Hawes v Dean
[2014] NSWCA 380
•7 November 2014
|
New South Wales |
Case Name: | Hawes v Dean |
Medium Neutral Citation: | [2014] NSWCA 380 |
Hearing Date(s): | 27 August 2014 |
Decision Date: | 7 November 2014 |
Before: | Bathurst CJ at [1]; McColl JA at [6]; Barrett JA at [7] |
Decision: | 1. Appeal allowed in part. |
Catchwords: | CONTRACTS - general contractual principles - construction and interpretation of contracts - construing a commercial contract in its context - no matter of principle - PROCEDURE - set-off - equitable set-off - entitlement to money judgments established by one party against another party and by an associated entity of the second against an associated entity of the first - whether primary judge correctly allowed equitable set-off - need for one right to impeach the other - whether rights and their sources so closely connected that equitable set-off should be ordered - lack of mutuality and separateness of sources held to be such as not to permit set-off - COSTS - challenges to aspects of costs orders at first instance - no matter of principle |
Legislation Cited: | Civil Procedure Act 2005 (NSW) |
Cases Cited: | AF Concrete Pumping Pty Ltd v Ryan [2014] NSWCA 346 |
Texts Cited: | R P Meagher, W M C Gummow and J R F Lehane, Equity Doctrines & Remedies (3rd ed 1992, Butterworths) |
Category: | Principal judgment |
Parties: | David Richard Hawes (First Appellant) |
Representation: | Counsel: |
File Number(s): | CA2013/295298 |
Decision under appeal: | |
Citation: | [2013] NSWSC 745; [2013] NSWSC 1246 |
Before: | Brereton J |
File Number(s): | 2009/290891 |
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
JUDGMENT
BATHURST CJ: I have had the advantage of reading the judgment of Barrett JA in draft. I agree with the orders proposed by his Honour and with his reasons. I make the following remarks in respect to what his Honour has described as issues (a) and (b) on the appeal.
Clause 5.2 of the Clydesdale Deed must be considered in the context in which it arises. That was made clear by the High Court in Woodside Energy Ltd v Electricity Generation Corporation (trading as Verve Energy) [2014 HCA 7; 188 ALJR 447 at [35]; see also Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 at [86].
In the present case the relevant context is provided by the recitals to the Clydesdale Deed and in particular recitals (f) and (g). These recitals make it clear that the Clydesdale project was to be the responsibility of the Hawes Group. The recitals also make it clear that what was envisaged was the obtaining of an extension of the options over the properties the subject of the proposed development, the obtaining of a Development Application and subsequent redevelopment or sale of the options.
In that context cl 5.2, in providing that the hypothetical option sale price would be paid if the Hawes Group proceeded with the purchase of the land, extended to the Hawes Group proceeding in the name of either Mr Hawes or Glenside Group Pty Ltd or, by Mr Hawes or Glenside Group causing a nominee to purchase the land, which was what occurred. That construction not only gives effect to the context but is also consistent with the words "proceed to purchase". The clause does not require the Hawes Group parties to purchase the land but rather to proceed to purchase, which could be done either in their own names or in the names of a nominee.
Further the context makes it clear in my opinion that the payment of the hypothetical option sale price is not conditional on construction commencing. The context envisaged is either Hawes Group selling the options or purchasing the land and proceeding with redevelopment. The Hawes Group effectively adopted the latter course by purchasing the land. It then became liable to pay the fee at the time specified in cl 7. From that time it was entitled to whatever benefit could be derived from the land either by way of sale or redevelopment.
McCOLL JA: I agree with Barrett JA's reasons and the orders his Honour proposes.
BARRETT JA: At various times from about 1988, Mr David Hawes and Mr Trevor Dean undertook a number of property development ventures together. Each used certain corporate vehicles. The individuals accept that neither they nor companies associated with them ever carried on business in partnership. Independence was maintained except to the extent that specific contracts were entered into from time to time in relation to particular ventures or investments.
In 2005, Mr Hawes and Mr Dean began to unwind their investments. To that end, a number of separate contracts were entered into at different times over a period, each effecting separation in relation to a particular venture. One such venture concerned a development site at Pymble.
The Clydesdale deed
On 8 September 2005, a deed referred to as "the Clydesdale deed" was made by Mr Hawes, Mr Dean, Hawden Property Group Pty Ltd ("HPG"), Leanwick Pty Ltd, Glenside Group Pty Ltd ("Glenside") and Gallwey Pty Ltd ("Gallwey"). The agreement evidenced by the Clydesdale deed was to the general effect that Mr Hawes and Glenside (referred to as "the Hawes Group") should have or retain the full benefit of such rights as the parties had in respect of the Pymble development site and that certain payments would be made as between the parties.
The Clydesdale deed began by reciting the desire of Mr Hawes and Mr Dean to "excise" from their business and to "implement special arrangements" concerning "the Project" consisting of the development of a residential complex on Nos 2, 3, 4, 5, 6 and 8 Clydesdale Place and No 1190A Pacific Highway, Pymble. It was further recited that Gallwey was the grantee of certain call options to purchase the relevant land. Those options were referred to as "the Options". Persons unrelated to and independent of Mr Hawes, Mr Dean and associated entities had granted the options.
The final recital was:
"It is the further intention of the parties that the Hawes Group will endeavour either to sell the Options with the benefit of the D.A. or to obtain finance for the purchase of the Land and construction of the Project."
Among the defined terms was "HPG Advances" - being $308,661 outlaid by "various HPG entities" in connection with the Project.
The operative provisions of the Clydesdale deed were contained in Schedule 6. By clause 1:
(a) the Hawes Group (that is, Mr Hawes and Glenside) was given sole entitlement to negotiate and deal with the grantors of the Options;
(b) Gallwey agreed to assign the Options (or any of them) to the Hawes Group or its nominee (or to nominate the Hawes Group or its nominee as the party entitled to exercise the Options); and
(c) it was acknowledged that the Hawes Group had absolute discretion to surrender, let lapse, or vary any of the Options or to enter into fresh option agreements with the grantors.
The deed continued as follows:
"2. The parties agree that the Hawes Group will not be required to repay the HPG Advances or account to HPG or the Dean Group in respect of the Clydesdale Project except from Project Revenue as herein provided.
3. The Hawes Group will be entitled to raise finance to take the project to D.A. stage in such manner as it sees fit, including by way of profit participation by the finance provider. All monies payable to a finance provider and all costs in connection therewith will be counted as part of Project Costs. In this regard the parties refer to the proposed funding as set out in the Loan Agreement Annexure 'A' hereto. The Hawes Group agrees that the eventual finance will be on the same or better terms (to the Hawes Entities) as those that are set out in Annexure 'A'.
4. The Hawes Group will pay from Project Revenue within the time period referred to in clause 7 below:-
(a) the HPG Advances to HPG (approximately $308,600 plus the sum of $36,000 as referred to in clause 6 hereof); and
(b) to the Dean Group a fee equal to 30% of the Profit (as defined hereafter), if any, derived by the Hawes Group following valuation or sale of the Options as set out in clause 5 below ('the Fee').
5.1 A sale of the Options may be effected by way of assignment or nomination or surrender and new documentation, as the Hawes Group may negotiate.
5.2 In the event that the Hawes Group proceed with purchase of the Land or part thereof and with construction of the Project instead of selling the Options, the Fee payable to the Dean Group will be calculated by reference to a hypothetical sale of the Options. In order to calculate the hypothetical profit or loss, it will be assumed that the sale price of the Options was equal to the valuation ('the Valuation') of the land to be made by the valuer commissioned by the incoming first ranking lender of finance to complete the purchase of the Land (or part thereof) and the construction of the Project minus the Adjusted Purchase Prices of the purchased lots. If the Valuation does not make allowance for GST on the margin scheme basis, the parties agree to make an adjustment to the amount of the Valuation of an amount to be agreed or in default of agreement to be determined by the Determinator.
5.3 'Project Costs' will be all actual costs of the Clydesdale Project to the date of sale or of the Valuation as the case may be, whether part of the HPG Advances or incurred by Glenside, inclusive of GST on an actual sale or, in respect of a hypothetical sale, of an amount equal to the GST that would have been payable in respect of an actual sale at the assumed price at the date of the Valuation.
5.4 'Project Revenue' will be the sale price (if any) together with any rents or other income earned by the Project up to the date of sale or of the Valuation, as the case may be.
5.5 'Adjusted Purchase Price' in relation to an Option is defined as the purchase price for the subject lot reduced by the amount of any option fee included in the HPG Advances that will be credited against the purchase price if the lot is purchased pursuant to an exercise of the Option.
5.6 'Profit' is defined herein as total Project Revenue minus total Project Costs PROVIDED THAT Project Costs will exclude management fees paid to Hawes Group but will include fees paid to all other consultants in relation to the Project. Should Profit be less than $0, no Fee will be payable.
6. The Hawes Group agrees that all bills owing and unpaid in relation to the Project as at the date of this deed (agreed at $36,000 due to Luchetti Lawyers) are the sole responsibility of the Hawes Group and indemnifies the Dean Group and HPG in relation thereto. Such bills will be paid by HPG and added to the HPG Advances.
