Bynon v Atma Nominees Pty Ltd as trustee for the Badjyn Investment Trust and the H & B Farm Trust
[2017] WASC 30
•15 FEBRUARY 2017
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: BYNON -v- ATMA NOMINEES PTY LTD AS TRUSTEE FOR THE BADJYN INVESTMENT TRUST AND THE H & B FARM TRUST [2017] WASC 30
CORAM: TOTTLE J
HEARD: 10 & 18 JANUARY 2017
DELIVERED : 15 FEBRUARY 2017
FILE NO/S: CIV 2616 of 2016
BETWEEN: ALLAN BYNON
First Plaintiff
PATRICIA BYNON
Second PlaintiffAND
ATMA NOMINEES PTY LTD AS TRUSTEE FOR THE BADJYN INVESTMENT TRUST AND THE H & B FARM TRUST
Defendant
Catchwords:
Practice and procedure - Application for summary judgment - Where anterior proceedings dismissed by consent - Whether defendant has established as a triable issue that the plaintiffs' claim is defeated by the principles of res judicata or issue estoppel - Where defendant contend plaintiffs failed to act reasonably and in good faith - Application granted
Legislation:
Rules of the Supreme Court 1971 (WA), O 14
Result:
Application for summary judgment granted
Category: B
Representation:
Counsel:
First Plaintiff : Mr R E Sandover
Second Plaintiff : Mr R E Sandover
Defendant: Mr M P Noonan-Crowe
Solicitors:
First Plaintiff : Jackson McDonald
Second Plaintiff : Jackson McDonald
Defendant: Valenti Lawyers
Case(s) referred to in judgment(s):
Australian Can Co Pty Ltd v Levin & Co Pty Ltd [1947] VLR 332
Cordinup Resorts Pty Ltd v Terana Holdings Pty Ltd (1997) 143 FLR 18
Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87
Isaacs v Ocean Accident and Guarantee Corporation Ltd (1958) SR (NSW) 69; (1957) 75 WN (NSW) 48
Rogers v Legal Services Commission (SA) (1995) 64 SASR 572
Stewart v Biodiesel Producers Ltd [2009] WASC 145
Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASCA 222
Thoday v Thoday [1964] 1 All ER 341
Willoughby v Clayton Utz [No 2] [2009] WASCA 29
TOTTLE J: The plaintiffs apply for summary judgment on claims arising from a deed of settlement (the settlement deed) executed on 9 September 2014.
The background
The settlement deed recorded the terms of settlement of a dispute between members of a farming family. The parties were the plaintiffs, the defendant (in its capacity as the trustee of the Badjyn Investment Trust) and the H & B Farm Trust (constituted by Mr William Bynon, his wife, Mrs Hazel Bynon, and Mr Jamie Bynon). Mr William Bynon and Mrs Hazel Bynon are the first plaintiff's parents and Mr Jamie Bynon is his brother.
The settlement deed was preceded by a Heads of Agreement executed on 11 February 2014. The Heads of Agreement were varied by an oral agreement made on 9 September 2014.
Relevantly, the settlement involved the transfer of one farm, New Farm, from the defendant to the first plaintiff, and the transfer of the first plaintiff's interest in another farm, Allan's Farm, to his brother, Mr Jamie Bynon, (collectively the Farm Transactions). The defendant agreed to indemnify the plaintiffs in respect of, alternatively to pay to them, the amount of any 'Tax Liability' (a term defined in the settlement deed) incurred by them, or either of them, as a result of the transfer of New Farm and the amount of any tax payable as a result of indemnity in respect of, or the the payment of the Tax Liability. The defendant also agreed to indemnify the plaintiffs in respect of any duty payable on the transfer of New Farm, the evident intention of the parties being that the plaintiffs should not have to pay any tax or duty as a result of the New Farm. The defendant and Mr Jamie Bynon agreed to give like indemnities on a joint and several basis to the plaintiffs in respect of the Allan's Farm transaction. Unless it is necessary to draw a distinction between the various amounts I will use the phrase 'Tax Liability' to refer to all the amounts claimed by the plaintiffs pursuant to these provisions.
The settlement deed provided for the Farm Transactions, to be completed by 3 November 2014 but settlement was not effected by that date.
In December 2014, the plaintiffs' solicitors informed the defendant's solicitors that the plaintiffs' accountants estimated that the Tax Liability would be $495,992.
On 6 March 2015, the plaintiffs commenced proceedings (the 2015 proceedings) against the defendant, Mr William Bynon and Mr Jamie Bynon seeking specific performance of the Farm Transactions and a declaration that the defendant was liable to indemnify the plaintiffs in respect of the estimated Tax Liability of $495,992 flowing from the Farm Transactions.
On 26 March 2015, the Farm Transactions were settled without any orders having been made by the court.
In correspondence between the parties' solicitors that followed the settlement of the Farm Transactions, the defendant's solicitors argued that the plaintiffs' claim in respect of the estimated Tax Liability in the 2015 proceedings did not disclose a reasonable cause of action because the claim was for an estimated amount rather than for the plaintiffs' actual liability. The defendant's solicitors invited the plaintiffs' solicitors to discontinue the 2015 proceedings.
Further correspondence was exchanged between the parties' solicitors about the costs of the 2015 proceedings. Ultimately the parties agreed that the 2015 proceedings should be dismissed and that the defendants in those proceedings should pay the plaintiffs' costs fixed in the amount of $2,500.
On 8 June 2015, a registrar of the court made an order dismissing the 2015 proceedings and providing for the defendants to pay the plaintiffs' costs fixed in the sum of $2,500. I will refer to the correspondence and the consent order in more detail later in these reasons.
On 16 June 2016, the plaintiffs' solicitors sent copies of notices of assessment issued by the Australian Taxation Office (the ATO) for each of the plaintiffs and stated that the Tax Liability resulting from the Farm Transactions was $273,125.40 and demanded payment of that amount. The defendant's solicitors contended that their clients were not liable to pay the amount demanded because the plaintiffs' cause of action in respect of the Tax Liability had been determined in the 2015 proceedings and to pursue the claim would offend against the principle of res judicata. In its submissions in opposition to the summary judgment application the defendant also contends that the plaintiffs failed to act reasonably and in good faith because they did not take steps that the defendant contends were open to them to reduce the Tax Liability.
On 16 September 2016, the present action was commenced. The plaintiffs issued a summons for summary judgment on 14 November 2016.
The evidence
The plaintiffs read and relied upon an affidavit sworn by the first plaintiff on 3 November 2016 and a further affidavit sworn by him on 23 December 2016. They also relied upon an affidavit sworn by Ms Marcia Fitzmaurice on 23 November 2016 and upon an affidavit sworn by Mr Craig Simon on 23 December 2016. Ms Fitzmaurice and Mr Simon are partners in the accounting firm known as Grant Thornton who were involved in assisting the plaintiffs by estimating the Tax Liability and thereafter preparing the plaintiffs' tax returns.
The defendant read and relied upon an affidavit sworn by Mr William James Bynon on 8 January 2016.
Principles applicable to summary judgment
There is no dispute about the applicable principles. Relevantly they may be summarised as follows:
1.Unless the court dismisses the application, or the defendant satisfies the court that there is an issue or question in dispute which ought to be tried, or that there ought for some other reason to be a trial, the court may give summary judgment: O 14 r 3(1) of the Rules of the Supreme Court (WA).
2.The applicant for summary judgement assumes the burden of persuading the court the claim made is a good one, that there is no defence to it, that leave to defend should not therefore be granted, and that judgement should be given for the plaintiff. The party showing cause against the application assumes an evidentiary burden by that process, but the overall legal burden of persuasion remains upon the applicant: Cordinup Resorts Pty Ltd v Terana Holdings Pty Ltd (1997) 143 FLR 18, 30.
3.The power to order summary judgement will be exercised with great care and will not be exercised unless it is clear that there is no real question to be tried: Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87, 99.
