Equuscorp Pty Ltd v Glengallan Investments Pty Ltd
[2002] QCA 380
•27 September 2002
SUPREME COURT OF QUEENSLAND
CITATION:
Equuscorp P/L & Anor v Glengallan Investments P/L; Equuscorp P/L & Anor v HGT Investments P/L; Equuscorp P/L & Anor v Thornton; Equuscorp P/L & Anor v Prendergast; Equuscorp P/L & Anor v Anderson; Equuscorp P/L & Anor v Codd [2002] QCA 380
PARTIES:
EQUUSCORP PTY LTD ACN 006 012 344
(first plaintiff/first appellant)
RURAL FINANCE PTY LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)
ACN 008 584 638
(second plaintiff/second appellant)
v
GLENGALLAN INVESTMENTS PTY LTD
ACN 009 836 364
(defendant/respondent)
EQUUSCORP PTY LTD ACN 006 012 344
(first plaintiff/first appellant)
RURAL FINANCE PTY LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)
ACN 008 584 638
(second plaintiff/second appellant)
v
HGT INVESTMENTS PTY LTD ACN 009 951 080
(defendant/respondent)
EQUUSCORP PTY LTD ACN 006 012 344
(first plaintiff/first appellant)
RURAL FINANCE PTY LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)
ACN 008 584 638
(second plaintiff/second appellant)v
BARRY THORNTON
(defendant/respondent)
EQUUSCORP PTY LTD ACN 006 012 344
(first plaintiff/first appellant)
RURAL FINANCE PTY LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)
ACN 008 584 638
(second plaintiff/second appellant)
v
BRIAN JAMES PRENDERGAST
(defendant/respondent)
EQUUSCORP PTY LTD ACN 006 012 344
(first plaintiff/first appellant)
RURAL FINANCE PTY LIMITED (RECEIVORS AND MANAGERS APPOINTED) (IN LIQUIDATION)
ACN 008 584 638
(second plaintiff/second appellant)
v
CYRIL WILLIAM ANDERSON
(defendant/respondent)
EQUUSCORP PTY LTD ACN 006 012 344
(first plaintiff/first appellant)
RURAL FINANCE PTY LIMITED (RECEIVORS AND MANAGERS APPOINTED) (IN LIQUIDATION)
ACN 008 584 638
(second plaintiff/second appellant)
v
EDWIN THOMAS CODD
(defendant/respondent)FILE NO/S:
Appeal No 11475 of 2001
Appeal No 11476 of 2001
Appeal No 11477 of 2001
Appeal No 11478 of 2001
Appeal No 11479 of 2001
Appeal No 11480 of 2001
SC No 1688 of 1991
SC No 1689 of 1991
SC No 1690 of 1991
SC No 1691 of 1991
SC No 1692 of 1991
SC No 9485 of 1998DIVISION:
Court of Appeal
PROCEEDING:
General Civil Appeal
ORIGINATING COURT:
Supreme Court at Brisbane
DELIVERED ON:
27 September 2002
DELIVERED AT:
Brisbane
HEARING DATE:
15 May 2002
16 May 2002JUDGES:
Williams JA, Mackenzie and Chesterman JJ
Separate reasons for judgment of each member of the Court; each concurring as to the orders madeORDER:
Appeals are dismissed with costs
CATCHWORDS:
CONTRACT – GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS – OTHER MATTERS - where investor/respondents entered into a loan agreement with the second appellant for the purposes of acquiring units in a limited partnership in an aquaculture investment scheme with purported taxation and self-funding benefits – where venture failed and there was no profit from which to repay the balance of loan monies – whether the true nature of the agreement was for a limited recourse loan or not - whether the learned trial judge erred in finding that the operative agreements determining the terms of the loans were oral agreements of limited recourse loans – whether executed deeds were varied by oral agreement – held the agreement was that constituted by deeds of loan
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSIDERATION – FAILURE OF CONSIDERATION – whether the second appellant/lender performed its obligations pursuant to the loan agreements where the loans made by it involved a round robin of transactions – whether the terms of the loan agreement executed required the second appellant to advance real money by way of loan and apply that money for the acquisition of units in the venture in circumstances where the only source of capital funds for the venture was from the sale of units – DTR Nominees Pty Ltd v Mona Homes Pty Ltd followed - whether provisions within the loan agreement of a promise to pay was sufficient discharge of the investor’s obligations to pay for the acquisition of the units – consideration of the term ‘lend’ – Australian Horticultural Finance Pty Ltd v Jekos Holdings Pty Ltd followed
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – REPUDIATION AND NON-PERFORMANCE – ELECTION AND RECISSION – LOSS OR WAIVER OF RIGHT TO RESCIND – whether the respondents affirmed the loan agreements after becoming aware that no real money was lent such that they became liable to repay the loan monies in accordance with the agreement – whether the learned trial judge erred in finding that no agreement, affirmation, acquiescence or waiver was made – where the appellants cannot rely on conduct by the respondents to support the appellants’ claim of affirmation of the loan agreement where that conduct essentially relates to obligations pursuant to a partnership deed to which the appellants were not parties – where the conduct of the respondents in keeping the loan agreement on foot despite the continued failure of the second appellant to advance real money did not extinguish the respondents’ right to terminate
CONTRACTS – PARTICULAR PARTIES – PRINCIPAL AND AGENT – CREATION OF RELATIONSHIP OF AGENCY – AGENCY CREATED BY OTHER MEANS – IMPLICATION OF AGENCY FROM PARTICULAR CIRCUMSTANCES – where director of second appellant instructed his brother to manage the company – whether the learned trial judge erred in finding the brother was an agent of the second appellant and therefore had authority to offer and execute on behalf of the company guarantees of a limited recourse loan
PROCEDURE – SUPREME COURT PROCEDURE – QUEENSLAND – PRACTICE UNDER RULES OF COURT – EVIDENCE - whether on an appeal against final judgment it was open to the appellants to challenge the correctness of an interlocutory order – Pioneer Industries Pty Ltd v Baker followed
PROCEDURE – SUPREME COURT PROCEDURE – QUEENSLAND – PRACTICE UNDER RULES OF COURT – EVIDENCE - consideration of the effect and operation of r 227(2) of the UCPR – whether a document disclosed pursuant to the rule may be tendered as evidence against the party making disclosure without the need to otherwise establish its admissibility
Evidence Act 1977 (Qld), s 92
Partnership (Limited Liability) Act 1988 (Qld), s 11
Uniform Civil Procedure Rules 1999 (Qld), r 227(2), r 211Australian Horticultural Finance Pty Ltd v Jekos Holdings Pty Ltd (Supreme Court of Queensland Writ Nos 612-622 of 1992, judgment 17 May 1996), considered
Australian Horticultural Finance Pty Ltd v Jekos Holdings Pty Ltd [1997] QCA 440; CA Nos 4078-4717 of 1996, 9 December 1997, considered
Bowes v Chaleyer (1923) 32 CLR 159, followed
Cobham v Frett [2001] 1 WLR 1775, distinguished
Commissioner of Taxation v Lau (1984) 54 ALR 167, distinguished
Commissioner of Taxation v Lau (1984) 6 FCR 902, distinguished
DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, followed
Frost v Knight (1872) L.R. 7 Ex 111, followed
Goose v Wilson Sandford & Co (U.K. Court of Appeal, 13 February 1998), distinguished
Hoyt’s Pty Limited v Spencer (1919) 27 CLR 133, followed
Mamm v Barclays Bank International (1977) QB 790, distinguished
Masters v Cameron (1954) 91 CLR 353, followed
Maybury v Atlantic Union Oil Co Ltd (1953) 89 CLR 507, referred to
Moylan v Nutrasweet Co [2000] NSW CA 337, distinguished
Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444, followed
Pioneer Industries Pty Ltd v Baker [1997] 1 Qd R 515, followed
R v Maxwell (NSW Court of Criminal Appeal, 23 December 1998), distinguished
Sargent v ASL Developments Pty Ltd (1974) 131 CLR 634, considered
Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310, followed
Tyler v Custom Credit Corporation Ltd (in liq) [2001] QSC 495, followed
Wilson v Thornbury [1875] LR 10 Ch App 239, referred toCOUNSEL:
P A Keane QC, with S S W Couper QC, for the appellants
D Cooper SC, with C Francis, for the respondentsSOLICITORS:
Gadens Lawyers for the appellants
Lees Marshall Warnick for the respondents
WILLIAMS JA: These are appeals from a judgment of a judge of the Trial Division delivered on 30 November 2001 dismissing the actions brought by the plaintiffs in each of the six proceedings which were heard together. In each matter the claim was for money owing pursuant to a loan agreement made on 30 June 1989 by each defendant as borrower with the second plaintiff as lender. The first plaintiff sued as assignee of the second plaintiff’s rights under each of the agreements.
