JACA Nominees Pty Ltd v Waldarra Pty Ltd

Not Restricted

IN THE SUPREME COURT OF VICTORIA
AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 2081 of 2008

J.A.C.A. NOMINEES PTY LTD
(ACN 005 353 702)

Plaintiff

WALDARRA PTY LTD
(ACN 004 367 935)

WARMILFORD PTY LTD
(ACN 006 703 144)

First Defendant

Second Defendant

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JUDGE:	JUDD J
WHERE HELD:	Melbourne
DATES OF HEARING:	20 – 23, 27 September 2010
DATE OF JUDGMENT:	2 December 2010
CASE MAY BE CITED AS:	JACA Nominees Pty Ltd v Waldarra Pty Ltd
MEDIUM NEUTRAL CITATION:	[2010] VSC 546

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CONTRACT – Oral agreement – Uncertainty – Constructive Trust

CONTRACT – Agreement in writing to create a trust – Whether agreement complete – Unstated consideration.

TRUSTS – Informal agreement – Common intention.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr MR Scott	Gadens Lawyers
For the Defendant	Mr A Nolan SC With Mr PG Little	Simpson Law

HIS HONOUR:

Introduction

In about February 1987, five men agreed to undertake a project to construct and operate a hotel on land at the corner of Greta Road and Mason Street, Wangaratta, Victoria. The land was owned by companies associated with one of the men, Anthony Ross Bennett, a solicitor. Mr Bennett invested in the project through a company he controlled, Bilboa Giselle Nominees Pty Ltd.

The other investors were William David Mackay, who invested through Kay By‑Products Pty Ltd; James Albert Riley, who invested through Darriwell Pty Ltd; Alan Bailey, who invested through Alan Bailey Nominees Pty Ltd; and Neil Alisdair Stewart, who invested through JACA Nominees Pty Ltd, the plaintiff in this proceeding. Mr Stewart is also a solicitor.

The five investors were each allotted units in the Warmilford Unit Trust. The second defendant, Warmilford Pty Ltd, was trustee. The trust deed was dated 10 February 1987. The trust deed recorded that Mr Bennett acquired six units; Mr Riley six units; Mr Stewart four units; and Mr Bailey, two units. Each unit was fully paid at $1.00. There was no evidence of any premium paid for the units.

Mr Bennett said that he later acquired the interest of Mr Bailey. Mr Stewart said that each unit holder made an initial investment of $100,000. Mr Bennett disagreed. Whatever the correct amount, only a few dollars from each investor was reflected in the purchase price of the units. There is no certainty about how the balance of the investment was treated, although presumably it was to be a loan.

The hotel was to be built, owned and operated, by Bethrica Pty Ltd. Such early records as are available indicate that prior to 1991, Bethrica was wholly owned by Warmilford.

The initial unit holders were not the first or last investors in the project. There was evidence of earlier investors, such as Messrs Heslop, McLeish and Symons. They seem to have retired from the project before 1987. Messrs Heslop and McLeish were partners in the accounting firm, Heslop & McLeish Pty Ltd, accountants for the first defendant, Waldarra Proprietary Limited, until about 1994.

The land was purchased by Warmilford in July 1987. Following the purchase of the land, and perhaps during the construction phase, new investors were introduced, although they did not become unit holders in the Warmilford Unit Trust. The new investors were Palezza Investments Pty Ltd, Fornello Pty Ltd and Bretcrest Pty Ltd. They became known as the Myrtleford Investors.

The hotel opened for business in about March 1991. In about October 1992, Waldarra acquired the interest of all investors, by paying them a proportion of the cash value of their investment.

This proceeding was brought by the plaintiff to secure a claimed entitlement to half of the net equity in the hotel. James Merrick Ussher, who controls Waldarra and Warmilford, disputed the plaintiff’s claim. He variously contended that it had no interest at all, or a 1/6 share, or a 1/5 share in the equity of the hotel. The principal issue in this proceeding is what, if any, interest the plaintiff has in the hotel.

Corporate and financial records, which would ordinarily evidence the respective interest of each participant, have either been destroyed or were never prepared. Instead, the court has had to rely on scraps of information made up of the imperfect recollections of participants, and incomplete, inaccurate or confusing documents purporting to evidence some aspects of the transaction. There were two notable exceptions. First, a sale agreement prepared by Mr Stewart in or after 1995, recording the sale by Waldarra of half of its interest in the hotel to the plaintiff; second, a minute of agreement, signed by Mr Stewart and Mr Ussher on 14 May 2007.

While the participants were, in form, corporations and trusts, it was plain that the relationships between the individuals controlling those entities were of primary importance. They were the real participants. Some gave evidence. They were Mr Stewart, Mr Bennett, Mr Mackay and Mr Ussher. Their recollections were surprisingly poor, particularly those of the protagonists, Mr Stewart and Mr Ussher.

Background

Warmilford acquired the land with the assistance of mortgage funds provided by Sandhurst Trustees Ltd and Beechworth & Ovens Credit Union Cooperative Ltd. In anticipation of the development, the land was sub-divided into two parcels. Following sub-division, Volume 09961 Folio 278 (derived from parent title Vol 09630 Folio 221) was registered to Bethrica and the remaining land, described in title Volume 9961 Folio 279, was registered to Warmilford. The parent title was cancelled and the existing mortgages discharged and replaced by mortgages in favour of the National Australia Bank.

Construction commenced in about 1989 or 1990. There were delays, but the hotel was eventually completed in early 1991. The project seems to have been perpetually undercapitalised, causing the participants financial stress. The delays in construction added to the financial stress of the participants. Additional capital was required by the bank to complete the project. In order to raise the additional capital, the accountant for Bethrica, Trevor O’Keefe, secured the involvement of the Myrtleford Investors. Each of the Myrtleford Investors subscribed for 5,000, $1 shares in Bethrica at some time during the financial year ended 30 June 1991. There was uncertainty about the amount invested by each of them. In all likelihood each entity invested $50,000 in Bethrica, although the basis of the investment was unclear. In the absence of premiums paid for $1 shares, their investment appears to have been a mix of equity and loans.

Mr Ussher said that in the early 1990s he met Mr Stewart in a street in Wangaratta. They were known to one another. Mr Stewart’s firm, Stewart & Noble Lawyers, were Mr Ussher’s solicitors, although Mr Stewart was not the partner who undertook Mr Ussher’s work. Mr Ussher said that Mr Stewart invited him to invest in the project, employing the proceeds derived from the redevelopment of some land owned by Waldarra. Mr Ussher said that he was told that there were four investors, each of whom had contributed $100,000. He said that Mr Stewart invited him to invest $100,000, but a little later proposed that he buy out all other investors, except for Mr Mackay and himself. If Mr Ussher’s account is correct, the initial invitation took place at some point after Mr Bennett bought out Mr Bailey, but before the Myrtleford Investors had become involved. Mr Stewart could not recall the precise circumstances in which Mr Ussher became an investor in the project.

In his first witness statement, Mr Ussher mentioned the initial invitation to invest $100,000, but gave the impression that the invitation was soon overtaken by the proposal to buy out the other investors. In a subsequent witness statement, Mr Ussher said that he had invested $100,000 into the project prior to buying out the other investors, and that the payment had been arranged by Mr Stewart. In my view, Mr Ussher’s evidence of an earlier investment was little more than reconstruction, based on his review of the accounts of Waldarra for the year ended 30 June 1992, which disclosed an ‘investment’ of $100,000. There was, however, other evidence supporting an investment by Mr Ussher prior to 30 June 1991, although as a whole the evidence on this issue was confused as to the timing and amount.

Mr Stewart was adamant that Mr Ussher and his company, Waldarra, were not involved in the project until about October 1992, when he and Mr Ussher negotiated the buy-out of the other investors by Waldarra. Mr Bennett, who gave evidence for the defendants, said that Mr Ussher had made an earlier investment of $100,000. His evidence of the amounts invested was also little more than reconstruction. He had no documentation, and his evidence was coloured by obvious antipathy towards Mr Stewart. I am not persuaded of the accuracy of Mr Bennett’s evidence regarding the timing and amount of investments by Mr Ussher or Mr Stewart. There was no evidence of any units issued to Mr Ussher, although the 1991 Annual Return of Bethrica recorded that, as at 30 June 1991, Waldarra held 5000 $1 shares in its capital.

Mr Stewart said that he and Mr Mackay put a proposal to Mr Ussher in about October 1992, to buy out all interests but for theirs, and to provide additional funds to reduce or eliminate Bethrica’s exposure to the bank. Mr Ussher agreed, at least in principle. The negotiations with the other investors were conducted through Mr Stewart and Mr Ussher. In the course of the negotiations, Mr Mackay told Mr Stewart and Mr Ussher that he also wanted to withdraw and be bought out like the others. It is that discussion, which took place in about October 1992, which formed the basis of the plaintiff’s primary case for a constructive trust. The plaintiff alleged that it reached an agreement with Waldarra to the effect that after buying out the other investors, Waldarra would hold half of its net equity in the hotel, after recovery of its loans, on trust for the plaintiff. The equity was said to be represented by shares held in Bethrica and units held in the Warmilford Unit Trust.

