Iacullo v Behrens - [2006] NSWSC 121

CITATION: Iacullo v Behrens [2006] NSWSC 121
This decision has been amended. Please see the end of the judgment for a list of the amendments.

HEARING DATE(S): 14, 15, 16, 17, 20 June 2005, 10 February 2006

JUDGMENT DATE :
10 February 2006

JURISDICTION: Civil

JUDGMENT OF: Smart AJ at 1

DECISION: See paras 408 and 409.

CATCHWORDS: Moneys not advanced as intended under loan agreement and mortgage - not a loan for past debts - consideration fails. Alternative claim for alleged cash advances dismissed. Lease of coffee shop set aside and no sums due to Iacullos for rent or damages. Partial indemnities as to finance leases granted - cross-claim for conversion dismissed.

LEGISLATION CITED: Fair Trading Act
Contracts Review Act 1980
Real Property Act
Retail Leases Act 1994

CASES CITED: Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 621
Burnes v Trade Credits Limited 1981 1 NSWLR 93
Codelfa Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337
Hoyts Pty Ltd v Spencer (1919) 27 CLR 133
Toll (FGCT) Pty Ltd v Alphaharm Pty Ltd (2004) 219 CLR 165

PARTIES: Dominic Iacullo & Anor v Uwe Behrens & Anor

FILE NUMBER(S): SC 5466/2004

COUNSEL: (P) Mr M Ashurst
(D) Mr F Gleeson

SOLICITORS: (P) Michell Sillar
(D) Aitken McLachlan Thorpe

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

SMART AJ

Friday, 10 February 2006

5466/2004:

JUDGMENT

Introduction – The following abbreviations are used:

1. As at 2000 PB and LI had been friends since their schooldays, first meeting when they were both 6 years old. PB had known DI for over 16 years. Their children had grown up together and the two families celebrated family milestones together. In 1995 PB married UB. This was her second marriage. Mr and Mrs Iacullo and Mr and Mrs Behrens and their families were friends and saw a lot of each other socially.

2. DI was, and regarded himself as, a successful businessman. He conducted a successful auto vehicle and automotive business, he owned a number of properties and he was developing some properties. One of those was situated at Canterbury Road, Campsie, close to Canterbury Hospital. There were retail spaces (including a chemist shop and coffee shop) and some offices for doctors and other related services. He spent over $500,000 in developing the property. He did not regard that as a substantial amount. About the same time as that development was proceeding and in about October 2000, the Iacullos entered into a contract for the purchase of a home at Blakehurst for $1.22 million. The Iacullos moved into the Blakehurst property in December 2000. That meant that their former home in Bower Street, Roselands, was available for lease. They did not sell it.

3. In 1995 the Behrens purchased a modest house at 82 Glamis Street, Kingsgrove. About March 1996 PB purchased a franchise of the "Cookie Man", selling cookies and other food items to the public in Westfield Shopping Centre, Hurstville. PB said that from time to time she sought business advice from DI, who was helpful. She looked up to him in business and commercial affairs. She admired his skills in these areas and was influenced and guided by him in these areas. UB was not involved in running or managing or working in the "Cookie Man" business. Latterly, UB worked as a handyman and ran a lawn-mowing and gardening business. He was in modest circumstances and was not familiar with financial affairs and matters of business. It was apparent from his period in the witness box that he was a man of limited talents and understanding. He was honest and did his best to tell the truth. The credibility of DI, LI and PB was poor and I have approached the evidence of each with caution.

4. From 1 January 2001 the Behrens became the tenants of the home of the Iacullos in Bower Street, Roselands. It was a substantial home and had a swimming pool. The rental was $1993.35 per month and this proved to be more than the Behrens could afford. She was not receiving an income after 1 April 2001. There was a dispute as to the circumstances surrounding the entry into this lease, but it is of little importance in the resolution of the parties' major disputes.

5. About 18 October 2000 DI had PB sign a letter, which he had had LI prepare, in these terms:

Re Leasing of Coffee Shop at 573 Canterbury Road, Campsie

I am the owner of a Cookie Man Franchise for the past five years situated at 113 Westfield, Hurstville, 2220. I am currently in the process of selling the above business. Once the sale is finalised I am happy to proceed with the Lease for the café as agreed at $500,00 per week subject to terms and conditions of the Lease.

I understand it is my responsibility to do the entire fit-out of the café including internal and external seating subject to your approval of the plans.

If you need any further information regarding the above please contact myself or my solicitor, Greg Harle …"

6. PB said that at the time DI asked her to sign the letter he said:

"Will you sign this letter for me, because I need to refinance with Perpetual. If I do not get the refinancing done I am going to lose my deposit on the house at Blakehurst."

7. By lease stated to commence on 1 March 2001 the Iacullos let the coffee shop at 571-573 Canterbury Road, Campsie to PB for 3 years at a rental of $26,000 per year. There were a lot of problems on fitting out the shop and it did not open for business until mid-October 2001

8. By letter of 26 February 2001 the Iacullos' solicitors wrote that the first two months of the term of the lease would be rent free and the third month would be at half rent.

9. The coffee shop did not do well. PB relied on a material misrepresentation, and sought to set aside the lease. She was sued for arrears of rent, loss of income pending a re-letting and damages.

10. In early 2002 the Behrens executed a loan agreement and a mortgage in favour of the Iacullos in the sum of $50,000, the security being a second mortgage of the Behrens property at 82 Glamis Street, Kingsgrove. $50,000 was not advanced as such. It was alleged by the Iacullos to be for the purpose of discharging pre-existing liabilities. This was denied by the Behrens. The Behrens contended that this sum was not advanced and that no valuable consideration was given by the Iacullos to the Behrens pursuant to the alleged loan agreement.

11. The Iacullos' claims could be summarised thus:

(b) Judgment against UB and PB for $50,000 and interest.

(c) Judgment against PB in the sum of $72,605.91 later amended to $118,157.12 and interest.

12. If the loan agreement is held not to be legally enforceable then the Iacullos seek to recover what they allege were the pre-existing liabilities owed by the Behrens:

(a) $12,080 being the arrears of rent owing pursuant to a residential lease of 1 January 2001 of 26 Bower Street.

(b) $12,879.52 being the amount due by PB pursuant to the lease of café-coffee shop premises.

(c) $25,039.50 being a number of advances made to PB particularised in Annexure C to the affidavit of 30 June 2003 of DI.

13. In their defence the Behrens have, as mentioned, in answer to the claim for $50,000 and interest relied on the lack of valuable consideration for the loan agreement and the mortgage. The Behrens also relied on misleading and deceptive conduct in contravention of s 42 of the Fair Trading Act 1987 (NSW), based on an alleged loan representation that $50,000 would be advanced. They contended that sum was not advanced by the Iacullos. The Behrens also alleged that the loan agreement and mortgage were unjust at the time they were made. They relied on these circumstances:

a) LI and PB have known each other as friends for about 30 years.
b) PB and DI have known each other and been friends for about 16 years. Over that period DI provided financial advice and emotional and financial support to PB including:

(i) advice on the tax treatment of investment properties and the benefits of negative gearing
(ii) advice on the establishment of businesses and business advice generally
(iii) advice as to the advantages and disadvantages of proceeding with PB's claim against her franchisor, the Cookie Man
(iv) unsecured cash loans, from time to time on payment terms which did not include interest and were on an informal basis

(v) emotional support and friendship

14. PB confided in DI from time to time in respect of her personal and business affairs. The Iacullos, as mentioned, leased a residential property owned by them to the Behrens.

15. The Behrens also claimed that PB was in a position of special disadvantage at or about the time of the execution of the loan agreement and mortgage, which position of special disadvantage was known or ought to have been known by the Iacullos and that it was unfair and unconscionable for the Iacullos to rely on the loan agreement and mortgage.

16. As to the alleged pre-existing liabilities of the Behrens they asserted as to the claim for $12,080.98 that they paid the Iacullos on 13 August 2001 $1991.35 by cheque in respect of rent due under the residential lease for August 2001. The Behrens further asserted that in January 2002 PB and DI agreed to set off $10,000 owing by DI to PB (being the balance of $15,000 given by PB to DI on 11 January 2001 to be held on her behalf for safekeeping) against five months rent under the residential lease.

17. The Behrens pleaded that after they vacated the Roselands property in November 2002 the Iacullos brought proceedings against them in the Consumer Trader and Tenancy Tribunal (CTTT) claiming moneys payable under the residential lease including the alleged unpaid rent and that the Iacullos failed to make any claim against the Behrens in respect of the alleged arrears of rent (as referred to in para 11A(a) of the claim). The Behrens further pleaded that the CTTT proceedings were determined by orders made on two occasions:

(a) by orders dated 25 October 2002 and the Behrens paid $1343.40 (plus a credit allowed in respect of the rental bond) in accordance with the orders of the CTTT and
(b) by orders dated 6 May 2003 and the Behrens paid $121.12 in accordance with the orders of the CTTT.

(The order made on 25 October 2002 required payment of $3183.40 with cedit to be given for the amount of the bond paid to the Iacullos).

18. The Behrens further pleaded that the plaintiffs were estopped upon the principles in Anshun from making any further claims in the present proceedings in respect of the alleged arrears of rent under the residential lease of the Roselands property (which arrears were not admitted) The Iacullos disputed that the principles in Anshun applied.

19. As to the claim of $12,879.52 pursuant to the lease of the Canterbury Road premises, the Behrens pleaded that the amount claimed related to a period prior to the commencement of the coffee shop business in 2001 and that the Iacullos were precluded by their agreement or representations to PB from claiming such amounts. Those representations included that the Iacullos would waive rent until the coffee shop business (to be conducted by PB and DI as partners) was sufficiently profitable to allow for both the payment of rent to DI and a wage to PB and in any event the Iacullos would waive the rental payable for the first three months after the commencement of trading of the business and one-half of the rent for the following two months. There were other alleged representations.

20. As to the claim of $25,039.50 in respect of a number of cash advances made to PB the Behrens pleaded that any cash advances were made to the company, Flowers Café Campsie Pty Limited and not to PB personally. That was the company used to run the coffee shop business.

21. As the Iacullos did not press their claim for an increase in the rental payable under the rent review clause I will pass over the provisions in the pleadings relating to that matter.

