JKAM Investments Pty Ltd ACN 159 084 018 v Damien

[2021] NSWSC 70

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

JKAM Investments Pty Ltd ACN 159 084 018 v Damien [2021] NSWSC 70

Hearing dates:

15, 16, 17, 18 & 19 July 2019, 12 & 27 September 2019, 28 October 2019, 18 December 2019, 12 February 2020

Date of orders:

19 February 2021

Decision date:

19 February 2021

Jurisdiction:

Equity

Before:

Slattery J

Decision:

See paragraph [433].

Catchwords:

CONTRACTS – development of land – defendant is the registered proprietor of a property used for commercial purposes as a gymnasium and offices – property leased but in need of further development – land is mortgaged to financial institution – defendant unable to fund further construction works on the property – plaintiff takes a lease over the property and enters into a deed by which the plaintiff would fund construction works on the property and then acquire the property pursuant to a contract for sale – disagreement arises between the plaintiff and the defendant about the interpretation of the development deed – the plaintiff and the defendant each refuse to pay the monthly mortgage payments to the defendant’s mortgagee, the mortgagee enters into possession and sells the property – the plaintiff alleges defendant has breached the development deed, an associated mortgage and the lease – whether the defendant is in breach as alleged.

MISLEADING AND DECEPTIVE CONDUCT – plaintiff claims defendant made a series of misleading and deceptive statements inducing the plaintiff to enter into a lease, a development deed, a contract for sale of land and a mortgage – the plaintiff alleges that the defendant stated that the defendant was not in default to its first mortgagee and that there were no other prior encumbrances over the property – the plaintiff further alleges that the defendant represented that his residential property would be included in the grant of a mortgage to the plaintiff – the executed version of the mortgage omitted the residential property – whether the defendant made these and other related statements – whether these and other related statements were false or misleading – whether these and other related statements induced the plaintiff to enter into the development deed – where the plaintiff claims that the defendant did not disclose knowledge of prior encumbrances and a deed with the first mortgagee – whether the circumstances were such that the defendant had a reasonable expectation of disclosure of that knowledge to the plaintiff.

ESTOPPEL – issue estoppel – former adjudication by this Court in separate proceedings between the same parties – finality of decisions – scope of issue estoppel – question as to whether the parties are bound by findings in the Court’s previous determination of the priority between equitable interests – whether the plaintiff can contend for inconsistent findings in support of its claim for misleading and deceptive conduct against the defendant – whether the findings in the previous determination are fundamental to the conclusion – issue estoppel found to be binding.

Legislation Cited:

Australian Securities and Investment Commission Act 2001, ss 12BB, 12DA, 12DC, 12GF

Civil Procedure Act 2005, s 100

Competition and Consumer Act 2010, Schedule 2 (Australian Consumer Law), ss 4, 13, 18, 30, 236, 237

Conveyancing Act 1919, ss 12, 120

Fair Trading Act 1987, ss 28, 32

Real Property Act 1900, s 59

Cases Cited:

70 Pitt Street Sydney Pty Ltd v McGurk [2004] NSWSC 413

Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No. 3) (2006) 67 NSWLR 341

Addenbrooke Pty Ltd (ACN 055 973 576) v Duncan and Others (No 2) (2017) 348 ALR 1

Blair & Perpetual Trustee Co Ltd v Curran (Adams’ Will) (1939) 62 CLR 464

Browne v Flower [1911] 1 Ch 219

Burrell v R (2008) 238 CLR 218

Champion Homes Sales Pty Ltd v JKAM Investments Pty Ltd [2014] NSWSC 952

Champion Homes Sales Pty Ltd v JKAM Investments Pty Ltd [2015] NSWSC 272

Champion Homes Sales Pty Ltd v JKAM Investments Pty Ltd [2016] NSWSC 1607

Clayton v Bant (2020) 385 ALR 41

Cohen v Tannar [1900] 2 QB 609

Damien v JKAM Investments Pty Ltd [2015] NSWCA 368

Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31

Dennett v Atherton (1872) LR 7 QB 316

Double Bay Newspapers Pty Ltd & Anors v AW Holdings Pty Ltd [1996] 42 NSWLR 409

Godfrey Constructions Pty Ltd v Kanangra Park Pty Ltd [1972] 128 CLR 529

Grosvenor Hotel Co v Hamilton [1894] 2 QB 836

Harrison Ainslie & Co v Lord Muncaster [1891] 2 QB 680

In the matter of JKAM Investments Pty Ltd [2015] NSWSC 2032

In the matter of JKAM Investments Pty Ltd [2016] NSWSC 1955

JKAM Investments Pty Ltd v Damien [2017] NSWSC 1182

Jones v Dunkel (1959) 101 CLR 298

Kelly v Rogers [1892] 1 QB 910

Kimberley NZI Finance Ltd v Torero Pty Ltd [1989] FCA 400

Lam v Ausintel Investments Aust Pty Ltd (1990) 97 FLR 458

Laurinda Pty Ltd v Capalaba Shopping Centre Pty Ltd (1989) 166 CLR 623

Line v Stephenson (1838) 132 ER 1075

Marginson v Blackburn Borough Council [1939] 1 All ER 273

Mason v Clarke (1955) AC 778

Merrill v Frame (1812) 128 ER 357

Miller & Associates Insurance Broking Pty Ltd (CAN 089 245 465) v BMW Australia Finance Ltd (CAN 007 101 715) (2010) 241 CLR 357

Miller v Emcer Products Ltd (1956) Ch 304

Moyston v The West Coal and Iron Company Ltd (1876) 1 CPD 145

Nash v Palmer (1816) 105 ER 1088

New Brunswick Railway Company v British & French Trust Corporation Ltd (1939) AC 1

Nia v Phuong (1993) 6 BPR 13

Peech v Best [1931] 1 KB 1

Poseidon Ltd v Adelaide Petroleum NL (1991) 105 ALR 25

Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477

Rogers v R (1994) 181 CLR 251

Sanderson v Berwick-upon-Tweed Corporation (1834) 13 Q.B.D 547

Stanley v Hayes (1842) 3 QB 105

Warman International Ltd v Dwyer (1995) 182 CLR 544

Texts Cited:

B. Edgeworth, Butt’s Land Law (7th ed, 2017, Thomson Reuters)

S. Bower and K. R. Handley, Res Judicata (5th ed, 2019, LexisNexis

Category:

Principal judgment

Parties:

Plaintiff/Cross-Defendant: JKAM Investments Pty Ltd ACN 159 084 018
Defendant/Cross-Claimant: Karl Damien

Representation:

Counsel:
Plaintiff/Cross-Defendant: P. Blackburn-Hart SC;
L. Katsinas
Defendant/Cross-Claimant: C. Stomo

Solicitors:
Plaintiff/Cross-Defendant: Kirco Jakimoski, JK Solicitors
Defendant/Cross-Claimant: Patrick John Duffy, Duffy Law Group

File Number(s):

2015/276373

Publication restriction:

No

Judgment

1. In 2012 Mr Karl Damien, the defendant, was the registered proprietor of land in Camden (“the Camden property”) and in Denham Court (“the Denham Court property”). A gymnasium business and related businesses operated from the Camden property from until a 2016 mortgagee sale by the National Australia Bank (“the NAB”). The Denham Court property is Mr Damien’s private residence.

2. Commencing in about 2011/2012, Mr Damien engaged builders, Champion Homes Sales Pty Limited (“Champion”) and later Architectural Collections Pty Limited (“Architectural Collections”) to undertake construction works on the Camden property. Architectural Collections was a company associated with Mr Joseph Elia. Mr Damien accrued substantial debts to both builders. Architectural Collections assigned Mr Damien’s debt to it to the plaintiff, JKAM Investments Pty Limited ("JKAM"), another company associated with Mr Joseph Elia. JKAM gave Mr Damien notice of the assignment of the debt. In July 2012 JKAM itself commenced building work on the Camden property.

