Investmentsource v Knox Street Apartments - [2007] NSWSC 1214

No judgment structure available for this case.

CITATION: Investmentsource v Knox Street Apartments [2007] NSWSC 1214

HEARING DATE(S): 23, 24, 25, 26 and 27 July 2007

JUDGMENT DATE :
31 October 2007

JURISDICTION: Equity Division
Commercial List

JUDGMENT OF: McDougall J at 1

DECISION: See paragraphs [272], [274] of judgment

CATCHWORDS: CONTRACTS – Joint venture – Agreement relating to property development – Dispute over net proceeds and order of distribution – Where joint venture relationship constituted by joint venture agreement and associated agreements – Intention of parties – Construction and effect of agreements – Where inconsistency between agreements – Whether breach of obligations under joint venture agreement – Whether damage proved to have been caused.

LEGISLATION CITED: A New Tax System (Goods and Services) Act 1999 (Cth)

CASES CITED: Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99
Chacmol Holdings Pty Ltd v Handberg (2005) 215 ALR 748
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389
Investmentsource Corporation Pty Ltd v Knox Street Apartments (2002) 56 NSWLR 27
Mackay v Dick (1881) 6 App Cas 251

PARTIES: Marcel Esber (First Plaintiff)
Joseph Esber (Second Plaintiff)
Casanda Pty Ltd (Third Plaintiff)
Kimberley Securities Limited (First Defendant)
Residential Housing Corporation Ltd (Second Defendant)
RP and PM Flexman (Fifth Defendants)

FILE NUMBER(S): SC 50049/02 & 50110/06

COUNSEL: T G R Parker SC / S Fendekian (Plaintiffs)
B A Coles QC / G A Sirtes (First Defendant)
D A Smallbone / K A Bagley (Fifth Defendants) (Flexmans)

SOLICITORS: Watson & Watson Solicitors (First, Second and Third Plaintiffs)
Landerer & Company Solicitors (First Defendant)
Bolzan & Dimitri Solicitors (Second Defendant)
Thurlow Fisher (Fifth Defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

31 October 2007

50049/02 INVESTMENTSOURCE CORPORATION PTY LIMITED v KNOX STREET APARTMENTS PTY LIMITED & ORS

50110/06 MARCEL ESBER & ORS v KIMBERLEY SECURITIES LIMITED & ANOR

JUDGMENT

1 HIS HONOUR: These proceedings concern a joint venture relating to a property development at Knox Street, Chippendale. The joint venture parties were Knox Street Apartments Pty Limited (Knox), the brothers Messrs Marcel and Joseph Esber (who effectively controlled Knox), and Kimberley Securities Limited (Kimberley). Knox had commenced the development well before the joint venture agreement with Kimberley was made on 7 December 2000. By that date, the development, Knox and the Messrs Esber and the development were in very serious difficulty. They faced liquidation or bankruptcy. The joint venture agreement with Kimberley offered the only prospect of salvaging the development. The project has been completed and all the units created by the development have been sold. Knox and Kimberley are in dispute over the net proceeds. They propose to take accounts of the joint venture. A number of questions have been propounded for resolution by the Court. The resolution of those questions will facilitate the taking of accounts. This judgment will deal with those questions. It will not resolve the entirety of the matters in dispute.

Background

2 As I have said, Messrs Marcel and Joseph Esber effectively controlled Knox. Although they were brothers, they were not speaking directly to each other at the time. The operations of Knox, at least in relation to the Central Park Apartments Development, were controlled by Mr Joseph Esber. Mr Marcel Esber acquiesced in this.

3 Kimberley is a company controlled by Mr Nathan (Nati) Stoliar. Mr Stoliar has many years’ experience in property development in this state. Mr Gabriel (Gabi) Lorentz was another director of Kimberley. It does not appear that he played any part in Kimberley’s decision making in relation to the joint venture agreement. Mr Alain Waitsman was Kimberley’s sales and marketing manager at the time. His responsibilities extended to the Central Park Apartments project.

4 Knox was the owner of the land in question. The development, known as Central Park Apartments, comprised some fifty-eight residential strata title lots. Knox put in place, to fund the acquisition and development of the land, the following facilities:

(1) A loan facility with a limit of $12.5 million provided by Law Mortgages Queensland Pty Ltd (LMQ), secured by a first registered mortgage over the property.

(2) A loan facility provided by Residential Housing Corporation Limited (RHC), on which about $1.26 million was owing when the joint venture agreement was made, secured by a second registered mortgage over the property and by second registered mortgages over strata title lots at Surry Hills owned by Mr Marcel Esber and Casanda Pty Limited, a company controlled by him.

5 By April 2000, the development was in trouble. Knox was in breach of its obligations to LMQ and RHC, which had commenced, or threatened to commence, proceedings. The builder had walked off the site. Knox and the Messrs Esber had run out of money.

6 In October 2000, Knox entered into a joint venture agreement with B J Metro Pty Limited, a builder. That agreement would have facilitated the completion of the development. Ultimately, it did not proceed.

7 It will be necessary to return to the detail of the joint venture agreement made on 8 December 2000. In essence, it included the following elements:

(1) Kimberley was designated as the “Development Manager”. Its obligations included to coordinate the development, bring it to completion, find or provide the necessary funding, arrange for the marketing and sale of the unsold lots and provide bookkeeping and accounting services.

(2) There was agreement as to the order in which the net proceeds of the joint venture would be distributed: repayment of the mortgagees, repayment of amounts advanced or incurred by Kimberley, the payment of a “fee” of $2 million to Kimberley, payment of unsecured creditors, payment of $3 million of profits to Knox and division of any balance between Kimberley and Knox.

(3) Kimberley was responsible for payment of “Project Costs” as defined and “other expenditures, disbursements or other liabilities incurred in relation to the Development Assets or the Development”, and was to be reimbursed in accordance with the scheme that I have just outlined.

(4) Kimberley was empowered to negotiate the sale of the unsold lots. A “Minimum Price” was specified for each lot. Kimberley’s authority was “to negotiate the sale of the Lots at prices equal to or greater than the Minimum Price for each Lot”.

8 Pursuant to a Deed of Loan and Guarantee made contemporaneously with the joint venture agreement, Kimberley obtained third registered mortgages over the strata title lots at Surry Hills owned by Mr Marcel Esber and Casanda. (These were the properties over which RHC had second registered mortgages.) There is a dispute as to the extent of the obligations secured to Kimberley by those mortgages.

9 Practical completion was achieved in about November 2001. The strata title plan (SP67022) was registered on 7 December 2001.

10 Before then, Kimberley had caused Knox to enter into an agreement with Milton Street Holdings Pty Limited and others (Milton). The parties called that the “Investmentsource agreement”, and I shall do likewise.

11 Milton and the other companies with whom Knox thereby contracted were associated with, and I think controlled by, Mr Henry Kaye. Mr Kaye has achieved some public notice as a promoter of the concept of real estate as the road to riches. It is clear that the objective of the Investmentsource agreement was to furnish Mr Kaye with a stock of units for sale to those who, inspired by his seminars, decided to follow that road.

12 The Investmentsource agreement included a put option granted by Milton to Knox in respect of some thirty-one strata title lots then unsold, and not otherwise earmarked, in the development. There was a “Takeout Price” specified for all the thirty-one units of $10,639,417.00, and for each unit the sum specified in a draft contract for sale relating to it.

13 Under the Investmentsource agreement, Investmentsource had the exclusive right to market the units and to procure purchasers for prices not less than the relevant Takeout Price. There was no entitlement to remuneration except in the event that Investmentsource negotiated a sale at a price higher than the Takeout Price, in which case it was entitled to keep the net difference as its remuneration.

14 The total of the sales prices realised by Investmentsource was $11,970,000.00 (some $1.33 million more than the total Takeout Price). In a separate judgment in these proceedings, relating to separate questions propounded pursuant to SCR part 31 r2(a), Barrett J concluded that Investmentsource was not entitled to retain its “remuneration” because it was not a licensed real estate agent. See Investmentsource Corporation Pty Ltd v Knox Street Apartments (2002) 56 NSWLR 27.

15 The Surry Hills units to which I have referred were sold by a prior mortgagee. Kimberley received the net proceeds after payment out of the prior mortgages: in round figures, $419,000.00. It credited the amount so received to the joint venture account.

16 Knox had reached an agreement with Mr and Mrs Flexman whereby they agreed to take three designated units in the development in satisfaction of the amounts lent by them. There is no doubt that if this agreement had been carried into effect, they would have received back the full amount of their advance plus a handsome recompense, or perhaps more accurately allowance for profit and risk. Mr and Mrs Flexman lodged caveats to protect their interests in what the parties called, and I will call, the Flexman units.

17 The agreement between Knox and Mr and Mrs Flexman recognised that the Flexman units might need to be sold, and provided that in those circumstances Knox should be liable for the amount of the debt together with interest.

18 The joint venture agreement provided that the Flexman units should not be marketed or sold unless both Knox and Kimberley reasonably agreed that there would not be sufficient proceeds from the sale of other lots to pay out all the mortgages. There is no suggestion that Knox ever formed such an opinion. Nonetheless, Kimberley procured purchasers for the Flexman units and caused Knox to enter into contracts for their sale. It also caused Knox to commence proceedings against Mr and Mrs Flexman for the withdrawal of their caveats. Ultimately, that relief was granted.

19 Mr and Mrs Flexman brought their own proceedings against Knox and Kimberley. Those proceedings have been compromised and they have a judgment against Knox.

20 Because completion of the sales occurred after 1 July 2000, the sales were “taxable supplies” and GST was payable in respect of them. Because the construction of the developments straddled the commencement of the GST legislation on 1 July 2000, the GST on the sales could have been assessed at a lesser rate than 10% by application of the margin scheme. This was not done.

21 Kimberley paid all outgoings on behalf of the joint venture. It took the benefit of all input credits on those payments. It maintains, however, that GST on the sales is not a Project Cost and that Kimberley should not have to bear it.

22 After payment out of all expenses of the development, there is a balance of about $1.866 million available for payment of Kimberley’s fee. That balance takes into account the proceeds of sale of the Flexman units, the windfall relating to Investmentsource’s failed claim for remuneration and the sum of $419,000.00 from the sale of the Surry Hills units.

The fundamental issues

23 As I have indicated, the parties formulated a number of separate questions for determination. They did this so that the basis on which the accounts are to be taken would be defined. I do not think that there is great utility in setting out those separate questions at this point, since an understanding of some of them requires some knowledge of the facts.

24 The fundamental issues include the following:

(1) Kimberley’s fee: is it payable only out of (and to the extent of) profits, as Knox contends; or is it payable by Knox and those who have guaranteed the obligations of Knox (as Kimberley contends) regardless of the extent of profits? Was payment of the fee secured by the mortgages over the Surry Hills units, and now by the amount of $419,000.00 received by Kimberley in respect of those mortgages? Who must bear the GST liability on Kimberley’s fee?

(2) The Investmentsource agreement: was Kimberley authorised to enter into it? Did Knox through Mr Joseph Esber give consent, and was that consent of continuing effect notwithstanding that Knox purported to withdraw it? Was the sale at a reasonable price in the conditions, and having regard to other evidence of value? Did Kimberley and its associates breach their fiduciary duties to Knox in causing it to enter into that agreement? What if any damages flow?