It was not in dispute at the trial that, if the plaintiffs proved an enforceable loan agreement in the terms they asserted, the following amounts were owing by the defendants as at 21 February 2000, the first day of trial:
$
Glengallan Investments Pty Ltd 1,056,081.37
HGT Investments Pty Ltd 1,056,081.37
Barry Thornton 2,745,811.56
Brian James Prendergast 528,040.68
Cyril William Anderson 1,795,338.33
Edwin Thomas Codd 316,824.41
Interest would of course have accrued subsequent to that date.
Thornton was a director of Glengallan Investments Pty Ltd and HGT Investments Pty Ltd, and he and Prendergast, Anderson and Codd were all associated with the GWA group of companies. Thornton and Prendergast were qualified accountants.
It should also be noted that KG Schroder, called as a witness by the defendants, was also an accountant employed in the GWA group; he had entered into a similar loan agreement with the second plaintiff, but the litigation with respect to his position was being conducted in the District Court.
The critical issues at the trial were:
(i) What were the terms of the loan agreements made between the second plaintiff and each of the defendants on 30 June 1989;
(ii) Did the second plaintiff perform its obligations pursuant to those agreements.
(iii) If the second plaintiff did not perform its obligations, nevertheless did the defendants affirm those agreements so that each was liable to repay the full amount of the notional loan.
It was the contention of the defendants that the terms of the loan agreements made on 30 June 1989 meant that the second plaintiff had only “limited recourse” with respect to repayment. On the case for the defendants each was only obliged to make two repayments of principal amounting to about one sixth of the notional loan; the balance of the loan was to be repaid out of the profits of the venture into which the loan funds were invested. In broad terms the learned trial judge found that the terms were as contended for by the defendants and that, as each had repaid all that was legally owing thereunder to the plaintiffs, the actions failed.
Further, or alternatively, the defendants alleged that the second plaintiff has never performed its obligations pursuant to the loan agreements in that real money has not been advanced, that such repudiation had been accepted by the defendants, and that in consequence the plaintiffs have no right to sue for repayment of principal and interest. Suffice it to say that there were findings by the learned trial judge that the second plaintiff did not fulfil its obligations pursuant to the loan arrangement (whatever be its terms) and, as there has been no affirmation by any of the defendants, the plaintiffs were not entitled to succeed on their claim.
The plaintiffs challenge all the findings of fact which enabled the learned trial judge to arrive at those ultimate conclusions. In order to succeed they must not only establish that the learned trial judge erred in making the findings which he did with respect to the terms of the agreements, but this court must also be persuaded to reverse the findings that the second plaintiff did not meet its obligations under the loan arrangements and that there was no affirmation by the defendants.
The trial was somewhat unusual in that the plaintiffs did not lead any oral evidence as to the negotiations which led to the various agreements of 30 June 1989. The only oral evidence called by the plaintiffs came from:
(i) PD Coulthard and E Pietrzykowski who in mid-1989 were employees of Westpac Bank; each gave evidence of the transactions which, on the case for the plaintiffs, constituted the making of loans in compliance with the obligations of the second plaintiff pursuant to the loan agreements of 30 June 1989;
(ii) DM Anderson, a partner in the accounting firm KPMG. Other accountants in that firm were appointed receivers of the second plaintiff on 26 July 1991;
(iii) WD Thompson, a solicitor, who in 1991 was retained by the defendants. He gave evidence under subpoena and produced notes of a telephone conference on 15 May 1991 which, on the case for the plaintiffs, was relevant to the issue of affirmation;
(iv) KR Humphrys who was also called pursuant to a subpoena. He was an investor in the relevant venture, and had some discussions with Prendergast late in 1991; that evidence was relevant to the issue of affirmation.
The case for the plaintiffs was essentially based on numerous documents which were tendered; they relied solely on documentary evidence to establish the terms of the loan agreements. Their case on the other issues also relied heavily on documentary evidence.
The defendants called the following witnesses, some of whom one would ordinarily have expected to be antagonistic to their cause:
(i) GM Johnson who became a director of the second plaintiff on 29 June 1989. He took over from Anthony James (Tony) Johnson, his brother, who at all material times was a director of Johnson Farm Management Pty Ltd, Farmer Johnson Pty Ltd and Farmer Johnson Aquaculture Limited. Tony Johnson was the driving force behind the venture in question;
(ii) MR Collins, who at the material time was a director of the company, Forestell Securities (Aust) Limited, which played a significant role in implementing the venture in question;
(iii) M Stewart-Hesketh, who at material times was an executive in the employ of the first plaintiff;
(iv) RJ Lynch, an accountant, who was engaged to settle the prospectus and other marketing information with respect to the venture in question;
(v) AB Hasell, who was the salesman employed to sell units in the venture in question and who negotiated the relevant agreements with the defendants. The learned trial judge found that at all material times he was acting on behalf of the second plaintiff and there is no reason to question that conclusion;
(vi) The defendants Thornton, Prendergast and Codd and their associate Schroder;
(vii) The solicitor for the defendants, IC Marshall;
(viii) An accountant with Ernst & Young, KJ Armstrong.
The learned trial judge, in broad terms, gave greater weight to oral testimony (in particular from Thornton, Hasell, and Prendergast) than he did to the documents; by accepting their oral evidence he effectively put a gloss on the interpretation of the loan agreements signed by the defendants which they would not have carried but for that evidence.
The trial commenced on 21 February 2000, and the evidence concluded on the ninth day, 2 March. Closing addresses of counsel were delivered on 8 March and the decision was reserved. On 20 April 2000 the solicitors for the plaintiffs wrote to the defendants alleging non-disclosure of certain documents and advising of the possibility of an application being made to re-open the trial for the purposes of conducting further cross-examination. After an exchange of correspondence the plaintiffs filed an application on 22 May 2000 seeking an order for further and better disclosure. (The defendants contend the plaintiffs were aware of the documents in question in the course of the trial, but there is no point in canvassing that contention further on the hearing of the appeal).
The matter was mentioned before the learned trial judge on 1 June when 10 and 11 July were fixed for the hearing of the application. On 26 September the learned trial judge published his reasons for ordering that the defendants make further disclosure. The documents were in the main said to be relevant to the issue as to the terms of the loan agreements and the oral evidence relating thereto. There was additional argument before him on that day. Then on 6 October 2000 the learned trial judge heard applications from the defendants for a stay of his order of 26 September; there was also an injunction in place temporarily restraining Arthur Andersen, who had been accountants at a material time for the defendants, from producing for inspection documents sought by the plaintiffs. On 13 October 2000 the defendants appealed against the order of 26 September. That appeal was heard on 22 February 2001, with the Court of Appeal publishing reasons for dismissing the appeal on 30 March 2001. Further disclosure was then made mainly from the file of Arthur Andersen, but the defendants claimed privilege with respect to some documents. That resulted in an application being filed on 1 May 2001 for consequential orders against the defendants enforcing the order of 26 September 2000. That application was heard by the learned trial judge on 16 May, and after hearing substantial argument the matter was adjourned. A further hearing of that application took place on 5 June.