The negotiations concluding in Waldarra’s purchase of the interests of the other investors at a discounted price, took place at a time of financial stress in the project. The hotel business was not performing to expectation. The bank was owed in excess of $1 million, and required repayment in early 1993. The financial pressure on the investors was such that they were uniformly content to accept around two-thirds of the cash value of their investment. That would indicate a pessimistic view, at least on their part, about the future of the project. Some or all of the individuals had given personal guarantees to the bank securing repayment of the debt. There was evidence of an expectation on the part of some retiring investors that Waldarra would repay the bank in full, thus relieving the guarantors of their obligation. In the events that occurred, the mortgage to the bank was not discharged until 2008.

There was evidence that some of the financial, corporate and legal records have been destroyed. Some documents that do exist are unreliable. There are internal inconsistencies. Some documents have plainly been manufactured after the event and back-dated, in an attempt to recreate or reflect someone’s understanding of past transactions. Even relevant banking records are not available, with the exception of an incomplete, although important, record of some payments made to and by Waldarra.

At trial, there was no agreement between the parties about initial contributions. Evidence given by individual investors was vague and incomplete, even insofar as it concerned their own investment. Mr Stewart claimed to have contributed a total of about $280,000 to the project by October 1992. He said he had made an initial contribution of $100,000, and advanced further funds when required. Mr Mackay said that he had invested between $200,000 and $220,000 initially, and thereafter made small additional contributions as funds were required. He was unable to recall with any precision the extent of his overall contribution, but said that it was in the vicinity of $280,000. He had destroyed all of his records relating to the venture about three years ago. Mr Stewart said that his records had been destroyed by his firm in early 2008, as aged documents. He was not challenged on that evidence, or the reason for the destruction of relevant documents. It is not clear what documents or classes of documents were destroyed.

Mr Mackay said that, with the exception of Mr Riley, all initial investors had made equal contributions. I take that to mean that Mr Mackay, Mr Bailey, Mr Bennett and Mr Stewart had each invested an amount of approximately $280,000 by October 1992. One might expect that investors in the position of these men, investing as a group in a cash hungry hotel project, would have ensured that their contributions were equal, or if not equal, the differences well acknowledged and recorded, so that future adjustments might be made. After all, the initial investors included two solicitors, Mr Bennett and Mr Stewart. The evidence does not suggest that any investor was commercially unsophisticated.

Mr Ussher rejected Mr Stewart’s claim that he had invested $280,000. He went so far as to reject the proposition that Mr Stewart had even made an initial investment of $100,000. He said that he was not persuaded that Mr Stewart had made any investment. Mr Ussher said that Mr Stewart told him that he had made an initial investment of $100,000, but had never furnished proof.

Mr Bennett said that to the best of his recollection, the initial unit holders in the Warmilford Unit Trust contributed a total of $400,000, made up of $100,000 each from entities associated with Mr Riley, Mr Mackay and himself; $66,666.67 from Mr Stewart’s entity, JACA Nominees; and $33,333.33 from Mr Bailey’s entity. Mr Bennett rejected the proposition that Mr Stewart had contributed about $280,000. He also rejected the proposition that Mr Mackay had contributed more than $100,000.

No one knew precisely what the Myrtleford Investors had contributed. Their investments were partly reflected in the issue of 5,000 fully paid $1 shares in Bethrica to each entity. There was some evidence to support the proposition that the Myrtleford Investors had each invested $50,000.

The evidence supporting payments of $50,000 by each of the Myrtleford Investors was for the most part reconstruction, based on the recollection of Mr Ussher and Mr Stewart, that Mr Ussher had paid investors about two thirds of the cash value of their investment. There was evidence of amounts paid to each of the Myrtleford Investors by Mr Ussher in the sums of $30,000 and $35,000. Such banking records as were available indicated that one of the investors, Bretcrest, which held 5000 shares in Bethrica, received two payments - $30,000 and $35,000. Palezza was paid $30,000, and Fornello, $35,000. Thus, even the banking records, coupled with evidence of the percentage payout, presented a confusing picture.

There was no explanation as to why some investors appear to have invested into Warmilford, while others invested in Bethrica; or what proportion of any such investment was to be treated as a loan. The corporate records also cast doubt over Mr Ussher’s claim to have invested $100,000 before October 1992. Waldarra had apparently been issued the same number of shares as each of the Myrtleford Investors in the financial year ended 30 June 1991. If the Myrtleford Investors paid $50,000 for 5,000 shares it might suggest an investment of only $50,000 by Waldarra.

The five investors recorded as unit holders in the 1987 Warmilford Unit Trust were each allotted units. There was no record of any premium paid for units. In the Annual Return of Bethrica, for the financial year ended 30 June 1990, Warmilford is recorded as owner of all of the issued share capital – 30,000 fully paid shares at $1 each. No share premium was recorded. Bethrica’s 1991 Annual Return recorded Warmilford as owner of 40,000 shares and the three Myrtleford Investors and Waldarra as owners of 5,000 shares each. There was no recorded share premium. Thus, taken at face value, the documents were consistent with only nominal amounts invested in equity, with the majority of funds advanced by way of loans.

The 1991 Annual Return of Bethrica was signed by Mr Stewart, in his capacity as a director, although he said that he had no recollection of Waldarra having any involvement in the project prior to October 1992. Mr Stewart also said that the Annual Return was incorrect when describing him as a director and secretary appointed on 27 November 1991. He said that he had been appointed many years earlier.

Mr Ussher said that he had no documents relating to the project. When new accountants were appointed to Warmilford and Bethrica in about 1994, they tried to reconcile, and in some cases recreate, the accounts and supporting documents. Norman Vincent Kenny assumed overall responsibility, and in about 1998 his assistant, Justin Andrew Timms, took over primary responsibility for the accounts of Warmilford and Bethrica. Their firm, Kerr Andison & Kenny, also undertook accounting work for Mr Ussher, Mr Stewart and associated entities.

Mr Kenny said he had been appointed to act as accountant for Bethrica and Warmilford by Mr Stewart, who told him that he owned half of the equity in the hotel. Thereafter Mr Kenny, and later Mr Timms, proceeded on that assumption, which remained undisturbed until a heated meeting between Mr Ussher and Mr Stewart in Mr Kenny’s office on 20 October 2008. It was on that occasion that Mr Ussher first challenged Mr Stewart about his claimed ownership, and informed Mr Kenny that he (Mr Ussher) did not accept that Mr Stewart owned half of the hotel.

Having assumed responsibility for the accounts of Bethrica and Warmilford in about 1994, Mr Kenny sought information from Mr Stewart, who told him that there were no documents. Mr Kenny wanted information about a trust deed. It is not clear how Mr Kenny knew there was a deed. In any event, Mr Stewart said that he was asked by Mr Kenny to prepare trust deeds, and was provided with information about unit holdings and other details. Consequently, Mr Stewart prepared a new unit trust deed and a discretionary trust deed, both of which were backdated to 15 October 1992. Mr Stewart prepared the new unit trust deed by photocopying the 1987 Warmilford Unit Trust Deed, and adding a new schedule and date. The discretionary trust deed was entirely new.

It remains a mystery as to why Mr Stewart did not simply give Mr Kenny the 1987 trust deed, rather than prepare a new deed, backdated to 15 October 1992. In any event, Warmilford was appointed trustee of the new unit trust, and Waldarra was recorded as the only unit holder, with 394,836 fully paid $1 units. The new unit trust deed was executed by Mr Ussher and his daughter, Susan Louise Ussher, on behalf of the trustee and unit holder. Mr Kenny was the settlor of the discretionary trust, and Warmilford was appointed the trustee. Mr Ussher and Ms Ussher executed the discretionary trust deed on behalf of Warmilford. The appointor was Mr Ussher. The role of the discretionary trust was unclear.

The number of units held by Waldarra, as recorded in the new unit trust deed, appeared to be a reflex of the value attributed to an investment recorded in the accounts of Waldarra for the financial year ended 30 June 1993. Those accounts had been prepared by Heslop & McLeish Pty Ltd, who were Waldarra’s accountants at that time. Messrs Heslop and McLeish were, of course, early investors in the hotel project. Mr Ussher said that the investment of $394,836 represented the total amount he had paid to buy out investors in about October 1992. If that is correct, that sum also included any prior investment by Waldarra. The preparation of the new unit trust deed, in or after 1995, seemed to be designed to achieve conformity with the accounts of Waldarra.

The recording of Waldarra’s investment as an asset, reflected in units in the new unit trust, indicated a decision made by someone to convert some loans into equity. Most of what was paid by Mr Ussher to other investors went to repay loans made by them to Bethrica or the Warmilford Unit Trust. At some time during the financial year ended 30 June 1993, and at a time after he had paid out the other investors, accounts for Waldarra were prepared and approved by Mr Ussher which differentiated between equity and loans to the project, attributing an equity component of $394,836.

If, as Mr Ussher claimed, he had made an investment in the project of $100,000, or even $50,000, prior to October 1992, the timing of that investment was uncertain. Mr Ussher appeared to rely upon the accounts of Waldarra for the year ended 30 June 1992 to prompt his recollection of the investment; and yet that sum seemed to evaporate when replaced in the following year by an amount of $394,836. That assumed, of course, that the total amount recorded as an investment was the same as the amount paid by Waldarra to buy out the other investors. One explanation for the anomaly is that Waldarra’s accountants eliminated an erroneous entry, recording an investment that had not in fact been made. The issue was not fully explored at trial, and I am left with conflicting oral and documentary evidence.

