David Clarke Air Conditioning Pty Ltd as trustee for the David Clarke Air Conditioning Trust v Quann [No 3]
[2017] WASC 91
•4 APRIL 2017
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: DAVID CLARKE AIR CONDITIONING PTY LTD as trustee for THE DAVID CLARKE AIR CONDITIONING TRUST -v- QUANN [No 3] [2017] WASC 91
CORAM: ALLANSON J
HEARD: 23 & 24, 27-29 JUNE 2016
DELIVERED : 4 APRIL 2017
FILE NO/S: CIV 1395 of 2013
BETWEEN: DAVID CLARKE AIR CONDITIONING PTY LTD as trustee for THE DAVID CLARKE AIR CONDITIONING TRUST
First Plaintiff
D S CLARKE NOMINEES PTY LTD as trustee for THE DS CLARKE SUPERANNUATION FUND
Second PlaintiffDAVID STUART CLARKE
Third PlaintiffAND
LINDSAY EDWARD QUANN
First DefendantCADAGI HOLDINGS PTY LTD as trustee for THE KARRIVIEW UNIT TRUST
Second DefendantKARRIVIEW MANAGEMENT PTY LTD
Third DefendantADDER HOLDINGS PTY LTD as trustee for THE GRV PROPERTY TRUST
Fourth DefendantHARBOUR RETIREMENT HOLDINGS PTY LTD as trustee for THE HARBOUR PINES INVESTMENT TRUST
Fifth DefendantLEROY NOMINEES PTY LTD as trustee for THE L E QUANN FAMILY TRUST
Sixth Defendant
Catchwords:
Contract - Oral agreement - Terms of oral agreement - Where precise terms not capable of ascertainment - Contemporaneous documents - Surrounding circumstances - Turns on own facts
Equity - Fiduciary duties - Conflict of interest - Whether fiduciary duties exist - Whether fiduciary duties breached - Turns on own facts
Contract - Misleading representation - Fair Trading Act 1987 (WA) - Turns on own facts
Trusts - Alienation of property - Whether transaction defeats the interests of creditors - Declaration to void transaction - Section 89 Property Law Act 1969 (WA) - Turns on own facts
Legislation:
Fair Trading Act 1987 (WA), s 10, s 79
Property Law Act 1969 (WA), s 89
Result:
Plaintiffs' claims successful in part
Declaration that certain transactions be void under Property Law Act 1969 (WA) s 89
Category: B
Representation:
Counsel:
First Plaintiff : Mr L A Warnick
Second Plaintiff : Mr L A Warnick
Third Plaintiff : Mr L A Warnick
First Defendant : Ms B Ludlow
Second Defendant : Ms B Ludlow
Third Defendant : Ms B Ludlow
Fourth Defendant : Ms B Ludlow
Fifth Defendant : Ms B Ludlow
Sixth Defendant : Ms B Ludlow
Solicitors:
First Plaintiff : Zafra Legal
Second Plaintiff : Zafra Legal
Third Plaintiff : Zafra Legal
First Defendant : Ludlow Legal
Second Defendant : Ludlow Legal
Third Defendant : Ludlow Legal
Fourth Defendant : Ludlow Legal
Fifth Defendant : Ludlow Legal
Sixth Defendant : Ludlow Legal
Case(s) referred to in judgment(s):
Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336
Brooker v Friend & Brooker [2006] NSWCA 385
Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304
Daly v Sydney Stock Exchange Limited [1986] HCA 25; (1986) 160 CLR 371
Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640
Fabcot Pty Ltd v Port Macquarie-Hastings Council [2011] NSWCA 167
Federal Commissioner of Taxation v Oswal [2012] FCA 1507; (2012) 91 ATR 684
First Industry Corp v Goh [2002] WASC 111
Hall v Poolman [2007] NSWSC 1330; (2007) 215 FLR 243
Helton v Allen [1940] HCA 20; (1940) 63 CLR 691
Hospital Products Pty Ltd v United States Surgical Corp [1984] HCA 64; (1984) 156 CLR 41
Johnson Tiles Pty Ltd v Esso Australia Ltd [2000] FCA 1572; (2000) 104 FCR 564
Lahoud v Lahoud [2006] NSWCA 169
Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449
Marcolongo v Chen [2011] HCA 3; (2011) 242 CLR 54
Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31; (2010) 241 CLR 357
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104
Pilmer v The Duke Group Limited (in liq) [2001] HCA 31; (2001) 207 CLR 165
Singh v Singh [2009] WASCA 53
Taco Company of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177
Watson v Foxman (1995) 49 NSWLR 315
Table of Contents
The parties
The plaintiffs
The defendants
Background
The plaintiffs' case
The evidence
The witnesses
Mr Clarke
Alan Rumsley
Mr Quann
Louise Anne Fazio
Alicia Quann
Jimmy Pull
Zoe Quann
The contract and fiduciary duties
Establishment of the contract
The statement of claim
The defence
Was there an oral contract
The alternative causes of action
The Memorandum of Understanding - Harbour Pines Retirement Village, May 2008
The document
The Karriview Estate Lifestyle Village
The Heads of Agreement, July 2008
The Heads of Agreement, September 2008
The plaintiffs' claims regarding Karriview Lodge
Deceit of fraudulent misrepresentation
Other causes of action on the Karriview investment
The Whiteboard Agreement, February 2009
Where was the investment
What is owing
The guarantee clause
The plea
The case based on representations
The claim to recover in contract
The secured debts
Conclusion
ALLANSON J: In 2008 and 2009, David Stuart Clarke invested funds in two businesses and an investment trust controlled by Lindsay Edward Quann. The investments were made through two companies, including the trustee of Mr Clarke's superannuation fund. Mr Clarke also made payments described as management fees. Mr Clarke and his companies seek to recover part of what was paid, alleging Mr Quann deceived him. The plaintiffs sue under various causes of action, with the overarching claim that Mr Quann breached fiduciary duties he owed to Mr Clarke and his companies as their adviser.
The parties
The plaintiffs
Mr Clarke ran an air conditioning business. He was the sole director and shareholder of the first plaintiff, David Clarke Airconditioning Pty Ltd, through which he conducted the business. David Clarke Airconditioning was the trustee of the David Clarke Air Conditioning Trust.
The second plaintiff, DS Clarke Nominees Pty Ltd, was established in 2008, as the trustee of the D S Clarke Superannuation Trust. Mr Quann assisted in setting up the superannuation fund.
Mr Clarke is also the director of DCFX Nominees Pty Ltd, as trustee of the DCFX Investment Trust, an investment vehicle set up with the assistance of Mr Quann in 2008. DCFX Nominees is not a party to these proceedings and none of the parties sought to join it, although the defendants base part of their claimed set off on amounts they say are owed by DCFX Nominees.
The defendants
Mr Quann is a Certified Practising Accountant and a registered tax agent. He says that he has not carried on an accountancy practice for some years, concentrating instead on his business interests. He is, or was at material times, the managing director and a shareholder of each of the second to fifth defendants.
Mr Quann held property and carried on business activities through the defendant companies and associated trusts. There is a web of financial relationships between the various companies and trusts, some of which are obviously calculated to preserve assets should there be adverse events. I discuss those relationships in greater detail below.
Mr Quann's business was largely associated with two properties: Karriview Lodge, an accommodation and functions business in Cowaramup; and the Harbour Pines Retirement Village in Geraldton.
Cadagi Holdings Pty Ltd is the trustee of the Karriview Unit Trust. Cadagi Holdings and Leroy Nominees Pty Ltd are the registered proprietors, as tenants in common, of the land on which the Karriview Lodge is situated.
Adder Holdings is the trustee of the GRV Property Trust, and the registered proprietor of the land on which the Harbour Pines Retirement Village in situated.
Harbour Retirement Holdings Pty Ltd is the trustee of the Harbour Pines Investment Trust.
In these reasons I will refer to the parties as follows:
First plaintiff: David Clarke Air Conditioning
Second plaintiff: DS Clarke Nominees
Third plaintiff: Mr Clarke
First defendant: Mr Quann
Second defendant: Cadagi Holdings
Third defendant: Karriview Management
Fourth defendant: Adder Holdings
Fifth defendant: Harbour Retirement Holdings
Sixth defendant: Leroy Nominees
Background
Mr Clarke met Mr Quann in April or May 2007, when Mr Clarke was installing an air conditioning system at a property next to one owned by the Quann family in Cottesloe. Mr Clarke quoted to install a system for Mr Quann, and David Clarke Air Conditioning later installed it. Soon after that first meeting, the two men began regular social contact: playing golf, dining together, watching sport. On occasion, they spoke about business. Mr Clarke saw Mr Quann as someone who could help him towards success. Mr Quann had the sort of business profile and external indications of wealth that Mr Clarke aspired to. Mr Clarke sought to profit from their friendship.
Mr Quann said in evidence that Mr Clarke was chasing him, looking to get involved in anything he perceived as a success. It is, in my opinion, likely that Mr Clarke actively pursued Mr Quann, hoping to obtain some advantage from their acquaintance. In that respect I accept the evidence of Mr Quann. The evidence included several other instances where Mr Clarke attempted to use clients or social acquaintances for business assistance or advice.
Mr Clarke was aiming high. His current plans are to profit from the boom in the Chinese economy. He intends to relocate to China, where he hopes to learn Chinese language in a two year intensive language programme, with the eventual goal of working as a middleman for Chinese investors wishing to invest in Australia. Mr Clarke did not present as someone with the resources to match these plans.
Mr Clarke and his companies entered agreements with companies in the Quann group. None of the agreements was fully documented - the only written agreements were a Memorandum of Understanding, and two Heads of Agreement, one of which was not signed. Mr Clarke and his companies made several payments to Mr Quann and his companies. Some were investments. Some were described as fees for management services to be provided by Karriview Management. The total investment was more than $500,000. The defendants do not dispute that Mr Clarke and his companies invested in Mr Quann's business projects, and have not recovered their investment.
The plaintiffs' claims go further. They allege that Mr Quann was engaged under an oral contract as the 'taxation, accounting, corporate, financial and business adviser' to Mr Clarke and his companies, and owed fiduciary obligations to the plaintiffs. The plaintiffs allege that Mr Quann advised on each of the investments in performance of his contract of engagement, and a breach of fiduciary duty affects all of the payments made.
The plaintiffs' case
The plaintiffs pleaded several alternative causes of action. Counsel for the plaintiffs identified the claim for breach of fiduciary duty as their primary claim. The plaintiffs also pressed claims under the Fair Trading Act 1987 (WA), in deceit, and for breach of contractual terms.
At trial, they did not pursue several of the pleaded claims: for breach of statutory duty under the Tax Agents Services Act 2009 (Cth); for negligence; in partnership; and for recovery of amounts paid as management fees. Part of the claim for breach of implied contractual terms was also not pursued.
The evidence
The witnesses
The plaintiffs called Mr Clarke, who made witness statements dated 3 November 2014, 17 April 2016, and 24 May 2016. The statements were admitted as his evidence‑in‑chief. He gave evidence at trial.
The plaintiffs also called Alan Phillip Rumsley, a legal practitioner.
Mr Quann made two witness statements, dated 10 May 2016 and 8 June 2016, and gave evidence at trial. The defendants also called Mr Quann's daughters, Alicia Quann and Zoe Delice Quann; his son-in-law Jimmy Gordon Pull; and his office manager, Louise Anne Fazio.
The case turns on the evidence of Mr Clarke and Mr Quann, together with the documents that were adduced in evidence that record their business dealings.
Mr Clarke
Mr Clarke was not a convincing witness. His recall of important discussions was unsatisfactory. I am not satisfied he accurately remembered representations that were made to him, or the terms of any undocumented agreement. Mr Clarke kept no record of his conversations with Mr Quann.
He was careless in his testimony. There are many significant examples in Mr Clarke's oral evidence of answers given with little thought.
Mr Clarke ran his own business, with annual turnover he estimated at around $500,000. When asked to look at accounts for his business, he responded was that it would be meaningless because he knew nothing about accounting.
His evidence was coloured by his animosity to Mr Quann. On occasions in cross examination, when he was shown documents and asked about them, Mr Clarke asserted that documents had been 'concocted'. For example, he was asked about a document regarding a proposed self-storage business in Malaga and said he had first seen the document when it was shown to him by his solicitor. The following exchanges occurred:
Ms LUDLOW: So, how do you think those documents came into existence?---They concocted them.