22. The Behrens pleaded a series of representations arising from discussions held over some months (about February to April 2001) as to the commencement of a coffee shop business at the Canterbury Road premises.

23. The Behrens allege that DI, in addition to the previously mentioned representations as to waiver of rent, represented that:

(a) if they were to commence the business they would do so as partners each would be a director of the business (if a company were formed to carry on the business)
(b) PB was to be the sole lessee of the area within 571-573 Canterbury Road to be occupied by the business. He was a lessor and did not want it generally known that he was a partner in the business;

(c) the profits and the liabilities of the business would be shared equally;

(d) DI would provide and/or obtain finance to meet the start-up costs, including fit out (such costs incurred by DI to be reimbursed to him when the business was in a position, financially to do so) and manage the financial and administrative aspects of the business; and

(e) PB would manage the café on a daily basis.

24. The Behrens alleged that about March/April 2001 in reliance upon the representations and in the circumstances earlier mentioned PB entered into the lease of the coffee shop and agreed to enter into the business with DI.

25. The Behrens alleged that by reason of the matters earlier pleaded as to the relationship between the Iacullos and PB the lease was unjust in the circumstances at the time it was made. The Behrens further alleged that by reason of those matters PB was in a position of special disadvantage at or about the time of the execution of the lease, which position of special disadvantage was known, or ought to have been known, by the Iacullos and that it was unfair and unconscionable for the plaintiffs to rely upon the lease.

26. The Behrens also alleged that about March/April 2001 an oral agreement was made between DI and PB in substantially the same terms as the representations previously summarised.

27. The Behrens alleged that about April/May 2001 Flowers Café Campsie Pty Limited was incorporated, that in about May 2001 a fit out of the premises commenced and that during the period April 2001 – September 2001 PB provided some equipment to the company for use in the business. The Behrens also alleged that from about April 2001 DI undertook the following tasks within the business and in part performance of the agreement:

(a) the incorporation of that company;
(b) decision making as to the nature of the fit out, including the selection of tradesmen;

(c) management of the finances of the business including the cheque and deposit books for the CBA held by the Company; and

(d) procurement of insurance for the business and its contents.

28. About August 2001 the company entered into the following finance leases:

(a) a lease of air conditioning equipment with Service Finance Corporation Limited

(b) a lease of kitchen equipment from AGC Limited

(c) a lease of kitchen equipment and fit out from Australian Integrated Finance Pty Ltd.

29. It is also alleged that about August 2001, in reliance upon the representations and in the circumstances of the relationship between the Iacullos and PB, the latter executed guarantees and indemnities in respect of each of the finance leases.

30. The Behrens alleged that the business commenced trading about October 2001 and did not reach a level of profitability sufficient to pay the rental under the lease and a wage to PB. They further alleged that about 30 October 2002, contrary to the representations and in breach of the terms of the agreement the Iacullos:

(b) served on PB a Notice of Termination of the lease agreement;
(c) evicted PB from 571-573 Canterbury Road

31. DI did not share equally in the profits and liabilities of the business.

32. The Behrens pleaded that the Iacullos were estopped from resiling from the representations made (and summarised earlier).

33. In their Notice of Cross-Claim the Behrens repeat paras 11 to 42 of the Amended Defence to the Further Amended Statement of Claim, that is those paragraphs relating to misleading and deceptive conduct, unconscionable conduct, the payments made, the proceedings in the CTTT including the estoppel based on the principles in Anshun, the commercial lease of the coffee shop area at 571-573 Canterbury Road, the representations made by DI, the facts relating to the commencement of the coffee shop business, the tasks undertaken by DI, the lease signed by the company, the guarantees and indemnities executed by PB and the conduct of the Iacullos contrary to the representations and in breach of the terms of the agreement.

34. The Notice of Cross Claim alleged that since November 2002 the Iacullos have refused PB access to the coffee shop area to allow her to take back and have otherwise not returned to her the equipment she provided and the equipment the subject of the finance leases and have thereby converted that equipment to their own use. Loss and damage are alleged.

35. The Behrens seek an order that the loan agreement, the mortgage and the lease agreement be set aside pursuant to the Contracts Review Act, s 72 of the Fair Trading Act (NSW) or under the general law. Alternatively, a declaration is sought that the loan agreement, the mortgage and the lease are void ab initio. In the further alternative orders were sought varying the loan agreement, the mortgage and the lease in such manner as the Court thinks fit. An order is sought that the matter be referred to the Master, Equity Division, to take accounts of and enquire of all dealings and transactions between PB and the Iacullos with respect to the café business. Also sought are damages including those recoverable pursuant to s 68 of the Fair Trading Act (NSW), interest and costs.

36. In their Amended Reply the Iacullos assert:

(b) the unsecured cash loans were made by DI to PB in respect of the operation of the business known as Flowers Café Campsie.

(c) the Behrens were independently represented by a firm of solicitors at the time that the loan agreement and mortgage were made

(d) their relationship with PB in respect of the café premises was at all times an arms length relationship between landlord and tenant

(e) (i) the incorporation of the company was arranged by PB through her accountant

(ii) PB was responsible for the fit out of the premises

(iv) the management of the finances of the café business, including the cheque and deposit books for the Commonwealth Bank of Australia held in the company's name was conducted by PB

(v) PB requested DI to arrange insurance for the café business and after he had done so the policy in respect of such insurance was maintained by PB.

37. The Iacullos admit:

(2) On or about 12 November 2002 they served on PB a Notice of Termination of the lease agreement

(3) In or about November 2002 they evicted PB from the café premises and say they were entitled to do so by reason of her non-payment of rent and failure to vacate the coffee shop premises after service of the Notice of Termination.

38. In their Defence to Amended Notice of Cross Claim the Iacullos say in answer to the claim for conversion:

(b) She has abandoned any equipment left on the café premises

(c) They are not liable for any loss or damage (which is not admitted) she may have suffered.

39. As to any reliance on the Contracts Review Act 1980 the Iacullos asserted that the loan agreement, the mortgage and the lease agreement were entered into by PB in the course of or for the purpose of a trade, business or profession carried on by her within the meaning of s 6(2) of that Act.

The Facts
40. In the main, but not entirely, I will deal with these chronologically.

41. It seems that PB was entitled to operate the Cookie Man Franchise at Westfield Shopping Centre, Hurstville until August 2001. Apparently the lease of the relevant shop in the Shopping Centre expired on 31 March 2001. The term of the lease and that of the franchise agreement are not clear on the evidence and some amendment of these facts may be necessary.

Relationship of the Parties And Purchase of Blakehurst Home
42. In October 2000 the Iacullos exchanged contracts for the purchase of 27 Gold Street, Blakehurst, a superior residence. At the time they owned and were living at 26 Bower Street, Roselands, a substantial and attractive residence.

43. In her affidavit of 25 November 2003 PB deposed to the assistance that DI gave her over the years in protecting her assets. She recounted how DI had sold them his four-wheel drive vehicle without them paying any money to him initially and permitting her to repay the purchase price by instalments which she did. PB said that there were also numerous occasions when DI lent her moneys and that she always paid him back. DI did not charge her interest on these loans. There was never a contract and they trusted each other.

44. PB said that on one of LI's visits to the Cookie Man and after LI had finished speaking to DI in relation to the purchase of their new home at Blakehurst the following conversation occurred:

"LI: The Commonwealth Bank is not going to honour the cheque for the 10 per cent deposit on the new house

PB: Can you get the money from somewhere else?

LI: Dominic has just asked me if your father would be able to lend us any money

PB: I do not think so."

45. In her affidavit of 14 June 2005 but not earlier, LI denied this conversation. LI added, "I have never asked Paula if her father would loan us moneys to purchase our home at Blakehurst. I do not ever recall discussing the financing arrangements for the purchase of the property."

46. In cross-examination LI agreed that in October 2000 she received news from DI that the bank had not honoured the deposit cheque of $122,000 for their new home. This was a surprise. She did not deny that she had received a telephone call from her husband about the deposit cheque. In October 2000 she went to the Cookie Man shop about every week. LI said it was possibly something she would have confided in PB, her close friend, about the time it occurred. LI was very "cagey" as she dealt with a series of questions about this topic and denied that she raised with PB a request from DI about borrowing some money from PB's father. LI said that the first time she turned her mind to responding to PB's affidavit of 25 November 2003 was on 14 June 2005.

47. I had major reservations as to the truthfulness of LI. This passage appears at T237:

"Q. … You have not been present while some witnesses have been cross-examined?
A. That's correct.

Q. You have (been) reading the transcript outside the Court?
A. No, not the transcript.

Q. You have (been) reading, Mrs Iacullo, the transcript of these proceedings outside the Court this morning?
A. No, I have been reading my affidavits.

Q. I will ask you once more. It is the case that this morning you were reading the transcript of these --
A. --I did read part of it this morning, yes.

Q. When you denied that you read it, that was untrue?

A. Yes, it was."

48. As LI was asked these questions she looked at counsel and his instructing solicitor and realised that she was being asked about what they had seen. She appreciated that there could be evidence about her untruthfulness and decided that she could no longer maintain her initial stance. Her facial expressions and body movements were eloquent. Her untruthfulness was brazen.

49. I think that the conversation deposed to by PB with LI probably took place.

Refinancing of Iacullos

50. PB said that shortly after this visit DI came to see her and gave her a letter dated 18 October 2000 (which is earlier set out) and asked her to sign it for him in the circumstances earlier mentioned. PB said that she agreed to his request as DI was a friend. She said that at the time of signing this letter she did not intend to take up a lease with DI because he had not asked her to and she was still running the Cookie Man. The letter wrongly stated that she was currently in the process of selling the Cookie Man business.

51. DI said that he did not borrow money from Perpetual and to that extent he denied he said the words attributed to him. DI said that he did ask PB to sign (and she signed) the letter dated 18 October 2000 (para 77 of DI's affidavit of 27 July 2004). Perpetual was and is a well known lender (via its companies) on realty. I think that DI probably did refer to Perpetual. The form of the letter DI had signed by PB could be placed before any number of lenders. About 8 December 2000 the Iacullos executed a mortgage over the Canterbury Road premises in favour of Perpetual Trustee Company Limited. There was an existing loan in place from Perpetual to DI's company, Glow Automotive. DI consolidated various loans into one loan.