If the Annual Return of Bethrica is to be accepted as an accurate record of the timing of Mr Ussher’s initial investment into the project, the investment must have been made at around the same time as the investments by the Myrtleford Investors; that is, prior to 30 June 1991. But Mr Bennett said that Mr Ussher made his first investment about three months before buying out the other investors. Such anomalies were not unusual. The best evidence of Waldarra’s total cost of equity in the project, differentiating that cost from his contributions by way of loans, is found in its accounts for the year ended 30 June 1993. While there is evidence supporting some investment by Waldarra prior to October 1992, I am not satisfied of the amount or timing of that investment. Ultimately, that is of little or no consequence, because the total cost to Waldarra is what was important. I find that Waldarra’s total cost of equity was $394,836.

The Annual Return of Bethrica, for the financial year ended 30 June 1994, prepared by Mr Kenny after he took responsibility for the accounts, recorded its directors as Mr Stewart, Mr Ussher and Ms Ussher; and the shareholders as Ms Ussher (as to one share) and Waldarra as beneficial owner of the remaining 60,000, $1 fully paid shares. In the following year the shareholding changed, so that Waldarra held only 20,000 shares, and Warmilford, held 40,000 shares. Ms Ussher continued to hold one share. There was no explanation as to why these changes took place. Thus, according to the corporate records as at 30 June 1995, the hotel was owned (through Bethrica) as to one-third by Waldarra and two-thirds by Warmilford. By that time, Warmilford had been appointed trustee of three trusts – the 1987 Warmilford Unit Trust, a new unit trust and a new discretionary trust.

The absence of records was alarming for a venture of this kind, in which solicitors and accountants had been intimately involved as investors, directors and service providers. What is also remarkable is the lack of recollection by Mr Stewart and Mr Ussher, of transactions involving significant amounts of money. If they are to be believed, Mr Stewart and Mr Ussher failed to recall events and circumstances which common sense dictates they should have recalled, even after so many years. Even with banking records to assist his recollection, Mr Stewart was unable to recall and explain a payment of almost $70,000 from Waldarra in October 1992; nor could he recall why sums of $40,000 and about $128,000 were paid to Bethrica shortly afterwards; or why $84,500 was paid on his account to Waldarra in June 1993. I do not accept that their memories were so poor. There were other reasons for their failure (or refusal) to recall and their inability to provide cogent explanations.

Mr Stewart’s explanation of the events surrounding the preparation and purported establishment of the new trusts was far from satisfactory. He said that he knew little about the law of trusts and did only as he was told by Mr Kenny. I do not accept that evidence. Mr Stewart was a solicitor in active practice. He controlled his own discretionary trust. He was an experienced investor in property. This and other anomalies were not explored in cross-examination. I infer that all parties perceived a benefit in leaving some matters unexplained.

While Mr Ussher accepted that he received bank statements from WIN Securities, a cash management service offered by Mr Stewart’s firm, he was adamant that he had not received a copy of the critical statement that disclosed the payments made by Waldarra to buy out the early investors, that recorded a payment to Waldarra on behalf of Mr Stewart in the sum of $84,500. Mr Ussher stubbornly refused to accept any position that might support the version of events advanced by Mr Stewart. When confronted by banking records, indicating payments made by or on behalf of Mr Stewart to Waldarra and Bethrica, he denied knowledge of them. He suggested that payments had been made without his authority. He stubbornly refused to accept that the plaintiff had any interest in the hotel, unless Mr Stewart could prove it.

The evidence given by both men was, at times, quite irrational. For example, Mr Stewart’s attempt to explain his preparation of the new trust deeds; and his evidence about the sale agreement prepared by him. The sale agreement, in my view, provided the key to the resolution of this case, even though it was described by Mr Ussher as having never been agreed or implemented, and by Mr Stewart as fundamentally incorrect. The terms of the agreement, as prepared and executed, did not suit either party, although for quite different reasons.

Mr Ussher’s evidence concerning the circumstances in which he came to sign a document on 14 May 2007 (the ‘Loans to Company’ document), which plainly reflected a potential division of net proceeds on the sale of the hotel on an equal basis, was irrational and contrived. So was his evidence concerning a meeting, later that year, at which the tax implications of the sale were discussed. He provided no adequate explanation as to why he did not challenge Mr Stewart’s asserted half-interest until about October 2008.

When giving their evidence, the demeanour of the protagonists, Mr Stewart and Mr Ussher, was most unusual. As a witness, Mr Stewart was impatient, and seemed distracted. Mr Ussher, at times, appeared to be concealing a deep contempt and resentment for Mr Stewart. At times both men appeared stunned or traumatised by the events and circumstances about which they were giving evidence. It was as if their ability to recall had, in some respects, closed down. There were unexplained gaps in their recollections. They filled the voids with irrational and unbelievable accounts.

There were two factors which, in my opinion, might have explained the extraordinary way in which the protagonists’ gave their evidence. The first was a possible desire to conceal their propensity, in concert with their accountants, to make every transaction ‘tax effective’. For example, loan repayments to Mr Ussher, which became an issue in the proceeding, were made in a ‘tax effective’ manner, with repayments taking the form of salary, superannuation or interest, depending on the financial position of Bethrica and Waldarra. The creation of the new trust deeds was another example. There was no explanation as to why these documents were necessary. The tax imperative might also explain the destruction or absence of records, although I do not discount the possibility that the investors, and their accounting advisors, simply overlooked the preparation of proper documentation. But given the number of investors, their professional qualifications and business experience, and the amounts invested, careless oversight seems an unlikely explanation.

In my view there was a much more compelling explanation for the behaviour of Mr Ussher and Mr Stewart throughout the project, and their demeanour when giving evidence, as well as the content of their evidence. That explanation involved Ms Ussher, who became Mr Stewart’s wife in the year 2000.

In the mid-1980s, Mr Stewart and Ms Ussher commenced a secret relationship. At that time, Mr Stewart, who is 20 years older than Ms Ussher, was married with three children. Mr Stewart and his first wife separated in about 1990. He and Ms Ussher commenced to live together in about 1993, and were married on 15 April 2000. Ms Ussher said that on around 11 June 2008, her marriage to Mr Stewart irreconcilably broke down. They are presently involved in divorce proceedings in the Family Court of Australia.

Ms Ussher started work at the hotel, on a part-time basis, when it opened for business in March 1991. She said that was a year or two before her father invested in it. That would indicate an initial investment by Mr Ussher at a time more consistent with Mr Stewart’s version of events. A few years later she commenced to work full-time, and continues to manage the hotel.

It was only after the marriage of Ms Ussher and Mr Stewart had broken down that Mr Ussher challenged Mr Stewart’s claim to an interest in the hotel. The first evidence of disagreement surfaced at a meeting on 26 September 2008, when Mr Ussher told Mr Stewart that he did not agree with the figures in the Loans to Company document, which both men had signed in May of the previous year. Even on that occasion, Mr Ussher did not directly challenge the concept of shared ownership.

At the meeting on 26 September 2008, Mr Stewart proposed that Mr Ussher buy him out. According to Mr Stewart, Mr Ussher told him that he could not afford to do so, but said that he did not agree with the figures in the agreement. Mr Stewart said that he was referring to the Loans to Company document. According to Mr Stewart, Mr Ussher said that he would talk to Mr Kenny and get back to him. While there is some ambiguity about the topic of disagreement, it seems probable that Mr Ussher was concerned about the accuracy of the calculation of his loan account.

Ms Ussher said that at some time in 2007, her father told her that although Mr Stewart claimed to own half the hotel, he did not own any shares. During his evidence Mr Ussher persistently linked ownership of the hotel to a shareholding. In my opinion, after the marriage between Mr Stewart and Ms Ussher broke down, Mr Ussher seized upon the lack of any shareholding by the plaintiff as the basis to explain his rejection of the plaintiff’s claimed interest in the hotel.

Mr Ussher made his first direct challenge to the plaintiff’s claim at the meeting on 20 October 2008. It is interesting to note that a few weeks earlier, on 2 October 2008, Ms Ussher had sworn an affidavit, filed in the Federal Magistrates’ Court in support of her application for a division of property, in which she asserted that Mr Stewart owned the hotel in equal shares with her father. About a month after the meeting, on 14 November 2008, Ms Ussher swore a further affidavit in the same proceeding, in which she said:

12Recently it was drawn to my attention that I had sworn an affidavit which referred to a share that Alisdair had in the tavern.
13After reading through the affidavit again it became obvious to me that I had overlooked the inclusion in my affidavit, at paragraph 14, being a reference to Alisdair owning the tavern in equal shares with my father, Merrick Ussher. This was an oversight on my behalf as I simply had no knowledge as to the interest, if any, that Alisdair had in the Town n’Country Tavern at Wangaratta.

Ms Ussher said that after making her first affidavit she discussed its content with her father, who told her that Mr Stewart did not own a half-share in the hotel. It would have been more frank of Ms Ussher to have deposed, in her second affidavit, to the conversation with her father, rather than that she overlooked that part of the paragraph in her previous affidavit.

In my opinion, the protagonists actively sought to suppress the significance of the relationship between Mr Stewart and Ms Ussher, and the ultimate breakdown of that relationship, to their business dealings. They appeared to regard the rise and fall of the relationship as no more than a surprising coincidence in the rise and fall of their business relationship. While the relationship between Mr Stewart and Ms Ussher was initially kept secret, Ms Ussher commenced to work at the hotel in March 1991, after Mr Stewart’s wife had ‘left town’. It is inconceivable that Ms Ussher’s father did not know of the relationship when he invested in the hotel, and yet Mr Ussher said he was uncertain as to whether he then knew of the relationship at that time.