4.Extensive argument may be necessary to demonstrate that there is no question which ought to be tried: Australian Can Co Pty Ltd v Levin & Co Pty Ltd [1947] VLR 332, 334.
5.In determining whether there is a question which ought to be tried, there must be a plausible contention requiring investigation. This does not mean that the court must uncritically accept every statement in an affidavit, 'however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same department, or inherently improbable in itself'. Nor must a court accept a statement in an affidavit not having 'sufficient prima facie plausibility to merit further investigation as to [its] truth': Civil Procedure - Western Australia [14.3.3].
Application for leave
An application for summary judgement must be brought within 21 days after an appearance is entered by a defendant or any later time with leave of the court: O 14 r (1) of the Rules of the Supreme Court (WA). The application in this case was brought some 27 days late and it was necessary for the plaintiffs to apply for leave to bring the application. An explanation for the delay was provided by the plaintiffs' solicitors and the application for leave was not opposed. I consider that leave to bring the application should be granted.
The plaintiffs' claim
The plaintiffs' claim is that the defendant is in breach of its obligations to indemnify them for, or to pay, the Tax Liability. The first plaintiff attaches a copy of the settlement deed to his affidavit sworn on 3 November 2016.
The relevant provisions of the settlement deed are cl 1.1, cl 2, cl 3.1, cl 3.2, cl 3.3, cl 3.4, cl 3.5, cl 3.6, cl 3.7 and cl 4. They read as follows:
1.Interpretation
1.1Capitalised Definitions
…
Tax means any tax, levy, charge, impost, fee, deduction, GST, compulsory loan or withholding which is assessed, levied, imposed or collected by any Australian or foreign Taxation Authority and includes, but is not limited to any interest, fine, penalty, charge, or any other amount imposed on, or in respect of any of the above.
Tax Liability means all Tax payable (including but not limited to capital gains tax), and all liabilities, losses, damages, costs and expenses of whatever description.
…
2.Settlement
2.1Settlement Sum
(a)Atma Nominees must pay the Settlement Sum to Allan as follows on 30 June 2016:
...
(b)Atma Nominees must pay the Settlement Sum by bank cheque or electronic funds transfer to Allan.
3.Transfer and sale of Properties
3.1Transfer of New Farm
(a)By 3 November 2014 Atma Nominees must effectuate the transfer of New Farm free of all encumbrances to:
(i)Allan and Patricia; or
(ii)Allan or Patricia.
(b)The transfer of New Farm prescribed in clause 3.1(a) is subject to clause 3.2.
3.2Method of transfer of New Farm to be determined by Atma Nominees
(a)Atma Nominees has the right to exercise its discretion, such discretion to be exercised reasonably, in electing whether to transfer the New Farm to Allan and Patricia in accordance with clause 3.1(a)(i) or to Allan or Patricia in accordance with clause 3.1(a)(ii).
(b)Atma Nominees must notify Allan and Patricia in writing at least 2 Business Days before effectuating transfer of New Farm confirming whether the proposed transfer of New Farm will be made in accordance with:
(i)clause 3.1(a)(i), in which case Atma Nominees must notify Allan and Patricia of the proposed allocation of ownership of New Farm between Allan and Patricia; or
(ii)clause 3.1(a)(ii), in which case Atma Nominees must notify Allan and Patricia of whether New Farm will be transferred to Allan or Patricia.
3.3Indemnity for Tax Liability on transfer of New Farm
(a)If the transfer of New Farm to Allan and/or Patricia under clause 3.1 on the distribution of any income or gain arising from the transfer of New Farm to Allan and/or Patricia under clause 3.1 results in Allan and/or Patricia incurring a Tax Liability ('Payment Amount'), then Atma Nominees must indemnify Allan and/or Patricia and pay to Allan and/or Patricia the amount of the Payment Amount.
(b)If Allan and/or Patricia will be liable to Tax as a result of receiving payment of the Payment Amount under clause 3.3(a), then Atma Nominees must pay an additional amount to Allan and/or Patricia ('Additional Amount') such that after payment of any Tax that may be payable by Allan and/or Patricia as a result of receiving the Payment Amount and the Additional Amount, Allan and/or Patricia receive the Payment Amount as if the Payment Amount were not subject to Tax in the hands of Allan and/or Patricia.
3.4Indemnity for transfer duty on transfer of New Farm
If the transfer of New Farm pursuant to clause 3.1 above results in any Duty being payable by Allan and/or Patricia, then Atma Nominees must indemnify Allan and/or Patricia for an amount equal to the amount of that Duty payable.
3.5Purchase of Allan's Farm
(a)Allan and Patricia agree to sell and Jamie agrees to purchase Allan's and Patricia's interest in the Allan's Farm ('Farm Interest') free of all encumbrances.
(b)By 3 November 2014 Allan, Patricia and Jamie will take all necessary steps to enter into a contract for the sale and purchase of Allan's Farm containing, among other things, the following terms:
(i)Jamie will pay the Allan's Farm Purchase Price to Allan by 3 November 2014;
(b)Jamie will pay the Allan's Farm Purchase Price to Allan at such place or places as Allan may from time to time in writing direct; and
(iii)the 2011 Joint Form of General Conditions for the Sale of Land shall be deemed to be incorporated into the contract so far as they are not varied by, or otherwise inconsistent with the express terms of the contract of this deed.
3.6Indemnity for Tax Liability on sale of Allan's Farm
(a)If the transfer of the Farm Interest under clause 3.5 results in Allan and Patricia incurring a Tax Laibility ('Second Payment Amount'), then Jamie and Atma Nominees (on a joint and several basis) must
(b)pay an additional amount to Allan ('Second Additional Amount') such that after payment of any Tax that may be payable by Allan as a result of receiving the Second Payment Amount and the Second Additional Amount, Allan and Patricia receive the Second Payment Amount as if the Second Payment Amount were not subject to Tax in the hands of Allan and Patricia.
3.7Indemnity for transfer duty on transfer of Allan's Farm
If the transfer of the Farm Interest pursuant to clause 3.5 above results in any Duty being payable by Allan and Patricia, then Jamie and Atma Nominees jointly and severally indemnity Allan and Patricia for an amount equal to the amount of that Duty payable.
4.Release
(a)Upon the:
(i)payment of the Settlement Sum in accordance with clause 2.1;
(ii)transfer of New Farm in accordance with clause 3.1; and
(iii)purchase of Allan's Farm in accordance with clause 3.5;
each party releases the other party from each of the Claims (as the case may be) which each party has had now or in the future may have, and but for this deed, could or might have had.
(b)The releases under this deed do not release a party from its obligations under this deed.
9.5 Further assurances
Each party must execute all documents and do all things as reasonably necessary to give full effect to the provisions of this deed and the transactions contemplated by it.
Ms Fitzmaurice attached to her affidavit copies of the notices of assessment issued to the plaintiffs by the ATO for the year ending 30 June 2015. She deposed that the Tax Liability was $273,125 and she attached the calculations undertaken by her to arrive at that figure. The defendant did not challenge the calculations made by Ms Fitzmaurice, though it does challenge whether the plaintiffs treated the Farm Transactions correctly in their tax returns, a subject to which I return later in these reasons.
The plaintiffs' evidence establishes the contractual foundation for their claim, that is, the evidence establishes the relevant terms of the settlement deed. The plaintiffs have also established the facts required to complete their causes of action, that is that they have a Tax Liability resulting from the Farm Transactions. They have done this by adducing the ATO assessments of their taxable income for the year ending 30 June 2015 and by Ms Fitzmaurice's calculations.
In his affidavit of 3 November 2016, the first plaintiff verifies the allegations of fact contained in the statement of claim and deposes that the defendant has no defence to the action.
Has the defendant established a triable issue?
Primary facts not in dispute
The defendant does not dispute the primary facts relied upon by the plaintiffs.
Has the defendant established as a triable issue that the plaintiffs' claim is defeated by the principles of res judicata or issue estoppel?
Relevant principles
There was no material dispute between the parties as to the relevant principles. The summary of the principles that follows draws upon the outline of the principles and authorities governing res judicata estoppel provided by Beech J in Stewart v Biodiesel Producers Ltd [2009] WASC 145 [6] - [21].