7. Payment of the Fee is to be made after the date of settlement of a sale by the Hawes Group of the Options, or in the case of a hypothetical sale, from the date of the last settlement of a purchase by the Hawes Group of any Lot comprised in the Project. The Fee payable to the Dean Group shall be calculated and paid by the Hawes Group to the Dean Group within seven (7) days from the relevant settlement. The Hawes Group shall provide all relevant documents to explain and support the calculation. In the event of a dispute over the calculation of the Fee, the Determinator shall determine the Fee.
8. The Dean Group and Gallwey acknowledge that the project is speculative in nature and that the Hawes Group shall not have any duty of care in relation to the control and management of the Project from the date of this deed and hereby release the Hawes Group from all claims relating to or arising from any act, decision or omission on the party of the Hawes Group in relation to the Project. Without limitation, the Hawes Group will not be bound to exercise any Option or to obtain any extension or variation thereof or to obtain any substitute option."
Annexure A was a pro forma loan agreement between Glenside as developer, unspecified contributors, and Mr Hawes as covenantor, in respect of Nos 2, 4 and 6.
The Equity Division proceedings
Differences concerning a quite separate property venture and a deed known as the "Gallwey deed" caused Mr Hawes and Hawes Investments Pty Ltd ("Hawes Investments") to commence proceedings in the Equity Division of the Supreme Court against Mr Dean and T & B Dean Investments Pty Ltd ("Dean Investments").
Mr Dean and HPG sought leave under s 22 of the Civil Procedure Act 2005 (NSW) to file a cross-claim against Mr Hawes and Glenside in the proceedings thus commenced. The cross-claim concerned the Clydesdale deed and other matters. In particular, there was a claim by HPG under clause 4(a) of the Clydesdale deed and a claim by Mr Dean under clause 4(b). The former was one of several claims brought (or defended) by Mr Dean on behalf of HPG by leave granted under s 237 of the Corporations Act 2001 (Cth). The application under s 22 and the related applications under s 237 were opposed by Mr Hawes and Hawes Investments. In relation to the s 22 aspect, they said that there was no commonality of transactions or transaction documents and that different parties were involved. After a contested hearing, Ward J granted leave under both s 22 and s 237 on 6 July 2010.
The claim and the cross-claim proceeded to trial before Brereton J. His Honour published his decision on matters of liability on 12 June 2013: Hawes v Dean [2013] NSWSC 745. It is unnecessary to refer to the outcome concerning the Gallwey deed dispute and the aspects of the cross-claim that did not concern the Clydesdale deed - save to note that, in relation to the Gallwey deed matter, his Honour held that Hawes Investments was entitled to a money judgment against Dean Investments. As to the cross-claim and the Clydesdale deed, his Honour concluded that Mr Hawes and Glenside were liable to pay HPG the "HPG Advances" under clause 4(a) and to pay Mr Dean the "Fee" under clause 4(b).
For reasons published on 3 September 2013 (Hawes v Dean [2013] NSWSC 1246), the primary judge held that:
(a) the amount payable by Mr Hawes and Glenside to HPG in respect of the HPG Advances was $534,187.23;
(b) the amount payable by Mr Hawes and Glenside to Mr Dean in respect of the clause 4(b) fee was $357,188; and
(c) the amount payable by Dean Investments to Hawes Investments in respect of the Gallwey deed matter was $321,386.01,
all such sums being inclusive of interest to 14 August 2013.
His Honour further held that "the judgment in favour of Hawes Investments in respect of the Gallwey deed and that in favour of Mr Dean in respect of the Clydesdale fee should be set off one against the other". These were the $321,386.01 judgment in favour of Hawes Investments and the $357,188 judgment in favour of Mr Dean.
In the result, therefore, there was
(a) a judgment against Mr Hawes and Glenside in favour of HPG for $534,187.23; and
(b) a judgment against Mr Hawes and Glenside in favour of Mr Dean for $32,801.99 (being $357,188 less $321,386.01),
with each judgment taking effect on 14 August 2013 and being inclusive of interest to that date.
Material issues before the primary judge
It was accepted by Mr Hawes and Glenside that, in the circumstances that existed, there was no "Project Revenue" or "Profit" (as defined by clauses 5.4 and 5.6 respectively of the Clydesdale deed) unless clause 5.2 had operated to create "Project Revenue" calculated by reference to a hypothetical sale price of the Options as there envisaged. And, of course, if there was no "Project Revenue", there was no payment obligation under either clause 4(a) or clause 4(b) since, according to the opening words of clause 4, the sum payable under each of those provisions was payable "from Project Revenue" (in addition, clause 2 made it clear that neither sum was required to be paid "except from Project Revenue as herein provided").
The parties took different views on the crucial question whether clause 5.2 operated to create "Project Revenue" calculated by reference to a hypothetical sale price of the Options. The issue was whether the opening words of clause 5.2 created preconditions to the operation of the clause and, if so, whether those preconditions had been satisfied. The words in question are:
"In the event that the Hawes Group proceed with purchase of the Land or part thereof and with construction of the Project instead of selling the Options . . ."
The primary judge made relevant findings as follows at [60] - [73] of the first judgment:
1. On 23 September 2005, Glenside entered into a deed with Berry Street Properties ("the BSP Deed") in relation to Nos 3, 5 and 8 Clydesdale Place, to the intent that BSP would provide funding for and take over the management of the project, and apply for and obtain a development consent for construction of the project, and at the election of BSP, Glenside would sell the options, or nominate BSP as the party entitled to exercise them and then exit the project.
2 In October 2005, the options in respect of Nos 2, 4 and 6 Clydesdale Place, and those in respect of Nos 3, 5 and 8 Clydesdale Place, were novated from Gallwey to Glenside. The option in respect of 1190A Pacific Highway was not novated and lapsed.
3. Between October 2005 and March 2006, Glenside entered into agreements with various external investors in respect of Nos 2, 4 and 6, in accordance with Annexure A to the Clydesdale Deed.
4. On 13 June 2006, Ku-ring-gai Council gave development consent in respect of Nos 2, 4 and 6.
5. In about August and September 2006, the option periods applicable to the several call options were extended to various dates in December 2006.
6. On 14 November 2006, Ku-ring-gai Council gave development consent in respect of Nos 3, 5 and 8.
7. On 24 November 2006, Clydesdale Place Pty Limited ("CPPL") was registered, and on 26 November 2006, the CPP Trust was established.
8. On 28 November 2006, 358 Pty Limited ("358PL") was registered, and on the same day the 358 Trust was established.
9. CPPL, the CPP Trust, 358PL and the 358 Trust were wholly owned and controlled by the Hawes interests, and were established in the context that the expiry of the options was imminent and that BSP was not in a position to exercise the options in respect of Nos 3, 5 and 8 before their scheduled expiry.
10. On 30 November 2006, Glenside and BSP entered into a memorandum of agreement whereby
(a) BSP consented to Glenside nominating 358PL to exercise the option in respect of No 5 - which would expire on 30 November - and to proceed to purchase No 5;
(b) it was agreed that, if required, Glenside would transfer control of 358PL as directed by BSP as part of a sale of the project;
(c) BSP acknowledged that if it were unable to procure a sale of the project prior to expiry of the options over Nos 3 and 8, Glenside was not undertaking any obligation to provide further assistance in respect of those properties and that if it did so it would require clause 7 of the head agreement to be renegotiated.
11. In November and December 2006, Glenside nominated 358PL and CPPL, respectively, to exercise the options in respect of Nos 3, 5 and 8, and Nos 2, 4 and 6.
12. 358PL and CPPL then exercised the options and entered into contracts for the purchase of the properties to which those options applied;
13. Some efforts to find an external purchaser continued, but at this stage without success;
14. 358PL and CPPL then sought finance from Suncorp to enable completion of the purchase and development of the properties and, for that purpose, obtained valuations from LandMark White on 19 February 2007, which valued Nos 3, 5 and 8 at $5,090,000 and Nos 2, 4 and 6 at $4,790,000.
15. On or about 13 March 2007, Suncorp approved finance for 358PL and CPPL respectively to acquire Nos 3, 5 and 8 and Nos 2, 4 and 6 and to construct the project on them.
16. In connection with the finance approval, Mr Hawes on 21 March 2007 made statutory declarations in respect of Nos 2, 4 and 6, and also in respect of Nos 3, 5 and 8, to the effect that the finance was of commercial financial benefit for the CPP trust and the 358 trust, as it would enable the trust to complete the purchase of the subject properties, and to proceed with redevelopment of the land.
17. 358PL completed the purchase of Nos 3, 5 and 8 on 15 March 2007, and CPPL completed the purchase of Nos 2, 4 and 6 on 21 March 2007.