Ms LUDLOW: Right. At what time?---In the last month.
…
ALLANSON J: I'm sorry. I didn't understand. You said concocted them in the last month. When do you - - -?---Sorry, in the last three months. But not ‑ well, I don't know when it was ‑ I don't know when it was created, but it wasn't until I was given that document by James Marzec [Mr Clarke's solicitor] (ts 104).
On another occasion, he was shown copies of trust certificates, apparently signed by him. He first said he had never seen them and that it was impossible that he had seen them and forgotten. When asked if he was saying his signature was forged, he accepted that it was possible he had forgotten about them.
Mr Clarke's pleaded case is that he and Mr Quann entered a Heads of Agreement dated 2 September 2008. He paid Mr Quann, or Cadagi Holdings, $350,000 pursuant to that agreement on 19 September 2008. In oral evidence, however, he said the money was paid first. When counsel put to him that the money was transferred on 19 September 2008 (which was his pleaded case, and corresponded with bank documents), he responded, 'Well, he [Mr Quann] has changed the date then, hasn't he?'.
There were significant inconsistencies in his evidence. Mr Clarke and Mr Quann went to China together in May 2009. Initially, Mr Clarke said he had been to China on a number of occasions before going there with Mr Quann. Then he said he went 'maybe once' before going with Mr Quann. Not long after, he said the trip with Mr Quann was the first time he went to China.
Mr Clarke and Mr Quann discussed starting a Chinese language school at Karriview Lodge. In his first witness statement, he said that they were considering a school at Karriview in around April 2009, before the trip to China. In cross‑examination, and in his second witness statement, Mr Clarke said that Mr Quann suggested it while they were on a river cruise in China.
This lack of accurate recall is particularly important when Mr Clarke's pleaded case was centred on oral agreements. Mr Clarke at no stage gave a coherent account of meetings with Mr Quann or, except where he could paraphrase the documents that had been produced, of the terms of any agreements made or advice given. His evidence was that he only read agreements properly and carefully 'when it all blew up'. At one stage (referring to September 2008, about a week after signing an agreement in which he committed to pay $350,000) Mr Clarke was asked what he and Mr Quann discussed in relation to a proposed development in Margaret River, and replied, 'It's probably the same old rubbish that we would do. We would have lunch, we would play golf, talk nonsense …'.
I am unable to rely on Mr Clarke as an accurate reporter of what had been said, or what had been agreed with Mr Quann.
There are three other matters I have taken into account in considering Mr Clarke's credibility generally. First, on the case he initially pleaded and set out in his first witness statement, he entered into an agreement to pay management fees to Karriview Management when, at least in 2007, no services were provided in that year. The purpose of the arrangement was to obtain taxation benefits to which Mr Clarke was not entitled. Second, his conduct towards Mr Quann and his family after disputes arose between them was disgraceful. On his own evidence, he rang Mr Quann's home and, when Mrs Quann answered, made heavy breathing noises over the phone. He made another call the same day. The following day he rang Mr Quann's mobile and said, 'Tell Lindsay Quann he's a dead man'. Third, he applied to deregister DS Clarke Nominees in June 2015, falsely declaring that the company had no outstanding liabilities and was not a party to any legal proceedings. At best, that showed lack of care to his obligations in making a formal declaration.
Alan Rumsley
Mr Rumsley was called in response to the defendants' plea that Mr Clarke engaged him to give advice on his investments. Mr Rumsley said that he had acted for Mr Clarke on completely unrelated matters in the Magistrates Court in 2007, but had not advised Mr Clarke in relation to his business dealings with Mr Quann. Mr Clarke had previously used Mr Rumsley's services. He may have again used him or engaged someone else, but did not.
I accept Mr Rumsley's evidence. It is unnecessary to say anything more about it.
Mr Quann
Mr Quann was unsatisfactory as a witness.
First, he was, at times, argumentative, to the point of maintaining indefensible positions. For example, the defendants plead an agreement under which David Clarke Air Conditioning was to pay Karriview Management an annual management fee of $72,000 for a period of no less than three years (Defence [2.2(xii)]). The defendants plead two invoices issued in June 2009, each in the sum of $39,600 ($36,000 plus GST) and unpaid (Defence 6.10). In oral evidence, Mr Quann said that the management fee for the year to 30 June 2009 was $72,000 plus GST. In an affidavit made on 14 June 2013, Mr Quann had sworn that Mr Clarke agreed to management fees of $72,000 to the 30 June 2007, $36,000 to 30 June 2008, and $36,000 to 30 June 2009. Both statements about the fee for 2009 could not be true. Mr Quann was reluctant to accept the inconsistency.
Second, I believe that Mr Quann was party to arrangements with Mr Clarke under which management fees were invoiced for the purpose of Mr Clarke obtaining a taxation deduction for the year ended 30 June 2007, when no services were provided and no fees were payable in that year.
Third, Mr Quann prepared or executed documents that he must have known incorrectly stated the effect of a transaction. Below, I discuss in detail a Memorandum of Understanding, signed on 9 May 2008, by both Mr Clarke and Mr Quann. The documents relating to that transaction do not truly reflect what was done in fact, or what could be done under the relevant trust deed.
Fourth, Mr Quann explained the discrepancy between the documents and what was done as a mistake by his bookkeeper, and suggested why his bookkeeper had made the error. I do not believe that explanation.
One of the difficulties in this case is that the documents which one would normally look to as an objective record of events were predominantly prepared by, or at the direction of, Mr Quann. Important contemporaneous business records, including the original registers of unit holders in unit trusts, were not produced. In his witness statement, Mr Quann said that in March 2012, the server at Karriview crashed, and all archived email correspondence and digital files were lost. In June 2014, he said, there was flooding in Margaret River and hard copy archives, which were 'filed at Karriview in a sea container' were largely destroyed. There is evidence of flooding in the lodge at Margaret River in 2014 which damaged carpets. No evidence was led about how documents were stored in the sea container and how they became damaged. In the light of my general impression of evidence of Mr Quann, I am sceptical of his explanation for the loss of documents. More importantly, I do not accept that missing documents would support what he now says.
Because of my unfavourable view of Mr Quann's credibility, the occasions when documents were cancelled and replaced, and his own evidence that documents did not accurately set out what had been agreed, at times I found myself unable to rely on documents produced by Mr Quann.
Finally, the plaintiffs also asserted, and Mr Quann agreed, that in 2010 he had been disqualified as an approved auditor of superannuation entities, under the Superannuation Industry (Supervision) Act 1993 (Cth).
Despite these general observations, I do not wholly reject the evidence of Mr Quann. There were several instances in the course of the trial where his account of his dealings with Mr Clarke and his explanation of events was consistent with contemporary documents, and made sense.
Louise Anne Fazio
Ms Fazio was, until 2005, an employee of Mr Quann and his companies, working full time as a bookkeeper/assistant accountant. From 2005 she was self-employed, but continuing to so the same work.
Ms Fazio prepared and lodged the BAS for the Clarke group from about September 2008 to November 2010. She prepared the 2007, 2008 and 2009 income tax returns for the group. The first two returns were lodged in October 2008, the 2009 return was not lodged.
Ms Fazio said that, although she was self-employed, for reasons of convenience she invoiced the Quann group for the work she did for Mr Clarke.
Alicia Quann
Alicia Quann is the younger of Mr Quann's two daughters. She met Mr Clarke on a handful of occasions between 2008 and 2010. Ms Quann said that she provided some marketing services to Mr Clarke in relation to the proposed Chinese Language School, and investment in self-storage facilities.
Ms Quann said that Mr Clarke began calling her regularly, at one stage, to get information about 'expos', an area in which Ms Quann worked.
Ms Quann was active in implementing arrangements in 2013, by which Leroy Nominees purported to exercise options it held to convert its investments in various unit trusts into secured debt.
Jimmy Pull
Mr Pull is the husband of Alicia Quann. He prepared a witness statement which was tendered, but he was not cross‑examined. His evidence was not relevant to the issues in this action.
Zoe Quann
Zoe Quann was the manager of Karriview Management. She was present on several occasions in 2008 to 2010 when Mr Clarke attended Karriview Lodge. In 2011, she was the target of some quite intimidating and erratic behaviour by Mr Clarke when his relationship with her father soured. Her evidence was of limited relevance.
The contract and fiduciary duties
The plaintiffs allege that, in May 2008, Mr Quann contracted to act as the plaintiffs' financial adviser. As financial adviser, he undertook fiduciary obligations and was subject to established proscriptive obligations: unless with the informed consent of Mr Clarke, to not obtain any unauthorised benefit from the relationship for himself or his companies, and to not be in a position where his interests or duties conflicted, or where there is a real or substantial possibility they may conflict, with the interest of Mr Clarke and the two companies through which he carried out his investments: Daly v Sydney Stock Exchange Limited [1986] HCA 25; (1986) 160 CLR 371; Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449, 463 ‑ 464; Pilmer v The Duke Group Limited (in liq) [2001] HCA 31; (2001) 207 CLR 165, 197 ‑ 198 [74], 199 [78] ‑ [79].
There is no doubt that at least some investment advisers will owe fiduciary duties to their clients: Daly v Sydney Stock Exchange (385). But whether a fiduciary relationship exists in a particular case, and the scope of that fiduciary relationship, are matters which depend critically upon the particular circumstances of the case: Hospital Products Pty Ltd v United States Surgical Corp [1984] HCA 64; (1984) 156 CLR 41, 96 ‑ 97; Pilmer v The Duke Group Ltd (196 ‑ 197).
The plaintiffs assert that Mr Clarke was in a vulnerable position with regard to Mr Quann. Neither Mr Clarke, nor his companies, possessed the knowledge or ability to enable them to evaluate how Mr Quann discharged his engagement, so that Mr Quann 'was obliged to unilaterally exercise his discretion in recommending actions to [the plaintiffs]': pars 7(b), 7(c).
In the course of the trial, the plaintiffs also repeatedly referred to Mr Clarke's trust in Mr Quann arising out of their friendship, and his lack of financial knowledge and sophistication.
Those are relevant factors. But although the plaintiffs refer to Mr Clarke's vulnerability and trust in Mr Quann, their case is based in contract. The question is whether Mr Quann, pursuant to that contract, undertook or agreed to act for, or on behalf of, the interests of Mr Clarke and his companies. That issue must be first considered.
Establishment of the contract
The statement of claim
In par 1(h) of the statement of claim (fourth further re‑amended writ of summons with indorsed statement of claim dated 29 June 2016), Mr Clarke alleges that Mr Quann carried on business as a tax agent, accountant and financial adviser; held himself out as being skilled and experienced in matters of taxation, accounting and corporate, financial and business matters; and accepted instructions to represent and advise clients in respect of their taxation, accounting, corporate, financial and business matters.
In pars 2 and 3 the plaintiffs plead the contractual basis for their claim. Paragraph 2 claims:
In May 2008 Mr Quann in his capacities pleaded in par 1(h) herein made oral representations to Mr Clarke in Mr Clarke's personal capacity, to the following effect:
(a)Mr Clarke should:
(i)appoint Mr Quann as Mr Clarke's tax agent and accounting, corporate, financial and business advisor,
(ii)instruct Mr Quann to bring into existence new entities, DS Clarke Nominees Pty Ltd, the DS Clarke Superannuation Fund, DCFX Nominees Pty Ltd and the DCFX Investment Trust;
(iii)instruct Mr Quann to cause Mr Clarke to be the sole director and shareholder of DS Clarke Nominees Pty Ltd and DCFX Nominees Pty Ltd;
(iv)instruct Mr Quann to cause DS Clarke Nominees Pty Ltd to become the trustee of the DS Clarke Superannuation Fund;
(v)cause David Clarke Air Conditioning Pty Ltd and the David Clarke Air Conditioning Trust to become clients of Mr Quann;
(vi)cause DS Clarke Nominees Pty Ltd and the DS Clarke Superannuation Fund to become clients of Mr Quann when they had been incorporated or brought into existence by him;
(vii)instruct Mr Quann to plan, advise upon and take charge of the management of the income tax liabilities of David Clarke Air Conditioning Pty Ltd, the David Clarke Air Conditioning Trust, DS Clarke Nominees Pty Ltd and the DS Clarke Superannuation Fund and Mr Clarke; and
(b)if Mr Clarke did so, then Mr Clarke, David Clarke Air Conditioning Pty Ltd, the David Clarke Air Conditioning Trust, DS Clarke Nominees Pty Ltd and the DS Clarke Superannuation Fund would have to pay little or no income tax thereafter in comparison to their liability for income tax if he did not comply with Mr Quann's representations pleaded in paragraph 2(a) herein.