3. Between September and December 2012, JKAM and Mr Damien entered into four transactions in relation to the Camden property. The combined effect of these transactions was to stabilise Mr Damien’s first mortgage debt to the NAB, to secure the payment of Mr Damien’s construction-related debts to JKAM, to develop the Camden property into a sports centre and gymnasium and to allow JKAM the opportunity, over time, to lease and then acquire the Camden property for itself. These four transactions were:

1. A lease by Mr Damien as lessor to JKAM as lessee dated 1 September 2012 (“the lease”);

2. A deed dated 10 December 2012 between JKAM and Mr Damien (“the deed”);

3. A contract for sale of the Camden property dated 21 December 2012 from Mr Damien as vendor to JKAM as purchaser (”the contract for sale”); and

4. A mortgage of the Camden property from Mr Damien as mortgagor to JKAM as mortgagee dated 21 December 2012 (“the JKAM mortgage”).

4. Mr Elia represented JKAM in negotiations for these four transactions and throughout subsequent events. His brother, Mr Johni Elia, was also an actor from time to time on behalf of JKAM and Architectural Collections. For convenience, these reasons will generally refer to Mr Joseph Elia as “Mr Elia”, and occasionally as “Joe Elia”. But to distinguish him from his brother, Mr Johni Elia, the latter will always be referred to by his full name.

5. Mr Damien represented himself in the negotiations, assisted at times by an associate, Mr Dean Alcorn, who holds qualifications in law and economics. Mr Elia and JKAM were not separately legally represented in the negotiations.

6. JKAM raises two kinds of issue in these proceedings. First, JKAM sues Mr Damien for damages for alleged breach of the terms of the September 2012 lease and the JKAM mortgage. JKAM alleges Mr Damien breached the covenant of quiet enjoyment in the September 2012 lease. The principal alleged breach being the NAB’s dispossession of JKAM and its exercise of its power of sale. JKAM further alleges Mr Damien breached the JKAM mortgage by permitting the lodgement of caveats on the Camden property by persons other than JKAM. Mr Damien contests these allegations.

7. Second, it alleges that Mr Damien engaged in a range of misleading and deceptive conduct, causing JKAM to enter into the four transactions. That alleged misleading and deceptive conduct related to a range of matters including the extent of Mr Damien’s debt and security obligations to the NAB, to Champion and to another company Hotray Pty Limited (“Hotray”). JKAM alleges that this misleading and deceptive conduct resulted in it suffering financial detriment, including the NAB’s exercise of its power of sale under its first mortgage over the Camden property.

8. The proceedings were heard on 10 May 2019, 28 June 2019, 15, 16, 17, 18 & 19 July 2019, 12 & 27 September 2019, 28 October 2019, 18 December 2019, and 12 February 2020. The proceedings were conducted for the plaintiff/cross-defendant by Mr P. Blackburn-Hart SC and Mr L. Katsinas of counsel instructed by JK Solicitors. Mr C. Stomo of counsel appeared for the defendant/cross-claimant instructed by Duffy Law Group.

The Prior Proceedings

9. Fact-finding in this proceeding is complicated by judicial findings in prior proceedings between the same parties. It is further complicated by the voluminous materials that the parties have extracted from those prior proceedings. Since these parties entered into the four transactions in 2012, this Court has given judgment in aspects of their disputes about the Camden property on at least seven occasions. The parties have also engaged in other interlocutory contests. For convenience of reference, JKAM’s Further Amended Statement of Claim in these proceedings uses a shorthand description for a number of these earlier judgments. These reasons adopt JKAM’s referencing system for describing these prior judgments.

10. In Champion Homes Sales Pty Ltd v JKAM Investments Pty Ltd [2014] NSWSC 952 (“the priorities judgment”), Darke J determined the relative priority of five equitable interests over the Camden property. His Honour found that on the following dates the following parties acquired the following valid equitable interests in the Camden property. Darke J also found that they all took priority according to the respective date of acquisition of the interest concerned, there being no postponing conduct by the interests created earlier in time.

1. Champion acquired an equitable charge on 4 April 2012 pursuant to a letter of acknowledgement of debt provided by Mr Damien;

2. JKAM acquired an interest as an equitable lessee on 1 September 2012, when it entered into the lease with Mr Damien;

3. Hotray acquired an interest as an equitable mortgagee on 10 December 2012, when it entered into a mortgage with Mr Damien;

4. JKAM acquired an interest as an equitable mortgagee on 21 December 2012, when it entered into the JKAM mortgage with Mr Damien; and

5. JKAM acquired an interest as a purchaser under the contract for sale of the Camden property on 21 December 2012, when it entered into that contract with Mr Damien.

11. The priorities judgment determined that the Champion equitable charge and the Hotray equitable mortgage were valid and took priority over JKAM’s equitable interests under the JKAM mortgage and as purchaser in the contract for sale. At one stage in these proceedings JKAM sought to put in issue the validity of the Champion equitable charge and the Hotray equitable mortgage. But Mr Damien and JKAM were both parties to the proceedings resulting in the priorities judgment and are bound by it. JKAM complains in these proceedings that neither the Champion equitable charge nor the Hotray equitable mortgage were disclosed to it before it entered the four transactions.

12. In Champion Holmes Sales Pty Ltd v JKAM Investments [2015] NSWSC 272 (“the set off judgment”), Rein J determined that Mr Damien was liable to JKAM for $549,000 on JKAM’s Cross-Claim, that amount being $528,000 on the debt assigned to it by Architectural Collections plus $21,000 for additional works that JKAM had executed at the Camden property. But Rein J also found that JKAM owed Damien $411,000 on account of JKAM’s responsibility under the December 2012 deed for mortgage repayments and other outgoings on the Camden property. Rein J set off these two amounts and entered judgment in favour of JKAM for $138,000. An appeal from that decision was dismissed: Damien v JKAM Investments Pty Ltd [2015] NSWCA 368 (Gleeson, Simpson JJA, Tobias AJA).

13. Several related disputes were dealt with in the Corporations List. In the matter of JKAM Investments Pty Ltd [2015] NSWSC 2032, Black J declined to set aside a statutory demand by Champion preliminary to winding up JKAM. In the later decision In the matter of JKAM Investments Pty Ltd [2016] NSWSC 1955, Brereton J found that JKAM had not established its solvency in answer to Champion’s statutory demand and adjourned the proceedings to give it an opportunity to do so.

14. In May 2015, with the consent of Mr Damien as registered proprietor, and JKAM as the occupier, the NAB obtained orders for possession of the Camden property in separate proceedings brought by it (“the possession judgment”).

15. Kunc J dealt with two later aspects of the proceedings. In Champion Homes Sales Pty Ltd v JKAM Investments Pty Ltd [2016] NSWSC 1607 (“the estoppel judgment”), Kunc J ordered the payment out of Court to Champion of the sum of $365,319.82 being the balance of the proceeds of sale of the Camden property that the NAB paid into Court after its exercise of its power of sale. In the priorities judgment, Darke J held that Champion had priority over all other competing equitable interests. No funds now remain in Court of the sale of the Camden property. They have been fully distributed. And in JKAM Investments Pty Ltd v Damien [2017] NSWSC 1182, Kunc J adjourned the hearing of the present proceedings to accommodate an application by JKAM to amend the Statement of Claim.

Overview and Introduction to the Issues

16. Fact-finding in this case is best approached with an overview of the issues now in dispute, starting with JKAM’s breach of lease and mortgage claims followed by claims of misleading and deceptive conduct.

17. Breach of the Lease. Mr Damien’s lease of the Camden property to JKAM commenced on 1 September 2012 for a term of 15 years terminating on 31 August 2027 with an option to renew for a further five years. Under the lease, clause 9.1, the lessor covenanted to give JKAM as lessee quiet enjoyment and possession of the Camden property for the term of the lease, whilst observing the terms of the lease. JKAM says it complied with the terms of the lease whilst it was in possession of the Camden property.

18. JKAM contends that, in breach of the lease, clause 9.1, on or about 23 May 2015 Mr Damien deprived JKAM of its quiet enjoyment of the property. The NAB as first registered mortgagee of the property obtained an order for possession of the Camden property on 13 May 2015, dispossessing JKAM on 23 May 2015, thereby causing JKAM to suffer loss and damage.

19. Breach of the JKAM Mortgage. Mr Damien granted the JKAM mortgage over the Camden property on 21 December 2012. Under the JKAM mortgage, clause 3.1 Mr Damien mortgaged the Camden property (defined as “the Secured Property” under the JKAM mortgage) as security for the performance of Mr Damien's obligations to JKAM, including to secure payment of what the mortgage defined as the "construction works amount", which was a sum of $528,000.

