of fiduciary duty as a director, the claim must fail.
The second critical matter is the alleged breach of fiduciary duty claim made by Wu and Austhome. Even accepting that the joint venturers were subject to fiduciary duties, I do not accept, for the reasons set out below, that the suggested conflict of interest constitutes a breach of fiduciary duty. The evidence does not establish any conflict or breach. Finally, even if there was a breach of fiduciary duty, I do not consider that it caused any loss. I am not satisfied that but for the conflict the Development would have got off the ground and progressed. The facts tell a completely different story. It is relevant to note that both parties were highly experienced property developers with numerous advisors and consultants and able, certainly in the case of the Brady Group to undertake multiple projects at the same time. This issue is discussed in Part G below.
This leaves, as I had originally intended, the breach of contract claims, each against the other. This is the third critical matter. A number of pertinent observations may be made.
Although providing a very general framework, the HoA did not apportion or allocate areas of responsibility and did not specify any detail in relation to the implementation progression and management of the Development, including what precisely the Development would comprise beyond a multi-storey, multi-purpose tower. The Permit granted on 15 June 2016 was just the start. Although a detailed and indeed necessary JVA was contemplated within 30 days none was agreed. Each joint venturer blames the other for this critical failure. In relation to this issue and for the reasons set out hereunder, although I consider that Wu was at fault, such breach did not cause any loss.
As a consequence, the parties continued to operate for the best part of three years under the broad framework of the HoA. There were, as may be expected, many meetings, discussions and correspondence during this period. There was much disagreement in relation to numerous operational, administrative and management matters, some petty, some more serious but all demonstrating a lack of co-operation and communication and different approaches to the issues. This created mistrust, deadlock, suspicion and a degree of paranoia on the part of Wu. The relationship was from the start unworkable, leaving aside any blame, and to some extent each party did their own thing with little or no co-ordination or co-operation. Both parties must accept a measure of blame, but of course blame the other as the sole cause of the problem.
It is probably necessary, but by no means easy in these circumstances to assess the conduct — and alleged breaches — of the parties during this period and within this context or framework. However, the more relevant issues are causation and loss to which I now turn. This is the fourth critical matter.
The short but critical and dispositive point is that accepting the breaches as alleged, both sides, I am not satisfied and the evidence does not establish that the breaches caused or in any way contributed to the contended loss in the case of each of the joint ventures. Each claim must fail. I warned the parties on several occasions about the difficulties associated with causation. In my opinion, it is more probable than not, and the evidence establishes, that in the counter-factual, had each joint venturer done what was required, itself a matter of great uncertainty, the position would have been the same and perhaps even worse. The Development and legitimate disputes and differences would have continued to exist as the Development unfolded. How can it possibly be said in this case that the design would have been agreed, architects and other consultants would have been appointed, endorsed plans would have been prepared and approved, all 31 conditions of the Permit would have been complied with or a new permit obtained and that the Development would have proceeded reasonably smoothly? No. Rather, the evidence suggests that there would have been disputation at every point and on almost every issue, the past being in this case a good predictor of the future. The holding costs would have been incurred by both sides. The evidence does not go beyond the hypothetical and does not establish that bridging or development or project finance would have been obtained in substitution for what are for the most part related party loans at excessive interest rates.
Consequently, each claim, far removed from the facts, is indulgent, extravagant, unsupported and must fail. It is not without interest to note that endorsed plans have still not been issued and the Development has still not got off the ground.
E BREACHES ALLEGED BY BRADY QUEEN
Failure to use best endeavours to execute a more detailed Joint Venture Agreement
Each party alleges that the other was in breach of the HoA by failing to use their best endeavours to execute a detailed JVA.
Clause 15.2 of the HoA provides:
Notwithstanding the previous sub clause, the parties shall use their best endeavours to proceed to a more detailed joint venture agreement to be prepared and executed ideally within 30 days of the date hereof.