The relationship between Mr Stewart and Ms Ussher must have influenced the business relationship, and yet Mr Ussher said that he never took much notice when they separated, and denied any resulting bad feelings towards Mr Stewart. He denied any suggestion that his refusal to acknowledge Mr Stewart’s interest in the hotel was connected with the failed marriage. From their evidence one might be forgiven for thinking that the relationship between Mr Stewart and Ms Ussher was entirely irrelevant to the issues in this case.

Mortgages

Apart from contributions by the investors in the project, whether characterised as subscriptions for units, shares or loans, funding for the purchase of the land and construction of the hotel was provided by financial institutions and secured by mortgage over the whole of the land described in Certificate of Title Volume 9630 Folio 221. The initial mortgages to Sandhurst Trustees and Beechworth & Ovens Credit Union were discharged and replaced by a mortgage to the bank. The mortgage to the bank was registered on 9 March 1989, nearly two years after Warmilford purchased the land.

The investors decided to subdivide the land into two allotments. That was achieved in about July 1990. Bethrica became registered as the proprietor of Lot 1, the hotel land, being the land described in Certificate of Title Volume 0961 Folio 278. The remainder of the land, described in Certificate of Title 9961 Folio 279, was registered to Warmilford. The Warmilford land was sold to assist in the reduction of the bank debt. The mortgage granted over the hotel land, owned by Bethrica, was not discharged until 21 February 2008. The mortgage granted to the bank over the Warmilford land was discharged on 5 October 1994.

Mr Stewart said that he prepared mortgages over the two titles to secure advances made by Mr Ussher, through Waldarra, to Bethrica, in addition to his equal equity contribution. The mortgages were never registered, but were executed on behalf of the mortgagor in each case by Mr Ussher as a director. Both mortgage documents were undated, and purported to grant a mortgage over the same land described in Certificate of Title Volume 9961 Folio 278. One mortgage was purportedly granted by Bethrica and the other by Warmilford. The Bethrica mortgage purported to secure a principal sum of $900,000 repayable on 9 February 1996. The typed date in the mortgage appeared to have originally been 9 February 1993, with a handwritten alteration to 1996. The rate of interest payable was 8 per cent. The mortgage granted by Warmilford was identical in all material respects but for the principal sum, which was $155,000.

The Plaintiff’s Claims

Obligations of the kind sought to be imposed by the plaintiff on Waldarra may arise from agreement, common intention, and the imposition of remedial orders to reflect contributions made to the acquisition of property. The plaintiff’s primary case relied upon an alleged agreement - offer, acceptance and consideration. While the plaintiff alleged that the effect of the agreement was to impose on Waldarra an obligation as trustee, holding half its net equity interest in the hotel on trust for the plaintiff, the actual terms of the alleged agreement were not in the nature of an informal agreement to establish a trust relationship.

The plaintiff’s primary case was that in about October 1992, shortly prior to the time Waldarra bought out the other investors, there were a number of conversations between Mr Ussher, Mr Stewart and Mr Mackay, in which Mr Ussher required, as a condition of the acquisition, that Mr Stewart and Mr Mackay remain as his equal partners in the hotel. The plaintiff alleged that when Mr Mackay decided to withdraw, because of the relationship between Mr Stewart and Ms Ussher, Mr Ussher sought Mr Stewart’s agreement to remain financially involved in the project and to be active in its management, in return for which Mr Stewart would be entitled to a reward or consideration of an equal share in the equity of the hotel, alternatively a one sixth interest. That pleading did not induce any confidence in the certainty of the alleged agreement.

The plaintiff’s alternative case relied upon a common intention, short of a concluded agreement, to the effect that Waldarra would hold half of its net equity in the hotel on behalf of the plaintiff. The plaintiff also relied on the contributions actually made by Mr Stewart and Mr Ussher, excluding loans, so as to impose an obligation on Waldarra, as trustee of one-half of its net equity in the hotel, held for the benefit of the plaintiff, or one-fifth or one-sixth of that interest, held on behalf of the plaintiff.

In the midst of the plaintiff’s raft of alternative propositions was another alleged agreement. By a relatively late amendment to its statement of claim, the plaintiff sought to rely upon the sale agreement as an enforceable contract in writing, made between the plaintiff and Waldarra, establishing a trust in favour of the plaintiff as to one-half of its shares held in Bethrica and of units held in the Warmilford Unit Trust.

The 1992 Oral Agreement

Mr Stewart said that when Mr Mackay decided to withdraw, and wanted to be bought out by Mr Ussher along with the other investors, Mr Ussher became reluctant to proceed at all with the proposal to buy out any investors. But when Mr Stewart indicated that he too wished to withdraw and be bought out, Mr Ussher said that he would not proceed unless Mr Stewart agreed to remain involved. Mr Stewart said that he agreed, but only on an equal basis – 50/50. He said Mr Ussher accepted his terms. Mr Stewart did not believe that Mr Mackay was present during that part of the conversation, although Mr Mackay said that he was present during such a conversation at about that time.

A central thesis of the plaintiff’s primary case was its contention that it was not obliged to pay for the equity by purchasing shares or units from Waldarra. The plaintiff submitted that the amount of its contributions was only relevant for the purpose of determining the amount of Mr Ussher’s loan. Mr Ussher would be taken to have invested the same amount as Mr Stewart by way of equity, with the balance contributed by Mr Ussher as a loan, attracting interest. In the evidence given by Messrs Mackay, Stewart and Ussher on this topic it was not always possible to distinguish between what was understood, assumed and spoken.

Mr Stewart gave evidence of discussions with Mr Mackay and Mr Ussher, before Mr Mackay decided to withdraw, concerning the basis upon which Mr Ussher would invest money into the project. Mr Stewart said that it was agreed that Mr Ussher would match the contributions made by Mr Mackay and himself, to become equal partners, and for anything more ‘he would get a mortgage for that amount’. Mr Mackay gave similar evidence. While that evidence did not go so far as to establish that Mr Ussher and Mr Stewart expressly agreed to a similar arrangement when the three-way proposal fell through, it did point to an important and continuing principle, which translated into a shared assumption by Mr Stewart and Mr Ussher, that equity contributions would be equal. The difference between the parties was in their differing versions as to how the equality in equity would be achieved.

Mr Mackay said that he was present when Mr Ussher offered Mr Stewart a half-share to induce him to ‘stay in and run the show’. Mr Mackay had no interest in the outcome of this proceeding and, while his recollection was less than perfect, presented as a credible witness. It seems highly likely that Mr Mackay would have been present during the discussion concerning Mr Stewart’s continued involvement. There is little doubt that Mr Mackay’s decision to withdraw, and the reason for it (Mr Stewart’s relationship with Ms Ussher) had a real impact on the discussions. It is inconceivable that Mr Mackay’s reasons for withdrawing were not explained to Mr Ussher. It is very likely that the conversation then turned to focus on Mr Stewart’s continued involvement in the project, and whether Mr Ussher was willing to proceed at all to buy out investors.

Mr Mackay acknowledged that the implementation of the proposed three-way partnership with Mr Ussher and Mr Stewart would eventually require an assessment to be made of the amount by which Mr Ussher’s contributions exceeded those of Mr Stewart and himself (which he said were equal) and, to that extent, Mr Ussher’s contributions would be ‘called a loan to the company’.

While I generally accept Mr Mackay’s evidence concerning his conversations with Mr Ussher and Mr Stewart, I am not persuaded that Mr Mackay had invested $280,000 in the project as he claimed. Banking records of a payment to Mr Mackay by Mr Ussher indicated that a lesser amount had been invested by Mr Mackay. There was a record of Mr Ussher paying $71,161.03 to Mr Mackay. If the payment received by Mr Mackay to buy him out was an amount representing the same proportion as was paid to investors - around two-thirds - that payment would indicate an initial contribution by him of a little over $100,000. The banking records are the best and only accurate evidence of payments and amounts invested.

Mr Mackay said that while he had no present recollection of the amounts invested by the other investors prior to his withdrawal, he did recall that Mr Riley’s investment was less than his, and said that he would have been aware of the investment made by each of the others at the time. That is not surprising. It would be surprising if the cash invested by partners, in a cash hungry project, became unequal, without the inequality coming to their notice. Mr Mackay said that with the exception of Mr Riley, he and the other investors made equal contributions. I am of the view that Mr Mackay was mistaken about the amount of his investment. If he invested an amount of around $100,000, it is very likely that the others, with the exception of Mr Riley, also invested similar amounts. There was also some symmetry between the amount paid by Mr Ussher to Mr Mackay and the amount paid to Mr Stewart, lending further support to my conclusion that by October 1992, they had each invested around $100,000.

While the banking records were the best evidence that was available, they were incomplete. They did not disclose any payment to Mr Bennett. Those records did, however, reveal payments to investors of around $270,000, including $66,923.73 to Mr Stewart. The amount paid to Mr Stewart could only be explained as a payment by Mr Ussher to purchase Mr Stewart’s interest, placing a cash value on that interest of approximately $100,000. Mr Ussher and Mr Stewart seemed unable to explain the payment. In my view they were unwilling to provide an explanation. They refused to acknowledge the obvious. For Mr Stewart, the bank records cut across the plaintiff’s case about its initial investment of $280,000; and for Mr Ussher, they revealed payments by Mr Stewart which he stubbornly refused to acknowledge.