52. DI agreed that prior to December 2000 he put in a finance application to Perpetual in which there were estimates of income and expenditure for the retail development. DI denied that it was in this context that he asked PB to sign a document indicating an intention to lease a coffee shop but DI was not being truthful.

53. DI said that at the time he asked PB to sign the letter, he knew that PB's franchise lease term at Westfield expired in August 2001. DI insisted that she was adamant that she was moving out. He said that at that stage he did not mention the Bank bouncing his cheque. He did not need to as that was already known and DI was in recovery mode.

54. It is probable that as at October 2000 there had been some discussion between PB and DI whether she would continue with the Cookie Man once her franchise lease term expired, but it was probably inconclusive. I do not accept that PB was then adamant that she was going to move out. PB did have problems with the Cookie Man business. This is evidenced by the Industrial Relations Commission proceedings about which there are relatively few details.

55. PB agreed that the statements made in the letter of 18 October 2000 were untrue. She realised that the letter was going to be used to influence a financial institution to advance a very substantial sum of money. On her version of events she was participating in a fraud on the financier. She did not attempt to say "no" or demur to what DI requested. PB said that she did not want the Iacullos to lose their deposit on the Blakehurst property. On her version of events the Iacullos were also participating in a fraud on the financier. I think that PB and the Iacullos were all participating in such a fraud. I reject the suggestion that the Iacullos were acting honestly in preparing the letter of 18 October 2000 and having PB sign it.

56. When it was put to DI that he asked PB to sign the letter of 18 October 2000 as part of the application for finance to Perpetual Trustee he replied, "Possibly, yes." The answer "Possibly, yes" was a little quaint. It was not a question of "Possibly". DI denied that he mentioned to PB at that time that a problem had occurred in relation to the deposit on the Blakehurst property with the Commonwealth Bank bouncing his cheque. It is probable that DI did mention this. The reason PB signed the letter was that she did not want the Iacullos to lose their deposit and believed that they would unless he re-financed.

Lease of 26 Bower Street Roselands

57. In the latter half of December 2000 the Iacullos moved into their Blakehurst home. PB said that shortly before they moved into that home DI came around to the property at Kingsgrove and they had a conversation to the following effect:

"DI: Why don't you rent my house and then you can rent yours? In that way you'll be able to negatively gear your property and obtain tax benefits.

PB: Oh, okay, I'll think about it."

58. UB gave evidence that he was present with PB when fuller but similar remarks were made by DI to him with DI also stressing the advantages of more space for their family as the children grew up. Thereafter, before Christmas 2000, the Behrens accepted DI's offer and rented 26 Bower Street, Roselands from the Iacullos. The Behrens also let their Kingsgrove property as an investment property as DI had suggested. PB asked DI to reduce the rent of $460 per week, but he declined on the basis that the Behrens would receive a substantial refund when they did their tax returns. DI denied that he urged the Behrens to rent his house, but I think that he did. DI said that the Behrens were keen to rent the Roselands house. That may well have been so.

59. PB said that during a dispute with the Cookie Man franchise in the Industrial Relations Commission of NSW she would often speak to DI about it and he gave her advice. He advised her to settle at the conciliation. Ultimately the dispute was settled and the parties entered into a confidential settlement agreement.

Coffee Shop

60. UB was not sure when DI first mentioned to PB that he wanted to have a coffee shop in his development project in Canterbury Road and that he wanted her to run it and be in partnership with him. UB thought it was around November-December 2000. He remembered DI discussing it with PB on New Year's Eve. The families had engaged in festivities that evening. UB said that they (UB and PB) did not really know what they were doing as they still had the Cookie Man franchise. He recalled DI proposing this toast, "Here is to us being business partners and to us making lots of money."

Payment of $15,000 and its Fate

61. I interrupt the narrative as to the Coffee Shop to deal with this payment.

62. PB said that following the Christmas trading in 2000 she had a substantial amount of money in the bank account for the Cookie Man. She anticipated heavy outlays by March 2001. She said that she felt it was necessary to put aside some of those moneys where neither she nor her husband could access them. She explained the position to DI, told him she did not want the moneys spent and asked him to hold the moneys for her. She was concerned that her husband as a joint signatory to the bank account may make an imprudent withdrawal.

63. PB said that shortly after that conversation she saw DI at Glow Automotive and handed him a cheque for $15,000. He handed her no document (whether an invoice or a receipt or anything else) in response when she gave him the cheque. She said that she had a conversation with him to the following effect:

"PB: I want you to look after this money for me. I may have to pay GST with it and I'll let you know when I need it, so I don't end up with a fine.

DI: Okay. You've done the right thing, Paula. When you need the money I can give it back to you. Just give me a bit of notice."

64. DI made no comment as to this in his affidavit. This infusion of funds would have been welcome. DI had just moved into the Blakehurst home and was developing 571-573 Canterbury Road.

65. PB said that about a month later, in February 2001 she went to Glow Automotive and handed him $1000 in cash and asked DI to put it with the other money he was holding for her. A conversation to this effect ensued:

"DI: What are you going to do about the fridge Uwe asked me to leave at Roselands. Uwe has not paid for it yet.

PB: Well put this money towards it and leave the balance remaining with the other money you're holding for me.

DI: Okay."

66. PB said that about the end of March 2001 she told DI that she was going to need a cheque for $5000 from the money she had given him, for the last rent payment for Westfield. DI said that would be fine. Shortly after this DI gave her a cheque for $5000.

67. PB said that between March 2001 and October 2001 she repeatedly asked for the balance of the moneys, namely $10,000. She said that usually DI's response was, "I have not got it now" or "You don't need it now, do you". She had told him that she had not yet lodged the BAS documents required for the Cookie Man and that the ATO had not yet contacted her to make those payments. On one occasion when she pressed him as to when he was going to give $10,000 to her he said that he would give it to her when he obtained a loan from the National Australia Bank. She said she told him that that was OK but if she were fined, he would have to pay it. He told her that he had a lot on his mind and that when he effected the refinancing she would receive the money.

68. DI denied that in January 2001 PB asked him to hold some money for her after Christmas trading. He agreed that she handed him a cheque for $15,000. The documents established that. DI said that PB never requested him to hold money for her. DI said that when he was constructing the shops (of which the coffee shop was one) he had alarms and air conditioning installed, the value of the air conditioning was slightly in excess of $7000 (including GST).

69. In his examination in chief DI recounted a conversation with PB not mentioned in his affidavit, although he dealt with the subject. He claimed this was said:

PB: Okay, here's a cheque for $15,000."

70. DI agreed that as at 11 January 2001 he had not given PB any document setting out a security deposit required under the proposed lease of the café nor any document setting out the cost of the air conditioning. DI claimed he had told PB of that cost.

71. DI's attention was directed to a FAX dated 22 February 2001 from Michell Sillar, his solicitors to him and the attached Lessor's Disclosure Statement, which stated:

"Finishes, fixtures, fittings, equipment and services to be provided by the Lessor

Lessee has to pay for the finishes, fixtures, fittings, equipment and services to be provided by the Lessor No.

…

Finishes, fixtures, fittings, equipment and services to be provided by the Lessee.

Full fit out of shop."

There was no reference to air conditioning.

72. DI believed that the document in question was sent by his solicitors to PB's solicitors. The document contained no statement that PB as lessee was to bear the costs of installing the air conditioning.

73. DI was referred to the letter of 26 February 2001 from the Iacullos' solicitors to Behrens' solicitors and the statement "the duly executed lease in duplicate must be returned to our office within seven (7) days together with a Bank Guarantee/Security Deposit in the amount of $6500 in favour of the Iacullos .

74. When it was suggested to DI that this request was inconsistent with PB having already paid him $6500 for a security deposit, DI gave this explanation:

"No, I've done many leases through Michell Sillar and that's a standard thing they've put on a bottom whether I got the bond money up front or not."

75. DI claimed he issued a receipt the following day. He made no reference to issuing such a receipt in any of his affidavits. Ultimately the Iacullos tendered a document headed

"Dominic and Lillian Iacullo

Tax Invoice 00001002 of 11/01/2001"

76. The document is addressed to Mr & Mrs Behrens. The substance of it reads: "Paid $15,000 towards coffee shop, Shop 3 571-573 Canterbury Road, Campsie." I am very sceptical about the provenance of this document and when it was created. Neither the original nor a copy was given to PB. DI is too worldly wise not to have appreciated its significance at an early date.

77. DI agreed that he never invested $6500 in an interest bearing account for PB. He deposited the cheque for $15,000 into the Iacullos' own overdraft cheque account. That account did not bear interest. The Iacullos' account did go into debit from time to time after January 2001. From 23 January 2001 the Iacullos' account would have been in debit without the $15,000.

78. DI denied that after March 2001 PB asked for $10,000 back from him. DI claimed that he gave PB two invoices, one was for $15,000 and one was for Flowers Café later on in March 2001. He did not account to PB for interest on the security bond and attempted to justify this by stating, "I don't account to any of my tenants for interest on the bonds that they give me."

79. DI said that PB pressed him continuously for some money. He disagreed that she asked him for money from that which he was holding for her for safekeeping. He said that she asked him to lend her some money. He maintained that $5000 paid to PB on 4 April 2001 was a loan. DI said that they did not discuss interest when he gave PB $5000. He was not charging her interest at that time.

80. In cross-examination PB stated that the payment of $15,000 had nothing to do with the proposed coffee shop business. She insisted that her decision to go ahead with the coffee shop proposal was not made until late March 2001. She had never previously asked DI to hold any money on her behalf.

81. Although PB felt that DI was making a lot of excuses and was stalling in paying her $10,000 which she needed, she did not write him a letter of demand nor did she speak with LI, her close friend about it. Further, she still paid rent on the Roselands property to DI for the months of March, April, May, June, July, August, September and October 2001. She said that DI explained to her that when he refinanced she would receive her money. That is why she still made the rent payments.

82. PB agreed that she had not suggested anywhere in her evidence that DI had agreed to forego the security deposit. PB said that she was never asked by anyone to provide a bond.

83. I reject the Iacullos' contention that PB paid $15,000 to DI on account of the coffee shop venture, and particularly for the air conditioning and the security deposit. That money was to be held by DI and returned to PB as she required. She anticipated using the money to meet her taxation obligations when ascertained.