18. On 3 May 2007, 358PL entered into a contract for sale of Nos 3, 5 and 8 to an external party, Dia Gabraa.
19. On 18 July 2007, the sale of Nos 3, 5 and 8 to Dia Gabraa was completed.
20. In March 2008, Mr Hawes commenced construction of the project on Nos 2, 4 and 6.
Decision of the primary judge - first alleged precondition
The primary judge held that, on the true construction of the Clydesdale deed, the reference in the opening words of clause 5.2 to the "Hawes Group" was a reference to Mr Hawes and Glenside. That conclusion is not challenged. His Honour accepted that clause 5.2 operated "only if Hawes and/or Glenside purchased the land or part thereof". On the view his Honour took, "the purchase in the name of CPPL and 358PL" was a purchase by the "Hawes Group" within the meaning of clause 5.2.
His Honour noted that, as expiry of the Options approached and further options (or extensions) could not be obtained, Glenside was not in a position to sell the Options themselves and did not wish simply to allow them to lapse. It therefore nominated 358PL to purchase Nos 3, 5 and 8 and CPPL to purchase Nos 2, 4 and 6. His Honour then said:
"Both CPPL and 358PL were owned and controlled by Mr Hawes. As their names bespeak, they were incorporated for the very purpose of acquiring the properties. They were nominated for that purpose by Glenside. In substance, this was a case of Glenside, instead of selling the options or allowing them to lapse, proceeding with the purchase of the land, albeit through a nominee. To treat this as other than the Hawes Group proceeding with purchase of the land would circumvent the contractual intention of the parties, and enable Dean's interest to be defeated by a stratagem. Glenside could have exercised the option and acquired the land in its own name, in which case there would be no debate in this respect; that it chose to do so through a nominee does not deprive the transaction of the character, in substance, of a purchase by Glenside."
On that basis, the decision of the judge was that the condition specified in the opening words of clause 5.2 had been satisfied: that is, that the Hawes Group had proceeded with the purchase of the land.
Decision of the primary judge - second alleged precondition
The Hawes parties submitted before the primary judge that the opening words of clause 5.2 incorporated a second precondition, namely, that the "Hawes Group" should "proceed ... with construction of the Project". The Hawes parties further submitted that that condition had not been satisfied.
The primary judge accepted that, in respect of Nos 3, 5 and 8 (which were on-sold to Dia Gabraa), no construction was ever undertaken by Mr Hawes, Glenside or any entity associated with them. In the case of Nos 2, 4 and 6, there was eventually construction by CPPL (one of the new companies formed by Mr Hawes), but only after the failure of repeated efforts to sell.
After noting those facts, the primary judge focussed on clause 7 which fixed the time for payment of the clause 4(b) fee. Clause 7 stated that payment of that fee was to be made
"after the date of settlement of a sale by the Hawes Group of the Options or, in the case of a hypothetical sale, from the date of the last settlement of a purchase by the Hawes Group of any Lot comprised in the Project."
Clause 7 went on to provide that the fee "shall be calculated and paid by the Hawes Group to the Dean Group within seven (7) days from the relevant settlement".
The primary judge said of these provisions (at [94]):
"The plain intent is that once the options were exercised and the purchases of the relevant properties settled, the fee would be payable. It is inconceivable that construction would be practically commenced, let alone completed, within seven days of completion of the purchase."
His Honour continued (at [94] - [96]):
"The parties could not sensibly have intended that Dean's entitlement to a fee would be dependent on the subjective intention of Hawes at the time of purchase of the land; nor that if he did not have the intention to construct the project at the time of the purchase, but having done so subsequently formed that intention, no fee would be payable, so that there would be no "Project Revenue". Nor could they sensibly have intended that if having purchased the land, the Hawes Group took advantage of an early opportunity to resell it before constructing the project, Dean would be deprived of the fee. It would make no commercial sense to construe clause 5.2 as depriving Dean of a fee just because Hawes may not yet have proceeded with construction of the project, or even formed the intention to do so.
The seven day period after completion of the purchase for payment prescribed by clause 7, powerfully indicates that proceeding with construction was not intended to be a condition for payment of the fee, as distinct some additional words assumed to describe the purpose for which the Hawes Group would presumably exercise rather than sell the options or allow them to lapse. That the deed did not contemplate, expressly, a situation in which the Hawes Group purchased the land but did not proceed with construction of the project, supports this: the reason is that it was assumed that if the Hawes Group purchased, it would be in order to construct the project.
His Honour's decision was that both the time specification in in clause 7 "and common sense" indicated that proceeding with construction was not intended to be a precondition to the operation of clause 5.2, the role of the clause being to provide a mechanism for attributing a value to the Options in the event that they were exercised, rather than sold or allowed to lapse.
Decision of the primary judge - set-off
The desire of Dean Investments to see its liability under the $321,386.01 judgment set off against the liability of Mr Hawes and Glenside under the $357,188 was a product of the circumstance that, in the words of the primary judge, the latter parties "do not appear to have adequate resources to satisfy the judgment against them".
Dean Investments accepted that statutory set-off under s 21 of the Civil Procedure Act 2005 (NSW) was not available and that equitable principle alone could be the source of the order it sought. The judge noted that it is not an essential requirement of an equitable set-off that the claim and counterclaim originate in the same contract or that there be identity between the parties to the set-off and the parties to the action. He referred to Commonwealth Trading Bank of AustraliavSidney Raper Pty Ltd [1975] 2 NSWLR 227 and Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439. Nor, in his Honour's view, was it necessary that there be an identity of beneficial interests. The "fundamental test", he said, is "that set-off will be permitted where it is inequitable for a creditor to take the benefit of a transaction without assuming the corresponding burden". His Honour continued (at [16] of the second judgment):
"An equitable ground for protection from a plaintiff's claim will be established where the defendant's set-off 'goes to the root of or impeaches the title of' the plaintiff's claim, but also where the counter-claim is 'so directly connected with the claim that it would be unjust to allow the plaintiff to recover without taking into account the defendant's counter-claim' (Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439, 465; AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705, Re Just Juice Corp Pty Ltd, James v Commonwealth Bank of Australia [1992] FCA 420; (1992) 37 FCR 445)."
The primary judge then turned to the facts, noting that Mr Hawes and Mr Dean had, over a period of about 17 years, engaged in some 15 property development projects on the basis of equality of interest, using a variety of corporate and trust structures, including Gallwey, Dean Investments (as trustee of the Dean Family Trust) and Hawes Investments (as trustee of the Hawes Family Trust). His Honour then quoted affidavit evidence of Mr Hawes, as follows:
"The association between the interests of myself and my family on the one side and the interests of Mr Dean and his family on the other side was such that all entities and projects were subject to equal ownership and control. Until 2004 whenever there was an inequality of funds contributed interest was calculated and taken upon in the accounts.
Until the breakdown of our business relationship it was the practice of Mr Dean and myself that each of us received equal fees and benefits, either directly or via our respective family members and entities. After 2004 the separation of management responsibilities began and where Mr Dean or I played a greater role in a specific project, a management fee was credited to that director or a family member or entity of that director.
On some occasions proceeds from one project have been used to effect adjustments between the Dean interests and the Hawes interests in relation to another project in order to achieve overall equality.
. . .
In addition to the entities jointly controlled by Mr Dean and myself, there are 2 family trusts. The trustee of the Hawes Family Trust is Hawes Investments Pty Ltd ('Hawes Trustee'). Neither Mr Dean nor any of his family have been directors of Hawes Trustee or beneficiaries of the Hawes Family Trust. Hawes Trustee is the second plaintiff in these proceedings.
The trustee of the Dean Family Trust is T & B Dean Investments Pty Ltd ('Dean Trustee'). Neither I nor any of my family have been directors of Dean Trustee or beneficiaries of the Dean Family Trust. Dean Trustee is the second defendant in these proceedings."
After referring to the fact that certain projects had been described as the "Hawden Investment Partnership", his Honour said (at [19] of the second judgment):
"The Trust Deed of the Hawes Family Trust is not in evidence; but its financial statements as at 30 June 2008 are, and from them it can be ascertained that the beneficiaries included Mr Hawes, his wife Mrs Caroline Elizabeth Hawes, Timothy Douglas Hawes and Alexandra Peppi Hawes; the different balances of the beneficiary accounts point strongly to its being, as one would expect, a discretionary trust; and the apparent role of Mr Hawes (to the exclusion of Mrs Hawes) in the dealings and transactions described in the evidence point to the conclusion, as one would expect, that he practically controlled the trust and was the appointor, such that he had the ability to control the trustee and thereby cause the trust property to vest in himself (cf Kennon v Spry [2008] HCA 56; 238 CLR 366).
Although different corporate entities and trusts were involved in different developments, ultimately they were vehicles for the beneficial interests of Mr Dean and Mr Hawes (variously held, at their discretion, by members of their families or corporations associated with them). The current proceedings and claims arose out of the separation of the totality of their affairs. All the disputes litigated were aspects of the overall dissolution of their relationship. It is clear that in the negotiations of the separation arrangements, their respective interests were treated in substance as, on the one hand, the interests of Mr Dean, and, on the other, those of Mr Hawes. Whatever might have been their position as against the rest of the world, between themselves the Hawes interests and the Dean interests were treated as two equal beneficial interests, albeit that each was held through a number of vehicles. Essentially, Mr Hawes and Mr Dean each determined, at their discretion, what if any interest other members of his family might have, or what distribution they might receive.