(3) The Flexman units: was Kimberley entitled to sell the Flexman units (and to commence proceedings in Knox’s name for the withdrawal of the caveats lodged by Mr and Mrs Flexman), having regard to relevant terms of the joint venture agreement? If it was not, were there breaches of the joint venture agreement, and what damages flow from those breaches?

(4) GST liabilities: was GST on the sale prices of the units a Project Cost which Kimberley was obliged to pay? Should Knox or Kimberley have sought to apply the margin scheme in circumstances where construction commenced before the inception of the GST legislation on 1 July 2000?

Question 1: is Kimberley’s fee now payable?

25 The parties agreed that this question should be answered “yes, subject to issue 2”.

Question 2: is the fee payable only to the extent of any profits?

26 Question 2 reads as follows:

2. If yes to 1, is the fee payable only to the extent of the profits (if any) on the joint venture account?

27 The parties accepted that if this question were to be answered “yes”, then Kimberley’s third cross-claim, insofar as it seeks payment of the balance of the fee, should be dismissed.

Relevant terms of the joint venture agreement

28 The parties referred to clauses 2.1, 2.2, 3.5, 9.1, 15.1, 15.3, 16.1 and 16.2. Those clauses read as follows:

2.1 Establishment of Joint Venture

As from the date of this Agreement there is established an unincorporated joint venture between the Venturers to be known as the “Central Park Apartments Joint Venture” for the purpose of carrying out the Development. The Joint Venture shall continue until it is terminated in accordance with this Agreement.

2.2 Joint Venture Profits

Progressively from the sales of units in the Property the Profits of the Joint Venture are to be distributed as follows:-

(a) After payment out of:-

(i) The first mortgage over the property including any interest or other costs, charged and expenses owing to the first mortgagee;

(ii) The second mortgage over the property including any interest or other costs, charges and expenses owing to the second mortgagee;

A. Any amount (currently estimated at $778,598.59) paid on behalf of KSA by KSL to LMQ to pay out arrears of interest, costs, charges and expenses owing to LMQ under the LMQ mortgage; PLUS

C. The re-imbursement to KSL of any other amounts it has paid out in respect of the payment of interest, costs, charges and expenses due and payable to the first and second mortgagees under their respective mortgagees from the date of this Agreement; PLUS

D. Any other moneys reasonably incurred by KSL on behalf of the Joint Venture in furtherance of the objectives of the Joint Venture; PLUS

E. Any amounts being the equivalent of the differential in interest rates referred to in clause 7.2 PLUS

F. The sum of Two Million Dollars being the fee due and payable to KSL for its participation in the Joint Venture

(b) The payment of all unsecured creditors;

(c) Thereafter KSA will be entitled to the next Three Million Dollars ($3,000,000) of Profits; and

(a) The Development Manager will render no charges to the Joint Venture for any work performed for the benefit of the Joint Venture but will be entitled to be reimbursed for:

(i) the reasonable charges of any third party consultants engaged by the Development Manager with the approval of the Management Committee;

On and from the date of this Agreement the net amount of any Project Costs or any other expenditures, disbursements or other liabilities incurred in relation to the Development Assets or the Development shall be borne and paid for by KSL and reimbursed to KSL in accordance with clause 2.2

15.1 The Joint Venture shall continue unless otherwise agreed between the Venturers until the completion of the Development and the sale and/or realisation of all the Development Assets by the Venturers to a third party or parties or distribution in specie of Such Development Assets (if the Venturers so mutually agree) to the Venturers or one or the other of them which shall take place:

(a) within three (3) years from the date of this Agreement (unless extended by agreement in writing between the Venturers);

(c) on the sale of all the units in the Development

whichever shall first occur.

15.3 The Joint Venture shall terminate when all Development Assets shall have been disposed of and the net proceeds and liquid assets, after satisfaction of liabilities to all Joint Venture creditors and the setting aside of reserves determined by the Venturers, or if applicable, the Non-Defaulting Party, to be appropriate to meet unmatured contingent and/or unforseen Joint Venture liabilities, shall have been distributed among the Venturers in accordance with this Agreement.

The Venturers agree that upon the realisation, sale, conveyance or other disposition of the Development Assets or any realisation, sale, conveyance or other disposition of part of the Development Assets the Net Proceeds of that disposal, or upon any net surplus from the Joint Venture being available for distribution to the Venturers such proceeds, shall be disbursed from the Joint Venture Account in the following manner:

(a) first, to repayment of all advances, interest and other amounts due or payable to the third party financier of the Joint Venture pursuant to the Purchase Facility, the Project Funding or any other facility entered into by the Venturers (or either of them) as contemplated by this Agreement and which are secured against the Joint Venture site (including the Property) or any Development Assets;

16.2 No Right to Claim

No party will demand or claim payment of an amount pursuant to the sequence of payments set forth in clause 16.1 unless all prior ranking amounts have been paid in full. To the extent that the funds available for disbursement pursuant to clause 16.1 are not sufficient to satisfy prior ranking amounts, each of the parties hereby forego and relinquish all claims they might otherwise have to claim the right to payment of the unpaid balance of that prior ranking amount and the right to payment of after ranking amounts from any of the other parties hereto.

29 The expressions “Development”, “Development Assets”, “Net Proceeds” and “Property” are defined in clause 1.1 of the joint venture agreement as follows:

“Development”

“Development Assets” means:

(a) the proceeds of sale of the Joint Venture Site or any part of the improvements;

(b) the proceeds of sale of all improvements constructed on the Joint Venture Site from time to time;

(c) all Plans and Specifications, plans, design drawings, layouts, specifications, computations, working drawings, feasibility studies, leasing proposals, sale proposals, valuations and other documents in the procession or control of the Venturers or either of them and relating to the Joint Venture Site or the Development;

(d) any Development Consent granted with respect to the Joint Venture Site current from time to time;

(e) any Building Approval granted with respect to the Joint Venture Site current from time to time;

(f) the benefit of all future building contracts and supply contracts entered into in respect of the Development;

(g) the Joint Venture Account;

(h) all plant, equipment and materials acquired by or on behalf of the Venturers or either of them in connection with the Development from time to time;

(i) all insurance policies in connection with the Development current from time to time and any proceeds of any claims in respect of those insurance policies;

(j) all leases in respect of the Improvements or any part or parts of them current from time to time;

(k) all contracts for sale of kind in respect of the Improvements or any part or parts of them current from time to tome and deposits held in connection with such sales; and

(l) all other assets of whatsoever nature relating to the Development from time to time;

“Net Proceeds”

30 It is clear that the Development Assets included unsold lots.

31 There are other defined terms in the provisions of the joint venture agreement that I have set out, but I think that their meaning is clear enough without going to the definitions in clause 1.1.

32 Perhaps not surprisingly, Knox and Kimberley agreed that they would act “in a manner which maximises the profit of the Joint Venture while minimising risks associated with it for the mutual benefit of the Venturers” (clause 2.4(j)).

33 Clause 13 dealt with the sale of lots. In substance, it permitted Kimberley to negotiate the sale of units at prices equal to or greater than the Minimum Price for each unit (clause 13.2):

13.2 Unless this Agreement is terminated or rescinded KSA agrees that until all of the Lots are sold or KSL is paid all moneys due to it under clause 2.2 (a) (iii) the Development Manager will have the exclusive right to negotiate the sale of the Lots at prices equal to or greater than the Minimum Price for each Lot and KSA will not otherwise than through the Development Manager’s nominated agency sell or seek to sell any of the Lots and any such sales shall be at prices equal to or greater than the Minimum Price provided that KSL is not in default under this Agreement. KSA shall refer any sales enquires made to it to KSL or its authorised agent.

34 The form of contract for sale was required to be approved by the Management Committee (clause 13.5). By clause 13.6, Knox agreed to the amendment of the standard form of contract to enable it to be adapted (with some restrictions) to individual sales. Otherwise, there were to be no amendments without the consent of Knox (clause 13.7).

35 Clause 17.5 prevented either “Venturer” from, among other things, entering into a contract relating to any unit except as provided in the agreement or as decided by the Management Committee:

17.5 Covenants on Dealing with Developments Assets

Notwithstanding any other provision of this Agreement neither Venturer will without the consent of the other Venturer (except as may be expressly authorised or required by this Agreement):

(a) use any of the Development Assets;

(b) enter into any bond or become bail with, or for any person or do, or knowingly cause or suffer to be done, anything whereby any of the Development Assets or any part thereof may be seized, attached or taken in execution;

36 The obligations of the joint venturers were defined not only in the joint venture agreement but also in associated agreements which, as Mr TGR Parker SC (who appeared with Ms S Fendekian of counsel for the Knox/Esber interests) put it, constituted a “suite” of agreements. Other relevant agreements include a deed of loan and guarantee, undated but agreed to have been made on 7 December 2000. By the deed of loan and guarantee, Kimberley agreed to make available to Knox a “Facility” – a loan facility – with a “Facility Limit”, at least initially, of $2.7 million.

37 By clause 2, Knox was entitled to draw down the Facility by instalments, up to the Facility Limit, by giving a “Drawdown Notice” to Kimberley. That procedure was never followed. In practice, what happened was that Kimberley, in its role as Development Manager, advanced monies from time to time to meet project expenses.

38 Kimberley laid stress on clauses 4 and 5.1. Those clauses read as follows:

4 Fees

The Borrower must in respect of the Facility pay to the Lender the fees (if any) described in Item 19 of the schedule such fees to be paid on the Final Repayment Date or the earlier termination of this Deed.

5 Repayment

5.1 The Borrower must subject to the following repay to the Lender the Principal Sum together with interest thereon and all other moneys payable to the Lender under the terms of this Deed on the Final Repayment Date. If under the provisions of this Deed any part of the Principal Sum falls due for repayment prior to the Final Repayment Date, the Borrower must make any such repayment on the date prescribed, together with all interest accruing on such repayment up to that date.

39 Item 19 of the schedule specified a fee of $2 million. It was common ground that this fee was the same fee as that referred to in clause 2.2(a)(iii) F of the joint venture agreement.

The parties’ submissions

40 It was common ground that the “suite” of agreements – specifically, for the purposes of this question, the joint venture agreement and the deed of loan and guarantee – should be construed together, in a way that rendered them consistent one with the other so far as possible. That approach involves the application, to a relationship documented in several different written agreements, of the principles described by Gibbs J in Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 at 109. It is an approach supported by the decision of North and Dowsett JJ in Chacmol Holdings Pty Ltd v Handberg (2005) 215 ALR 748 at 763 [67] to 765 [77].

41 Mr Parker submitted that it was the joint venture agreement that was the primary document, and the source from which, objectively, the intention of the parties was to be ascertained. He submitted that the deed of loan and guarantee was ancillary to the joint venture agreement, intended to reinforce and secure the rights and obligations created by the joint venture agreement but not to vary them.

42 Mr Parker submitted that clause 16.2 of the joint venture agreement, read in conjunction with clause 2.2, made it clear that the fee was payable, if at all, out of profits. This being so, Mr Parker submitted, clause 4 of the deed of loan and guarantee should be construed consistently, so as to create an obligation to pay the fee only to the extent that the profits of the joint venture permitted. He acknowledged that this involved some detraction from the clear words of clause 4.