In par 3 the plaintiffs plead that induced by Mr Quann's representations and in reliance upon them Mr Clarke engaged Mr Quann as Mr Clarke's tax agent and accounting, corporate, financial and business adviser and gave him the instructions referred to in par 2(a)(ii) to (vii). In par 3(e) the plaintiffs plead:
[P]ursuant to which contract Mr Quann contracted to provide to Mr Clarke, David Clarke Air Conditioning Pty Ltd, the David Clarke Air Conditioning Trust, and, when they were incorporated or brought into existence, DS Clarke Nominees Pty Ltd and the DS Clarke Superannuation Fund the services pleaded in paragraph 2(a)(vii) herein from time to time for the duration of the engagement in consideration of Mr Clarke's agreement to pay or cause to be paid to Mr Quann his reasonable fees for the provision of such services to him, David Clarke Air Conditioning Pty Ltd, the David Clarke Air Conditioning Trust, and, when they were incorporated or brought into existence, to DS Clarke Nominees Pty Ltd and the DS Clarke Superannuation Fund; …
The plaintiffs plead that Mr Clarke requested Mr Quann to accept his superannuation fund and its trustee as his clients and Mr Quann accepted them. He also, pursuant to the contract, established DCFX Nominees Pty Ltd and the DCFX Investment Trust: par 3(k).
In par 4, the plaintiffs plead implied terms of the contract, including terms that Mr Quann would provide his professional services with reasonable skill and care, alternatively with the degree of skill, care and diligence to be expected of a reasonably competent and prudent tax agent and accounting, corporate, financial and business adviser, and further to act honestly and with integrity.
Paragraph 6 then claims:
Further or alternatively, in the circumstances of the relationship of professional service provider and clients formed between Mr Quann and David Clarke Air Conditioning Pty Ltd, DS Clarke Nominees Pty Ltd and Mr Clarke by their entry into the contract of engagement pleaded in paragraph 3 herein, there arose and at all material times thereafter there was a relationship between Mr Quann and David Clarke Air Conditioning Pty Ltd, DS Clarke Nominees Pty Ltd and Mr Clarke in which David Clarke Air Conditioning Pty Ltd, DS Clarke Nominees Pty Ltd and Mr Clarke:
(a)were dependent upon Mr Quann for taxation, accounting, corporate, financial and business advice which would be in their best interests, and
(b)reposed confidence in Mr Quann to provide such advice to them.
In par 7 the plaintiffs plead that during the existence of that relationship the actions taken by Mr Quann 'in his performance of the contract of engagement pleaded in paragraph 3' were required to be in the best interests of the plaintiffs; Mr Quann was obliged to unilaterally exercise his discretion in recommending actions to the plaintiffs in respect of their taxation, accounting, corporate, financial and business affairs. A fiduciary relationship arose between Mr Quann and the plaintiffs under which he was prohibited from using his position as a party to the contract of engagement to obtain a private advantage; from permitting his personal interests to conflict with those of the plaintiffs; and from preferring his own interests or those of the other defendants to the interests of the plaintiffs.
The defence
The defendants admit that Mr Quann agreed to act as Mr Clarke's tax agent, as and from the second half of 2007. They deny that Mr Quann was engaged to act as Mr Clarke's tax accountant or financial adviser: par 3.
The defendants plead that, in about mid-2007, Mr Quann was invited to a meeting at Mr Clarke's home to discuss an investment plan strategy for Mr Clarke, who said he wanted to 'formalise some sort of investment plan and strategy with [Mr Quann] and his entities': par 3.2.2(vi). Mr Quann refused Mr Clarke's request to be his tax accountant: par 3.2.2(viii). The defendants admit that Mr Quann offered 'to assist [Mr Clarke] looking at business ventures and the management of [David Clarke Air Conditioning's] investments' (par 3.2.2(x)), and, in effect, agreed to become Mr Clarke's tax agent: par 3.2.2(xi). Mr Quann agreed to manage and assist in creating an investment portfolio for David Clarke Air Conditioning 'in consideration for payment, by the first plaintiff, of agreed lump sum management fees to [Karriview Management Pty Ltd] in the amount of $72,000 plus GST p a ... for a period of not less than 3 years with the first pre-payment due on or before 30 June 2007, and to which the third plaintiff agreed on behalf of his entities': par 3.2.2 ((xii).
The defendants plead that, at subsequent meetings, Mr Quann and Mr Clarke discussed investments in self-storage units, a Chinese language school, a lifestyle village at Karriview Lodge, and the Geraldton Retirement Village: par 4.1.
The defendants deny that Mr Quann was acting as an adviser, and that there was a conflict of interest. They plead in the alternative that, if there was a conflict, the plaintiffs were aware of the defendants' business interests 'through a process of on-going, full disclosure' and entered the business dealings with full consent: par 5.
The defendants plead that Karriview Management performed management services for entities under the control of Mr Clarke and invoiced them for fees. David Clarke Air Conditioning paid the GST component of the fees for the year ended 30 June 2007; the accrued $72,000 for that year was converted to a loan. The defendant plead that they invoiced for part of the 2008 fees ($36,000 plus GST), and David Clarke Air Conditioning paid the GST component on 28 May 2008 and $36,000 on 30 June 2008. Karriview Management invoiced for the balance of the 2008 management fees in September 2008 and David Clarke Air Conditioning paid the fees on 30 September 2008.
Was there an oral contract
The plaintiffs point to factual issues such as Mr Clarke's lack of sophistication in financial matters, his trust in Mr Quann as a friend and an experienced businessman, and his apparent willingness to go along with whatever Mr Quann suggested, without question. There is no doubt that Mr Quann exercised a surprising degree of influence over Mr Clarke between May 2008 and February 2009, evidenced by Mr Clarke and his companies investing approximately $500,000 with little understanding of what he was investing in, and few and patently inadequate documents.
But the crux of the plaintiffs’ pleaded case is the claim that, in May 2008, Mr Clarke engaged Mr Quann as his 'tax agent and accounting, corporate, financial and business adviser' under 'an oral contract of engagement between Mr Clarke as client and Mr Quann as service provider': par 3(d). And, as a result of that engagement, Mr Quann was in a contractual relationship under which he would provide services to the plaintiffs for reward, and was subject to implied obligations that he would at all times act in the best interests of Mr Clarke and his companies and manage any conflicts of interest that might arise.
Each element of a cause of action must be proved to the reasonable satisfaction of the court; the court 'must feel an actual persuasion of its occurrence or existence': Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336, 361 (Dixon J); Helton v Allen [1940] HCA 20; (1940) 63 CLR 691, 712 (Dixon, Evatt & McTiernan JJ). Where the plaintiff relies upon an oral agreement, the court must be satisfied that there is sufficient evidence to support a positive finding that such an agreement was made. To the extent Mr Clarke relies on conversations, he must prove those conversations 'with a degree of precision sufficient to enable the Court to be reasonably satisfied that they supported the relationship for which he contended': see Brooker v Friend & Brooker [2006] NSWCA 385, McColl JA [134] (reversed on appeal, but not on this question); Lahoud v Lahoud [2006] NSWCA 169 [91].
On the central allegation that Mr Clarke and Mr Quann entered the contractual relationship pleaded in pars 2 and 3, the plaintiffs face serious obstacles. The evidence of Mr Clarke regarding his dealings with Mr Quann is a poor foundation for the claim. Mr Clarke was not a convincing witness. His recall of important discussions was unsatisfactory. To the extent he did recall, his evidence did not support the agreement that the plaintiffs pleaded.
Mr Clarke and Mr Quann both agreed that, after Mr Clarke had installed an air conditioner for Mr Quann, their relationship was social, and the discussions between them occurred primarily on social occasions, including watching sport, over meals, and playing golf. The informal nature of their relationship is exemplified by Mr Clarke's evidence about the first time he paid money to Mr Quann. Mr Clarke said that he received no invoices from Mr Quann for his services as a tax agent, but after he received a tax refund, on the basis of an offhand remark from Mr Quann, he put $2,000 cash and some lollies in a paper bag and took them around to Mr Quann.
Given the circumstances in which these 'business discussions' occurred, and the level of informality in their dealings, it is not surprising that Mr Clarke would not remember in any detail what was said. And I am not satisfied Mr Clarke accurately remembered representations that were made to him, or the terms of any undocumented agreement.
Mr Clarke set out his dealings with Mr Quann in his first witness statement. Mr Clarke said that, in the course of conversations with Mr Quann in 2007, he expressed dissatisfaction with his accountants and bookkeepers. He said that Mr Quann told him he knew ways to minimise tax and that if Mr Clarke appointed him as his accountant and business and tax adviser Mr Quann 'would take good care' of him, Mr Clarke would pay very little tax and it would all be perfectly legal. Mr Quann said: 'Let me take care of your business and I will take care of you. I can teach you about business, minimise your tax and make you wealthier': par 37.
Mr Clarke said he told Mr Quann, in late 2007 or early 2008, that he would follow his advice and '[from] that stage onwards, I considered Mr Quann to be my business and tax adviser and accountant for me and my entities … and whatever other companies, trusts or other structures that Mr Quann might set up for me as he had described to me to give effect to our agreement': par 40. Mr Clarke saw Mr Quann as 'a possible mentor from whom I could learn business skills and learn about accounting and taxation': par 43. In oral evidence he said:
I was - I was sort of in awe at this guy. I thought, you know, 'This is better than a Harvard degree,' because I can get - in six months or 10 months, I can learn more than five years of uni or five years of reading textbooks because this guy has done it all before.
Mr Clarke made the global statement that he believed that Mr Quann was the accountant, business and taxation adviser for Mr Clarke and his entities 'as a result of all my dealings with Mr Quann to that point in time and everything he had said to me about himself and matters of business management and taxation since I had come to know him'. The question is not what Mr Clarke believed, but what was said and what, objectively, was agreed in the discussions between the two men.
In his evidence about particular dealings, Mr Clarke's witness statement is quite detailed. He sets out at some length the effect of a conversation with Mr Quann in May 2008 and three subsequent conversations leading to a Memorandum of Understanding signed on 9 May 2008. But in cross‑examination, Mr Clarke showed no actual recollection of what had been said. When asked about what Mr Quann advised him regarding planning for an investment, Mr Clarke referred to the superficial trappings of Mr Quann's business success:
Ms LUDLOW: Okay. Well, can you tell me what was said?---We ‑ we would ‑ we would talk business. So I can't – I can't tell you what – what was said, but I just ‑ I got the impression from talking to Lindsay – he has got a house on Broome Street, Cottesloe which is expensive. He's driving a late model BMW.
…
Ms LUDLOW: …at the initial stages, you and Lindsay must have agreed something?---That's incorrect.
Ms LUDLOW: Okay. So you suggest that you just let Lindsay take over all of your affairs holus-bolus?---That's exactly right. That's exactly right.
Ms LUDLOW: Right. And you had no input?---No. Lindsay ‑ Lindsay controlled absolutely everything because he had me hooked.
Counsel for Mr Quann returned to the existence of a contract or agreement:
Ms LUDLOW: Now, you said before lunch that there was no contract or agreement for Lindsay or Mr Quann, or his entities to do anything other than lodge your tax agreements. Is that right?---No. Lindsay -Lindsay ‑ Lindsay said, 'Look, I'm going to help you in business. I'm going to take care of your finance, your tax, your accounting. We're going to do this, this, this and this, and away we go.' And then I thought 'brilliant' because, the thing is, I was under the impression that he was a sophisticated businessman. So I ‑ I started ‑ I was like his little puppy dog just following him along. He had me completely hoodwinked. And he would just say, 'Right. We're doing this, this, this and this', and whenever he said it, I just did it. And that’s what happened.