In those circumstances, it seems to me that there was an identity of underlying beneficial interests. Hawes Investments, as trustee of the Hawes Family Trust, is a vehicle that holds part of the Hawes interest in the ventures. It would be positively unjust to permit Hawes Investments to enforce the judgment in its favour against Dean Investments for the benefit of the Hawes interest, without requiring a set-off of the moneys due by Mr Hawes and Glenside (being Hawes vehicles) to Mr Dean as a result of his success on the cross-claim. It would be unjust to require one interest to account to the other, without imposing a reciprocal obligation on the other.
For those reasons, the judgment in favour of Hawes Investments in respect of the Gallwey Deed and that in favour of Mr Dean in respect of the Clydesdale fee should be set off one against the other. The result is a net judgment in favour of Mr Dean against Mr Hawes and Glenside for the sum of $32,801.99 (inclusive of interest to 14 August 2013)."
Issues on appeal
The notice of appeal filed by Mr Hawes, Hawes Investments and Glenside and the amended notice of cross-appeal filed by Mr Dean raise issues as follows:
(a) whether the primary judge erred when he decided that, for the purposes of clause 5.2 of the Clydesdale deed, purchase of land by CPPL was a purchase by the "Hawes Group";
(b) whether the primary judge erred when he decided that the words "proceed . . . with construction of the Project" in clause 5.2 did not create a precondition to the operation of that clause;
(c) whether the primary judge erred when he ordered set-off as between the liability of Dean Investments under the $321,386.01 judgment and the liability of Mr Hawes and Glenside under the $357,188 judgment;
(d) whether certain expense items were wrongly taken into account as deductions in calculating the clause 4(b) fee; and
(e) whether the discretion as to costs miscarried.
Issues (a) to (c) arise from the Hawes parties' notice of appeal. Issue (d) arises from Mr Dean's notice of cross-appeal. Both parties raise matters concerning costs (issue (e)).
Issue (a) - analysis and decision
The Hawes parties contend on appeal that there was no foundation for the judge's conclusion that purchase "in the name of CPPL and 358PL" was purchase "by" Mr Hawes and Glenside (or either of them). The judge's characterisation was explained by, first, his reference to purchase by Mr Hawes and Glenside "albeit through a nominee", secondly, a view that the purchase actually made was "of the character, in substance, of a purchase by Glenside" and, thirdly, a view that a strict and literal reading would "enable Dean's interest to be defeated by a stratagem". The Hawes parties say that a court is not justified in going beyond clear and unambiguous language merely because the contract would have a more commercial and businesslike operation if given an interpretation other than that dictated by the language used. Reliance is placed on the following passage in the judgment of Macfarlan JA (Young JA and Tobias AJA agreeing) in Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137 at [55]:
"So far as they are able, courts must of course give commercial agreements a commercial and business-like interpretation. However, their ability to do so is constrained by the language used by the parties. If after considering the contract as a whole and the background circumstances known to both parties, a court concludes that the language of a contract is unambiguous, the court must give effect to that language unless to do so would give the contract an absurd operation. In the case of absurdity, a court is able to conclude that the parties must have made a mistake in the language that they used and to correct that mistake. A court is not justified in disregarding unambiguous language simply because the contract would have a more commercial and businesslike operation if an interpretation different to that dictated by the language were adopted."
The Dean parties emphasise the need to eschew a technical, narrow or pedantic approach to construction and to adopt a businesslike interpretation, having regard to the language used and the objects the contract is intended to secure as indicated by the context in which it was made, the genesis of the contract and the background to it. They rely on observations to this effect by Gleeson CJ in International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; 234 CLR 151 at [8].
The Dean parties stress the definition of "Hawes Group" in the deed:
"In this deed unless the context otherwise requires the following terms shall have the following meanings:
. . .
'Hawes Group': means individually and collectively Hawes and the Hawes Entities."
(It is uncontroversial that "Hawes" is Mr Hawes and that there is only one "Hawes Entity", being Glenside.)
The point is made that context may cause the defined term to have some modified or extended meaning so that it is not confined to Mr Hawes and Glenside. That is so, it is said, not only because the definition uses the words "unless the context otherwise requires" but also because of the overriding importance of context even in the absence of such words. The Dean parties refer, in the latter connection, to what was said by Leeming JA (with the concurrence of McColl and Gleeson JJA) in Perpetual Custodians Ltd v IOOF Investment Management Ltd [2013] NSWCA 231; 304 ALR 436 at [86]:
"The same approach applies to contracts. For example, Lord Steyn has written extrajudicially that '[e]ven an agreed definition is of limited use: it takes no account of contextual requirements': (2001) 21 OJLS 59, p 60. The same point was made by Fullagar J in Halford v Price (1960) 105 CLR 23 at 33; [1960] ALR 560 at 566. Professor G McMeel has written (The Construction of Contracts, 2nd ed, Oxford University Press, 2011, p 159) that 'even defined terms must yield to wider context or contrary intention'. Professor Carter has said that 'the absence of [words to the effect "unless the context indicates otherwise"] does not mean that the definition necessarily applies to every usage of the term in the document' (The Construction of Commercial Contracts, Hart, 2013, p 446). That must in my opinion be correct in principle. The ordinary approach to construction insists on reading the contract as a whole and doing so harmoniously, so as to resolve or minimise internal inconsistency. Foreign to that approach would be a slavish rule that defined terms inevitably bear every aspect of their defined meaning. The contestable nub of the matter is what is sufficient to constitute a displacing context or contrary intention. Owen and Steytler JJ have said that 'the deliberate use of defined words is not to be lightly passed over, even where the definition leaves open the possibility of another meaning for a defined phrase': BHP Petroleum (Australia) Pty Ltd v Sagasco South East Inc [2001] WASCA 159 at [24], a proposition whose force I acknowledge."
In my opinion, the submissions of the Dean parties must be preferred on this matter.
As the Dean parties observe, the primary judge recognised that the Clydesdale deed envisaged three possible courses of action by the Hawes Group in relation to the Options: first, that the Options themselves should be sold (a matter expressly referred to in clause 5.1); second, that the Hawes Group should raise finance "to take the project to DA stage" (something that is referred to in clause 3 and could not be achieved except through exercise of the Options); and, third, allowing the Options to lapse (the "absolute discretion" to let them lapse was referred to in clause 1). The clause further recognised that value would be realised only through sale or exercise of the Options (that is, the first course or the second). Clause 5.2 was concerned with the case where the Options were not allowed to lapse (ie, the third course was not taken) and were not themselves sold (ie, the first course was not taken). The concern of the clause was with the second possibility where the Hawes Group proceeded with purchase of the whole or a part of the land the subject of the Options "instead of selling the Options".
Facilitation of dealing by the Hawes Group in ways envisaged by the deed was an objective of clause 1. It was there recognised that a nominee of the Hawes Group (rather than the Hawes Group itself) could either take an assignment of one or more of the Options or become the purchaser of land upon exercise of an Option. The introduction of nominees as part of the working out of the scheme for which the deed provided was thus part and parcel of that scheme.
The Hawes interests say that there was, on the evidence, no basis for any finding that either CPPL or 358PL was a "nominee", in the strict sense of bare trustee, of either Mr Hawes or Glenside. They point out that those two companies borrowed the necessary money from Suncorp in their own right and proceeded as principals.
These matters may be accepted. But they have no bearing on the question whether, in the sense relevant to the parties' contract, the "Hawes Group" effected the purchase of the land that was purchased upon exercise of options by CPPL and 358PL. In the circumstances of ensured flexibility of action that the deed secured for the Hawes Group, the parties embraced the possibility that, within the deed's general framework, transactions might be structured in advantageous ways to suit the convenience and interests of Mr Hawes. Purchase of the land (or part of it) by a so-called "nominee" was one of the possibilities expressly recognised as part of the mechanism of flexibility.
The findings referred to at items 7 to 9 at [24] above established that the benefits accruing to CPPL and 358PL through purchase of land the subject of some of the options were benefits enjoyed by Mr Hawes. It was Mr Hawes who had introduced those companies to play the roles that they in fact played. He took advantage of the flexibility the Clydesdale deed provided as to the structuring of any purchase transaction.
For the reasons the primary judge gave, the purchases by CPPL and 358PL were, in context, properly regarded as purchases by the "Hawes Group".
Issue (b) - analysis and decision
The Hawes parties say that the judge was in error in finding that undertaking of construction by the "Hawes Group" was not a precondition to the operation of clause 5.2. Influential in his Honour's decision was the fact that, under clause 7 (and in the applicable case of a "Hypothetical sale"), the clause 4(b) fee was payable within seven days after the last settlement of a purchase of a lot by the Hawes Group and the view that construction on particular land could not reasonably be expected to have commenced within such a short time after completion of the acquisition of that land.
The Hawes parties make three criticisms of the primary judge's reasoning: first, that the words "proceed . . . with the construction of the Project" are unambiguous; second, that there is no foundation for the judge's view that it is "inconceivable" that construction would be practically commenced within seven days of settlement of the purchase; and, third, that the judge's construction relied upon impermissible addition of absent words.