20. Under the JKAM mortgage, clause 6.15, the mortgagor, Mr Damien, was required to ensure that a caveat was not lodged by any party other than JKAM on the Secured Property, as defined.

21. JKAM alleges that Mr Damien breached clause 6.15 of the JKAM mortgage by permitting, or acquiescing in, the lodgement of caveats over the Camden property by other parties including one by Champion on 27 September 2013, thereby causing loss and damage to JKAM due to its consequent inability to deal with the Camden property or to realise any part of it as security for Mr Damien’s obligations to JKAM.

22. Mr Damien contests many of JKAM’s allegations. The resolution of much of that contest depended on the credibility of the two parties, Mr Elia and Mr Damien. The Court took contemporaneous notes of its credibility assessments of both these witnesses.

23. The Denham Court Misleading Conduct. JKAM claims that prior to its entry into the four transactions that Mr Damien, and Mr Alcorn on his behalf, represented to JKAM, and agreed with JKAM, that Mr Damien would grant JKAM a mortgage over both the Camden property and the Denham Court property.

24. JKAM alleges that contrary to Mr Damien’s representations and in breach of their agreement that Mr Damien, or Mr Alcorn on his behalf, omitted any reference to the mortgage over the Denham Court property from the final form of the mortgage executed on 21 December 2012. JKAM and its principal, Mr Elia, contend that earlier drafts of the mortgage had all included the Denham Court property as part of the secured property and that he was unaware of its omission in the executed version.

25. JKAM’s case is that Mr Elia executed the mortgage on its behalf in the mistaken belief it covered both properties. JKAM says Mr Damien induced this mistake by silence in omitting the Denham Court property from the final draft of the mortgage without alerting Mr Elia to the omission. In the Further Amended Statement of Claim this conduct is referred to as Silence Conduct One. JKAM says that as a result of this conduct it entered the mortgage holding inadequate security.

26. The Prior Encumbrances Misleading Conduct. JKAM next alleges Mr Damien did not disclose two existing encumbrances over the Camden property before JKAM’s entry into the four transactions in late 2012. Prior to the four transactions, Champion had created an equitable charge. And prior to three of the four transactions Hotray had created an equitable mortgage.

27. Champion, which had commenced building works on the Camden property prior to the work of Architectural Collections, held an equitable charge over the Camden property dated 4 April 2012, securing Mr Damien's obligations to it of $586,334 for unpaid building work. Champion’s charge was held valid by Kunc J in Champion Home Sales Pty Ltd v JKAM Investments Pty Ltd [2016] NSWSC 1607. As a result of the priorities judgment, Champion’s equitable charge had priority over all other equitable interests in the Camden property, other than the first registered mortgage to the NAB.

28. Hotray’s equitable interest in the Camden property was created by an unregistered mortgage securing a sum of $300,000 plus interest that Mr Damien was said to then owe Hotray. The Hotray mortgage was executed together with a related deed on 10 December 2012.

16. Neither the Champion charge nor the Hotray mortgage were caveated on the title to the Camden property before December 2012. A caveat in respect of the Hotray mortgage was first recorded on the title to the Camden property on or about 18 December 2012. This caveat preceded only the JKAM mortgage and the contract for sale, which were both executed on 21 December 2012. Champion did not lodge a caveat claiming this equitable charge until much later, on 30 September 2013. But Darke J found that, as JKAM did not search the register before its entry into the December 2012 transactions, Champion’s failure to lodge a caveat earlier was not postponing conduct.

17. JKAM alleges Mr Damien engaged in misleading conduct by silence in not disclosing to JKAM: (a) the Champion charge nor the Hotray mortgage prior to the execution of the lease on 1 September 2012 and the deed on 10 December 2012; and (b) the Champion charge nor the Hotray mortgage prior to the execution of the contract for sale and the JKAM mortgage on 21 December 2012. This conduct related to these prior encumbrances is variously referred to in the Further Amended Statement of Claim as Silence Conduct Two and Silence Conduct Three.

18. The NAB Loan Facility Misleading Conduct. Before the four transactions, Mr Damien had executed a deed of forbearance (“forbearance deed”) with the NAB on 27 August 2012. The forbearance deed restricted Mr Damien from further encumbering or selling the Camden property, in exchange for the NAB not exercising its rights upon Mr Damien’s first mortgage default to the NAB.

19. JKAM alleges Mr Damien did not disclose the existence of the forbearance deed prior to any of the four transactions. JKAM alleges that three related non-disclosures on Mr Damien's part induced JKAM to enter the four transactions in late 2012. JKAM alleges that neither Mr Damien nor Mr Alcorn disclosed to JKAM: (1) the existence of the forbearance deed; (2) that Mr Damien was in default to the NAB under the loan facility secured by the NAB mortgage; and (3) that entry into the four transactions with JKAM would place Mr Damien in default to the NAB under the forbearance deed. This conduct related to the NAB is variously referred to in the Further Amended Statement of Claim as Silence Conduct Four, Silence Conduct Five and Silence Conduct Six.

20. The No Debts to Champion Misleading Conduct. JKAM also alleges that Mr Damien engaged in earlier positive conduct between December 2011 and March 2012 that was misleading and deceptive. JKAM alleges that between those dates Mr Damien, both orally and by implication, represented to JKAM that Mr Damien did not owe any money to Champion and that the Camden property was not burdened with any security obligation to Champion for debts owing to Champion for construction works.

21. The Plus Fitness Lease Registration Misleading Conduct. The final positive misleading conduct alleged related to the leasing status of the Camden property. JKAM alleges that in December 2011 Mr Damien orally represented to JKAM that Mr Damien had leased the Camden property to Plus Fitness under a lease recognised by the NAB, thereby also impliedly representing to JKAM that Mr Damien was in a position, without likely opposition from the NAB, to register any lease that Mr Damien might grant in the future to companies incorporated by Mr Elia, such as JKAM.

22. Implied Representations and Reliance. JKAM alleges that the above misleading conduct related in part to present matters and in part to future matters, and that the conduct constituted continuing representations up to the time of entry into the four transactions. To the extent that the representations were as to future matters, JKAM alleges there were no reasonable grounds for making them: Competition and Consumer Act 2010, Schedule 2 (Australian Consumer Law), s 4 and Australian Securities and Investment Commission Act 2001 (“the ASIC Act”), s 12BB.

23. JKAM also alleges that the misleading conduct already described also conveyed a series of false implied representations. These implied representations were said to be the following:

“The Misleading Conduct conveyed also false implied representations (Implied Conduct) that:

a.   Mr Damien had a present and ongoing capacity to enter the Instruments or complete the Contract of Sale by November 2013 without the burden of either or both of the Competing Interests.

b.   Mr Damien had a present and ongoing capacity to enter the Instruments concerning the Property on the terms he did without being in breach of the obligations in the instruments.

c.   Mr Damien had not engaged in conduct of the type which had created the Competing Interests.

d.   Mr Damien had not been in default of his obligations to the NAB prior to the creation of any of the Instruments and will not be in default of his obligations with the NAB by virtue of creating or performing the Instruments.

e.   There were no burdensome or severe legal obligations existing with the NAB first registered mortgagee such as those which had existed in the Forbearance Deed and which would affect the entry and or performance of the Instruments.

f.   Mr Damien was able to enter the Instruments without breaching his obligations to the NAB as the first registered mortgagee.

g.   JKAM could rely on the Camden Property and the Denham Property as providing security in the event the sale of the Camden Property did not complete and a payment of at least $528,000 was to be made as a debt payable to JKAM.

h.   JKAM would be the second mortgagee regarding the Denham Property and the Camden Property with only NAB taking priority to JKAM with a caveatable proprietary interest.

1. No other entity was provided an undisclosed security interest (in particular a mortgage or money security) over the Camden Property or the Denham Property which would have priority over the security to be given to JKAM over the Camden Property and the Denham Property as a second mortgagee.

j.   Mr Damien will and JKAM will be able to successfully challenge proprietary money interests that might be asserted in the future over the Camden Property and or the Denham Property to have priority over JKAM’s second mortgage, as they did not exist.

k.   JKAM’s security would be as a second mortgagee second only to the NAB as first registered mortgagee.

l.   JKAM will be able to resort to the Denham Property or the Camden Property for the purposes of enforcing its security.

m.   Mr Damien will not burden the Denham Property or the Camden Property with any new caveatable interests without the consent of JKAM or will promptly act to issue lapsing notices for any caveats filed on the Camden Property and the Denham Property asserting any interest other than that of a first registered mortgagee or JKAM’s interests.”