When asked about a payment he made in 2008, Mr Clarke did not refer to any contractual basis for it:
Ms LUDLOW: Okay. Did David Clarke Air Conditioning in fact pay $39,600 in 2008?---I paid a 3600 component.
Ms LUDLOW: Yes?---And then he said, 'Dave, give me 36,000 and I'm giving you 18 back.'
Ms LUDLOW: Okay. So, the 36,000 why did you pay that?---Because he told me to.
Ms LUDLOW: So, if Lindsay told you to jump off a bridge you would do that too?---At that stage, highly likely.
Ms LUDLOW: Right, okay. And what – why?---Because I thought he was a serious guy.
Ms LUDLOW: Because you wanted to make some money?---I thought he was a serious businessman.
Ms LUDLOW: And you wanted to make some money?---Well, I thought that I was going to be taught about accounting, financing, property development and a whole lot bunch of stuff because I thought he was a serious businessman. So, he's telling me all this stuff because every time we’re at dinner he's telling me, 'I've done this, I've done that,' blah, blah, blah, blah, and I'm just lapping it up. And so he said, 'Give me money, give money,' and I was just giving him money.
I am not satisfied that I can act on the evidence in Mr Clarke's witness statement as a true recollection of what was said.
The parties later did things that are consistent with at least some of the terms of the agreement pleaded: Mr Quann assisted in setting up the DS Clarke Superannuation fund with a corporate trustee; Mr Quann assisted in setting up DCFX Nominees Pty Ltd and the DCFX Investment Trust; Mr Clarke, through David Clarke Air Conditioning, paid fees to Mr Quann or companies in his group. And Mr Clarke's companies invested substantial sums in Mr Quann's businesses. But I am not satisfied that those matters prove the agreement alleged. Specifically, I am not satisfied that they prove an appointment of Mr Quann, or any of his companies, as an adviser, on the terms pleaded, before or at the time of the investments and payments in May 2008.
The plaintiffs attempted to overcome this lack of evidence regarding the agreement by relying on evidence given by Mr Quann in his witness statement. In particular, counsel relied on Mr Quann's statement that he 'offered to assist Mr Clarke in looking at business ventures and the management of his own investments': par 38(i); and agreed that Karriview Management would provide management, administrative and consultancy services in respect of his investment entity and superannuation fund: par 45(g). Those statements must, however, be read in context. Consistently with the pleaded defence, Mr Quann said that discussion about Mr Clarke's investments was in mid-2007, when Mr Clarke invited him to his house to discuss a personal investment plan. Mr Quann said that he did not suggest or discuss any proposed investments with Mr Clarke until late 2007 or early 2008, and does not say any suggestion or discussion was in the context of an advisory relationship. The offer of consultancy services, on Mr Quann's evidence, was in or about late 2007 or early 2008, when he had discussions with Mr Clarke about different business ventures that Mr Clarke proposed to Mr Quann: par 44.
The offer of services was through Karriview Management. While Mr Quann was the managing director of Karriview Management, the entity which would provide those services was the company. None of this supports the pleaded oral agreement in May 2008.
In cross‑examination, Mr Quann agreed that Karriview Management did provide services to Mr Clarke as 'part of the management of his investment portfolio for the three years which commenced from 30 June 2007'. But his explanation of his dealings with Mr Clarke was quite different from the plaintiffs' case. Mr Quann said that Mr Clarke was 'chasing him', talking about 'breaking into the wealthy western suburbs', and with 'a particular touch as far as the Chinese were concerned'. Mr Quann said that he was not touting for work as an accountant. He did, however, say that Mr Clarke asked him to get involved in his business affairs. He said the agreements put in place were for Mr Quann to act as Mr Clarke's tax agent, and for Karriview Management to 'help him facilitate his investment portfolio'.
Mr Quann also said that Karriview Management was to be paid $72,000 (plus GST) a year as a fee for its services. It is not disputed that Mr Clarke made some payments to Karriview Management. The plaintiffs initially sought to recover the amount of those payments as damages, alternatively equitable compensation.
Before an amendment to the statement of claim on the last day of the trial, the plaintiffs' pleaded case was that the arrangement for these payments was a sham intended to defraud the tax authorities. In the course of the plaintiffs' opening I asked if the 'sham' allegation was maintained, and counsel replied that 'without doubt' that was true with respect to the year ended 30 June 2007. In moving the amendment to abandon the plea (which was not opposed), counsel said that the plaintiffs maintained the claim that no services were provided in the year ended 30 June 2007, but they no longer claimed a tax indemnity and there was no longer a need for the facts to be pleaded.
On the evidence before me, I cannot find that Karriview Management provided management services to Mr Clarke or his companies in the year ended 30 June 2007. Mr Quann said that the 2007 payment was a prepayment for the year ended 30 June 2008. But that explanation was not consistent with other evidence, and I do not believe it was true. The tax invoice issued for the fee is dated 30 June 2007 and has the narrative, 'Being management fee to 30 June 2007'. Mr Clarke was required to pay cash for only the GST component; the balance was recorded as payment by Karriview Management for units in the DCFX Investment Trust. The description of the payment as a management fee for 2007 was a deceit, and the arrangement does not reflect well on the credit of either Mr Clarke or Mr Quann.
The parties do not agree whether the fee was $36,000 or $72,000 for the two following years. Nor do they agree about the reason why the payments were made. David Clarke Air Conditioning paid one amount of $36,000 in June 2008. The plaintiffs assert that the first payment was made in reliance on advice by Mr Quann that $18,000 of that amount would be 'refunded' by paying it to DCFX Nominees as the balance of the consideration for Karriview Management's units in the DCFX Investment Trust. A second payment of $36,000 was made in September 2008. No other payments were made, even though the relationship between Mr Clarke and Mr Quann continued into 2010.
In short, the purported 'management fees' do not support the existence of a contract under which Mr Quann, for reward, acted as Mr Clarke's adviser. The purpose of the payments was something other than a fee for management services.
On the first day of the hearing, in the plaintiffs' opening, I aired my concern about whether the plaintiffs were maintaining their pleaded case that the fiduciary relationship arose out of a contract of engagement, formed by oral agreement in May 2008. Counsel confirmed that the plaintiffs relied upon their pleaded case. Although the evidence shows the existence of agreements between the parties, the plaintiffs have not proved the contract of engagement alleged in par 3 of the statement of claim. The claim based on fiduciary obligations arising out of purported performance of that contract must fail.
That does not dispose of the action, as the plaintiffs maintained alternative causes of action for the money invested.
The alternative causes of action
It is convenient to consider those claims by reference to three documented agreements and one draft agreement between Mr Clarke and Mr Quann. The agreements relate to the two business operated by Mr Quann and his group of companies: the Harbour Pines Retirement Village in Geraldton, and the Karriview Lodge in Cowaramup. They overlap in time. In chronological order, they are: the Memorandum of Understanding regarding the Harbour Pines Retirement Village, in May 2008; a draft Heads of Agreement regarding Karriview Estate Lifestyle Village, prepared in July 2008 but not signed; Heads of Agreement regarding the Karriview Estate Lifestyle Village, signed in September 2008; and an agreement, recorded on a whiteboard, in February 2009, purportedly as an amendment of the Memorandum of Understanding signed in May 2008.
The Memorandum of Understanding - Harbour Pines Retirement Village, May 2008
The first relevant agreement is a Memorandum of Understanding relating to units in the GRV Property Trust, which operated Harbour Pines Retirement Village. The agreement was made in May 2008.
The document
The Memorandum of Understanding is stated to be between Mr Clarke (DSC), Mr Quann (LEQ), DS Clarke Nominees 'ATF Clarke Super Fund' (CSF), Cadagi Holdings Ltd ATF Karriview Unit Trust (KUT), and Adder Holdings ATF GRV Property Trust (GRV). After setting out the parties, identified by the abbreviations, it is in these terms (and in block capitals):
BACKGROUND
1.KUT OWNS 1,400,000 SPECIAL UNITS IN GRV.
2.GRV OPERATES A RETIREMENT VILLAGE IN GERALDTON.
3.IT IS AGREED KUT WILL SELL 150,000 SPECIAL UNITS OF ITS PRESENT HOLDING OF 1,400,000 EXISTING SPECIAL UNITS TO CSF
THE SALE IS TO TAKE PLACE AS FOLLOWS
12 MAY 2008 = $50,000
12 MAY 2009 = $50,000
12 MAY 2010 = $50,000
GRV AGREES TO PAY CSF A GUARANTEED 12% INTEREST ON THE PRINCIPLE [sic]. INTEREST IS TO BE PAID 6 MONTHS IN ARREARS FROM THE DATE OF ACQUISITION.
THE GUARANTEE IS JOINT BETWEEN GRV AND LEQ.
A PUT/CALL OPTION IS EXERCISABLE 6 MONTHS AFTER THE FINAL PAYMENT:
BEING 12 NOVEMBER 2010.
WHEREBY, CSF CAN EITHER CONVERT THE SPECIAL UNITS TO 5% OF THE CAPITAL OF GRV WHICH WILL ENTITLE CSF TO RECEIVE THEREAFTER 5% OF THE DEFERRED MANAGEMENT FEES COLLECTED BY GRV FROM THE 12TH MAY 2010 IN LIEU OF RECEIVING 12% INTEREST AGREED TO UNDER THE ORIGINAL AGREEMENT – OR CALL ON ADDER TO REACQUIRE THE 150 000 ONE DOLLAR SPECIAL UNITS AT PAR. SETTLEMENT TO TAKE PLACE SIX MONTHS AFTER THE FINAL PAYMENT OR BY THE 12 NOVEMBER 2010, WHICHEVER IS EARLIER.
SIMILARLY, GRV AND OR LEQ AND/OR HIS NOMINEE CAN CALL ON CSF TO REACQUIRE ITS SPECIAL INCOME UNITS AT PAR. PAR BEING ONE DOLLAR PER UNIT. TOTAL BEING 150,000.00 DOLLARS. 6 MONTHS AFTER FINAL PAYMENT (12TH NOVEMBER 2010).
ANY DELAY IN PAYMENT BY EITHER PARTY WOULD ATTRACT A 15% INTEREST RATE PENALTY BASED ON THE OUTSTANDING BALANCE.
The document is signed by Mr Clarke for the Clarke Super Fund and Mr Quann for the Karriview Unit Trust and the GRV Property Trust. The defendants plead that the document is not executed by Cadagi Holdings or Adder Holdings in accordance with the Corporations Act 2001 (Cth), being signed by one director only and without seal. It was, in any event, varied and largely superseded in February 2009.
Mr Clarke typed the Memorandum. Mr Quann testified that the terms reflected what had been jointly discussed between the parties. I accept that Mr Clarke had input regarding the terms, but much of the information that forms the basis of the agreement was exclusively within the knowledge of Mr Quann.
Under the Trust Deed for the GRV Property Trust, by obtaining special income units, DS Clarke Nominees may have obtained limited rights. Special income units or income units could be issued subject to conditions, including that they were not transferrable, and the holder obtained 'no interest whatsoever' in the Trust or the Trust Fund, other than the right to a $1 redemption payment for each unit. Mr Clarke's right to interest and the option to call on Adder Holdings to reacquire the units were not incidents of holding units but are contractual and founded solely in the Memorandum of Understanding.
Mr Clarke was at this stage enthralled by the prospect of Mr Quann as a business mentor. He paid money to Mr Quann without understanding fully, if at all, where it was to be invested or what he had obtained. He kept no adequate records of what had occurred. For example, in this transaction Mr Clarke agreed that his superannuation fund would purchase units in the GRV Property Trust, but was issued with units in the Karriview Unit Trust. I can make no finding on the evidence whether Mr Clarke ever received certificates as to his holding. The Karriview Unit Trust units were later redeemed for units in the Harbour Pines Investment Trust. Mr Clarke appears to have had no appreciation of where his investment lay at any particular time.
Mr Quann also maintained no adequate records. He dealt with the different companies he controlled without proper regard for the limits on what he or they could do. For example, he signed the Memorandum of Understanding on behalf of Cadagi Holding or Adder Holdings, now pleading that the document is not properly executed by those companies. The investment in GRV Property Trust is another example. Under the Trust Deed for the GRV Property Trust, special income units are not transferable; the transaction set out in the Memorandum would have been in breach of the trust deed. Mr Quann initially denied the transaction would have been in breach of the trust deed, saying it 'gave an intent of the parties' and that the Clarke Super Fund was 'issued with new units'. He only reluctantly accepted in cross examination that the Memorandum provided for a sale of units in GRV Property Trust by Cadagi Holdings, not the issue of new units.