Mr Ussher said that he paid almost $400,000 to buy out the investors, although he said that he was unable to reconcile payments. Mr Ussher had said that he was never able to balance his books even though his accountants had done so in 1993. He said,

I could never get anything to balance, nothing seemed to work out. The figure showing the $394,000, it didn’t matter how I paid for the shares it never came out right, I couldn’t get it to come out right at all.

His accountants, however, had valued the total invested by Waldarra at $394,836. Mr Ussher’s evidence, which was more a recitation of Waldarra’s accounts than recollection, was generally consistent with the banking records, if an allowance was made for an additional payment to Mr Bennett, who had purchased the Bailey interest some years earlier.

Doing the best I can from the incomplete evidence and faulty recollections, I find that by October 1992, Mr Stewart had made an investment, in units and loans, of the order of $100,000, and that he had been bought out by Mr Ussher on 22 October 1992. Thus, following Mr Ussher’s acquisition of all other interest in the hotel, including Mr Stewart’s equity, Mr Stewart had no equity. That conclusion is consistent with the banking records. It is also consistent with Mr Stewart’s instructions to Mr Timms, for the purpose of preparing the Loans to Company document in May 2007, which valued his equity in 1993 at nil.

Mr Ussher accepted that there had been a discussion in which there was an agreement or understanding to the effect that Mr Stewart might become entitled to half the equity. He seemed to accept that such a conversation had taken place prior to his buying out the other investors. Mr Ussher also said that, at some time after he acquired all the interests of the other investors, Mr Stewart prepared a document under which Waldarra would sell sufficient shares and units to Mr Stewart to equalise equity. He described the document as a proposal. Mr Ussher said that it was never implemented because there was no agreement as to price. That document is discussed in more detail below. I have referred to it as the ‘sale agreement’.

Mr Ussher said that he did not want to be in the project alone, and was content to have Mr Stewart as an equal partner. His recollection of the discussion about the equalisation of equity was to the effect that Mr Stewart would be required to purchase half the shares. Accepting the accountant’s valuation of the cost to Waldarra, the cost to the plaintiff of half of that equity would have been $197,418.

I am satisfied that there was a conversation between Mr Stewart and Mr Ussher in about October 1992, in which Mr Stewart and Mr Ussher agreed that the plaintiff might become entitled to acquire half the equity in the hotel. That much seems common ground. The issue between them was the basis upon which that might happen. Mr Ussher’s version involved the mechanism of a purchase by Mr Stewart of shares and units, in circumstances where Mr Stewart would pay ‘more money to me’. Mr Ussher said he would have accepted, as the price, half the cost of his investment in buying out the other investors. That is consistent with the principle of equality which underpinned the proposed three way partnership.

In October 1992, the issued shares in Bethrica did not equate with the cash investment made by the shareholders. There was a mix of equity and loans. It was not until about 1995, when the new trusts were created, that the value of Waldarra’s ‘equity’ was reflected in shares and units. At the time of the discussions in October 1992, concerning the circumstances in which the plaintiff would acquire a half interest in the hotel, the shares and units did not reflect the total price paid by Mr Ussher. Thus, accepting Mr Ussher’s version of the arrangement between them, it is improbable that Mr Stewart and Mr Ussher could then have concluded any agreement as to how an equalisation of equity would be achieved. While Mr Ussher might have assumed that the transaction would involve a transfer of shares, circumstances were such that any discussion about the basis upon which the plaintiff would acquire its equity must have been in the most general of terms.

While I am not satisfied that Mr Stewart and Mr Ussher discussed and agreed upon terms under which Mr Stewart would acquire shares or units, I am satisfied that their discussions were conducted on the assumption that if Mr Stewart was to acquire a half interest, there would need to be an equalisation of equity after Mr Ussher had bought out the existing investors.

Important components in the factual matrix underlying the plaintiff’s primary case were Mr Stewart’s claim of an initial investment of about $280,000; and the calculation of equity defined by the amount of his financial contribution. Mr Stewart said that he and Mr Ussher had agreed that insofar as the cash contribution by Mr Ussher exceeded his cash contribution, Mr Ussher’s contribution would be treated as a loan, attracting interest at 2 per cent less than the bank rate. He anticipated that Mr Ussher would contribute sufficient funds to enable Bethrica to pay down at least some of its debt to the bank. Mr Stewart said that having reached agreement with Mr Ussher, he advanced further funds to the business and continued to be involved in the management of the hotel. Thus, Mr Stewart’s version of the agreement did not depend upon any particular amount paid by him to acquire equity. Insofar as there would be a need to calculate equity contributions, the amount would be calculated by reference to what he might invest in the future, not the cost to Waldarra of its equity.

While Mr Stewart vigorously denied Mr Ussher’s version of the arrangement, that required him to buy and pay for half of the shares and units, both versions accepted the underlying assumption of equality of equity. The flaw in Mr Stewart’s version was exposed when Mr Ussher bought him out, reducing his starting investment position to nil. In the absence of a commencing position of $280,000, as Mr Stewart claimed, the equalisation of equity must involve money paid by him. That is what Mr Ussher expected, and what Mr Stewart ultimately conceded in evidence. Mr Stewart said that he and Mr Ussher had discussed the future funding that would be required, after Mr Ussher purchased the other interests. He said that he committed to making contributions towards the hotel and to Mr Ussher, ‘when I could and when I was able’.

I reject Mr Stewart’s evidence that he had already invested $280,000 by the time of the discussions in October 1992. I find that his investment was approximately $100,000. Once he had been paid out by Mr Ussher, his equity was nil. In the absence of some basis upon which equality of equity was to be achieved, the plaintiff’s version left open the possibility that it could own half the hotel while paying substantially less than half of what Waldarra had paid, or perhaps nothing – if it could not afford to do so. The plaintiff’s version left the amount of the contribution entirely at the discretion of Mr Stewart.

I am not persuaded that such an arrangement was agreed. It would have been commercially absurd. The cost of equity was ascertainable, by reference to what Waldarra had paid, even though it was not precisely ascertained at that time. Importantly, the plaintiff’s equity position was nil. Those facts, coupled with the underlying and shared assumption of equality of contribution, lead to the overwhelming probability that Mr Stewart and Mr Ussher both recognised and accepted that for the plaintiff to acquire a half interest it would need to pay half of Waldarra’s cost, although perhaps it was not obliged to do so immediately. Mr Ussher knew that Mr Stewart did not then have any funds.

While there remained uncertainty, at least in Mr Ussher’s mind, about the amount to be paid, the basis upon which the plaintiff was to acquire its interest had been agreed. The discussions in October 1992, concerning a mortgage to Mr Ussher, supported the conclusion that the parties acknowledged a need to differentiate between equity and loans. They must have recognized that at some time it would become necessary to calculate the amount of Mr Ussher’s contributions to be treated as a loan, and secured by a mortgage, and thus be precise about equity contributions. That time did not arrive until the parties decided to sell the hotel.

The Sale Agreement

In the midst of the uncertainty created by a failure to properly document the transaction, missing or destroyed documents and faulty recollections, there was one bright light. At some time after February 1993, Mr Ussher, on behalf of Waldarra, and Mr Stewart, on behalf of the plaintiff, executed an agreement in writing that purported to record a sale by Waldarra to the plaintiff of one-half of the units held by it in the Warmilford Unit Trust and one-half of the shares held by it in Bethrica. The document did not, however, record the amount that was said to have been paid by the plaintiff.

At some time after its execution, a version of the document was revisited by Mr Stewart and Mr Ussher, to initial a ‘correction’ made by Mr Stewart. According to Mr Stewart, at some time after the agreement had been signed, he realised that the preamble contained an error. He said that the preamble should have stated that Waldarra was ‘owner of half of the shares in Bethrica’, not ‘one third of the shares’. He made the change which he and Mr Ussher subsequently initialled.

There were two versions of the sale agreement before the court. There was an uncorrected version, which was fully executed. As with the corrected version, the fully executed document did not include the amount paid. Notwithstanding its shortcomings, the fully executed but uncorrected version of the document, appeared to confirm basic elements of the agreement I have found had been reached by Mr Stewart and Mr Ussher in October 1992, although with more precision.

The defendants’ attack of the document was narrow. They called it a proposal, alleging that the price for the sale had never been agreed. They said that the agreement was not intended to take effect until a price was agreed. Mr Ussher said it was never implemented. The defendants submitted that the document was incomplete and thus unenforceable, because of the absence of such an important element. They did not advance any other basis upon which enforcement should be refused, except to submit that Mr Stewart appeared to reject the terms of the agreement as erroneous insofar as it purported to record a sale.

The substantive parts of the agreement provided,

…WHEREAS The Legal Owner [Waldarra] is the owner of all the units in the WARMILFORD Unit Trust which owns all the shares in Warmilford Pty Ltd and which in turn owns two-thirds of the shares in BETHRICA Pty Ltd AND WHEREAS the legal owner is the owner of one-third of the shares in Bethrica Pty Ltd AND WHEREAS on the 9^th day of February 1993 the Legal Owner sold one-half of the units in the Warmilford Unit Trust and one-sixth of the shares in Bethrica Pty Ltd (hereinafter called ‘one half of the units and shares) to the Beneficial Owner [JACA Nominees] for the sum of [left blank]
NOW THIS AGREEMENT WITNESSETH
1.        In consideration of the sum of $ [left blank] paid by the beneficial Owner to the legal Owner (the receipt whereof is hereby acknowledged) the Legal Owner has sold on half of the units and shares to the Beneficial Owner
2.        The Legal Owner holds one-half of the units in shares as trustee for and on behalf of the Beneficial Owner
3.        The Legal Owner hereby confirms that it holds one half of the units and shares upon trust for the Beneficial Owner and agree that it will at the request and cost of the Beneficial Owner execute such documents and do such acts as may be required to vest one half of the units and shares in the name of the Beneficial Owner or in the name of such persons as the Beneficial Owner shall from time to time in writing direct.[1]

[1]Emphasis added to highlight the point of ‘correction’ by Mr Stewart, from ‘one third’ to ‘one half’.