On 18 July 2001 the learned trial judge delivered reasons dismissing the claim of privilege made by the defendants. In the course of those reasons his Honour observed that the issues raised were “legitimate ones for proper consideration”. In consequence on 1 August further documents were produced by the defendants. The matter was then brought on before the learned trial judge on 22 August when each side made submissions as to the future course of the trial. On 24 August 2001 the plaintiffs filed an application for an order that the trial be re-opened. That application was heard on 10 September, and after hearing argument from both sides the learned trial judge ordered that the trial be re-opened.
There was argument on that date as to the plaintiffs’ right to tender documents pursuant to Rule 227(2) of the UCPR – a matter to which it will be necessary to refer later – and decision on that point was reserved. That decision was handed down on 14 September 2001; the learned trial judge ruled against the tender pursuant to that rule of the documents in question. Thornton was called that day to give further evidence, was further cross-examined, and some further documents were tendered by counsel for the plaintiffs from the recently discovered material. Prendergast was available to give evidence but was not required by the plaintiffs; some of the documents in question could prima facie have been tendered through him. There followed further oral submissions by counsel for all parties and the trial was then adjourned for decision. As already noted judgment on all the issues raised at trial was delivered on 30 November 2001.
In written outline of argument on appeal counsel for the plaintiffs contended that the delay between the conclusion of the bulk of the evidence at trial (8 March 2000) and the date of judgment (30 November 2001) was so protracted, though not the fault of the trial judge, that his findings of fact should be treated by this court with reserve; they should be the subject of more intense scrutiny. Though the argument contained in the outline was not made the subject of further oral submissions, the contention was not abandoned.
In support of the argument reference was made to a number of decisions including Goose v Wilson Sandford & Co (U.K. Court of Appeal, 13 February 1998), Moylan v Nutrasweet Co [2000] NSW CA 337 and R v Maxwell (NSW Court of Criminal Appeal, 23 December 1998). To those could be added a reference to the decision of the Privy Council in Cobham v Frett [2001] 1 WLR 1775. In each of those cases the delay between hearing and judgment was attributable to some fault on the part of the trial judge. In a number of the cases, representations had been made on behalf of the parties to a more senior judge requesting information as to when the judgment would be handed down. Promised dates were not met. In those cases there was not mere delay in delivering judgment; there was a basis for concern, sometimes evident from the reasons ultimately produced, that the trial judge had difficulty in fulfilling the obligation of delivering a timely judgment. That is clearly not the case here; nothing could be further from the truth.
Within three months of reserving his decision (the time frame within which judges of this court endeavour to deliver judgment) the learned trial judge was aware that an application was to be made to re-open the trial. For all one knows he could well have virtually completed writing his reasons when he became aware of that fact; it is, of course, not appropriate to make any inquiries in that regard. Thereafter, over a period of more than 12 months, the matter was regularly back before him for further argument. The documents at the centre of the disputes during that period were relevant to the credibility of the defence witnesses, particularly with respect to their testimony as to the terms of the loan agreements made on 30 June 1989. That was the critical area of factual dispute between the parties. The hearings during that period meant that all of the evidence relevant to that issue was again highlighted for the learned trial judge.
Far from operating to defeat careful, rational analysis of the evidence those later hearings would have given the learned trial judge the opportunity of further evaluating any tentative conclusions he may have reached.
Whilst credibility issues were important, namely whether the defence witnesses should be believed when they put a gloss on documents, the case did not hinge upon the acceptance of one body of oral evidence over another body of oral evidence contradicting it. There was, as usual, a full transcript of evidence (and most argument) available to the learned trial judge. He had all the documents which were so critical to the contention of the plaintiffs. Those matters distinguish this case from the cases relied on by the plaintiffs.
In the circumstances of this case the delay between the conclusion of the initial hearing and ultimate judgment does not require this court to approach the findings of fact made by the learned trial judge in any special way.
When the issue is that of considering documents in the light of oral evidence given by witnesses who were considered prima facie to be honest and reliable, not contradicted by other oral evidence, this court is in as good a position as the trial judge to determine the ultimate questions of fact.
Before proceeding further it is necessary to set out the detail of the investment venture in question. The Johnson group of companies (including the second plaintiff, Johnson Farm Management Pty Limited and Farmer Johnson Aquaculture Limited) operated or were associated with a number of investment schemes with purported taxation benefits in the late 1980s. Prior to the venture which is central to this litigation the Johnson group had created and marketed the “Blueberry Hill Development” and in 1989 it was believed that that venture was generating significant profits and returning taxation benefits to investors in it. Because Thornton (and to a lesser extent other defendants) knew details of the Blueberry project and was influenced by its apparent success to enter into the venture in question it is necessary to refer briefly to some of its features.
Pursuant to that scheme an investor entered into an agreement to farm and be responsible for a minimum of 700 blueberry trees with the Farm Owner. The Farm Manager agreed to do all the necessary work in consideration of payment of a fee by the investor. After the first two years that fee was payable from income generated by the project. The investor was to pay the capital amount to acquire the trees, plus the management fees and enhancement fees in the first year. The prospectus provided that an investor could borrow up to 100% of the management fees and enhancement fees for the first year. The first year’s interest on the loan had to be paid either at a discount rate in advance or in arrears at a higher rate. According to the marketing literature:
“The balance of the Loan i.e. approximately 81% of principal plus interest is paid from farm income in the first five years and this part of the Loan is non-recourse.”
The marketing literature also included a pro forma Loan Agreement. Clauses 1 and 2 thereof provided that the lender (the second plaintiff in these proceedings) agreed to lend the Principal Sum and in consideration of the receipt thereof the borrower “undertakes to repay the Principal Sum in accordance with the terms of this Agreement”. Clause 3A provided that the balance of the Principal Sum should be repaid within five years of the date of the loan agreement. Then it was provided in Clause 3C as follows:
“(i)The Borrower shall repay to the Lender the respective sums specified in . . . Schedule 2 three (3) months from the date hereof and six (6) months from the date hereof respectively in reduction of the Principal Sum;
(ii)The balance of the Principal Sum . . . shall be repaid to the Lender by direct deduction from the income received by the Borrower from the Farm . . .
(iii)The Borrower shall have the right on any day . . . to repay to the Lender . . . the whole of the balance of the Principal Sum.”
If the agreement stopped there it would be clear that the borrower remained liable at all times for repayment of the amount of the loan plus interest, but it was recognised and hoped that after the first two initial payments profits from the venture would repay the balance of the loan. But if the venture failed, or the profits were not sufficient to repay all of the loan and interest, the borrower would have to meet the shortfall. But the agreement did not end there. Clause 4(iii) was in these terms:
“Notwithstanding anything hereinbefore or hereinafter contained and subject expressly to . . . the due performance by the Borrower of the conditions imposed on him by Clause 5 hereof, then the Lender shall have no right of recourse against the Borrower and the Borrower shall have no other personal liability for payment of the balance of the Principal Sum or Interest owing under Clauses 3B(i) and (ii) or any other costs, charges or expenses whatsoever in respect of the balance of the Principal Sum other than out of the income from the farm as provided in sub-clause 3C(ii) hereof.”
For present purposes it can be assumed that the provision just quoted overrode the earlier terms of the agreement, and on that basis it followed that if the venture failed the borrower was not legally obliged to meet any shortfall in repayment of the balance of the loan.
Given the apparent success of the Blueberry project in 1988-9 the Johnson group then began marketing an aquaculture scheme called the “Red Claw” project. Initially Thornton was shown a draft prospectus, but shortly before he signed the necessary documentation he was in possession of the prospectus which had been duly lodged with the National Companies and Securities Commission. The following overview of the structure of the venture is taken from that prospectus.