The basic principle is clear: the final decision in a case estops or precludes any party to the litigation from disputing against any other party in later litigation the correctness of the earlier decision, except on appeal. The same claim cannot be raised again between them: Spencer Bower, Turner & Handley, The Doctrine of Res Judicata (3rd ed, 1996) [2], [9]. Two policy considerations underpin this basic principle: first, the interest of the community in the termination of disputes and in the finality and conclusiveness of judicial decisions; second, the interest of litigants in being protected from the vexatious repetition of civil actions or criminal proceedings.
When a case is litigated to judgment and upheld the cause of action merges in the judgement and it loses its separate existence. This is described as 'merger in judgement'. It is to be contrasted with what is sometimes termed 'cause of action estoppel', which applies to preclude a party from raising the same claim again in later litigation, whether the claim in the earlier action succeeded or failed. The distinction between res judicata by merger in the judgment and cause of action estoppel on the one hand and 'issue estoppel' was explained by Diplock LJ in Thoday v Thoday [1964] 1 All ER 341, 352 as follows:
The particular type of estoppel relied upon by the husband is estoppel per rem judicatam. This is a generic term which in modern law includes two species. The first species, which I will call 'cause of action estoppel', is that which prevents a party to an action from asserting or denying, as against the other party, the existence of a particular course of action, the nonexistence or existence of which has been determined by a court of competent jurisdiction in previous litigation between the same parties. If the cause of action was determined to exist, i.e., judgement was given upon it, it is said to be merged in the judgement… If it was determined not to exist, the unsuccessful plaintiff can no longer assert that it does; he is estopped per rem judicatam… The second species, which I will call 'issue estoppel', is an extension of the same rule of public policy. There are many causes of action which can only be established by proving that two or more different conditions are fulfilled. Such causes of action involves many separate issues between the parties as there are conditions to be fulfilled by the plaintiff in order to establish his cause of action; and there may be cases where the fulfilment of an identical condition is a requirement common to two or more different causes of action. If in litigation upon one such cause of action any of such separate issues as to whether a particular condition has been fulfilled is determined by a court of competent jurisdiction, either upon evidence or upon admission by a party to the litigation, neither party can, in subsequent litigation between one another upon any cause of action which depends upon the fulfilment of the identical condition, assert that the condition was fulfilled if the court has in the first litigation determined that it was not, or deny that it was fulfilled if the court in the first litigation determined that it was.
The constituent elements of res judicata estoppel are identified in Spencer Bower, Turner & Handley Res Judicata (3rd ed, 1996) [19] as follows:
(i)the decision was judicial in the relevant sense;
(ii)it was in fact pronounced;
(iii)the tribunal or court had jurisdiction over the parties and the subject matter;
(iv)the decision was -
(a)final, and
(b)on the merits;
(v)it determined the same question as that raised in the later litigation; and
(vi)the parties to the later litigation were either parties to the earlier litigation or their privies, or the earlier decision was in rem.
This statement was cited with approval by Pullin JA (Wheeler & Miller JJA agreeing) in Willoughby v Clayton Utz [No 2] [2009] WASCA 29 [14].
Although not a decision on the merits, a consent judgement or order may constitute a res judicata: Spencer Bower Turner & Handley at [38].
Questions may arise, however, as to what has been decided by the consent judgment. In Isaacs v Ocean Accident and Guarantee Corporation Ltd (1958) SR (NSW) 69, 75; (1957) 75 WN (NSW) 48, 49 - 50, Street CJ and Roper CJ in Eq addressed this issue and said:
It is clear that the mere fact that the judgment is by consent does not detract from its conclusive effect upon the issues determined by it: Re South American and Mexican Co; Ex parte Bank of England. But a judgment operates by way of estoppel only as to those matters which are necessarily decided by it. (Cf Blair v Curran; Jackson v Goldsmith). 'Though consent judgments and orders are undoubtedly in every case decisions in the sense that the actual mandatory or prohibitive parts of the judgment or order are conclusively binding upon ... the parties ... it may often be a matter of legitimate doubt and debate as to what, if any, particular questions or issues of right, title, or liability were, expressly or impliedly, the subject of the consent, and of the decision. For this purpose, as for all other purposes connected with the ascertainment of the subject-matter of a decision, the court will closely examine all such evidence, if any, as is available and admissible, and, by the aid of such materials, will ascertain whether any and what adjudication of matters in dispute was expressed, or necessarily involved, in the actual decision assented to' (Spencer Bower on Res Judicata, p 24, par 34). Again, at p 114, par 174, the learned author says: 'In the case of judgments and orders by consent ... it is absolutely essential to refer to the pleadings or affidavits of the parties, if the judgment or order is in a naked and general form, in order to ascertain what, if any, decision of particular questions or issues was impliedly consented or submitted to by the party against whom such consent ... judgment or order was made'. (citations omitted)
Observations to the same effect are to be found in Spencer Bower Turner & Handley, Res Judicata at [39]:
Though consent judgements and orders are decisions and their operative parts binding, it may not be clear what questions are concluded. The court will examine the available evidence to ascertain the matters in dispute. Any issue which the parties recognised was the subject of the litigation and was fundamental to the judgement or order will be conclusively determined. Where, however, there are no such materials neither party is estopped from disputing anything but the actual judgement or order. The proper approach to determining the scope of a consent judgement was stated by Lord Herschel LC:
'… a judgement by consent is intended to put a stop to litigation between the parties, just as much as is a judgement which results from the decision of the court after the matter has been fought to the end. And I think it would be very mischievous if one were not to give a fair and reasonable interpretation to such judgements and were to allow questions that were really involved in the action to be fought over again in a subsequent action. (footnotes omitted)
The weight of authority in Australia is that the identity or otherwise of the causes of action under consideration is determined by matters of substance rather than the technical identity of the legal form of action or category of claim invoked: see Stewart v Biodiesel Producers Ltd, per Beech J at [17] and the authorities cited by his Honour.
The pleadings
In the statement of claim in the 2015 proceedings the plaintiffs pleaded: the effect of the relevant provisions of the settlement deed; the defendant's failure to settle the Farm Transactions; and then pleaded out the facts relied on in support of their claim for an indemnity in respect of the estimated Tax Liability. The relevant paragraphs read as follows:
17.On 16 December 2014, the Plaintiffs, in accordance with its [sic] obligations under the Deed:
(a)provided the First Defendant with an assessment of the estimated Tax Liability with respect to the New Farm Transaction and Allan's Farm Transaction, being an amount of $495,992 (Payable Tax); and
(b)notified the First Defendant that it wished to exercise its right to be indemnified for the Payable Tax immediately pursuant to clause 3.4 of the Deed.
Particulars
Letter from Jackson McDonald to Valenti Lawyers dated 16 December 2014
18.As at the date of this writ, the First Defendant has:
(a)failed to indemnify the plaintiffs for the Payable Tax;
(b)failed to provide any explanation, or otherwise indicate whether or not the First Defendant agrees or disagrees with the quantum of the Payable Tax; and
(c)instead, has simply refused to substantially communicate, engage or meaningfully confer in relation to the matter at all.
In the prayer for relief the plaintiffs sought:
A.An order for specific performance of the Deed requiring the First Defendant, Second Defendant and Third Party to:
(a)at a date no later than 14 days after the Court so orders, attend settlement and do all things necessary to effect settlement of the New Farm Transaction and the Allan's Farm Transaction;
(b)…
B.A declaration that the First Defendant indemnify the Plaintiffs for any amount incurred by the Plaintiffs pursuant to clause 3.3 of the deed, being the Payable Tax.
CCosts on a full indemnity basis.
DSuch further or other order as the Court deems appropriate.
In the statement of claim in the present proceedings the plaintiff's pleaded the effect of clauses 3.3, 3.6 and 9.5 of the settlement deed and then pleaded the claim for the Tax Liability as follows:
7.Settlement of the New Farm Transaction from the Defendant to the First Plaintiff was effected on 26 March 2015.