37. JKAM alleges that in reliance upon the alleged misleading conduct it did the following: (1) it entered into the four transactions; (2) it registered caveats over the Camden property on and from 21 December 2012; (3) it engaged in litigation challenging the priority asserted by the Champion charge and the Hotray mortgage; (4) it continued, to its detriment, the development of the Camden property up to the value of $528,000, when the actual value of the development works exceeded that amount; and (5) it pursued the goal of acquiring the Camden property after its development.

38. Prejudice JKAM Allegedly Suffered. JKAM alleges that the misleading conduct closed off a number of options that had formerly been available to it and thereby caused it prejudice. JKAM first says that it could not register the lease, as the NAB would not consent to registration based on the NAB’s rights under the forbearance deed.

39. As to the contract for sale, JKAM says its completion was commercially feasible between September and November 2013 and that JKAM was during that period ready, willing and able to complete the contract. But JKAM says completion became impossible at the specified purchase price of $2,081,000, because that amount could not satisfy the combined financial obligations that the NAB, Champion and Hotray were claiming.

40. JKAM says that in litigation it challenged the competing interests of Champion and Hotray in the Camden property, leading to the priorities judgment. JKAM did so by unsuccessfully asserting the priority of the lease, the JKAM mortgage and the contract for sale over these other securities.

41. JKAM says that the misleading conduct also prevented the enforcement of its security beyond the set off judgment amount of $138,000 against the Denham Court property, the estoppel judgment having allowed the release of the $365,319.82 in funds to Champion, which had been paid into Court by the NAB in accordance with the priorities judgment.

42. JKAM says that the sale of the Camden property did not result in payment to it (or the provision of new security to it for the payment) of its full entitlement under the set off judgment.

43. JKAM says that by reason of the combined effect of the priorities judgment, the possession judgment, the estoppel judgment and the misleading conduct, JKAM has suffered loss and damage by the loss of the benefit of the security that the JKAM mortgage would otherwise have provided to JKAM in respect of the Camden property and the Denham Court property.

44. JKAM says that the set off judgment is presently not secured against the Camden property; the judgment is interlocutory and not final; and the costs ordered against JKAM through the priorities judgment, together with JKAM’s own costs regarding the priorities judgment, are not presently secured against the Camden property.

45. The Court notes that an Amended Statement of Cross-Claim was also filed by Mr Damien on 16 October 2017. This Amended Cross-Claim alleged breaches of the September 2012 lease and the December 2012 deed. But at the hearing on 16 July 2019, Mr Stomo told the Court his client had abandoned this claim. No formal notice of discontinuance has yet been filed. The directions at the end of these reasons require a notice of discontinuance to be filed within 28 days.

46. The Court further notes that a persistent feature of the parties’ submissions in these proceedings is to advance contentions that go beyond the pleadings. The Court has decided the case on the basis of the pleadings; not on the basis of these broader contentions.

Credibility Issues

47. Mr Elia. Mr Elia is an astute businessman. He is intelligent, determined and streetwise. He is used to surveying and assessing any commercial landscape confronting him. In the courtroom he well understood the implications of questions asked of him. He was combative, arguing points with his questioner. He consciously tried to answer all questions to the best advantage of his case. To avoid giving potentially embarrassing answers, he was prepared to deflect questions, to answer different questions from the one he was asked, and to raise other issues to take the questioner away to another topic.

48. He was not a witness in whom the Court could always place confidence where he perceived his self-interest was at stake. Some of his answers did not accord with reasonable business practice, which threw doubt upon their reliability. But substantial parts of what he says can nevertheless be accepted as being a more probable account of events than Mr Damien’s version.

49. Mr Elia’s answers at times conveniently denied familiarity with documents which had been in his possession. The Court does not accept that Mr Elia did not read these documents. He was adept at quickly absorbing the contents of documents given to him in the courtroom. He was well across the detail of most of the voluminous documents in the case. He could quote the main contents of many of them by heart. He knew the precise differences between them, occasionally correcting counsel when the wrong document was mentioned.

50. Mr Karl Damien. Like Mr Elia, Mr Damien had a thorough understanding of business and commercial matters. Mr Damien was a consciously cautious witness, who gave limited evidence to ensure he did not get caught out in cross-examination by giving away too much detail. He hedged his answers to avoid getting trapped with testimony he could not later avoid.

51. When Mr Damien decided it was convenient, he did not answer questions. He claimed not to remember what happened or he deflected the question to avoid any difficulties he perceived in his case from answers. He too could at times give a reliable account of events. But the Court does not find him to be a witness whose testimony can always be accepted.

52. In deciding between the conflicting testimony of both these witnesses, context and the objective probabilities are an important aid to fact-finding.

53. The following is a narrative of the relevant history. This narrative represents the Court’s findings on the matters covered, except to the extent that the context indicates that only the parties’ allegations are being recorded. For reasons of economy, this narrative does not always include reference to versions of the facts that have been rejected.

JKAM Deals with Mr Damien – 2011 to 2013

54. Mr Damien acquired the Camden property in about 2003 in partnership with two others. They funded the acquisition with borrowings secured by the first mortgage to a financial institution. By 2007 he and his business partner Mr Aaron Bell were co-owners of this commercial property. In late 2009 or early 2010, when the property was untenanted, Mr Damien and Mr Bell reached an agreement with a gym and fitness provider, Fitness First, to lease the property on the basis that Fitness First undertook its refurbishment during the lease and Fitness First’s refurbishment costs would be covered by the lessors. Fitness First had not yet commenced occupation. But it had an unregistered lease.

55. The lessors engaged Champion, a construction company, to complete the refurbishment and building works. Soon afterwards Mr Damien bought out Mr Bell’s joint interest in the property. Mr Damien refinanced the first mortgage with the NAB into his own name and increased the borrowings. But Mr Damien’s overall debt burden became too high, and he ran into financial trouble and was unable to pay Champion.

56. In response to this situation, Champion ceased building work on the site in July 2011 with Mr Damien owing money to it, and the building work only partly complete. Mr Damien partly blamed Champion for this outcome, accusing it of underestimating the costs of construction and contributing to his predicament.

57. Caught in a financial squeeze, Mr Damien needed a creative financial solution. Mr Chris Haddad, a mutual friend of both Mr Damien and Mr Elia, introduced them in late 2011. Mr Haddad, who worked in real estate/finance, had some familiarity with Mr Damien’s situation and thought that Mr Elia might be able to provide a solution for him.

58. They first met when Mr Elia undertook a site inspection at the Camden property in December 2011 with a work colleague, Mr Hicham Baydoun. The site was close to another development site that Mr Elia was looking at in Harrington Street, Elderslie. Mr Elia observed at the Camden property that the whole interior of the building and much of the exterior required completion. The unfinished building featured incomplete concrete and drainage works, unfinished timber stud frames on the walls, bare metal frame ceilings, incomplete plumbing works, untiled bathroom areas and an absence of electrical wiring. Mr Elia concluded there was still much work to do before the building work at the site would be completed.

59. Mr Damien explained to Mr Elia that he was trying to complete the building works himself, but the building costs were inflating quickly, well beyond his initial estimates. Mr Damien says he told Mr Elia that he still owed Champion a substantial sum, and that he was looking for a more reasonably priced builder. Mr Elia said he would look at the plans and consider giving a quote.

60. This is Mr Damien’s version of the pair’s early conversations in about March of 2012 and the Court accepts that it is close to what happened but that it is not fully accurate. Mr Damien undoubtedly explained what work had to be done. Mr Elia undoubtedly agreed to look at the plans and see if he would quote for completing the construction work on the property.

61. But Mr Damien did not confess to Mr Elia that he owed Champion a substantial sum. He was not that open with Mr Elia about what had happened with the prior builder, Champion. Mr Elia could work out for himself, simply from the state of the building and the fact that the builder had left mid-project, that there must have been a serious dispute between Mr Damien and Champion. The parties each take extreme positions on the question of Mr Damien’s disclosure to Mr Elia about his debt to Champion. Mr Damien says he told Mr Elia he owed Champion a substantial sum. Mr Elia says that Mr Damien told him he did not owe Champion any money.