On 21 December 2015, a meeting of directors took place. Brady, Pethica, Wu and Vojo Vukadinovic (Vojo) attended the meeting. Vojo chaired the meeting and took the minutes. The minutes of the meeting record, inter alia:
Vojo Vukadinovic stated that the current Joint Venture Agreement provided in clause 15.2 that a more detailed joint venture agreement would be prepared.
Anthony Brady stated that he wanted this done, David Wu agreed that it should be done. This was agreed unanimously.
It was resolved that the Brady Group would provide Andrew Joseph the information for the drafting of the new agreement by 11 January 2016 and, David Wu was welcome to send any suggestions to Andrew Joseph by the same date. Once Andrew Joseph has drafted the new agreement Anthony Brady and David Wu would use their best endevours [sic] to make any agreed changes to the agreement with the view of signing of [sic] on the agreement within two weeks of receiving the draft from Andrew Joseph.
Both parties accept that it was agreed a more detailed JVA should be prepared. The parties do not agree on the process pursuant to which the JVA was to be prepared. Brady alleges that at the meeting it was agreed that S&C would be retained to prepare a detailed JVA. Wu alleges that it was agreed that Wu and Brady would first agree the principal terms of the JVA prior to giving instructions to S&C. On 22 December 2015, Vojo circulated the minutes of the meeting. Wu never took issue with the minutes.
On 4 February 2016, Pethica sent an email to Joseph of S&C, copied to Wu and Brady, attaching a letter giving instructions to prepare the detailed JVA. The letter states, among other things:
the directors of 280 Queen Pty Ltd have determined that in accordance with clause 15.2 of the Heads of Agreement…a more detailed Joint Venture Agreement is to be entered into.
In light of the ownership structure…it should be described as a Unit Holders Agreement rather than a Joint Venture Agreement.
The directors of 280 Queen Pty Ltd instructed that I was to provide a briefing document identifying key areas to be expanded upon in the Unit Holders Agreement and [Wu] would provide details of any issues he felt needed to be addressed.
[Wu] and [Brady] have agreed that Strongman and Crouch Solicitors are to prepare a draft unit Holders Agreement at the expense of 280 Queen Pty Ltd for consideration by both parties…
We are keen to progress this developed Unit Holders Agreement as quickly as possible…
Annexed to the letter is a five page document titled ‘Unit Holders Deed Key Issues to Address’. The document sets out 34 issues to be considered, which includes:
2. Acknowledgement that Unit Holders Deed supersedes the Deed of Heads of Agreement.
10.Feasibility Study to be prepared and incorporated into the Deed with right of Board to review and amend as required.
11. Expenses may only be incurred which are contemplated by the Feasibility Study. Any two Board members to approve the incurring of costs provided they fall within the approved Feasibility Study allowances. If any expense exceeds the approved Feasibility Study Allowance budget, the Board must meet to review and agree a revised Feasibility Study allowance budget. Where practical a minimum of three quotes are to be obtained from qualified and experienced parties for all services to be provided. Tenderers to be notified to the Board with agreed time line to raise any objections or propose any alternatives (say 7 days).
19. Brady (personally) & Wu, Austhome and Paragon Real Estate (save for OC Management) are required to provide their respective expertise to 280 Queen Pty Ltd at no cost. This does not include Brady Group Corporate and/or staff of Brady Corporate entities.
20. Include acknowledgement that Brady and associate interest are entitled to be involved in other developments which may be competing with 280 Queen Pty Ltd.
On 8 February 2016, Pethica sent an email to Joseph, copied to Wu and Brady, attaching a letter providing further instructions to Joseph. The email also attached various background documents.
On 10 February 2016, Wu sent an email to Pethica and Joseph, copied to Brady, stating ‘I think it is premature to start drafting the agreement and I am not fully understood & agreed the changes yet.’ Wu also requested a meeting with Joseph regarding the JVA. On the same day, Joseph replied to Wu’s email advising that the agreement had already been drafted and that it will be sent to Wu and Pethica that day. Joseph sent the draft JVA to Pethica and Wu that afternoon.
