Elite Realty Development Pty Ltd v Sadek

[2023] NSWCA 165

Court of Appeal

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

Elite Realty Development Pty Ltd v Sadek [2023] NSWCA 165

Hearing dates:

15 June 2023

Date of orders:

19 July 2023

Decision date:

19 July 2023

Before:

Payne JA at [1]
Mitchelmore JA at [113]
Stern JA at [114]

Decision:

In the Maroubra Appeal (2022/318509)

(1)   Leave refused to amend the notice of appeal.

(2)   Appeal dismissed.

(3)   Appellants to pay the respondents’ costs.

In the Avoca Appeal (2022/318527)

(1)   Appeal dismissed.

(2)   Appellants to pay the respondents’ costs.

Catchwords:

CONTRACTS – Duress – Illegitimate pressure – Affirmation – agreement to terminate property development joint venture – where one party entered agreement under duress – duress from gun attack – agreement performed by both parties – whether duress ended – whether performing agreement constituted affirmation – whether rescission barred by affirmation

CIVIL PROCEDURE – Hearings – Procedural fairness – whether affirmation pleaded at first instance – whether parties below conducted case on basis of affirmation

PARTNERSHIPS AND JOINT VENTURES – Joint venture agreements – Rights and duties between joint venturers – assets of joint venture – tracing – whether properties bought with joint venture funds

APPEALS – Point not taken below – Pleadings – new arguments raised on appeal – whether Court should hear new arguments – whether leave should be granted to amend notice of appeal

CORPORATIONS – Directors and officers – Directors’ duties – Fiduciary duties – where director personally entered deed – company not party to deed – where company involved in a joint venture – whether deed terminated joint venture – whether director breached duties – whether relief available - whether loss shown

Legislation Cited:

Civil Liability Act 2002 (NSW) s 5O

Civil Procedure Act 2005 (NSW) Pt 6

Corporations Act 2001 (Cth) ss 180-182, 1317H

Evidence Act 1995 (NSW) s 136

Cases Cited:

Barton v Armstrong [1976] AC 104

Bryant v Quinn [2022] NSWCA 163

Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40

Elite Realty Development Pty Ltd v Sadek [2022] NSWSC 1333

Hawker Pacific v Helicopter Charter (1991) 22 NSWLR 298

Kuru v State of New South Wales (2008) 236 CLR 1; [2008] HCA 26

Maroubra Road Developments Pty Ltd v Afyouni [2019] NSWSC 1639

Russell Gould Pty Ltd v Ramangkura (2014) 87 NSWLR 552; [2014] NSWCA 310

South Western Sydney Local Health District v Gould (2018) 97 NSWLR 513; [2018] NSWCA 69

United Dominions Corporation v Brian Pty Ltd (1985) 157 CLR 1; [1985] HCA 49

University of Wollongong v Metwally (No 2) [1985] HCA 28; (1985) 59 ALJR 481

Whisprun Pty Ltd v Dixon (2003) 234 CLR 492; [2003] HCA 48

Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12

Texts Cited:

J Edelman, “Understanding Tracing Rules” (2016) 16(2) QUT Law Review 1

Category:

Principal judgment

Parties:

2022/318509:
Elite Realty Development Pty Ltd (First Appellant)
Hazem Abdallah Afyouni (Second Appellant)
Afyouni Holdings Pty Ltd as Trustee of the Afyouni Trust (Third Appellant)
Omar Sadek (First Respondent)
Bilal Dennaoui (Second Respondent)
Big Homes Sydney Pty Ltd (Third Respondent)
Maroubra Road Development Pty Ltd (Fourth Respondent)
Sadek & Co Pty Ltd (Fifth Respondent)

2022/318527:
Elite Realty Development Pty Ltd (First Appellant)
Omar Sadek (First Respondent)
Sadek & Co Pty Ltd (Second Respondent)

Representation:

Counsel:

2022/318509:
F Corsaro SC; P Folino-Gallo (First Appellant)
E Ball; S Hanscomb (First, Third and Fifth Respondents)

2022/318527:
F Corsaro SC; P Folino-Gallo (First Appellant)
E Ball; S Hanscomb (First and Second Respondents)

Solicitors:

2022/318509:
ZBA Lawyers (First Appellant)
Vincent Young Lawyers (First, Third and Fifth Respondents)

2022/318527:
ZBA Lawyers (First Appellant)
Vincent Young Lawyers (First and Second Respondents)

File Number(s):

2022/318509; 2022/318527

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity

Citation:

[2022] NSWSC 1333

Date of Decision:

30 September 2022

Before:

Peden J

File Number(s):

2018/383933; 2020/114103

HEADNOTE

[This headnote is not to be read as part of the judgment]

Two appeals were heard concurrently, emerging from separate property developments conducted on behalf of Mr Hazem Afyouni and Mr Omar Sadek.

The Maroubra Appeal

In 2016, Mr Afyouni (the second appellant) and Mr Sadek (the first respondent) entered a joint venture agreement to develop property in Maroubra. For this project, they incorporated two companies, Elite Realty Development Pty Ltd (Elite) and Maroubra Road Development Pty Ltd (MRD). Mr Afyouni and Mr Sadek were both directors and, through their alter ego companies, joint owners of Elite and MRD.

In 2018, following a disagreement, Mr Afyouni changed the access settings to Elite’s bank accounts so that money could be withdrawn only if both he and Mr Sadek consented. This caused problems for Elite paying its subcontractors. One of the subcontractors, Mr Bilal Dennaoui, threatened Mr Afyouni with a gun and demanded he reverse the changes to the account. Mr Afyouni complied. The primary judge found that Mr Sadek either procured the gun attack or acted in a common design with Mr Dennaoui to bring the attack about.

Soon after the attack, Mr Afyouni and Mr Sadek entered an agreement to terminate the Maroubra joint venture. The parties agreed that Mr Afyouni would relinquish his directorship and ownership of MRD and that Mr Afyouni would then receive $700,000.

For the gun attack, Mr Afyouni successfully sued in tort. He also sought rescission of the termination agreement on the ground of duress. The primary judge found that rescission was unavailable because, although Mr Afyouni entered the agreement under duress, he later affirmed the agreement by performing it once the duress had ended. The appellants appealed from this finding.

While the Maroubra development was underway, Mr Sadek incorporated a separate company, Big Homes Sydney Pty Ltd, which bought a property at Matraville and another at Condell Park. The primary judge found that the purchases were funded with bank loans, were not intended to fall within the Maroubra joint venture and were not bought with joint venture funds. The appellants appealed from these findings.

The issues on appeal were:

(i)    Whether the respondents failed to plead or “properly argue” affirmation at first instance;

1. Whether the primary judge should have found that, because the gun attack left Mr Afyouni with post-traumatic stress disorder or because he was still in fear of Mr Sadek, Mr Afyouni remained under duress when carrying out the termination agreement and that affirmation was not proven;

(iii)    Whether the appellant should be permitted to amend their case on appeal to argue that the Matraville and Condell Park properties were bought with bank loans repaid using Maroubra joint venture money and were therefore traceable property.

The Avoca Appeal

Mr Afyouni and Mr Sadek were each owed money by an unrelated construction company, Kanebridge Constructions NSW Pty Ltd and its subsidiaries. In mid-2017, Mr Afyouni and Mr Sadek agreed to release Kanebridge from its debts, provided that a Kanebridge subsidiary KPI53 enter a joint venture with Elite to develop a property at Avoca Beach. In late 2017, the agreement with Kanebridge began to break down.

In March 2019, Mr Sadek executed a deed with the Kanebridge companies, settling his aspect of the dispute with them. The deed recited that Mr Sadek had terminated the Avoca Beach joint venture in July 2017. Elite alleged that Mr Sadek terminated the joint venture on that date, or that the deed itself terminated the joint venture. Elite complained that by terminating the Avoca Beach joint venture, Mr Sadek, as its director, breached his fiduciary and directors’ duties. The primary judge found that Mr Sadek had not in fact terminated the joint venture and had therefore not breached any duties. Elite appealed this finding.