The purpose of the Red Claw Project was to form and generate profits from a series of partnerships, each of which would carry on the business of the farming, harvesting and marketing of freshwater crayfish. Each partnership would carry on its business on land near Innisfail. Each partnership project was to be carried on for a period of twelve years. Each partnership would be a limited partnership constituted pursuant to the provisions of the Partnership (Limited Liability) Act 1988 (Qld). Those who invested money in the project would be the “Limited Partners”, and the “General Partner” would manage all the business affairs of each partnership. Each limited partnership would lease from the Farm Owner the ponds in which the crayfish were to be farmed. Each limited partnership would contract through the General Partner to engage the Farm Manager to manage the farm interests. The contribution made by an investor was to be measured by reference to a number of units in the limited partnership. The prospectus provided:
“The subscription money for one unit in a limited partnership is $868 and the minimum subscription per Investor is five units.”
The minimum number of units which had to be subscribed before the project commenced was 4000; that is 4000 for each limited partnership. Until such time as the minimum subscription had been received the monies were to be held by the “Investors’ Representative” which body was to represent the interests of all the investors.
The prospectus then disclosed the following:
(a)The Investors’ Representative was Eagle Star Trustees Limited which was said to be a member of the Eagle Star Insurance Group of Companies;
(b)The General Partner was Forestell Securities (Australia) Limited which was said to have had ‘many years experience as the manager of a number of investment projects in the agricultural sector’;
(c)The Farm Manager was Johnson Farm Management Pty Limited;
(d)The Farm Owner was Farmer Johnson Aquaculture Limited.
Included in the prospectus was a document described as “Expert’s Report on Taxation Considerations” prepared by Ernst and Whinney, Chartered Accountants. The following extracts therefrom are significant for present purposes:
“We are informed that the proposed activities of each partnership are to be carried out on a commercial basis and scale with a view to deriving profit. Under the Partnership Deed a partnership is not permitted to commence business prior to the Investors’ Representative receiving a minimum subscription from prospective partners.
. . .
Each partnership should be entitled to deductions in terms of Section 51 of the ITAA for the following expenses:
(i) Licence fee paid to the Farm Owner under the Facilities Licence Agreement;
(ii) Lease rental paid to the Farm Owner under the Grow Out Pond Lease;
(iii) Management fees paid to the Farm Manager under the Management Agreement;
(iv) Annual fees payable to the Investors’ Representative;
(v) Purchase of crayfish;
. . .
Section 82KL deals with transactions where deductions are claimed and expenditure is recouped (i.e. the taypayer obtains benefits additional to those intended to be received in respect of the expenditure incurred). So long as there is no recoupment of expenses (e.g. no intention that borrowings made by each partnership or borrowings made by the Investing Partners to take up their partnership units shall not be repaid, and the loans are in fact repaid), it is our opinion that this Section will not have application.”
Under the heading Key Legal Data in the prospectus and the sub-heading Minimum Subscription the following appeared:
“All monies subscribed by applicants will be refunded if the minimum subscription of 4000 partnership units is not received within four months of the date of this prospectus. No allotment of partnership units will be made pursuant to this prospectus until the whole of the minimum subscription is received in cash.”
The prospectus also contained instructions on how to invest and application forms. Payment was to accompany the application form and it was stated that the cheque should be in Australian dollars, crossed “Not Negotiable” and made payable to Eagle Star Trustees Ltd.
It is not without significance for present purposes that the prospectus did not deal with the question of the investor borrowing funds for the purpose of acquiring units in the venture; on the face of the prospectus any borrowing by an investor would be a separate matter for the investor to negotiate with a lender.
Prendergast was involved with Thornton in most of the negotiations with respect to the investment by all of the defendants but clearly Thornton was the principal negotiator. It was accepted for purposes of the litigation that at all material times Thornton had full authority to bind all defendants; any knowledge he had constituted knowledge by each of the defendants. In consequence it is sufficient to concentrate on Thornton’s involvement in the discussions leading up to the defendants committing themselves to the Red Claw project on 30 June 1989.
In about March/April 1989 Hasell was engaged by the Johnson group to market the Red Claw project. Insofar as there were opportunities still available for investment in the Blueberry project he also marketed that scheme. He had previously been a stockbroker and in that capacity had had dealings with Thornton and the GWA Group.
In about April/May 1989 the defendants, were looking for “a speculative investment opportunity which offered reasonable tax incentives”. As a result of restructuring the GWA group the defendants had available cash and were looking for appropriate investment opportunities. Thornton spoke to a number of financial advisers at about that time, one of whom was Hasell. Thornton placed their first relevant conversation as being in early May. There was discussion about the Blueberry project which Hasell said was a “limited recourse investment where you only have to pay a small amount of money up front and the tax benefits are much better.” Thornton was given some brochures regarding the Blueberry venture. According to Thornton he was particularly interested in that venture because of the limited recourse aspect. At that time the Blueberry project was almost fully subscribed and there was insufficient capacity for that project to provide the investment opportunity Thornton and those he represented wanted. It was in those circumstances that Hasell mentioned the Red Claw project. The first document Thornton received from Hasell was that headed “Precisely What is The Best Farming Investment This Year?” That document roughly set out the structure of the project (which has been detailed above) and made representations as to the anticipated return and initial taxation benefits. It mentioned that a potential investor could borrow funds and indicated probable return after repaying the whole of the loan. Significantly for present purposes when giving an example of the profit which would be returned the document stated:
“In this instance an investor would have an initial cash outlay of $781 and a deduction of $5,061.”
Thornton became interested in the Red Claw project after reading that material. He arranged for Hasell to give him a more extensive presentation in relation to it. That occurred probably early in June 1989. On that occasion a draft of the prospectus was discussed. Hasell stated that the literature showed that the project was “based on the self-funding nature of the project” as had been the position with the Blueberry venture.
In his reasons for judgment the learned trial judge accepted the oral evidence of Hasell, Prendergast and Thornton as “true”. It has already been observed that there was no evidence to the contrary of that given by each of those three as to what was said leading up to the signing of documents on 30 June 1989. In consequence, careful consideration must be given to their evidence as to the terms of those conversations, and then the court must consider their legal effect.
According to Thornton after looking at the documents he made a remark to Hasell along the lines:
“This does not state that there will be no legal requirement on me to pay loan repayments out of my own pocket if the project turns out not to be self-funding.”
Hasell’s response was to the effect that all the Johnson group projects had been totally self-funding and that is why that risk was not addressed in the written material.
Amongst the documents in the possession of the defendants was that put out by the Johnson group, headed “Important Late News” and bearing date 26 June 1989. Thornton said he could not specifically recall the document, or any detailed conversation with Hasell about it. But it is a significant document because ultimately the defendants availed themselves of the finance referred to therein. Previously the defendants had been advised that the Johnson group had an arrangement with three banks that loans would be available to approved investors, but some time in June the banks withdrew from that arrangement. That led to the circulation of the document “Important Late News”. One would think that it must have been a document on the table when there was discussion between Thornton and Hasell about recourse where profits from the project were insufficient to repay borrowings. The concept of limited recourse would only be of significance where the investment monies were borrowed from a company associated with the project.
The document headed “Important Late News” indicated that the second plaintiff, Rural Finance Pty Ltd, would advance six year loans to approved borrowers to purchase units in the Red Claw project. The loans were being offered on the following terms:
“Interest – 18% pa – Year 1 interest payable in advance by the Investor personally, subsequent interest payable from projected Project cash, yearly in arrears.
Principal – Up to 100% of Red Claw investment may be borrowed (Minimum Loan $20,000). Loan principal is repayable in part (approx 16.4%) from Investor cash during the first six months. The balance is repayable over five years from projected Project cash.
Security – the loan is secured against the borrower’s interest in the Project. The loan is not non-recourse and the Project profits are not guaranteed.”
After giving an illustration of the taxation effect of investing consequent upon borrowing on those terms the document set out details of “how to proceed”. If an investor took up the offer it was said that the second plaintiff would pay the loan proceeds direct to Eagle Star Trustees Ltd by 30 June 1989 as subscription moneys for units in the venture.