The copy of the sale agreement, containing the hand written correction in the preamble, was executed under seal by the plaintiff, but only signed by Mr Ussher on behalf of Waldarra. The other copy, which appeared to have been separately executed, had both seals attached, although it did not include the hand written amendment. There was another unusual and unexplained feature of the fully executed copy of the sale agreement. It was a copy bearing a facsimile header indicating that the sender was ‘VIC CASINO & GAMING AUTHORITY’. The document had been faxed by the authority on 14 August 1998. The document apparently held by the authority, was not produced. There was no explanation as to why the authority held the document, or what use had been made of it by any of the parties or Bethrica. In any event, there was no objection to the plaintiff relying on the faxed copy in the absence of the original.

The plaintiff submitted that there was no need to record the amount paid because the document recorded that the amount had in fact been paid. I do not accept, as a matter of construction, that where provision is made to record an amount that has been paid, the parties may be taken to have intended that to record the amount was entirely superfluous. Their failure to record the amount does not, of course, necessarily render the agreement incomplete, if in fact the amount was agreed with sufficient certainty.

In circumstances where the defendants now contend that the amount to be paid had never been agreed, the formal execution of the sale agreement by Waldarra was very unusual. Why would the parties execute the document in the absence of agreement on price? On the other hand, if a price had been agreed, why not write the amount in the document?

The plaintiff submitted that payments that had been made to Waldarra and Bethrica satisfied any obligation contemplated under the sale agreement. That may be so, but the argument assumed an obligation to pay an agreed amount, and that the payments were referable to performance. The amounts paid by or on behalf of Mr Stewart were $40,000 to Bethrica on 10 December 1992; $128,119.11 to Bethrica on 9 February 1993; and $84,500 to Waldarra on 9 June 1993. Those payments, amounting to $252,619.11, exceeded one-half of the amount which Mr Ussher estimated he had paid out to purchase the shares and units, and the amount calculated by Mr Ussher’s accountants as the cost to Waldarra for its equity.

The preamble is confusing because of the reference to the Warmilford Unit Trust as owner of all of the shares in Warmilford Pty Ltd. That was an obvious error. Putting that error to one side, the preamble recorded an ownership position of shares in Bethrica which only came into existence after 30 June 1995. That would indicate that the sale agreement was probably prepared in or after 1995, not 1993. According to its 1993 Annual Return, 60,000 shares issued by Bethrica were beneficially owned by Waldarra, and one share was owned by Ms Ussher. The shareholding recorded in the 1994 Annual Return remained the same. In the following year the shareholding changed. In its 1995 Annual Return, prepared by Mr Kenny, Bethrica recorded Waldarra as owner of only 20,000 shares and Warmilford as owner of 40,000 shares. Ms Ussher’s shareholding remained unchanged. The two new trust deeds, prepared at about the same time, recorded Waldarra as owning 394,836 units in the Warmilford Unit Trust.

The plaintiff relied on the sale agreement as a binding and enforceable contract under which it was entitled to call for a transfer of the shares and units. Mr Stewart, who prepared the sale agreement, said that he had employed a precedent which, on reflection, was not apt for the purpose. He said that the agreement should not have recorded a sale but merely acknowledge the trust in cl 2. The plaintiff relied separately on cl 2, in which Waldarra acknowledged the plaintiff’s entitlement to half of the shares in Bethrica and half of the units in the Warmilford Unit Trust, as corroboration for the 1992 oral agreement.

The plaintiff’s reliance on the sale agreement was ambivalent, even schizophrenic. One might have expected the plaintiff to embrace the sale agreement and build its case around it. Its difficulty was, however, that it had committed itself to a primary case which relied on a version of events that was inconsistent with the straightforward concept of a sale and payment for shares and units. The sale agreement did not emerge until sometime after the proceeding had commenced, and was only relied upon by the plaintiff at a relatively late stage, introduced into the pleadings by an amendment made shortly prior to trial.

The evidence given by Mr Stewart about the preparation of the sale agreement was irrational and contrived. It can only be explained by a desperate attempt to maintain the credibility of the plaintiff’s original case that the amount of the equity contributions would be determined by reference to what Mr Stewart had contributed. The original case seemed to have been built around the May 2007, Loans to Company document.

Mr Stewart could not explain why he had prepared an agreement which incorrectly recorded the intended transaction. His attempt to explain the handwritten amendment was irrational. He speculated that a draft was initially prepared for the purpose of recording the agreement between Mr Mackay, Mr Stewart and Mr Ussher in 1992. I reject that explanation. The sale agreement was consistent with the corporate records made after 30 June 1995. It was most probably prepared at about the time the new trust deeds were prepared. In my opinion, it was prepared to document the agreement that Mr Ussher and Mr Stewart had made in about October 1992. It was also prepared at a time when both parties understood that the price payable for the shares and units had already been paid.

I have found that in their dealings in October 1992, Mr Stewart and Mr Ussher both proceeded on the common assumption of equality of equity as the basis for the plaintiff’s entitlement to a half share in the hotel; that Mr Stewart accepted that he would be required to pay for the equity; and that the equity to be acquired and paid for was defined by what Waldarra had paid to acquire it. I am satisfied that the parties agreed or assumed that the price to be paid by Mr Stewart was half of the cost to Waldarra of its investment. Payments were made by or on behalf of Mr Stewart. Notwithstanding Mr Stewart’s reluctance to explain the payments, they must have been referable to some obligation. I am persuaded that Mr Stewart made the payments in order to discharge an obligation to Mr Ussher to acquire equity. The amounts and timing yield no other credible explanation.

Further, I am persuaded that Mr Ussher would not have executed the sale agreement on behalf of Waldarra, unless satisfied that the plaintiff had performed its obligation to pay the ‘price’, and he was willing to procure Waldarra to perform its obligations. Notwithstanding his persistent refusal to acknowledge the payments made by or on behalf of Mr Stewart to Waldarra and Bethrica, recorded in bank statements, I find that when executing the sale agreement, Mr Ussher well knew that Mr Stewart had made the payments in amounts, which in aggregate, exceeded half of his own estimate of the cost of equity.

The absence of an amount written into the document might be explained by Mr Ussher’s uncertainty about the correct amount. He said he was unable to get anything to balance. The parties may have recognised a need for adjustments, to deal with Mr Stewart’s payments to Bethrica, or to arrive at a more precise calculation of Waldarra’s loan balance. From the events leading up to the preparation of the Loans to Company document in 2007, and the circumstances in which that document was signed, I infer that there was continuing uncertainty in the mind of Mr Ussher, Mr Stewart and their accountants as to an accurate calculation of equity, and thus loan balances, throughout the life of the project. Whatever may have moved the parties to execute the sale agreement without inserting an amount, by doing so they acknowledged the price as paid, and that the plaintiff was entitled to a transfer of shares and units when called upon.

I do not accept Mr Ussher’s suggestion that the seal of Waldarra was affixed to the sale agreement without his knowledge. He signed two copies of the document and initialled an erroneous change on one copy. Nor do I accept the defendants’ submission that the sale agreement was a mere proposal; it was the document intended by the parties to perfect and record the oral arrangements made between them in about October 1992. That document was intended by the parties to, and did, record a transaction that had already taken place, save for Waldarra’s obligations under cl 3.

In commercial transactions the courts will strive to give effect to the expressed arrangements and expectations of those engaged in business, notwithstanding that there may be areas of uncertainty or the omission of particular terms. The courts will not, however, make contracts where, for example, the parties failed to agree upon an essential term.[2] This is not a case where the parties have failed to agree upon an essential term. They agreed that the price to be paid by the plaintiff for its half interest was half the cost to Waldarra of acquisition of its equity. The fact that there may have been, and even remains, some uncertainty as to the precise amount is not to the point. It was and is ascertainable.
[2] See generally Vroon BV v Fosters Brewing Group Ltd [1994] 2 VR 32, 67-71.

At the time the sale agreement was executed, in about or after 1995, the price had been agreed in principle. The amount was sufficiently well defined to enable the parties to acknowledge it as having been paid, without the need to write it down. The actual recording of the price was not regarded by the parties as essential or vital.

Consequently, the plaintiff is entitled to call upon Waldarra, under cl 3 of the sale agreement, to transfer to the plaintiff one half of the shares held in Bethrica and one half of the units held in the Warmilford Unit Trust.

Loans to Company document dated 14 May 2007

The operating entity, Bethrica, owned the hotel land and was indebted to the bank and to Waldarra. Mr Timms said that Bethrica’s accounts were unreliable insofar as they purported to record loan repayments and the outstanding balances. The unreliability of Bethrica’s accounts, as a record of Mr Ussher’s loan balance, was explained by Mr Timms as the result of ‘tax effective’ payments made over the years by Bethrica to Waldarra and Mr Ussher. By that euphemism was meant payments in the form of superannuation, wages or interest which would be a deductible expense for Bethrica, and hopefully would not attract tax in the hands of Mr Ussher or his entity.

