Frederick Clarkson Brooker v Friend & Brooker Pty Limited

[2005] NSWSC 395

CITATION:	Frederick Clarkson Brooker v Friend & Brooker Pty Limited & Anor [2005] NSWSC 395
HEARING DATE(S):	06/12/04; 07/12/04; 08/12/04
JUDGMENT DATE :	29 April 2005
JUDGMENT OF:	Nicholas J
DECISION:	Para 82

CATCHWORDS:	EQUITY - whether existence of fiduciary relationship - whether fiduciary relationship continued after incorporation of business - whether duty to account - whether entitlement to equitable relief established
CASES CITED:	Australian Broadcasting Commission v Australian Performing Right Association (1973) 129 CLR 99 Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153 Canny Gabriel Castle Jackson Advertising Co Limited v Volume Sales (Finance) Pty Limited (1974) 131 CLR 321 Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 Morgan v 45 Flers Avenue Pty Ltd (1986) ACLR 692 Royal Botanic Gardens and Domain Trust v South Sydney Council (2002) 186 ALR 289 Schipp v Cameron [1998] NSWSC 997 United Dominions Corporation Limited v Brian Pty Limited (1985) 157 CLR 1
PARTIES:	Frederick Clarkson - First Plaintiff Friend & Brooker Pty Limited- First Defendant Nicholas Macarthur Friend - Second Defendant
FILE NUMBER(S):	SC 5181/00
COUNSEL:	R G Forster QC/M S White - Plaintiff No appearance - First Defendant D J Hammerschlag SC/H Parker - Second Defendant
SOLICITORS:	Jonathan D'Arcy & Co - Plaintiff No appearance - First Defendant Bull Son & Schmidt - Second Defendant

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Nicholas J

29 April 2005

& Anor

JUDGMENT

1 His Honour: By his fifth amended statement of claim Frederick Clarkson Brooker, the plaintiff, (Mr Brooker) seeks a declaration that between May 1977 and January 1995 there existed a partnership between him and Nicholas Macarthur Friend, the second defendant, (Mr Friend) for the conduct of a building construction and development business, alternatively a declaration that for the period there existed between them a joint venture for the conduct of such a business for which Friend & Brooker Pty Limited, the first defendant, (the company) was the corporate vehicle and in relation to which joint venture Mr Brooker and Mr Friend owed each other fiduciary duties including a duty to account, and had equal rights, entitlements and liabilities.

2 Mr Brooker further claims entitlement to a full account of all dealings and transactions between the parties arising out of the partnership or joint venture. Further claims are made for damages or equitable compensation for loss suffered by Mr Brooker by reason of Mr Friend’s refusal to make equal contribution to the repayment of his personal borrowings for the purposes of the business.

3 Mr Friend denies Mr Brooker’s entitlement to any relief. He contends that his relationship with Mr Brooker was as shareholders and directors of the company and that the business was carried on exclusively through that vehicle. He denies the existence of a joint venture outside the corporate relationship.

4 Mr R. G. Forster SC, and Mr M. S. White appeared as counsel for Mr Brooker. Mr D. J. Hammerschlag SC, and Mr H. Packer appeared as counsel for Mr Friend.

5 At the conclusion of the hearing it was accepted that if it was found that Mr Brooker was entitled to an order for an account or damages the making of any final order should be deferred pending submissions about it.

6 The affidavits of Mr Brooker and Mr Graham Peterson were read and they were cross-examined. Mr Friend’s affidavits were not read and he gave no oral evidence.

Background

7 The following narrative is of events which provide some background for the better understanding of Mr Brooker’s claims. Most of these matters were not in dispute and in any event there was ample evidence for the finding that each took place.

8 In about May 1977 Mr Brooker and Mr Friend resigned from their employment as engineers with John Holland Constructions Pty Limited with the intention of together establishing an engineering and construction business.

9 On 18 July 1977 the company was incorporated to which Mr Brooker and Mr Friend were appointed directors. Their respective family trusts became equal shareholders through a common trustee, Naya Nominees Pty Limited.

10 Between about July 1977 and about 1979 the principal activity of the company was civil engineering construction. In 1979 the scope of the business was widened to include property purchase and development.

11 In about 1980 Mr Brooker and Mr Friend were advised by their accountant, Mr Joslin, that carrying out property development through a trust structure would give them discretion as to the distribution of profits. The advice was accepted, and unit trust structures with corporate trustee companies were used for projects. These included the projects at No. 44 Bridge Street, Sydney and Doohat Avenue, North Sydney by Ilenace Pty Limited, and at No. 11 Hardie Street, Neutral Bay by Duvana Pty Limited. Syelight Pty Limited, a company in which Mr Brooker and Mr Friend each owned one half of the shares, undertook the development of the Neutral Bay property for Duvana Pty Limited. The structure under which Mr Brooker and Mr Friend carried on business is depicted in Exhibit B.