The issues on appeal were:

(i)    Whether, by his dealings with the Kanebridge companies, Mr Sadek “de facto” terminated the Avoca Beach joint venture, diminished the Avoca Beach joint venture’s assets and diminished the value of KPI53’s assets, such that he breached his directors’ and fiduciary duties to Elite;

1. Whether, if there was a breach of duty, the primary judge erred in refusing equitable compensation or statutory damages under Corporations Act 2001 (Cth) s 1317H, on the basis that Elite had suffered no loss.

The Court (per Payne JA, Mitchelmore and Stern JJA agreeing) held, dismissing both appeals:

In the Maroubra Appeal

On issue (i)

1. Affirmation was pleaded with sufficient clarity in the defence at first instance. The clear import of a particular paragraph in the defence was that rescission was not available because Mr Afyouni had performed the termination agreement: [52]-[54].

2. Even if affirmation was not clearly pleaded, the appellants were on notice at first instance that the respondents relied on affirmation: [59]. To determine whether or not a point was taken at trial, it is necessary to examine the actual conduct of the proceedings. The primary judge expressly raised the topic of affirmation as a bar to rescission with both parties: [56].

Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12 at 497 applied; South Western Sydney Local Health District v Gould (2018) 97 NSWLR 513 distinguished.

On issue (ii)

1. The primary judge correctly stated the principles on duress: [20]. The question is whether the will of the party alleging duress was deflected by illegitimate pressure, causing them to enter the impugned agreement. It must also be reasonable for the person alleging duress to believe that the person engaging in the wrongful conduct would take the action foreshadowed.

Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 at 302-3; Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 at 46; Barton v Armstrong [1976] AC 104 at 120 cited.

1. The primary judge correctly stated the principles on affirmation: [63]-[64]. Affirmation may occur when the person under duress performs the voidable contract with knowledge of the circumstances after escaping from the duress and taking no steps to set aside the agreement.

Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 at 304-5; Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 at 1283; North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (The “Atlantic Baron”) [1979] QB 705 at 721 cited.

1. The primary judge correctly found that Mr Afyouni was no longer under duress when performing the termination agreement. Mr Afyouni’s post-traumatic stress disorder diagnosis did not constitute duress: [68]-[70]. Psychiatric illness is not co-extensive with duress: [66]. A person can suffer from a psychiatric illness with their decision-making ability intact: [67]. The primary judge was also right to reject Mr Afyouni’s evidence that he remained in fear of Mr Sadek while performing the termination agreement: [71].

Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 at 46 applied.

1. The primary judge correctly found that Mr Afyouni affirmed the termination agreement by accepting $700,000 due to him under the agreement, by resigning his directorship of MRD and transferring his shares: [70].

On issue (iii)

1. The appellants’ proposed amendment impermissibly raised a new case on appeal: [77]. Evidence the appellants sought to rely on as part of their amended case was not probative, and would not have altered the primary judge’s findings: [84].

2. The appellants’ original case on appeal and at first instance was that the Matraville and Condell Park properties were bought with joint venture funds. The primary judge was plainly correct to reject this argument: [80], [81].

In the Avoca Appeal

On issue (i)

1. At first instance, the appellants’ case was that Mr Sadek terminated the Avoca Breach joint venture at law: [95]. The primary judge’s finding that Mr Sadek did not terminate the Avoca joint venture was correct: [96], [98].

2. On appeal, the appellants argued that Mr Sadek’s conduct falling short of legal termination amounted to a breach of duty: [99]. This case was inconsistent with what was argued at first instance and should not be permitted: [101].

On issue (ii)

1. The primary judge did not describe loss as a “precondition” for equitable compensation or Corporations Act 2001 (Cth) s 1317H damages: [108]. Rather, the case put by the appellants to the primary judge was that Elite should be compensated for loss. She would have refused relief on the case before her because no loss was demonstrated: [107]. There was no error: [109].

Judgment

1. PAYNE JA: These proceedings arise out of property developments involving Mr Hazem Afyouni (the second appellant in the Maroubra Appeal) and Mr Omar Sadek (the first respondent in both proceedings), and certain companies associated with each of them. Mr Bilal Dennaoui (the second respondent in the Maroubra Appeal) played no part in the trial or the appeal.

2. Two proceedings (2020/114103 and 2018/383933) were determined together in the Equity Division (Elite Realty Development Pty Ltd v Sadek [2022] NSWSC 1333) and the appeals (2022/318509 and 2022/318527) were heard concurrently in this Court.

3. In the first case, Mr Sadek and Mr Afyouni entered into a “joint venture” agreement to develop a property at Maroubra (“the Maroubra joint venture”). The second case concerned alleged breaches of fiduciary duties by Mr Sadek in relation to a separate “joint venture” development at Avoca (“the Avoca Beach joint venture”).

4. The existence of the Maroubra joint venture agreement was common ground, but its scope was controversial. To carry out the Maroubra joint venture agreement the parties incorporated Elite Realty Development Pty Ltd (Elite) (the first appellant in both proceedings) as the builder. Afyouni Holdings Pty Ltd as trustee for the Afyouni Family Trust (the third appellant in the Maroubra Appeal), which the primary judge found was the alter ego of Mr Afyouni, owned 50% of Elite, and Sadek & Co Pty Ltd (the fifth respondent in the Maroubra Appeal), which the primary judge found was the alter ego of Mr Sadek, owned the other 50%. Mr Afyouni and Mr Sadek were Elite’s directors. Maroubra Road Development Pty Ltd (MRD) (the fourth respondent in the Maroubra Appeal) was incorporated to purchase the Maroubra development site. Mr Afyouni and Mr Sadek were directors of MRD and held 50% of the shares in MRD each.

5. The primary judge found that the Maroubra joint venture was brought to an end orally on 25 May 2018, on terms “consistent” with a deed of termination which was drafted on 6 June 2018 but never signed by the parties (“the Termination Agreement”).

6. The primary judge found that Mr Afyouni entered into the Termination Agreement under duress, because of a gun attack on Mr Afyouni by Mr Dennaoui, committed jointly and severally by Mr Sadek. Damages for battery and assault (including aggravated and exemplary damages) were awarded by the primary judge by reason of the gun attack. No appeal or cross appeal is brought from the finding of duress or the making of those orders.

7. The primary judge concluded, however, that rescission was not an available remedy because Mr Afyouni had subsequently affirmed the Termination Agreement. This conclusion is the principal subject matter of the first appeal.

The Maroubra Development

8. In early 2016, Mr Afyouni and Mr Sadek decided to carry out a joint property development in Maroubra. The Maroubra joint venture was a contract, made orally. The essential terms of the agreement were:

1. the parties would purchase a development site in Maroubra;

2. the property would be developed;

3. the parties would share the profits of the development 50/50; and

4. the parties would be entitled to receive back the cost of the materials they contributed to the project.

9. On 13 July 2016, MRD purchased a property in Maroubra for $3.2 million. Mr Afyouni contributed approximately $170,000 towards the purchase price and Mr Sadek approximately $1,140,000. Other finance was secured against their businesses and a unit Mr Afyouni owned.

10. In 2017, Elite began construction work at the Maroubra site. The primary judge found that the originally predicted costs of the Maroubra development were $7.558 million. In January 2019, all but one of the units had been sold off the plan, for $8,613,272.56. The one remaining unit, Unit 9, is currently owned by MRD and was valued in 2017 at $1,275,000. There was no more current evidence about the actual costs of construction or valuation before the primary judge.

Kanebridge and the Avoca Development

11. The parties’ eventual falling out stemmed from their dealings with an unrelated construction company, Kanebridge Constructions NSW Pty Ltd (Kanebridge) and its subsidiaries KPI37 Pty Ltd (KPI37) and KPI53 Pty Ltd (KPI53). Before making the Maroubra joint venture agreement, both Mr Sadek and Mr Afyouni had performed work for Kanebridge. By November 2016, Kanebridge owed one of Mr Afyouni’s alter ego companies, Conditionex Pty Ltd, about $200,000 and one of Mr Sadek’s alter ego companies, Render and Paint Pty Ltd, about $1,300,000.

12. In March 2017, Mr Afyouni and Mr Sadek agreed to their companies releasing Kanebridge from these debts in consideration for Kanebridge entering the Avoca Beach joint venture agreement with Elite to develop a property at Avoca Beach. Under the agreement, which was in writing, KPI53 would transfer 50% of its interest in a property at 14-18 Cape Three Points Road, Avoca Beach (“the Avoca Property”) to Elite. Thereafter, it was agreed that Elite and KPI37 would develop the Avoca Property. KPI37 would meet all construction costs up to $1,350,000 and thereafter all costs would be split 50-50. In effect, the primary judge found, Mr Afyouni and Mr Sadek bought an interest in the Avoca Property development by forgiving debts owed to their companies.