43 Mr BA Coles QC (who appeared with Mr GA Sirtes of counsel for the Kimberley interests) submitted that clauses 2.2 and 16.2 of the joint venture agreement were concerned simply with priorities. As I understood his submissions, he did not accept that clause 16.2 had the effect of negating personal liability for any of the payments, or entitlements, specified in clause 2.2.

44 Thus, Mr Coles submitted, giving clause 4 of the deed of loan and guarantee its obvious and natural meaning was either consistent, or at least not inconsistent, with the relevant provisions of the joint venture agreement properly construed.

45 In support of this submission, Mr Coles advanced a detailed textual analysis of clause 2.2. He noted that a “fee” is a sum payable by one identifiable party to another, and that clause 2.2(a)(iii)F described it as a fee “due and payable to” Kimberley. He submitted that the only party from whom it could be due and payable was Knox, since the unincorporated joint venture had no legal personality and since Kimberley could hardly have a contractual obligation to pay a fee to itself. Although Mr Coles did not I think refer to it, the definition of “Building Contract” also refers to the fee “as being payable to” Kimberley, and thus lends some support to this aspect of Mr Coles’ submissions:

“Building Contract”

and in the event that there are any additional moneys to be paid to the Builder over and above the $6,300,00 [sic] pursuant to the Building Contract for any reason, then these additional payments are to be at the sole cost and expense of KSL and is to be deducted from the $2,000,000 fee referred to in clause 2.2 as being payable to KSL.

46 Each of Mr Parker and Mr Coles drew attention to what were said to be relevant commercial considerations underpinning his preferred construction.

Analysis

47 As I have said, I accept that the joint venture and deed of loan and guarantee should be construed together, and, so far as possible, should be rendered consistent each with the other. I accept further that the starting point is the ascertainment of the intention of the parties insofar as it appears objectively from those agreements, a process that may be informed by reference to the factual situation leading up to their making.

Construction of the joint venture agreement in isolation

48 The intention of the parties, as it appears from the joint venture agreement, was to establish an unincorporated joint venture for the purpose of carrying out the “Development” as defined (clause 2.1). Putting aside the verbiage of the various definitions, the “Development” was the completion of the design and construction of the Central Park Apartments, the subdivision of the completed development into lots and the sale of the lots thereby created. As I have noted, Knox and the Messrs Esber were in dire financial straits at the time the joint venture agreement was made. They had (by Mr Joseph Esber’s account) a construction project about 30% complete, with the builder being insolvent and having walked off the site. They were in default under their financial obligations to their mortgagees. They were facing ruin. A previous attempt to extricate themselves from this position, through the joint venture with BJ Metro, had come to nothing. As events unfolded, the joint venture agreement with Kimberley enabled the project to be completed, and either prevented or at least averted financial ruin for Knox and its principals.

49 Mr Stoliar was, by his own uncontradicted evidence, a man with great experience, and no doubt commensurate success, in the field of property development. Perhaps for that reason, Kimberley had a very wide discretion to act in bringing the joint venture to completion (clause 3.3). There were exceptions, relatively few, of matters reserved to the Management Committee. There were other matters reserved to the agreement of the joint venture parties (for example, the sale of the Flexman units – clause 6; and the sale of any lot at a price less than the specified minimum price - clause 13.2).

50 Clause 3.5 dealt with Kimberley’s remuneration. Subpara (a) provided for reimbursement of various expenses. Subpara (b) made it plain that Kimberley’s only entitlement to remuneration was that “specified in this Agreement”. Mr Parker did not submit that this would oust any entitlement under any other agreement.

51 The only express references in the joint venture agreement to Kimberley’s fee are those contained in clause 2.2 and in the definition of Building Contract. Clause 2.2 deals with distribution of the “Profits” of the joint venture. Despite the initial capital letter, the word “Profits” is not defined; but its meaning may perhaps be guessed at: in particular, when clause 2.2 is read in conjunction with clause 16.1. The latter clause makes it reasonably plain that the “Profits” that are the subject of clause 2.2 are the “net proceeds” of the disposal of (in substance) lots in the development after repayment of all relevant loan facilities. (There is perhaps an air of unreality about clause 16.1(a), in that secured lenders would insist on and obtain repayment, presumably progressively as sales settled, of the amounts secured before granting discharges or partial discharges of their mortgages.)

52 Clause 2.2 specifies the priority agreed to be given to Kimberley’s fee of $2 million. It also makes it reasonably clear that the fee is to be payable, at least in the first instance, out of profits. That “first instance” approach receives some support from the absence elsewhere in the agreement of any relevant express reference to the fee and, perhaps more importantly, from the absence of any express obligation on Knox to pay it. Certainly, the “first instance” view that clause 2.2 gives in relation to the fee is confirmed by clause 16.1.

53 Against that background, it is necessary to focus attention on clause 16.2: a provision on which each of Mr Parker and Mr Coles placed considerable importance. For convenience, I repeat it:

16.2 No Right to Claim

No party will demand or claim payment of an amount pursuant to the sequence of payments set forth in clause 16.1 unless all prior ranking amounts have been paid in full. To the extent that the funds available for disbursement pursuant to clause 16.1 are not sufficient to satisfy prior ranking amounts, each of the parties hereby forego and relinquish all claims they might otherwise have to claim the right to payment of the unpaid balance of that prior ranking amount and the right to payment of after ranking amounts from any of the other parties hereto.

54 That subclause reinforces, by proscription, the prescription set out in clause 2.2: neither party can claim an entitlement until all prior entitlements have been paid in full. But it goes further, and deals with the situation where there is insufficient money to pay an entitlement specified in clause 2.2. In that circumstance, the parties give up their right to payment of any unpaid balance or any later ranked amounts. But they do so not just from the distribution of profits established by clauses 2.2 and 16.1, but “from any of the other parties hereto.”

55 The submissions (both written and oral) for Kimberley, although voluminous and lengthy, never came to grips directly with the concluding words of clause 16.2. Indeed, I gained the distinct impression during closing submissions that Kimberley had not appreciated the reliance that Knox placed on those words. (See Mr Coles at T289.15.50; and compare Mr Parker in opening at T7.10, 11.20 – in which clearly the reference to clause 16.3 should be read as a reference to clause 16.2).

56 The strong – in my view, inescapable – impression given by the joint venture agreement, considered as a whole but without reference to other contractual documents, is that the parties agreed that Kimberley would have what might be called a “success fee” of $2 million, to be paid only out of profits. It is difficult, if not impossible, to reconcile the alternative view – that Kimberley had a contractual entitlement to its fee regardless of the profitability of the joint venture – with the concluding words of clause 16.2. Certainly, I do not think that the words “due and payable” do so; at most, they mean “due and payable in accordance with this agreement”.

57 It is possible to see an underlying commercial rationale for this; and it is equally possible to see an underlying commercial rationale for the alternative view. The construction preferred by Knox gives Kimberley a real interest in acting effectively to secure the financial success of the project. A fee payable only out of profits, and therefore properly to be regarded as a success fee, might be thought to provide a stronger incentive to assiduous management than would a fee payable regardless of success.

58 On the other hand, the project was in a precarious state when the parties entered into the joint venture agreement. Kimberley assumed substantial responsibilities, including financial obligations, under the joint venture agreement. It could be said that Kimberley might not have done so without the promise of a reward that was, if not practically then at least contractually, assured.

59 Given the counterbalancing commercial considerations, I see no reason to depart from what in my view is the clear meaning of the concluding words of clause 16.2, read in the context of the joint venture agreement as a whole. I therefore conclude that, if the joint venture agreement fell to be construed standing alone, Kimberley would have no entitlement to be paid the fee except out of, and to the extent of, profits in accordance with the scheme established by clauses 2.2 and 16.1.

Construction of the joint venture agreement in context

60 However, as I have said, the joint venture agreement cannot be considered in isolation.

61 The joint venture agreement does not refer, either in its recitals or in its operative provisions, to the deed of loan and guarantee. For example, it is not made a condition precedent to Kimberley’s obligations under the joint venture agreement that the deed of loan and guarantee be made and that the securities contemplated by it be given. Likewise, the deed of loan and guarantee does not refer to the joint venture agreement.

62 Nonetheless, it is clear that the deed of loan and guarantee is a necessary part of the relationship (to use what I hope is a suitably diffuse term) between Knox and Kimberley. Mr Parker submitted that the deed of loan and guarantee was “ancillary” to the joint venture agreement. I am not sure that this is correct; but even if it be accepted, it does not resolve the question of the apparent conflict between the two agreements.

63 It is reasonably clear from the joint venture agreement that Kimberley was obliged to advance money for the purposes of the joint venture. See for example clause 2.2(a)(iii)B, C, D; clause 9.1; clause 9.3. But there is nothing in the joint venture agreement that specifies the terms on which Kimberley is to advance money or, apart from clause 2.2, the terms upon which it is to be repaid. The deed of loan and guarantee deals with those topics.

64 As I have noted, the deed of loan and guarantee provides for the creation of a “Facility”, with a limit of $2.7 million (clause 2 – advances; item 7 of the schedule). Clause 4 deals expressly with the fees payable by Knox to Kimberley. For ease of reference, I set it out once more

4 Fees

65 Although the plural “fees” is used, item 19 of the schedules specifies only one fee: $2 million. It was common ground between the parties that this was the same fee as that referred in clause 2.2(a)(iii)F of the joint venture agreement.

66 Clause 5 of the deed of loan and guarantee dealt with repayment. Knox’s obligation was to repay “the Principal Sum” – i.e., all advances made by Kimberley out of the Facility – and all other money payable under the terms of the deed of loan and guarantee.

67 The parties to the deed of loan and guarantee included not just Knox (as “Borrower”) and Kimberley (as “Lender”) but also Messrs Marcel and Joseph Esber and Casanda (each as a “Guarantor”). The obligations of the guarantors were to guarantee payment to Kimberley of the “Guaranteed Money” (clause 10.1) and to indemnify Kimberley against loss (clause 10.3). The expression “guaranteed money” was defined in clause 1.1.3 as follows:

1.1.13 “ Guaranteed Money ” means any and all amounts which at any time or from time to time may for any reason be owing or payable by the Borrower to the Lender in connection with this Deed or any instrument or transaction contemplated by it, whether at law or in equity in relation to the any moneys advanced by the Lender to or on behalf of the Borrower but does not include the Fee referred to in Item 19;

68 It may be noted that although the word “Fee” in this definition has an initial capital letter, it is not a defined term. It will be necessary to return to this, in connection with Kimberley’s claim against the guarantors. Nonetheless, for present purposes, the definition indicates that the parties to the deed of loan and guarantee were aware of the distinction between advances on the one hand and the fee on the other. Advances were to be secured by the “Current Security”, the giving of which was a condition precedent to Kimberley’s obligations under the deed (clause 6.1).

69 It is difficult to understand what the parties intended clause 4 of the deed of loan and guarantee to achieve if it were not intended, as its terms suggest, to make the “fees” to which it refers payable by Knox to Kimberley in accordance with its terms.