12 From time to time money was borrowed for use by the company in its business. Funds were obtained by way of direct borrowings from third parties including banks, family members, and friends. Mr Brooker and Mr Friend also, separately, borrowed funds which each on-lent to the company, which loans were reflected in the directors’ loan account as unsecured loans.

13 On about 16 January 1984 the company entered into a contract with the Eurobodalla Shire Council (the council) for the construction of a sewerage reticulation work at Narooma for the sum of $2,531,062.48 (the Narooma contract). To finance the works the company arranged an overdraft facility for $350,000.00 with the ANZ Bank. Funds were also obtained by way of loans from other parties.

14 In about August 1984, at Mr Brooker’s suggestion, it was agreed that all loans from family members and friends should be consolidated into the directors’ loan account, and he instructed the company’s accountant to proceed accordingly.

15 In September 1985 the Narooma contract reached practical completion. In about January 1986 the company submitted a claim for the sum of about $1,000,000.00 to the council for quantities underpaid. The claim was rejected in about April 1986.

16 By early 1986 the company’s account, and the account of the associated company, Syelight Pty Limited, with ANZ Bank had been frozen. In order to fund a construction contract in Canberra which the company then had with Blue Circle Southern Cement Limited arrangements were made to use the account of Ilenace Pty Limited with another bank.

17 In November 1986 SMK Investments Pty Limited (SMK) through its director Mr Graham Richard Peterson agreed to lend Mr Brooker the sum of $350,000.00. These monies were on-lent by Mr Brooker to the company and were applied, inter alia, to repay loans from various lenders.

18 From mid-1987 to mid-1990 Mr Friend secured and managed to completion a number of small construction contracts for the company. Funds were provided through Ilenace Pty Limited and the personal accounts of the directors. Since about July 1990 the company has not been involved in construction work or other trading activity.

19 During 1991 the company was engaged in litigation with the council in respect of its claim. On 6 September 1991 it was paid the sum of $193,680.00 by the council.

20 On 9 June 1993 the council paid the company the sum of $1,634,964.00 pursuant to the arbitrator’s award of 19 March 1993. At about the end of June 1993 various creditors of the company were paid from the proceeds of the first payment from the council. Mr Brooker and Mr Friend each were paid the sum of $63,638.00.

21 On 3 March 1994, after further litigation, the award was increased by the sum of $256,898.00. On 19 September 1994, pursuant to a deed of release the council paid the company a further sum of $900,000.00.

22 In about October 1994 and on 25 January 1995 there were meetings between Mr Brooker and Mr Friend during which Mr Friend denied personal liability for the SMK loan or an obligation to share equally in its repayment. It appears that the parties have been in dispute since then.

23 On 8 February 1995 Mr Brooker and Mr Friend met at the office of the company’s solicitors, Foulsham & Geddes. It was agreed that from the proceeds of the payment of $900,000.00 from the council the sum of $213,933.00 should be applied in payment of the ANZ Bank and small creditors. It was also agreed that the balance of about $687,000.00 be paid out equally to the parties by instalments by way of loans from the company.

24 During the period 24 August 1995 to 3 March 1998 from the proceeds of the third payment received from the council advances were made to each of Mr Brooker and Mr Friend of the total sum of $345,000.00 in various amounts as interest free loans. The sum of about $6,000.00 remains as an asset of the company.

The SMK loan

25 In these proceedings Mr Brooker claims that in November 1986 SMK lent to the joint venture or partnership and, in effect, to him and Mr Friend, the sum of $350,000.00. He asserts that he and Mr Friend personally borrowed money for the purposes of the business and hence are personally liable to the lender for it. Mr Friend denies the claim. It is convenient to determine this issue before turning to the others.

26 The circumstances of the loan were that in November 1986 Mr Brooker spoke to Mr Peterson about the financial difficulties of the company, and expressed a need for the sum of $350,000.00. Mr Peterson agreed to provide it. A few days later Mr Brooker had the following conversation with Mr Friend:

“I said: ”Graham and Sue Peterson have offered to loan us $350,000 to take the pressure off until we finalise the claim against the Council”.
He said: “What do you think?”
I said: “We do not have a choice. If we do not accept there is no way we can repay Alcon or the De Bakkers or maintain the Trade Credits loan”.
He said: “Well then, we should do it””.

27 Thereafter arrangements were made pursuant to which SMK provided the funds to Mr Brooker. On 8 November 1986 the sum of $20,000.00 was paid to Mr Brooker in advance of settlement. On 23 December 1986 the balance of $330,000.00 was applied, inter alia, to discharge the company’s loans from Trade Credits Limited, Alcon Investments Pty Limited and G. A. and A. G. de Bakker, and to pay Mr Brooker the sum of $37,183.95. The monies were treated by the company as having been lent to it by Mr Brooker as its accounts show (TB 1270).