DS Clarke Nominees did not receive units in the GRV Property Trust by sale or issue of new units. The evidence uniformly points to units being issued in the Karriview Unit Trust: a certificate, dated 19 May 2008 but unsigned, certifies that 50,000 units had been issued in the Karriview Unit Trust; in February 2009 Mr Clarke and Mr Quann made a variation agreement under which the 'investment in Cadagi' under the May 2008 agreement was realised and reinvested in the Harbour Pines Investment Trust.
Mr Quann said that there was a document, dated on or around 9 May 2008, recording the issue of units in the GRV Property Trust. But no certificate was produced. The defendants did not produce any contemporaneous records of decisions of the trustees of the GRV Property Trust to issue new units. It was only in February 2016 that Ms Fazio advised Mr Quann that she had adjusted the accounts of Adder Holdings to show that DS Clarke Nominees had held special income units in the GRV Property Trust from 19 May 2008 until 16 February 2009.
Mr Quann suggested that Ms Fazio had erred in issuing units in Karriview Unit Trust, rather than GRV Property Trust, because the DS Clarke Nominees had 'incorrectly' paid the money for the units to Cadagi Holdings. But he had to accept that the payment to Cadagi Holdings was consistent with the transaction under the Memorandum.
The defendants called Ms Fazio. She referred to the 'errors' which Mr Quann said had been made in relation to the issue of units in GRV Property Trust. It was clear that Ms Fazio regarded these as errors because Mr Quann told her they were. She had no independent knowledge. I do not believe there was any error.
It was not possible to resolve what had happened by recourse to the unit registers. The unit registers that had been produced by the defendants were reconstructions. I am not satisfied that they are reliable. More generally, there were very few documents produced by the defendants that were both signed and dated. The notable exception was documents that were internal to the Quann entities and recording resolutions or transactions intended to preserve their assets from creditors.
The arrangements set out in the Memorandum of Understanding were not completed. The special units issued in the Karriview Unit Trust (assuming they were validly issued) were later cancelled. Mr Clarke made only one payment under the Memorandum of Understanding, and the agreement it documented was later varied in February 2009. At trial, counsel for the plaintiffs referred to the variation as the 'Whiteboard Agreement', because that is how it was recorded. Mr Clarke and Mr Quann also discussed a proposed development at Karriview Lodge. In the second half of 2008, their focus appears to have been on that property.
The Karriview Estate Lifestyle Village
The other major investment by Mr Clarke and his companies was in the proposed Karriview Estate Lifestyle Village. The investment is set out in two documents described as Heads of Agreement: the first in July 2008; the second executed on 2 September 2008. The plaintiffs refer to the July document as a draft. It is both unexecuted and incomplete.
The Heads of Agreement needs to be put in a factual context.
Mr Clarke said that the investment in Karriview was first discussed with Mr Quann in one of their conversations in May 2008. Mr Quann spoke of involving him in the construction of residential units on the Karriview Property. Mr Quann told him he had a 'dream' for the property: to construct a new village of chalet-style accommodation to be sold to people over the age of 55. The Karriview property would be divided into two separate operational portions: strata titled residential village units and the Karriview Lodge.
Mr Clarke said that Mr Quann told him he wanted to offer him the opportunity to profit from the development of the chalet village. He could recommend a way in which he could invest and secure an opportunity to share in the large profits to be made, and also minimise liability for income tax. Mr Clarke said that Mr Quann said to leave the detail to him 'as my business adviser and tax accountant'.
In his first witness statement, Mr Clarke sets out, in some detail, the effect of what Mr Quann said to him about the agreement. The witness statement largely reflects what was written in the Heads of Agreement provided by Mr Quann in July. Again I have no confidence that Mr Clarke has any reliable recollection of what was said to him.
In his witness statement of 17 April 2016, Mr Clarke portrays a different plan. He speaks of Mr Quann's plan to build a new retirement village with a full time caretaker, with the main financial benefit through the management fees from the retirement village units, not sale of chalets: par 22. Mr Clarke said at par 42:
… The whole point for me was getting involved in development of the property by building a new retirement village. We had talked about this and worked on it so much that I never considered the possibility of any other concept.
There is other evidence that, well before he met Mr Clarke, Mr Quann had considered the building of chalets catering to the over 55 market. The owners of Karriview Lodge had an existing planning approval, dated 11 April 2001, for the construction of 18 chalets. In 2005, the Shire of Augusta-Margaret River advised that building licenses had been issued for six chalets, and the council had no objection to the remaining 12 chalets 'being specifically catered to over 55 year olds'. Other conditions of the planning approval were not in evidence, although Mr Quann referred to a requirement that they be short term stay. The Shire further advised:
In regard to Leasehold arrangements, this is a matter to be discussed with the Western Australian Planning Commission (WAPC), if subdivision is proposed.
In March 2008, Karriview Lodge was valued. The valuer acted on instructions from the ANZ Bank, apparently for first mortgage security purposes.
The valuer's report notes that the property was not operated as a normal resort, but catered for weddings and functions, with an emphasis on further development of the site. The next stage of development is described as 12 retirement units, to be developed as six duplex buildings and sold on a long term leasehold basis. The sale price of the proposed new units was estimated at $450,000 per unit, with $700,000 anticipated expenditure for each duplex. The existing 10 units were valued at $3,250,000 or $325,000 per unit. That value was on a rate per unit, taking into consideration 'the ancillary and supporting development such as restaurant, conference area, staff quarters, tennis courts etc'.
By June 2008, Mr Clarke was engaged in at least preliminary work relating to a proposed development at Karriview Lodge. On 16 June 2008, he received design drawings for a duplex development at Karriview Lodge. In an email dated 3 July 2008 he thanked the draftsman for work already done, and advised, 'we are going to move on this straightaway. I am meeting a builder on site next week who will organise all docs etc from here on in'.
The Heads of Agreement, July 2008
In July 2008, a document was produced, as a Heads of Agreement, between David Clarke Air Conditioning, Mr Clarke, Cadagi Holdings, and Mr Quann. Mr Clarke said it was provided to him by Mr Quann.
The Heads of Agreement begins with recitals regarding a proposed joint venture agreement 'to build two (2) 1 bedroom units at Karriview Lodge's property in Margaret River'. It provides, primarily, for how David Clarke Air Conditioning was to fund its contribution to the joint venture:
(1)an initial deposit of $65,000 + GST on 25 August 2008;
(2)a second instalment of $285,000 + GST, two weeks after the issue of a building licence for the construction of the two units by the Shire of Augusta Margaret River.
Other significant terms were that:
(1) The deposit became refundable if the WA Planning Commission did not rezone the property within six months of 25 August 2008;
(2)Cadagi Holdings would act as construction manager;
(3)Mr Clarke would act as 'consultant' and receive costed construction reports from the date of commencement to the completion of construction;
(4)Cadagi Holdings guaranteed to refund the $350,000 + GST if neither of the initial units was sold 18 months after 'construction complete date';
(5)On completion of the initial two units, Cadagi Holdings would offer David Clarke Air Conditioning the option to develop the remaining units.
The parties proposed, at a later time, to record the agreement 'in a document or documents containing fuller terms and conditions' (Recital 3).
The July Heads of Agreement was not signed by any party to it. Mr Clarke said, in his witness statement of 17 April 2016, that while the agreement reflected what they had been talking about, he could not get a mortgage to fund his contribution to the joint venture at that stage because he did not yet have title to his house: par 31.
Mr Clarke had to borrow the funds to finance his investment. His evidence about obtaining the loan is both internally inconsistent and inconsistent with the documents. The documents themselves are not all consistent.
Mr Clarke said, in his first witness statement, that Mr Quann took him to his ANZ Bank branch on several occasions in August 2008, where he went through the paperwork for a loan secured by a mortgage on his house. Everything seemed to be provisionally approved, but it was not finalised at this time: par 102. On 19 September 2008, Mr Quann became flustered when Mr Clarke said he not done anything about obtaining the money. Mr Quann said that Mr Clarke had to arrange his loan facility immediately, drove him to the local ANZ branch where he entered into the formal loan agreement to borrow $500,000.
His oral evidence was calculated to put a different slant on the obtaining of the loan. He said that Mr Quann took him to the ANZ Bank in Fremantle:
He had a relationship with them. They didn't even vet me. I walked straight in there, sat down in the board room. The paperwork was already done because he knew the guy… . Out comes the paperwork and he said, 'Yes. He's fine.' I signed it and away we went.
The documents tell a different story. By a letter, dated 28 July 2008, the ANZ provided a Loan Offer to Mr Clarke for an investment loan of $500,000. Mr Clarke signed the letter, agreeing to and accepting its terms, on 1 September 2008. A later bank document refers to an offer of 14 August 2008. An executed loan agreement and mortgage were not adduced in evidence. It is not in dispute, however, that Mr Clarke obtained the loan.
The mortgage which provided security for the loan settled on 19 September 2008. Mr Clarke sent a memo to the ANZ Bank, dated 19 September 2008, asking the bank on settlement to transfer $385,000 'incl GST' to Cadagi Holdings bank account. The transaction date for the transfer to Cadagi Holdings is 22 September 2008.
The Heads of Agreement, September 2008
A Heads of Agreement, dated 2 September 2008, was executed by Mr Clarke, David Clarke Air Conditioning (signed by Mr Clarke as director), Mr Quann, and Mr Quann as director of Cadagi Holdings.
Mr Clarke said in his first witness statement that the Heads of Agreement was signed within 48 hours of his providing $350,000 to Mr Quann. That is inconsistent with both the pleaded case and the documents regarding the loan. The documents show that the Heads of Agreement was executed about 20 days before the money was transferred to Cadagi Holdings. In his second witness statement Mr Clarke acknowledged that the sequence of events in his earlier statement may be incorrect.
It is possible that Mr Clarke had confused when he signed the letter of offer from the bank with when the money came through weeks later. His evidence in cross‑examination was confusing:
MS LUDLOW: Well, the period I'm talking about here is specifically in relation to July to September and now the month of September. What I want to know is what happened first. What was the order of this? You say Lindsay did everything, it's all Lindsay's fault. You signed this document on 2 September. What I want to know is when did you go to the bank?‑‑‑Ask Lindsay, he took me there.
MS LUDLOW: Can you not read a calendar?---I can't remember.
MS LUDLOW: Okay. Was it on or about the date that you signed that document?---It would have been shortly thereafter.
MS LUDLOW: Thereafter, not before?---I would say so. Yes.
MS LUDLOW: Right?---Because he has got the money ‑ he has got the money through and then he locks it in with the contract and the signature.
MS LUDLOW: No. No. This is what I'm asking you. I want to be really clear about this. What came first, the money or the contract?---The money. I think it was the money.
MS LUDLOW: Okay. Well, I'm going to put it to you that the money was transferred on 19 September?---Okay. Well, he has changed the date then, hasn't he?
This is another example where Mr Clarke's evidence reflects his obvious animosity to Mr Quann, rather than care for accuracy.
Mr Clarke said that he signed the Heads of Agreement at Mr Quann's home, witnessed by Mr Quann's son, Bellamy. Mr Clarke said that he briefly read the front page and the signing page which appeared to look like the July Heads of Agreement. He signed each page, but did not read it. The process of signing was rushed. Mr Clarke's oral evidence was that Mr Quann 'switched' the agreement, from what had been agreed in July. He only worked out that things had changed, 'When it all blew up and I started reading these things properly and carefully'.
In cross‑examination, it was put to Mr Quann (and denied by him) that his and his son's signatures were both on the document before Mr Clarke arrived and that Mr Clarke was rushed into signing.
To the extent it remains relevant, given my findings on the issue of fiduciary relationship, I do not accept Mr Clarke's evidence as to the circumstances of signing. He may have rushed the signing and not read the document properly. Having seen Mr Clarke give evidence, I would not deny that possibility. But I am not satisfied that Mr Quann in some way prevented him from reading the document or rushed him.