On 7 March 2016, Joseph sent an email to Pethica and Wu noting that he had not received a response from either Pethica or Wu and that the draft JVA would not progress if further instructions are not received. On the same day, Pethica responded to Joseph’s email, copied to Wu, requesting a Word version of the draft JVA. Wu did not respond to either Joseph’s or Pethica’s email.
On 9 March 2020, Pethica sent two emails to Joseph, copied to Wu and Brady, attaching a copy of the draft JVA incorporating the Brady Group’s comments. The email stated ‘… to date we have received no feedback or comment from David Wu in relation to either our initial instructions or your draft.’ Wu did not respond to either of these emails.
On 10 March 2016, Joseph sent an email to Pethica, copied to Wu and Brady, seeking clarification on whether he should ‘review the document before David Wu has commented on the original draft’. Joseph also asked whether ‘it would not be better to wait until both venturers agree in principle on the form of the deed, and the adjustments that need to be made to it?’. Pethica responded to Joseph’s email, copied to Wu and Brady as follows:
We note that the parties have a period of one month in which to raise any issues and Mr Wu has not provided any comments.
The parties agreed a process during the Board meeting of December 2015 and wish to progress the Unit Holders Deed. Accordingly we request you please commence your review of the document now.
On the same day, Wu sent an email responding to Joseph’s and Pethica’s email, which states:
My apology could not get back to you earlier and please use this email for anything relation to 280 Queen Street (not my private email).
Due to the complex of the issue and language barrier, I have not fully understood your draft. Can I come see you mid next week? Happy for Mr Brady to attend as well. As my previous email related to Brady/Wu Unit Holders Deed, the sensible approach would be to get parties consent first before even to draft it. I will comment on it after I am fully understood and raise my issues as well.
Between 10 March 2016 and 15 March 2016 various emails were exchanged between Pethica, Joseph and Wu to organise a meeting to discuss the draft JVA. On 15 March 2016, Pethica sent an email to Joseph and Wu. The email stated:
It is disappointing that Mr Wu is unable to find the time to progress this most important matter on any of the times that you are available in circumstances where he is the one who has requested your assistance to explain the document.
Notwithstanding, I stand ready willing and able to meet at any time which is convenient to both yourself and Mr Wu.
A meeting was scheduled for 22 March 2016.
On 18 March 2016, Joseph sent an email to Pethica and Wu attaching a revised draft of the JVA. On the same day, Wu responded to Joseph’s email requesting a Word version of the draft.
On 21 March 2016, Wu sent an email to Joseph and Pethica, copied to Brady, requesting that the meeting scheduled for the next day be postponed. The email states:
After reading Simon’s revised proposal of Unit Holder Agreement, I would like to postpone tomorrow’s meeting (my apology). Can Simon please email me detailed reason for each clause he put in this proposal and I will consider, reschedule the meeting then?
….
I also notice Mr. Pethica has instructed Mr Joseph to do further revised proposed UHA without my consent which I think is acting outside of the HOA.
On 30 March 2016, Pethica sent a letter to Wu requesting that he provide his comments on the draft JVA. The letter stated ‘We note that at the board meeting of 280 Queen Pty Ltd held 21st December 2015 it was unanimously agreed that a more detailed agreement be developed to replace the Deed of Heads of Agreement entered into in May 2014.’
On 16 April 2016, Wu sent an email responding to Pethica disputing, for the first time, that a unanimous agreement was reached at the 21 December 2015 board meeting.
On the same day Pethica sent an email to Wu, which states:
Likewise the minutes record (correctly based on my recollection of the meeting) that it was unanimously agreed to develop the Heads of Agreement into a Joint Venture Agreement (subsequently described as a Unit Holders Agreement).
To my knowledge, today’s email is the first occasion that you have questioned the Board decision, despite being fully informed of my correspondence to Mr Andrew Joseph of Strongman and Crouch Solicitors on this subject and the draft agreements he circulated in response over the course of 2016. I note that you have not sought (and subsequently cancelled) meetings with Mr Joseph to explain the Agreement to you.