28 The loan was secured by first mortgage over the property of Mr Brooker’s wife at No. 12 Milner Street, Mosman for which Mr Brooker was guarantor, and by a second mortgage over the property jointly owned by Mr Brooker and his mother at No. 4 Selwyn Street, Artarmon.

29 In evidence Mr Peterson acknowledged that any claim for recovery of the loan would be made against Mr Brooker and not against the company or Mr Friend.

30 All of the documentation as to the obtaining and securing of the loan makes plain that it was made to Mr Brooker and/or his wife, and I so find. Other evidence demonstrates beyond argument that Mr Brooker himself had no doubt that he was liable to SMK for it. An example is the separation of loan account document (FCB 16) prepared by him in which the disbursements made from the SMK loan are credited only to his loan account, as was the amount of $250,000.00 which was repaid to SMK in July 1993 from the proceeds of the payment from the council.

31 Another example is the letter from Mr Brooker’s solicitors to Mr Friend’s solicitors of 30 May 2002 (Exhibit 1) in which the following is stated:

“7 In or about December 1986 the loan from, inter alia, Trade Credits Pty Limited and from Mr de Bakker was refinanced by a loan from SMK Investments Pty Limited to Mr Brooker. Mr Brooker remains liable to SMK Investments Pty Limited for the balance due under this loan and interest. The loan was secured by mortgage over Mr and Mrs Brooker’s property at 12 Milner Street, Mosman and 4 Selwyn Street, Artarmon”.

32 In cross-examination Mr Brooker adhered to his claim that the monies were jointly borrowed by Mr Friend and himself (T pp 52-56) in the face of the evidence to the contrary. I found this evidence to be implausible.

The relationship between Mr Brooker and Mr Friend

33 Fundamental to Mr Brooker’s case is the contention that the relationship was either a partnership or joint venture which existed outside and beyond the company which was merely the vehicle through which the business was conducted.

34 The plaintiff’s evidence was that during 1976 and 1977, whilst working on the same project in Canberra, he and Mr Friend had a number of conversations in which they discussed establishing a construction business together, its operation, how it would be financed, and how contributions, losses and profits would be shared. In his affidavit of 25 November 2002 (para 8) he said:

“8 In mid 1976 I was assigned to a new project in Queanbeyan, the Googong Water Treatment Plant and moved to Canberra for the purpose. Mr Friend also worked on the same project and lived in Canberra. I worked with Mr Friend on this project until in or about 1977. Whilst in Canberra I had discussions with Mr Friend in relation to establishing a construction business together. During these conversations we discussed in considerable detail the direction of the business, how it would be operated, how it would be financed and how contributions, losses and profits would be shared. During the course of these various conversations the following was said:
(a) In relation to the structure of the venture and contributions:
I said: “The partnership should be a 50:50 in every respect”.
He said: “Yes of course”.
I said: “There will not be a hierarchy between us with one in charge and the other subordinate. We will draw equal salaries and plough as much back as we can into the business, but of course we shouldn’t draw any salary until we have a cash flow to support it”.
He said: “I agree with all that”.
I said: “When we are drawing a salary I will need enough to support my family”.
He said: “Well I won’t need that much. I can draw what I need and leave the rest in as loan”.
I said: “When the business is at the point where it no longer needs any financial input from us and each of us has got back what we have put in, like undrawn salary and such like, then we can start drawing profits – sharing everything equally”.
He said: “You know sometimes when two people are in business together it might appear as though one is working harder than the other but it is often the case that the other one is making an equally important contribution in a conceptual or creative way that is not so obvious”.
I said: “Don’t worry Nick, we will each put in to the best of our ability but at the end of the day what we take out will be 50:50. There won’t be any argument about that”.
(b) In relation to the business name:
He said: “The business name should be Friend and Brooker”.
I said: “I agree, we can’t have Brooker and Friend it sounds too much like a wedding invitation”.

(c) In relation to incorporating a company:
I said: “We will have to run the partnership through a company structure. We will need to protect ourselves against bad debts and such like. To protect our personal positions we should establish a company and carry out all trading through the company”.
He said: “Yes I agree”.
(d) In relation to banking:
He said: “We should approach the ANZ for banking services. My family has a long association with the bank”.
I said: “I agree”.
(e) In relation to the business premises:
I said: “It makes sense that we use my house in Annandale. We can use the lower level as our office”.
He said: “That is a good idea and I could live upstairs if that is okay by you”.
I said: “Yes, of course””.