8.Settlement of the Allan's Farm Transaction from the Plaintiffs to Allan Bynon was effected on 26 March 2015.
9.On 15 June 2016, the Plaintiffs' solicitors advised the Defendant's solicitors that:
(a)the Plaintiffs' taxable income had been assessed by the Australian Taxation Office (ATO); and
(b)pursuant to clauses 3.3 and 3.6 of the Deed the Defendant was liable to pay the Plaintiffs an amount of $273,125.00.
Particulars
Letter from Jackson McDonald to Valenti Lawyers dated 15 June 2016.
10.On 16 June 2016, the Plaintiffs' solicitors provided the Defendant's solicitors with the Plaintiffs' ATO notice of assessment and confirmed that:
(a)the amount payable pursuant to clauses 3.3 and 3.6 of the Deed amounted to $273,125.40 (Indemnity Amount); and
(b)interest began accruing on that liability commencing 7 June 2016 until payment.
Particulars
i.Letter from Jackson McDonald to Valenti Lawyers dated 16 June 2016.
ii.The Indemnity Amount is calculated as follows:
First Plaintiff
Second Plaintiff
Total
Clause 3.3(a)
$199,621
-
$199,621
Clause 3.3(b)
$64,777
-
$64,777
Clause 3.6(a)
$5,929
$874
$6,803
Clause 3.6(b)
$1,924
-
$1,924
Total
$272,251
$874
$273,125
11.In accordance with the Taxation Administration Act 1953 (Cth) (Act):
(a)interest at the relevant General Interest Charge (GIC) rate capitalising daily accrues on the Indemnity Amount commencing 7 June 2016 until the entire sum has been paid to the ATO;
(b)the GIC is calculated by reference to section 8AAD of the Act and is updated quarterly;
(c)the GIC rate for:
(i)the period April - June 2016 was 0.02535519%;
(ii)for the period July - September 2016 was 0.02461749%; and
(iii)the period October - December 2016 is 0.02393443%.
12.On 28 June 2016, the Plaintiffs made demand on the Defendant for payment of $273,849.62 being the Indemnity Amount and accrued GIC of $1,598.22.
Particulars
Letter from Jackson McDonald to Valenti Lawyers dated 28 June 2016.
13.On 28 June 2016 the Defendant became liable to pay the Plaintiffs the Indemnity Amount and accrued GIC pursuant to clauses 3.3 and 3.6 of the Deed.
14.On 30 June 2016, the Defendant rejected the Plaintiffs' demand.
Particulars
Letter from Valenti Lawyers to Jackson McDonald dated 30 June 2016.
In the prayer for relief the plaintiffs claim:
A.An order for specific performance by the Defendant of clauses 3.3 and 3.6 of the Deed.
B.A declaration that the Defendant is liable for the Tax Indemnity under clauses 3.3 and 3.6 of the Deed.
C.Further or alternatively:
(a)payment by the defendant to the plaintiffs of the sum of $273,125.40; and
(b)interest thereon capitalising daily at the relevant GIC rate from time to time commencing 7 June 2016 until payment in full by the Defendant to the Plaintiffs.
D. Costs on a full indemnity basis
E.Such further or other order as the Court deems appropriate.
The events preceding the consent order
On 27 March 2015 (the day after the Farm Transactions were settled) the defendant's solicitors wrote to the plaintiffs' solicitors and referring to the writ and statement of claim in the 2015 proceedings stated:
We note that part of the relief sought in the action is specific performance of the transfer of the land known as New Farm and pay [sic] a sum of money to the Plaintiffs at settlement equal to the duty on the transfer … We confirm that settlement was effected on 26 March 2015. It is our considered view that as a result of the settlement of the relief sought in this component of the action falls away.
The remaining relief sought in the action is a declaration that our client ATMA Nominees Pty Ltd indemnify the Plaintiffs for any amount incurred by the Plaintiffs pursuant to clause 3.3 of the Deed, being the Payable Tax (as defined in the statement of claim).
Payable Tax is defined in paragraph 17 of the statement of claim as 'an amount of $495,992.00', a sum which is pleaded to represent the estimated Tax Liability with respect to the New Farm Transaction and Allan's Farm Transaction. On the Plaintiffs own pleadings the declaration seeks a declaration that our client indemnify your clients for an estimated liability which is yet to arise and is presently unascertainable. The opinion of Grant Thornton upon which it appears your clients estimated tax liability is based on estimates and assumptions which may not eventuate. The opinion itself states that grant Thornton is concerned in a different tax outcome than the one shown in the opinion could arise. The opinion further states that 'if the trust were to distribute income or a capital gain it makes on transferring the land to Allan or Patricia, the tax position would be different from the one shown above', and goes on to state that 'a quotes distribution of trust income or capital gain could potentially offset any outstanding liability as referred to above, but would have a different tax make up and outcome'.
It is impossible for an accurate assessment of your clients' tax position to be made prior to the issue of a tax assessment after 30 June 2015.
It is our preliminary view that the proceedings as they currently stand are liable to an application to strike out the pleadings on the basis that they fail to disclose any reasonable cause of action. We respectfully suggest that your clients withdraw the writ of summons.
Would you please advise whether you have instructions to discontinue the action. Alternatively, if you are not instructed to discontinue the action, please advise the basis upon which you consider the pleadings are not liable to be struck out. Please consider this letter conferral in accordance with Order 59 of the Rules of the Supreme Court.
…
On 2 April 2015, the plaintiffs' solicitors wrote to the defendant's solicitors seeking payment of the plaintiffs' costs in the sum of $14,039.80. The plaintiffs' solicitors said that if the defendants refused to pay costs in that sum they were instructed to amend the writ of summons to delete the claim for declaratory relief in respect of the tax liability and to seek costs on an indemnity basis. The plaintiffs' solicitors set out why they maintained that the plaintiffs were entitled to costs on an indemnity basis.
There was further correspondence in which the quantum of the plaintiffs' costs and the defendant's liability to pay those costs was debated. On 25 May 2015 the defendant's solicitors sent a lengthy letter to the plaintiffs' solicitors in which they reiterated the defendant's position to the effect that the plaintiff had no claim in respect of the Tax Liability because that liability had not yet been assessed by the ATO. The defendant's solicitors repeated the contention that the declaratory relief sought in relation to the Tax Liability had no prospects of success and should be dismissed. The letter concluded, however, with an offer to pay the sum of $2,500 in full and final satisfaction of the plaintiffs' costs of the proceedings on the basis that the action be dismissed.
On 27 May 2015, the plaintiffs' solicitors responded to the offer, stating that they had been instructed to accept $2,500 in full and final settlement satisfaction of their clients' costs. They said that they would draft consent orders to that effect. Later on the same day the plaintiffs' solicitors prepared a memorandum of consent orders which provided for the discontinuance of the proceedings and the payment of $2,500 costs and sent them to the defendant's solicitors.
On 28 May 2015, the defendant solicitors wrote to the plaintiffs' solicitors pointing out that it had been agreed that the action be dismissed rather than discontinued and asking for an amended consent order to be prepared. Subsequently, the plaintiffs' solicitors prepared a further memorandum of consent orders that provided for the action to be dismissed.
The consent order made on 8 June 2015 was in the following form:
PURSUANT TO ORDER 43 RULE 16 AND BY CONSENT IT IS ORDERED THAT:
1.The action be dismissed against the defendants and the third party.
2.The defendants pay the plaintiff's costs of the action, fixed in the amount of $2,500.
BY THE COURT
REGISTRAR
Analysis
Res judicata – merger in judgment/cause of action estoppel
The critical question is whether the cause of action relied upon in the present proceedings is the same cause of action pleaded in the 2015 proceedings. The relevant paragraphs of each statement of claim plead a breach of the obligations imposed by cl 3.3 and cl 3.6 of the settlement deed, but the facts establishing the breach in each pleading are different.