There was consensus from all present at the 21 December 2015 280 Queen P/L Meeting that the Heads of Agreement relationship needed to be further developed and I am most surprised that you now chose to assert otherwise nearly four months after the event.
On 19 April 2016, Pethica sent an email to Wu attaching a letter addressed to Wu setting out, in detail, Pethica’s version of events regarding the parties’ agreement to have a detailed JVA prepared and the preparation of the draft JVA by S&C. Pethica also requested that Wu provide his availability for a meeting with Joseph to discuss the draft JVA.
Wu responded to Pethica’s letter by first sending an email to Pethica, copied to Brady, in which he states that he does not agree that a ‘unanimous agreement’ was reached to instruct S&C to draft the JVA. Wu also sent a further email on 19 April to Pethica and Brady attaching a letter which states, among other things:
My understanding is that at the board meeting…held 21st December 2015 it was agreed that, where possible, to develop a more detailed agreement to further detail the current Deed of Heads of Agreement… I have not once agreed to replace this HOA. Please note that for future reference, under any circumstances, any matters agreed to by myself must be in writing with details what is agreed on, otherwise it shall be invalid. (Original emphasis)
The letter went on to state Wu’s version of events and concluded:
…I urge you to provide details of each stage of your proposed joint management agreement to me, consistent with the HOA in principle, so we can look to progress the detailed agreement and explore mutually acceptable outcomes.
On 20 April 2016, Wu sent an email to Pethica expressing his concern as to the progress of the development. The email states:
I am concerned with the progress of 280 Queen Street development, as we had previously agreed by Brady Queen & Austhome Development, that the construction will start in August 2017 at latest. So far we still don’t have the planning permit (after nearly two years) and very little other progress has been made. I urge you to provide details of each stage of your proposed joint management agreement ASAP, consistent with the HOA in principle, so we can look to progress the detailed agreement and explore mutually acceptable outcomes to progress the project further.
On 11 May 2016, Joseph sent an email to Wu and Pethica advising that he has not received further instructions for six weeks and asking ‘is anything further required of me in connection with the proposed agreement?’
On 3 August 2016, Joseph sent an email to Pethica, copied to Wu, attaching a letter addressed to Pethica. The letter read:
Mr David Wu has informed us that the instructions to this firm to prepare the Unit Holders Agreement were not authorised by the board of 280 Queen Street Pty Ltd.
Please comment.
On the same day, Joseph sent an email to Pethica and Wu attaching a letter addressed to Pethica and Wu. The letter provided that S&C cannot advise either party in regards to disputes between the parties and that they should respectively retain independent lawyers to advise.
On 8 August 2016, Joseph sent an email to Pethica, copied to Wu, advising that ‘Mr Wu takes the position that our retainer was never authorised by the Board of 280. Please tell me: is it the case that our retainer to prepare the Unit Holders Agreement was never authorised expressly or by implication by the Board of 280?’ On the same day, Pethica sent a letter to Joseph, copied to Wu, confirming that the engagement of S&C was ‘expressly authorised by a unanimous resolution of the Board of 280 Queen Pty Ltd on 21st December 2015.’ The letter extracted the resolution regarding the preparation of the detailed JVA from the meeting on 21 December 2016 and states ‘the verbal assertion made to you last week that the retainer was entered into without the consent of the 280 Queen Pty Ltd board is incorrect.’
In my opinion neither the claim nor the counterclaim are made out.
Brady Queen did instruct S&C, as agreed at the December meeting, and a draft agreement was prepared. Some of the proposed terms may have been contrary to the HoA. Pethica said that the document was only a draft and was to be discussed. Wu gave evidence to the effect that it had been agreed, that before S&C were instructed, the terms had to be agreed first between him and Brady, a matter that Brady did not disagree with. Of course the parties could still meet and agree on terms with the draft in front of them. However, as with most issues in this case that required co-operation and communication, they did not. Brady Queen was pressing for a meeting with S&C to finalise the terms and Wu suggested that this was premature as a number of matters needed to be agreed. A number of proposed meetings were cancelled by Wu. The parties did not each retain solicitors and S&C were acting for both parties. Were the parties using their best endeavours?