13. In late 2017 and early 2018, Mr Afyouni and Mr Sadek began to suspect Kanebridge was not abiding by the Avoca Beach joint venture agreement. They alleged that construction was proceeding at the Avoca Property without Elite’s knowledge or involvement. Eventually, they alleged that Kanebridge had sold the Avoca Property to a completely unrelated entity. In about November 2017, Elite lodged a caveat over the Avoca Property. In May 2018, Mr Sadek and Mr Afyouni met with KPI53’s former directors. Mr Afyouni’s evidence was that KPI53 wanted to end the Avoca Beach joint venture agreement and pay out the amounts owing to Mr Sadek and Mr Afyouni respectively. Mr Sadek wanted to accept that offer. Mr Afyouni did not. When Mr Sadek suggested they accept KPI53’s offer, Mr Afyouni refused.

14. On 8 May 2018, Mr Afyouni changed the access settings to Elite’s bank accounts so that money could only be withdrawn from the accounts if both he and Mr Sadek signed the withdrawal form. Prior to that time, Mr Sadek had been responsible for paying contractors engaged in the Maroubra development from the account. Mr Afyouni’s evidence was that he “block[ed]” the Elite bank accounts because he was now in a “fighting situation” with KPI53 and needed to protect his assets. He also said he was “putting pressure on [Mr Sadek] so … we can resolve” the Kanebridge dispute. The email exchanges between Mr Afyouni and Mr Sadek became heated. Mr Sadek complained repeatedly about the “block” on the Elite bank account. Both Mr Afyouni and Mr Sadek suggested different terms for ending their joint venture; in each case, the suggested terms were unacceptable to the other party.

The gun attack

15. On 20 May 2018, Mr Dennaoui threatened Mr Afyouni with a gun and demanded money. Mr Dennaoui was a labourer employed by Mr Sadek. On 23 May 2018, Mr Dennaoui was arrested and charged with firearms offences and using an offensive weapon with intent to commit an indictable offence, namely intimidation. On 25 October 2019, Mr Dennaoui pleaded guilty to the latter charge and was sentenced to 2 years and 9 months’ imprisonment. Whether the gun attack happened was not in dispute. The parties disagreed, however, about Mr Sadek’s involvement in it. The primary judge accepted the following version of events, and there is no challenge to those findings in this appeal:

1. Mr Dennaoui approached Mr Afyouni with a gun;

2. Mr Dennaoui was accompanied by a second person, whose identity is unknown;

3. Mr Dennaoui told Mr Afyouni he was owed about $50,000 by Mr Afyouni and Mr Sadek;

4. Mr Dennaoui demanded Mr Afyouni “unblock” or “open” the Elite bank account so he could be paid;

5. Mr Dennaoui’s accomplice struck Mr Afyouni’s friend in the face;

6. Mr Dennaoui told Mr Afyouni that if he was not paid, he would return “tomorrow”.

16. The primary judge found that Mr Dennaoui and Mr Sadek acted in a common design to intimidate Mr Afyouni through the gun attack, and alternatively, that Mr Sadek procured Mr Dennaoui’s gun attack on Mr Afyouni. There was no challenge to those findings. The primary judge found that Mr Sadek and Mr Dennaoui were joint tortfeasors and responsible for damages payable to Mr Afyouni in battery and assault.

Terminating the Maroubra joint venture

17. In the days following the gun attack, Mr Afyouni and Mr Sadek continued to negotiate about the termination of the Maroubra joint venture agreement. The primary judge found that Mr Afyouni acted under duress in those negotiations by reason of the gun attack. On 23 May 2018, Mr Afyouni reinstated the previous conditions of access to Elite’s bank account, allowing Mr Sadek to withdraw funds without the written permission of Mr Afyouni. On 25 May 2018, Mr Sadak and Mr Afyouni met and again discussed terms for dissolving the Maroubra joint venture agreement.

18. On 25 May 2018, Mr Sadek and Mr Afyouni agreed to enter into the Termination Agreement for the Maroubra joint venture. The primary judge found that the terms of the Termination Agreement were that Mr Afyouni would leave the development of Maroubra entirely to Mr Sadek and would relinquish his ownership and directorship of MRD. In exchange, Mr Afyouni would be paid $700,000.

19. The primary judge found that these terms were reflected in a written agreement, drafted by a lawyer Mr Jason Cameron on 6 June 2018. At no point did either party sign the agreement, but there was no challenge to the primary judge’s finding that the Maroubra joint venture agreement was terminated by oral agreement on 25 May 2018.

Duress

20. There was no challenge to the principles applied by the primary judge in determining whether the Termination Agreement was entered under duress. The primary judge held that Mr Afyouni had the onus of proving illegitimate pressure was brought to bear when he entered the Termination Agreement. If he met that onus, then Mr Sadek had to prove that pressure did not cause Mr Afyouni to enter the agreement: Barton v Armstrong [1976] AC 104 at 120 (Lord Cross).

21. Her Honour explained that an agreement was voidable if illegitimate or not legally justifiable pressure was applied to a person by someone who intends to compel the person to enter into the agreement: Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 at 46 (McHugh JA). As McHugh JA explained in Crescendo Management at 45 in the context of economic duress:

… there are two elements in the realm of duress: (a) pressure amounting to compulsion of the will of the victim and (b) the illegitimacy of the pressure exerted.  ‘There must be pressure’, said Lord Scarman ‘the practical effect of which is compulsion or the absence of choice’. 

22. The primary judge went on the find that it is not necessary for the will of the victim to be overborne; it is a matter of “the will being deflected, not destroyed”. In Crescendo Management, McHugh JA continued:

A person who is the subject of duress usually knows only too well what he is doing. But he chooses to submit to the demand or pressure rather than take an alternative course of action.  The proper approach in my opinion is to ask whether any applied pressure induced the victim to enter into the contract and then ask whether that pressure went beyond what the law is prepared to countenance as legitimate? 

23. The test for a plaintiff relying on duress is an objective one – was it reasonable for the person alleging duress to believe that the person engaging in the wrongful conduct would take the action foreshadowed? (Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298, 302-3 (Priestley JA, with whom Clarke and Handley JJA agreed)). In this case, the primary judge formulated the question as follows: was it reasonable for Mr Afyouni to believe that Mr Dennaoui would harm him, whether by shooting or otherwise? No challenge was advanced by either party to this statement of the law.

24. The primary judge concluded that the duress brought to bear on Mr Afyouni by Mr Dennaoui and Mr Sadek was at least one reason Mr Afyouni entered the Termination Agreement. Her Honour concluded that the defendants had failed to discharge their onus to prove duress was not an operative reason why Mr Afyouni entered the Termination Agreement. There was no challenge to these findings on appeal.

Affirmation of the Termination Agreement

25. The primary judge found that Mr Afyouni subsequently affirmed the Termination Agreement, and that by reason of affirmation he was not entitled to rescission of the Termination Agreement. The primary judge made the following unchallenged findings of fact relevant to her conclusion that the Termination Agreement had been affirmed:

1. On 26 June 2018, Mr Afyouni withdrew $200,000 from Elite’s bank account, on the basis that it was the first instalment of the $700,000 settlement sum payable under the Termination Agreement. Mr Sadek and Mr Afyouni continued to discuss the breakdown of the Avoca Beach joint venture after that time. The two men met at their accountant’s office. They corresponded with the solicitor, Mr Cameron, and various real estate agents.

2. Around December 2018, KPI53 issued a lapsing notice in relation to the caveat lodged over the Avoca Property. On 10 December 2018, Mr Afyouni told Mr Sadek about the lapsing notice and obtained Mr Sadek’s consent to challenging the notice. On 12 December 2018, Mr Afyouni caused Elite to commence proceedings to challenge the lapsing notice. The primary judge found that no threats were made by Mr Sadek towards Mr Afyouni at this time.

3. On 22 January 2019, Mr Afyouni sent an email to the solicitor handling the conveyance of the Maroubra properties and Mr Sadek, explaining his intention to withdraw a further $500,000 from the Elite account in satisfaction of the remaining amount payable under the Termination Agreement.