In the statement of claim in the 2015 proceedings the critical facts upon which the putative cause of action depends are the defendant's failure to indemnify the plaintiffs in respect of, or to pay to them, the Tax Liability estimated to be payable by the plaintiffs as a result of the Farm Transactions. This was clearly not a 'Tax Liability' as defined by cl 1.1 of the settlement deed.
In the statement of claim in the present proceedings, the critical facts upon which the cause of action depended were the defendant's failure to indemnify the plaintiffs in respect of, or to pay to them, the Tax Liability payable by the plaintiffs as a result of the Farm Transactions as a consequence of the ATO's assessment.
Not only are the facts upon which the breaches depend different but the evidence required to establish those facts is different: in the 2015 proceedings the plaintiffs would have been required to adduce evidence to establish the estimate of Tax Liability; in the 2016 proceedings proof of the ATO's assessment is what is required. The difference in the pleaded facts and the difference in the evidence required to establish those facts leads me to conclude that the cause of action raised in the present proceedings is not the same as that raised in the 2015 proceedings. The res judicata principle does not operate to prevent the plaintiffs from maintaining their claim in respect of the Tax Liability in the present proceedings.
There is a further basis for concluding that the dismissal of the 2015 proceedings did not operate as a res judicata. The consent order provided for the dismissal of the action against the defendants and the third party. Adopting the words of Street CJ and Roper CJ in Eq in Isaacs, the consent order was 'in a naked and general form'.
To determine what questions or issues were impliedly decided by the consent order it is necessary to examine the materials that form the background to the making of the order.
In this case, one of the objectives of the 2015 proceedings was to achieve the settlement of the Farm Transactions. This occurred shortly after the commencement of the proceedings and it was unnecessary for the plaintiffs to maintain their claims for specific performance of the Farm Transactions. The only claims that remained to be determined were the claim for a declaration as to the defendants' liability to indemnify the plaintiffs in respect of the estimated Tax Liability resulting from the Farm Transactions and the claim for costs.
As noted earlier the defendant's solicitors argued that the pleading in respect of estimated Tax Liability did not disclose a reasonable cause of action. They invited the plaintiffs to discontinue the action, though, subsequently when making an offer to pay $2,500 in respect of the plaintiffs' costs, they stated the action should be dismissed.
In my judgment, when construed in context the consent order did not determine the plaintiffs' claims in respect of the Tax Liability. This construction recognises that the initial catalyst for correspondence that led to the consent order was defendant's solicitors' contention that the plaintiffs' cause of action in respect of the Tax Liability had not yet arisen. The defendant's solicitors did not contend that there would be no claim when assessments were made by the ATO. It is apparent from the plaintiffs' solicitors' correspondence that they accepted that the cause of action in respect of the Tax Liability had not arisen. There was no controversy about this. The focus of the correspondence was on the defendants' liability for the plaintiff's costs and the amount of the costs. In the context of the dispute between these parties, construing the consent order as not determining the cause of action for the Tax Liability in not inimical to the broad policy considerations to which I referred when outlining the relevant principles.
Both counsel drew my attention to the decision of Rogers v Legal Services Commission (SA) (1995) 64 SASR 572 and each relied upon it to support their submissions. The defendant's counsel relied upon the decision as support for the proposition that consent orders may constitute a res judicata. (I will return to the basis upon which the plaintiff's counsel relied upon the decision in the paragraphs that follow.) In Rogers, the Full Court of the Supreme Court of South Australia - Cox, Prior and Lander JJ - concluded that, in proceedings referred to as 'the first proceedings', the plaintiff's case had been struck out for failure to disclose a cause of action. As a result, the plaintiff then issued another set of proceedings (referred to by Lander J as 'the second proceedings'). The defendant raised the defence of res judicata and applied for summary judgment. The master entered judgment against the plaintiff, finding that the cause of action in negligence was res judicata and that the pleadings failed to disclose a cause of action. The Full Court allowed the appeal. Lander J gave detailed reasons (with which Cox and Prior JJ agreed). In his judgment Lander J made the point that if there must be correspondence between the cause of action in the first proceedings and the cause of action in the second that allows the doctrine of res judicata to apply, then:
The very nature of the order, ie that the proceedings are dismissed because the proceedings do not identify a cause of action, rather suggests that the cause of action could not have been disposed of, because, in fact the finding is there was no cause of action, and therefore no cause of action could have merged into the judgment (593).
At (596) Lander J returned to the point stating that where in the first proceedings the only matter that was determined was that there was no cause of action, res judicata would have no application.
Counsel for the plaintiffs argued that because the statement of claim in the 2015 proceedings did not disclose a reasonable cause of action in respect of the Tax Liability Lander J's reasoning in Rogers applied to the plaintiffs' case. The plaintiffs' counsel contended that I should hold that there could be no res judicata because there was no justiciable cause of action pleaded in the statement of claim in the 2015 proceedings.
Whilst I consider that there is some force in the plaintiffs' counsel's submission I think the acceptance by the plaintiffs that the statement of claim in the 2015 proceedings did not contain a reasonable cause of action in respect of the Tax Liability reinforces the conclusion I have reached in relation to the construction of the consent order, and the issues that should be taken as being determined by it, rather than forming a separate basis for holding that the claim made in the present proceedings is the subject of a res judicata. This approach recognises that in Rogers the court had determined that no cause of action was raised in the first proceedings, a position to be contrasted with the present case in which the plaintiffs conceded the issue.
Issue estoppel
The defendant submits that 'the consent order comprised a conclusive determination not only of the plaintiffs' cause of action but of all the facts and issues necessary to the determination of that cause of action and that thus the plaintiffs are estopped from raising any fact or issue necessary to the determination of the 2015 proceedings in the 2016 proceedings'. The defendant's submissions do not identify the facts or issues that the plaintiffs are estopped from raising.
I do not accept that the defendant has established the existence of an issue estoppel as a triable issue. As I have noted earlier, the facts relied upon for the causes of action in each of the proceedings are different and, correctly construed, the consent order did not determine any issue upon which the plaintiffs' claim for the Tax Liability depended.
Has the defendant established a failure by the plaintiffs to act reasonably and in good faith as a triable issue?
An outline of the defendant's submissions
The defendant's submissions start with the proposition that it was an implied term of the settlement deed that the plaintiffs were under an obligation to act reasonably and in good faith.
The defendant contends that the plaintiffs breached their obligation to act reasonably and in good faith because they did not treat the Farm Transactions 'appropriately' in their taxation returns, resulting in a Tax Liability that was greater than it should have been. Specifically, the defendant contends that the plaintiffs 'failed to take into account the fact that the vesting of "New Farm" in [the first plaintiff] constituted a vesting of a trust asset in a beneficiary of the trust, and this failure significantly increased the tax liability incurred by [the first plaintiff] in circumstances where [the first plaintiff] should properly have taken steps to minimise the tax liability arising from the transaction'.
In support of the contention that it was open to the plaintiffs to reduce the tax payable as a result of the transfer of New Farm the defendant relied upon the following:
(1)The fact that the first plaintiff joined in the defendant's successful objection to the assessment of ad valorem transfer duty imposed on the Heads of Agreement under the Taxation Administration Act 2003 (WA) on grounds that included, relevantly, that the transfer of New Farm to the first plaintiff was made by the defendant by exercising a power of appointment over New Farm in its capacity as the trustee of the Badjyn Investment Trust and that there was not and would not be any consideration for the transfer. The defendant instructed counsel to prepare the objection and the plaintiffs' solicitors authorised the defendant's counsel to lodge the objection. The objection was lodged with the Office of State Revenue on 17 April 2015.
(2)The views expressed by the defendant's accountant, Mr Ian Truscott of RSM Australia Pty Ltd in a letter dated 6 December 2016 to its solicitor, a copy of which was attachment 'WJ B‑17' to the affidavit of Mr William Bynon. In that letter Mr Truscott stated:
The tax consequences of the vesting of the land 'New Farm' to Allan Bynon as per the Deed of Settlement and Release can have vastly different tax consequence [sic] depending on why the amount was vested to Allan. The value of the land vested to Allan was $1,160,000 and has been treated as a vesting of a trust asset, farmland, to a beneficiary of the Trust in the accounts of The Badjyn Investment Trust.