Brady Queen’s claim must fail. Assuming Wu did not use his best endeavours — he should have met and discussed (and criticised) the draft — I am far from satisfied that the parties would have reached the necessary consensus, despite best endeavours on both sides. They had entirely different views as to how the Project was to be managed and working out an arrangement in these circumstances and with the requirement that the agreement be consistent with the HoA, would have been an extremely difficult task, one that in my opinion would not have been achieved. Finally and critically, the evidence of Brady confirms that although the failure to enter into a JVA or Unitholders Agreement was a matter of some concern and anxiety it had no effect on and did not stall the Project to any relevant degree. It did not cause any loss to Brady Queen.
The same may be said in relation to Wu’s claim. Assuming Brady did not use his best endeavours — he should have met with Wu first and discussed proposed terms — I am far from satisfied that the parties would have reached the necessary consensus, despite best endeavours on both sides. However, as the chronology suggests, Brady was prepared to meet and discuss the terms and he was in fact anxious to do so. Wu was not prepared to meet stubbornly asserting that they should have met first before instructions were given to S&C.
So far as may be necessary however, although it is without consequence, I find that Wu was to blame for the failure to sit down and discuss the terms of the proposed agreement. He cancelled meeting after meeting. He wanted a full explanation of each term. It was provided. To suggest that he should have met with Brady first is not an answer. Does that mean that they should never meet? It was always contemplated that S&C would prepare the JVA or Unitholders Agreement. The short point is that Wu never provided comments on the draft agreement and never sought to discuss and work out and negotiate any differences. Rather, he continued for many months to harp on about matters that had become historical and entirely overtaken by the critical need to conclude the Unitholders Agreement. Wu was copied into all drafts of the agreement and correspondence and only after about four months, and on 16 April 2016 did he assert that the board had not made a unanimous decision on 21 December 2015, to appoint S&C. The position taken by Wu was entirely unreasonable, impractical and indicative of the way the relationship had and was to progress. Wu’s email of 19 April referred to in paragraph 83 is self-evidently an extraordinary email. Wu clearly failed to use his best endeavours to enter into a Unitholders Agreement, but this caused no loss to Brady Queen.
Failure to authorise payment of necessary expenses
Brady Queen alleges that Wu and Austhome failed to authorise payment of necessary expenses in the sum of $203,126.31 in breach of clauses 7.4 and 18.1 of the HoA. Numerous examples are given over the period June 2016 to May 2018. Wu contends, that in relation to most of the expenses, they were not approved by both parties as required by clause 7.4 of the HoA and were therefore required to be paid by Brady Queen, and not 280 Queen. Wu contends further that under clause 7.6 of the HoA Brady Group expenses were not payable. One amount is for $550. It is unlikely that this amount, or any other amount for that matter would derail or delay the Project as contended.
The objective of the rule is “to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage”. The appellant’s case was based upon the first limb of the principle stated in Warman and later restated in Pilmer:
“the fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is ‘a conflict or a real or substantial possibility of a conflict’ between personal interests of the fiduciary and those to whom the duty is owed.”
In Chan v Zacharia, Deane J observed that the equitable rule involved two themes and that:[26]
The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. Notwithstanding authoritative statements to the effect that the “use of fiduciary position” doctrine is but an illustration or part of a wider “conflict of interest and duty” doctrine (see, eg, Boardman v Phipps; N.Z. Netherlands Society “Oranje” Inc v Kuys), the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it.
[26](1984) 53 ALR 417, 434 (Deane J).