For convenience I will refer to these as “the para 8 conversations”.

35 In May 1977 they commenced work in Annandale under the business name Friend & Brooker. On 18 July 1977 the second defendant was incorporated and an account with the ANZ Bank at Annandale was opened in its name. From about May 1977 to 1984 each were paid equal salaries and any undrawn salary was credited to their loan account.

36 Mr Brooker’s understanding was that incorporation would protect him from personal liability for the trade debts of the business, although there would be some debts for which he would accept personal liability. He gave as an example debts from associates, and went on to say: “I have always had the understanding that we would have personal liability for those, and in as far as we were able, to pay personal liability for any debts of the business” (T p 111). He stated his belief that he had a moral liability to pay trade creditors of the company, a responsibility beyond the company.

37 Mr Brooker also understood that by virtue of his fifty percent shareholding he would share equally in the profits of the company, and as a co-director with Mr Friend would have equal say in its affairs. He understood there were commercial and taxation advantages in carrying on business through corporate entities, and said that from 1977 all the business was carried on through corporate entities. Mr Brooker and Mr Friend left it to the company accountant to work out the most tax advantageous way of treating the accounts.

38 When asked whether he understood that by being equal shareholders he would share equally in any dividends or returns resulting from the company’s activities he agreed, and added that the “… agreements on equality went deeper” (T p 30). By this he said he meant “… that our agreements on equality were an agreement (sic) which was preceding and overriding the obligations or rights one might have in relation to the company” (T p 112).

39 The following is a relevant passage from the cross-examination (T p 63):

“Q. Just to understand then before I take you to the remaining conversations, your position is that you formed a company to trade through and your understanding was if in the end the company failed and, let's say, was wound up and you had undrawn salary or you had put money in that the company couldn't afford to repay you, that your understanding is that the agreement between you and Mr Friend was that each of you would pay to the other directly across the top of the company, even though it had failed, any amount which was necessary to equalise your contributions?
A. Yes, that's exactly what I say.
Q. And it doesn't matter that your sole source of business, the company, had failed and that either of you may not have had the money to pay, it would just be an obligation that would be there forever between you?
A. It would be an obligation which if it could not be met immediately would be met in time”.

And at T p 64:

“Q. … You tell his Honour that the arrangement between you was that one way or another if the company made a loss and there wasn't enough to repay either of you out of the company, your arrangement extended to one paying across the top the other the extent of his contribution unrepaid; is that right?
A. As far as was necessary to equalise the losses, yes.
HIS HONOUR:
Q. Can I understand that your understanding was that this was the effect of a private arrangement between you and Mr Friend really outside the operations of the company?
A. Yes.
HAMMERSCHLAG:
Q. And you derive that, you say, from conversations which are set out in your affidavit?
A. Yes, and the way in which we conducted the business.

Q. Well, the way in which you conducted the business was to accrue loan accounts and at all material times pay each other out 50/50, right, of what there was?
A. Well, there were never any payouts.
Q. In what way then do you tell his Honour that's the way you conducted it?
A. By the way in which we kept records of contributions in order to have those records when the time came to equalise those before either sharing surplus or sharing loss”.

40 Mr Brooker relied upon the para 8 conversations (set out in para 34) as the evidence of the agreement. His evidence was (T p 67):

“Q. Just go back to paragraph 8. In the middle of the page you say, "When the business is at the point where it no longer needs any financial input and each of us has got back what we have put in". By that you meant from the returns of the business; correct?
A. Yes.
Q. “Like undrawn salary and such like we could start drawing profits sharing equally.”
A. Yes.
Q. What you meant by that was you would each put in whatever, once the company was in a position to pay you back it would pay you back in accordance with your contributions, and then after that you would share equally?
A. That's correct.
Q. And that's what your understanding is. At the end of the day, if and when the company could pay each of you back the money it owed it would do so, and whatever was left over would be shared between you equally?
A. Yes, that's correct.
Q. There is nothing in this conversation that says anything about you being liable to him personally or he being liable to you personally across the top of the company for any ultimate shortfall in either of your contributions, is there?
A. I believe that's implicit in that part of the conversation.
Q. And that is the conversation which you under your oath tell his Honour from which you derive this agreement between you outside the affairs of the company, that one would be liable to the other for any shortfall when the company couldn't pay?
A. Yes.
Q. And you say you made that agreement at a time at which either of you had almost nothing to your names?
A. Well, that seems to be a double question. We made it at that time, but neither of us had nothing to our names.
Q. Each of you had very little, you have told his Honour, and also you were perfectly conscious of the fact that you were about to embark on an enterprise in a risky field of endeavour?
A. Yes.
Q. Let me put it to you squarely, Mr Brooker. I want to suggest to you that the evidence that you have given his Honour this morning, to the extent that you said the same thing yesterday, that you understood there was an agreement between you two young men at the time that either of you would be liable to the other on failure of the company to be able to pay each of you personally across the top, is untruthful?
A. That's not right. That's exactly how I understood the relationship between us”.