70 It is equally difficult to understand why the parties would have created enforceable rights to and obligations of payment in one agreement and negated those rights and obligations in another: particularly where both agreements were part of a set (or “suite”) of agreements executed contemporaneously with the intention that, between them, they should define fully the rights and obligations of all relevant parties in respect of the relationship (or relationships) that they created. In this context, it should be noted that the logic of Mr Parker’s submissions is not confined to the fee. It extends to all monies advanced by Kimberley for the purposes of the project; and Mr Parker did not shrink from acknowledging this (see for example T11.10 – .45).

71 The structure of the joint venture agreement – that the parties agreed to commit their capital and resources, and to accept the risk of loss, without one being liable to indemnify the other in the event of loss – may be thought to be consistent with the general concept of joint venture. However, I do not think that this is a consideration of great moment: if only because the inequality of bargaining power between Knox and Kimberley (Knox was desperate; Kimberley was not) was so substantial. Thus, I do not think that the conflict between the two agreements can be resolved by references to questions of general principle, practice or understanding.

72 The documents were drafted by Kimberley’s legal representatives at the time, KNPW Lawyers. It is clear that they were drafted in haste, and likely I think that they were redrafted as the negotiations between Knox and Kimberley progressed. There are many marks of haste: including not just the conflict between clause 16.2 of the joint venture agreement and clause 4 of the deed of loan and guarantee, but in clause 2.2 of the former. For example, it is not really apt to talk of registered mortgagees being paid out of “profits” (whether with or without any initial capital letter); ordinarily, profits are determined after all advances have been repaid. Again, in clause 2.2(a)(iii), the concept of advances by Kimberley “to the mortgagee” is curious; and the curiosity is not resolved by the six specified examples that follow, some of which have no relationship whatsoever to any mortgagee. Again, it is clear that Kimberley’s fee is not due and payable out of profits as stated, because unsecured creditors – whose claims would need to be brought to account before any question of profit or loss could be resolved – rank below Kimberley in this respect.

73 Evidence of the chronological relationship between the executed version of the joint venture agreement and the executed version of the deed of loan and guarantee may well have been relevant to the question of construction. For example, if the form of the deed of loan and guarantee had been settled relatively early in the course of negotiations, whereas the form of the joint venture agreement (including its provisions as to the fee) continued to be the subject of negotiation and redrafting thereafter, this may have favoured the resolution of the question of construction in the manner for which Knox contended. But the parties put no evidence before the Court – or, if they did, they did not refer to it in their submissions – as to the chronology of the process of drafting the two agreements.

74 It could be said that clause 16.2 of the joint venture agreement is general in its application, whereas clause 4 of the deed of loan and guarantee is specific. This characterisation, which was not addressed in the course of argument, might suggest that the latter should prevail over the former to the extent of any inconsistency. I am not sure that this greatly advances resolution of the difficulty.

75 On balance, I think that the construction advanced by Kimberley is to be preferred. Clause 2.2(a)(iii)F refers to “the fee due and payable to [Kimberley] for its participation in the Joint Venture.” Leaving aside the definition of “Building Contract” (see para [45] above) which does not advance the argument, there is no term of the joint venture agreement apart from clause 2.2(a)(iii)F that refers specifically to the fee, let alone a term that makes it “due and payable”. On the contrary, clause 2.2 read in conjunction with clause 16.2 would suggest that the fee is not “due and payable” except to the extent that the profits of the joint venture permit. However, there is an independent source of obligation to pay the fee: clause 4 of the deed of loan and guarantee. On any view, that clause makes the fee “due and payable”. In other words, it is that clause which enables the fee to be characterised as it is in clause 2.2(a)(iii)F of the joint venture agreement.

76 Thus, I think, when clause 16.2 refers to claims that the parties might otherwise have to payment of amounts specified in clause 2.2, it is to be read as claims that the parties might otherwise have under the terms of the joint venture agreement. Clause 16.2 should not be read as striking down entitlements arising under other agreements.

77 In this context, it is significant that the argument propounded by Knox in respect of the fee would apply equally to all other advances made by Kimberley pursuant to the deed of loan and guarantee. It would require the Court, on appropriate facts, to set aside not merely the obligation created by clause 4 of that deed but also the repayment obligations set out in clause 5; and the diminution of Kimberley’s rights would not stop there.

78 If, as Knox submits, the effect of clause 16.2 of the joint venture agreement is to abrogate the rights created by clauses 4 and 5 of the deed of loan and guarantee, that would yield a collateral benefit to the Guarantors. The definition of “Guaranteed Money” focuses on amounts owing by Knox to Kimberley (“any and all amounts which at any time or from time to time may… be owing or payable by [Knox] to [Kimberley] in connection with this Deed or any instrument or transaction contemplated by it…”). Thus, if by virtue of clause 16.2 of the joint venture agreement Knox had no, or a limited, liability to Kimberley in respect of the fee and in respect of advances under the deed of loan and guarantee, the liability of the Guarantors would be limited likewise.

79 In short, if Kimberley’s only recourse, in respect of both advances made by it and the fee due and payable to it, were to the profits of the joint venture, then the whole structure of guarantees and mortgages in support of them would be substantially irrelevant. Kimberley would always be entitled to be paid out of profits, so far as they might extend; and, as third mortgagee of the subject land, would always have the means to ensure that it was paid. What purpose, then, would be served by the guarantees and their supporting mortgages?

Conclusion

80 I therefore conclude that question 2 should be answered “no”.

Questions 3A and 3B: Was the making of the Investmentsource agreement authorised?

81 It is convenient to consider these questions together, since each involves the issue of Knox’s consent (or withdrawal of consent) to the making of the Investmentsource agreement.

82 Question 3A reads as follows:

3A. Did Lorentz’ conduct as pleaded in para C12 of the Further Amended First Cross-Claim breach his obligations under the Power of Attorney?

Result: If yes, damages payable by Lorentz to KSA to be referred out.

Sub Issues

(a) Did Lorentz execute, on behalf of KSA pursuant to the Power of Attorney, the Investmentsource Agreement (as defined in the Further Amended First Cross-Claim)?

(b) If yes to (a), in executing the Investmentsource Agreement, did Lorentz breach his duties and obligations to KSA as set out in paragraph C10 of the Further Amended First Cross-Claim?

(c) Further and alternatively, if yes to (a), were Lorentz’s obligations under the Power of Attorney subject to KSL’s obligations under the Joint Venture Agreement?

(d) (i) If yes to (c), is the Investmentsource Agreement a mortgage, charge, contract or liability in connection with the development Assets as defined in the Joint Venture Agreement (see clause 17.5(c))?

(ii) If yes to (d)(i), did KSL comply with its obligations under the Joint Venture Agreement before entering into the Investmentsource Agreement by obtaining KSA’s consent in accordance with the JVA?

83 Paragraph 12 of the further amended first cross-claim reads as follows:

“the Investmentsource Agreement”

Investmentsource

84 Notwithstanding the denial in the defence to that cross-claim, it was common ground at the hearing that Mr Lorentz did indeed execute the Investmentsource agreement pursuant to the power of attorney.

85 Question 3B reads as follows:

3B. Did KSL’s conduct as alleged in C13 of the Further Amended First Cross-Claim breach its obligations under the Joint Venture Agreement?

Result: If yes, then costs in Category J to be excluded from the Joint Venture Account; refer quantum of costs incurred by KSA for determination.

Pleading References:

· Further Amended Third Cross-Claim; - Paras C12

· Response to Further Amended Third Cross-Claim:- Para 4(b) and Schedule Category J

· Further Amended First Cross-Claim:- Paras C6, C7, C8, C9, C10, C12, C13, C14, C16, C16A, C17, C19A, C19B, C19C

· Response to Further Amended First Cross-Claim:- Paras C6, C7, C8, C9, C10, C12, C13, C19, C20, C21

86 Paragraph 13 of the further amended first cross-claim reads as follows:

C13. The execution by Lorentz of the Investmentsource Agreement was instigated or procured by Kimberley in its capacity as Development Manager under the Joint Venture Agreement.

87 The fundamental difference between the parties is whether (as Kimberley and Mr Lorentz allege) Knox agreed to the making of the Investmentsource agreement or whether (as Knox alleges) Knox effectively withdrew any consent that it had given. To deal with that, I shall consider first the question of credibility, then question 3B and finally question 3A.

Credibility

88 Because a resolution of the question of consent involves an analysis of the relevant testimony, it is convenient to consider at this point the question of credibility. What I have to say on that topic relates to the whole of the evidence of the relevant witnesses. Those witnesses are Mr Joseph Esber, Mr Stoliar, and Mr Waitsman.

89 Listening to the oral evidence of each of those witnesses left me with the very strong impression that none of them had any clear recollection of the detail of the events to which they had deposed in their various affidavits, and that each of them had sought to reconstruct his account of those events by reference to contemporaneous documents. I am not satisfied in any case that this process inspired any actual recollection. I am also satisfied that for Messrs Joseph Esber and Stoliar in particular, this process was, to a greater or lesser extent unconsciously, heavily influenced by perceptions of self – interest or advantage.

90 The point as to reconstruction is clearest in the evidence of Mr Waitsman, who accepted that he had no actual recollection of any conversations with Mr Joseph Esber, and had reconstructed those conversations based on what he thought had occurred (T104.33 - .46):

“Q. I want to suggest to you there is a difference between remembering a conversation and reconstructing it based on what you think would or should have happened having read documents from the time at a later stage. Now based on that distinction what I am putting to you is that you don't have any actual recollection of any conversations with Mr Esber, what you have done in your affidavit is to reconstruct those conversations based on what you think happened, correct?
A. That could be correct.
Q. There is no could be about it, that is correct, is it not?
A. That is correct.”

91 Mr Stoliar claimed to have an actual recollection of particular events, including of what were on Kimberley’s case the crucial events of 30 March 2001. I do not accept that aspect of his evidence. A key part of it – the alleged involvement of a Mr Ilias Stoikos in the events that day – is unlikely to be correct, having regard to contemporaneous documents to which I shall return.

92 In addition, as to Mr Stoliar, I formed the strong impression that he had a sense of grievance that his efforts to rescue or “salvage” both Knox and the development had not received adequate recognition, and that the litigation was poor recompense for those efforts.

93 Further, as to Mr Stoliar, there were aspects of his evidence that caused me real concern. For example:

(1) Mr Stoliar understood that Kimberley’s obligation under the joint venture agreement was to obtain at least the Minimum Price shown in it for each unit (T155.20-.25). He said he had the belief that this was achievable in December 2000 when the agreement was made (T155.55) and that Kimberley was “absolutely” committed to achieving those prices (T156.5). Nonetheless, Mr Stoliar sought to explain his willingness to deal with Investmentsource at a substantial discount to those prices on the basis of a recollection of an adverse move in the market at the time (T 163.6 - .29). I do not accept that evidence of purported recollection; and I note that the underlying proposition - of adverse movement in the market – was denied by the valuer called by Kimberley, Mr Simon Feilich (T 216.8 - .37; see para [169] below).