Grant Thornton, Allan Bynon's accountant, has treated the vesting of the land to Allan as a payment for giving up his right to further legal action against Bill Bynon, his family and/or entities. If this is the correct CGT event for the payment then I believe they have treated the CGT calculation correctly.
However, there could be other reasons why the $1,160,000 value was vested to Allan which would result in other CGT events taking place. These other possible events include:
CGT event E5 – A beneficiary becoming entitled to a trust asset
CGT event E6 – Disposal to beneficiary to end income right
CGT event E7 – Disposal to beneficiary and capital interest
Allocating some or all of the value of the $1,160,000 farm land vesting to any of the other CGT events would result in a different CGT calculation and ultimately a different tax amount payable. This tax liability I believe it could have been significantly lower than the tax payable under the method lodged in Allan's tax return. For example, if the full amount was an E5 CGT event vesting the asset to Allan then there would have been nil tax payable by Allan as Allan acquired his interest in the Trust for no expenditure and his interest in the trust was a pre-CGT asset which exempts any capital profit made.
Given that the dispute between the parties started as a request from Allan to seek his share of the trust estate/inheritance, as he was wishing to leave the farming enterprise, a large portion of the $1,160,000 would have been a calculation of his interest in the trust. CGT events E5 to E7 would then likely apply to that portion of the payment.
If I had prepared Allen's tax return for the 2015 year I would have sought some clarification from the Deed of Settlement as to a breakdown of the $1,160,000 value vested to Allan. What portion was his entitlement to the trust property and what portion was the giving up his right to take further legal action against the other parties.
…
The parties' communications concerning the Tax Liability
On 4 November 2014, the plaintiffs' solicitors wrote to the defendant's solicitors notifying them that the plaintiffs' accountant, Mr Craig Simon of Grant Thornton, required information in order to clarify the tax position of the parties and that the most efficient way of obtaining that information was for Mr Simon to contact Mr Truscott directly. The plaintiffs' solicitors asked the defendant's solicitors to take steps to ensure the Mr Truscott would be in a position to assist Mr Simon. The defendant's solicitors responded by email sent on the same day stating that they would speak with the client and Mr Truscott and revert to the plaintiffs' solicitors as soon as was reasonably possible.
On 12 November 2014, the plaintiffs' solicitors sent a further email to the defendant's solicitors advising that the amount of the Tax Liability was being determined by Mr Simon and repeating the request for the defendant's solicitors to facilitate communication between Mr Truscott and Mr Simon.
On 13 November 2014, Mr Simon telephoned Mr Truscott and informed him that he was assisting the plaintiffs in relation to the tax liabilities incurred as a result of the Farm Transactions. In his affidavit Mr Simon deposed that he 'invited' Mr Truscott to assist in minimising tax arising from the transactions by clarifying how Mr William Bynon intended to transfer the assets out of the Trust and by providing Mr Simon with a copy of the 2014 financial statements for the Badjyn Investment Trust. Mr Truscott said that he would check with his client and get back to Mr Simon. Later on 13 November 2014 Mr Truscott sent an email to Mr Simon in which he stated that his client had advised him that he did not want Mr Truscott to send through the financial statements that had been sought by Mr Simon.
On 20 November 2014, the first plaintiff had a telephone conversation with Mr Truscott in the course of which Mr Truscott told him that Mr William Bynon had instructed that he was not to provide any information to the first plaintiff.
On 3 December 2014, the plaintiffs' solicitors wrote to the defendant's solicitors and stated that Grant Thornton required access to Mr Truscott in order to determine the tax liability arising from the Farm Transactions but that such access had been denied.
On 10 December 2014, the plaintiffs' solicitors wrote again to the defendant's solicitors commenting upon the position taken by the defendant in relation to the provision of information by Mr Truscott to Mr Simon. In that letter the plaintiff's solicitors stated:
(a)Under the Deed your client is liable for all Tax payable arising as a result of the transfer of New Farm and Allan's Farm.
(b)As was expressly raised by your client's previous lawyer, Mr Neil Pacer, it is in all parties interests that incidents of taxation arising from the transactions contemplated by the deed are minimised. This is particularly, we would have thought anyway, the case for your client and the family entities.
(c)Our client has, at our request, employed Grant Thornton to work with the family accountant Mr Truscott to secure this outcome. The discussions between Mr Truscott and Mr Craig Simon of Grant Thornton were proceeding positively, until your client informed Mr Truscott that he could not deal with Mr Craig Simon.
(d)This is hugely counter-productive for all parties, again we would have thought, particularly for your client and the family entities. Based on our discussions with Mr Simon who is experienced in farming disputes of this nature and addressing the tax consequences, there are relatively straightforward ways of ensuring the tax is minimised.
On 18 December 2014, the plaintiffs' solicitors wrote to the defendant's solicitors advising them Grant Thornton had, on the information available to that firm, concluded that a tax liability of $495,992 resulted from the Farm Transactions.
On 23 January 2015, the defendant's solicitors wrote to the plaintiffs' solicitors and expressed their preliminary view that the anticipated tax liability of $495,992 was a significant sum which required further investigation. They said that they had received instructions to seek an opinion from Mr Truscott concerning the plaintiffs' likely tax liability.
On 29 January 2015, the plaintiffs' solicitors wrote to the defendant's solicitors and stated that if the defendant intended to dispute the tax liability as assessed by Grant Thornton they, that is, the defendant's solicitors, should supply an alternative assessment with supporting documentation.
On 13 February 2015, the plaintiffs' solicitors wrote again to the defendant's solicitors pressing them for an alternative assessment of the tax liability.
On 23 February 2015, the plaintiffs' solicitors wrote to the defendant's solicitors referring to their earlier demand for the defendant to pay $495,992.
On 3 March 2015, the defendant's solicitors wrote to the plaintiffs' solicitors stating, in effect, that the demand for payment of $495,992 was premature as the fact that the plaintiffs anticipated and estimated that such a liability would arise did not give rise to an obligation on the part of the defendant to pay them that sum at that time. The plaintiffs' solicitors responded on the same day maintaining the argument that the defendant had a present liability to pay the sum demanded but that if the defendant was not prepared to pay that liability now the plaintiffs would make a claim for it when it was formally assessed.
On 18 March 2015, the plaintiffs' solicitors wrote to the defendant's solicitors noting that no alternative assessment of the tax liability had been provided by the defendant's accountant nor had the accountant been permitted to engage in constructive discussions with Grant Thornton with a view to achieving an agreed tax liability.
On 27 March 2015, the defendant solicitors wrote to the plaintiff's solicitors in the terms that I have outlined at [37].
No further correspondence was exchanged between the parties concerning the assessment of the Tax Liability until 3 June 2016 when the plaintiffs' solicitors wrote to the defendant's solicitors enclosing drafts of the plaintiffs' tax returns and attaching an Excel spreadsheet setting out Grant Thornton's calculations of the estimated Tax Liability. The plaintiffs' solicitors asked the defendant's solicitors to review the calculations and to let them know whether they agreed with the amounts calculated. The plaintiffs' solicitors invited the defendant's accountant to contact Ms Fitzmaurice of Grant Thornton if he wished to do so.
It appears that there was no response to the plaintiffs' solicitors' letter of 3 June 2016, and on 16 June 2016 the plaintiffs' solicitors sent copies of the notices of assessment issued by the ATO to the defendant's solicitors.
Neither the defendant's solicitors nor anyone on the defendant's behalf provided the plaintiffs an alternative basis for the assessment of the Tax Liability prior to the disclosure of Mr Truscott's letter dated 6 December 2016.