62. The Court does not find either of these versions probable. If Mr Damien had said he still owed Champion a substantial sum, this would have invited further inquiry from Mr Elia about how much was admitted to being owed and whether Mr Damien had offered security for what was outstanding. Equally, a negative answer by Mr Damien to a question from Mr Elia “do you owe Champion any money?” was likely to generate a further inquiry for Mr Elia about how the dispute with Champion had been resolved.

63. But neither of these conversations unfolded between the parties. Moreover, the Court was not persuaded that either witness could give proper context to such conversations.

64. That leaves the Court to work out what, if anything, was said about Mr Damien owing money to Champion. In the Court’s view, it is far more probable that Mr Damien told Mr Elia that there was an ongoing dispute between Champion about how much was owing and that he, Mr Damien, believed that because of Champion’s poor performance and abandonment of the works, that his dispute with Champion was likely to be resolved. Such a version better explains Mr Elia’s general willingness to put enquiry about Champion aside in his discussions with Mr Damien without accepting the improbable statement that Champion had been fully paid.

65. Agreement did not come quickly. Mr Elia spoke further with Mr Haddad to acquire more information about the development of the Camden property and considered his options. Mr Haddad appeared to assume the role of an intermediary between Mr Elia and Mr Damien in this part of the negotiations. Mr Haddad did not give evidence.

66. In late March 2012, Mr Damien met Mr Elia at the site and they looked at the plans again together and examined what work still had to be done. By then Mr Damien had negotiated an informal lease with Plus Fitness, which appeared to be ready to go into occupation once the gym was complete. Mr Damien told Mr Elia that his aim was to complete the building work and to try and have a lease to Plus Fitness registered when he had approval from his bank. Mr Elia says that Mr Haddad obtained from Mr Damien some information about Mr Damien’s mortgage debt to the NAB. These negotiations ultimately led to a disputed meeting between Mr Damien and Mr Elia at Mr Damien’s office in Prestons in mid-April 2012.

The Meeting at Prestons – 3 April 2012

67. On either 3 or 12 April 2012, Mr Elia attended a meeting at Mr Damien’s office in the suburb of Prestons, which is approximately 40 kilometres from Sydney’s CBD. Mr Elia says the meeting took place on 3 April. Mr Damien puts it at 12 April. Because of the surrounding correspondence, Mr Elia is likely to be correct and the date was probably 3 April. There was only one meeting between the two of them at Prestons in the first half of April 2012. Much of what happened during the meeting is in contest.

68. Mr Damien’s evidence about the meeting is quite simple. He says that Mr Elia came around to discuss the work that Mr Damien wanted completed at the Camden property. He says that there was no quotation at the time for the works to complete and that he did not have any idea what the cost of the work was going to be. He says the meeting was brief. The Court accepts this simple account of the conversation.

67. Mr Elia says that he arrived at Mr Damien’s Prestons office after lunch. In preliminary discussions Mr Elia pointed out that the construction work remaining was extensive and that he understood that Mr Damien could not get further funding from the NAB to pay for the construction works. Mr Elia says that he raised with Mr Damien the issue of obtaining further security from Mr Damien as a condition of his involvement in the project, pointing out that from his enquiries at that time the property had negative equity: $1,626,000 was owed to the NAB and the current incomplete state of works at the property and a recent valuation meant that it was probably worth only about $850,000. He says he explained that it was “too risky for me to come in and complete the building works without security of our monies that is being invested into your property”.

68. Mr Elia says that he asked what are the “other securities that you can provide?” Mr Elia recounts that this question then led to the following conversation between them:

Mr Damien:   “Yes I do, I own a house in Denham Court.”

Mr Elia:   “Do you have a mortgage on the property?”

Mr Damien:   “Yes, to Adelaide Bank.”

Mr Elia:   “How much is mortgaged on Denham Court?”

Mr Damien:   “I owe about $1,250,000 to Adelaide Bank.”

Mr Elia:   “Do you know what the value of the house is at the moment?”

Mr Damien:   “About $1,950,000; it’s a large home on 11,000 sq/m of land.”

Mr Elia:   “The only way that I can move forward with the construction works at the gym is to have security by way of second mortgage over the Camden and Denham Court properties. On my calculation is the current equity in the Camden property is a negative equity of approximately $776,000. There seems to be some equity in your home; do you have a bank statement for the Denham Court property?”

Mr Damien:   “Yes, let me look through my files, yes here it is.”

71. The Court accepts Mr Elia’s evidence that the Denham Court property was discussed at this time and in these terms. Mr Elia further says that Mr Damien handed him a copy of an Australian Mortgage Options bank statement for the Denham Court property for the period between 1 July 2011 and 31 December 2011. He observed that it was in Mr Damien’s name and it recorded the address of the Denham Court property.

72. Such a document passed between the parties and a conversation to this effect about the Denham Court property is the best explanation for its passage. Mr Elia did request security over the Denham Court property as early as April 2012. There was by April 2012 a loose understanding that it might become available as security. This conclusion is further supported by emails between Mr Damien, Mr Haddad and Mr Elia on 13 February 2012 that show that Mr Elia received from Mr Damien a copy of a rates notice for the Denham Court property. But as will be seen, Mr Damien eventually talked Mr Elia out of insisting on this additional security.

73. Mr Elia says the conversation then proceeded to discuss the possibility of him purchasing the property. Mr Damien says that Mr Elia’s possible purchase of the Camden property was not raised until later. But Mr Elia says that it came up on 3 April 2012 as follows, as if it had been previously discussed. But there is no evidence that the Court accepts that the subject of a purchase had been discussed before this, making Mr Elia’s version of this part of the conversation improbable:

Mr Damien:   “Okay Joe. It is agreed, we have an agreement. I will provide you security over the Camden and Denham Court properties by way of registered second mortgage to secure the payment of all building works undertaken at the gym.”

Mr Elia:   “Karl, regarding the purchase of the property, I am interested and want to proceed but will need to sort out our finances for the purchase. In the meantime, I will start preparing myself to start construction work on site and speak to my lawyer regarding the second mortgage securities, could you please confirm for me that the tenant, Australian Fitness Management Pty Ltd still wants to proceed with the lease as I noticed after reading the agreement for lease that the lessors works would be completed by 1 October 2010.”

Mr Damien:   “Joe, I really appreciate you helping me out on the property, maybe we can to smother projects in the future together.”

Mr Elia:   “Hopefully this is the start of something good, let us get this project completed first for you, thank you for time today.”

74. If this conversation took place it is to be expected that Mr Elia would have done as he promised and spoken to his lawyer and taken steps to begin preparing second mortgage securities for both the Camden property and the Denham Court property. But there is no evidence of Mr Elia communicating with a lawyer or beginning to arrange a second mortgage security over the Denham Court property through a lawyer.

75. Mr Elia faces another difficulty in reconciling his subsequent conduct with his version of this part of this conversation. He says that after the conversation “I commenced work on the property on Mr Damien’s oral agreement to provide registered second mortgages over the Camden and Denham Court properties, while formal documentations were to be prepared by Mr Damien”. Mr Elia was not the kind of person who would have undertaken work on the Camden property whilst leaving hanging a promise to him that he would receive a registered second mortgage over another property. If such an agreement had been made at this meeting, he is very likely to have followed it up quickly as a precondition for their further financial arrangements, which he did not.

76. Mr Elia’s account of his conclusion from this conversation is odd for another reason. He seems to take away from this conversation that “formal documentations” were to be prepared by Mr Damien. It is true that it was Mr Damien, not Mr Elia, who had Mr Alcorn’s assistance. But nowhere in Mr Elia’s version of the conversation did Mr Damien commit to preparing the documentation. And as Mr Damien was the proposed mortgagor he was not the logical candidate to do so. Mr Elia was a sufficiently astute businessman to know that as the proposed mortgagee, he should prepare the “documentations”.

77. Apart from the Court’s overall doubts about Mr Elia’s credibility, these gaps and impracticalities in Mr Elia’s account cast doubt upon his version of this part of this conversation and the Court does not accept it.