(2) Mr Stoliar sought to suggest that he had no recollection of any further valuation obtained from REA Australia in February 2001 (T156.20-.40). It is clear that such a valuation was obtained, and clear that it would have been passed onto Mr Stoliar (see paras [101] to [103] below). That valuation is inconsistent with Mr Stoliar’s evidence of an adverse movement in the market, and in addition undermines the rationale that he gave for causing Knox to enter into the Investmentsource agreement. I do not accept that a man of Mr Stoliar’s experience, ability and obvious intelligence would have forgotten such a document. I think that he propounded loss of memory as a convenient way of avoiding the obvious evidentiary problem to which, as no doubt he foresaw, the substance of that valuation would lead.

“A. Your Honour, the reason that I thought, I had a meeting with our lawyers and the decision or the conclusion was that it would jeopardise the security of the joint venture if we will not take this offer. The lawyers said in order to act amicably and in the best interest to the joint venture is to enable Mr Esber and his attorneys to seek an injunction in Court whereby it will open the opportunity to discuss this alternative in front of a judge. Our lawyer therefore recommended to me that they will offer to Knox Street Apartments we will not sign the contract, we give you the opportunity to apply to the Court in order to stop it. And they give them, I don't remember, 72 hours or 48 hours. When they didn't take any step towards that, we have considered that the silence is like a consent or an agreement. So, in other words, we took the view that there is the best option for the company, here are other party do not even take the suggestion from our lawyers to go and to seek for injunction from the Court.”

94 Taking into account the matters to which I have referred in para [89] and my concerns with the reliability of Mr Stoliar’s testimony, I do not regard him as a witness on whose evidence great reliance can be placed. Of course, to the extent that his evidence is corroborated (either by other acceptable evidence, by contemporaneous documents or in other ways) my concerns lead nowhere. But to the extent that it is not so corroborated, I hesitate to rely upon it.

95 There are two further points. The first is that, for the reasons given in paras [89] and [90] above, I do not regard Mr Waitsman’s evidence as capable of providing much in the way of corroboration of Mr Stoliar. The second is that to the extent that the evidence of Mr Stoliar conflicts with that of Mr Joseph Esber then, in general and notwithstanding the matters to which I now turn in discussing Mr Joseph Esber’s evidence, I prefer the latter.

96 It is clear that Mr Joseph Esber has a feeling of grievance, and thinks that he, his brother and their company have been badly treated by Kimberley. I am sure that his sense of grievance has unconsciously permeated his attempts to recall relevant events.

97 I was initially perturbed by Mr Joseph Esber’s demeanour in the witness box. However, as his cross-examination progressed, I formed the view that he was struggling to some extent with the questions put, and that this, combined with his sense of grievance, explained more than adequately the concerns that I had felt. I might say, in this context, that it was apparent that English is not Mr Joseph Esber’s first language; and I can quite understand that a person in his position might have found the orotund formulation of many of the questions put to him a little difficult to follow.

98 Again, whilst I do not find that Mr Esber sought to mislead the Court, I do think that his unsupported evidence needs to be examined with caution. In one respect, however – the meeting of 30 March 2001 and the alleged involvement of Mr Stoikos - I think that his account is preferable, supported as it is by contemporaneous documents (or, more accurately, inferences available from them).

99 Mr Marcel Esber gave very brief evidence on one particular question – the withdrawal of consent. No question arises as to his credibility, and I accept his evidence so far as it goes.

Question 3B: Kimberley’s conduct

Negotiations with Investmentsource and with Blue Print

100 Mr Joseph Esber’s unchallenged evidence was that he discussed the question of valuation with Mr Waitsman in January 2001, and that he sent Mr Waitsman a copy of a valuation prepared for LMQ some two years earlier (a valuation by REA dated 2 February 1999).

101 Mr Joseph Esber said also that in February 2001 he had a discussion with Mr Waitsman in which Mr Waitsman said, among other things, that he had received an updated valuation “at over $21 million, in accordance with the price list”. Mr Waitsman denies that this conversation occurred, or that he had received such an updated valuation. I do not accept those denials. The evidence showed that REA sent a tax invoice to Kimberley on 9 February 2001, making a claim for $2,500.00 for a valuation of the project. The client was stated to be “Waitsman”. It is clear that Mr Waitsman received this invoice: he signed it so as to approve it for payment. Mr Waitsman accepted that he would not have approved the invoice for payment unless the valuation had been received, and accepted from the fact of his approval that it was in fact received (T94.45). The valuation, although called for, was not produced.

102 Mr Waitsman accepted further that he would have passed the valuation on to Mr Stoliar, in accordance with his normal practice (T95.35, .45).

103 Some evidence of the content of the valuation comes from an email from Mr Rod Gee of Investmentsource to Mr Waitsman of 14 March 2001. It appears from the email that Mr Waitsman (or someone else at Kimberley) had passed the valuation on to Mr Gee. Mr Gee’s email indicates that the valuation of the unsold units was $14,426,000.00. Mr Gee said (perhaps not surprisingly, given that Investmentsource was looking to acquire the unsold units) that the valuation was “a little heavy”.

104 In those circumstances, I prefer Mr Joseph Esber’s account of the conversation. I find that a valuation was prepared for Kimberly in February 2001, which assigned a total value of $14,426,000.00 to the unsold units. I find that Messrs Waitsman and Stoliar were aware of this when they negotiated what became the Investmentsource agreement.

105 One way or another, Mr Waitsman provided Mr Joseph Esber with a copy of Mr Gee’s email. That email offered “an acquisition price of $12,285,00.00 equating to $323,290.00 per unit” for the unsold units. Mr Joseph Esber discussed that “offer” with Mr Waitsman. There are differing accounts of what was said. However, Mr Joseph Esber says that a few days later he informed Mr Waitsman that he and his brother would not accept the Investmentsource offer. Mr Waitsman says that he does not recall that conversation. I think that it is likely that a conversation to the effect alleged by Mr Joseph Esber did take place. It is consistent with his subsequent actions in seeking to find a more advantageous way of disposing of the unsold units.

106 Mr Joseph Esber approached a company known as Blue Print Property Consulting (NSW) Pty Limited. It appears that Blue Print had some experience in marketing units in developments such as the Central Park Apartments development. On 3 April 2001, Mr John Stanley of Blue Print sent a fax to Knox apparently attaching the price list from the joint venture agreement and stating “we believe the sales consultants at Blue Print… can sell the majority of the 31 units, in a time frame of no more than six – eight weeks.” The letter indicated what would be required for Blue Print to proceed.

107 While Mr Joseph Esber was dealing with Blue Print, negotiations were progressing between Kimberley and Investmentsource. Investmentsource wrote to Mr Waitsman on 24 March 2001, confirming “our intention to proceed with the acquisition of the project subject to your satisfaction of our normal terms and conditions and your formal adoption of our required specification”. The letter stated “that the agreed price for the takeout equates to an average of $336,000.00 per unit, being in the total sum of $12,768,000.00 inclusive of gst”. That letter prompted Mr Waitsman to prepare a memorandum for Mr Stoliar’s consideration, dated 26 March 2001.

108 In that memorandum, Mr Waitsman set out the current position in relation to sales. It included the following information (clearly based, in part on the Investmentsource letter of 24 March 2001):

“38 remaining units at a list price of	$14,705,000.00
20 sales contracted net proceeds of	$ 6,728,000.00
Total expectation (gross)	$21,543,100.00 [sic]
Offer received from investment source [sic]	$12,768,000.00
Offer (average of $336,000.00)
20 sales contracted net	$ 6,728,000.00
Less fees	$ (63,840.00)
Net proceeds (less GST payable)	$19,432,000.00. [sic]

109 That memorandum was adorned with handwriting which Mr Stoliar accepted looked like his (T159.25). It was put to Mr Stoliar that his handwriting was a calculation as to whether, taking into account existing sales and assuming that the transaction with Investmentsource proceeded, there would be sufficient money to pay all amounts due to the prior mortgagees and Kimberley. Mr Stoliar did not accept that this was “necessarily” so (T159.33, T160.38).

110 In my view, it is clear that Mr Stoliar was doing precisely what was put to him: calculating whether Kimberley would get its money back if it entered into the transaction proposed by Investmentsource. There was no other rationale suggested for the figures, or for the calculations embodied in them. As Mr Parker put to Mr Stoliar, the handwritten figures bore a close resemblance to actual figures relevant to Kimberley’s investment: an uncanny coincidence if the calculation were not for the purpose put to Mr Stoliar. I do not regard as honest this aspect of Mr Stoliar’s evidence.

111 On 30 March 2001, there was a meeting between Messrs Joseph Esber, Stoliar and Waitsman. There is a dispute as to the reason for that meeting. Mr Joseph Esber says that he went to Kimberley’s premises for reasons unconnected with the Central Park Apartments project; Mr Stoliar would not accept this. If it were necessary to decide, I would prefer Mr Joseph Esber’s evidence on this point.

112 On any view, the discussion turned to the Central Park Apartments project. On any view, in the course of that meeting, Mr Joseph Esber signed a document in the following terms:

“I Joseph Esber on behalf of Knox Street Apartments Pty Ltd agree with the proposal as received from Investment Source Commercial P/L.

Dated 30 March 2001.

I agree that Kimberley Securities Limited can enter into this agreement

Yours Sincerely,

Joe Esber”

113 Mr Esber’s signature was witnessed by Mr Waitsman.

114 Mr Joseph Esber says that before he signed the document, he told Mr Stoliar that he could not agree to the Investmentsource proposals, and that better prices could be achieved by selling in the conventional manner. Mr Joseph Esber says that Mr Stoliar asked him to “agree with the proposal in principle, as it would be good to achieve the sales in a single transaction”, and reassured him that “I will go back to IS and get a better deal”.

115 Messrs Stoliar and Waitsman deny that Mr Stoliar made any such comment. They say, in substance, that there was a discussion by telephone with Mr Stoikos of Blue Print; that Mr Stoikos said in effect that the Investmentsource offer was fair; and that thereupon Mr Joseph Esber signed the “consent”. I do not accept that such a discussion took place.

116 As I have said, Mr Joseph Esber had contacted Blue Print. Blue Print did not reply until 3 April 2001: after the meeting in question. In those circumstances, I think, it is unlikely that Mr Joseph Esber would have referred to Blue Print as “the agent we were previously working with” (in Mr Waitsman’s words). Nor do I think that Mr Joseph Esber would have accepted the telephone opinion of someone he did not know when, so far as he was aware, Blue Print was still considering the proposal.

117 Mr Joseph Esber did accept that he had a conversation with Messrs Stoliar and Waitsman in which Mr Stoikos was involved. That conversation occurred, he said, some days after 30 March 2001. Having regard in particular to the fact that Mr Joseph Esber had approached Blue Print, and had not received a response as at 30 March 2001, I think that it is unlikely that the meeting of 30 March 2001, went as Messrs Stoliar and Waitsman said it did. But I have difficulty too in accepting Mr Joseph Esber’s account of it.

118 On 18 May 2001, KNPW sent a fax to Ms Rose Kanaan of Rose Kanaan & Associates, who was then acting for Knox. The fax included a draft agreement intended to give effect to the Investmentsource offer. The letter asked that Messrs Joseph and Marcel Esber cause Knox to execute the draft agreement under seal. Ms Kanaan replied three days later. She stated that Knox did not agree to the takeout price specified in the draft agreement, noting that it was approximately $1.6 million less than the list prices for the relevant units. Further, she said, Knox preferred to proceed with Blue Print in terms of its letter of 3 April 2001.