The Coffee Shop History Continued.
84. The Letter of Intent of 30 January 2001 and signed by PB stating that she intended to lease the Coffee Shop at 571-573 Canterbury Road at a monthly rental of 2166.67 for 3 years "with commencement 1st March after 2 mths ½ rent $250 weekly" with an option to renew for 3 years was a fraud to assist DI with his financing of the new building. It provides as to Fit-Out for a "2 mths rent free period to commence from the date lease is executed." She agreed that this was her second fraudulent act. DI was a party to the fraud, the Letter of Intent probably being intended to be used to raise or reorganise finance.

85. There is a large measure of coincidence between the lease signed by PB and the Iacullos and the terms of the Letter of Intent of 30 January 2001. Those were the terms DI proposed. He was alert to the value of having her write in the terms in her hand DI wanted PB to run the coffee shop with him and under his control and probably believed that ultimately she would agree to do so.

86. The Iacullos' submissions as to the dishonesty of PB have force, but they proceed on the basis that DI was not involved in the frauds. I do nor accept that this was so.

87. DI caused his solicitors to prepare a lease of the coffee shop premises in anticipation that PB would eventually agree to become the lessee. It was not until the end of March 2001 that PB decided not to renew her lease with Westfield. She was not prepared to and did not commit herself to running the coffee shop and leasing it until she had resolved the Cookie Man situation. She did not sign the lease until April 2001.

88. UB said, and I accept, that after New Year's Eve 2000 and in the first few months of 2001 DI often came round to the Roselands property and had numerous conversations with PB. Most of the time UB did not become involved in the conversations as he saw them as PB's business.

89. PB said that in January and February 2001 DI and she had conversations on several occasions discussing the opening of a coffee shop in his development at 571-573 Canterbury Road. She said that in early March 2001 he telephoned her at the Cookie Man and they had a conversations to this effect:

"DI: Are you interested in putting a coffee shop into my building. You shouldn't renew your lease with Westfield, come and do the coffee shop with me.

PB: I am not sure what I am doing with the Cookie Man at the moment. I will think about it."

90. She deposed to a further conversation during January-February 2001 when he asked her whether she would be interested in going into the coffee shop:

"PB: Dominic, I am not interested in going into business on my own because of how hard it has been running the Cookie Man for five years. I need someone to share the responsibility with me.

DI: Well we will go into this as partners."

DI denied this conversation and asserted that he never discussed with PB the possibility of being partners in the business. He did discuss renting the coffee shop to her.

The Company

91. The incorporation of a company to run the coffee shop business overlapped with the granting of a lease to PB for that shop.. While the lease discussions continued from February 2001 and possibly even from 30 January 2001 when PB signed a Letter of Intent, the discussions between PB and DI as to the setting up of a company were held in early April 2001 and possibly before this. It is proposed to detail the subsequent history of the company although that extends beyond the execution of the lease and its termination.

92. PB said that in early April 2001 after she had decided to go into business with DI they had a conversation in which the setting up of the coffee shop was discussed. They agreed to set up a company to run it. She attributed words to the following effect to DI:

"I'll look after the paper work and your role will be to look after the daily running of the café. We will both be directors. We will use your accountant."

DI denied making that remark, but I think it probably was made.

93. Mr G J Widdup, a practising chartered accountant, who had PB and UB as clients recalled that sometime before April 2001 PB telephoned him and stated that she was going to open a café with DI, the husband of a very old friend and a successful businessman. He was going to help her get back on her feet. She had been under financial stress due to her operation of the Cookie Man business. Mr Widdup said that some short time after this, in the first week of April 2001 he received a note from PB in these terms:

"Finished up at Westfield – It's time for a new venture.

571-573 Canterbury Road, Campsie

(florist

(sub-newsagent

$500 per week – first 3 months rent free

Landlord Dominic Iacullo

Lease prepared by Greg Harle

Dominic Iacullo

Paula Behrens.

We would like to use you as our accountant for the Café. We need a shelf company as soon as possible later to be called Flowers Cafe

Dominic is guarantor for all the financing – Any bills concerning café can be sent to above address

Dominic Iacullo (w) 9 789 1177 (h) 9 546 3019

Paula Behrens 9 703 2828 0411 210064"

94. The accountants purchased a shelf company from Corporate Network Ltd. The necessary forms were lodged with Corporate Network Limited and a certificate of registration of the company Flowers Café Campsie Pty Limited was issued with a commencement date of 9 April 2001. All necessary consent forms were prepared and sent to PB. Subsequently the accountants received signed "Officeholder Consent Forms" signed by PB and DI. At the request of either PB or DI the accountants sent a FAX to the Commonwealth Bank, Campsie, enclosing a certified copy of the Company's Certificate of Registration to assist in the opening of a company bank account. The Australian Taxation Office was advised of the company's registration and an ABN registration number and tax file number obtained.

95. Mr Widdup said that on about 15 May 2001 he received a FAX from Glow Automotive which listed some figures. He had a telephone conversation with DI in which he asked Mr Widdup to put the figures in a format that the finance company would accept. Mr Widdup did so and forwarded a FAX with the re-formatted figures to DI on 17 May 2001.

96. Mr Widdup said that sometime in late 2001 he became aware that the coffee shop was not doing very well and that the relationship between PB and DI had soured. About 11 June 2002 the accountants received a copy of a letter of that date addressed to PB as secretary of the company from DI resigning as a director. The requisite forms were lodged with SCIC. In early 2003 PB instructed the accountants to voluntarily deregister the company. This was a result of the failure of the café financially. The requisite form was lodged with ASIC.

97. DI stressed that it was PB who gave the instructions to the accountant for the setting up of the company. PB was incorrect when she said that DI arranged all matters relating to the setting up of the company. PB said that it was not until after the commencement of these proceedings that she became aware from a search of the company that she was its sole shareholder. That statement was incorrect.

98. PB said that shortly after the conversation in which the company's registered name was selected she was at Glow Automotive when DI telephoned Mr Widdup. She could not remember exactly what was said during the conversation but the subject mostly was in respect of the setting up of the company which was to run the business and who were to be the directors of the company.

99. As to this occasion DI said that PB was with him at Glow Automotive when she called Mr Widdup and handed him the phone. DI recalled saying to Mr Widdup words to the effect of, "I'm to be a director and I'm not going to be a shareholder – Paula will hold all the shares".

100. It is probable that at an early stage DI did give instructions to this effect to Mr Widdup. Whether PB heard those instructions and whether she appreciated their effect are moot points on which I am not able to make a finding. PB was the only shareholder. This appears from the documents filed shortly after the registration of the company and from the company's annual return signed by PB.

Coffee Shop Lease & Basis of Business Relationship
101. By letter bearing date 26 February 2001 the solicitors for DI purported to send the lease of the café premises to the solicitors for PB. That letter required the duly executed lease in duplicate to be returned to DI's solicitors within 7 days, together with a Bank Guarantee/Security Deposit for $6500 and some five cheques covering stamp duty, sundry legal costs and production fees. The letter proceeded that notwithstanding anything contained in the lease the first two months of the lease "shall be the rent free period and the third month should be at half rent."

102. PB said that around March 2001 DI came to her house and showed her a document which appeared to be a lease that had been prepared for one of the places within the development. He asked her to sign it so he could show his bank manager that he had a source of money coming in. This would increase his borrowing power. She was not ready to sign any lease because she still had her lease at Westfield.

103. Amongst other conversation words to this effect were, according to her, used:

"DI: … When you sort out your current situation, we can commence the café business. If the café does not go ahead we will tear up the lease. I am only putting your name on the document because I am the landlord and I do not want it to be known that I am a partner in the business.

PB: Dominic I can see your solicitor here wants costs for the preparation of the lease. I am not in a position to pay any money at the moment.

DI: Do not worry Paula. I will pay it and we can sort it out later. The business will be a success because I know many people in the area. I have been operating here for many years. The first three months will be rent free and for the first two months after that it will be half rent, from the time we start trading.

PB: Dominic, in my view, neither of us should take any money out until the café makes a profit then we can reimburse ourselves for rent and wages. Any profit after that should be shared equally.

DI: I agree."

104. DI denied this conversation. He stated that the draft lease was forwarded by his solicitors and not delivered by him to PB. The versions of DI and PB are contradictory. For the version of PB to be true, either DI or someone acting on his behalf must have collected the letter and document addressed to PB's solicitors, either from DI's solicitors or PB's solicitors or some intermediary and put them in DI's hands. DI must then have given them to PB. Otherwise PB made up an elaborate story. I think that PB's version of events and the conversations which occurred is probably correct.

105. DI said that during early March 2001 he was looking for a tenant for the café premises and that he had discussions with a number of potential tenants, including PB.

106. PB said that during March 2001 DI telephoned her at the shop on a number of occasions enquiring whether she had made a decision. She replied in the negative. PB stated that before the end of her lease with Westfield she told DI that the Behrens did not have the money to put into the business of a coffee shop. DI replied "Paula, don't worry about the money; because I have that covered You won't have to pay anything up front. I will organise the money." DI denied that that conversation occurred but I think it probably did.

107. PB said that DI also said during this period:

"We'll go into this together as partners. It will cost us about $40,000 all up, if it doesn't work – well that's $20,000 each, it's no big deal."

DI denied this conversation occurred. He also denied that they ever discussed being partners in the business, but I do not accept DI's denials.

108. At the end of March 2001 PB decided not to renew the lease because Westfield wanted to increase the rent too much. She wrote a letter to Westfield on 29 March 2001 advising that trading would cease at 5.00pm on Saturday 31 March 2001. PB said that at the time of sending the letter to Westfield she had not decided whether she would go into the business with DI. However, she said that during the week after the expiry of the lease with Westfield she decided to go into business with DI to run the café.

109. UB said that he recalled an occasion in or around March/April 2001 when DI came to the Roselands property and had a lengthy conversation with PB about setting up the proposed coffee shop UB heard parts of the conversation as he moved around the house. UB said he specifically recalled DI saying words to the following effect:

"Paula, no rent will be due and no wages will be paid until the shop is making a profit. Once that happens you can pay the rent and you will also receive a wage. But you do realise that the initial period will be the hardest because that is when we will be setting things up."