The evidence of Mr Simon and Ms Fitzmaurice
In his affidavit Mr Simon deposed that he had 'endeavoured to lawfully mitigate the tax consequences of the Deed of Settlement' but to do that he required the co-operation of Mr William Bynon and the defendant and 'their up‑to‑date and complete financial position', and that without that information he was not in a position to consider the other options raised by Mr Truscott in his letter dated 6 December 2016. Mr Simon deposed that Grant Thornton prepared the plaintiffs' tax returns based on the information available to them.
It is apparent from the calculations attached to Ms Fitzmaurice's affidavit that she prepared the first plaintiff's tax returns on the basis that the transfer of New Farm to him was in consideration of him giving up his right to take legal action in respect of New Farm.
Analysis - breach of implied term issue
Has the defendant established as a triable issue that the settlement deed imposed an obligation on the plaintiffs to act reasonably and in good faith?
The implied term for which the defendant contends is one which imposes a standard of conduct on the plaintiffs to act reasonably and in good faith. This is to be contrasted with an implied term that imposes an obligation to bring about a certain result - the minimisation of tax.
In Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASCA 222, the court was concerned with an express term that obliged the parties to deal with each other in good faith. Pullin JA, with whom Newnes JA agreed, outlined the case law concerning the meaning of the phrase 'good faith' in a contractual context as follows:
[48]Much more has been written about the meaning of the phrase in the cases. I will refer to some of the most important of those cases. In Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, Priestley JA, after reviewing the law in the United States and Australia and referring to developments in the United Kingdom and Canada, considered that there was a strong case in Australia for accepting a good faith obligation similar to that prevailing in Europe and the United States.
[49]Sir Anthony Mason, in an address given at the University of Cambridge in 1993 (subsequently published in (2000) 116 LQR 66), discussed the question of whether an obligation of good faith should be implied in every contract, and then went on to consider the 'concept of good faith'. He referred to the United States Uniform Commercial Code and the Restatement Of Contracts, Second, and said that it was 'by no means clear' what 'good faith' in the context of American provisions meant, but he said it was probable that the concept embraced no less than three related notions, namely:
(i)an obligation on the parties to cooperate in achieving the contractual objects (loyalty to the promise itself);
(ii)compliance with honest standards of conduct; and
(iii)compliance with standards of conduct which are reasonable having regard to the interests of the parties.
Sir Anthony added that, in his address, he would use '"good faith" mainly in the sense of loyalty to the promise itself and as excluding bad faith behaviour' and that he would 'avoid becoming enmeshed in the American arguments about what "good faith" means'.
[50]In 1998, in Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349, the question arose as to whether the duty of good faith was to be implied by law in the commercial contract in question. Sheller JA wrote the reasons with the other members of the court agreeing. The bulk of the reasons concern the question about whether a term was to be implied at law and the conclusion was that such a term could be implied. That aspect of the judgment is not relevant in this case. Sheller JA did not spend much time discussing the content of the duty but he did quote MasonJ's address and the three aspects which ShellerJA stated that Sir Anthony said were 'probably' involved. It appears that Sheller JA treated the well-known implied term obliging parties to cooperate in achieving the objects of the contract (see Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596) as being an aspect of the obligation of good faith, adding that:
Sir Anthony Mason said that such cases come close to a recognition of the good faith doctrine described as 'loyalty to the promise itself' (368).
[51]In 2001, Parker J in Central Exchange Ltd v Anaconda Nickel Ltd, dealing with an interlocutory application for pre-action discovery, noted the submission of the plaintiff that there was an implied 'term of good faith'. Reference was made to Alcatel and subsequent decisions which applied Alcatel. As to the content of the obligation, Parker J referred to the Sir Anthony Mason address and noted a submission to him that good faith involved the three 'related notions' to which Sir Anthony referred. Parker J said that rather than spend more time on the issues, because he was dealing with an interlocutory application 'hardly suited to the full analysis of a possible major development in the law of contract', he would proceed to consider what the consequences would be if there was an implied term of good faith. His Honour reached the conclusion that there was no unreasonable conduct on the part of the defendant and dismissed the application. On appeal, in Central Exchange Ltd v Anaconda Nickel Ltd [2002] WASCA 94; (2002) 26 WAR 33, the same approach was taken. The appeal was dismissed. Malcolm CJ referred to Parker J's preparedness to approach the matter on the basis of 'an assumption that a term that the respondent would deal with the appellant in good faith was to be implied' [19]. Steytler J, with whom Wallwork J agreed, also made the assumption and dealt with the matter on the assumption that a term of good faith was to be implied, but 'without deciding that question'.
[52]By the time the Full Court dealt with the Central Exchange case, the New South Wales Court of Appeal had once again said something on the topic in Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558. The dispute in that case arose out of a franchise agreement. At [169] ‑ [173], Sheller, Beazley and Stein JJA discussed the content of the duty of an implied term requiring good faith to be displayed by the contracting parties. The Mason lecture was again referred to. Their Honours concluded that a term of 'reasonableness' and 'good faith' should be implied [183]. The content of the duty of good faith was the content referred to in the Mason address.
[53]In 2004, in Expectation Pty Ltd v Pinnacle VRB Ltd, there was a contract containing an express term requiring the parties to a 'Letter Agreement' to 'negotiate in good faith to close the transactions contemplated in this Letter Agreement'. The trial judge found that the defendant had not breached the term requiring the parties to negotiate in good faith. Steytler J wrote the reasons with the other members of the court agreeing. His Honour referred to the trial judge's reasons which noted that the obligation of good faith involved the three related notions referred to in the Mason lecture. In the context of a duty of good faith in relation to negotiations, Steytler J noted the trial judge's observation that 'the term would be breached by the abandonment of the process of negotiation in the sense of a failure to do what was reasonably required if the defendant was to remain loyal to the promise it had made' [43]. (I have added emphasis to words of importance in this sentence.) Later, Steytler J said [45] that the trial judge was fully cognisant of the fact that the good faith term would be breached by failure 'to take reasonable action to negotiate the agreement'.
[54]In another case referred to by the parties, Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, Barrett J accepted that the content of the duty of good faith was as explained in the Mason lecture. Barrett J noted [64] that there was 'some overlap' with the term implied by law to do everything necessary to enable the other party to have the benefit of the promise in a contract. His Honour observed that the more substantial and separate content of the duty of good faith itself would therefore seem to lie in the second and third limbs of Sir Anthony's formulation, that is adherence to standards of conduct which are 'honest, as well as being reasonable having regard to the parties' interests'. His Honour noted [65] that that meant that it became necessary to inquire about the extent to which selflessness is required. He added [65]:
It must be accepted that the party subject to the obligation is not required to subordinate the party's own interests, so long as pursuit of those interests does not entail unreasonable interference with the enjoyment of a benefit conferred by the express contractual terms so that the enjoyment becomes (or could become) ... 'nugatory, worthless or, perhaps, seriously undermined'.
[55]Finally, reference should be made to the recent decision in 2009 of United Group Rail Services Ltd v Rail Corporation of New South Wales, which the trial judge cited in this case. Allsop P wrote the reasons in that case with the other members of the court agreeing. As part of a dispute resolution clause, the parties expressly agreed to undertake 'genuine and good faith negotiations' to resolve disputes arising from the performance of a fixed body of contractual rights and obligations. An issue was whether the agreement was incomplete. Allsop P reviewed the authorities. At [65], Allsop P said that an obligation to undertake discussions about a subject in an 'honest and genuine attempt' to reach an identified result is not incomplete. He then added '[i]t may be referable to a standard concerned with conduct assessed by subjective standards, but that does not make the standard or compliance with the standard impossible of assessment'. His Honour noted that '[w]hat the phrase "good faith" signifies in any particular context and contract will depend on that context and that contract', but that a number of things could be said, namely that '[t]he phrase does not, by its terms, necessarily import, or presumptively introduce, notions of fiduciary obligation' and '[n]or does it necessarily import any notion or requirement to act in the interests of the other party to the contract' [70].