119 KNPW replied on 22 May 2001. Among other things, they referred to Mr Joseph Esber’s “consent” given on 30 March 2001. There does not appear to have been any reply to that letter until, almost two months later, a different firm of solicitors (Beswick Solicitors) replied on behalf of Knox. The reply said, among other things that:

· Proceeding with the Investmentsource would cause “Knox” significant loss;

· “… your client’s threatened conduct is in breach of the terms of the joint venture agreement,

· Contrary to representations made by Mr Stoliar and Mr Waitsman and in all the circumstances, unconscionable”.

· Referring to the “consent in writing”, the letter said that Mr Joseph Esber “signed that document under extreme duress and in reliance upon undertakings made by Mr Stoliar concerning a development at Regent Street Chippendale” which undertakings, the author said, “were subsequently repudiated”.

120 The letter did not specify what were the representations made by Messrs Stoliar and Waitsman. I would have expected Mr Joseph Esber to have recalled them some four months after the event; and I would have expected them to have been specified in the letter.

121 More significantly, there was no evidence before the Court of the “extreme duress and… undertakings… concerning a development at Regent Street Chippendale”. Mr Joseph Esber said that he went to Kimberley’s premises on 30 March 2001 to collect a cheque relating to that development (which was not specified; and which was not the subject of any document put into evidence). He gave no evidence of any “extreme duress” or “undertakings” in relation to that development.

122 In those circumstances, I do not accept his evidence, given some six years after the event, of the conversations that preceded his signing of the “consent”. No doubt, Mr Joseph Esber may have hoped that the deal could be improved. Perhaps, he thought, Mr Stoliar would try to improve it. Nonetheless, I am satisfied that he signed the document knowing that he was giving the consent of Knox to what was described in it: the Investmentsource proposal. As I note in para [135] below, Mr Coles accepted that the Investmentsource proposal referred to in the “consent” of 30 March 2001 was the proposal embodied in the letter of 24 March 2001. (I deal with the date of the letter in the following paragraphs.) I am satisfied that Mr Joseph Esber understood that Kimberley intended to act on that consent, by negotiating the full terms of the agreement with Investmentsource and by asking Knox to enter into it.

123 There was some issue in the affidavit evidence as to which of the two Investmentsource letters (24 or 30 March 2003) was referred to in the “consent”. It could only have been the latter if that letter had been sent by fax, or some other method of immediate transmission. The copy in the Courtbook bore no evidence of facsimile or other specific transmission. Knox called for the original. It was not produced.

124 Mr Waitsman suggested in his first affidavit that the letter of 30 March 2001 had been received before the meeting was arranged. He says that he gave it to Mr Joseph Esber at the meeting. Having regard to what I have said as to Mr Waitsman’s evidence, I do not accept his unsupported assertion as evidence of the sequence of events.

125 Mr Stoliar too says that a copy of the letter of 30 March 2001 was given to Mr Joseph Esber at the commencement of the meeting on that day. Again, for the reasons that I have given, I do not accept that, without more, as evidence of the fact.

126 I conclude, consistent with Mr Coles’ acceptance, that the probabilities are that the letter given to Mr Joseph Esber when he signed the “consent” was the Investmentsource letter of 24 March 2001, and that this letter was the “the proposal as received from” Investmentsource referred to in that consent. In this context, I note that the first sentence of the “consent” ends with “P/L.”. On the next line there appear the words “Dated 30 March 2001.”. I suspect that what happened was that Mr Waitsman decided to date the document and then added the third sentence as an afterthought. Thus, I do not regard the date on the document as referable to the date of the Investmentsource proposal but, rather, as intended to indicate the date on which the document was signed.

127 There was an issue, not at the forefront of this aspect of the case, as to Mr Joseph Esber’s authority. The evidence on that is all one way. As between the brothers, it was Mr Joseph Esber who had all relevant dealings with Kimberley. Mr Marcel Esber confirmed that he left it to Mr Joseph Esber to undertake those dealings. When Kimberley required the assent of Knox to, or the participation of Knox in, anything to do with the development, it approached Mr Joseph Esber. I am satisfied that Knox held Mr Joseph Esber out as the person authorised to deal on its behalf with Kimberley in relation to the development. Mr Stoliar and Mr Waitsman said that this was their perception of Mr Joseph Esber’s role; and I accept this aspect of their evidence.

The withdrawal of consent

128 Nonetheless, it does not follow that the “consent” of 30 March 2001 continued in force up until the time the Investmentsource agreement was made on 24 May 2001. Specifically, before that agreement was executed (on behalf of Knox, by Mr Lorentz in pursuance of the power of attorney), Ms Kanaan wrote the letter of 21 May 2001 to which I have referred above. I do not understand how anyone who received that letter could have understood it as doing anything other than withdrawing whatever consent had been given by the document of 30 March 2001. It must have become apparent to Kimberley upon receipt of that letter that Knox no longer consented to the making of the Investmentsource agreement.

Terms of the Investmentsource agreement

129 In substance, the Investmentsource agreement:

(1) Gave Investmentsource the right to market the units to third parties, at prices not less than the specified “Takeout Price” relating to each unit (clause 6.1);

(2) Provided that the only remuneration payable in respect of any such sale would be the amount by which the price actually obtained by Investmentsource exceeded the Takeout Price for that unit (clause 7.2); and

Analysis

130 In my view, it is clear that, but for the consent, the making of the Investmentsource agreement would have been in breach of clause 17.5 of the joint venture agreement. Indeed, to the extent that I understood Kimberley’s submissions on this point, it did not submit otherwise. It relied upon the consent, submitted that the decision was one taken “carefully” and not at an undervalue, and submitted that the withdrawal of the consent on 18 May 2001 was ineffective.

131 The second point can be put to one side for present purposes. The issue with which I am presently concerned is whether, because of the consent, there was no breach of clause 17.5. It is irrelevant to that question that any breach (if breach there were) was one undertaken carefully and conscientiously, and at the best available price (if those be the facts) – they are questions for later consideration.

132 Kimberley put its case on withdrawal of consent (or as to the ineffectiveness of that withdrawal) as follows:

(1) Mr Joseph Esber was the controlling mind of Knox at the relevant time. He made its decisions largely without any input from Mr Marcel Esber. There was some disagreement between the brothers at the time, and they were not talking to each other.

(2) The letter of 21 May 2001 does not represent “a unified decision by [Knox]. It was one brother purporting to withdraw [Knox’s] consent absent support from” the other (closing written submissions, para 20).

(3) On 22 May 2001, KNPW replied to Ms Kanaan’s letter of the previous day. They informed Ms Kanaan, and through her Knox and the Messrs Esber, that Kimberley proposed to cause Knox to enter into the Investmentsource agreement by using the power of attorney. The letter offered Knox a window of opportunity – until 5:00pm on 24 May 2001 – to commence proceedings to seek to restrain the sale. Knox did not avail itself of that opportunity.

204 The parties accepted that, under the GST legislation, Knox was the party primarily liable for GST on the sale of units, because it was the proprietor and vendor of those units. The dispute, in relation to the last sub issue, turned on what Knox said was Kimberley’s responsibility to ensure that GST was paid.

205 Given that GST was a Project Cost, it was payable by Kimberley (clause 9.1). However, Kimberley could only pay GST if Knox lodged Business Activity Statements, received assessments and passed those assessments on to Kimberley. There is no evidence that Knox ever did this.

206 Knox submitted in essence that Kimberley was obliged to ensure that Knox claimed the benefit of the margin scheme and submitted Business Activity Statements on that basis.

207 In my view, Knox was obliged under clauses 2.4(j) and 2.5 of the joint venture agreement to claim the benefit of the margin scheme, to submit Business Activity Statements on that basis and to provide the assessments to Kimberley so that Kimberley could pay them out of the proceeds of sale (or, otherwise, pay them itself and recoup itself out of the proceeds of sale pursuant to clause 9.1). Alternatively, such obligations should be implied pursuant to, or perhaps more accurately as incidents of, the Mackay v Dick duty of cooperation. Absent such cooperation (whether pursuant to the contract or pursuant to the implied obligation), the scheme set out in clause 9.1 for payment of Project Costs could not work in relation to GST.

208 There is no doubt that each of the parties had the benefit of accounting advice. Given the publicity that attended the introduction of the GST, I would infer that each party was well aware of the tax and of its impact, and of its obligations in relation to the tax. This is explicit in the case of Kimberley, through the evidence of its financial controller (or former financial controller) Mr Peter Scown. (I have not dealt with Mr Scown’s credibility. It is sufficient to say that no attack was made on his credibility and that, so far as his evidence went, I accept it.)

209 Given that Knox did not do what was necessary to enable Kimberley to pay the appropriate amount of GST, I do not see how Kimberley can have been in breach of its obligations under clause 9.1 by failing to pay GST. Perhaps Kimberley should have taken the matter up with Knox. But it did not; nor did Knox take the matter up with Kimberley.

Conclusion on Question 6

210 In the circumstances, I do no more than conclude that GST on the sale of units is a project cost, and that the proper amount of such GST, calculated on the basis that Knox had elected to use the margin scheme, should be brought to account as a Project Cost in the taking of accounts between the parties to the joint venture agreement.

Question 7: GST and penalties paid by Kimberley

211 Question 7 reads as follows:

7. Is Kimberley entitled to reimbursement of its expenditure, or other liabilities in relation to the GST assessments and other matters referred to in paragraph C29 of the further amended third cross-claim?

212 The further amended third cross-claim is brought by Kimberley against Knox and the Messrs Esber. Paragraph C29 reads to be read in conjunction with paragraphs C24 to 28. Those paragraphs read as follows:

“the GST Assessments”

Kimberley’s Objection Notices”

“the ATO’s Objection Decisions”

“the Federal Court Proceedings”)

28. In the Federal Court Proceedings, Kimberley is required to pay $250,055.00 on account of the GST Assessments in respect of the Knox Street Development, and therefore is entitled to reimbursement of that amount from Knox Street.

29. Kimberley incurred expenditure, disbursement and/or other liability in relation to the GST Assessments, Kimberley’s Objection Notices, the ATO’s Objection Decisions, the Federal Court Proceedings and the Supreme Court Enforcement Action (as defined in paragraph A6 herein above) in the amount of approximately $100,000.00.

Deed of settlement between Kimberley and the ATO

213 Knox submits that the resolution of this question is to be determined by reference to a deed of settlement made on 22 September 2006 between Kimberley and the Commissioner of Taxation. That deed was admitted into evidence as a confidential exhibit. Nothing that I am about to say should be taken as detracting from that status, or as varying by implication the confidentiality order that I made when the document was admitted.

214 Kimberley appears to accept that the question should be resolved by reference to the deed of settlement. However, it submits, an understanding of that deed, and indeed its proper construction and application to the facts, must be informed by reference to an antecedent letter from the ATO to Kimberley dated 6 February 2006.