78. But it is probable that the Denham Court property was discussed in some form at about this time in the context of one of Mr Elia’s companies undertaking construction work on the site. As was indicated above, Mr Elia obtained an Australian Mortgage Options bank statement over Mr Damien’s Denham Court property. The Court accepts Mr Elia’s version to the extent that he raised the subject of the Denham Court property becoming a second mortgage security, but the Court does not accept that he secured such a commitment from Mr Damien in April 2012.

79. Mr Damien denies having any conversations like those Mr Elia describes. He says that Mr Elia came around to his Prestons office to discuss the work Mr Damien wanted completed at the Camden property. He says that no quotation to complete the remaining building works had been agreed at that stage. Mr Damien says the meeting was brief. This is likely to be correct. There is no evidence of any agreement as to the price of the works based around a quotation at that stage. It is therefore unlikely that Mr Elia would have given a firm commitment to proceed, or that in exchange Mr Damien would have promised Denham Court as security. It was too early for either commitment.

80. But Mr Damien came away from this meeting with the optimistic impression that he now had a builder to complete the gym and who might perhaps even purchase the property. Putting the best face on these discussions he advised the NAB of that by mid-April 2012.

81. In one other respect Mr Elia’s version of this conversation is to be accepted. Mr Elia says that Mr Damien said to him that the NAB had valued the property in 2010 at $2,850,000 on a projected on-completion basis. Thus, Mr Elia was thereby given some indication, apart from his own intuition about property values, as to what the property could be worth, were it to be completed.

Champion Takes a Charge – 4 April 2012

82. The day after this meeting at Prestons, Mr Damien met with Mr Steve Malesev, the principal of Champion, to discuss the amount outstanding on the building contract, which Mr Damien and a company associated with Mr Bell made with Champion on 15 December 2010. At that time, some $542,652.82 was outstanding on this building contract. As Darke J found in the priorities judgment (at [21]), Mr Malasev had Mr Damien sign a letter of acknowledgement of debt on that day which charged the Camden property as security for that debt and “entitled [Champion] to lodge a caveat over [the Camden property] as security for the abovementioned debt”. Mr Damien and Mr Malasev agreed in this acknowledgment that the outstanding debt would be paid out by the sale or refinance of the Camden property.

83. Although Mr Malasev was sufficiently concerned about Mr Damien’s ability to pay for the building work that he had Mr Damien execute this letter of acknowledgement of debt, Champion did not lodge a caveat based on the security created by this document until September 2013.

Mr Elia Floats a Proposal to Purchase the Camden Property – April/May 2012

84. Mr Damien and Mr Elia had several telephone conversations in April/May 2012. They were mainly trying to agree upon quotations for the construction work. But Mr Elia sensed a business opportunity for himself. During one of these conversations, according to Mr Damien, Mr Elia raised the idea of purchasing the Camden property from Mr Damien, in a structure like the one the parties ultimately used.

85. The Court accepts Mr Damien’s evidence on this. Mr Elia wanted the construction work finished before he purchased. Mr Damien wanted a quotation so he could try and get the finance to complete the work and agree to a contract. The Court accepts that a conversation of the following type took place:

Mr Elia:   “I have been giving this some consideration and I am wondering if you are interested in selling the property.”

Mr Damien:   “I suppose if the price is right there is no reason why I cannot sell the property. Why… Are you interested?”

Mr Elia:   “Yes, but the construction work needs to be finished first.”

Mr Damien:   “When you provide me with a quotation. And I can get the finance to complete the work, we can agree to a contract.”

Mr Elia:   “I was thinking of entering an agreement at present and the value of the work to be built into the contract price.”

Mr Damien:   “If you have a proposal please just put it to me and we can work on it.”

Mr Elia:   “OK… I will do that.”

Mr Damien:   “It is also important that if you do want to purchase the property it has to be done before the end of the year, and sooner rather than later as I am having problems with NAB and they are threatening to foreclose on the property. I also still owe money to the previous builder Champion Homes and I need to pay them soon or they might take action on the property.”

Mr Elia:    “I understand the situation.”

86. It is probable that Mr Elia raised the idea of the purchase at this time. It is equally probable that Mr Damien pointed out some of his various financial obligations in order to progress what looked like being a more complicated proposal than he had originally envisaged for the property.

87. It is central to Mr Damien’s case that he pointed out the urgency of that situation from his perspective, the pressure from the NAB, and the unpaid builder, Champion. It is central to Mr Elia’s case that he was unaware of these existing obligations. Mr Elia was aware that Mr Damien was receiving demands from the NAB and he was aware Mr Damien had a dispute with Champion. His sense of that pressure on Mr Damien was one of the reasons Mr Elia perceived a financial opportunity here for himself.

A Meeting on 30 May 2012?

88. Mr Elia says he had another meeting with Mr Damien near his office on 30 May 2012. Mr Elia’s version of this conversation contains some statements that are convenient to his case that the Court does not accept that he made. Mr Elia says that he and Mr Damien had the following exchange:

Mr Elia:   “It was hard for me to decide whether to do the construction works and wait until the property is complete to be paid, even though you have agreed to provide security for payment over the Denham Court property our funds are tied up on the Camden property or to purchase the Harrington Street, Elderslie property with current funds available and own it outright and then obtain construction finance for the construction works.”

Mr Damien:   “I can see that you have a lot of experience and knowledge in construction, I am doing some stuff overseas on roadworks in Bangladesh and other countries are you interested in working overseas?”

Mr Elia:   “At this present time, I am really busy here and do not need to look overseas for work, thanks for the offer.”

89. This conversation is improbable. Although it refers to an existing agreement to provide security over the Denham Court property, nothing had happened for six weeks to progress this alleged consensus, and there is no contextual conversation that follows-up the mention of the agreement about the Denham Court property. Had it been mentioned, it is to be expected that there would have been some discussion about the timing of the preparation of the second mortgage documentation.

90. And Mr Elia’s mention of the purchase of the Elderslie property in this context is also improbable. It was of no interest to Mr Damien. There was no reason for Mr Elia to raise it.

91. Mr Elia’s account then has the conversation finishing with Mr Damien inquiring about Mr Elia’s “thoughts about the purchase” which is said to generate the following conversation, which the Court accepts probably occurred:

Mr Elia:   “Yes, I spoke to my finance broker who advised me that the bank will not lend on a building that is not complete and without an occupation certificate, even though there is a tenant that has signed a 10 year lease, the construction works still need to be completed first.”

Mr Damien:   “How long do you think the construction works will take to finish?”

Mr Elia:   “The work at the gym is substantial and extensive, 6 to 9 months to complete, if all goes well in the construction.”

Mr Damien:   “The mortgage on the property is costing me money, I am keen to sell the property and can’t wait.”

Mr Elia:   “Let me go away and think about it and get back to you, I will need some time to work a solution that could work for me and you.”

Mr Damien:   “I look forward to hearing back from you.”

92. The reference to the NAB mortgage “costing me money” is the kind of thing that Mr Damien is likely to have said. He did disclose to Mr Elia the pressure from the NAB on him to meet his first mortgage commitments and that that pressure was driving his interest in selling the property to Mr Elia.

A Conversation on 13 July 2012?

93. Mr Elia says that he met Mr Damien again at Mr Damien’s Prestons office on 13 July 2012. Mr Elia says that the purpose of this meeting was to discuss various matters; including the construction work on the property, the sale of the property, and the formalities for the registered second mortgages over the Camden property and the Denham Court property to secure the construction works. Mr Elia says the following conversation took place between them. The Court accepts that substantial parts of it took place.

Mr Elia:   “You said previously, champion just stopped the building works.”

Mr Damien:   “Yes, they had troubles building.”

Mr Elia:   “Do you have a contract with them?”

Mr Damien:   “Yes, I do?”

Mr Elia:   “Why don’t you sue him [Champion] for breaching the building contract?”

Mr Damien:    “I can’t, I have known Steve Malesev Director of Champion for around 25 years and is a personal friend of mine and business partner, I do all the kitchens for the homes that Champion build and it is my main source of income, I can’t believe Champion just stopped the construction of the property, and if I knew he was going to do this to me, I would of sold the building in the rundown state it was in 2010 in an as is condition, as the building was worth around $1,800,000 and the debt on the property to the bank was around $1,050,000.”

Mr Elia:    “Do you owe Champion any money?”

Mr Damien:    “No.”

Mr Elia:    “Are you in default with the NAB Mortgage for the Camden property?”