In Pilmer v Duke Group Ltd (in liq), McHugh, Gummow, Hayne and Callinan JJ formulated the no conflict rule as follows:[27]
… [T]he fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is ‘a conflict or a real or substantial possibility of a conflict’ between personal interests of the fiduciary and those to whom the duty is owed.
[27](2001) 180 ALR 249, 271 [78] (McHugh, Gummow, Hayne and Callinan JJ).
In Streeter v Western Areas Exploration Pty Ltd (No 2), McLure P (with whom Buss JA agreed) observed that a fiduciary is under an obligation, without informed consent, not to promote his or her personal interest by making or pursuing a gain or benefit in circumstances in which there is a conflict or a real or substantial possibility of a conflict between the fiduciary’s personal interest and those whom he or she is bound to protect. Her Honour also observed that:[28]
When examining the case law, a distinction needs to be drawn between those cases in which the fiduciary was under a positive duty to acquire or seek to acquire a particular benefit or property for the company (Cook v Deeks[1916] 1 AC 554; Chan v Zacharia; Industrial Development Consultants Ltd v Cooley[1972] 1 WLR 443; Keech v Sandford (1726) 25 ER 223) and cases where there is no such positive duty. This case falls into the latter category. Whether there is a sufficient connection in those circumstances can give rise to difficult questions of fact. Indeed, where a complex course of dealing is in issue, as in this case, minds reasonably may differ as to the outcome of the application of the principles: Maguire v Makaronis (468). The principles in this area of the law are easier to state than to apply.
[28](2011) 278 ALR 291, 305 [76] (McLure P).
If, contrary to my opinion, Brady was subject to fiduciary obligations which included a restriction against undertaking any project in competition with 280 Queen, the contended conflict point, I do not in any event consider that there has been any breach of such duty. The short point is that in the particular facts and circumstances of this case there was no real or substantial possibility of a conflict on the part of Brady between interest and duty.
Prior to the trial I understood Austhome and Wu to contend that the conflict manifested itself in Brady and Pethica devoting substantially more time to the 380 Lonsdale Street project to the detriment of the 280 Queen Street project. It was suggested that this was the reason for the substantial delays on the part of Brady and Pethica in responding to Wu and attending to relevant matters. In fact prior to the trial Austhome sought extensive discovery of potentially thousands of documents to make good this point. The application was dismissed. To the extent that this point was run at trial and is persisted with it is without merit. It is not supported by the evidence which in fact points the other way, that is that Brady and Pethica were keen to get on with the Development and did not slow down on account of the 380 Lonsdale project. Brady had the staff, consultants and resources to undertake both ventures. I find that there is no evidence in support of the proposition that the 380 Lonsdale project undertaken by Brady Lonsdale had a detrimental effect on the 280 Queen Street Project so far as capacity to undertake both projects is concerned. Any delay was as much the fault of Wu, perhaps even more so, as it was of Brady.
However, as it emerged at trial, and indeed as pleaded, the main contention of Wu and Austhome was that the respective projects — by 280 Queen and Brady Lonsdale — had the same target markets and that this was a relevant conflict that underpinned the breach of fiduciary duty by Brady personally. For the reasons given, the suggested conflict is without merit and is not supported by the evidence. There was no conflict. The projects were different. The timeframe was different. The design was different. Finally there was no expert evidence (and no evidence other than bald assertion), and it is far from self-evident, that selling apartments in two different residential towers in the Melbourne CBD in 2016-2017 would be detrimental to both.
However, as noted there is a more fundamental point. The alleged competing project was undertaken by Brady Lonsdale. Although ultimately controlled by Brady, it was not explained precisely how Brady personally was in breach of fiduciary duty.
Causation
If, contrary to my opinion, there was a breach of fiduciary duty, as contended, that is a real or substantial possibility of conflict represented by the mere existence of a competitive project, by another entity (Brady Lonsdale), not the alleged fiduciary (Brady) I do not, so far as may be relevant, consider that in the facts and circumstances of this case, any such breach caused any loss to either 280 Queen (the suggested rival project) or Austhome and Wu. The simple point is that the parties were unable to work together and it did not matter what other projects Brady or the Brady Group was involved in. To suggest that but for the conflict 280 Queen and its stakeholders would have made substantial gains is absurd, contrary to the evidence and my findings, and is in the realm of the fairy tale.