4. On 28 February 2019, Mr Afyouni visited Mr Sadek’s accountant’s office and there executed documents transferring his company’s ownership of MRD to Mr Sadek and resigning his directorship of MRD.

5. By 29 February 2019, the sale of all but one of the Maroubra units was finalised. On that day, Mr Sadek transferred $500,000 to Mr Afyouni, in completion of the $700,000 payable under the Termination Agreement. Mr Sadek’s unchallenged evidence, which the primary judge accepted, was that he had no further dealings with Mr Afyouni after this point.

26. On 10 April 2019, Mr Afyouni withdrew a further $269,000 from MRD’s account. In separate proceedings, Ward CJ in Eq later found Mr Afyouni had wrongfully misappropriated this money and ordered him to repay the sum to MRD: Maroubra Road Developments Pty Ltd v Afyouni [2019] NSWSC 1639.

27. Mr Afyouni first claimed that he entered into the Termination Agreement under duress in May 2019.

Findings on affirmation

28. The primary judge held that affirming an agreement entered under duress does nothing to change the fact that, originally, the agreement was voidable for duress. Instead, affirmation disentitles the relevant party from rescission of the agreement. Her Honour noted that the defendant must prove affirmation. The primary judge explained that a party can affirm or ratify an agreement entered under duress only once the duress has ended. She then explained that affirmation may occur when “the person the subject of the duress acts under the voidable contract ‘with full knowledge of the circumstances after escaping from the duress and taking no steps to set aside the transaction’, providing the conduct is unequivocal”, citing Hawker Pacific at 304-305 (Priestley JA, with whom Clarke JA agreed). Her Honour also noted that delay in complaining about duress can also support a finding of affirmation.

29. The primary judge found that any duress on Mr Afyouni ended after October 2018, because that was the last time Mr Afyouni alleged Mr Sadek had taken inappropriate threatening action. Because the duress had ended, Mr Afyouni was in a position to affirm the Termination Agreement at any time after October 2018. Her Honour found that Mr Afyouni did so by:

1. In January 2019 actively seeking, and subsequently accepting, payment of the final $500,000 promised in the Termination Agreement by writing to the conveyancing solicitor and copying the email to Mr Sadek. Mr Afyouni accepted payment of $500,000 on settlement of the Maroubra units without complaint.

2. Signing the documents to relinquish his interest in MRD and his directorship of the company at Mr Sadek’s accountant’s office without complaint.

30. The primary judge found that Mr Afyouni did not do either of these things because he feared for his or his family’s safety. Her Honour concluded that there was no evidence of any threat being made to his family at any time by Mr Sadek.

31. The primary judge found that Mr Afyouni did not complain about duress until May 2019, despite Mr Afyouni having been involved with lawyers concerning KPI53 since December 2018 and his legal issues with Mr Sadek since he took the $269,000 in March 2019, and despite his experience with police in relation to Mr Dennaoui. 

32. The primary judge found that Mr Afyouni commenced complaining about duress in May 2019 because of Mr Sadek’s legal action for the return of the $269,000 referred to at [22] above.

33. The primary judge concluded that because Mr Afyouni affirmed the agreement, it was beside the point that he initially entered it under duress; when he later affirmed the agreement, rescission became unavailable.

Remedy

34. Before the primary judge Mr Afyouni sought a declaration that he was entitled to rescind the Termination Agreement and “[a]n order for the taking of accounts of the Maroubra JV”, without first electing to rescind the Termination Agreement. Her Honour found that, if she was wrong that Mr Afyouni affirmed the agreement, he would first have to elect to rescind the agreement, and repay the $700,000 paid under that agreement, before the taking of an account could be ordered. No ground of appeal challenged this finding.

35. On the contingency that following an appeal an account might be ordered, her Honour made findings about the terms of the joint venture:

1. The parties agreed to contribute to the costs of the Maroubra development equally. In fact, however, Mr Sadek contributed more than 50%, because Mr Afyouni could not afford his share. In effect, Mr Sadek loaned Mr Afyouni part of the funds for his contribution. Her Honour found that 10% interest was payable on this loan (rather than the 15% Mr Afyouni claimed).

2. When the parties themselves carried out work on the Maroubra development, it was “at cost”, meaning wages and other expenses, but not profit.

36. The primary judge found that a separate development at Matraville being conducted by Mr Sadek and a property bought by him at Condell Park were not subject to the Maroubra joint venture agreement. The primary judge found that Mr Sadek, through his company Big Homes Sydney Pty Ltd (the third respondent to the Maroubra appeal) (Big Homes), entered the Matraville development and bought the Condell Park property without recourse to funds belonging to the Maroubra joint venture and without any intention to bring either asset within the Maroubra joint venture. The Matraville development and Condell Park property were accordingly not joint venture property.

The Avoca Beach joint venture proceedings

37. In the Avoca Beach joint venture proceedings, Elite complained that Mr Sadek had breached his directors’ duties to Elite, either at general law or under the Corporations Act 2001 (Cth).

38. Elite alleged that Mr Sadek did this, in his personal capacity and as a director of Render and Paint, in the following ways:

1. by entering into an agreement in July 2017 to terminate the Avoca Beach joint venture agreement (“the Avoca Beach Termination Agreement”), and

2. by entering into a deed with the Kanebridge companies, whereby Render and Paint was compensated for debts owed to it (“the March 2019 Deed”).

39. Elite submitted that Mr Sadek’s entry into the Avoca Beach Termination Agreement constituted a breach of his duties under general law to Elite to act in good faith, not to act for his own benefit, and to avoid a conflict between his duty to Elite and his personal interests. It further argued that this conduct amounted to a breach of his statutory directors’ duties under ss 180-182 of the Corporations Act. Elite contended that Mr Sadek’s entry into the Avoca Beach Termination Agreement caused Elite to lose certain rights against KPI53 and related entities or discharged KPI53 from performing its obligations to Elite, including Elite’s contractual right to have 50% of the Avoca Beach Property transferred to it.

40. The principal evidence for the Avoca Beach Termination Agreement was the later March 2019 Deed between Mr Sadek and the Kanebridge companies. That Deed contained a recital that Mr Sadek had, in July 2017, represented that Elite was unable to fulfill its obligations under the Avoca Beach joint venture and had terminated the joint venture agreement.

41. The only parties to the March 2019 Deed were KPI53, related Kanebridge entities, Mr Sadek and his company Render and Paint. Neither Elite nor Mr Afyouni was a party to the March 2019 Deed or to the July 2017 Avoca Beach Termination Agreement.

42. Elite further complained that entering the March 2019 Deed was itself a breach of Mr Sadek’s fiduciary and directors’ duties. That was because the Deed’s recitals amounted to a unilateral termination of the Avoca Beach joint venture, and because one of the terms of the March 2019 Deed was that, in settling the dispute between Mr Sadek and the Kanebridge entities, Mr Sadek’s company or its nominee would receive two units with a market value of $500,000 each from another Kanebridge entity. The purported termination was said to deprive Elite of opportunities under the Avoca Beach joint venture, contrary to its interests.

43. The primary judge rejected these arguments. She found that the purported July 2017 Avoca Beach Termination Agreement was not made and that Mr Sadek did not breach any directors’ or concurrent fiduciary duties. On the evidence, there was no termination of the Avoca Beach joint venture by Mr Sadek. The recitals in the March 2019 Deed led to no different conclusion. The March 2019 Deed was not binding on Elite or Mr Afyouni. Instead, her Honour looked to Mr Sadek’s conduct in the aftermath of the purported July 2017 termination. The primary judge found that Mr Sadek acted as though the Avoca Beach joint venture were still on foot, for example writing in a 15 May 2018 email that “the [Avoca Beach] JV will stay there and no deal/offer at this time”.

44. Nor was making the March 2019 Deed a breach of any directors’ or concurrent fiduciary duties. By entering the March 2019 Deed, Mr Sadek did not deal with any of Elite’s rights, since Elite was not a party to that Deed and its rights were expressly preserved in it.

Remedy

45. Her Honour found on the contingent basis that breaches of fiduciary duty or statute were established that Elite would not have been entitled to either of the remedies it sought in relation to these alleged breaches, equitable compensation or compensation pursuant to s 1317H of the Corporations Act for loss shown to have been suffered as a result of a breach of directors’ duties. That was because the appellants had not established that any loss claimed had been suffered.