Mr Damien:   “No.”

Mr Elia:    “Are you in default with the Denham Court Mortgage?”

Mr Damien:   “No.”

Mr Elia:   “Do you have any details of the contractors that worked at the gym?”

Mr Damien:   “I might have, I will need to look through my file for the property.”

Mr Elia:    “Are there any outstanding matters regarding the property I should know?”

Mr Damien:   “No.”

Mr Elia:    “Do you owe money to anyone that could affect your financial situation?”

Mr Damien:    “I owe a lot of money to my granite guy who does the stone benchtops for superior kitchens, but that is for superior and further my credit rating is clean, I always pay my bills.”

Mr Elia:    “Have you made any agreements with anyone regarding the Camden property?”

Mr Damien:   “The only agreements I have was with Chris Haddad who acts on Mr behalf, to find a purchaser for the property. I agreed to pay him $75,000 on settlement of the property, if he finds me a purchaser, that is it.”

Mr Elia:    “Karl, the only way I can agree to do a deal for the purchase of the property is to have settlement of the Contract for Sale delayed until after we finish construction works on the property with an OC (“Occupation Certificate”) issued for occupancy, obviously the tenant will need to execute the 10 year lease”, my financier has agreed to provide the funding on completion of the building works to purchase the property. Have you had a chance to contact the tenant regarding the lease?”

Mr Damien:    “Joe, the tenant has terminated the Agreement to Lease as I have taken too long to complete the refurbishment, but if you buy the property they will enter into a new lease with you directly.”

Mr Elia:   “My past experience in subletting commercial properties is that I would need to have a head lease with you for the whole property and consented by the First Registered Mortgagee, then I could sublease the property to the tenant.”

Mr Damien:    “Yes, that would work.”

Mr Elia:   “This is the only way I know it will work.”

Mr Damien:   “I will agree to lease the whole property to you and I will ensure to have the lease registered on title, do we have an agreement that?”

Mr Elia:   “Yes, we have an agreement to lease the property and what about the sale of the property?”

Mr Damien:    “The agreement to sell the property would have the following terms being $2,081,000 is the purchase price with an extended settlement date to be after the date of the occupation certificate is issued, with your lease to be included in the contract for sale as a going concern.”

Mr Elia:   “The commission of $75,000 for the sale to Mr Hadad is included in the purchase price.”

Mr Damien:    “Yes, I will pay that to Mr Hadad at settlement.”

Mr Elia:    “We will be purchasing the property from you for investment purposes, so instead of investing our monies into purchasing the Harrington St, Elderslie property, we will complete the construction works on the property secured by the Second Mortgage over Denham Court and Camden properties, I agree to your proposal and agreement, we have a deal.”

94. At first impression, there is an improbable naiveté to parts of this conversation that is not consistent with Mr Elia’s commercial experience. Why would he ask these questions about Mr Damien owing Champion money, about the default to the NAB, about default on the Denham Court mortgage or about any other “outstanding matters regarding the property I should know” and then accept the answers at face value? If Mr Elia thought that the questions were important enough to ask, then they were also worthy of being confirmed in some reliable way, through lawyers or by means of objective evidence.

94. Mr Elia had only met Mr Damien in December the previous year through Mr Haddad. Mr Damien had not by then done much that would engender trust in Mr Elia. To a streetwise actor such as Mr Elia, Mr Damien could be seen as another property developer in need of money.

95. But the relationship was more complex than this. The Court accepts Mr Elia’s account that a relationship of some trust had developed on his part in Mr Damien and Mr Alcorn by about this time. Mr Elia was dealing with Mr Damien through a mutual friend, Mr Haddad. Mr Damien had appeared to be relatively open about his financial problems. Mr Elia developed some personal affinity with Mr Damien. Over six months of satisfactory discussions and an attractive commercial proposition engendered greater trust in Mr Elia.

96. The Court accepts Mr Elia’s evidence that such a relationship existed. The objective facts support the inference that it did. A remarkable feature of the transactions in December 2012 is that Mr Elia did not engage his own lawyer to act on behalf of JKAM in respect of the December 2012 deed, the contract for sale or the JKAM mortgage that month. Mr Elia, on behalf of JKAM, took the unusual step as the mortgagee of the JKAM mortgage to permit a lawyer associated with the mortgagor to draft the mortgage. Mr Elia was well experienced in commercial matters to know that as mortgagee he was entitled to stipulate the terms of the mortgage that he wanted for JKAM. But he was prepared to acquiesce in a course of dealings in which Mr Alcorn drafted the September 2012 lease and all the other documents in December 2012. This would not have happened without Mr Elia reposing significant levels of trust in Mr Damien and Mr Alcorn. And the trust went so far as Mr Elia not only taking drafts from Mr Alcorn, but being prepared to execute them without double checking them with separate lawyers.

97. Thus, what was said in this conversation needs to be judged in that background, which makes more likely conversations which may at first appear improbable. But the Court does not accept that all of this conversation took place in the way that Mr Elia says it did.

98. In the Court’s view it is unlikely that Mr Damien lied directly to Mr Elia in this conversation. It is probable that Mr Elia asked Mr Damien whether he owed Champion any money. It is also likely, in the Court’s view, that Mr Damien simply fudged his answer by saying there was a dispute but it is likely that Mr Damien emphasised his relationship with the director, Mr Malasev, and indicated that it was likely the dispute would be resolved.

99. It is also unlikely that Mr Elia asked a direct question of Mr Damien as to whether he was “in default with the NAB”. Mr Elia already knew that the NAB were putting pressure on Mr Damien to sell, and that Mr Damien was probably in default to the NAB. Mr Elia did not have to ask. But the Court infers that Mr Elia probably did ask Mr Damien about the subject of his relationship with the NAB. This was of interest to Mr Elia, who had the objective of ascertaining whether the NAB was content with Mr Damien’s dealing with Mr Elia. And Mr Damien did not indicate to Mr Elia there was anything to worry about.

100. These findings about Mr Elia’s knowledge of Mr Damien’s default to the NAB reduce much of the significance of another related dispute between the parties about whether Mr Elia saw an email chain (sent to him on 13 July 2012) that revealed Mr Damien’s then financial position in default to the NAB. Mr Elia says he did not pay much attention to the email. This can be accepted because Mr Elia was working by then on the assumption of Mr Damien’s probable default to the NAB.

101. The Court accepts that on 13 July 2012 Mr Elia did ask the three broad questions about “any outstanding matters regarding the property I should know?”, “do you owe money to anyone that could affect your financial situation?” and whether Mr Damien had “made any agreements with anyone regarding the Camden property”. These were general precautionary questions which, even without legal advice and dealing with someone he thought he could trust, Mr Elia decided he should ask. Subject to what is said here, the Court also accepts that Mr Damien gave Mr Elia the answers that Mr Elia says he did in this conversation.

102. In the Court’s view, these questions were broad enough to signal to Mr Damien that Mr Elia was interested to know (a) whether there were any encumbrances over the Camden property, which had financial significance for the commitment that Mr Elia was proposing to make through JKAM, and (b) whether there was any difficulty expressed by the NAB with Mr Damien’s proposed transactions with Mr Elia. Mr Damien must have understood from the nature of Mr Elia’s questions that these matters were presently of interest to Mr Elia and would continue to be of interest to him right up until he entered transactions with Mr Damien.

103. Another marker of Mr Elia’s trust in Mr Damien is that when he accepted these answers at face value, he did not check them through lawyers or by searching the register and did not return to the subject to ask the questions again at any time before entering the final group of transactions in December 2012.

104. A security interest such as the Champion charge was a relevant “outstanding matters regarding the property” that Mr Elia needed to know about. Mr Damien’s answer “No” could perhaps be justified in his own mind because a direct question had not been asked of him. But that question combined with the following question about owing money “that could affect your financial situation” called for Mr Damien to declare the Champion charge and the amount that was due on it. That he did not respond openly in this way was misleading and was not corrected before Mr Elia entered all four transactions.

105. The same logic called for Mr Damien later to declare the forbearance deed and the Hotray mortgage when they came into existence.

106. Finally, it is unlikely that the Elderslie property was mentioned in this conversation. This is not information that Mr Elia needed to share with Mr Damien. It is not obvious why Mr Damien needed to know about Mr Elia’s decisions in relation to the Elderslie property.