That document also contained a number of paragraphs under the heading “Taxation Department Policy”. Therein it was said that the ATO was scrutinising the proliferation of “guaranteed forward income projects”. It stated that the ATO wanted “an investor to bear operating business risk prerequisite to gaining tax deductions.” The document then expressed the view that the Johnson group did not accept the ATO stance and suggested it may not stand up to legal challenge. Then the following significant paragraph appeared:
“Due both to this proliferation and to Sydney ATO’s current views, Johnson Farm Management Pty Limited decided in May 1989 to abandon ‘safe’ investor loans and ‘forward minimum income’ attachments in favour of ‘full investor risk’ coupled with highly conservative project profit forecasts.”
It seems clear that when Thornton and Hasell discussed the consequences of insufficient profits being generated to repay the loan they did so in the light of the contents of the document headed “Important Late News”. The conversation only makes sense if they were considering a proposal which involved the defendants borrowing from a company which was prepared to recognise that repayment of principal was expected to come out of the profits of the venture.
I now return to Thornton’s evidence as to the negotiations between himself and Hasell. When Thornton asked were the loans intended to be full recourse loans, Hasell replied that “the answer to your question is yes, but this problem has never arisen” or words to that effect. When Thornton pressed for a limited recourse loan Hasell responded:
“I think I can get you a guarantee from Johnson Farm Management that the project will be self-funding and that there will be no recourse by the lender after the initial payments and that all that would be required to be paid would be the first payment of interest and two payments of principal like the Blueberry project. I’ll talk to Tony Johnson about this and let you know.”
That ended what was frequently referred to in evidence and argument as the first pleaded meeting.
Later there was a telephone discussion between Thornton and Hasell in which the former said that the project “looks interesting”. By this time Thornton had a better idea of what the other defendants were interested in investing and informed Hasell of that. Later still there was another telephone call in which, according to Thornton, Hasell said:
“I have spoken to Tony Johnson who has agreed to your proposal. Rural Finance will be offering all of you the loans for the Red Claw investment as well as any Blueberry investment on a limited recourse basis and all the documentation ought to be available within the next few days.”
There was no major inconsistency or discrepancy between the evidence of Thornton and Hasell in regard to the content of their discussions during that period. In his statement Hasell indicated that he implied to Thornton that the Johnson group would stand behind the loan; if all went well the project would be self-funding, but the Johnson group would stand behind the loan. He also concedes that in at least one conversation he represented to Thornton that Johnson Farm Management would guarantee to the defendants that the deal was a “non-recourse loan”. He understood that that was something which would be worked out between the defendants and the Johnson group and later put into writing. Hasell’s evidence is not as precise as Thornton’s as to the sequence of meetings and the occasions on which particular statements were made.
It is agreed by all that on 30 June 1989, the last day for making the investment if there were to be taxation benefits for the financial year ending on that date, Hasell met Thornton and Prendergast in the former’s office and presented them with a number of documents, including a Loan Agreement. It was generally understood that the Application for units and the Loan Agreement would have to be completed by each defendant that day. Thornton objected that he was not being given sufficient time to peruse the documentation; he intimated he was only going to invest if the loans were limited recourse and there was no possibility of them being assigned.
It is now necessary to turn to the Loan Agreement which was presented to Thornton and which ultimately was signed on that day by or on behalf of each of the defendants.
The Agreement named the second plaintiff as the lender. It recited that the borrower had applied for a certain number of units in the limited partnership and that the “Lender has agreed to lend to the Borrower and the Borrower has agreed to borrow from the Lender the principal sum as specified in this Agreement, for the purpose of allowing the Borrower to acquire the said units.” There was then reference to the “Deed” between Forestell Securities (Australia) Limited as General Partner and Eagle Star Trustees Limited as Representative; terms defined in that Deed carried the same meaning for purposes of the Loan Agreement. Clause 8 then provided:
“Subject to the acceptance of the Application of the Borrower pursuant to the provisions of the Deed, the Lender hereby agrees to lend to the Borrower the Principal Sum.”
Clause 9 provided the “Principal Sum shall be . . . applied in payment of the Application Moneys . . . under the Deed.”
The term of the loan was for six years and at the end of the term “the Borrower shall pay to the Lender so much of the Principal Sum as has not been repaid.” The document then provided (reading together Clause 11 and Schedule 4) that regular payments should be made in reduction of the Principal Sum. Clause 13 provided that the Borrower should have the right at any time to repay the whole of the balance of the Principal Sum. Clause 12 was in these terms:
“Without reducing the obligation of the Borrower pursuant to Clause 11, the Borrower by his execution hereof hereby authorises and directs the Representative and the General Partner to pay any part of the Partnership income to which the Borrower becomes entitled to the Lender, firstly in reduction of any interest accrued or due but unpaid in respect thereof and secondly in reduction of the Principal Sum.”
Clause 24 conferred on the Lender the right to assign its rights and obligations under the Agreement to another party. Finally it should be noted that Clause 15 provided the governing law of the Agreement was that of the Australian Capital Territory, and the parties submitted to the jurisdiction of the courts for that Territory.
According to Thornton on reading that document he said to Hasell that the loans were not limited recourse and there was an assignment clause in the agreement. In reply Hasell said words to the effect that that must be a mistake and he would ring Tony Johnson and speak to him about it. It is agreed that Hasell telephoned Tony Johnson and had a conversation with him in the presence of, but not in the hearing of, Thornton. Hasell’s evidence as to the words actually used in the telephone conversation and in conveying that to Thornton is extremely vague. The evidence of Thornton (statement exhibit 107) is that, after speaking for some time on the telephone, Hasell said:
“Tony has said he will provide you with a written document guaranteeing that the loans are limited recourse and because they are limited recourse loans, there is nothing to assign and you shouldn’t be concerned about an assignment to a third party.”
Thornton then took the telephone from Hasell and spoke to the person he believed to be Tony Johnson. His evidence is that he cannot recall Johnson’s words but “it would have been to the effect that he was prepared to confirm what Alastair (Hasell) had said.” That concluded the telephone conversation. The learned trial judge made the following finding with respect to that telephone conversation:
“Mr Anthony Johnson to whom Mr Thornton spoke on the telephone while the meeting was in progress, assured Mr Thornton that it would not be necessary to provide that the loans were not assignable because ‘being limited recourse loans there was really nothing to assign’. . . . Mr Anthony Johnson also promised to provide Mr Thornton with documents confirming that the loans were limited recourse loans.”
That is a bold finding particularly given that neither Hasell or Thornton gave evidence they recalled Tony Johnson using those words. The finding is solely based on what Thornton said in his statement he recalled Hasell saying to him after the phone conversation. As it is on Thornton’s case the most critical time in the negotiations it is surprising he cannot recall what Tony Johnson said to him over the phone. Indeed under cross-examination (T/s 566) Thornton admitted he had forgotten the phone conversation with Tony Johnson for a period of time until he was reminded of it by Hasell; it was apparently because he had forgotten it he did not refer to that conversation in his affidavit sworn 27 November 1991 (Exhibit 98).
Returning to the discussion on 30 June as indicated by the evidence. After the phone conversation Hasell said words to the effect that he was also an investor in the project and that he was “getting a guarantee from Rural Finance for my loan.” [There was also evidence that Hasell represented to at least one other investor (Reinicke) on 30 June 1989 that Tony Johnson “will give a personal guarantee” that only two repayments of principal would have to be made.]
At trial there was an issue whether Tony Johnson had authority at that time to speak on behalf of the second plaintiff as he had resigned as a director the previous day. The learned trial judge found that on 30 June Tony Johnson “had authority to manage the business of the second plaintiff”; he also expressly found that on 30 June Tony Johnson was “acting as the agent of the second plaintiff”. That finding was undoubtedly based on the evidence of Gregory Johnson that on becoming the principal director of the second plaintiff on 29 June he “instructed my brother to be the manager of that company” and that he authorised Tony to give people guarantees on behalf of the second plaintiff. On appeal the plaintiffs challenged these findings but there is no basis for interfering with them.
In his reasons the learned trial judge said that an “oral agreement was reached then between Mr Thornton, acting on behalf of himself and the other defendants, and Mr Hasell on behalf of the second plaintiff”. Immediately after that sentence his Honour dealt with the telephone conversation referred to above and then went on to detail the amount each defendant was to borrow.