DI denied the words attributed to him.

110. DI said that he never had any discussions with PB about going into business together, but I reject the evidence of DI on this point. PB said that in early April 2001 she and DI had a telephone conversation to the following effect:

"DI: Paula have you taken the lease to a solicitor yet

PB: Not yet.

DI: Can you sign it and get it back to me because there is a florist who also wants the shop. My agent has found a tenant and taken a deposit for it. However, I would prefer a café business. If you backdate the lease from the time we first discussed it then I will tell the agent that you were before the florist."

This was not an honest proposal. The lease was backdated and expressed to commence on 1 March 2001. DI's version of his conversation did not include the second, third and fourth sentences of the quoted reply as alleged by PB. It is probable that DI said words to the effect of the second, third and fourth sentences.

111. PB said that sometime after this she saw her solicitors and signed the lease.

112. DI said that the agent had found another tenant. However, as he (DI) had promised the lease to PB, he did not want to go back on his word to her. That is a specious explanation.

113. In cross-examination PB agreed that:

(a) she did not tell her solicitors that there was to be a rent free period of 3 months; and

(b) the instruction which she gave to the accountant was that there was to be a rent free period for 3 months.

(She did not see why it was necessary to tell the accountant everything in one initial letter).

(c) She did not tell the accountant that no rent was payable until after the business had started trading or become profitable despite her conversation with DI to this effect having taken place in March 2001 before she gave instructions to the accountant.

(d) there was no document recording an agreement to give a longer rent free period after 2½ or 3 months and no document providing that no rent was due until the company started trading or the company (the coffee shop) became profitable.

114. These are important concessions on the part of PB. The difficulty was and is that PB relied on the oral representations of DI and the oral agreements she made with DI. She relied on him and what he said and his greater financial experience and expertise. He had courted her to run the coffee shop as he believed he could trust her and that she would run it well. She believed that they were going to be partners in the business and that he would guide and support her. PB attached relatively little importance to the documents which she signed, relying on what DI told her. As DI well knew PB did not have an ability to manage and cope with financial and business matters. Her expertise was in serving and preparing the food and the coffee. DI remarked on this.

115. The Iacullos attached importance to a difference between PB's account of the conversation with DI in para 10 of her affidavit of 2 June 2003 and that in para 42 of her affidavit of 25 November 2003. In para 10 the relevant sub-paras read:

"PB: Dominic, your solicitors want costs for the preparation of the lease. I am not in a position to pay any money at the moment.

DI: Don't worry Paula. I'll pay and we can work it out later. The business will be a success. The first three months will be rent free and then for the two months thereafter it will be half rent.

The sub-paras in para 42 are in substantially similar terms except for the last sentence which reads:

"The first three months will be rent free and for the first two months after that it will be half rent from the time we start trading."

The change lies in the extra words at the end "from the time we start trading".

116. At the time the words were spoken it was not envisaged that the fit out would take so long and that there would be so many problems with it. The first quote for the fit out was given on 11 April 2001, but the contract was not signed until 10 July 2001. As a result of a further series of problems the fit out was not completed until October 2001 and the café did not open until mid October 2001. It was estimated that the actual fit out would take a month.

117. As at March 2001 it would have been reasonable to proceed on the basis that the contract for the fit out would be signed and the work completed within three months, that trading would then commence and that rent relief would be needed for the next two months while the business built up.

118. In the context I do not regard the omission of the words "from the time we start trading" from the first version of the conversation as significant. It was not anticipated that there would be a delay of the magnitude which occurred. Further, the lease was backdated to 1 March 2001. This was well before PB had decided to embark upon the café venture and wrote to her accountant.

119. The attention of PB was directed to the Lessor and Lessee Disclosure Statement, especially cl 6 which reads:

"Apart from the statements or representations set out above, no other promises, representations, warranties or undertakings (other than those contained in the lease) have been made by the lessor to the lessee in respect of the premises or the business to be carried out on the premises."

120. PB agreed that she read this clause and that the statement contained within it was true. She had not inserted details of any other agreements or representations in the lengthy space provided. PB said that there were other agreements and these were oral. She was unable to explain why she did not include details of these other oral agreements.

121. PB said that while she went to her solicitors' office to sign the lease, the solicitors did not explain the lease. She did not read the lease. She understood that she would be bound by the terms of the lease. She did not tell either her solicitors or her accountants about any oral (or side) agreements or representations. The lease contained a whole agreement term but PB did not know what this meant.

122. PB asserted that before she sent the instructions to the accountant DI had said that he would provide the finance for the fit out of the coffee shop. This was confirmed in her instructions to the accountant, "Dominic is guarantor for all the financing …"

123. PB said that later he wanted her to borrow the money for the fit out as he did not want his name on the finance documents. She knew from April or May 2001 that DI was not going to provide finance for the fit out. DI told her to mortgage her house.

124. PB denied that DI told her this before she signed the lease for the coffee shop. She then said that it would have been after April or May 2001 but later she seemed to accept that it was about the time she signed the lease.

125. PB was referred to the letter bearing date 5 June 2001 from her solicitors to DI's solicitors enclosing Lease, in duplicate, duly executed and a series of trust account cheques in payment of the costs of solicitors, mortgagee's costs, stamp duty and registration fees. PB's solicitors were provided with the necessary funds of $2247.70 by Flowers Café Campsie Pty Ltd from its CBA account about 24 May 2001. It is not clear who provided the sum of $2247.70 to the company, but it may well have come from moneys provided by DI. At an early stage he had said that he would pay the lease costs.

126. PB agreed that after she became aware of DI's attitude to financing the project she did not tell her solicitors to stop the lease going ahead. PB just appeared to accept DI's instructions that the arrangements had changed and to do what he wished. She appeared to feel committed to the project. She still retained the belief that neither rent nor wages would be payable until the business was trading and profitable and that she and DI would run the business in partnership.

The Agents Commission

127. DI said that he had a conversation around March 2001 about the agent's commission for finding a tenant of the coffee shop area, namely the florist, to the following effect:

"DI: Paula, the agent wants his commission.

PB: I'll pay it."

128. PB gave a different version of events. She said that in April 2001 (or perhaps a little later) DI said to her, "Paula the agent was angry because he will not get his commission for finding the florist, but that is not my problem." PB denied that the conversation deposed to by DI occurred. PB recalled that after the café had started operating and probably in March 2002, when DI was at the café, she had a conversation with him to the following effect:

"DI: I want a cheque for $1000. It is for the agent because he is hassling me for the money.

PB: What does that have to do with the café?
DI: Well I will keep it with me in my wallet but I am not going to give it to him unless he really hassles me for it."

DI denied that there was any question of the cheque not being given to the agent unless he pressed for it. DI said that he handed the cheque to the agent straight away.

129. PB said that after the conversation DI then handed her the chequebook for the café and she signed the cheque for $1000. The cheque bore the number 118. The chequebook and the bank statements reveal that cheques 117 and 119 were presented in March 2002 and that cheque 118 in favour of the agent was presented in June 2002. The agent's records indicate that the cheque was received in June 2002. It is improbable that the agent would not bank the cheque promptly when he had been pressing for it. I think that the version given by PB is correct and that DI probably did not give the cheque to the agent until June 2002.

The Café Fit-Out
130. The air conditioning equipment was installed in the café premises in the early months of 2001 by or at the behest of DI. PB said that at the time she entered into the air conditioning document some months later she understood that that equipment had been installed. PB understood that DI owned that equipment and was using it as security for a loan. She did not understand that the document was a rental agreement. She agreed later that she should have answered earlier that she was aware that the air conditioning transaction was not totally legitimate. She knew that the invoice had been subsequently created for finance purposes. She described it as a forgery.

131. In cross-examination DI agreed that in March 2001 he spoke to several shopfitters, including R & C Shopfitting (R & C). DI had spoken to one of his customers who was a shopfitter. That person decided the job was too big for him. DI spoke to David Catesby, the Sales Manager of R & C, about the job and its likely cost and also to Romano Pacione (RP), the Principal of R & C. In March 2001 DI was aware that the anticipated cost of the fit out was at least $40,000, possibly more.

132. PB said that in April and May 2001 she and DI began sourcing appropriate people to carry out the fit out of the café. Most of the quotations were addressed to DI. The final quote of R & C of 10 July 2001 was addressed to both of them. DI said that he suggested a number of different shopfitting companies to PB, that she chose R & C and that it was her choice alone. I do not accept this last mentioned assertion. R & C was a joint choice made on DI's recommendation.

133. DI agreed that many quotes were received with his name upon them. There was a FAX machine at the office of Glow Automotive whereas PB did not have a FAX machine. DI held discussions with R & C about its quotes.

134. DI agreed that PB left it to him to look after the fit out side because she only knew how to run the food side. DI agreed that he told RP that he (DI) was going to look after the actual fit out. That was on behalf of PB.

135. PB stated that all decisions for the fit out were discussed between them (PB and DI). However, DI usually had the final say. She said that DI organised installation of services such as plumbing, electrical and air conditioning. DI agreed that once R & C gave him a floor plan of what was needed at the coffee shop he was actively involved in organising the fit out. DI said that PB asked him to look after the underground services and that was why he signed off on a construction drawing. She chose the colours and interior design. DI chose the tiles for the wall and floor, drain in the kitchen, the tiles for the toilets, the chairs and tables. PB stated that DI wanted everything new and would not agree to anything secondhand. He insisted that he had put the best of everything into the building and that he wanted the same for the fit out of the coffee shop. She gave some examples. He overruled her on the choice of chairs and tables. DI insisted that the ultimate choice was that of PB. DI said that he had nothing to do with the choice of tiles, chairs or tables. DI agreed that he recommended to PB that she choose new equipment, but the ultimate decision was hers alone. He did not use the words attributed to him. Having seen and heard both PB and DI at length in cross-examination it was clear that DI was the dominant player in attending to the fit out and in the decisions which were made as to that. I reject the contention that the decisions were those of PB alone. I also reject the contention that the ultimate choice was that of PB.

136. PB said that throughout the fit out of the coffee shop the tradesmen used were selected by DI. She did not have any control over the selection of the tradesmen. DI said that PB asked him to organise the tradesmen for her and that he agreed.