When requested to make a calculation of Waldarra’s loan position in 2007, Mr Timms relied on information provided by Ms Ussher to prepare the Loans to Company document. The document was signed by Mr Ussher and Mr Stewart on 14 May 2007, and was advanced by the plaintiff as evidence that Mr Ussher had agreed to, and acknowledged, shared ownership of the hotel on the terms set out in the document.

Mr Timms’ firm, Kerr Anderson & Kenny, were accountants for Mr Stewart, Mr Ussher and their associated entities. Mr Timms was responsible for the accounts of Bethrica and Warmilford. He had undertaken that task since about January 1998, under the supervision of Mr Kenny who was the responsible partner. When preparing income tax returns for Bethrica, Mr Timms took instructions from Mr Ussher, Mr Stewart and Ms Ussher, who was by then managing the hotel business on a full-time basis.

Mr Timms said that he was initially told by Mr Kenny that Mr Ussher and Mr Stewart had equal interests in the hotel. He also said that he had been told by Ms Ussher, who married Mr Stewart in the year 2000, that the hotel was owned by her father and husband.

Mr Timms said that there were occasions prior to 2007, when Mr Ussher and Mr Stewart told him they would like calculations made of the value of their interests in the hotel, which comprised equity and loans. He said that he understood from those discussions that the financial contributions made to Bethrica by Mr Ussher and Mr Stewart were different. Prior to preparing the Loans to Company document, Mr Timms was told by Mr Stewart that he and Mr Ussher had each contributed $300,000 by way of equity. The context in which the document was prepared was the proposed sale of the hotel.

Mr Timms said that he was told by Mr Stewart that equity contributions would not attract interest. Using information provided by Ms Ussher to calculate payments made to Mr Ussher, and the information provided by Mr Stewart about equity contributions, Mr Timms prepared the document to show how the proceeds from a sale would be divided between Mr Ussher and Mr Stewart, assuming a sale price of $2 million.

The plaintiff relied upon the Loans to Company document, and a later tax calculation document and presentation, as admissions by Mr Ussher of the plaintiff’s entitlement to a half interest in the hotel. The admissions were said to be constituted by Mr Ussher’s acknowledgement, through his signature of the Loans to Company document; and his failure to demur from the assumption underlying the equal distribution of net proceeds, set out in the tax calculation document tabled and discussed at a meeting in late 2007.

Mr Ussher explained his having signed the Loans to Company document by saying that he was told by Mr Timms that Mr Kenny required him to sign the document. Mr Kenny said that he knew nothing of the preparation of the document, or of its existence, until shortly after a meeting on 20 October 2008 between Mr Stewart and Mr Ussher in his office. At that meeting there was a dispute between Mr Ussher and Mr Stewart. That was the first occasion on which Mr Kenny became aware that Mr Ussher challenged Mr Stewart’s claim to own half of the hotel. On that occasion Mr Ussher had said that Mr Stewart was only entitled to 20%, and that the document he had signed with Mr Timms (the Loans to Company document) was not worth the paper it was written on. The following day Mr Stewart contacted Mr Kenny and told him where he could locate the Loans to Company document, which was in a file in Mr Kenny’s office.

The defendants challenged the accuracy of the document, and characterised it as complex and difficult to understand. They sought to explain Mr Ussher’s signature in one or more of three ways. First, that he had been induced to sign by a misrepresentation to the effect that Mr Kenny had a role in the preparation of the document; second, his approval and signature was made conditional upon a subsequent satisfactory explanation of the document by Mr Kenny; and third, that he had been induced to sign by a misrepresentation to the effect that his signature was required by Mr Kenny.

While some of the calculations made in the document were rudimentary, its purpose was clear. Mr Timms said that the document was prepared in order to calculate the amount available for distribution to the owners after Mr Ussher’s loan entitlements were taken into account. The significance of the document was that Mr Timms had calculated the loan balance for Waldarra, and net divisible proceeds, on the basis of equal equity held by Mr Stewart and Mr Ussher.

The Loans to Company document disregarded the company and trust structures. Equity contributions recorded in the document had been made at different times, but were equal, at $300,000 each. The loan balance due to Mr Ussher was calculated after deducting repayments from a stated opening position. Mr Timms used a summary of loan repayments prepared by Ms Ussher, who told him that she had made and retained records of repayments from Bethrica to Waldarra. Mr Timms was not shown her records, but was given the summary prepared by her. The records maintained by Ms Ussher were produced at trial.

Having completed the document, Mr Timms arranged to meet Mr Ussher in his office on 14 May 2007. The meeting lasted only 10 to 15 minutes. Mr Timms said that he explained the document to Mr Ussher, by reading parts of it. He said he mentioned the contributions, repayments and interest calculations, and explained the division of proceeds on sale. Mr Timms said that after taking Mr Ussher through the document, Mr Ussher said that he was satisfied that the matter was now properly documented. Mr Timms asked Mr Ussher to sign the document, which he did.

Mr Ussher’s evidence about the circumstances in which he came to sign the document was confused and unsatisfactory. In his witness statement, Mr Ussher said that the meeting at which he signed the Loans to Company document was attended by Mr Timms and Mr Stewart. Mr Timms and Mr Stewart both denied that Mr Stewart was in attendance. I accept the evidence of Mr Timms that he met separately with Mr Stewart and Mr Ussher. Mr Ussher also said in his witness statement that he signed the document because he was told that Mr Kenny had provided the information and would explain the document at some later time. Mr Timms said that Mr Kenny’s name was not mentioned. In his oral evidence in chief, Mr Ussher said that he signed the document because he was told by Mr Timms and Mr Stewart that Mr Kenny ‘required it and he needed it’. In my view, Mr Ussher’s explanation for signing the document – that he had been asked to sign it because ‘Norm required it’ – was opportunistic, and not credible.

The defendants’ challenge to the accuracy of the Loan to Company document focussed on the timing and calculation of contributions, as well as the calculation of repayments and interest. They challenged the calculation of contributions by contrasting the timing and amount of Mr Stewart’s contributions with other evidence given by him; and the loan account calculations by reference to the evidence of Mr Kenny, to the effect that the loan account recorded in the books of Bethrica were accurate and took account of all of the payments made to Mr Ussher.

Insofar as it is relevant, I have no confidence in the certainty expressed by Mr Kenny as to the accuracy of the Waldarra loan account as recorded in the books of Bethrica. Mr Kenny said that each of the payments calculated by Ms Ussher and provided to Mr Timms would have been taken into account in the calculation of the loan account, and would be found recorded within the ledgers. He said that interest payments had been suspended until the company had the funds to pay interest, and therefore the only calculation to be made in order to determine the balance of the loan account due to Waldarra was to calculate interest.

The difficulty with Mr Kenny’s contention was that the payments recorded by Ms Ussher and provided to Mr Timms, recorded numerous payments of interest to Waldarra over the period of time during which Mr Kenny said that interest was not paid. In any event, the approach taken by Mr Timms in the preparation of the document was to start from scratch, with a total loan amount, adding interest and deducting payments. His approach had its own integrity, although may not have been precise. The document purported to do no more than arrive at an agreed loan balance and a basis to divide the net proceeds following a proposed sale.

I do not accept that Mr Ussher signed the document because he was told that Mr Kenny required him to do so. It was not put to Mr Timms in cross-examination that he had said any such thing to Mr Ussher. I accept the evidence of Mr Timms that he attended a meeting with Mr Ussher at which he explained the document to him and asked for his signature. Mr Ussher signed the document as a basis upon which the proceeds from a proposed sale might be distributed. Mr Timms then procured a signature from Mr Stewart and placed the document in a file as a minute of agreement between Mr Stewart and Mr Ussher. That minute of agreement acknowledged Mr Stewart’s half interest in the hotel.

I am persuaded that Mr Ussher was fully aware of the purpose and content of the document when he signed it. The equity calculation and loan balance may not have been accurate, but the parties, and their accountants, were anxious to reach an agreed position to facilitate a sale and winding up of the venture. Mr Ussher was well aware of the assumptions made about contributions and the manner in which the loan account had been calculated. Mr Timms explained the various elements of the documents to Mr Ussher. Mr Ussher did not object to the equal division of net proceeds because knew and accepted that the plaintiff was so entitled.

The tax calculation document, also prepared by Mr Timms, contained the same assumption – equal ownership of the hotel, although it was not signed. The document was placed before Mr Stewart and Mr Ussher at a meeting with their accountants in late 2007, to explain the tax consequence of a sale based on a price of $4.5 million.

Mr Ussher dismissed the significance of the tax calculation document by asserting its irrelevance in the absence of a sale. He also said that the assumed sale price of $4.5 million was unrealistically high. At the meeting in about October or November 2007, at which Mr Timms presented the document and explained its content, Mr Ussher could not but have noticed the equal distribution of net proceeds. Mr Ussher said that he made no comment at the meeting. Ms Ussher, who also attended the meeting, said that her father’s only comment was to the effect that if tax had to be paid, it would be paid. I am satisfied that Mr Ussher was fully aware of the assumption underlying the explanation given by Mr Timms at the meeting. His attempt to explain his failure to challenge the assumption was disingenuous. He accepted the assumption because he had already agreed that the plaintiff owned a half share in the hotel.