41 Mr Brooker also referred to occasions on which Mr Friend confirmed their trust for each other.

42 He could recall no discussions with Mr Friend pursuant to which he ever agreed with him that he would undertake personal liability for any debts of the company. He accepted that there was no discussion in which it was agreed that they would decide at some time whether or not to pay creditors which the company could not pay, or that each at some time would take responsibility for any debts owed by the company to any other person.

43 It is common ground that no partnership accounts were kept, and that the accounts concerning the business were those of the company which conducted it.

44 After commencement of operations on the Narooma project under the contract made 16 January 1984 the company experienced financial difficulty. To finance its activities funds were raised from time to time by personal borrowings by the parties which were on-lent to the company, as well as by loans directly to the company.

45 In August 1984, at Mr Brooker’s suggestion, it was agreed to consolidate all loans from family and friends into their own account with the company. He said that business was then on the brink of insolvency and its books were to be inspected by accountants on behalf of the bank. He felt that the bank would look more favourably upon the balance sheet if those debts were shown as being to the directors. The balance sheet for the year ended 30 June 1987 gave effect to this treatment and reflects the SMK loan of $350,000.00 which had been on-lent by Mr Brooker.

46 On 8 December 1993 there was a directors’ meeting attended by the parties. A record of it is TB 301. It was resolved to accept interest on loans raised by directors at Supreme Court rates, calculated from 1 July 1984. Having regard to the time spent on company affairs, particularly in relation to the litigation of the claims against the council, it was also resolved to accrue for each director fees of $15,000.00 per annum for the years ended 30 June 1985 and 30 June 1986, and $5,000.00 per annum for the years ended 30 June 1987 to 30 June 1993. The priority for payment of debts of the company was also settled.

47 On 3 January 1995 the accountant provided to the parties a balance sheet as at 31 December 1994. It recorded the only assets as $732,818.00 which was the balance of cash received from the council after payment of some trade creditors. Liabilities included an item for creditors at $669,911.00 and an item in respect of directors’ loan accounts and superannuation at $2,055,181.00. In cross-examination (T pp 50-51) Mr Brooker agreed he had a moral obligation to take nothing for the directors but to pay out the trade creditors and the bank. He said it was his wish to pay SMK, being the one remaining creditor, all of the money that was available for each to contribute to ensure that it was paid out in full. He said it was his intention not to take any money for himself.

48 On about 20 November 1995 the parties met in Mr Foulsham’s office when Mr Brooker produced a copy of the separated loan accounts (FCB 16) and invited discussion about it. Mr Friend then left the meeting. It appears that there were no subsequent communications between the parties prior to the commencement of these proceedings. Mr Brooker asserts that the partnership was then terminated.

49 On 27 December 2000 these proceedings commenced with the filing of the statement of claim. It includes in para 2.3 the allegation that the agreement provided:

“To the extent that either of them suffers any loss in relation to loans made or credit given to the Company or guarantees or security given for the benefit of the Company they shall make contributions one to the other to the intent that the losses are born equally”.

50 In cross-examination, Mr Brooker said the agreement relied upon was as conveyed in the para 8 conversations. He agreed that during the conversations no reference was made to any loss in relation to loans or credit given, or to any guarantee or security. He claimed a specified amount from each defendant, but made no claim for account. He accepted that the first time when such a claim was made was on 26 April 2002 by the amended statement of claim.

The submissions for Mr Brooker

51 Mr Forster SC submitted that it should be found that the relationship was, in fact, a partnership in which the parties bear all losses equally, alternatively that the agreement between the parties was such that upon payment of a debt by one the other is obliged to reimburse him one half.

52 It was put that the conversation established the basic structure of the relationship between the parties as a partnership in which they were to contribute equally and to share losses equally. It was put that the conversation established agreement for the partnership to be run through a company thereby protecting them from personal liability for debts incurred by the company, but with the consequence that each would share personal liability for the loan of the other which had been provided to the company. The submission went as follows (T p 139-140):

“HIS HONOUR:
Q So is this it, that on this proposition where the company borrows, no personal liability.

FORSTER:
A Yes.

HIS HONOUR:
Q Where an individual incurs a liability or what I will call a personal borrowing and those funds are provided to the company for the company's purposes, then the binding arrangement is that each member of the partnership is liable for that borrowing.

FORSTER:
A Yes, your Honour”.