[56]The particular agreement under consideration there led Allsop P to conclude that the agreement carried with it 'a requirement to bring an honestly held and genuine belief about their mutual rights and obligations and about the controversy to the negotiations, and to negotiate by reference to such beliefs' [72]. He said that a party would not be entitled to 'pretend to negotiate' in order to drive the other party into an expensive arbitration that it believes the other party cannot afford and concluded:
It is sufficient to say that the standard required by the notion of genuineness and good faith within a process of otherwise tactical and self-interested behaviour (negotiation) is rooted in the honest and genuine views of the parties about their existing bargain and the controversy that has arisen [73].
I have already referred to the Aiton case, the relevant passages of which were set out in the trial judge's reasons.
[57]Many other authorities and learned articles were referred to, but they were all thoroughly reviewed in the more recent cases and particularly in Allsop P's reasons for decision in The United Group Rail Services case. In my view, it is unnecessary to add to the already voluminous material dealing with the subject given that the natural and ordinary meaning is straightforward.
Murphy JA made a number of observations about the concept of good faith in a contractual setting and on the subject of Sir Anthony Mason’s proposition that good faith embraces three notions said:
[92]Whilst I would, with respect, agree that the three notions referred to by Sir Anthony Mason may in a general sense be regarded as illustrating related aspects of the concept of 'good faith', it is nevertheless important, in my view, to bear in mind the following matters. The first is that they are 'notions' which are 'related' to each other. It would be wrong in my view to regard them as, in effect, statutory criteria, each to be interpreted in its own right, and then applied independently of the other. The second and related matter is that the assessment of what is 'reasonable having regards to the interests of the parties' in the third notion, will itself in my view be informed by the identification of the 'contractual objects' and the scope of the obligation 'to cooperate in achieving [those] objects' with which the first notion is concerned, having regard to the proper construction of the contract as a whole. In this sense, the reference to the 'interests' of the parties in the third notion is to be understood as a reference to the 'legitimate' interests of the parties. The third is that the question for the court, in this case, is ultimately one of the proper construction of the contract, according to recognised principles. It would not, it seems to me, be appropriate, as at times the appellant's submissions tended to suggest, to substitute the interpretation and application of a predetermined and external formula for the process of construction of the terms of the contract.
The settlement deed does not impose any obligations of a continuing nature on the plaintiffs and I have reservations about whether a term obliging the plaintiffs to act reasonably and in good faith is to be implied into the settlement deed, a formal agreement clearly settled with the assistance of lawyers.
I am prepared, however, to assume in the defendant's favour that the plaintiffs owed an obligation to act reasonably and in good faith in discharging any obligations imposed upon them by the settlement deed.
No submissions were made by the defendant as to the content of the duty to act in good faith but I will proceed on the basis that the duty embraces the three related notions identified by Sir Anthony Mason in his extra curial observations referred to by Pullin and Murphy JJA in Strezelecki, that is, the plaintiffs: were obliged to co-operate in achieving contractual objects; were obliged to comply with honest standards of conduct; and, were obliged to comply with standards of conduct what were reasonable having regard to the interests of the parties. I note, however, that neither cl 3.3 nor cl 3.6 imposes any obligations upon the plaintiffs to which the duty to act reasonably and in good faith might attach. Although not articulated in the defendant's submissions, it is arguable the obligation imposed by cl 9.5 to 'do all things as reasonably necessary to give full effect to the provisions of this deed and the transactions contemplated by it' included an obligation on the plaintiffs to declare the gains or benefits derived by them from the Farm Transactions in their tax returns and that the duty to act reasonably and in good faith attached to that obligation.
No submissions were made by the defendant on whether the 'duty to act reasonably and in good faith' should be construed as a hendiadys or whether it should be construed as involving a duty to act reasonably and a separate but potentially overlapping duty to act in good faith.
Has the defendant established as a triable issue that the plaintiffs have failed to act reasonably and in good faith?
The conclusion I have reached on this question is that this issue has been contrived by the defendant in an attempt to defeat the application for summary judgement. In my opinion this conclusion is inescapable when regard is had to the history of the exchanges between the parties about the Tax Liability.
Although I bear in mind, as Murphy JA pointed out in Strezelecki, that the notions identified by Sir Anthony Mason embraced by the concept of 'good faith' are related and are to be considered together and not independently, for the purposes of analysis I will break the question down into its components.
There is no evidentiary basis for the contention that the plaintiffs had not co-operated to achieve the contractual objects of the settlement deed, nor is there any basis for contending that the plaintiffs have not complied with honest standards of conduct. In my view the communications between the parties' solicitors and the communications between Mr Simon and Mr Truscott make it very plain that the plaintiffs and those acting on their behalves have adopted a co-operative approach and have plainly acted honestly.
In my assessment the plaintiffs have not breached any obligation to act reasonably whether that obligation is an incident of the duty to act in good faith or is an obligation that is separate from it. My reasons are as follows.
First, in November 2014 the plaintiffs sought information from the defendant's accountant to assist them in clarifying the tax position. When that information was not forthcoming the plaintiffs' accountant prepared estimates of the Tax Liability. The estimate was provided to the defendant's solicitors who stated that they would seek advice from the defendant's accountants and revert with an alternative basis for assessment. No alternative basis for the assessment of the Tax Liability was provided by the defendant’s solicitors or accountants.
Second, in June 2016 the plaintiffs' solicitors provided the defendant's solicitors with drafts of the plaintiffs' tax returns for comment. This provided the defendant and those advising it with the opportunity to articulate the concerns that the defendant has raised in the context of this application. No concerns were expressed on the defendant’s behalf about the approach taken by the plaintiffs to the method of assessment disclosed in the plaintiffs’ draft tax returns. Indeed, no comments at all about the plaintiffs’ draft tax returns were made on the defendant’s behalf.
Third, having regard to the history of the relationship between the parties and the nature of the dispute, Mr Simon's evidence to the effect that no steps could be taken to minimise the Tax Liability without the assistance he had requested from Mr Truscott (but which was not forthcoming), may be readily understood and accepted.
Fourth, to the extent the defendant relies on the views expressed by Mr Truscott in the letter written by him attached to Mr William Bynon’s affidavit, those views are equivocal. Mr Truscott does not say the approach taken by the plaintiffs in their tax returns is incorrect. He does not say that the New Farm transaction should have been treated as a vesting of a trust asset to a beneficiary of the trust, albeit that that is the way, he says, it has been treated in the trust's accounts. Parenthetically, I observe the defendant has not put the trust accounts into evidence nor has it adduced any documentary evidence verifying the statements made by Mr Truscott.
Mr Truscott stated that had he been preparing the first plaintiff's tax return for the 2015 year, he would have sought a breakdown of the value vested in the first plaintiff between entitlement trust property and the surrender of the right to take further legal action. This statement highlights the difficulty in which the plaintiffs were placed. The source of information about the value to be attributed to the asserted entitlement to trust property was the defendant or its accountant, Mr Truscott, and Mr Truscott had been instructed not to provide any information to the plaintiffs. Moreover, in this respect, it is significant that Mr Truscott does not assert that the first plaintiff should have attributed all of the value of the New Farm transaction to the vesting of a trust asset. In other words, in Mr Truscott’s view an apportionment was required but the information required to make the apportionment was not provided by the defendant.
Fifth, even though Mr Truscott asserts New Farm was vested in the first plaintiff by way of the vesting of a trust asset, Mr Bynon in his affidavit does not depose in direct and clear terms that this is what occurred. He implies that this is what occurred by referring to the objections to the duty assessment a draft copy of which was attached to his affidavit. This is a matter on which Mr Bynon could have given clear and unequivocal evidence and he should have done so.
Sixth, the defendant only raised the allegation that the plaintiffs have acted unreasonably in the manner in which they declared the Farm Transactions in their tax returns after the summary judgement application was made. The fact that the defendant did not raise the allegation that the plaintiffs had adopted an incorrect approach to the Tax Liability at an earlier date despite being invited to offer its comments on the approach adopted by the plaintiffs is telling.
Conclusion
For the reasons set out above, I do not consider that the defendant has shown a triable issue and the plaintiffs are entitled to summary judgment. I will hear the parties as to the form of the judgment and costs.
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