Maroubra Appeal

Ground 1

46. Ground 1 of the Maroubra Appeal is that the allegation that Mr Afyouni had affirmed the Termination Agreement was not pleaded or the subject of submissions.

47. The appellants submitted that affirmation was only fleetingly raised in submissions and that the issue of delay, which was raised, went only to whether entry into the Termination Agreement was in fact motivated by duress. It was submitted that “[d]elay was not deployed, in cross-examination, in a manner that was implicitly or expressly suggestive of the fact that, at some later stage in time, Mr Afyouni had affirmed the contract”. The appellants further submitted that “the Respondent simply embraced the suggestion made by the primary judge [during the respondent’s closing] that Mr Afyouni affirmed the contract by responding in the affirmative without developing any submissions in support of that proposition”.

48. The appellants submitted that the primary judge did not remedy the procedural unfairness created by going beyond the case that was pleaded and run at trial by “raising with the parties the alternative basis upon which the case may be determined so as to give the parties an opportunity to be heard”, citing South Western Sydney Local Health District v Gould (2018) 97 NSWLR 513; [2018] NSWCA 69 at [70]-[73]; Bryant v Quinn [2022] NSWCA 163.

49. On the assumption that affirmation had not been pleaded, the appellants submitted that they had not consented to a case outside the pleadings being conducted, and that because the issue of affirmation was not fairly raised, the appellants’ case was not as developed as it could or should have been. They pointed to the following aspects of their case. First, additional evidence could have been led as to the fear that Mr Afyouni was labouring under. Secondly, additional evidence could have been led explaining why Mr Afyouni engaged in the post-signing conduct, particularly “evidence that contextualised the matters referred to in the primary judge’s reasons”. Thirdly, the appellants could have developed their submissions as to why Mr Afyouni did not affirm the Termination Agreement.

50. I would reject ground 1 of the appeal.

51. Paragraph [85](b) of the Defence was in specific response to the appellants’ duress claim. In paragraph [85](b), the respondents pleaded that:

1. between about May 2018 and 28 February 2019 Mr Sadek caused the sum of $700,000 to be paid to Mr Afyouni and/or Afyouni Holdings Pty Ltd pursuant to the Termination Agreement; and

2. on or about 28 February 2019 Mr Afyouni caused Afyouni Holdings Pty Ltd to transfer its shareholding in MRD to Sadek & Co Pty Ltd and Mr Afyouni resigned as a director of MRD.

52. The respondents pleaded that, “in the premises”, all the “causes of action” alleged were released, extinguished and are no longer available to the appellants. The clear import of this paragraph of the Defence was that the Termination Agreement was performed by the subsequent payment to Mr Afyouni and the third appellant of the sums payable under it, by Mr Afyouni transferring the third appellant’s shares in MRD, and Mr Afyouni resigning as a director of MRD. It was pleaded that by reason of the subsequent performance, the appellants were not entitled to rescission of the Termination Agreement.

53. The appellants did not in writing or orally on the appeal suggest that the term “cause of action” in Defence [85](b)(iii) could not capture their claim for rescission, or that the language of “extinguish[ing]” a cause of action was an inappropriate description of the effect of acts constituting affirmation. If such a claim had been made, I would have rejected it. True it is that duress entitling a party to rescission is not a cause of action. However, in context, the meaning and content of the pleading is sufficiently clear.

54. The appellants’ pleaded case aimed to establish that Mr Sadek was responsible for acts of duress which led Mr Afyouni to enter into the Termination Agreement and, by their continuing effects, caused Mr Afyouni to perform the agreement, including by accepting payments under the agreement, transferring shares and resigning as director of MRD. In answer to these claims, the Defence articulated with sufficient clarity a case that, because of the subsequent performance of the Termination Agreement in the way pleaded, Mr Afyouni was not entitled to rescission of the Termination Agreement. Affirmation was sufficiently pleaded.

52. The cases referred to by the appellants do not lead to any different conclusion. Gould was a case where the relevant section, s 5O(2) of the Civil Liability Act 2002 (NSW), was not pleaded, nor mentioned throughout the trial. The case is distinguishable on both bases here. Bryant v Quinn was also a case where the relevant issue was not pleaded and the appellant in that case was entitled to proceed on the basis that the dispositive issue had not been pleaded. The case is again distinguishable on both bases here.

53. There is an additional reason I would reject ground 1. It is clear from an examination of the transcript that the case was litigated by the parties on the basis that affirmation was an issue in the case. The primary judge obviously understood that affirmation was part of the respondent’s case and raised it with senior counsel for each of the parties in their respective closing addresses. While Mr Afyouni’s subsequent acceptance of $700,000, his transfer of shares in MRD and his resignation as a director of MRD were relevant to several aspects in the case, the parties engaged about whether, as the appellants submitted, Mr Afyouni remained under duress in completing the Termination Agreement in 2019 or whether, as the respondents submitted, Mr Afyouni was no longer under duress and affirmed the Termination Agreement by his actions in 2019. Her Honour expressly raised the topic of affirmation as a bar to rescission with the parties. Having raised the issue with senior counsel for the appellants during his closing address, the primary judge had the following exchange with senior counsel for the respondents:

HER HONOUR: When did he receive the final 500,000?

CHESHIRE: February of 2019 28th, being the day or the day before he resigned as a director.

HER HONOUR: So he raised it [duress] four months later.

CHESHIRE: Yes. Well, he raised it four months after he got his final 500, but the agreement was in May and of course he took his first 200 in June of 2018, so that's an inconsistent step, so I would say at the very least it's from June 2018 to June 2019, so that's a year.

HER HONOUR: Yes.

CHESHIRE: That I think is all I need to say on the issues of the duress. As to the--

HONOUR: But you say the delay goes to the whole issue of whether there was in fact - it was motivated by duress.

CHESHIRE: Absolutely.

HER HONOUR: As opposed to being a bar on recission.

CHESHIRE: I say also a bar on recission, or a reason why your Honour—

HER HONOUR: Because there's been an affirmation.

CHESHIRE: Yes. (emphasis added)

57. This is a case where no relevant particulars of the Defence were sought by the appellants. It is necessary to look at the actual conduct of the proceedings to see whether a point was or was not taken at trial, especially where a particular is equivocal: Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12 at 497. The parties engaged about the subject of affirmation. Whilst Mr Afyouni’s delay in complaining about duress was part of the respondents’ case, the case was conducted on the basis that in accepting $500,000 and transferring shares in MRD in 2019, Mr Afyouni was no longer acting under duress. I reject the appellants submission that any additional evidence could have been led about the fear that Mr Afyouni was labouring under after October 2018. The appellants conducted their case below on the basis that Mr Afyouni was acting under duress in 2019 in accepting $500,000 and transferring shares in MRD. That case was rejected by the primary judge. Mr Afyouni gave evidence at some length explaining why he engaged in the 2019 conduct. No additional possible evidence which could have been given was suggested by the appellants. The appellants had every opportunity make submissions about why Mr Afyouni did not affirm the Termination Agreement. The appellants said at the trial, and repeated again on appeal, that Mr Afyouni was acting under duress in taking the steps he did in 2019. That submission was rejected by the primary judge.

58. It is significant that when the issue of affirmation was raised by the primary judge with the respective parties’ senior counsel, both accepted the issue as being raised for determination by the Court. Senior counsel for the appellants sought to develop submissions that affirmation was not made out on the evidence due to ongoing pressure. Senior counsel for the appellants, who on a number of occasions complained that matters raised by the respondents had not been pleaded, made no such complaint about the topic of affirmation, which had expressly been raised by the primary judge with both parties. After this, senior counsel for the respondents confirmed that affirmation was part of their case. Senior counsel for the appellants had a further opportunity to address after this exchange and did not take a pleading objection.

59. The case before the primary judge was litigated on the basis that by reason of subsequent performance of the Termination Agreement by Mr Afyouni, after he was no longer affected by duress, the appellants were not entitled to rescission of the Termination Agreement. That was what the primary judge found.

Ground 2

60. Given the conclusions I have reached in relation to ground 1 of the appeal, the complaints forming part of ground 2 about the procedural fairness issues raised by the absence of a pleading of affirmation may be put to one side.