215 The recitals to the deed of settlement disclose the following matters:

(1) The Commissioner considered, and Kimberley disputed, that there was a general law partnership between Kimberley and Knox in respect of the Central Park Apartments project;

(2) The Commissioner registered that partnership pursuant to section 25-5(2) of the GST Act with the effect from the joint venture agreement (8 December 2000);

(3) The Commissioner issued to Kimberley and Knox jointly and severally as general law partners two assessments in respect of the sale of units: one for GST for the four months ending 31 December 2001 to 31 March 2002; and one for penalties;

(4) After a review, the Commissioner issued to Kimberley assessments in respect of the services supplied by it to Knox pursuant to the joint venture agreement: one for GST for the period ending 30 March 2002; and one for penalties;

216 Against the background thus recited, clause 2.1 of the deed provided that if Kimberley paid the amount of $119,418.00 by 31 October 2006, and in the absence of fraud and non-disclosure, the Commissioner would reduce the partnership assessments (both for GST and for penalties – subpara [215(3)] above) to nil, would remit all general interest charges on those assessments, would allocate refunds as stated in the recitals, and would remit general interest charges in respect of the other assessments issued to Kimberley.

217 The deed contained other provisions aimed at bringing to an end all disputes between Kimberley and the Commissioner (including objections to assessments and proceedings in the Federal Court).

218 Further, and of particular relevance, the Commissioner undertook not to issue any further assessment or amended assessment to Kimberley in respect of, among other things, the joint venture and the sale of the units. In other words, it appears, the Commissioner has given up his claim that Knox and Kimberley were general law partners, and assessable as such for GST in respect of the sale of the units.

219 Thus, on the face of the deed, the only payment made by Kimberley – in the sum of $119,418.00 – is payable towards Kimberley’s GST liability “in respect of the supply of development and project management services to Knox pursuant to the [joint venture] agreement”.

220 Kimberley’s performance of those services under the joint venture agreement was a supply made by it to Knox. Thus, as clause 22.2 of the joint venture agreement provides, Kimberley is liable for that GST (and clause 22.1 would appear to achieve the same effect).

221 I do not understand how the plain construction and effect of the deed of settlement can be overcome by the correspondence on which Kimberley placed reliance – even if that correspondence were in some way inconsistent with the terms of the deed.

222 In fact, I do not think that there is any inconsistency. It is clear that the letter of 6 February 2006 relates to the matters that became set out in the relevant recital to the deed of settlement. That recital clarified that the assessments related, as I have said, to “the supply of development and project management services to Knox pursuant to the [joint venture] agreement”. Thus, although as a matter of language it may be that the assessments are related to the alleged partnership between Kimberley and Knox (as Mr Coles submitted – closing written submissions, para 77), the deed makes it clear that the liabilities in question have nothing to do with the sale of units in the Central Park Apartments development.

223 I conclude that Kimberley is not entitled to be reimbursed for such GST liabilities as it has shown it incurred (taking into account the terms of the deed of settlement and the payments made pursuant to it).

Question 8: Project Costs

224 Question 8 reads as follows:

(a) Payments before the joint venture came into effect;

(b) Variations to the lump sum building contract price;

225 The parties accepted that I should not deal with the whole of this question. They appear to be at odds as to the extent to which I should (or should not) deal with it.

226 As to the first category of expense: Kimberley contended that, as a matter of construction, it was entitled to recover amounts paid even before the making of the joint venture agreement if, by the terms of the joint venture agreement, they could be classed as a Project Cost or were otherwise payable to it. Knox did not dispute this: at least at the level of principle.

227 Para (n) of the definition of Project Costs reads as follows.

(n) any costs, charges or expenses in relation to the Development which have been incurred prior to the date of this Agreement and which a party is entitled, pursuant to this Agreement, to be reimbursed;

228 It is a question of fact, and one which I cannot resolve on the material before me, as to whether any particular cost incurred prior to 8 December 2000 is a Project Cost by virtue of that paragraph.

229 As to the second category of expense: Knox submitted that any variation to the price payable under the building contract would be Kimberley’s responsibility, and something to be deducted from the fee payable to Kimberley. It relied on the definition of “Building Contract”, which for convenience I repeat:

“Building Contract”

and in the event that there are any additional moneys to be paid to the Builder over and above the $6,300,00 [sic] pursuant to the Building Contract for any reason, then these additional payments are to be at the sole cost and expense of KSL and is to be deducted from the $2,000,000 fee referred to in clause 2.2 as being payable to KSL.

230 Kimberley submitted that the question of entitlement to a variation would depend on the circumstances in which the variation was effected, and that this issue had thus been postponed for later assessment.

231 As a matter of construction of the definition of “Building Contract”, the position for which Knox contends appears to be correct. However, it may be that a particular variation was negotiated with the consent of Knox in circumstances in which, expressly or by implication, Knox agreed that the extra cost occasioned by the variation should be treated as a Project Cost. In those circumstances, I shall say no more.

232 As to the third category of expense: this – at least in so far as it is capable of present resolution – relates to amounts paid by Kimberley for the services of a Mr Brett McKechnie.

233 Mr McKechnie carries on business as “Brett McKechnie Consulting Services”. He gave unchallenged evidence to the following effect:

1. He had been engaged since 1999 by Kimberley to provide project management consultancy services to it, including overseeing construction on its development sites, “liaising” with councils and the like; and preparing costings and budgets for developments.

2. Kimberley engaged him as the project manager for the Central Park Apartments development in about December 2000.

3. Between February 2001 and March 2002, he attended the Knox Street site on average five days per week for at least two hours per day “overseeing the construction of the Knox Street Development and meeting with the builder, subcontractors and other consultants to discuss the construction of the Knox Street Development”.

234 Kimberley’s obligations as project manager included the following (from clause 3.2 of the joint venture agreement)

3.2 Obligations of Development Manager

The Development Manager agrees that it will:

(a) co-ordinate the overall Development including the design, construction and project management aspects of the Development;
(b) negotiate with, effect the appointment of, instruct and monitor performance of all professional consultants required to provide services to the Joint Venture during the course of the Development (including any contractors or sub-contractors providing building, construction or associated services) including without limitation solicitors, architects, surveyors, real estate agents and marketing consultants;

(i) formulation of a Development Programme showing the manner in which the Development Manager expects the Development to proceed including a timetable for the completion of each of the stages of the Development and the envisaged cost to complete each of the stages of the Development;
(j) regular updating of the Development Programme when reasonably so requested by the Management Committee to take account of events or circumstances which affect the progress of completion of the Development;

235 Clause 3.5 dealt with Kimberley’s entitled to remuneration:

Remuneration for Development Manger

(a) The Development Manger will render no charges to the Joint Venture for any work performed for the benefit of the Joint Venture but will be entitled to be reimbursed for:

(i) the reasonable charges of any third party consultants engaged by the Development Manger with the approval of the Management Committee;

236 Kimberley did not suggest that Mr McKechnie’s engagement had been effected with the approval of the Management Committee (or that the approval of the Management Committee had been sought and unreasonably withheld). Its case was that “[t]the charges of Mr McKechnie were legitimate costs and expenses incurred in connection with the Development and, thereby, representing part of the Project Costs. The costs of [Mr] McKechnie were not that [sic] of the Development Manager. The development manager was obliged to coordinate, inter alia, the project management aspects of the development, not to undertake the project management itself. This micro-management was a legitimate Project Cost” (closing submissions, para 80(b)).

237 Knox submitted that “[i]n relation to project management costs, Kimberley agreed to undertake the work for a Fee: see clause 3.5 of the JVA. It is clear from clause 3.5 that Kimberley was not entitled to contract such work out at the Joint Venture’s expense” (closing submissions, para 47).

238 There are two ways of looking at Mr McKechnie’s position, and each of them means that this issue should be answered adversely to Kimberley.

239 Firstly, to the extent that Mr McKechnie was doing work which could be characterised as project management (and I have the strong impression from his affidavit that he was) then he was doing what Kimberley was obliged to do. On that basis, Kimberley is obliged to absorb the cost of employing him.

240 Alternatively, and to the extent that Mr McKechnie may be regarded as having performed (as a third party consultant) services other than project management services, Kimberley is not entitled to reimbursement because the approval of the Management Committee was neither sought nor given (nor sought but wrongfully refused).

241 Kimberley is not entitled to be reimbursed for the amounts that it paid to Mr McKechnie.

Other issues

242 The remaining questions relate to proceedings 50110 of 2006 brought by Mr Marcel Esber and Casanda (for convenience, I shall call them the mortgagors) against Kimberley. They relate to the mortgages given by them to Kimberley over the units owned by them respectfully in Surry Hills. As I have said, a prior mortgagee sold those units. Kimberley, as third mortgagee, received about $419,000.00 after the claims of the prior mortgagees had been satisfied. It retained that money, and applied it to the joint venture account.

243 As best I understand the position taken by the mortgagors, they did not dispute that Kimberley, as third mortgagee, was entitled to hold the balance paid to it until all their liabilities to Kimberley that were secured by the mortgages had been discharged. They did however submit that on this analysis (which in effect treats the money as a replacement for the security over real property) they were entitled to the interest that accrued from time to time, in the same way as they would have been entitled to the rents and profits of the realty.

244 The real question between the parties is as to the extent of the liabilities that were secured by the mortgages. Kimberley contended that the mortgages secured its fee; alternatively, it contended, they secured at least any shortfall (excluding the fee) under the joint venture: i.e., any amount, excluding the fee, in respect of which Kimberley was unable to obtain reimbursement from the proceeds of sale of the units.

245 The question – do the mortgages secure payment of the fee? - can be dealt with. So, too, can the further question – do the mortgages secure any other shortfall? - at least, at the level of principle.

Relevant terms of the mortgages

246 The position taken by the mortgagors was simple. The mortgages secured payment of the “Guaranteed Money”. By clause 1.1.13 of the deed of loan and guarantee, that did not include the fee:

1.1.13 “ Guaranteed Money ” means any and all amounts which at any time or from time to time may for any reason be owing or payable by the Borrower to the Lender in connection with this Deed or any instrument or transaction contemplated by it, whether at law or in equity in relation to the any moneys advanced by the Lender to or on behalf of the Borrower but does not include the Fee referred to in Item 19;

247 Kimberley’s submissions started with the proposition that, under the deed of loan and guarantee, Knox was obliged to pay the fee to Kimberley. I have concluded that this is so on the proper construction of the deed of loan and guarantee read in conjunction with the joint venture agreement.

248 The next step in Kimberley’s submissions was to note that, under clause 6.1, its obligations under the deed of loan and guarantee (including to make available the “Facility”), were conditional upon delivery of the “Current Security”. “Current Security” was defined in clause 1.1.6 to mean “the security described in Item 6 of the schedule”. Item 6 of the schedule specified the third mortgage from Knox to Kimberley over the Knox Street property and the mortgages given by the mortgagors over their respective properties at Surry Hills.

249 Along the way, Kimberley pointed to the definition of “Loan Security” in clause 1.1.18:

“Loan Security”

250 Although, I think, clause 1.1.18 did not feature at the forefront of Kimberley’s submissions, I will deal with it now. The words “as security for the Principal Sum or interest on it or any other monies from time to time payable by the Borrower to the Lender” seem to me to qualify “Security” and not, as well, the words, “Current Security”. Thus, I do not think that there is any inference available from clause 1.1.18 that the Current Security should stand as security for “any other monies from time to time payable by the Borrower to the Lender”.