The Loans to Company document was signed by Mr Ussher on the premise, understood by him at the time, that the plaintiff was entitled to a half interest in the hotel. The document was intended to resolve lingering uncertainty about the precise calculation of equity, and thus Waldarra’s loan balance. While Mr Stewart’s estimate of his contribution, at $300,000, was inaccurate, it was good enough for Mr Stewart and Mr Ussher at that time.

The significance of the document was not that it was binding as to the amount of their equity contributions, or the loan balance, but as a powerful admission by Mr Ussher of the plaintiff’s entitlement to the benefit of the sale agreement. The document might also be relied upon as an admission concerning the loan balance, even though the accuracy is now challenged by Mr Ussher.

At some point it may become necessary to calculate a loan balance for Waldarra and the plaintiff. Some adjustments may be required to ensure that of the total sum paid by Mr Stewart, Waldarra is in receipt of $197,418 as payment for equity, with the balance treated as a loan. The loan balance due to Waldarra, as recorded in the accounts of Bethrica, may require recalculation and adjustment, to reflect the true nature of the payments that were made to Mr Ussher and Waldarra from Bethrica over the years.

Had a sale taken place prior to the commencement of this proceeding, and Waldarra’s loan account paid out, and the net proceeds divided in accordance with the Loans to Company document, a subsequent challenge to the loan balances may not have been successful. While the Loans to Company document may now be relied upon as admissions as to those matters, it was not submitted by the parties that its accuracy, as a record of the loan balance due to Waldarra, remained beyond challenge. I have not been asked to make any finding as to the loan balance due to Waldarra and am in no position to do so. Insofar as it is relevant, I accept Mr Stewart’s evidence that the loans to Waldarra were to attract interest at 2% less than interest charged by the bank. The parties must have intended the bank interest to be calculated for that purpose by reference to a similar loan on similar security.

Common Intention

Having regard to the findings I have already made, it might seem unnecessary to proceed to consider the plaintiff’s alternate cases for a constructive trust based upon common intention, or its claims for remedial orders based on the contributions. I have found that Mr Stewart and Mr Ussher reach agreement in about October 1992 that the plaintiff would be entitled to a half interest in the hotel if it paid half of Waldarra’s cost of acquisition. I have found that between that time and the execution of the sale agreement, Mr Stewart made contributions of $252,619.11 to Bethrica and Waldarra. I have found that the sale agreement was a concluded and enforceable agreement.

But if I am wrong, and the correct position is that the October 1992 oral agreement was too vague or uncertain, because the parties had not sufficiently defined the manner in which the half interest was to be acquired; or the sale agreement is unenforceable because it was incomplete in that it failed to record a price, or because the price had not been precisely ascertained or agreed - the facts disclose a common intention to the effect that the plaintiff would be entitled to a half interest in the hotel if it made financial contributions, as and when it could, equal to half the cost to Waldarra of acquiring the whole of the equity. That common intention, coupled with the payments made by Mr Stewart, are sufficient to impose upon Waldarra an obligation as trustee as to half its interest in the hotel on behalf of the plaintiff.

In Shepard v Doolan[3] White J provided a useful summary of the applicable principles.
[3](2005) NSWSC 42.

34Where a constructive trust is imposed, based upon the parties’ common intention as to the ownership of property upon which the claimant has acted to his or her detriment, the inquiry is as to the actual intention of the parties. The law does not impute a presumed intention to the parties based upon what the Court considers fair and reasonable persons in the position of the parties would have intended had they turned their minds to the issue. (Pettitt v Pettitt [1970] AC 777 at 804, 810, 810, 816-817; Gissing v Gissing [1971] AC 886 at 900, 902, 905-909; Allen v Snyder [1977] 2 NSWLR 685 at 690, 698, 701).
35It is unnecessary to enter the debate as to whether a trust based on the parties’ common intention is properly characterised as a constructive trust, or whether it should be characterised as an express trust which is enforceable notwithstanding the want of writing as it would be an equitable fraud for the legal owner to rely on the absence of writing to deny the beneficiary’s interest. (Allen v Snyder at 692-3; 699). In later cases, eg Grant v Edwards [1989] CH 638; Maharaj v Chand [1986] AC 898 at 907; Green v Green (1989) 17 NSWLR 343; Brandling v Weir [2003] NSWSC 723; Parianos v Melluish (2003) 30 Fam LR 524, this class of trust has been classified as a constructive trust, even though it is based on the parties’ actual intentions, rather than imposed despite their intentions.
36The intention to be established need not be that the parties have a specific share of the property. It is sufficient that they intend that the claimant should have a beneficial interest or “some form of proprietary interest”. (Green v Green at 355, 356; Grant v Edwards at 654; Parianos v Melluish at [31], [39]).
37The intention may be established in various ways. There may be an agreement between the parties as to how the property should be held. There may be express statements as to their intention. There intention may be inferred from their conduct. The question of what acts demonstrate an agreement or common intention referable to the beneficial enjoyment of the property is one of evidence, not law. Allen v Snyder at 691; Green v Green at 355). A common intention that a party have a beneficial interest in a property owned by another will not be inferred merely from their joint occupation of property, nor the carrying out of household duties, nor the bringing up of children on the property, nor the doing of repairs, renovations, maintenance, decoration or improvement, nor the provision of furniture. (Pettitt v Pettitt [1970] AC 777 at 805-6, 811, 181, 826; Gissing v Gissing [1971] AC 886 at 900, 910; Burns v Burns [1984] Ch 317 at 326, 328, 342.
38The intention may be inferred from financial contributions, direct or indirect, to the acquisition of property, including the paying off of mortgages, or the payment of expenses which free up funds for that purpose. (Burns v Burns at 328-329; Gissing v Gissing at 900, 902-3, 906-907; Grant v Edwards at 647, 648-9, 653-4, 655; Green v Green at 355). This is a wider enquiry than whether a contribution was made to the purchase money such as to give rise to a presumption of a resulting trust. Whilst both enquiries address the inferences to be drawn as to the parties’ actual intentions, a contribution to the purchase price creates a presumption of beneficial ownership in the proportion which the amount contributed bears to the price. For a “common intention” constructive trust, a contribution, direct or indirect, to the costs of acquisition of the property is a matter from which an intention that the claimant have a beneficial interest in the property might be inferred. There is a difference between a fact from which an inference can be drawn, and a fact from which a rebuttable presumption arises. The significance of the difference will depend upon the strength of the presumption. In the case of the “common intention” constructive trust, there is no presumption that the beneficial interest is in proportion with the contribution on the purchase price.
39Other evidence from which conclusions may be drawn about the intentions of the parties include declarations of the parties before or at the time of the transaction or so close in time after the transaction as to constitute a part of it. Subsequent declarations of intention are only admissible against interest. (Calverley v Green (1984) 155 CLR 242 at 262 and 269; Charles Marshall Pty Ltd v Grimsley (1956) 95 CLR 353 at 365; Bryson v Bryant (1992) 29 NSWLR 188 at 215).
40The plaintiff must also show that she acted to her detriment in a way referable to the agreement or intention that she have an interest in the property. Austin v Keele (1987) 10 NSWLR 283 at 291; Grant v Edwards at 648; Carruthers v Manning [2001] NSWSC 1130 at [124]. Conduct which is insufficient to establish a common intention as to the ownership of the property may be insufficient to constitute relevant actions to the plaintiff’s detriment to establish a trust if the common intention is established otherwise. Conduct may be both the evidence from which an intention that the plaintiff have a beneficial interest can be inferred and the act of detrimental reliance.

The common intention was evidenced in part by an agreement between Mr Stewart and Mr Ussher to the effect that the plaintiff would become entitled to a half-interest in the hotel upon making a contribution. The dispute at trial was as to the nature of the contribution and transaction that was necessary for the plaintiff to acquire the half-interest. I have found that the parties shared a common assumption that their equity would be equal. The distinction between equity and loans was, and remains, important. Equity in the hotel was defined by the cost to Waldarra, ultimately reflected in units and shares. Its accountants had valued its equity at $394,836. The parties understood and accepted that the only way to achieve equality was for the plaintiff to acquire equity from Waldarra.

The common intention was also to be inferred from the conduct of the parties following the discussions in 1992. Notwithstanding any ambiguity or uncertainty surrounding their agreement about the nature and detail of the proposed transaction, the following facts and matters support the existence of the common intention: (1) Mr Ussher paid out all other investors, including Mr Stewart; (2) substantial amounts were paid by or on behalf of Mr Stewart to Bethrica and Waldarra; (3) those payments would not have been made unless Mr Stewart was obliged to do so in order to secure the plaintiff’s interest; (4) Mr Ussher knew that the payments were made for that purpose; (5) Mr Stewart and Mr Ussher signed the Loans to Company document, which constituted an admission by Mr Ussher that he and Mr Stewart each owned a half-share in the net equity in the hotel.

This alternative claim by the plaintiff does not automatically lead to a conclusion that the trust imposed on Waldarra is to the same effect as that imposed under the sale agreement. The hotel is owned and operated by Bethrica, which in turn is owned by Waldarra and Warmilford. These entities are controlled by Mr Ussher. They hold the shares in Bethrica because Mr Ussher so decided, albeit on advice from his accountants.

In my opinion, insofar as it may become necessary to give effect to the common intention trust, the declaration of trust contained in cl 2 of the sale agreement provides the best evidence of the nature of the intended trust, imposing an obligation on Waldarra to hold half of its shares in Bethrica and half of its units in the Warmilford Unit Trust upon trust for the plaintiff.

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[2010] VSC 546

2 December 2010