61. The essence of the remaining part of ground 2 as it was developed at the hearing was that, if affirmation was fairly raised, the finding of affirmation by the primary judge was incorrect and should not have been made by her Honour.

62. The law in relation to affirmation was described by her Honour in the following way:

“[278] Affirmation of an agreement obtained under duress is a bar to the remedy of rescission. The defendants have the onus of establishing that Mr Afyouni affirmed the Termination Agreement: Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 at 1283.

[279] Affirmation can only occur when the duress has ceased to have effect. It may occur where the person the subject of the duress acts under the voidable contract “with full knowledge of the circumstances after escaping from the duress and taking no steps to set aside the transaction”, providing the conduct is unequivocal: Hawker Pacific v Helicopter Charter (1991) 22 NSWLR 298 at 304-305 (Priestley JA, with whom Clarke JA agreed).

[280] Delay in complaint after the duress has ceased can amount to affirmation. For example, Mocatta J found in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (The “Atlantic Baron”) [1979] QB 705 at 721:

…since there was no danger at this time in registering a protest, the final payments were made without any qualification and were followed by a delay… before the owners put forward their claim, the correct inference to draw, taking an objective view of the facts, is that the action and inaction of the owners can only be regarded as an affirmation.”

63. No issue was taken by the appellants with these statements of law by the primary judge.

64. The appellants’ principal submission was that the finding of Post-Traumatic Stress Disorder made in relation to Mr Afyouni as part of the damages claim for assault and battery was inconsistent with the finding that Mr Afyouni was no longer acting under duress in performing the Termination Agreement after October 2018. In support of this ground, the appellants, orally and in writing, primarily relied on the evidence given by Dr Robertson and Dr Parmegiani that Mr Afyouni’s injuries arising from the gun attack were ongoing and that they constituted a whole person psychiatric impairment of 17%. The appellants further relied on the evidence of Dr Robertson that, at the time of his assessment, Mr Afyouni suffered from an adjustment disorder with anxiety and depressed mood primarily caused by the circumstances of harassment and threats of death or injury. The appellants submitted that the general damages of $55,000 awarded by the primary judge to Mr Afyouni for psychiatric injury, together with the evidence of Dr Robertson and Dr Parmigiani, “is antithetical to the proposition that Mr Afyouni was free from the effects of the duress from October 2018”.

65. Psychiatric illness is not co-extensive with duress in a contractual or restitutionary sense. In Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 at 46 McHugh JA said:

The proper approach in my opinion is to ask whether any applied pressure induced the victim to enter into the contract and then ask whether that pressure went beyond what the law is prepared to countenance as legitimate? Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. But the categories are not closed. Even overwhelming pressure, not amounting to unconscionable or unlawful conduct, however, will not necessarily constitute economic duress.

66. A person can suffer from a psychiatric illness with their autonomous decision-making ability intact. Neither of the experts relied on by the appellants provided evidence that Mr Afyouni’s illness meant that he could not make decisions freely for himself or that he was affected by duress in 2019. Further, the appellants’ reliance on the opinions of Dr Parmegiani and Dr Robertson about Mr Afyouni’s actions in 2019 was seriously undermined in cross-examination.

67. During the cross-examination of Dr Parmegiani, the following exchange occurred:

Q.  Mr Afyouni, I think, told you that he changed the company's bank account to joint signatories, because of certain unauthorised transactions by his business partner, is that right?

A.  Yes.

Q.  I think it right that Mr Afyouni did not suggest to you that, in fact, he changed the bank account because he was engaging in negotiations to finalise the business relationship with Mr Sadek.  He didn't tell you that, did he?

A.  No.

Q.  He didn't tell you, in fact, that after the assault with a gun he continued to maintain the joint signatory position on the bank account, and to negotiate with Mr Sadek, and indeed then to reach an agreement with Mr Sadek about a separation of their business affairs.  He didn't tell you any of that, did he?

A.  No, I don't recall, no.

Q.  He didn't tell you that, in fact, they reached an agreement on 25 May, which is less than a week after the gun incident, whereby Mr Afyouni subsequently received $700,000.  He didn't suggest anything to that effect, did he?

A.  No.

Q.  If, in fact, it was the position and I ask you just to assume for a moment that after the gun event, he was able to continue to negotiate and to reach a settlement, with his business partner, by which he received $700,000, that again would undermine the accounts of the history of the incidents that he gave to you.  Correct?

A.  I think it would need more information surrounding that negotiation, that settlement, whether the pistol incident played a role and so ought to clarify exactly what all that meant.

68. During the cross-examination of Dr Robertson, the following exchange occurred:

Q. May I take it that Mr Afyouni didn't, in fact, tell you that not only had he reached a settlement with his partner but that, under that settlement, he received $700,000? He didn't tell you that, did he?

A. No.

Q. If, in fact, it was the case that he put a two sign arrangement in order to protect his position while he was engaging in negotiation, he did engage in negotiation and, even after the gun attack, he was able to and did continue with negotiations, and reached a settlement and received $700,000. That would suggest a greater resilience and perhaps lesser passivity in the process than Mr Afyouni gave you to understand; correct?

A. It's a reasonable conclusion, from what you've told me.

69. The appellants also submitted that even if a finding of affirmation of the Termination Agreement was open to the primary judge, the finding that Mr Afyouni had escaped the effect of duress by October 2018 was “against the weight of evidence”. It was submitted that the evidence of Mr Afyouni below that he signed documents in February 2019 in the presence of Mr Sadek supported his claim that the duress was ongoing after October 2018. The suggestion that Mr Sadek’s presence on the occasion of the transfer of the MRD shares makes a difference should be rejected.

70. The primary judge made detailed and unchallenged findings of fact leading to a conclusion that after October 2018 Mr Afyouni was no longer acting under duress. The primary judge carefully considered, and rejected, Mr Afyouni’s evidence that he acted in fear of Mr Sadek in seeking and accepting the $700,000 payable under the Termination Agreement and in transferring the shares in MRD and renouncing his directorship of that company to complete his obligations under the Agreement. No error was asserted in the legal test applied by the primary judge to the question of affirmation. No factual error in that conclusion was demonstrated. No error has been shown in the conclusion of the primary judge that Mr Afyouni’s conduct after October 2018 affirmed the Termination Agreement.

71. I would reject ground 2 of the notice of appeal.

Ground 3

72. The appellants made clear that this ground was contingent upon success in grounds 1 or 2. Given my conclusions about those grounds this ground strictly does not arise. I will nevertheless deal with it for the reasons given in Kuru v State of New South Wales (2008) 236 CLR 1; [2008] HCA 26 at [12].

73. The Matraville Property and Condell Park Property were owned by Big Homes. Before the primary judge, the plaintiffs argued that Big Homes purchased these assets with funds Mr Sadek misappropriated from the Maroubra joint venture, or that the assets were intended by Mr Sadek and Mr Afyouni to be part of that joint venture.

74. There is a fundamental problem with ground 3. The primary judge found that the appellants did not establish that either of the Matraville Property or the Condell Park Property were purchased using joint venture funds and therefore did not constitute traceable property of the Maroubra joint venture. No challenge was made to this finding. Instead, at the hearing, the appellants sought leave to amend the notice of appeal to allege not that joint venture funds were used to purchase the Matraville Property but that joint venture funds were used to repay the loan used to purchase the Matraville Property and the Condell Park Property.

75. The amendment sought to the notice of appeal was (proposed amendments underlined):

The primary judge erred at J [334]-[340] in finding that the Matraville Property and the Condell Park Property were not assets of the joint venture for the purpose of the taking of accounts of the joint venture. The primary judge should have found that the purchase price short term loan and NAB Loan facilities drawn down to purchase the properties was were then paid using joint venture funds, and that upon avoidance of the Termination Agreement and restoration of the joint venture parties to their positions as at 25 May 2018, funds belonging to the joint venture or their traceable proceeds at that time (including the Matraville Property and the Condell Park Property) were assets of the joint venture (Ground 3).

76. The proposed amendments seek to raise a case which was not pleaded or conducted below and not addressed by the primary judge. It is fundamental that parties not be permitted to raise a new case on appeal, especially as here the case had not been identified until the close of the oral hearing of the appeal and in circumstances where the documentary record is seriously incomplete.