53 Mr Forster SC went on to put (T p 144):

“If it is anticipated that we would make a submission that your Honour would ignore the company, that's not what we say. Those companies were legitimate companies, legitimately carrying on the business they were carrying on. We say that over the top of them there is a basic agreement between these two men that whatever ultimately comes out of it, be a gain, be it a, loss will ultimately end up equal in their pockets. If that weren't the case, your Honour, one would imagine that neither of them would be prepared to borrow money off friends and close relatives and large amounts, such as the 350 thousand, risk their own exposure, risk, in effect, their family's assets, unless each of them believed that the other would be equally liable to assist in compensating or in reimbursing those people”.

54 In conclusion it was submitted that there was a relationship whether a partnership, joint venture, or otherwise, in which each had a fiduciary duty to the other which entitles Mr Brooker to a full accounting between the parties from 1977 to date. It was put that the liability for repayment of the SMK loan should be borne equally and there should be an accounting to assess the amount contributed by each to enable equalisation of the losses incurred in their venture.

The submissions for Mr Friend

55 Mr Hammerschlag SC submitted that after incorporation there was no fiduciary relationship as claimed. The conversation relied upon by Mr Brooker does not evidence an agreement pursuant to which such a relationship was established. The question of sharing liability for personal borrowings which were on-lent to the company was simply not discussed. Further, it cannot be assumed that the parties even turned their minds to this issue based on a conversation in which all that was said about personal liability was that incorporation would protect them from it.

56 He contended that the proposition that a partnership continued after incorporation is insupportable. He pointed out that thereafter there existed none of the necessary features of a partnership at law. He submitted, and it was common ground, that after incorporation the parties no longer transacted business in their own right, there were no partnership assets, no partnership accounts were kept, and the liability of the parties was limited. He also referred to the fact that the company has not yet been wound up, and holds assets of about $6,000.00.

57 Mr Hammerschlag SC also submitted that even if an entitlement to an account was found, no order should be made as it would lack utility. He relies upon the evidence that the company accounts up to and including 1992 have been prepared and agreed. The accounts to 1995 have been prepared but not yet finalised, although it is open to the parties as directors to complete the process. Importantly, he says, the company has not been wound up and it is not open to order an accounting between directors and shareholders in disregard of the continuing existence of the corporate structure which carried on the business.

58 Reference was also made to the information contained in FCB 16, being the separated accounts prepared by Mr Brooker for discussion purposes, which demonstrates that he has available to him extensive financial information concerning the transactions which involved the directors and the company over many years. Thus it was put that Mr Brooker is already seised of ample accounting information to enable him to identify what he claims to be payable to him by Mr Friend, and to prosecute a claim for it if he chose to do so.

59 It was also put that Mr Brooker’s delay in claiming an account is such that the court, in the exercise of its discretion, should refuse the order sought. It was put that although on Mr Brooker’s case the alleged partnership terminated in about November 1995 no claim for equitable relief was made until the amended statement of claim was filed in these proceedings on 26 April 2002. During the intervening period the interest claimed to be payable on the SMK loan increased the total debt substantially to the present amount of about $1,300,000.00. Furthermore, between 24 August and 3 March 1998 Mr Brooker received from the company the total sum of $345,000.00 by way of loans, the proceeds of which have paid personal expenses and he is not in a position to repay them to the company. It is also submitted that a relevant consideration in the exercise of discretion is Mr Peterson’s evidence that having regard to Mr Brooker’s financial straits, he is not presently proposing to claim against Mr Brooker for repayment of the SMK loan.

Discussion

60 The primary question for consideration is whether there was an agreement between the parties which established a fiduciary relationship as a partnership, or a joint venture, or one based on a relationship of trust and confidence. It was put that under this relationship Mr Friend owed a fiduciary duty to account to him for Mr Friend’s share of the obligation to repay the SMK loan, and for other transactions during the time the parties were carrying on business together.

61 It was contended that the fiduciary relationship was created by the agreement made in the para 8 conversations which took place prior to the incorporation of the company. Central to Mr Brooker’s case is the contention that the effect of the agreement was to establish a fiduciary relationship by which after incorporation each party would be personally liable to contribute equally to the repayment of loans undertaken by the other for the purpose of obtaining funds which were on-lent to the company.

62 The approach to be taken in deciding whether a relationship is a fiduciary relationship was stated by Mason, J in Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at pp 96-97 as follows:

“The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf. Phipps v. Boardman (1967) 2 AC 46, at p 127), viz., trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions "for", "on behalf of" and "in the interests of" signify that the fiduciary acts in a "representative" character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal …

… Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction”.

His Honour went on to say (p 102) that it is now acknowledged generally that the scope of the fiduciary duty must be moulded according to the nature of the relationship and the facts of the case.