251 The real focus of Kimberley’s submissions was directed to the wording of the mortgages. Each mortgage incorporated a memorandum, E985772. No one referred me to the terms of that memorandum. I do not propose to go where the parties did not.

252 However, each mortgage included an “annexure” setting out particular terms. In each case, that annexure commenced with the words “this Mortgage is given to secure the repayment to the Mortgagee of the Secured Monies being the monies due and owing by the Mortgagor as Borrower to the Mortgagee as Lender pursuant to the Deed of Loan and Guarantee of even date.”

253 The expression “Secured Monies” is not defined in the deed of loan and guarantee.

254 By clause 1 of the annexure, the mortgagor in each case was obliged to pay Kimberley the Secured Monies or the unpaid balance on the earlier of the sale of the last unit or 30 November 2003. It reads as follows:

MATURITY DATE

1. The Mortgagor will pay to the Mortgagee the Secured Moneys or so much thereof as shall remain unpaid upon the sale of the last remaining Lot in the Mortgagor’s proposed strata subdivision of the land into Strata Lots or 30 November, 2003 whichever is the earlier.

255 Clause 6 of the annexure provided as follows:

6. Collateral Security

As collateral security the Mortgagor (as Guarantor) and the Mortgagee (as Lender) have entered into a Deed of Loan and Guarantee of even date. Any breach of the said Deed of Loan and Guarantee shall be a breach of this Mortgage and any breach of this Mortgage shall be deemed to be a breach of the said Deed of Loan and Guarantee.

256 The schedule to the deed of loan and guarantee uses the expression “Borrower” to denote Knox, and the expression “Guarantor” to denote the Messrs Esber and Casanda.

257 The mortgagors (and, for that matter, Mr Joseph Esber) would never, as “Borrower”, owe any money to Kimberley under the deed of loan and guarantee. Their liabilities to Kimberley under that deed were as guarantors (or, using the defined term, as “Guarantor”).

258 Mr Coles submitted that, in the introductory words of the annexure (see para [252] above, the word “Mortgagor” should be read as referring to Knox, and that the word “Borrower” was correct. Not surprisingly, Mr Parker submitted that the word “Mortgagor” should stand (i.e., as referring to Mr Marcel Esber or Casanda as the case may be) and that the word “Borrower” should be read as “Guarantor”.

259 In each mortgage, the expression “Mortgagor” was used. In one, it denoted Mr Marcel Esber. In the other, it denoted Casanda.

260 The expression “Mortgagor” is used consistently throughout the annexure to each mortgage. Thus, the “Mortgagor” appoints Kimberley his or its attorney, undertakes to pay the secured monies on the maturity date (clause 1), undertakes to observe memorandum E985772 (clause 2) and gives other covenants.

261 By clause 5, the “Mortgagor” undertakes to observe terms of the prior mortgages over the property that is the subject of his or its mortgage to Kimberley. All that is consistent with the proposition that the word “Mortgagor” was used in the introductory words of the memorandum to denote the mortgagor named in the mortgage, not (by mistake) to denote the mortgagor as borrower under the deed of loan and guarantee.

262 Further, clause 6 expressly refers to the Mortgagor’s position as Guarantor under the deed of loan and guarantee. That could only be correct if, as Mr Parker submitted was the case, the expression “Mortgagor” in the opening words were intended to refer to the particular mortgagor and not to Knox.

263 Further, I think, clause 6 indicates that the misdescription that has occurred in the introductory words to the annexure arises from the use of the word “Borrower” rather than the word “Guarantor”.

264 Thus, as a matter of construction, I think that the mortgages should be read as securing the repayment to Kimberley of whatever monies might be or become due and owing by the mortgagor as guarantor to Kimberley under the deed of loan and guarantee. In other words, I think, each mortgage should be read as securing payment of the “Guaranteed Money” as that expression is defined in clause 1.1.13 of the deed of loan and guarantee.

265 Mr Coles submitted that it was entirely understandable that the mortgagors should have stipulated to avoid personal liability for the fee, but nonetheless might have accepted that the mortgages given by them to Kimberley should secure payment of the fee. I have to say that I find this argument difficult to follow. The mortgages were given to secure the obligations undertaken by the mortgagors as Guarantors under the deed of loan and guarantee. It does not seem to me to be consistent with that (in my view self evident) proposition that they would have agreed to charge their estates in the mortgaged properties with amounts other than those owing in their capacity as Guarantors.

266 Mr Coles submitted that the interpretation that I have indicated in para [264] “would be disconsonant with the wording and intention of clause 6.1 of the Deed of Loan and Guarantee” (closing submissions, para 86). I have to say that I have some difficulty in following that submission also. Kimberley’s obligations under the deed were subject to the matters stipulated in clause 6.1. Clause 6.1 refers, relevantly, only to the Current Security. (No one suggested that Kimberley had stipulated for “Further Security”, either at the outset or at any time during the currency of the joint venture.) It cannot be said that the mortgages given by the mortgagors in support of their guarantees were, in the words of clause 1.18, “other Security… provided… as Security for… any other monies from time to time payable by the Borrower to the Lender”.

267 To the contrary of Mr Coles’ submission, I think that clause 6.1 is reasonably plain. Kimberley was content to accept its obligations under the deed of loan and guarantee on delivery to it of the Current Security in accordance with clause 6.1.1. So far as the guarantors were concerned, their obligations (and the mortgages given in support of them) were limited because of the definition of “Guaranteed Money”. Kimberley reserved the right to call for Further Security, either at the outset or during the currency of the joint venture. Had it done so, that Further Security – regardless of its source – might have extended to the fee. But Kimberley did not do so; and its right to do so cannot in my view reflect back on, so as in some way to undercut or undo, the express limitation on the Guarantors’ liability.

268 I therefore conclude that neither the mortgages given by the mortgagors to Kimberley nor the sum of approximately $419,000.00 received by Kimberley as the fruits of those mortgages were or is available as security for payment of the fee.

269 It would seem to follow that, whilst Kimberley may have been entitled to hold the net proceeds of sale until the extent of the Guaranteed Monies could be determined, it was not entitled to do as it has done, and allow itself the beneficial use of them.

270 Although this question was raised in the course of oral argument, Kimberley did not really address the position that would apply if (as I have concluded) the benefit of the mortgages did not extend to the fee. The position would seem to be that Kimberley was not entitled to the beneficial use of the money until the maturity date. At that date, it was entitled to appropriate the money against whatever amounts (excluding the fee) were then owing by the mortgagors to it pursuant to the deed of loan and guarantee and their mortgages.

271 If the parties cannot sort this position out in the light of the findings that I have made, I will hear further argument.

Conclusions and orders

272 In summary, I conclude that the separate questions should be answered as follows:

(2) Questions 3A and 3B: The Investmentsource agreement was not made in accordance with the relevant requirements of the joint venture agreement, and thus was not “authorised”. It is not possible to deal further with question 3A, having regard to the way that the parties put their submissions.

(3) Question 4: In the events that have happened (namely, that Investmentsource has been held disentitled to receive its fee, and the joint venture has received the benefit of that fee) the prices paid by Investmentsource were not less than those that should have been obtained by Kimberley having regard to its obligations under the joint venture agreement.

(4) Questions 5A and 5B: My tentative view is that, on a proper construction of the joint venture agreement and in the events that have happened, it would have been necessary to sell the Flexman units when in fact they were sold, and the parties acting reasonably and on the assumptions to which I have referred should have formed an opinion to that effect.

(5) Question 6: GST on the sale of units (calculated in accordance with the margin scheme) was a Project Cost. Knox should have elected to take advantage of the margin scheme and should have submitted business activity statements accordingly. GST properly assessed on that basis should then have been paid by Kimberley as a Project Cost.

(6) Question 7: The GST and other matters referred to in paragraph C29 of the further amended third cross-claim are not Project Costs for which Kimberley is entitled to be reimbursed.

(7) Question 8: Amounts paid by Kimberley for the services of Mr McKechnie are not Project Costs.

273 Declarations and orders should be made to give effect to the conclusions that I have expressed, so that (to the extent possible) the accounts can be taken on the basis of those conclusions. To the extent that the parties wish to deal with any question that remains unresolved, I will hear further argument. Again, if the parties cannot agree on the appropriate costs order to be made, I will hear further argument.

274 I direct the parties within 14 days to bring short minutes of order to give effect to these reasons. The short minutes of order should include draft directions for the further hearing (if required) of any unresolved question, and for resolving the issue of costs if the parties cannot agree on the costs order to be made.

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Citations

Investmentsource v Knox Street Apartments [2007] NSWSC 1214

Most Recent Citation

Joseph Street Pty Ltd v Tan [2010] VSC 586

Cases Citing This Decision

3

Residential Housing Corporation v Esber [2011] NSWCA 25

Broadway Plaza Investments v Broadway Plaza Pty Ltd; In the matter of Combined Projects (Arncliffe) Pty Ltd [2019] NSWSC 1082

Joseph Street Pty Ltd v Tan [2010] VSC 586

Cases Cited

4

Statutory Material Cited

1

Investmentsource Corporation Pty Ltd v Knox Street Apartments Pty Ltd [2002] NSWSC 710

Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36

CITATION:	Investmentsource v Knox Street Apartments [2007] NSWSC 1214
HEARING DATE(S):	23, 24, 25, 26 and 27 July 2007
JUDGMENT DATE :	31 October 2007
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	McDougall J at 1
DECISION:	See paragraphs [272], [274] of judgment
CATCHWORDS:	CONTRACTS – Joint venture – Agreement relating to property development – Dispute over net proceeds and order of distribution – Where joint venture relationship constituted by joint venture agreement and associated agreements – Intention of parties – Construction and effect of agreements – Where inconsistency between agreements – Whether breach of obligations under joint venture agreement – Whether damage proved to have been caused.
LEGISLATION CITED:	A New Tax System (Goods and Services) Act 1999 (Cth)
CASES CITED:	Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 Chacmol Holdings Pty Ltd v Handberg (2005) 215 ALR 748 Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 Investmentsource Corporation Pty Ltd v Knox Street Apartments (2002) 56 NSWLR 27 Mackay v Dick (1881) 6 App Cas 251
PARTIES:	Marcel Esber (First Plaintiff) Joseph Esber (Second Plaintiff) Casanda Pty Ltd (Third Plaintiff) Kimberley Securities Limited (First Defendant) Residential Housing Corporation Ltd (Second Defendant) RP and PM Flexman (Fifth Defendants)
FILE NUMBER(S):	SC 50049/02 & 50110/06
COUNSEL:	T G R Parker SC / S Fendekian (Plaintiffs) B A Coles QC / G A Sirtes (First Defendant) D A Smallbone / K A Bagley (Fifth Defendants) (Flexmans)
SOLICITORS:	Watson & Watson Solicitors (First, Second and Third Plaintiffs) Landerer & Company Solicitors (First Defendant) Bolzan & Dimitri Solicitors (Second Defendant) Thurlow Fisher (Fifth Defendants)