77. The new point is that the appellants seek to trace into both the Matraville and Condell Park properties on the basis that later repayment of loan monies used to purchase these properties was made with joint venture funds. The proposed amendment is a fundamental departure from the case that was run at trial and, until the very end of the day, this appeal. The primary judge cannot have erred in failing to address a case which was not pleaded or the subject of any submissions below. It would be inimical to the dictates of Part 6 of the Civil Procedure Act 2005 (NSW) to permit the appellants to reframe their case on appeal in this way. I would refuse leave to amend the notice of appeal. The appellants are not permitted to run a new and unpleaded case on appeal: University of Wollongong v Metwally (No 2) [1985] HCA 28; (1985) 59 ALJR 481 at 483. As the High Court remarked in Whisprun Pty Ltd v Dixon (2003) 234 CLR 492; [2003] HCA 48 at [51]:

Nothing is more likely to give rise to a sense of injustice in a litigant than to have a verdict taken away on a point that was not taken at the trial and could or might possibly have been met by rebutting evidence or cross-examination.

78. On the case that was pleaded and conducted below in relation to the Matraville development, the primary judge made findings that the purchase was funded by debt. Her Honour did not accept that the Matraville development was ever discussed as a joint venture project or intended as such. Her Honour found that there was no contemporaneous email, text message or document between the parties or from any accountant or lawyer supporting this contention. There were also no documents indicating that Mr Afyouni was involved in any loan being obtained to purchase or develop the Matraville Property. Her Honour found that “the evidence only goes as far as to demonstrate that Mr Sadek spoke to Mr Afyouni about the fact that he was looking at the Matraville site”. Her Honour also found that there was no evidence for any alleged “unauthorised” use of joint venture funds in relation to the Matraville Property.

79. Those findings were not challenged. The primary judge’s finding that the Matraville Property was not an asset of the Maroubra joint venture was plainly correct.

80. On the case which was pleaded and conducted below in relation to the Condell Park Property, the primary judge similarly found that it was not demonstrated that the money used to purchase the property comprised joint venture funds. Rather, the funds used comprised money to which Mr Sadek and his corporate entitles were entitled to either by way of reimbursement or because those funds were the profit component of the Maroubra development in circumstances where the Maroubra joint venture had been terminated.

81. The primary judge’s finding that the Condell Park Property was not an asset of the Maroubra joint venture was correct. The appellants did not demonstrate that the Condell Park Property was purchased with funds belonging to the Maroubra joint venture.

82. During the hearing of the appeal, the appellants sought to refer to further evidence on this ground. Leave was granted to identify where in the Blue Appeal Books the evidence sought to be relied upon could be found. In submissions delivered after the hearing, which travelled beyond the leave which had been granted, the appellants admitted that the evidence sought to be relied on was not in the Blue Appeal Books. The evidence was apparently before the primary judge but was not referred to in the decision of the primary judge and was not referred to in the appellants’ oral or written submissions. It may be doubted that the material was actually in evidence before the primary judge. This is because the appellants specifically asked the primary judge not to consider documents other than those referred to during the course of the evidence or otherwise in submissions.

83. On the contingent hypothesis that the material was in evidence before the primary judge, no different conclusion to that reached by her Honour is warranted. The material comprises a selection of National Australia Bank statements of account for Big Homes. There are, without doubt, numerous entries in those bank statements relating to “Maroubra”. The only evidence from Mr Afyouni about this was, by rulings made under s 136 of the Evidence Act 1995 (NSW), admissible only to prove Mr Afyouni’s state of mind and not the truth. The passage in Mr Sadek’s affidavit relied upon by the appellants did not contain any relevant admission touching upon the relevant question. The new material does not establish that the Matraville or Condell Park Property was purchased with funds belonging to the Maroubra joint venture, nor, if it matters, that any loan was repaid using funds belonging to the Maroubra joint venture.

78. The appellants submitted that they sought to rely on the material only on the question of “backwards tracing”. Given the way the case was conducted below, the issue of “backwards tracing” does not arise. This is because the repayment of loans was not the way the appellants conducted the case below. The issue that this evidence was said to address was not litigated at the trial.

79. No doubt, had the issue of “backwards tracing” been litigated, consideration of the decision of this Court in Russell Gould Pty Ltd v Ramangkura (2014) 87 NSWLR 552; [2014] NSWCA 310 and the remarks of Edelman J writing extra-curially (see J Edelman, “Understanding Tracing Rules” (2016) 16(2) QUT Law Review 1, 13) would have been important. But because of the way the appellants conducted the case before the primary judge, the issue did not arise. Whilst I have considered the new documents, they do not change the outcome of ground 3, which should be dismissed.

80. I would reject ground 3 of the notice of appeal.

Relief sought

87. As I would dismiss the three grounds of the Maroubra Appeal it is strictly unnecessary to address the relief sought by the appellants, but for abundance of caution, I will address what appear to be a number of difficulties. Proposed order 2 sought the following relief:

Declare that the first defendant holds his interests in the Matraville Property and the property at 102 Yanderra Street Condell Park (folio reference 16/H/1872) and the property at 277 Beauchamp Road Matraville (folio reference 1857/752015) on trust for the Maroubra JV.

88. Making every assumption favourable to the appellants, it is difficult to see that relief in this form would ever have been appropriate. The potentially slippery nature of a “joint venture” was addressed by the High Court in United Dominions Corporation v Brian Pty Ltd (1985) 157 CLR 1; [1985] HCA 49, per Mason, Brennan and Deane JJ at 10. The appellants’ problems here are more fundamental. It will be recalled that the primary relief sought by the appellants was a declaration that the Termination Agreement was voidable and that the appellants were entitled to elect to rescind that agreement. The appellants’ proposed order 2 involves a declaration that property is held by a “joint venture” which has been terminated but which may, at the election of Mr Afyouni (assuming proposed order 3 were made) be revived if an election is made to rescind the Termination Agreement. If the Termination Agreement were not rescinded, the declaration in proposed order 2 would potentially be meaningless. At the very least it would be confusing. Both would be good reasons not to make proposed order 2, at least in the form identified.

89. Proposed order 3 sought a declaration that, subject to repayment of the $700,000 received subject to that agreement, Mr Afyouni has a right to rescind the Termination Agreement. Proposed order 4 was:

Order that an account of the profits of the Maroubra JV be taken.

90. Even if the appellants had succeeded in this appeal, an order in this form should not be made. The appellants would have no entitlement to an account of the profits of the Maroubra joint venture for as long as the Termination Agreement stands. The entitlement to an account would only arise if the Termination Agreement was set aside. Before obtaining an account, Mr Afyouni would first have been required to elect to rescind the Termination Agreement. Until that election was made, he would have had no interest in the Maroubra joint venture. Any account, assuming it were otherwise appropriate to order, would be conditional upon Mr Afyouni electing to rescind the Termination Agreement.

Avoca Appeal

Ground 1

91. The appellants’ first ground in the Avoca Appeal is that the primary judge erred in finding that Mr Sadek did not breach his duties as a director to the appellant at general law or alternatively under the Corporations Act by preferring his own interests to those of Elite when dealing with the Avoca Beach joint venture. They submitted that the primary judge should have found that Mr Sadek allowed his duties to Elite to conflict with his personal interest in receiving benefits from KPI53 by entering into the March 2019 Deed and in asserting in July 2017 that Elite had become incapable of performing the Avoca Beach joint venture.

92. The appellants submitted that the fact that Elite’s interests were expressly preserved in Recital J to the March 2019 Deed “is not to the point. Whether Elite was in a position to exploit the opportunity to make a profit on the Avoca Beach Joint Venture is not determinative of the issue”. The appellants submitted that the approach of the primary judge failed to appreciate: first, that Mr Sadek extracting himself from the Avoca Beach joint venture in accordance with the March 2019 Deed “constituted a de facto termination of the joint venture”; secondly, that the payment of funds to Mr Sadek diminished the joint venture assets to the detriment of Elite’s interests; and thirdly, that the payment of funds diminished the assets of KPI53 to the detriment of Elite’s interests.