The Dean parties again emphasise the purpose of clause 5.2, that is, to provide a mechanism by which the clause 4(b) fee might be calculated if the Options were exercised rather than sold. Consistently with that, the Dean parties argue that the words "and with construction of the Project" are no more than part of a general description that serves to distinguish the second of the courses described at [46] above from the first.
I am of the opinion that the Dean parties' submissions should be accepted. The words "instead of" in clause 5.2 are significant, particularly when considered in light of the fact that the purpose of the clause is to give content to the concept of "Project Revenue" which has, as its central component "the sale price (if any)". The words "instead of selling the Options" show that clause 5.2 is concerned with a case where a sale as such has not generated a "sale price" that could be taken into account as a component of "Project Revenue" but there is nevertheless some other activity in which the Options are turned to account warranting resort to the value of the land as if it were a "sale price". That other event, of its nature, must be one that sees the value inherent in the development potential of the site somehow brought home to the Hawes Group.
The parties must, in my view, be taken to have described that other event - in contradistinction to "selling the Options" - as the Hawes Group "proceeding with" (or, to put it another way, embarking upon) an undertaking consisting, in a prospective sense, of purchase and development of the whole or some part of the relevant land. It is the taking of the definitive step of purchase by way of initiation of the composite process and as a precursor to development that is the "event" with which clause 5.2 is concerned; and it is beside the point when construction following purchase commences or indeed whether it commences at all.
The primary judge was right to concentrate upon clause 7 and to take notice of its requirement that the clause 4(b) fee be paid, in a clause 5.2 case, within seven days after the last settlement of a purchase of a lot by the Hawes Group (according to the meaning of that expression that includes CPPL and 358PL). Clause 7 tells strongly against any requirement that, in order for clause 5.2 to operate, there must be actual commencement of construction as distinct from the existence of future construction as an element of a composite process of purchase and construction which is embarked upon by completing the purchase.
Issue (c) - analysis and decision
As has been seen, the decision of the primary judge on liability and quantum was that
(a) Mr Hawes and Glenside were liable to HPG to the extent of $534,187.23;
(b) Mr Hawes and Glenside were liable to Mr Dean to the extent of $357,188; and
(c) Dean Investments was liable to Hawes Investments to the extent of $321,386.01.
In relation to the second and third of these items, the natural consequence would have been entry of judgment for $357,188 in favour of Mr Dean against Mr Hawes and Glenside and entry of judgment for $321,386.01 in favour of Hawes Investments against Dean Investments. In allowing equitable set-off and holding that only one judgment should be entered (being a judgment for the difference between the two sums in favour of the party entitled to the larger sum), the primary judge necessarily took the view that, in the circumstances of the case, Dean Investments' liability of $321,386.01 to Hawes Investments referable to the Gallwey deed was of such a character that, to the extent of $321,386.01, it provided Mr Dean with "some equitable ground for being protected against" his liability for $357,188 (as against Mr Hawes and Glenside) on account of the clause 4(b) fee and acted to "impeach the title" of Mr Dean to that larger sum.
The words just quoted are those used by Lord Cottenham LC in Rawson v Samuel (1841) Cr & Ph 161; 41 ER 451 at 458 in a passage approved by the High Court in Hill v Ziymack [1908] HCA 13; 7 CLR 352 at 361. The Lord Chancellor observed that, in every relevant case to that point (except one), equitable set-off had been allowed only where "the equity of the bill impeached the title to the legal demand". In England, the Court of Appeal decided in 2010 (in Geldof Metaalconstructie NV v Simon Carves Ltd [2010] EWCA Civ 667; [2010] 4 All ER 847) that the "impeachment of title" test "should no longer be used", noting disapproval of it in Bank of Boston Connecticut v European Grain and Shipping Ltd [1989] AC 1056 by Lord Brandon of Oakbrook who regarded the concept as "not a familiar one today"; while in Bim Kemi v Blackburn Chemicals Ltd [2001] 2 Lloyd's Rep 93, it was described by Potter LJ as "difficult to define and apply".
The "impeachment of title" test remains applicable in Australia. In Norman; Re Forest Enterprises Ltd v FEA Plantation Ltd [2011] FCAFC 99; 195 FCR 97, the Full Federal Court noted several cases in which the test had been adopted and applied by Australian appellate courts in recent times, including Walker v Department of Social Security (1995) 56 FCR 354, J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 41 ALR 539 and Forsyth v Gibbs [2008] QCA 103; [2009] 1 Qd R 403 (to these must now be added HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479, a case to be referred to in greater detail presently, and Ozden v Commonwealth Bank of Australia [2014] VSCA 127). The Full Federal Court noted that, in Forsyth v Gibbs, Keane JA (with whom McMurdo P and Fraser JA agreed) said at [10] that equitable set-off does not depend upon an unfettered discretionary assessment of what is fair. Rather, it is essential that there be such a connection between the claim and cross-claim that the cross-claim can be said to impeach the claim.
In Lord v Direct Acceptance Corporation Ltd (1993) 32 NSWLR 362, this Court accepted the impeachment test as explained at [3709(h)] of R P Meagher, W M C Gummow and J R F Lehane, Equity Doctrines & Remedies (3rd ed 1992, Butterworths), namely, that it is an indispensable requirement of equitable set-off "that the set-off actually go to the root of, be essentially bound up with, impeach the title of the plaintiff". The same test is stated in the 4th edition of that work at [37-045(h)]: R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow and Lehane's Equity Doctrines and Remedies, (4th ed 2002, Butterworths LexisNexis). The court said that the concept was "better stated" in Meagher, Gummow and Lehane than in Bank of Boston Connecticut v European Grain and Shipping Ltd (above).
A more recent statement of the principle in this Court is found in the judgment of Emmett JA (Beazley P and Meagher JA concurring) in HP Mercantile Pty Ltd v Dierickx (above). His Honour said (at [136]), referring to the decision of Gummow J in James v Commonwealth Bank of Australia (1992) 37 FCR 445:
"For there to be an equitable set-off, the set-off must essentially be bound up with and go to the root of, challenge, call in question, or impeach the title of the claimant. Equitable set-off is available where the party seeking it can show a recognised equitable ground for being, to the relevant extent, protected from its adversary's demand. The mere existence of a cross-claim is not sufficient. There must be some ground for equitable intervention beyond the mere existence of a cross-claim, such that it can be said that the equity of the defendant impeaches the claimant's title to the legal demand being enforced."
Emmett JA gave three examples of situations in which relevant impeachment will exist. The first is where a mortgage is granted to a solicitor as security for costs and the mortgagor client has a cross-claim against the solicitor for faulty work (the lien of a solicitor was referred to as "well known" in this connection in Simpson v Lamb (1857) 7 E & B 84; 139 ER 1179 at 1181). The second is where a builder has a claim for money due under a building contract and there is an unliquidated claim against the builder for damages for breach of that contract. The third case is where a lender fails to provide promised further advances for a development project and the borrower is unable to complete the development project and repay the advances actually made.
In all the hypothetical cases to which Emmett JA referred, two wrongs or defaults are so closely connected that a net position or result ought in equity to prevail between the parties because it would be unconscionable to allow one of them to insist on its legal right without first accommodating the other's countervailing legal right. It is the existence of that unconscionability that causes the first party's claim to be "impeached" (that is, undermined and defeated) by the second party's claim.
In the present case, two obvious factors immediately call into question the closeness of the connection between the two relevant claims. First, the person entitled to receive $357,188 was not the person liable to pay $321,386.01 and the person entitled to receive $321,386.01 was not the person (or even one of the persons) liable to pay $357,188. Mutuality is entirely lacking. Secondly, the respective liabilities and entitlements arose from different transactions entered into at different times (the Clydesdale deed in one case and the Gallwey deed in the other).
The Hawes parties submit that, in those circumstances, there was no sufficient basis to allow equitable set-off. As they correctly point out, the fact that the defendant has a cross-claim against the plaintiff and both arise from the same transaction is not of itself sufficient to warrant set-off. Much less is set-off warranted, they say, when there were different transactions giving rise to different causes of action and the respective claims are between different parties in different rights.
The Hawes parties also challenge certain factual findings relevant this aspect of the case. They point to several matters which, they say, indicate separateness or division between the relevant claims, in particular
(a) the judge referred to "the apparent role of Mr Hawes (to the exclusion of Mrs Hawes) in the dealings and transaction described in the evidence" yet the evidence showed that the sole shareholder, sole director and sole secretary of Hawes Investments at all material times was Mrs Hawes;
(b) the judge's inference that Mr Hawes practically controlled the Hawes Family Trust was unwarranted when it is recognised that Mr Hawes was not a director of Hawes Investments, which was the trustee of the trust; and
(c) the judge mischaracterised the position when he said that there was "an identity of underlying beneficial interests" as between the Hawes parties and the Dean parties by reason of their association over some 17 years on the basis of equal enjoyment, since, as the Hawes parties emphasise, separate entities were used, separate accounts were prepared and separate tax returns were filed.