His Honour then went on to say that the -
“unconditional liability of each of those defendants was to be limited to three payments: the first on 30 June 1989, the second at the end of September 1989 and the third and final payment (which was to be equal to the second) at the end of December 1989. The first payment was to be a pre-payment of interest and the second and third payments were to be repayments of principal. After those payments had been made the defendants were to remain liable to repay the money they had borrowed and to pay interest, but only from their shares in the profits of the project . . .”
A few paragraphs later on in his judgment his Honour said: “On 30 June 1989 a document entitled ‘Loan Agreement’ was executed by or on behalf of each defendant.” Then he went on to say: “There was no provision in the loan agreement documents for limited-recourse of the kind agreed to orally, but the documents were executed by or on behalf of the defendants on the understanding that the further documents promised by Mr Anthony Johnson would be provided.” Rather surprisingly there was no finding as to when in relation to the conversations referred to the loan agreements were executed.
By the terms of the documents executed that day each of Glengallan Investments Pty Ltd and HGT Investments Pty Ltd acquired 500 units in the partnership, Thornton 1300 units, Prendergast 250 units, Anderson 850 units, and Codd 150 units. By the loan agreements each of Glengallan Investments and HGT Investments borrowed $434,000, Thornton $1,128,400, Prendergast $217,000, Anderson $737,800, and Codd $130,200. The terms of the Loan Agreements were as indicated above; no amendments were made consequent upon the discussions before execution.
It will be necessary to return to these findings subsequently.
According to Thornton he pressed for the further documentation after 30 June 1989 but it was not immediately forthcoming. He did receive some good reports from Hasell about the progress of the venture. In August 1989 a letter was received from Johnson Farm Management including documentation for use by the defendants in preparing their tax returns for the year ended 30 June 1989. That recorded the pre-payment of interest, showed the relevant share each defendant had in the partnership, and incorporated a financial forecast for the twelve year life of the project. Later in that month certificates were received evidencing the number of units held by each defendant in the partnership together with other material relevant to the completion of their income tax returns. On or about 29 September 1989 cheques were drawn to meet the first repayment of principal due from each defendant. Then a letter dated 29 November 1989 was received from the second plaintiff to which extensive reference was made at trial and on the hearing of the appeal. Relevantly it said “we wish to remind you that your second (and final) loan repayment in relation to your investment in the Red Claw Project falls due in December 1989”. It went on to indicate that early payment would result in a rebate of interest. Each defendant duly met the obligation to make that repayment of principal.
The learned trial judge gave significant weight to the letter of 29 November 1989, and in particular the inference contained therein that only two repayments of principal had to be made by the defendants. On the appeal counsel for the plaintiffs contended that it was significant that in his reasons the learned trial judge did not refer to another letter from the second plaintiff dated 6 November 1990. That letter was sent to each of the defendants, and was signed by Kathy O’Leary, who also signed the letter of 29 November 1989. The letter of 6 November 1990 asked each investor to sign and return an acknowledgment of the loan contract. Though none of the defendants signed and returned the document, none made any adverse response upon its receipt. The acknowledgement each defendant was asked to sign was in these terms:
“I/We confirm that a loan contract exists in accord with the copy provided by you and I/We agree and confirm that all Interest and Principal repayments are entirely My/Our responsibility and are quite separate and apart from the project funded by the above loan.”
The submission by counsel for the plaintiffs on appeal was that by not objecting to that the defendants were impliedly acknowledging that the assertions made therein by the second plaintiff were correct. At least, on that submission, the contents of the letter of 6 November 1990 counter-balanced any inference which might be drawn from the earlier letter of 29 November 1989 alone.
It was also submitted by counsel for the plaintiffs on appeal that the learned trial judge gave undue weight to the letter of 29 November 1989 given a passage in the report of the Receivers and Managers of the second plaintiff dated 16 August 1991. That report was tendered at trial by the defendants. The passage in question suggested that the letter of 29 November 1989 was sent to the defendants in error; the writer acted under a mistaken belief that the position with the Red Claw Project was as existed under another project being conducted by the Johnson group. Though the passage is to be found in a document tendered by the defendants, it was not supported by any oral evidence given at trial, and in the circumstances little weight should be attached to the statement in question. In those circumstances it could not be said that the learned trial judge erred in not attaching significant weight to the assertion in the report.
The defendants lodged income tax returns for the year ended 30 June 1989 claiming deductions in accordance with the material they had received from Johnson Farm Management. (Exhibit 18).
Ultimately on 19 December 1989 Hasell delivered to Thornton an envelope containing a number of documents. There were six documents each headed “Guarantee”; one with respect to each of the defendants. Relevantly the Guarantee provided:
“In consideration of . . . entering into the acquisition of . . . units in the Red Claw Project, with Johnson Farm Management Pty Limited and applying for a loan from Rural Finance Pty Limited for . . . we the undersigned hereby guarantee and indemnify . . . as follows:
1. That the only payments to be made by . . . will be as follows:
Prepaid Interest – Due 30/06/89 of $ . . .
Principal Repayment – Due 30/09/89 of $ . . .
Principal Repayment – Due 31/12/89 of $ . . .
2. That no further payment will be made by . . . beyond the above to Johnson Farm Management Pty Limited, Rural Finance Pty Limited or any other party.
3. Against any claims or demands by Johnson Farm Management Pty Limited or Rural Finance Pty Limited or any other partner in respect to the Red Claw Project or the said loan agreement in excess of the abovementioned amount.”
The agreement was then executed under seal by Anthony J Johnson personally and Johnson Farm Management Pty Ltd. Against the words:
“The Common Seal of Rural Finance Pty Limited was hereunto affixed by authority of a resolution of the Board of Directors in accordance with Memorandum and Articles and Association in the presence of”
appeared the words “for and on behalf of” over the signature of Anthony J Johnson, but no seal of that company was affixed.
On reading the documents Thornton concluded that “their terms seem to me to confirm the limited recourse nature of the loan.” He said he noted “that the guarantees did not mention the non-assignment issue” but “still believed that, as suggested by Tony Johnson, the loans were not worthy of assignment.” He also said under cross-examination that he “couldn’t understand why they called it a guarantee except that that was the term that Tony Johnson had used in that discussion that I had with him on 30 June confirming the arrangement whereby he said he guarantees the arrangement is a limited recourse arrangement”.
Thornton did not seek any legal advice with respect to the documents, and they were apparently merely lodged with the papers of each of the defendants.
During 1990 and the early part of 1991 the defendants received favourable reports from Johnson Farm Management as to the progress of the venture. Though a circular dated 20 November 1990 referred to an ATO audit it suggested that investors would have no worries. The Red Claw Investor Circular January 1991 referred to some production problems which would probably result in no profit being achieved for the year ended 30 June 1991, but it painted an optimistic picture for the ensuing year. That circular also referred to the ongoing ATO audit of the project. Then came the Red Claw Project report of May 1991. It again referred to some problems which had set the project back and indicated there could be a change in the General Partner. But again the overall position was represented as being satisfactory. That document also referred in some detail to the ATO audit. It should also be noted that with respect to the ATO audit Johnson Farm Management Pty Limited in a notice to investors dated 14 March 1991 said:
“This closing stage of the audit involves an ATO examination of the nature of each loan between Red Claw investors and Rural Finance Pty Limited (RF). From discussions with ATO officers, it is known that ATO’s attention is attracted to this area because their examination of RF to date suggests to them that RF may have loaned too much too easily to Red Claw investors in 1989. The implication in ATO’s mind seems to be that the loans might not be repayable by the investor personally, but might be part of a non-recourse device to gear up tax deductions.
To protect the deductions already claimed, there is now an onus on RF and on each Red Claw investor/borrower to demonstrate that the loans are genuine.”
On each occasion when reference was made in those documents to the ATO audit it was said, expressly or impliedly, that the critical issue from the ATO’s viewpoint was that the investors remained liable for repayment of borrowed funds. The documents, again either expressly or impliedly, indicated that the second plaintiff was contending that as the loans were not non-recourse there was no problem. Despite receiving each of those documents the defendants did not raise with the second plaintiff their contention that the loans were of limited recourse and that the lender’s interests were not assignable.