137. PB said that in about September 2001 R & C delivered, for the first time, the benchtops and other materials to commence the first stage of the shop fit out DI told her that he was not happy with R & C's work to date. He organised a meeting between himself, PB and RP of R & C at the coffee shop. David Catesby, the Sales Manager also attended. PB said that the meeting was heated with numerous arguments between DI and RP and DI and Catesby. DI did not dispute that the verbal exchanges he had with RP and Catesby were vigorous. PB deposed to this conversation:

"RP: You do not know anything about shop fit-outs. You should stick to being a mechanic

DI: I am Paula's half partner in the business."

138. On 11 May 2001 Canterbury City Council issued its consent in respect of 571-573 Canterbury Road to a "Change of Use and Shop Fit Out for Florist and Gift Shop". It is not clear how this fits into the overall picture.

139. PB understood in the early stages that DI was going to provide the finance for the fit out. PB said that during April/May 2001 she had a conversation with DI to the following effect:

"DI: … the bank manager has agreed to give me this money but he wants to see some financials from me.
PB: What happened to you having the money situation covered.

DI: … it would be better for you to borrow the money because being the landlord I do not want to put my name on any paper work involved in the café business. Trust me, I know the bank manager and it will not be a problem. The loan will be an interest only loan at a cost of about $400 per month. This will be easily affordable and we should be able to pay ourselves shortly after opening the café.

PB: … I do not think that a bank manager will approve a loan because I do not have any income.

DI: Use your house as security.

PB: I will not do that."

140. As earlier mentioned when PB became aware of DI's attitude to financing the project she did not tell her solicitors to stop the lease going ahead. She disagreed that she was content to go ahead with the venture on the basis that she would be providing the finance. She did assume some financial responsibility for the project.

141. On 14 June 2001 PB & UB applied to the St George Bank Ltd for finance to fit out the café. DI was not involved in that application, which was unsuccessful. PB agreed that if the application had been successful they had intended to go ahead with the financing of the fit out and that she was prepared to do so without DI's name being in any part of the application for finance.

142. PB said that RP became aware that they were having difficulty obtaining finance because they were unable to pay him some of the quoted price upfront. RP referred them (PB & DI) to Natalie Uren at Innovation Finance. PB said that DI entered into negotiations with Innovation Finance, but did so in the name of PB. By FAX of 15 June 2001 to DI Innovation Finance (per Natalie Uren) suggested two ways of financing the cost of the fit out, that is, by a lease facility or asset purchase facility. She advised that a second mortgage over 82 Glamis Street was not cost effective PB believed that DI was acting on behalf of the company. PB did not speak to Natalie Uren.

143. PB agreed that she signed a statement of assets and liabilities of herself and UB in respect of an application for finance. She realised that the finance application would involve her personally giving guarantees and indemnities and that the finance company needed the information requested. Finance was arranged by Innovation Finance. DI played a major part in obtaining finance and had discussions with Natalie Uren. PB said that about July/August 2001 DI told her that Natalie Uren was going to courier some documents for PB to sign.

144. PB said that she signed three lease agreements and three personal guarantees. The lease agreements (and associated guarantees) between the company and AGC and between the company and AIF were signed by her on one occasion at the office of Glow Automotive and the lease agreement between the company and SFC was signed at a later date. On each occasion DI was present and told her and the witness where to sign. The witness was Robert Proscino, LI's cousin and an employee of Glow Automotive.

145. In her affidavit of 25 November 2003 PB stated that when executing the document she did not realise that she was executing guarantees and indemnities in addition to the lease agreements. She said that she did not question or ask DI exactly what she was signing as she trusted him. In cross-examination PB conceded that it was false for her to say that she did not realise that she was executing guarantees and indemnities at the time she did so.

146. PB conceded that she was aware that DI's name did not appear on the guarantee. She knew that if the company did not meet its obligations she would be personally liable.

147. PB agreed that when the finance documents arrived by courier for her to sign there were stickers on them indicating where she was to sign. She said that DI was present while she signed the documents and that it was both the stickers and DI which and who were directing her where to sign the documents. This was further explained:

"Q. His direction was ' The documents have arrived, you'll need to sign them.'

Q. Then to work out where you had to sign them you followed the arrow that Mrs Uren had placed on them.

A. Yes."
The documents were signed at Glow Automotive office.

148. PB agreed that when the documents were signed DI was not pressuring her to sign them. He did not rush her to sign the documents but she did not read them. PB agreed that she signed the documents voluntarily. She had the opportunity to read and understand them. She had access to copies of the documents shortly after she signed them.

149. This passage appears in her cross-examination:

"Q. At the time you signed these documents [the finance documents] you understood that you were personally guaranteeing the liability of the company.

A: No. I thought I was signing as a director of the company."

150. This last mentioned answer was challenged in cross-examination. PB conceded that she knew when she had signed the document headed GUARANTEE & INDEMNITY AGC – Australian Guarantee Corporation Limited - that she was guaranteeing the company's liabilities, that is, the liabilities of Flowers Café Campsie Pty Ltd.

151. PB agreed that she knew that DI's name did not appear on the AGC finance document. She agreed that he did not want to be associated with it. She gave this evidence:

"Q. [DI] said the finance is a matter, that's up to you, didn't he?
A. Up on behalf of the café, yes."

152. PB signed the Service Finance Corporation Ltd documents as Guarantor. She has signed directly under the Title "GUARANTORS". ("Must Be Signed By Directors If Customer Is a Private Company"). PB adhered to her answer that she was only guaranteeing as a director on behalf of Flowers Café. She conceded that whether she was guaranteeing as a director or not she knew that if the company failed in its obligations to the finance company she personally would be liable.

153. PB was taken to the finance documents of Australian Integrated Finance Pty Ltd (Elderslie Finance). PB signed the Rental Schedule/Tax Invoice on behalf of the company. PB also signed a document headed Deed of Guarantee & Indemnity as the guarantor. She also signed a document headed "Guarantor's Acknowledgment". (Commercial). In answer to the questions posed in it she stated that she had read the guarantee and indemnity and that she was aware that she should get legal advice from her lawyer and financial advice from her financial adviser before she signed the guarantee and indemnity. She also stated that she decided to sign the guarantee and indemnity without getting advice and that she understood that this was at her own risk.

154. After having been taken through the three sets of financial documents (leases, guarantees and indemnities) PB agreed that it would be false to say that when she executed these documents she did not realise that she was executing them as guarantees and indemnities as she had done in para 74 of her affidavit of 25 November 2003. She gave this explanation:

"I always believed I was signing on behalf of the company and that we were both directors and both liable."
Partnership

155. PB said that prior to instructing the accountant she and DI agreed that each of them would be a director of the company. It was not a case of DI assisting her with the paperwork, rather DI took the role of looking after the paperwork.

156. PB said that she and DI decided that they would form a company with both of them as directors to conduct the café business. She gave this evidence:

"Q. And you considered Mr Iacullo and yourself as partners because you were both directors of this company?

Q. The form of the partnership that you intended was a private company with both you and Mr Iacullo as a director?

Q. And that's in fact what happened?

A. I believe so, yes."

157. PB agreed that as from mid April 2001 when she signed the various company forms to be lodged with ASIC she knew that she was the only shareholder in the company. She also signed the company's Annual Return on 21 January 2002, showing herself as the sole shareholder. In para 55 of the affidavit of 25 November 2003 she had stated, "It was not until after the commencement of the proceedings that I became aware that I was its sole shareholder." PB denied that this statement was false. She said that when she signed the documents she did not check the documents properly.

158. PB adhered to the contention in her affidavit that she did not know at the time she signed the company forms and the Annual Return that she was the sole shareholder of the company.

159. PB said that DI had control of the company's chequebook and the money. PB had no explanation for why DI, after writing out the cheques, did not sign them but had her sign them. She replied that this was for DI to answer. PB said that to her knowledge DI did not sign any cheques except those intentionally held and not presented.

Prelude to the Loan Agreement
160. PB said that the café commenced trading in mid to late October 2001 and that almost every day DI asked her how the business fared that day and often asked, "Is there any money for banking?" DI said that he did not visit the café every day. When he did go there he offered to do the banking as PB would find it difficult to leave the shop.

161. Initially there was not much money for banking. She gave DI what cash there was over and above the float in the cash register. She understood that DI banked the money, or had it banked. Goods delivered to the café were paid for out of the cash register, except that if large amounts had to be paid DI would write a cheque and PB would sign it. DI had possession of both the cheque book and the deposit books for the company account. DI denied that he had possession of the cheque book. PB obtained possession of the deposit book about October 2002. DI arranged for all insurances for the café and for the fixtures and equipment installed in the café. DI insisted that he did this at PB's request.

162. Sometime after the café commenced trading DI handed PB a cheque which was written out and completed from the company's cheque book, stating that it was rent for the café. When PB responded that there was not enough money in the account she said DI said that he was going to use the cheques to claim GST on them as if the rent had been paid. PB said that she agreed to sign the cheque on the understanding that DI would put aside the cheque until the business was making enough to pay the rent. DI denied the conversation and stated that the first cheque that he received from PB, which was drawn on the Flowers Café account, was in March 2002 after the loan agreement had been executed.

163. In about October 2001 PB experienced acute financial difficulty. This was the reason she stopped paying rent for the Roselands property. She did not claim to offset the $10,000 which DI allegedly held. PB did not appear to have an explanation as to why she did not contact DI over the non-payment of the rent. Nor did she contact LI.

164. PB said that she applied for a loan of $50,000 in November 2001 to put some money into the coffee shop to match DI's contribution and to have some excess money for the residential rent. She was referred to an application of 7 December 2001 for $50,000 made to St George Bank by her and her husband. This application was refused.

165. PB said around early December 2001 she and DI had a conversation to this effect:

"DI: It is about time I started getting something out of the café because I have put a lot of money into it. We should start getting rent now.

PB: Well if you are going to start taking the rent I am going to start taking a wage and we know that there is not enough money to do that at the moment."

166. DI said that he recalled PB coming to their home in Blakehurst and having a conversation with LI in which words to the following effect were used:

"PB: I don’t want to continue in the café business and I have had a few job offers.

DI: Then maybe you should put a manager in the café to look after it for you."