The Dean parties, being the beneficiaries of the set-off ordered by the judge, seek to uphold it. They emphasise that the equitable jurisdiction to order set-off is discretionary and that, in attacking the exercise of the discretion, the Hawes parties must, as required by House v The King [1936] HCA 40; 55 CLR 499 at 504, show that the judge acted upon a wrong principle, allowed extraneous or irrelevant matters to guide or affect him, mistook the facts, did not take into account some material consideration; or that, upon the facts, the decision is unreasonable or plainly unjust and therefore of itself indicative of failure properly to exercise the discretion.
The Dean parties refer to the following as matters showing the true complexion of the factual context:
1. Mr Hawes was the largest beneficiary of the family trust of which Hawes Investments was the trustee.
2. Mr Hawes conducted all the negotiations relevant to the Gallwey deed in relation to which the judgment in favour of Hawes Investments was given;
3. In formulating their disengagement proposals, Mr Hawes and Mr Dean looked through corporate and other structures and treated assets and liabilities as if they were their own or, putting this another way, treated the corporate and other structures as their alter egos.
4. Mr Hawes and Mr Dean were guarantors of relevant mortgage debts and therefore took personal financial responsibility.
5. Although the Gallwey deed and the Clydesdale deed were entered into separately in relation to separate development projects, the disputes arising from those deeds, as well as the other disputes the parties litigated, were aspects of the overall disengagement of Mr Hawes and Mr Dean and the consensual termination of the relationship that had existed between them for some 17 years and which had, from time to time, involved use of proceeds from one venture to achieve equality between the parties in relation to others.
It may be accepted that, in pursuing commercial opportunities together over an extended period, Mr Hawes and Mr Dean, to a very large extent, looked beyond the vehicles they used. And it may well be the case that, on the Hawes side, Mr Hawes himself was the decision-maker and that Mrs Hawes, although the sole shareholder, sole director and sole secretary of Hawes Investments played, at best, a very subsidiary or nominal role (on the evidence, she was not shown to have been actively involved in any of the relevant discussions and negotiations).
At the same time, however, the business structures erected by the human parties were obviously intended by them to be real and to play defined roles. They were not mere fronts or shams. Had a creditor of one of the corporate entities brought a debt action against Mr Hawes or Mr Dean personally, the individual, relying on the corporate veil, would promptly have entered a plea of "never indebted". And if the taxation authorities had levied taxes on the basis that the income of all relevant individuals, companies and trusts should be treated as an agglomerated whole, there would have been immediate resort to statutory provisions that identify separate taxable entities and specify how the taxable income of each is to be calculated.
The fact that, while the relationship continued, the parties were astute to adopt particular procedures and structures for what must have been sound commercial reasons and that each individual was content to see the other hold investments and incur liabilities in such a way as to reduce personal exposure militates against the notion that, in the context of a termination of the relationship, those aspects should be ignored or discounted as mere technicalities in favour of some approach based on economic reality or the substance of the matter. When it was put to the English Court of Appeal in Bank of Tokyo Ltd v Karoon [1987] AC 45n at 64l that it would be "technical for us to distinguish between parent and subsidiary company in this context" because "economically . . . they were one", Goff LJ pointed out:
"But we are concerned not with economics but with law. The distinction between the two is, in law, fundamental and cannot here be bridged."
In this case too, regard must be had primarily to the separateness of entities. The primary judge was of the view that, as between the individuals, there were "two equal beneficial interests" and that a different position (involving separate entities and "a number of vehicles") pertained only "as against the rest of the world". I am not persuaded that that is a correct characterisation. The "vehicles" insulated particular assets and liabilities on one side of the enterprise not only from "the rest of the world" but also from the other side. The "vehicles" cannot be ignored; nor can it be said that the insulation they were obviously designed to achieve should somehow be overlooked when it came to ascertaining assets and liabilities. While equity will sometimes countenance set-off otherwise than between the same parties, some particularly compelling factor making reliance on separate rights unconscionable must be found to justify set-off in circumstances of glaring lack of mutuality.
Because the respective rights of the parties arise from separate contracts (the Gallwey deed in one case and the Clydesdale deed in the other), the quest for any factor that causes Hawes Investments' right to $321,386.01 to be "bound up with and go to the root of, challenge, call in question, or impeach the title of" Mr Dean to $357,188 necessarily concentrates on the disengagement and separation arrangements in the context of which the two deeds were made.
The primary judge took the view that the disputes litigated by Hawes entities and Dean entities were all "aspects of the overall dissolution of their relationship". As his Honour recognised, however, the various aspects of the separation proceeded independently of one another. It is instructive to note the judge's findings in that respect.
His Honour found that, although negotiations for the division of the Gallwey investment began in January 2005, it was not until some ten months later that the parties' accountants presented a draft "term sheet". The judge referred to aspects of the Gallwey negotiation in March 2006 and correspondence in September and October 2006. "Working templates" were prepared by the accountants in November 2006, spread sheets followed and the Gallwey deed was executed on 20 November 2006.
The Clydesdale deed was the product of a much less protracted process. The judge recorded simply that negotiations took place between May and September 2005 and that the Clydesdale deed was executed on 8 September 2005, that is, more than 14 months before the execution of the Gallwey deed.
These findings are quite at odds with any notion of co-ordinated and concerted separation. The entities involved in the Clydesdale investment (including Mr Hawes and Mr Dean themselves) were content to commit to a scheme of separation in relation to that investment which was negotiated over a period of some six months and documented in contractual form on 8 September 2005. At that date, such of those parties (including Mr Hawes and Mr Dean) as were also investors in the Gallwey project were at what was obviously an early stage of attempts to find a basis for agreed termination of that separate project. Negotiation and correspondence continued into 2006 and it was not until 20 November 2006 that the Gallwey deed was executed. At that point, relevant parties had already been contractually committed to the Clydesdale division for some 14 months. They had undertaken their contractual commitments without any assurance - or even objectively based expectation - that they would ever find any agreed basis for termination of the Gallwey venture.
In those circumstances, it was, in my opinion, incorrect to view all the relevant transactions as having taken place under the umbrella, as it were, of some "overall dissolution". While, in the end, a series of contracts was negotiated which, but for the ensuing litigation, allowed the parties to go their respective ways, the disengagement was, on the evidence, an uncoordinated and piecemeal affair. When the Clydesdale deed was executed on 8 September 2005 (and gave rise to new rights and obligations), it was not part of any "overall dissolution" and there was no indication that any "overall dissolution" would ever be achieved. It was, in a real sense, fortuitous that negotiations that apparently became more active after execution of the Clydesdale deed ultimately caused the Gallwey deed to be executed 14 months later.
The question for the primary judge was whether Hawes Investments' right to the extent of $321,386.01 (as against Dean Investments) referable to the Gallwey deed went to the root of, was essentially bound up with and impeached Mr Dean's right to $357,188 (as against Mr Hawes and Glenside) on account of the clause 4(b) fee under the Clydesdale deed, such that it was inequitable to allow Mr Dean to recover that $357,188 without giving credit for the $321,386.01 owed by Dean Investments to Hawes Investments. In my respectful opinion, his Honour erred in giving a positive answer to that question. The separateness of the transactions from which the rights arose, both in time and as to subject matter, the lack of any overarching agreement and the lack of correspondence between parties entitled and parties liable were so pronounced as to preclude a positive answer. Keane JA reminded us in Forsyth v Gibbs (above) that equitable set-off does not depend upon an unfettered discretionary assessment of what is fair and that it is essential that there be such a connection between the claim and cross-claim that the cross-claim can be said to impeach the claim. That connection is lacking here and any sanctioning of equitable set-off can only be the product of impermissible resort to the kind of discretionary assessment against which Keane JA cautioned.
I am therefore of the opinion that, in this aspect of the case, the primary judge misapplied the principles as to equitable set-off and that, upon the correct assessment of the facts, the decision to allow equitable set-off was unreasonable, with the result that the discretion in that respect miscarried.
Issue (d) - analysis and decision
Mr Dean's cross-appeal raises questions about the calculation of the clause 4(b) fee.
In general terms, the clause 4(b) fee was to be 30 per cent of "the Profit" (as defined by clause 5.6); and "the Profit" was "Project Revenue" (as defined by clause 5.4); less 'Project Costs" (as defined by clause 5.3). It is the contention of Mr Dean that certain items were wrongly included as elements of "Project Costs".
The items in question (identified by numbers given to them in a Scott schedule dated 21 May 2012) are:
36: | $ 10,004 | - | legal costs for options and purchases (2, 4 and 6 Clydesdale Place) |
37: | $156,807 | - | stamp duty (2, 4 and 6 Clydesdale Place) |
39: | $ 963 | - | company establishment costs (2, 4 and 6 Clydesdale Place) |
55: | $ 7,499 | - | legal costs for options, exchange and settlement (3, 5 and 8 Clydesdale Place) |
57: | $176,816 | - | stamp duty payable on exchange (3, 5 and 8 Clydesdale Place) |
59: | $ 963 | - | company establishment costs (3, 5 and 8 Clydesdale Place) |
As has been seen, CPPL became the purchaser of Nos 2, 4 and 6 Clydesdale Place and 358PL became the purchaser of Nos 3, 5 and 8. Items 36 and 55 represent legal expenses referable to those respective purchases, while Items 37 and 57 represent stamp duty for which the respective purchasers became liable on their purchase contracts. Items 39 and 59 are the expenses of incorporating CPPL and 358PL.