Under cover of letters dated 27 March 1991 each defendant received a Notice of Assignment from the second plaintiff to the first plaintiff. The Notice asserted that on 8 January 1991 the second plaintiff assigned to the first plaintiff “its interest under the loan agreement it has with you dated 30th day of June 1989 including its rights to monies and you are hereby directed to make all payments of monies due under the loan agreement” to the first plaintiff. Thornton gave evidence that he was “worried” on receiving that notice. According to him he telephoned Tony Johnson and asked for an explanation, asserting that he thought he had a limited recourse arrangement and there was nothing to assign. According to him Johnson responded by saying that it was “all very complex” and he wouldn’t understand it.
The defendants in April 1991 consulted Morris Fletcher & Cross, their then solicitors, about the assignment. Those solicitors wrote separate letters to each of the plaintiffs and Johnson personally on 18 April 1991. In the letter to the first plaintiff the following passage appeared:
“We draw your attention to the amended terms of the Loan Agreement as indicated in a Deed dated 19 December 1989 (“the Variation”). Copies are attached for your records. Our clients’ obligations with respect to the loans are therefore set out in the Loan Agreement of 30 June 1989 and the Variation of 19 December 1989. . . . The Variation is headed ‘Guarantee’ and records the terms of the Loan Agreement as varied. . . . The obligations are those which exist under those two documents and are not of a non-recourse nature.”
It is not necessary to finally resolve the question whether it was open to the learned trial judge to find as he did, in respect of this occasion or the later occasions discussed by Williams JA and Chesterman J since, for the reasons given by Williams JA, I agree that the failure to carry out the terms of the agreements by actually advancing money is fatal to the defendant’s case on this issue.
The reasons of Williams JA also demonstrate that the kinds of concerns that may arise in cases where there has been a long delay in delivering judgment do not arise in this case. I agree with his conclusion in that regard.
With regard to the interpretation of r 227(2) UCPR, in my view, the natural reading of the rule is that it precludes a disclosing party from challenging admissibility on the grounds of relevance and relieves the party tendering the document of the need to prove that the document is what it purports to be. It does not purport to vary in other respects the rules of evidence or statutory bases of admissibility to allow a party to have a document the contents of which are liable to be objected to successfully on other recognised grounds admitted in evidence.
I agree that the appeals should be dismissed with costs to be assessed.
CHESTERMAN J: I agree with Williams JA that these appeals should be dismissed. With one reservation I agree with his Honour’s reasons for proposing that order.
The trial judge rejected the appellants’ submissions that the respondents (and, in particular, Mr Thornton) knew that no money had been advanced by Rural Finance Pty Limited (“Rural Finance”) to provide the purchase monies for the respondents’ units in the limited partnership and to provide the partnership with the capital necessary for the success of its venture and that, despite that knowledge, they affirmed the loan agreement with Rural Finance. I agree with Williams JA that the appellants’ submissions that the respondents affirmed their loan agreements with the result that they should be liable to repay the money which was never, in fact, lent, should be rejected. I am not, however, as confident as his Honour that the findings of the trial judge as to the respondents’ knowledge that money was not advanced can escape criticism.
The trial judge found that “It was not until long after 1991 that the [respondents] became aware of the fact that the second [appellant] had no real money to lend on 30 June 1989”, and that “None of the [respondents] had any knowledge of what was done at the Westpac Bank on 30 June 1989 at any material time …”.
The appellants mounted a spirited attack on this finding. The criticism appears to have substance.
The terms of exhibit 49 and the circumstances surrounding it are set out in the reasons for judgment of Williams JA. The exhibit appears to be cogent evidence of the fact that during the telephone conference Mr Johnson said, as Mr Thompson recorded:
“$15M comprised $13M which partners individually borrowed plus $2M in cash. Partnership received $15M and paid it to JFM as prepayment. JFM put $2M to project and $13M on IBD in RF. So $13M went around in circle. The intent was to sell off non-guaranteed RF loans.”
Mr Thompson testified that the exhibit was a typed copy of handwritten notes he made during the conference. He was not cross-examined. The format of the document attributes the words I have quoted to Mr Johnson. They do not appear to be a narrator’s comment.
The trial judge was reluctant to accept the accuracy of the contemporaneous note because neither Thornton nor Prendergast said they could recall a “round robin” being mentioned, or the fact that the money advanced by Rural Finance was returned to it by way of investment and so “went round in a circle”. I myself would doubt that the absence of such a recollection many years later should cast doubt upon a contemporaneous record of a conversation the veracity of which was not challenged.
The appellants point out that Mr Thornton and Mr Prendergast were shown to have been erroneous in their testimony that they did not discover the ephemeral nature of the advance made by Rural Finance until late in 1999. Their solicitor, Mr Marshall, admitted in cross-examination that he became aware in 1996 following discovery of documents in the litigation, that the advance purportedly made by Rural Finance on 30 June 1989 consisted of “a round robin cheque transaction”. It was, he considered, most unlikely that he would not have passed on that information to Mr Thornton. Confirming his evidence is a letter (exhibit 147) written by Mr Marshall on 20 August 1996 to the solicitors for the appellants advising them that he had recently learnt that “no monies were ever advanced by Rural Finance as the loans were effected by round robin style transactions …”.
Knowledge gained by the respondents in 1996 of the true nature of the advance made by Rural Finance in June 1989, cannot be relevant to whether the respondents affirmed the loan agreement in 1991, 1992 or 1993, but it does provide a basis for hesitating to accept Mr Thornton’s evidence that he knew nothing of the round robin until 1999.
The appellants rely also upon exhibit 53, a letter dated 29 May 1991 from “Farmer Johnson” to Mr Hasell on behalf of the respondents. The letter read:
“1.… We are responsible to both construct and to maintain the project.
2.Funds were received … to carry out the … work. We … lodged substantial funds on an interest bearing deposit … with Rural Finance … with the intent to draw down as … works progressed.
…
4.Rural Finance … agreed to progressively sell its loan receivables portfolio to fund progressive return over interest bearing deposit as and when we required funds … Rural Finance has been selling its receivables for the past year to the extent of approximately six million dollars.
…
6.Rural Finance’s remaining loan portfolio … consists of approximately a further six million dollars in outstanding loan principal, of which most is due to be repaid by borrowers in the period June 1992 to June 1994.
…
10.In January 1991 … Rural Finance … assigned all its subject remaining six million dollar portfolio (being 79 separate loan contracts) to Equus Financial Services Limited for $79 (being $1 per loan contract) …”
This letter, and its significance, were not mentioned by the trial judge in his reasons. It appears to be important. Paragraph 14 of the letter sounded a note of urgency. It said:
“The basic position with the Red Claw project is that an otherwise sound operation is in imminent danger of collapse because loans made by Rural Finance Pty Ltd to Red Claw investors cannot be converted to cash mainly due to the economic recession in this country today.”
The conference recorded in exhibit 49 was convened for the same reason. The project was in immediate danger of foundering from lack of funds. Although there was some coyness in the explanations given by the Messrs Johnson for the partnership’s impecuniosity it was made obvious that the great bulk of application monies had not been made available to the partnership and that Rural Finance, which was said to have received the monies by way of deposit, did not, in fact, have any money which it could repay to the partnership. The reference to money “going in a circle” and of Rural Finance raising money by selling its loan portfolio point unequivocally to the sham nature of the loan transaction.
It may be accepted that before a party to a contract can be said to have affirmed it in circumstances where he might have rescinded it, he must have had sufficient knowledge of the facts giving rise to the right to rescind to have exercised a conscious choice about what he should do. See Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 642 and 658. It is not enough that the party be put on notice that there might be a factual basis of rescinding. There must be actual knowledge of the facts.