63 In United Dominions Corporation Limited v Brian Pty Limited (1985) 157 CLR 1 the High Court stated (pp 10-11):

“The term “joint venture” is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill ... The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership: such as a company, a trust, an agency or joint ownership. The borderline between what can properly be described as a "joint venture" and what should more properly be seen as no more than a simple contractual relationship may on occasion be blurred … One would need a more confined and precise notion of what constitutes a "joint venture" than that which the term bears as a matter of ordinary language before it could be said by way of general proposition that the relationship between joint venturers is necessarily a fiduciary one: but cf. per Cardozo C.J., Meinhard v. Salmon (1928) 164 NE 545, at p 546. The most that can be said is that whether or not the relationship between joint venturers is fiduciary will depend upon the form which the particular joint venture takes and upon the content of the obligations which the parties to it have undertaken”.

64 In Schipp v Cameron [1998] NSWSC 997 (para 730) Einstein, J explained that the scope and content of the fiduciary duties arising out of a non-partnership joint venture are to be determined by the terms of the agreement and/or the nature of the relationship between the parties. He emphasised that the principle source of any fiduciary obligations which may exist between the participants in a joint venture is the agreement between them. He also said (para 711) that the description given to the relationship by the parties by, for example, referring to each other as partners, or as engaged in a joint venture, is not determinative of its true nature (cf. Canny Gabriel Castle Jackson Advertising Co Limited v Volume Sales (Finance) Pty Limited (1974) 131 CLR 321.

65 It is therefore necessary to consider the terms of the para 8 conversations to determine whether they evidence the fiduciary relationship for which Mr Brooker contends. I refer briefly to the applicable principles in the following paragraphs.

66 To discern the objective which the parties had in view the court is required to consider the words they used with regard to the circumstances and context in which they were uttered. In construing the meaning of the words the court will strive to give the agreement a commercial, reasonable and rational operation (see e.g., Royal Botanic Gardens and Domain Trust v South Sydney Council (2002) 186 ALR 289 paras 10, 11; Australian Broadcasting Commission v Australian Performing Right Association (1973) 129 CLR 99 at p 109).

67 In Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at pp 313-314 Kirby, P said:

“Whoever may be the parties to the agreement, it is the fundamental rule, that a court should give the words of a written agreement the natural meaning that they bear. Subject to that rule, in giving meaning to the words of an agreement between commercial parties, courts will endeavour to avoid a construction which makes commercial nonsense or is shown to be commercially inconvenient. This is because courts will infer that commercial parties would not themselves normally agree in such a way”.

68 A court will also take into account the principles set out by Heydon, JA in Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153 at pp 163-164. Relevant principles are, (a) that post-contractual conduct is not admissible on the question of what a contract means as distinct from the question of whether it was formed, and (b) that the construction of a contract is an objective question for the court, and the subjective beliefs of the parties are generally irrelevant in the absence of any argument that a decree of rectification should be ordered or an estoppel by convention found. (No argument of these kinds was advanced in this case).

69 Analysis of the evidence in the para 8 conversations` shows that there were various conversations on the subject of establishing a construction business together. Words spoken in some of these conversations are set out in sub-paras (a), (b), (c), (d), and (e). There is no indication as to whether the passage quoted is the whole or a part of the conversation. In respect of each there is nothing indicative of date, occasion, or context, although there is sufficient for the inference that the conversations took place between mid-1976 and sometime in 1977.

70 From paras 10, 11, and 12 of Mr Brooker’s affidavit of 25 November 2002 it appears that the parties commenced business in partnership in May 1977, which I infer was in accordance with the matters discussed in the para 8 conversations. The company was incorporated on 18 July 1977 but there is no evidence as to whether the conversation in para 8(c) in relation to incorporation took place before or after the commencement of the partnership in May 1977. It is uncertain whether it was always intended that the parties should operate through a corporate structure, or whether it was decided to do so after they began operating as a partnership and had seen the benefits of incorporation, and agreed to change the nature of their relationship in order to obtain those benefits. There is thus no evidence as to the context and circumstances in which the conversation as to incorporation took place, these being matters relevant to ascertaining the content of any agreement.

71 In the end, the court is left to consider the natural and ordinary meaning of the words in the para 8 conversations. It is to be kept in mind that Mr Brooker could recall no discussion with Mr Friend in which he agreed to undertake personal liability for any debts of the company. He agreed that there was no discussion with Mr Friend in which it was agreed that they would decide at some time whether or not to pay creditors which the company could not pay, or that each at some time would take responsibility for debts owed by the company to other persons.