Mr Clarke may have been unaware of the extent to which the September Heads of Agreement differed from its predecessor, but I do not believe he did not know it had changed. Mr Clarke could not have been unaware that the agreement regarding his investment in Karriview Lodge was not what had been discussed in July.
First, the circumstances were obviously different from July. Under the July Heads of Agreement, Mr Clarke should have already paid $65,000 on 28 August. He had made no payment and had not yet completed his arrangement for finance.
Second, Mr Clarke knew that construction of new units at Karriview was not proceeding immediately. Mr Quann said, and I accept, that he and Mr Clarke had ongoing discussions about how to proceed where they were both keen to get something started, but realised they could not get the building licences through in a hurry, where there was a delay in getting builders in the prevailing market, and where builders were quoting extravagant prices. The Heads of Agreement prepared in September was against that background, where what was contemplated in July could not proceed.
Mr Quann's evidence about the period leading up to the September Heads of Agreement is supported by other evidence. Mr Clarke was closely involved in events relating to Karriview Lodge. On 3 July 2008, Mr Clarke sent an email to Mr Penny, who had been preparing designs, advising him that he (Mr Clarke) was meeting a builder on site the following week. Mr Clarke said he advised Mr Quann to build a 'more sophisticated product', recommending the work of a particular architect. He organised a builder in Cottesloe to talk to Mr Quann. He asked another builder, the brother of one of his refrigeration mechanics to have a look - incidentally, referring to the unexpectedly high cost of building.
The extent of his involvement, and his knowledge that no progress was being made, is clear in the following exchange:
Ms LUDLOW: And from July to September 2008, how many times did you visit Karriview?---In 2008? Quite a lot because that's ‑ that's when everything was rolling along fine and I thought ‑ a lot, but not every weekend because it's pretty boring down there. There's nothing to do. So whenever I went, maximum one night.
Ms LUDLOW: And when you were down there regularly, what could you see happening?---Nothing.
Ms LUDLOW: No. Did you see anything being, you know, moved towards site works - - -?---Nothing.
Ms LUDLOW: - - - plans - - -?---Nothing.
Ms LUDLOW: - - - subdivisions - - -?---Nothing.
Ms LUDLOW: Did you see any papers towards building approvals?‑‑‑Nothing.
Later, he said he was talking to Mr Quann nearly every day.
Third, the September Heads of Agreement differs markedly from the July draft. It is headed, 'Re Stage 1 Karriview Estate Lifestyle Village'. The parties are the same as for the July draft, but there the similarities end. There is no longer a reference to a joint venture. The full $350,000 is now payable immediately as a 'procurement fee'. It identifies the existing four units, and the budgeted prices for their sale.
That is not to suggest that the September document satisfactorily sets out the parties' rights and obligations. To borrow from George Orwell, the language of the agreement is 'designed … to give an appearance of solidity to pure wind'. The parties could not have proceeded on the terms recorded there. But it was the expressed intention of the parties (as for the draft in July) to record the terms in a further document or documents. Mr Quann said he contemplated a professionally drafted agreement. The evidence does not show why that was not done.
The Heads of Agreement begins with recitals:
A.'Cadagi' wishes to obtain traction and introduce certainty as to outcomes for the development of a lifestyle village on its property at Karriview Lodge.
The lifestyle village is to be called Karriview Estate.
B'DCAC' proposes to pay a $350,000 + GST procurement fee to 'Cadagi' to participate in Stage 1 of the lifestyle village.
C.'Cadagi' has agreed to pay ongoing fees to 'DCAC' as units are sold in Stage 1 as outlined in this agreement.
D.'Cadagi', 'DCAC', 'LQ' and 'DC' have reached terms of agreement as set out in this agreement. The parties propose that at a later point in time their agreement be recorded in a document or documents containing fuller terms and conditions.
Part 1 of appears to commence positively:
Cadagi and DCAC have agreed to jointly proceed with Stage 1 of the development as herein outlined.
It then sets out the agreed budgeted sale proceeds of four existing units at Karriview Lodge, identified as Olives Outlook, FV1/AOR, FV2/BOR, and Evelyn Outlook. This corresponds with the description of buildings in the valuation report of Knight Frank, dated 9 March 2008, which referred to Olives Building (a free standing two unit building); a two level/six unit building containing Forrest View 1 and 2, Bears Retreat 1 and 2, and Arthurs Outlook 1 and 2; and Evelyn Esther (designed to be leased as one unit, or separated into two).
Part 2 is headed, 'Attendance to Pre-sale Matters Pending', and records that the parties have agreed that 'various matters have to be finalized prior to the sale of the 4 units':
Attendance to those matters will be jointly finalised by all parties and to the satisfaction of all parties in order to facilitate the sale of all 4 units.
The matters requiring attention and finalisation are as follows:
1.Detail inventory
2.Provide improvement options prior to sale of initial 4 units
3.Finalize sale contract(s) for initial 4 units and balance of 12 units
4.Confirm and determine management fee(s)
5.Confirm and determine provision of on-going services independent of lodge, including but not limited to: IT, Water, Fire Fighting, Electricity and Security
6.Appointment of Caretakers to provide caretaker and on site maintenance services
7.Confirm initial budget for the village. Provision of working capital shortfall while sales and development in progress.
8.Signage/Communications and Web Page
9.Appointment of Sales Agency
10.Completion of plans for the next stage of 12 units
Part 3 provides for the payment by David Clarke Air Conditioning of a procurement fee 'to participate in the sale and the development of Stage 1'. For its procurement fee, David Clarke Air Conditioning was to receive a flat fee of $87,500 plus GST on the sale of each unit (that would amount to the return of the $350,000 investment were all units sold); 2% commission on gross sale price; 25% for all proceeds in excess of nominated sales price of the units sold; fees (unspecified) on the sale of each unit; and 'a documentation and infrastructure fee for attendance to Matter Pending Agenda completed to the satisfaction of all parties' of $16,000 plus GST.
Mr Clarke maintains that his understanding, despite the terms of the document, was that the agreement was for constructing and selling new units on the land at Karriview. But, as he said, he did not start reading documents carefully until later, and he did not always understand what Mr Quann was telling him.
Mr Quann said the agreement was for the sale of leaseholds of existing buildings, for terms less than 20 years (there being no subdivision of the land), and for short term stay (to comply with planning approval from the Shire). He said the Knight Frank Valuation Report valued the units that they were proposing to sell at $3,250,000, or $325,000 per unit, and that, in his understanding, the valuation was based on the sale of leaseholds. The Heads of Agreement does not in any way refer to the sale of leasehold interests. Mr Quann agreed that it was not in the document, but said it was agreed and was the intention.
The plaintiffs' claims regarding Karriview Lodge
Deceit of fraudulent misrepresentation
The plaintiffs allege:
(1)that the terms of the September Heads of Agreement were materially less advantageous to Mr Clarke and David Clarke Air Conditioning and materially more advantageous to Mr Quann and Cadagi Holdings: par 44;
(2) that Mr Clarke entered a loan agreement with the ANZ Bank, drew upon the loan, and incurred liabilities to the bank in the belief that the terms of the investment were materially the same: par 46;
(3) Mr Quann caused Cadagi Holdings to pay the sum of $350,000 to Karriview Management: par 46A;
(4)neither Mr Quann nor Cadagi Holdings had any intention of selling the residential units, and their sole purpose was to induce David Clarke Air Conditioning to pay the procuration fee so that it could be used for other purposes: par 48.
The plaintiffs plead that Mr Quann fraudulently, alternatively, negligently or recklessly misrepresented 'the nature, purpose and terms of the proposed investment' so as to induce David Clarke Air Conditioning to pay the procuration fee: par 49.
The plaintiffs also allege that Mr Quann falsely represented that he had advice as to the legality of the development being structured so as to grant 'life tenancies in residential units': par 53. There is no plea, however, that the representation pleaded in par 53 was made before the investment, or induced Mr Clarke or his company to do anything that caused loss. The plaintiffs also allege a false representation that David Clarke Air Conditioning would obtain a tax deduction on account of the payment of the procuration fee: par 54.
There is no doubt that the terms of the September Heads of Agreement were materially less advantageous than those in the draft from July. The only right obtained for the payment of $350,000 was a right to 'participate' in sale and development. David Clarke Air Conditioning would obtain no return unless and until units were sold. Provisions for recovery of the deposit and invested money, in the event that the development did not proceed or was delayed, were no longer included. Mr Quann and Cadagi Holdings had no obligation to complete matters pending or to sell one or more of the units within a specified time. Mr Clarke' entitlement to a documentation and infrastructure fee required completion of the Matters Pending Agenda 'to the satisfaction of all parties'.
The loss of protection for Mr Clarke, should the development not succeed, is obvious on the face of the documents. I am not satisfied that Mr Quann misrepresented that those protections would remain.
The plaintiffs also assert that Mr Clarke entered the loan agreement with the ANZ Bank 'in the belief that the terms of investment in the September Heads of Agreement were materially the same as the terms of investment set out in the July HOA': par 46. I am not satisfied that is true, because I am generally unable to accept Mr Clarke's evidence. If he did hold that belief, I am not satisfied that it was the result of the conduct of Mr Quann. The most cursory reading of the September Heads of Agreement reveals fundamental differences from what Mr Clarke says had earlier been discussed.
Finally, the plaintiffs plead that, at all material times, neither Mr Quann nor Cadagi Holdings had any intention of selling the residential units, the subject of the September Heads of Agreement, and their sole purpose in taking the actions they did was to induce David Clarke Air Conditioning to pay the procuration fee so that it could be used for other purposes: par 48.
Mr Clarke, of course, does not say that he was induced by any representation of a present intention to sell the existing units, or even failure to inform him that there was no such intention. On his evidence, he did not understand that to be the parties' intention at all.
There are matters which might cast doubt on whether there was then a serious intention to proceed in the manner set out in the Heads of Agreement. The lack of any clear statement of what each party was expected to do is troubling. The defendants did not adduce evidence of any significant attempts to sell the units after September 2008. But, ultimately, I am not satisfied that the plaintiffs have proved that the failure of Stage 1 to progress is because Mr Quann and Cadagi Holdings did not intend, in September 2008, to sell those units. There is evidence that Mr Quann had been considering the development of Karriview for the over 55 market since, at the latest, 2005. The instructions to the valuer in March 2008 were based on the sale of retirement units on a long term leasehold basis. Mr Quann further states (at [70]) that:
(1) in July 2009, Cadagi Holdings engaged an architect for purposes including 'to act as a guide for the improvement options required prior to the sale of the 4 units';
(2)Cadagi Holdings attended to matters of 'signage/communications';
(3) the delay in Stage 1 is due to the Global Financial Crisis, with a slump in property and land prices in Margaret River.
The guarantee clause
The Whiteboard Agreement is not an executed contract, but a document recording what the parties have agreed. Clause 12 simply states that the investment 'is to be guaranteed by HPIT LQ'. It is not clear what is intended. If intended to be a guarantee, it is not in writing signed by the guarantor.
What was intended must be determined, like any other construction exercise, by reference to the words the parties have used to record the agreement and by reference its context and purpose: Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 [46] ‑ [47]. That approach should be followed even if the agreement has been recorded informally, and, it must be said, inadequately.
The Whiteboard Agreement must be read together with the earlier Memorandum of Understanding, which it varies. Adder Holdings was no longer a party to the agreement and incurred no obligations under it; and DS Clarke Nominees was no longer to acquire units in the GRV Property Trust. The agreement provided, however, that the Clarke Superannuation Fund was entitled to 5% of Deferred Management Fees generated by the sale of units in the Harbour Pines Retirement Village, operated by Adder Holdings and the GRV Property Trust.
Against that background, I would construe the obligations assumed by Harbour Pines Investment Trust and Mr Quann to 'guarantee the investment' as a primary obligation to make payments of an amount equal to 5% of the Deferred Management Fees. They are not guaranteeing payment by Adder Holdings ‑ which under the varied agreement has no obligation to pay - but promising that they will pay an amount calculated in that way.