The primary judge's decision concerning these items and the way in which they fell to be taken into account was as follows (at [118] of the first judgment):
"Secondly, a number of items are disputed on the basis that they relate to the purchase of the properties pursuant to exercise of the options, and are not associated with Glenside's holding, sale or 'hypothetical sale' of the options and are thus not 'actual costs of the Clydesdale Project ... incurred by Glenside'. The purpose of the hypothetical sale formula was to ascertain the value Glenside gained by exercising the option, in lieu of selling it. If Glenside had sold the options, the selling costs would undoubtedly have been Project Costs. The purchase price of the properties is taken into account under the 'Adjusted Purchase Price' formula. The costs associated with exercising the option reduce the value of the options to Glenside. Accordingly, in my view, costs associated with exercising the options are legitimate Project Costs. They had to be incurred for Glenside to acquire the value represented by the options."
The judge thus held that the items in question were within the "Project Costs" definition in clause 5.3.
His Honour proceeded on the basis that, in a clause 5.2 case, the "Project Costs" definition was supplemented by part of the regime created by clause 5.2 which applied in the case of "purchase of the Land or part thereof" by "the Hawes Group". That approach is, in concept, correct. Clause 5.2, dealing with the particular case of such a purchase by "the Hawes Group", says that "the Fee payable to the Dean Group" (obviously enough, the clause 4(b) fee) is to be "calculated by reference to a hypothetical sale of the Options"; and that, in order to "calculate the hypothetical profit or loss" (being, if a profit, the "Profit" applicable for the purposes of clause 4(b) to calculate the fee), it is to be assumed that the options had been sold for an amount produced by a particular valuation of the land "minus the Adjusted Purchase Price of the purchased lots".
The expression "Adjusted Purchase Price" is defined by clause 5.5, but only as it applies to "an Option". It should be inferred, however, that the same expression, used in relation to "the purchased lots", is to have a corresponding meaning, subject to any adjustment necessary to accommodate relevant differences between "an Option" and "the purchased lots". In both cases, therefore, one must find "the purchase price" (in an undefined sense) of the relevant subject matter.
The "purchase price" applicable to the "Adjusted Purchase Price" concept can only be that received by the vendor. The preoccupation is with the "sale price" achieved upon sale of lots instead of options. The purchase price will therefore not include expenses of purchase (including stamp duty) that fall exclusively on a purchaser.
Having discovered the "Adjusted Purchase Price", one turns to the definition of "Project Revenue", the main component of which is "the sale price" or, in a clause 5.2 case, the price applicable to the hypothetical sale there mentioned, being "the Valuation" minus the "Adjusted Purchase Price" which is, in essence, the price received by the vendor (to which expenses of purchase incurred by the purchaser are irrelevant).
The next step is to determine "Profit" as referred to in clause 5.6 - or, as it is expressed in clause 4(b) itself, "the Profit (as defined hereafter), if any, derived by the Hawes Group following valuation or sale of the Options as set out in clause 5 below".
The words of clause 4(b) emphasise that the definition of "Profit" in clause 5.6 is to be applied in a particular context. The definition plays a part in discovering "Profit" that is "derived by the Hawes Group" at a particular time or during a particular period, that is (in a clause 5.2 case), "following" valuation pursuant to that clause.
The deduction directed by the definition of "Profit" is deduction of "total Project Costs", that is, "all actual costs of the Clydesdale Project to the date of sale or Valuation as the case may be" (in a clause 5.2 case, of course, the reference to "sale" is irrelevant). The "Clydesdale Project", although it does not appear to be the subject of any formal definition is, clearly enough, the project described in Schedule 4 to the Clydesdale deed, that is:
"The development of a residential complex on land at Clydesdale Place, Pymble."
As has been noted, the clause 4(b) fee is fixed as a percentage of the "Profit" (as defined) "derived by the Hawes Group following valuation or sale of the Options as set out in clause 5 below" (emphasis added). In a clause 5.2 case, one element of the "Clydesdale Project" is the purchase of lots by the Hawes Group as envisaged by that clause. It follows that, in such a case, all expenses incurred by the Hawes Group in purchasing the lots are, of their nature, part of the "actual costs of the Clydesdale Project" as referred to in the clause 5.3 definition of "Project Costs" - subject only to the timing issue posed by the words "to the date of sale or of the Valuation as the case may be" in clause 5.3.
As to that timing matter, it must be borne in mind that, because the case at hand is one of "Valuation" under clause 5.2 rather than "sale", the sequence of events is that which clause 5.2 itself identifies, that is, purchase of the land (or part of it) by the Hawes Group, followed by "the Valuation". The clause envisages valuation only if the Hawes Group has purchased the land or part of it. It must therefore be the case that the Hawes Group has effected a purchase of lots and therefore incurred all costs of purchase before the date of the valuation, with the result that those costs fall within the period delimited by the words "to the date of sale or of the Valuation as the case may be" in clause 5.3.
For these reasons, the primary judge was correct in his conclusion that costs associated with the exercise of the options and the purchase of land by CPPL and 358PL were "Project Costs". Items 35, 36, 55 and 57 at [85] above are obviously within that category and were correctly recognised by his Honour as "Project Costs". In the case of stamp duty, liability arose upon first execution of the relevant purchase contract. There is, I suppose, a question about the two separate items of $963 for company formation expenses (items 39 and 59 at [85] above) but, because there is a plausible contention that the creation of the corporate entities was part of the purchase transaction undertaken through special purpose vehicles and the amounts are inconsequential, the primary judge's decision on those items should not be disturbed.
Issue (e) - analysis and decision
Both the Hawes parties and the Dean parties contend that the judge's discretion as to costs miscarried. In order to explain the respective submissions, it is necessary to refer to aspects of the proceedings not so far mentioned.
The cross-claim brought by Mr Dean and HPG against Mr Hawes and Glenside was, as to the aspect involving HPG, a statutory derivative action brought by Mr Dean on behalf of HPG pursuant to leave granted by Ward J under s 237 of the Corporations Act. This was one of several claims made or defended by Mr Dean on behalf of HPG pursuant to leave under s 237. Others were claims against Mr Hawes in respect of his HPG loan account and claims against a company called Warr Pty Ltd based on a deed referred to as the "Warrawee deed".
Also before the primary judge were claims by Mr Hawes for winding up orders in respect of HPG and another company (Hawden Constructions Pty Ltd) on the just and equitable ground, it being alleged that each company was in a state of deadlock. Pursuant to leave granted under s 237, Mr Hawes defended these proceedings on behalf of the subject companies.
The outcome in relation to the Warrawee deed aspect was described by the primary judge as follows (at [147] of the first judgment):
"Hawes amended their Defence to the cross-claims brought by Dean in respect of the Warrawee Deed on 7 February 2012. Dean subsequently, on 9 May 2012, informed Hawes that those claims were abandoned. Only the question of costs remains outstanding: the Dean interests contending that the late amendment of the defence to the cross-claims necessitated the vacation of the hearing dates in February 2012, and that the defences previously pleaded were manifestly hopeless."
The date of abandonment here referred to was 13 days before the commencement of the hearing. Because the claim under the Warrawee Deed had been abandoned by Mr Dean, his Honour gave judgment on that claim for the cross-defendants.
The outcome in relation to the two winding up applications was recorded by the judge as follows (at [27] of the second judgment):
"On the plaintiffs' claims for the winding up of HPG and Hawden Constructions on the just and equitable ground, the first plaintiff succeeded. Although ultimately this relief was not opposed, the claims were originally defended, at the instance of and then by the first defendant Mr Dean, by leave under Corporations Act, s 237."
In relation to costs, the judge approached the matter at two levels. First he had regard to "the overall outcome of the proceedings" which he assessed as being "a net adjustment, in favour of the Dean interests and against the Hawes interests, of just under $300,000", coupled with failure of the Dean interests "to achieve a further net adjustment in their favour of $450,000 on their unsuccessful Warrawee Deed and differential drawings claims". His Honour continued (at [24] of the second judgment):
"Looked at broadly on the basis of the claim and cross-claim, the Hawes interest wholly succeeded on its claim. The Dean interest succeeded on the greater part of the cross-claim, but was unsuccessful in respect of the Warrawee Deed and differential drawings claims. That suggests that the Dean interest should pay the Hawes interest's costs of the claim, and the Hawes interest should pay the greater share, but not all, of the Dean interest's costs of the cross-claim."
The primary judge then examined the matter on an issue by issue basis and recorded preliminary views about costs, as follows:
1. On the Hawes parties' claim under the Gallwey Deed, Hawes Investments succeeded against Dean Investments and there was no suggestion that any cost order other than that the Dean Investments should pay Hawes Investments' costs was appropriate.
2. On the Hawes parties' claims for the winding up of HPG and Hawden Constructions on the just and equitable ground, Mr Hawes succeeded and, although ultimately the relief was not opposed, the claims were originally defended at the instance of and then by Mr Dean, by leave under s 237, so that Mr Dean should pay the Mr Hawes' costs of the winding up proceedings until 7 February 2012 (when the defence of the winding-up application was abandoned), and thereafter the costs should be payable out of the assets of the companies.