In any event, Wu and Austhome are not claiming any relief in relation to the competitive project, that is, 380 Lonsdale. They do not seek an account of profits or equitable compensation in relation to that project. Rather, they seek relief based on the effect that the competitive project, allegedly in breach of fiduciary duty, had on Austhome’s interest in 280 Queen. It had no effect at all.
In Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited,[29] a case referred to by both parties, causation and the quantification of loss were relevant issues in relation to parties that had knowingly assisted in a breach of fiduciary duty. The case is therefore of limited assistance or relevance to the case before me.
[29](2018) 92 ALJR 918.
In relation to quantification the plurality said:
13.Once it has been determined that a benefit or advantage has been caused by the acts of knowing assistance, there remains the question of quantification of the benefit to be disgorged. While it is true that equity will not require an errant fiduciary or a participant in a breach of fiduciary duty to account for an advantage which the breach of fiduciary duty has not caused or to which it has not sufficiently contributed, where causation is sufficiently established the onus is upon the errant fiduciary or participant to show that he or she should not account for the full value of the advantage. That onus is not discharged by mere conjecture or supposition giving the benefit of the doubt to a proven wrongdoer. The requirement of proof conforms with the obligation of a party charged with a breach of fiduciary duty to show why the full value of an advantage obtained in a situation of conflict of duty should not be disgorged.
14.There are two ways in which the wrongdoer might discharge that onus and reduce the extent of the liability to disgorge profits. The first way, which can involve notorious difficulties in attribution of costs, is by proving his or her entitlement to an allowance for costs incurred, and labour and skill employed. No issue of an allowance arises, or was relied upon, in this appeal because it was accepted that the expenses included in the discounted cash flow included an amount for the work and effort of Woff and Corby.
15.The second way, which was the focus of this appeal, is by demonstrating that the benefit or advantage is beyond the scope of the liability for which the wrongdoer should account for profits. A wrongdoer might prove that some profit or benefit is beyond the scope of liability for which he or she should account if the profit or benefit has no reasonable connection with the wrongdoing. For example, in Frank Music Corp v Metro-Goldwyn-Mayer Inc, the Ninth Circuit Court of Appeals accepted that a copyright infringement by MGM Grand Hotel Inc in a performance at the MGM Grand Hotel entitled the plaintiffs to the profits directly from the performance. It also entitled the plaintiffs to a proportion of indirect profits, including from the consequential increase in hotel room bookings which were held to have a “sufficient nexus” with the performance. But the direct profit from the performance to be disgorged was limited to nine per cent because the copyright infringement comprised only the substantial part of Act IV in a ten-act performance. Nor did it entitle the plaintiffs to any profits made by the liable parent company, Metro-Goldwyn-Mayer Inc, as a result of “the advertising value” of the hotel.
In dealing with equitable principles, Gageler J said:
83.The “cardinal principle of equity” is “that the remedy must be fashioned to fit the nature of the case and the particular facts”. Contrary to approaches which have emerged in some English cases since Warman, identification of a benefit or gain for which a defendant fiduciary or knowing participant is to be ordered to account is the outcome neither of judicial discretion nor of the determination of a mere factual issue of causation. Identification of the benefit or gain is a matter of judgment informed by equitable principle. However contestable the judgment to be made might be on the facts of a particular case, the judgment to be made is one which admits only of a unique outcome which, once made, falls to be appraised on appeal according to a standard of correctness.
84.Equity is not ignorant of questions of causation. What it stresses is that questions of causal nexus in a remedial context must be addressed by reference to the equitable obligation breach of which is to be vindicated by the remedy that is sought.