The plea
The plaintiffs' plea, to some extent, conflates the Memorandum of Understanding and its later variation. They plead that Mr Quann advised Mr Clarke and his companies that, to establish an income stream for DS Clarke Nominees, Mr Clarke should cause it to invest in the Harbour Pines Retirement Village in Geraldton by acquiring 150,000 special income units in the GRV Property Trust: par 21. On or about 9 May 2008, Mr Quann orally advised Mr Clarke as to the terms of the agreement (to be documented in a memorandum of understanding). He also advised that the investment would be safe and financially advantageous because the payment of $150,000 would deliver a substantial financial return; the financial return would be equivalent to the total value of the sum paid by DS Clarke Nominees plus interest at 12% per annum, or, if DS Clarke Nominees elected to convert its units into 5% of the capital of the GRV Property Trust, 5% of the deferred management fees income of the GRV Property Trust collected after 10 May 2008: par 23.
The terms were incorporated into a document dictated by Mr Quann to Mr Clarke, and typed by Mr Clarke: par 23A. The plaintiffs plead that Mr Clarke executed the document induced by, and in reliance on, the advice given by Mr Quann. Mr Quann also executed the memorandum.
The plaintiffs plead that DS Clarke Nominees paid a total of $156,000 in three payments on 19 May 2008 ($50,000), 16 February 2009 ($56,000), and 4 June 2009 ($50,000). The first and third payments were made to Cadagi Holdings, the second payment to Harbour Pines Investment Trust: par 26. This plea fails to recognise that, at 16 February 2009, the underlying agreement was varied.
On 16 February 2009, Mr Clarke and Mr Quann met at Karriview Lodge. The plaintiffs plead that Mr Quann advised Mr Clarke by saying words to the effect:
(a)he should cause DS Clarke Nominees to increase its investment in the Geraldton Retirement Village to $225,000 by accepting additional units in lieu of interest, or as bonus units, and subscribing for additional units;
(b)some or all of the investment should be by subscription in units in the Harbour Pines Investment Trust;
(c)the Harbour Pines Investment Trust was a suitable vehicle for investment in the Geraldton Retirement Village;
(d)the return on the investment would be a percentage of the Deferred Management Fees received by Adder Holdings;
(e)the investment would be guaranteed by HPIT and Mr Quann;
(f)the investment could be redeemed.
The plaintiffs further plead that representation that Harbour Pines Investment Trust was a suitable vehicle for investment in the Geraldton Retirement Village was false: par 34A. Harbour Pines Investment Trust had no record of earning significant income; had no assets other than special income units in the Karriview Unit Trust and loans to the GRV Property Trust; and moving the investment from the GRV Property Trust deprived DS Clarke Nominees of recourse to the assets constituting the Geraldton Retirement Village in the event of a claim to enforce rights or recover the investment.
The plaintiffs allege that, induced by and in reliance on that advice, Mr Clarke orally varied the Memorandum of Understanding, and caused DS Clarke Nominees to make three payments totalling $156,000 on 19 May 2008, 16 February 2009 and 4 June 2009, as pleaded in par 26 of the statement of claim; and a further payment of $16,965 on 31 July 2009: par 35. The plaintiffs do not plead that they made the disputed payment of $1,250.
Mr Quann did not apply the payments towards subscription for units in the GRV Property Trust, but applied the first $50,000 towards subscription in the Karriview Unit Trust, then caused those units to be cancelled and applied amounts paid towards subscription for units in the Harbour Pines Investment Trust or towards loans from Cadagi Holdings to Harbour Pines Investment Trust: par 35A. Between 16 February 2009 and 30 June 2009, without informing Mr Clarke or seeking his approval, Mr Quann caused Harbour Retirement Holdings to invest $600,000 in special income units of the Karriview Unit Trust: par 35AA.
DS Clarke Nominees has received no income, return of capital on the special income units in Harbour Pines Investment Trust: par 35B.
The plaintiffs plead that the advice was not in the best interests of DS Clarke Nominees; that Mr Quann's purpose in so advising was to obtain a benefit for Cadagi Holdings, Harbour Pines Investment Trust and GRV Property Trust and to protect the GRV Property Trust from possible claims; and that none of Mr Quann, Adder Holdings, Cadagi Holdings, or Harbour Retirement Holdings intended to treat the Memorandum of Understanding of May 2008, as varied, as binding on them should they prefer not to do so: par 36.
The plaintiffs allege that by 30 June 2009, DS Clarke Nominees, by operation of the agreement made on 16 February, had a total investment of $225,000: par 37. DS Clarke Nominees held 225,000 special income units, each $1.00, in either the GRV Property Trust or the Harbour Pines Investment Trust. Adder Holdings has failed to pay interest at the rate of 12 % per annum on the $225,000: par 38.
Mr Clarke has exercised the put option to require Adder Holdings to redeem or acquire its investment in the Geraldton Retirement Village (whatever form that investment took). Adder Holdings and Mr Quann have failed to pay the sum of $225,000 or any sum to DS Clarke Nominees: pars 39 - 41.
The defendants admit the terms of the Memorandum of Understanding, but deny the allegations regarding advice by Mr Quann. The defendants plead that the terms were determined jointly, and are not representations by Mr Quann; the document was drafted by Mr Clarke.
The case based on representations
The nature of a representation conveyed by words or conduct is a question of fact to be determined having regard to what was said or done considered against the background of all the surrounding circumstances: Taco Company of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177, 202. A representation will be false or misleading if it induces, or is capable of inducing, error: Johnson Tiles Pty Ltd v Esso Australia Ltd [2000] FCA 1572; (2000) 104 FCR 564 [63]; Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [15].
Where the plaintiffs rely on misleading and deceptive conduct arising from representations conveyed by what was said at meetings, they need to prove the words were spoken with a degree of precision sufficient to enable the court to be satisfied that what was said would reasonably give rise to the representation claimed: see, for example, Watson v Foxman (1995) 49 NSWLR 315, 318 ‑ 319. They do not have to prove the precise words spoken at the meeting. But the court needs to be satisfied, bearing in mind the civil standard of proof, that words were spoken that would reasonably convey the representation asserted.
In determining whether the statements by Mr Quann reasonably give rise to the pleaded representation, I have had regard to the circumstances in which the words were said and the whole of the course of conduct of the parties. The question of fact should not be decided by examining the evidence about the events of February 2009 in isolation: compare Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 [114]; and Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592 [109].
The first finding is that, except where matters are recorded in writing, or not in dispute, I do not accept Mr Clarke's evidence about what was said, or represented, or agreed. I have given my reasons for why I regard his evidence as unreliable.
Second, the plaintiffs plead that the meeting in February 2009 was in further purported performance of the oral contract made in May 2008, and that Mr Quann, in his capacity as adviser, gave advice to Mr Clarke that induced Mr Clarke to orally vary their earlier agreement: par 34. I have already set out why I do not accept the case based on the contract of engagement.
Third, much of the plea based on representations by Mr Quann is not supported by the evidence. Or, to put it another way, the representations pleaded do not arise from what was said.
I am satisfied that Mr Quann represented to Mr Clarke that investment in Harbour Pines Investment Trust was a suitable investment for his superannuation fund: Mr Quann admitted that he said as much. But I am not satisfied that he represented it to be an investment in the Geraldton Retirement Village (or Harbour Pines Retirement Village). It was, on the documents recording the agreement, including exhibit 6 in Mr Clarke's own hand, an investment in the Harbour Pines Investment Trust. The only reference to the retirement village is in the entitlement to a percentage of Deferred Management Fees. There was no representation that Harbour Pines Investment Trust owns or operates the retirement village. Mr Clarke was a party to the Memorandum of Understanding, signed in May 2008, which identified Adder Holdings as the trustee of the GRV Property Trust and as the operator of the retirement village. The substance of cl 1 of the Whiteboard Agreement was that Mr Clarke and his superannuation fund were realising their earlier investment in the GRV Property Trust to purchase units in Harbour Pines Investment Trust.
Accordingly the plea in par 34A that Mr Quann falsely represented that Harbour Pines Investment Trust was a suitable vehicle for investment in the Geraldton Retirement Village must fail. That is not what was represented to Mr Clarke in the agreement, and there is no satisfactory evidence that Mr Quann made that representation orally or by conduct.
The plaintiffs further plead in par 36 that none of Mr Quann, Adder Holdings, Cadagi Holdings or Harbour Retirement Holdings intended to treat the varied Memorandum of Understanding as binding on them or to comply with its terms if they preferred not to do so. Although it is not altogether clear, I believe this is intended to be a plea of misleading and deceptive conduct, there being an implied representation that those parties did intend to treat the terms as binding.
The plaintiffs rely on five specified matters as evidence of this false intention:
(1)The falsity of certain representations pleaded in par 23 of the statement of claim. Those representations, however, relate to the Memorandum of Understanding made in May 2008 and varied. I am not satisfied that they show an intention not to comply with the agreement, either as made or as varied. Looking at the varied agreement, it is relevant that Adder Holdings is not a party to it, and there is no longer to be an investment in the GRV Property Trust. Although Cadagi Holdings was a party to both agreements, and later payments were made to it, Cadagi Holdings undertook no obligations after the realisation of the existing investment in it. Mr Quann said, and the financial statements support, that the payments were received by Cadagi Holdings on behalf of Harbour Retirement Holdings. That, at least, is how they were treated for accounting purposes.
(2)Next, the plaintiffs rely on the facts pleaded in pars 29 and 34A. Paragraph 29 pleads that Mr Quann created a conflict between his personal interests and his duty to Mr Clarke and his companies, arising out of the fiduciary relationship, in entering the original Memorandum of Understanding. Paragraph 34A pleads representations which, as I have found above, were not made. Even if established, I am not satisfied these are matters which would prove the false intention alleged.
(3)The plaintiffs allege that Mr Quann did not provide any amended written form of the Memorandum of Understanding. There is no dispute that the variations were recorded on the whiteboard, and Mr Clarke made his own copy of it at the time, amended at least in part by Mr Quann. The earlier Memorandum, although in writing and signed, was not a professionally drawn or comprehensive agreement. I am not satisfied that the failure to provide a consolidated amended form of the Memorandum establishes the intention alleged.
(4)The plaintiffs allege that the third payment was, at the request of Mr Quann, made to Cadagi Holdings and not to Harbour Retirement Holdings. That is so, but it says nothing about the intention of the parties when the agreement was made.
(5)Finally, the plaintiffs plead that neither Adder Holdings nor Harbour Retirement Holdings has paid income or return of capital.
(a)With regard to Adder Holdings, from the making of the variation it was no longer a party to any agreement with Mr Clarke or his companies. It had no obligations after the agreement was varied in 2009.
(b)Harbour Retirement Holdings is also not a party, although it is trustee of the trust which was named as a party. Harbour Retirement Holdings made one cash payment ($3,813) and payments by the issue of further shares as contemplated by the agreement. It has not paid the percentage of Deferred Management Fees, as agreed, and has not returned the capital sum invested.
I am not satisfied that this shows the intention alleged at the time of the agreement. The evidence is that other matters arose between Mr Quann and Mr Clarke, including a dispute about Mr Clarke withdrawing funds from DCFX Holdings and failing to pay funds into the DCFX Investment Trust as he had agreed. This lead Mr Quann to want an account of the parties positions at June 2009. By 2010, the relationship had broken down. The fact that the agreement was not complied with does not satisfy me that there was no intention to comply with it from the start.
The claim to recover in contract
There are various aspects to the claim in contract.
First, the plaintiffs plead that DS Clarke Nominees held 225,000 units in the GRV Property Trust, alternatively Harbour Pines Investment Trust at 30 June 2009, being its investment of $225,000. The investment was, from February 2009 at the latest, not in the GRV Property Trust. DS Clarke Nominees held units in the Harbour Pines Investment Trust. There is a dispute about how many units it held. I am satisfied, as I have recorded above, that it was 202,750 units.
Second the plaintiffs plead that Adder Holdings has failed to pay interest at 12% on the units held in the GRV Property Trust from 1 July 2009: par 38. From February 2009 the agreement to pay 12% interest had been superseded. Adder Holdings had no obligations under the varied agreement.
Third, the plaintiffs plead that, in or about October 2009, it was agreed that DS Clarke Nominees would exercise its put option 'to redeem or acquire the investment … in the Geraldton Retirement Village (whatever form that investment took …): par 39. The defendants do not dispute that DS Clarke Nominees has 202,750 units in the Harbour Pines Investment Trust, with a balance due of $202,750. They otherwise deny par 39.