93. Ground 1 of the Avoca Appeal should be rejected. The primary judge made the following finding at [323]:

[323] Elite’s pleaded case in relation to a breach of a directors’ and fiduciary duties is premised on there being a termination at law as a result of Mr Sadek’s conduct, as was accepted by senior counsel for Elite during the hearing. Elite never asserted that the Avoca JV was terminated, nor that the recital in the March 2019 Deed was binding on it. It was KPI that asserted in the proceedings against it, until it was removed because of its liquidation, that the Avoca JV was terminated by agreement in July 2017. However, that was never finally determined. (emphasis added)

94. The primary judge found that the way the case was conducted by the appellant was that “breach of a directors’ and fiduciary duties is premised on there being a termination at law as a result of Mr Sadek’s conduct” (emphasis added). Whilst it may be accepted that the appellants’ pleading on this topic was ambiguous, the case actually conducted was clarified by the appellants’ senior counsel in submissions. Having clarified the case in the way the primary judge recorded, it is not helpful on appeal to seek to return to the ambiguous pleading and revive a case which has been abandoned below. The finding at [323] by the primary judge about the way the appellants conducted their case below was not challenged. It is clear, as the primary judge found, that there was no “termination at law” of the Avoca Beach joint venture by Mr Sadek’s conduct. So much appears now to be common ground.

95. The primary judge made further findings fatal to ground 1 of the Avoca Appeal. At [324] the primary judge made unchallenged findings of fact about the alleged breaches of duty:

[324] I am not satisfied that Mr Sadek breached any directors’ and concurrent fiduciary duties in relation to the so-called Avoca Beach Termination Agreement. The facts do not allow the conclusion that there has been any termination by Mr Sadek of the Avoca Beach JV. Instead, following the purported termination in July 2017, Mr Sadek acted in a manner consistent with the continuation of the Avoca Beach JV, for example, in the negotiations throughout 2018. As noted above, on 15 May 2018 Mr Sadek emailed Mr Khattar with inter alia “The [Avoca Beach] JV will stay there and no deal/offer at this time”. Further, on 10 December 2018 in an email to Elite’s lawyer, Jason Cameron, Mr Sadek indicated that he considered Elite still had an interest in the Avoca Joint Venture Property by virtue of its caveat:

I have to be clear and honest with you.

As you know I don’t trust those people (and the last few months gave me a big lesson in trusting people)

So we have to be on top of them, as they ready to play more games and the time on their side.

Plus those monies mine and Hazem been with them for years and still nothing, and back to square one

And they sitting on it and it’s not hurting at all

But in saying that we still have the JV and the caveat in our hand. (emphasis added)

96. Finally, there was a finding that no termination of the Avoca Beach joint venture was effected by the March 2019 Deed. At [325], which was not challenged, the primary judge found:

[325] Although there is a recital included in the March 2019 Deed to the effect that the Avoca JV was terminated in July 2017 (Recital J), there are no operative terms to that effect, remembering that Elite and Mr Afyouni were not parties to the Deed. On its own, I am not satisfied that Recital J establishes there had been any “termination” caused by Mr Sadek.

97. The primary judge was correct. The March 2019 Deed (including Recital J) did not effect a termination at law of the Avoca Beach joint venture.

98. On appeal the appellants sought to advance a different case premised on there being a “de facto termination” of the Avoca Beach joint venture, a diminution in the Avoca Beach joint venture’s assets and a diminution in the value of KPI53’s assets. None of these matters were raised below. Had these allegations been made below, the respondents would have enjoyed the opportunity to lead evidence about the issues involved. If the appellant were permitted to rely on these allegations for the first time on appeal, the respondents would encounter real unfairness. Ground 1 should be dismissed.

99. In any event, it is unclear what the appellants mean by a “de facto” termination of the Avoca Beach joint venture. Even if this case was open, I am not satisfied that any practical consequence to the Avoca Beach joint venture was demonstrated by the appellants. The appellants claim that Mr Sadek’s actions diminished the Avoca Beach joint venture’s assets is inconsistent with the evidence as neither Mr Sadek nor his company, Render and Paint, received any benefits from the Avoca Beach joint venture as a result of the March 2019 Deed. Finally, I am not satisfied that the appellants demonstrated there was any diminution of the value of KPI53’s assets by reason of the March 2019 Deed.

100. Like the primary judge, however, as I have concluded there was no termination of the Avoca Beach joint venture (the only case conducted by the appellants) I am reluctant to consider whether Mr Sadek’s conduct falling short of effecting a termination nonetheless breached directors’ and fiduciary duties when the matter was inconsistent with the case conducted by the appellants and was only faintly touched on in submissions in this Court.

101. I would reject ground 1 of the Avoca Appeal.

Ground 2

102. Ground 2 in the Avoca Appeal only arises if ground 1 is upheld. For the reasons I have given, ground 1 should be rejected and, accordingly, ground 2 must also be dismissed. I will nevertheless deal with it for the reasons given in Kuru. The primary judge found:

[333] In any event, as I have concluded there was no termination by Elite, I do not need to consider whether Mr Sadek’s conduct falling short of effecting a termination nonetheless breached directors’ and fiduciary duties when the matter was not developed in submissions. Further, the only relief sought by Elite was orders for equitable compensation or compensation pursuant to s 1317H Corporations Act for loss shown to have been suffered as a result of a breach of directors’ duties. In circumstances, where it has not been demonstrated that Mr Sadek caused Elite to lose any of its rights in entering the March 2019 Deed and Elite’s rights were expressly preserved, I do not consider Elite is entitled to a remedy.

103. The appellants submitted that the primary judge erred in finding that, on the basis that Elite had suffered no loss, the appellant was not entitled to relief for Mr Sadek’s alleged breach of duties as director of Elite.

104. The appellants submitted that neither of its pleadings in relation to relief rests upon the premise that Elite suffered any actual loss. They submitted that no finding of actual loss is required to grant equitable compensation or an order under s 1317H of the Corporations Act.

105. As the primary judge explained at [333], the only relief the appellants sought was equitable compensation or statutory damages for loss (emphasis added). The primary judge clearly understood that was the case that was pleaded and run by the appellants below.

106. The primary judge did not err in refusing that relief on the basis that it had not been demonstrated that Mr Sadek caused Elite to suffer any loss. No case was advanced to the primary judge that equitable relief should be fashioned to address a profit that Mr Sadek had allegedly made. The appellants also sought an order for discretionary compensation under section 1317H of the Corporations Act. That discretion allows the Court to include profits in the measure of compensation under section 1317H(2). That, however, was not what the appellants asked the primary judge to do. Nothing whatsoever was said by the appellants about s 1317H in submissions to the primary judge. No case was advanced that s 1317H relief should be fashioned to address a profit that Mr Sadek had allegedly made.

107. The primary judge did not identify “preconditions” to relief (in equity or under section 1317H). Rather, her Honour addressed the case which was put to her by the appellants.

108. The contingent conclusions of the primary judge about equitable compensation and s 1317H addressed the case conducted by the appellants and those conclusions were correct. On the contingent basis that ground 2 of the appeal needs be considered I would in any event reject it.

Relief sought

109. The relief sought in the notice of appeal was also problematic. Despite advancing ground 2 on a “profit” basis, no order seeking to calculate any “profit” was sought. Instead, the orders sought were:

1. a declaration that Sadek and Co holds its interests in two properties at Kellyville on trust for Elite or Mr Afyouni; and

2. a declaration that Elite or Mr Afyouni has an equitable charge (in an unparticularised amount) over the Kellyville properties.

110. Senior counsel for the appellants accepted that making every assumption favourable to his clients, and assuming grounds 1 and 2 succeeded, there was insufficient evidence to make the orders sought and the case would need to be remitted to the primary judge. Considerable further evidence would need to be considered before orders could be formulated.

Conclusion and proposed orders

111. Given the conclusions I have reached, it is unnecessary to address the respondents’ notice of contention which also addressed the “backwards tracing” issue.

112. For the foregoing reasons I propose the following orders:

1. In the Maroubra Appeal (2022/318509)

(1)   Leave refused to amend the notice of appeal.

(2)   Appeal dismissed.

(3)   Appellants to pay the respondents’ costs.

2. In the Avoca Appeal (2022/318527)

(1)   Appeal dismissed.

(2)   Appellants to pay the respondents’ costs.

113. MITCHELMORE JA: I agree with Payne JA.

114. STERN JA: I agree with the orders proposed by Payne JA and with his Honour’s reasons.

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Decision last updated: 19 July 2023