3. On HPG's cross-claim in respect of the HPG advances based on clause 4(a) of the Clydesdale deed, HPG succeeded and, pursuant to the orders made by Ward J on 6 July 2010, Mr Dean gave an undertaking to bear the costs of prosecuting the derivative suit in the name of HPG personally. Because Mr Dean had, pursuant to that undertaking, personally borne the costs of successfully prosecuting the HPG Advances claim for the benefit of HPG, his Honour saw it as appropriate that the corresponding costs order be in his favour personally - adding that, as HPG itself had incurred no costs, it was doubtful whether HPG could recover costs and inappropriate that it should do so (since, if it did, there would be a benefit to the unsuccessful half-shareholder as to half, notwithstanding that it bore none of the costs directly or indirectly).
4. On the cross-claim by Mr Dean for the clause 4(b) fee under the Clydesdale deed, Mr Dean succeeded and in principle Mr Hawes and Glenside should pay his costs.
5. On the claim under the Warrawee Deed brought by Mr Dean on behalf of HPG, Mr Dean failed, the claim having been abandoned after a late amendment which raised a new issue that had not previously been pleaded. The judge noted submissions by the Hawes parties that, as the cross-claim had failed in circumstances that amounted not to compromise but surrender to an irresistible defence, Mr Dean ought to pay their costs of this claim. His Honour also noted Mr Dean's submission that, as the defence had succeeded only by reason of a late amendment, the Hawes parties should pay his costs on the basis of what was said to be "the principle that where defendants succeed only by a late amendment of the defence the successful defendant should be deprived of a costs order in its favour, and in addition should be ordered to pay the costs of the unsuccessful plaintiff".
Having made that assessment and referred to other submissions, his Honour said (at [36]-[38] of the second judgment):
"While there are some risks of imprecision in the Court broadly apportioning costs, rather than leaving the attribution of costs to particular issues to a costs assessor, the benefits in terms of promoting the finalisation of litigious disputes and reducing the complexity of the assessment process usually favour adoption of such a course. Apportioning costs between issues is necessarily discretionary and impressionistic (James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWSC 296; Tomanovic v Global Mortgage Equity Corporation Pty Ltd (No 2) [2011] NSWCA 256; 288 ALR 385). On such an approach - the parties though invited to do so did not adduce evidence to assist on this issue and made only the broadest submissions - I would attribute 35% of the costs of the proceedings as a whole to the plaintiffs' claim under the Gallwey Deed, on which the Hawes interest is prima facie entitled to costs; 5% to the winding up proceedings, on which the Hawes interest is prima facie entitled to costs; 40% to the cross-claim founded on the Clydesdale Deed for the HPG advances and the Clydesdale Fee, in respect of which the Dean interest is prima facie entitled to costs; 10% to the claim under the Warrawee Deed, in respect of which neither party is entitled to costs; and 10% to the differential drawings claim, in respect of which the Hawes interest is entitled to costs. On that approach, the overall result would be that the Hawes interest is entitled to costs of 50% of the proceedings, and the Dean interest to the costs of 40%, and the net result would be that the Dean interest should pay 10% of the Hawes interest's costs of the proceedings.
However, one must not lose sight of the overall outcome of the proceedings, which favoured the Dean interest, and while it is correct that the Dean interest failed on a claim for a further net $450,000, that claim was almost entirely attributable to the Warrawee Deed claim, in respect of which I have concluded that in principle there should be no order.
When one weighs all these considerations, it seems to me that the just result, having regard to the respective degrees of success of the parties and the time and effort attributable to the various issues on which they respectively succeeded and failed, and bearing in mind also that in substance the proceedings were for the dissolution of a joint venture, there should be no order as to costs (without disturbing any costs orders made to date."
The order then made and entered was
"No order as to costs, to the intent that each party bear its own costs."
Neither the Hawes parties nor the Dean parties are content with this outcome. The Hawes parties say that the judge erred, first, in failing to award costs to Hawes Investments against Dean Investments (this is item 1 at [106] above); and, second, in failing to award costs to Mr Hawes against HPG and Hawden Constructions in respect of the winding up of those companies (item 2 at [106] above). The Dean parties say that the judge erred in not awarding Mr Dean the costs of the cross-claim or, at the very least, those costs to the extent that they related to the Clydesdale deed.
On each side, therefore, it is put that regard should be had to particular aspects of or issues in what was, by any measure, a complex proceeding ranging over numerous transactions and factual situations and entailing a mixed outcome. The primary judge's discretion with respect to costs under s 98 of the CivilProcedure Act was a very broad discretion. He had had the advantage (if one can call it that) of hearing the several interrelated claims over three days in May 2012 and then for a further day in August 2012 and of absorbing and analysing the facts and issues in the detail necessary to produce two judgments totalling 205 paragraphs and 70 pages. It was obvious that there was no outright victor such as to facilitate simple application of the principle that costs should follow the event. It was also obvious that there were two economic groups, each of which had enjoyed a measure of success and suffered a measure of failure. Dissection of the entrails according to issues would have presented many difficulties.
The submissions the parties have made in this Court with respect to the costs orders made by the primary judge proceed on the footing that some aspect or other of the overall dispute deserves to be singled out for special attention when it comes to costs. The Hawes parties identify two such matters. The Dean parties identify one. The corollary of the submissions made by both is that there must be some form of systematic breakdown of the whole into component parts, not necessarily restricted to the three the parties identify. Once a global approach is abandoned, the only alternative is complete and comprehensive segregation.
Such a course is simply impossible unless a detailed and exhaustive breakdown is attempted and even then may be beyond realistic reach at appellate level. An appeal court should interfere with a costs order only if it is clear that the relevant discretion has miscarried at trial. There was no obvious miscarriage here. Indeed, the outcome that commended itself to the primary judge and the manner in which his Honour arrived at it represented unexceptionable and principled exercise of the discretion that was at his disposal.
There is a question whether a party whose challenge on substantive matters fails at appellate level may, in the absence of leave to appeal, continue to maintain a challenge to a costs order: Supreme Court Act 1970 (NSW), s 101(2)(c). In the present context, having regard to the conclusions I have reached, that question does not affect the Hawes parties (which were successful in relation to the set-off matter) but is relevant to the position of the Dean parties whose only substantive challenge (concerning the Scott schedule items) was unsuccessful.
Meagher JA pointed out in AF Concrete Pumping Pty Ltd v Ryan [2014] NSWCA 346 at [72] that the question whether an appeal which includes substantive grounds as well as grounds relating to costs is, when the substantive grounds are determined against the appellant, an appeal "as to costs only" within s 101(2)(c) is the subject of conflicting decisions in other intermediate courts of appeal, a number of which are referred to by Campbell JA in C G Maloney Pty Ltd v Noon [2011] NSWCA 397 at [104]. Meagher JA adopted the course that had been adopted by Campbell JA and addressed each of the grounds of appeal in order to decide whether the interests of justice require that leave be granted.
In this case, such an exercise would produce a result corresponding with that I have already stated.
Disposition
On the conclusions I have reached, the outcome of the appeal and cross-appeal should be that the orders of the primary judge are modified in one respect only. The judgment against Mr Hawes and Glenside in favour of Mr Dean in the sum of $32,801.99 should be set aside and there should instead be two judgments, one against Mr Hawes and Glenside and in favour of Mr Dean in the sum of $357,188 and the other against Dean Investments and in favour of Hawes Investments in the sum of $321,386.01. In that way, the set-off which I consider to have been wrongly ordered will be reversed.
Finally, there is the question of costs in this Court. On the view I have taken, Mr Dean has failed in his cross-appeal and the Hawes parties' appeal has been successful in relation to the set-off issue only. In those circumstances, Mr Dean should be ordered to pay the Hawes parties' costs of the cross-appeal and, since the set-off issue may be regarded as having accounted for one-third of the subject matter of the appeal, there should be orders that the Hawes parties pay two-thirds of the Dean parties' costs of the appeal and that the Dean parties pay one-third of the Hawes parties' costs of the appeal.
The orders I propose are accordingly as follows:
1. Appeal allowed in part.
2. Set aside order (4) made in the Equity Division on 3 September 2013 and in lieu thereof make orders (4) and (4A) as follows:
"(4). Give judgment that the first cross-defendant David Richard Hawes and the second cross-defendant Glenside Group Pty Ltd pay the first cross-claimant Trevor Laurence Dean the sum of $357,188. (inclusive of interest to 14 August 2013), this judgment to take effect on 14 August 2013.
(4A) Give judgment that the second defendant Dean Investments Pty Ltd pay the second plaintiff Hawes Investments Pty Ltd the sum of $321,386.01 (inclusive of interest to 14 August 2013), this judgment to take effect on 14 August 2013."
3. Cross-appeal dismissed.
4. That the appellants pay two-thirds of the respondents' costs of the appeal.
5. That the respondents pay one-third of the appellants' costs of the appeal.
6. That the cross appellant pay the cross respondents' costs of the cross-appeal.
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Amendments
11 June 2015 - added representation to the coversheet
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