The evidence suggests that Mr Thornton, a very successful businessman and qualified accountant, did not lack shrewdness or business acumen. If he did not understand from what he was told at the conference and from exhibit 53 why the project was deprived of capital it is inconceivable that he would not have asked. There are, therefore, substantial grounds for thinking that in May 1991 he was made aware that no money had changed hands between Rural Finance and the partnership and that was why it stood on the brink of collapse. It is not necessary to decide whether the contrary findings of fact made by the trial judge should be varied. Whether or not the respondents knew in May 1991 that no funds had been advanced by Rural Finance two years earlier the conduct relied upon as constituting affirmation of their loan agreements is not sufficient for the purpose of making them liable to repay a non-existent debt.
The acts which are said to constitute affirmation were summarised by the trial judge in para 45 of his Honour’s reasons. They were that:
(a) On 24 September 1991 the respondents recommitted themselves to an action that they had commenced in the Supreme Court in the ACT seeking declarations that they had performed their obligations under the loan agreements by repaying part of the money Rural Finance had agreed to lend. The point is that the respondents were confirming the validity of the loan agreements whilst stating that they had no outstanding obligations under them.
(b) In December 1991, February 1992 and September 1992 the respondents attended partners’ meetings and voted as holders of units represented by the full amount of the applications monies though that part of the money which was to be provided by Rural Finance had not been paid.
(c) The respondents claimed deductions in their tax returns for the years 1991, 1992 and 1993 on the basis that they had incurred liabilities to the full extent of the amounts which Rural Finance had respectively agreed to lend to them.
(d) For the same years two of the respondents, Glengallen Investments Pty Ltd and HGT Investments Pty Ltd, recorded as liabilities the full amount of the loans which were to have been made to them or on their behalf by Rural Finance.
A further incident of affirmation was alleged to have arisen from a memorandum (exhibit 80, 25 May 1991) which was said to evidence the respondents negotiating “on the basis that the loans were on foot”. I think it safe to ignore this particular because the memorandum does not appear capable of amounting with sufficient clarity to an act of affirmation.
The loan agreements, pursuant to which the respondents were sued, were each made between Rural Finance and the respondents. The agreements recited that the respondents had applied for a certain number of units in a limited partnership and that Rural Finance had agreed to lend the principal sums specified for the purpose of allowing the respondents to acquire the units. By clause 8 Rural Finance agreed to lend to each respondent the principal sum which, by clause 9, was to be applied in payment of the application monies and otherwise in accordance with the respondents’ obligations under the partnership deed (as particularly defined).
The partnership deed was made between Forestell Securities (Australia) Limited, Eagle Star Trustees Limited, the respondents (inter alia), Australian Eagle Insurance Company Limited, Eagle Star Insurance Company Limited and Eagle Star Holdings PLC. Rural Finance was not a party. The deed defined “application monies” to mean all money paid by the respondents (inter alia) for units. By clause 3.3 every person who wished to apply for a unit in the limited partnership had to complete and deliver to the general partner an application for units and a cheque made payable to the representative in payment of the price for each unit applied for. When the minimum subscription for units had been met, and the safeguards provided for in the deed had been satisfied, the representative was to pay the application monies to the general partner for the purposes of the partnership and any subscribers/applicants would be issued with the number of units commensurate with the amounts they had paid.
The respondents were issued with the number of units referrable to the amounts actually paid by them together with the amounts each had agreed to borrow from Rural Finance.
The acts said to constitute affirmation were the exercise of rights by the respondents consistent only with their being owners of that number of units rather than the smaller number of units which had been paid for from their own monies. The respondents voted at partnership meetings the full value of their issued units; they claimed tax deductions in respect of that interest in the partnership and their liability to repay Rural Finance.
The first described act of affirmation is not of this character. It should be discussed separately. The conduct of the litigation against Rural Finance was not, however, an affirmation that the loan agreements remained on foot. It is true that the respondents did not seek to rescind the agreements but their proceedings were the antithesis of an affirmation that the respondents owed money under the agreements. They sought a declaration that the agreements were at an end, because they had been discharged by performance. They were wrong in their contentions but they were not claiming that the agreements remained effective.
There are, I think, fundamental difficulties in accepting the submission that the respondents have by their conduct summarised in para 19 affirmed the loan agreements. In this sense the affirmation alleged is an election to keep the loan agreements on foot rather than to rescind them for Rural Finance’s failure to perform its obligation to lend the money. As Cockburn CJ said:
“But in that case he keeps the contract alive for the benefit of the other party as well as his own; he remains subject to all his own obligations and liabilities under it, and enables the other party not only to complete the contract … but also to take advantage of any supervening circumstance which would justify him in declining to complete it.”
Frost v Knight (1872) LR 7 Ex 111 at 112 quoted with approval by Starke J in Bowes v Chaleyer (1923) 32 CLR 159 at 197. To the same effect is the judgment of Barwick CJ in Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 at 450‑1.
As Williams JA has explained the loan agreements obliged Rural Finance to make an advance of money to the representative to purchase units in the partnership. Rural Finance did not perform, no doubt giving rise to a right in the respondents to rescind the agreement. If they affirmed the agreements they kept them in existence so that each party was obliged to perform their terms. The respondents would be obliged to repay the monies advanced on their behalf, but only after they had, in fact, been advanced.
The artificiality which would result from this analysis shows, I think, that affirmation (or election) as a principle cannot apply in these circumstances. According to Williston on Contracts, 3rd Edition, Vol 5, para 687:
“The commonest case of election in the law of contracts arises where, with knowledge of a breach of condition or a defence excusing performance, a promisor either refuses or continues to accept performance from the other party. As the only theory upon which the benefit of such performance can be rightfully received is on the assumption of an election to continue the contract, that assumption is made if the injured party accepts further performance.”
This exposition of the principle shows that affirmation does not apply to this case. The respondents did not accept further performance by Rural Finance of its obligations under the agreements. The whole point is that Rural Finance did not perform the agreements at all.
According to Stephen J in Sargent at 641:
“The doctrine only applies if the rights are inconsistent the one with the other and it is this concurrent existence of inconsistent sets of right which explains the doctrine; because they are inconsistent neither one may be enjoyed without the extinction of the other and that extinction confers upon the elector the benefit of enjoying the other, a benefit denied to him so long as both remained in existence.”
It is true that the respondents only had rights with respect to, or arising out, of the numbers of units in the partnership they claimed if a larger amount had been paid as application monies for them than they themselves had paid. But the disconformity between the number of units in respect of which the respondents exercised rights, and the number of units for which they paid, does not amount to an inconsistency of rights in the sense that must be established for the doctrine of election to operate. The rights exercised in respect of the units were exercised against the members of the limited partnership. Rural Finance was not a party to the partnership deed. The exercise of rights against the partners was not inconsistent with the assertion of a right against a non-partner arising out of a different agreement. The respondents did not have the right to choose between owning so many units or being lent so much money. If the money were not paid on their behalf they did not own the units. This is so whether or not the respondents chose to affirm or rescind the loan agreements for Rural Finance’s failure of performance. If they had affirmed the agreement they would still not have owned the units until they were paid for. The respondents were not asserting rights to the units and rights to something inconsistent with their ownership of the units. They were asserting rights which they did not have because of the non-payment of most of the application monies. This case is quite different to that of an innocent party to a contract who does have the right to bring it to an end or to insist that the other party perform.
Moreover the doctrine of election operates in a contractual framework. It determines which set of rights should apply in a given situation. The content of the rights is fixed by reference to the terms of the agreement made by the parties. The result of an election to affirm a contract is not to impose upon the party a greater burden than the contract imposed. The loan agreements did not oblige the respondents to pay the principal sums borrowed before the advances had been made. Affirmation cannot operate to create a debt when no money has been paid in the first place.
“The common law … never did conceive of indebtedness in a sum certain for an executed consideration as a mere breach of contract: it is rather the detention of a sum of money …”
Per Dixon CJ, McTiernan and Taylor JJ in Young v Queensland Trustees Ltd (1956) 99 CLR 560 at 567.
As I have said, I agree that the appeals should be dismissed with costs.
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