85.The benefit or gain for which a fiduciary or knowing participant is liable to be ordered to account must, as a baseline requirement, have a causal connection to the fiduciary’s breach of equitable obligation. The requisite causal connection was explained in Warman to exist if the benefit or gain has been obtained “by reason of” the fiduciary position, where the relevant breach is of the conflict rule, or if the benefit or gain has been obtained “by reason of” the fiduciary taking advantage of an opportunity or knowledge derived from the fiduciary position, where the relevant breach is of the profit rule.
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88.A causal connection between a fiduciary’s breach of fiduciary obligation and a benefit or gain sufficient for the fiduciary or knowing participant to be liable to the equitable remedy of account will exist if the benefit or gain to the fiduciary or knowing participant would not have been obtained “but for” the breach, in the same way as a causal connection sufficient for the fiduciary to be liable to the equitable remedy of compensation will exist if a loss to the person to whom the fiduciary obligation is owed would not have been sustained but for the breach. Because the concern of equity is to vindicate the equitable obligation that has been breached, the “but for” connection will be sufficient even though other contributing causes might be in play. That the fiduciary’s breach of fiduciary obligation is dishonest and fraudulent is also good reason for treating a sufficient causal connection as existing if the dishonest and fraudulent breach can be concluded to have played a material part in contributing to the benefit or gain of the fiduciary or knowing participant even in circumstances where it cannot be concluded that the benefit or gain would not have been obtained but for the breach.
89.Obviously enough, as with any other question of causation in equity, the causal connection between a fiduciary's breach of fiduciary obligation and a benefit or gain must be judged using common sense and “with the full benefit of hindsight”. And as with other questions of causation in equity, the inquiry into causation is not to be constrained by normative limitations imported from the common law. To introduce those limitations would risk confusing distinct legal policies underlying distinct bases of legal liability and limiting equity’s capacity to mould equitable relief to the circumstances of the individual case.
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91.The reasoning in Warman makes explicit that where there is shown to exist a causal connection between a fiduciary’s breach of fiduciary obligation and a benefit or gain to the fiduciary or knowing participant, the onus shifts to the defendant to establish that it is inequitable to order that the defendant account for the value of the whole of the identified benefit or gain. The shifting of onus is explicable in part, but only in part, as putting the burden of proof of contested questions of fact on a party who is a proven wrongdoer. The burden on the defendant is not just evidentiary; more fundamentally, it is persuasive. The obligation of the defendant, imposed as an incident of “the fiduciary relation itself”, is to “justify” the “private advantage” that has been obtained.
In this case the question does not relate to any gain made by Brady (or Brady Lonsdale) but rather loss suffered by Austhome and Wu. On the evidence it is impossible to conclude that but for the Brady Lonsdale undertaking of the 380 Lonsdale Project — the suggested breach of fiduciary duty — 280 Queen Street would have progressed to fruition, whatever that might be. As found and for the reasons given, it had no impact on the 280 Queen Street Project, a different project, a far more developed project and a project not beset by the difficulties experienced by the Development. In fact, based on the evidence and my assessment of the parties I would go further and find that if the Brady Group had not undertaken the 380 Lonsdale Project, the Development would still not have got off the ground.
Wu and Austhome did not claim an entitlement to any profit derived from the suggested competing development, but rather loss suffered from a reduction in the value of their shareholding in 280 Queen. However, as I have endeavoured to demonstrate the Project was doomed from the start.
Finally, the claim that Brady Queen knowingly received the benefit of the breach of fiduciary duty and as a consequence holds one — third of its interests in 280 Queen on trust for Austhome is self — evidently entirely misconceived. If the joint venturers were prejudiced and suffered loss from the competing project how can one of them have received any benefit? No further elaboration is necessary or required.
H DISPOSITION
For the reasons given, the claim and the counterclaim will be dismissed.
A final word. Each parties claim is fundamentally misconceived. The claim and counterclaim should never have been made. The matter should have ended with the purchase of the shares and units following an expert valuation. No party sought to appeal those orders.
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