167. As business was slow DI and PB agreed to sub-lease part of the café to Amelia Cavallheiro to sell flowers. DI had a sub-lease prepared for part of the café at a weekly rental of $150 (plus GST). Amelia provided PB with a cheque for her rent monthly which PB gave to DI to bank.

168. PB said that prior to Christmas 2001 she went to the Iacullos' house and that amongst other things, a conversation to this effect took place:

"DI: Paula, look I am not a partner in the business and I want to start receiving rent.

PB: Dominic, that is not possible. The shop does not make enough money. We agreed that you would not receive any rent and I would not receive any salary until there was enough money in the business. You cannot involve yourself in setting up the shop, fitting it out and then walk away … The café was totally your idea and you declined the florist so that you could take a share of the profits… If rent was all you were interested in you should have taken up the florist. What about the $10,000 you are holding for me?

366. I accept that during the course of contract negotiations, the parties may change their positions. They may take extra steps to protect themselves, rearrange, or minimise their liabilities.

367. I have reached these conclusions:

(a) DI represented to PB in March 2001, prior to her entering into the coffee shop lease, that they would conduct the proposed coffee shop business together, and in conjunction with that representation made representations that there would be a 2½ month rent free period under the coffee shop lease and that there would be no rent or wages payable until the coffee shop business was profitable.

(In the evidence there is a reference to an initial rent free period of 3 months and also to 2 months thereafter at half rent. While the representation as to the longer period was probably made, it is unnecessary to take this point further, as I am satisfied that no rent was payable unless and until the coffee shop business was profitable and it was not profitable as at 12 November 2002)

(b) In substance what DI represented and proposed was a partnership with PB running the coffee shop and DI bringing his business experience to bear in the setting up of the shop and in managing the financial aspects of the business. It was envisaged that once the coffee shop business became profitable PB would pay DI rent at the agreed rate and PB would be paid a weekly wage ($500 pw) with the profits to be split equally between them. How this would be achieved had not been agreed. This could have given rise to problems.

(c) Flowers Café Campsie Pty Ltd was formed as the vehicle to give effect to their joint intention to operate the coffee shop business together. DI used the company to minimise, if not eliminate, any personal liability on his part. PB assumed, as guarantor, liability under the financial leases.

(d) DI in fact exercised the role of the dominant partner, controlling the financial and administrative aspects of the business. His role was far greater than that of landlord and non-executive director.

Cross Claims
368. The Cross Claims repeat paras 11to 42 of the Amended Defence to the Further Amended Statement of Claim, The repeated paragraphs presently relevant to the coffee shop lease are paras 24 to 42 (both inclusive). They cover the defence and claim under the Fair Trading Act, the Contracts Review Act and under the general law.

369. In their final written submissions the Behrens concentrated as to the coffee shop lease on what they described as the misleading conduct of DI and relief under the Fair Trading Act. In their initial submissions, which were incorporated into their final submissions, the Behrens sought relief under the Fair Trading Act as to the coffee shop lease. The initial submissions were lodged just prior to the hearing starting. As to the coffee shop lease I have considered the position under the Fair Trading Act.

370. The Behrens submitted that the representations by DI in relation to waiving payment of rent and the rent free periods were representations as to a future matter and are taken to be misleading by s 41 of the Fair Trading Act because DI (on behalf of the Iacullos) did not have reasonable grounds for making such representations. Despite what he said, he did not intend to waive the rent of the coffee shop unless and until the coffee shop business was profitable. He referred to obtaining "back rent".

371. By letter of 30 October 2002 DI and LI demanded payment of $20,836.31, being the alleged outstanding rent for the coffee shop, GST, interest and legal costs within seven days. They also made a without prejudice offer applicable in the event of the sale of the business and required to be accepted within five days of 30 October 2002.

372. The Iacullos, in exercise of their purported right of re-entry, re-entered the coffee shop and excluded PB. The Iacullos had the locks changed. By notice to PB dated 12 November 2002, and delivered that day DI and LI terminated the lease of the coffee shop upon the stated ground of "failure to pay the rent for a period in excess of fourteen (14) days, i.e., since 1 March 2002." PB was in no position, financially, to resist her eviction. By letter of 12 November 2002 to PB, DI and LI advised that they would give her a limited right to access the coffee shop. She was advised to make arrangements with their real estate agent, David Kay Pty Ltd for access to occur before 26 November 2002. On 13 November 2002 on the letterhead of the real estate agent PB made arrangements for the removal and collection of food perishables from the coffee shop. PB was required to return all keys of the property.

373. By FAX sent on 15 November 2002 by PB addressed to DI and faxed to David Kay probably by DI, PB asked to be advised of a suitable time to "access the shop and remove my things." The FAX continued:

"Items not leased,

Coffee machine, grinder, radio, plates, cutlery, glasses, microwave, salamander, utensils, tables/chairs, pots/pans, milkshakemaker, trays, personal papers, cheque book, money in register, stock etc.

Items leased,

Fridges, freezers, fixtures etc.

Icecream fridge needs to go back to Cadbury ice cream

Coffee cups, umbrella, barriers need to go back to Schibells coffee.

Natalie from Innovation Finance is waiting to hear back with a time so that the leasing companies can take back their equipment.

Please Fax your response to me ASAP …"

374. By letter of 18 November 2002 and stated to be faxed on 19 & 20 November 2002, DI and LI asked PB to make arrangements with Graham Sun of the real estate agents, or with David Bannerman of Michell Sillar.

375. By FAX bearing date 26 November 2002 Mr Sun, of the agent, advised "Further to the landlord's notice of 12 November 2002 we advise that today is the final day to have your goods/equipment removed from the premises" and "Please contact me should you intend to proceed."

376. The accounts of Michell Sillar reveal that DI consulted with them as to the "removal of the lessee's goods, issues arising from the proposed purchaser of the business seeking to purchase the business, removal of the sub-tenant's goods."

377. Negotiations took place between the real estate agent and Innovation Finance Pty Ltd as to equipment located at the coffee shop and financed by Service Finance Corporation Limited, AGC Limited and Australian Integrated Finance Pty Ltd respectively. By FAX of 26 November 2002 Innovation Finance asked the agent if any of their clients were interested in taking over the contracts or making an offer on the equipment. On 26 November 2002 the agent sent copies of the summaries of the finance contracts to DI.

378. By its Business Sales Advice of 13 March 2003 headed:

"Sale: Coffee Shop

Re: Sale of Business"

"…

Lease: Grant of New Lease

Rent Period: 3 years

Option: 3 years & 3 years

Rent: 550 & GST pw"

379. Ultimately, DI paid the following sums to the finance companies (inc GST):

(a) Service Finance Corporation Ltd $ 2,500

- purchase of air conditioner - invoice
dated 2.4.03

(b) Australian Integrated Finance
- purchase of 4 pieces of equipment -
invoice dated 14.4.03 $11,000

(c) AGC Limited
- purchase of kitchen fittings and
kitchen furniture - $10,000
$23,500

380. About 15 April 2003 the Iacullos, according to their invoice, sold this equipment for $55,000 ($50,000 & GST of $5,000) to M & P Troulis, the incoming tenants of the coffee shop). While the sale agreement for the equipment does not bear a date, it specifies the settlement date as 16 April 2003. The lease bears date 7 April 2003, with the 3 year term commencing on 1 May 2003 and an option for 3 years. The monthly rent was $2383.33

381. The agent (Century 21 Parkside at this stage) rendered an account for commission of $8000 re "Sale of Shop".

382. The remittance advice of the Iacullos' solicitors to Century 21 Parkside reads:

"Mr D & Mrs L Iacullo

Sale of Shop 4, 571-573 Canterbury Road, Campsie, Business broker commission."

383. The account of Michell Sillar of 17 April 2003 reads "Drafting … the lease for Iacullo Sale of Business."

384. Taking into account the commission of $8000 and GST of $5000 the Iacullos made approximately $18,000 on the purchase and sale of the equipment and fittings of the coffee shop. It was an easy, no risk arrangement because the Iacullos had a definite purchaser before they agreed to purchase the equipment from the financiers.

385. As RP pointed out, some of the equipment was custom made for the coffee shop. What is apparent is the close link between the purchase and use of the equipment and the lease. They are inter-connected. A Coffee shop equipment for use in the business was being sold along with the grant of a new lease.

Conversion
386. PB has complained that the Iacullos refused her access to allow her to take back and have otherwise not returned to her a coffee espresso machine, a coffee grinder, a focaccia press, a radio and the equipment the subject of the finance leases.

387. The letter of 12 November 2001 of DI the Iacullos, while stating an intention to give PB a limited right of access to the coffee shop before 26 November 2002 on conditions, makes no reference to whether she can remove any items. The note signed by PB on 13 November 2002 refers to the removal of perishable food items from the shop by the agent, or authorised agents, their collection by PB and the return of all keys. I have earlier referred to PB's FAX of 15 November 2002 apparently sent to DI and the Iacullos' letter bearing date 18 November 2002. This does not make clear what PB was to be allowed to collect. The FAX of 26 November 2002 from the agent to PB refers to that being "the final day to have your goods/equipment removed from the premises." There is no specification of PB's goods/equipment. On the same day three faxes were received from Innovation Finance. PB assumed, or was told, that Innovation Finance would wish to collect the leased goods from the coffee shop. Because of the default, or impending default, the financiers would probably not accept PB removing the leased goods.

388. A stalemate had developed. Innovation Finance, on behalf of each financier, was seeking somebody to take over the existing leases or purchase the equipment. In the ensuing months it seems that Innovation Finance on behalf of the financiers was content for the leased equipment to remain in the closed coffee shop. It seems that in February-March 2003 DI entrusted the re-letting of the shop and the sale of the business/equipment to another agent, Century 21 Parkside, which was able to find a purchaser for the business/equipment at a substantial profit for the Iacullos, and a new lessee for the shop. The equipment in the shop was of use to a lessee proposing to conduct the business of a coffee shop. The evidence suggests that the premises were well fitted out for a coffee shop.

389. It is too late and impracticable to order the return of the goods which PB asserts belong to her. There was no admissible evidence of the value of those goods, but the estimated cost/value in para 36 of the Amended Defence was $2400-$3400 and a little more in subsequent documents. In the absence of any reliable evidence of value, it is not possible to make any award of damages in her favour. PB is not entitled to maintain any claim for conversion in respect of the leased goods in the circumstances of the present case.