72 In my opinion all that relevantly can be taken from the para 8(c) conversation with regard to the other conversations in para 8 is that at some time the parties agreed to establish a company in order to protect themselves from personal liability for debts incurred in the conduct of the business. It demonstrates the common intention to cease carrying on business in a relationship which exposed them to personal liability for its debts, and to replace it with a corporate structure under which there was no such exposure. In my opinion that is as far as the evidence goes. Mr Brooker’s subjective understanding of the arrangement is irrelevant.

73 In my opinion nothing in the para 8 conversations indicates that the parties turned their minds to the notion of continuing the partnership or any other relationship after the company had taken over the operation of the business, or that a business relationship should continue to operate outside the company under which each owed a fiduciary duty to the other. Furthermore, there is simply no evidence that the parties agreed that the business would be conducted by the company subject to each accepting personal liability for the debts of the other to a third party.

74 It seems to me that the parties, with the benefit of professional advice, incorporated their business because it was commercially advantageous to do so in that it protected the personal position of each. Mr Brooker impressed me as an experienced businessman well aware of what was required for the protection of his interests. It is reasonable to expect that there would have been some record of an agreement intended to operate outside the corporate structure whereby the parties preserved the risk of personal liability for the debts of each other where the proceeds were on-lent to the company. The absence of such evidence suggests that there was in fact no such agreement.

75 There is also no evidence that Mr Friend agreed to be jointly liable for, or to contribute to, the repayment of the SMK loan. It is difficult to accept that, if in truth he held the belief that Mr Friend was equally liable for this loan, Mr Brooker proceeded with the borrowing, and procured the securities from his wife and his mother, without first obtaining Mr Friend’s acceptance of such liability. That there is no evidence that there was even discussion as to liability is remarkable having regard to the financial difficulties then facing the company, and the likelihood that it may have been unable to repay Mr Brooker the monies which he had on-lent to it. The absence of evidence as to these matters is, in my opinion, further indication that there was no agreement to the effect claimed in these proceedings. This doubt is reinforced by the delay until about October 1994 when Mr Brooker first claimed that Mr Friend was equally liable for the loan.

76 In reviewing the evidence concerning the SMK loan I have not overlooked that on 30 June 1993 Mr Friend agreed that the company should pay SMK the sum of $250,000.00 in partial repayment of Mr Brooker’s borrowing. In his affidavit of 30 April 2004 (para 7) Mr Brooker says that at the meeting on that date Mr Friend altered the amount referable to the loan but said nothing about it. There is no evidence that the issue of joint liability was raised. This occasion provides no support for the existence of the agreement alleged.

77 What happened was that from the time of incorporation the partnership ceased, just as the parties intended. The effect of incorporation changed the basis upon which the business had been conducted since May 1977, not only with regard to third parties, but also as between themselves. Thereafter their relationship was as co-directors of the company, and the assets and liabilities associated with the business were the company’s. Exhibit B depicts the interrelationship of corporate structures and unit trusts by which the business operated.

78 As Mr Friend’s counsel submitted, it is apt to refer to the passage in Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at p 691 per Young, J:

“Unfortunately, it very often happens in cases in this court that a person has arranged his affairs for commercial or fiscal reasons employing a particular structure, which with respect to creditors and the Government he expects to be recognized as no sham, but when it comes to a dispute with his former wife or former business associates it is not in his interests to maintain the structure and he pleads before this Court that one must not look at the structure at all but rather at the “realistic” or “practical” effect of what has happened. I do not find this sort of submission attractive. So long as the law permits people to erect structures which have meaningful legal consequences then if a person elects to erect such a structure he must take the consequences of such erection for better, for worse, for richer or poorer, in commercial sickness or commercial health”.

79 In my judgment Mr Brooker has utterly failed to prove any agreement pursuant to which the existence of a fiduciary relationship with Mr Friend was established after the incorporation the company. I reject the submission made on his behalf that the relationship between the parties in the conduct of the business was that of a common law partnership, or a joint venture, or some other relationship which gave rise to an entitlement to an accounting from each other of all contributions by and payments to them to ascertain what, if anything each must pay to the other so that the ultimate loss of the business is shared equally between them.

80 As I have found Mr Brooker has failed to establish entitlement to the relief sought in these proceedings. I propose to order that the fifth amended statement of claim be dismissed. The hearing concluded on the basis that the court should decide whether an entitlement to an accounting or other forms of equitable relief had been established and, if so, to afford the parties the opportunity to be heard as to the terms of any order to be made. In the circumstances, and having regard to the conclusion to which I have come, there is no purpose to be served in deciding whether or not the court should make any order for relief on the hypothesis that there was a fiduciary relationship between the parties.

81 In the circumstances it is appropriate to afford the parties the opportunity to address me in relation to costs. Arrangements should be made with my Associate by 10 May 2005 for the re-listing of the matter.

82 The order which I make is that the proceedings be dismissed and that there be judgment for the defendants.

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