At October 2009, the put option in the original Memorandum of Understanding was of no effect. There could be no reacquisition of units held by DS Clarke Nominees in the GRV Property Trust because it held no units. DS Clarke Nominees was, however, entitled to call for the return of its investment in Harbour Pines Investment Trust by giving 6 months' notice. In par 40, the plaintiffs plead that, by letter on 1 November 2010, Mr Clarke called on Mr Quann to repay $225,000 by three six monthly instalments of $75,000 each. On the findings I have made, the notice was wrong, both as to the amount claimed and the intervals between instalments. DS Clarke Nominees is, however, entitled to call for the return of its investment.
It is also entitled from 1 July 2010 to an amount equal to 5% of the Deferred Management Fees generated by the sale of units in the Harbour Pines Retirement Village.
There are no amounts to be set off against the claim, there being no claimed set off between DS Clarke Nominees and Harbour Retirement Holdings or Mr Quann.
The secured debts
Although the Whiteboard Agreement on which the plaintiffs have succeeded names 'HPIT' as a party, and the 'guarantee' as given by HPIT, it is a trust and does not have separate legal identity. In contracting the way he did, I am satisfied that Mr Quann was acting on his own behalf and on behalf of Harbour Retirement Holdings, of which he was a director. That is, he was contracting on behalf of the trustee. The unit certificates issued to the plaintiffs were issued by Harbour Retirement Holdings.
The Trust Deed of the Harbour Pines Investment Trust provides for the Trust Fund to be divided into units: cl 3.4. The beneficial interest in the Trust Fund is vested in the Unit Holders for the time being, with all Unit Holders entitled to a beneficial interest in the Trust Fund as an entirety: cl 3.1, cl 3.3. Clause 9 conferred on the Trustee powers of investment, including the power to borrow, to advance and lend money, and to deal with, manage and realise any investments as the Trustee thinks fit and as if it were the absolute beneficial owner of the trust fund. The Trustee is entitled to be indemnified out of the assets for the time being of the Trust Fund against liabilities incurred in the execution or attempted execution or any of the trust powers and discretions or by virtue of being the Trustee: cl 19.6.
Harbour Retirement Holdings is personally liable to DS Clarke Nominees. It is entitled, however, to be indemnified from the trust assets under cl 19.6. As trustee, it also has a right in equity to be indemnified for liabilities properly incurred in the management or administration of the trust. DS Clarke Nominees holds no security over the trust assets, and has no direct remedy against those assets. It is entitled, however, to be subrogated to Harbour Retirement Holdings' right of indemnity from trust assets.
It is in that context that the court must consider the plaintiffs' claim to set aside specified transactions entered into by the entities controlled by Mr Quann, including transactions by Harbour Retirement Holdings, on the basis that they are alienations of property made with intent to defraud creditors, and voidable under the Property Law Act 1969 (WA).
By s 89(1) and (3) of the Property Law Act:
(1)Except as provided in this section, every alienation of property made, whether before or after the coming into operation of this Act, with intent to defraud creditors is voidable, at the instance of any person thereby prejudiced.
…
(3)This section does not extend to any estate or interest in property alienated for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the alienation, notice of the intent to defraud creditors.
The principles governing the operation of s 89 were recently set out by Gilmour J in Federal Commissioner of Taxation v Oswal [2012] FCA 1507; (2012) 91 ATR 684 [21] ‑ [25], applying the reasoning of the High Court in Marcolongo v Chen [2011] HCA 3; (2011) 242 CLR 54. Relevantly, for present purposes:
(1)the intention to hinder or delay creditors is the relevant species of fraud;
(2)'creditors' are not confined to those to whom a debt is (at the time of the disposition) presently due and owing;
(3)the section requires proof of actual intention, but intention may be inferred from circumstances; and
(4)the intention to hinder or delay creditors need not be the sole or predominant purpose of the assignment.
See also: First Industry Corp v Goh [2002] WASC 111; Singh v Singh [2009] WASCA 53.
In Hall v Poolman [2007] NSWSC 1330; (2007) 215 FLR 243 [550] ‑ [551], Palmer J said of the equivalent section in NSW (s 37A Conveyancing Act 1919):
The purpose of s 37A is to defeat fraud no matter by what device it is implemented. The reach of the section is not foreshortened by technical obstructions placed in the way of recovery proceedings in furtherance of the original fraudulent intent. The words of the section are of the widest possible application; they focus on the effect of what is done, not on the means by which it is done. The word 'alienation' encompasses every conceivable means whereby property might be removed from the reach of a person's creditors. The section does not say that the alienation must be by the act of the fraudulent debtor.
If a person acts collusively with a fraudulent debtor in such a way as to cause ownership of property to move, or to remain away, from the apparently passive debtor, there nevertheless has been an alienation of property for the purposes of the section. In this regard, s 37A Conveyancing Act is wider in reach than s 121(1) of the Bankruptcy Act 1966, which catches only 'a transfer of property by a person who later becomes bankrupt': cf Official Trustee in Bankruptcy v Mateo [2003] FCAFC 26; (2003) 202 ALR 571, at [61] per Wilcox J.
The section empowers the court to declare void the acts of a collusive third party, and the court may order the third party to re‑transfer the property: Hall v Poolman [553].
The plaintiffs plead:
(1)From November 2010, Mr Clarke made demands upon Mr Quann for the return of funds invested by David Clarke Airconditioning and DS Clarke Nominees: par 60A.
(2)Mr Quann was aware by not later than 1 January 2013 of claims or a potential claim by the plaintiffs against his companies: par 60B.
(3)Mr Quann was a director and the directing mind and will of each of the companies, including Harbour Retirement Holdings and Leroy Nominees, and his knowledge is to be imputed to each of them: par 60C.
(4)During the financial year ended 30 June 2013, each of Cadagi Holdings, Adder Holdings and Harbour Retirement Holdings, at the direction of Mr Quann, caused secured debts to Leroy Nominees to be created, without receiving in return any or any proportionate value: pars 60D, 60I, 60N.
The effect of the creation of each secured debt was that if the plaintiffs succeeded in a claim against those defendants or became a judgment creditor of them, the funds available to meet that judgment would be diminished to the extent of the security interest and the claim represented by the judgment would to that extent be defeated: pars 60E, 60G, 60O. It is not expressly pleaded, but I understand the plaintiffs' claim to include where one or more plaintiff may become subrogated to the relevant trustee's right of indemnity from the assets of a trust fund, and the action of the defendants is to diminish the funds available to satisfy the claim.
By taking the benefit of the debt and security interest Leroy Nominees received the benefit of alienations of property with knowledge that they were made with intent to defraud the plaintiffs by defeating their claims: pars 60H, 60M, 60R.
The plaintiffs seek orders that:
(a)the alienation of property represented by the creation of the debt or the purported acknowledgement of an existing indebtedness be declared void under s 89 of the Property Law Act, alternatively in the exercise of the court's equitable jurisdiction;
(b)an order that the alienation of property represented by the creation of the security be declared void under s 89, alternatively set aside in the exercise of the court's equitable jurisdiction; and
(c)alternatively, an order that the secured debt is held by the sixth defendant in each case under a constructive trust for the plaintiffs.
The plaintiffs added a claim for an order that Leroy Nominees repay any amount paid to it by Harbour Retirement Holdings in purported discharge of the secured debt. This further claim is based on the record in the financial statements of Harbour Retirement Holdings at 30 June 2014 that the debt had fallen to $49,223 and at 30 June 2015 was $70,000. Nothing more is known about how the debt was reduced.
Specifically on the claim regarding Harbour Retirement Holdings, the plaintiffs plead that, during the financial year ended 30 June 2013, Harbour Retirement Holdings, at the direction of Mr Quann, caused to be created a secured debt of $500,000 to Leroy Nominees, without receiving in return any or any proportionate value. The claim is based on balance sheets of Harbour Retirement Holdings which show:
(1)at 30 June 2012, Harbour Pines had no indebtedness, but was owed $119,468 by Leroy Nominees;
(2)at 30 June 2013, Harbour Pines had a non-current liability of a secured debt of $500,000 to Leroy Nominees.
The defendants admit that Harbour Retirement Holdings caused the debt to be created and plead that it was created at the direction of Leroy Nominees, was done for valuable consideration and in good faith: par 48F.
First, I am satisfied that the plaintiffs have proved that the creation of the secured debt in 2013 was done with the relevant intent to defraud creditors. It is particularly relevant to the inference of intention that similar transactions were made over the same period by each of the companies controlled by Mr Quann and named as defendants to the action. Mr Clarke had given notice seeking the return of his investment in Harbour Pines Investment Trust in late 2010. I am satisfied that, from then, Harbour Retirement Holdings knew of the potential claim against it, by reason of Mr Quann's knowledge. Mr Quann said that the plaintiff had been threatening legal action since early 2011. Each of the other trustees acted after then to create secured debts in favour of Leroy Nominees, sufficient to defeat the claim of a judgment creditor.
In effect, Leroy Nominees had set up a protective position in 2007, whereby Leroy Nominees had the option, on written demand, to convert units it held in the Quann controlled unit trusts, including Harbour Retirement Holdings, to a secured loan. The transactions recorded in the balance sheets were the acknowledgement of an existing indebtedness, previously in the form of unit holdings but which was now converted to secured debt. Mr Quann, and his daughters who were called as witnesses, referred to this as protecting the position of Mrs Quann, who had in 2004 lent money from the sale of the family home in her name to Leroy Nominees. Mr Quann described the arrangement as, 'providing a planning mechanism where Yvonne could get her money back'. His evidence was:
Mr WARNICK: The purpose of the redemption was to protect your wife?‑‑‑To make provision for Yvonne's retirement. To provide her with some certainty.
Mr WARNICK: Provide her with certainty of being repaid by Leroy. Yes?‑‑‑That Leroy was in a position to repay her.
Mr WARNICK: And to do that, Leroy had to be in a position to get the money from Cadagi and Adder and Harbour. Is that right?---Which I had already put in. Yes.
Mr WARNICK: And you protected your wife's position by exercising Leroy's conversion options?---As part of an estate planning mechanism.
The effect of the creation of the secured debt was that, if DS Clarke Nominees succeeded in its claim against Harbour Retirement Holdings, the funds available to meet that judgment would be diminished to the extent of the security interest and the judgment would, to that extent, be defeated. I have no doubt that is what was intended. Mr Quann is a director of Leroy Nominees. His knowledge should be attributed to Leroy Nominees. Leroy Nominees, accordingly, had notice of the intent to defraud creditors, and cannot rely on s 89(3).
The defendants attempted to avoid the consequences of Mr Quann's direct involvement in the claims and potential claims by Mr Clarke by having relevant resolutions to convert the debt made by his daughter, Alicia (also a director). She stated that her purpose in securing the debts was 'to make sure that we could pay the money on [Mrs Quann's] 60th birthday in 2014 July'. She said that, when she took steps to convert the investments to secured debt, two years earlier, she was unaware that there were pending proceedings.
That does not avail for two reasons: first, Leroy Nominees has attributed to it the knowledge of Mr Quann as director. Second, regardless of Ms Quann's motive to protect the position of her mother, the purpose of Leroy Nominees was to give its debt priority over unsecured creditors.
Finally, I agree with the submission put on behalf of the plaintiffs that the relevant 'alienation' for the purposes of s 89 is the full sequence of actions: redemption of the units, creation of a debt in the amount payable on redemption, and creation of security for that debt. There are serious doubts whether the defendants validly followed this sequence. But, assuming that they did, the alienation did not occur in 2007 when the option to convert was created. It was only when units were redeemed and the security was created over the resultant debt that there was an alienation of property by Harbour Retirement Holdings.
There will be orders that the alienation of property represented by the redemption of the units held by Leroy Nominees in Harbour Retirement Holdings, and creation of a debt for the redemption amount, and the creation of security for that debt, be declared void under s 89 of the Property Law Act. It will be further ordered that any amount paid by Harbour Retirement Holdings to Leroy Nominees in purported discharge of the secured debt be repaid.
Conclusion
The second plaintiff has succeeded in its claim against Mr Quann and Harbour Retirement Holdings. It is entitled to the return of its investment, and the amount of 5% of Deferred Management Fees from 1 July 2010.
I will hear the parties regarding the form of the orders, interest and costs.
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