390. PB did not dispute that substantial amounts were owed to the finance companies under the leases. The payout figures (calculated about November 2003) were estimated to be:

(a) AGC $21,231.13

(b) AIF $20,343.48

$13,919.93

$55,494.54

391. PB said that as at 25 November 2003 SFC had commenced proceedings against her, claiming $14,887.42 plus interest and costs. The materials do not reveal whether the financiers have given credit for the amounts received from DI as the purchaser of the equipment and what the present indebtedness is said to be.

Relief Claimed:
392. In their final submissions the Behrens sought the setting aside of the coffee shop lease and an order that the Iacullos indemnify PB in respect of her liability under the finance leases. It was further submitted that if the Court concluded that it should not provide relief in respect of the finance leases, relief should be granted in respect of the liabilities assumed by PB under the café lease. I have earlier summarised the relief claimed by the Behrens in their cross-claim.

393. Should the lease of the coffee shop be set aside? When she signed the lease PB knew that she had to comply with its terms. I have found that the lease was entered into as a result of a material misrepresentation on the part of DI that he and PB would carry on the coffee shop business together and that no rent and no wages would be payable unless and until the coffee shop business became profitable. I am satisfied that it did not become profitable in the period from mid-October 2001, when it opened up, to 12 November 2002. PB would not have entered into the lease if the misrepresentations had not been made. As at 12 November 2002 the lease had, according to its terms, commenced on 1 March 2001.

394. Rather than setting aside the lease, would the better course be to vary the terms of the lease by adding at the end of cl 1 a proviso in these terms:

"Provided that no rent shall be payable by the lessee to the lessors unless and until the coffee shop business becomes profi6able, that is able to pay the rent and a weekly wage of $500 to the lessee."

395. There would be an accompanying declaration that as at 12 November 2002 no rent or occupation fee was due and payable by PB to the Iacullos.

396. PB signed the finance leases knowing that she was liable as guarantor. As earlier mentioned the loan in respect of Service Finance Corporation Limited was in respect of an air conditioning system for which an invoice with an inflated cost of $15,000 was submitted. Its cost was about $6500 plus GST. The air conditioning unit in the coffee shop and those in the other two areas of the Iacullos' premises, were fitted at the same time in early 2001. DI had paid a company known as Air-On Installations for the air conditioning unit. DI said that PB subsequently arranged finance on that unit. He was aware that was happening. The maximum amount which the financier was prepared to lend was $14,000 plus GST. DI said he had difficulty in answering the question which asked him whether he said he had no involvement in raising that finance. DI was then taken to a FAX dated 9 August 2001 from Innovation Finance to him. His assistance was sought in having the air conditioning unit supplier complete an invoice for the supply of the unit. A pro forma invoice setting out what was required was attached. The FAX read "… could you please have the attached invoice prepared and forwarded by FAX to 02 8 817 0058." That was the FAX number of Innovation Finance. The FAX continued that they had arranged "for the cheque to be directly deposited into your account today …". The FAX also stated "… the invoice will need to be forwarded to the funder for settlement." In the bottom right hand corner of the pro forma invoice some person has written "9774 1822 Fax". That is the Fax number of Air-On Installations. (also referred to as "On Air Installations").

397. There is a Tax Invoice bearing date 3 August 2001 from Air-On Installations addressed to Service Finance Corporation Ltd for "Supply and Install New Actron … Air Conditioning System" for $15,400 (inclusive of GST). This evidence was given by DI:

"Q. And what I'm putting to you is you faxed … the pro forma invoice to On-Air Installations.

A. I reiterate the fact that Paula did not have a fax machine and she requested me to fax it on her behalf."

398. DI said that possibly before he sent the FAX he had a telephone conversation with a man known as Paul from On-Air Installations to tell him it was coming, but he could not remember what happened three years ago. DI in truth remembered that conversation.

399. DI agreed that the purpose of that conversation was to explain to On-Air Installations that he was requesting them to complete an invoice in the manner which subsequently appeared (referred to earlier). He also agreed that the purpose of this invoice was to obtain finance from Service Finance Corporation for $15,400.

400. DI agreed that the number noted on the bottom of the FAX from Innovation Finance in handwriting was the serial number of the air conditioning unit for which On-Air Installations invoiced the finance company.

401. DI agreed that he knew the air conditioning unit was not valued at $14,000 or $15,000 and that the invoice given to the finance company was untrue and explained his actions thus:

"That was a deal that Natalie [Uren of Innovation Finance] and Paula arranged amongst themselves and they requested to me to ring Air-On on their behalf."

Later on DI said:

"I didn't request that invoice from Air On, Paula did, I just faxed it across. I've made that very clear earlier."

402. I do not believe DI when he seeks to blame PB and exonerate himself. DI, as a director of the company, was dealing with this matter and contacting both Innovation Finance and Air-On Installations. He had previously dealt with the latter. He was the architect of and the person who carried out the fraud on SFC. DI appreciated the need for capital.

403. The bank statements of the company reveal that on 21 August 2001 $15,400 was paid into the company's account. At that point there was a credit balance in the account of $108.14. Between 22 August 2001 and 12 September the credit balance was used to meet about ten cheques and one pre-authorised automatic withdrawal, that is, it was used as if it were capital and fully expended.

404. While DI organised and carried out the fraud it seems that both DI and PB benefited in that it allowed Flowers Café Campsie Pty Ltd to meet a substantial number of cheques to help it become operational. PB signed the lease documents with SFC as guarantor. In all the circumstances DI should be ordered to indemnify PB in respect of three-quarters of the amount which remains owing to SFC.

405. As to the other two finance leases it seems that the moneys for the fit out and equipment were paid to R & C and that Innovation Finance may have allowed excessive funds to be paid to R & C. PB was aware that she was guaranteeing the company's obligations under the finance leases to AIF and AGC. DI was the effective organiser of the fit out and the finances and the dominant partner. DI represented to her that they would carry on the business of the coffee shop together. The appropriate order is that DI should indemnify PB in respect of half the amount outstanding under the finance leases to AIF and AGC. In fixing these shares I have not taken into account the profit which DI made on the purchase and sale of the equipment in the coffee shop The air conditioning unit did not form part of that equipment.

406. In their Further Amended Notice of Cross Claim the Behrens sought an order that the matter be referred to the Master, Equity Division, to take accounts of and to enquire of all dealings and transactions between PB and the cross defendants with respect to the coffee shop business.

407. I have decided not to follow that course. The dealings and transactions of the parties were deployed fairly fully before me. Taking accounts and holding an enquiry would be very expensive and the costs of that would not be justified, having regard to the relatively small amounts involved in these proceedings. The declarations and orders I propose will sufficiently resolve the matters in issue between the parties. Further proceedings would not be warranted.

408. These proceedings should be disposed of as follows:

(a) Dismiss the claim for judgment for possession of 82 Glamis Street, Kingsgrove, being the land descried in Folio 92/14705 of the Real Property Act Register. Leave to issue a writ of possession refused.
(b) Dismiss the claim that the Behrens pay the Iacullos the sum of $50,000 together with interest.

(c) Declare that the Loan Agreement between the Iacullos and the Behrens and the mortgage executed by the Behrens over 82 Glamis Street, Kingsgrove, are unenforceable and that the Behrens hold 82 Glamis Street, Kingsgrove, free from Mortgage 895 3490K.

(d) On the alternative claim of the Iacullos for $12,080.98 for outstanding rent for 29 Bower Street, Roselands, there seems to be an outstanding balance of $87 to be addressed when the Short Minutes are settled.
(e) Dismiss the alternative claim of the Iacullos for $25,039 for alleged cash advances to PB

(f) Set aside the lease No 8053407S from the Iacullos to PB as to the coffee shop, 571-573 Canterbury Road, Campsie, folio identifier 1/1020408.

(g) Declare that no sums are due by way of rent or damages by PB to the Iacullos in respect of the coffee shop.

(h) Order that DI indemnify PB as follows:

(i) As to the amount due to Service Finance Corporation Limited under the air conditioning lease – three-quarters of such amount.

(ii) As to the amount due to AGC Limited under the lease of various items of kitchen equipment – one half of such amount.

(iii) As to the amount due to Australian Integrated Finance Pty Limited under the lease of dishwasher, gas stove, p[an fryer and freezer – one half of such amount.

(i) Dismiss the claim for damages for conversion.

409. I direct that the Behrens deliver draft Short Minutes of Order to give effect to this judgment to the Iacullos and to my associate within 7 days. Within a further 5 days the Iacullos are to notify my associate and the Behrens of all objections to such Short Minutes. The Short Minutes will be settled 14 days from today or on such other day as may be arranged with my associate. At that time I will also hear submissions as to costs.

**********

13/03/2006 - - Paragraph(s)

14/03/2006 - paragraph 13 lost in original entry on system - Paragraph(s) para 13

CITATION:	Iacullo v Behrens [2006] NSWSC 121 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	14, 15, 16, 17, 20 June 2005, 10 February 2006
JUDGMENT DATE :	10 February 2006
JURISDICTION:	Civil
JUDGMENT OF:	Smart AJ at 1
DECISION:	See paras 408 and 409.
CATCHWORDS:	Moneys not advanced as intended under loan agreement and mortgage - not a loan for past debts - consideration fails. Alternative claim for alleged cash advances dismissed. Lease of coffee shop set aside and no sums due to Iacullos for rent or damages. Partial indemnities as to finance leases granted - cross-claim for conversion dismissed.
LEGISLATION CITED:	Fair Trading Act Contracts Review Act 1980 Real Property Act Retail Leases Act 1994
CASES CITED:	Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 621 Burnes v Trade Credits Limited 1981 1 NSWLR 93 Codelfa Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Hoyts Pty Ltd v Spencer (1919) 27 CLR 133 Toll (FGCT) Pty Ltd v Alphaharm Pty Ltd (2004) 219 CLR 165
PARTIES:	Dominic Iacullo & Anor v Uwe Behrens & Anor
FILE NUMBER(S):	SC 5466/2004
COUNSEL:	(P) Mr M Ashurst (D) Mr F Gleeson
SOLICITORS:	(P) Michell Sillar (D) Aitken McLachlan Thorpe