107. Email correspondence directly after 13 July 2012 throws light on what was discussed that day. On 15 July 2012, Mr Elia emailed Mr Damien thanking him for the lunch on the previous Friday, saying:

“Thanks for your lunch on Friday, as per our discussions please find attached proposal for repurchase of [the Camden property]. Should the conditions be agreed we will be able to sign the contract and move asap this coming week. Look forward to hearing from you.”

109. Attached to this email was a document which had been put together by Mr Elia consequent upon the discussion on 13 July 2012. It reflects an early, less developed form of the transaction that ultimately devolved between them. Only parts of it are relevant to the present issues. The document had a sub-heading, “Conditions of Exchange of Contract by way of construction works to complete the project at [the Camden property]”. The relevant parts of the document are as follows:

1. The agreed sale price being $1.68 million owed to the National Bank with (current bank statement with amount owing to be provided)

2. $300,000 will be paid to KARL DAMIEN on settlement.

3. All relevant council rates, water rate costs and all relevant certification fees, costs related to [DA No.], final occupation certificate inspections are to be paid by Karl Damien.

4. Karl Damien has confirmed that the monthly payments to service the property loan has been paid up to the 31/12/2012 to the national bank.

5. The agreed terms of the exchange of contract being that if the tenancy for the whole building is not fully tenanted by the end of the year, Karl Damien has agreed to release the purchaser from all contractual obligations in relation to the exchange of contract and will pay the sum of $ 480,000 plus gst being for the construction works completed at [the Camden property].

…

1. Karl Damien has granted and allowed the purchaser to borrow and obtain a second mortgage on the property owned by him [the Denham Court property].

2. Karl Damien has granted the purchaser to borrow and obtain a second mortgage on the property known as [the Camden property].

…

1. Karl Damien will permit the purchaser to make all necessary enquires to the purchaser in relation to [the Denham Court property] and [the Camden property].

2. Karl Damien permits the purchase make enquires to the local council and relevant services departments in relation to [the Camden property].”

   110. At the end of Mr Elia’s version of the conversation on 13 July 2012, he claims that he said that completion of the construction works on the Camden property would be “secured by the second mortgage over the Denham Court and Camden properties, I agree to your proposal and agreement, we have a deal”. The discussion concerning the Denham Court property was not that definitive. Mr Elia’s email to Mr Damien on 15 July describes his attached document as “attached proposal” and that looking ahead he says “should the conditions be agreed we will be able to sign the contract”. This indicates that Mr Damien probably did not give his full assent to the proposal at the meeting on 13 July. In the Court’s view, a better construction of what happened at this meeting in relation to the Denham Court property is that Mr Elia asked for security over the Denham Court property and Mr Damien said that he would consider it.

   111. Mr Damien replied on 18 July 2012, giving his more up-to-date understanding of their then consensus. But it was a consensus that had very different elements from the agreements ultimately made between these parties at this time. Mr Damien contemplated the sale of the Camden property to Mr Elia’s interests with the exchange of contracts within three weeks “by say 3 August 2012” with a settlement date on “say 19 October 2012”. On settlement of the sale he was stipulating for the purchaser to pay him an extra $400,000. He also proposed the following if the transaction did not proceed:

3. In the event that the building is not fully tenanted by 19 October 2012 then the purchaser has the right to rescind the contract and walk away

4. That decision must be made by 26 October 2012

5. In the event that the purchaser decides to rescind the contract and walk away then Karl Damien will pay the purchaser $480,000 plus GST for the building works completed at the property

6. In order to secure that payment I will grant to the purchaser a mortgage over the properties at [the Camden property] and [the Denham Court property]

Let me know if you are happy with the above, or if you need to change anything.”

112. By about 18 July 2012, it can be accepted that there was a general consensus that if a contemplated sale transaction of the Camden property which would probably be completed by the end of October did not go ahead, that the Denham Court property could be used as backup security to secure the repayment of building work invested in the Camden property.

113. At that stage, both parties were uncertain as to the relative timing of completion of the construction work and the consummation of their other arrangements, so recourse to additional security was part of their consensus. But as the parties’ negotiations developed and building work started, Mr Damien’s position on this changed.

The NAB Acts, the Narellan Sale and the Forbearance Deed – July/August 2012

114. Mr Damien owned a childcare centre at Narellan which was also security for the NAB facility. The NAB was pressing him for repayment of some of the money he owed the bank on the NAB facility. The bank required him to sell the childcare centre. The NAB withheld $200,000 from the childcare centre sale proceeds to pay down the arrears on the NAB facility and to provide a fund to meet future interest payments.

115. But Mr Damien’s financial position with the NAB continued to deteriorate. The bank wanted more certainty about the timing of the sale of the Camden property. It was prepared to allow Mr Damien a degree of control over the sale, provided the sale took place within the timeframe and structure dictated by the NAB. The NAB required him to enter a forbearance deed.

116. Contents of the forbearance deed. On 27 August 2012, Mr Damien signed the forbearance deed with the NAB. The deed recited that the NAB would provide a financial accommodation to Mr Damien under a loan facility originally offered in August 2011 and that the facility was secured over the Camden property and another property at Narellan. The forbearance deed recorded that the facility was in default and that as a result the NAB had issued notices pursuant to the facility and under the securities the NAB held with its facility.

117. The forbearance deed recorded that the Narellan property had been sold and an amount equal to six months payments due on the facility had been paid from the proceeds of sale into a term deposit. The NAB agreed upon the terms of the forbearance deed to forbear from taking further enforcement action.

118. Under the forbearance deed, Mr Damien acknowledged and agreed that the facility and the securities were in default, and that the facility, the securities and certain guarantees were valid and enforceable. And the securities, as at 10 August 2012, secured an Amount Owing of $1,706,183.55 (clause 3). Subject to compliance with the forbearance deed, the NAB agreed, “to forbear from taking any action to enforce its rights arising out of the facility and securities until the Settlement Date [namely, 31 December 2012]” (clause 4).

119. Mr Damien was required to maintain interest payments falling due under the facility in order to comply with the forbearance deed, and the NAB was authorised to draw upon a term deposit to meet interest payments up until the Settlement Date (clause 5). And the borrower and guarantors were required to pay the Amount Owing on the Settlement Date (clause 5).

120. The forbearance deed regulated the sale of the remaining secured property, the Camden property. In any such sale, the forbearance deed required Mr Damien and the guarantors to obtain the NAB’s prior consent to the sale before the exchange of contracts and to ensure any contract for sale was unconditional (clause 6). The guarantors under the forbearance deed were two companies associated with Mr Damien that have not otherwise featured in these proceedings. The forbearance deed closely controlled the sale of the secured property in the following other ways: providing the NAB with the agency agreement and marketing strategy; providing fortnightly updates on sale progress; providing the NAB with a copy of the contract for sale; regulating the deposit and terms and conditions of the sale; and requiring on settlement that the NAB receive the full sale proceeds to reduce the amount owing (clause 6).

121. Other standard provisions in the forbearance deed required maintenance of the secured property (clause 7), the consequences of default (clause 8), the NAB’s non-waiver of rights (clause 9), and the release of rights of the borrower (clause 10). Finally, the parties were obliged that each of them, “must keep confidential the terms of this document and any information which either of them may provide to the other”, except as required by law, if the information is in the public domain or with the prior written consent of the party providing the information (clause 13). The forbearance deed made time of the essence (clause 15.6).

122. Whilst Mr Damien is unlikely to have been particularly sensitive to the obligations of confidentiality that clause 13 imposed on him, it is another reason making it unlikely that Mr Damien was open with Mr Elia about the existence of the forbearance deed.

123. Disclosure of the forbearance deed. Mr Damien says that he was an open book with Mr Elia about the forbearance deed, telling Mr Elia that he had signed the forbearance deed with the bank and that he needed to pay out the NAB by the end of that year. Mr Damien says the following conversation took place between them about the forbearance deed:

Mr Damien:   “It is really important that settlement takes place by the end of the year (2010) because now I have signed the forbearance deed, if I don’t pay out NAB by the end of the year, NAB can force me to sell the property.”

Mr Elia:   “Yes, I understand, we will settle by the end of year.”

124. Mr Elia denies any such conversation took place. The resolution of the contest about this conversation depends in part upon the credibility of the parties to it and in part upon the objective probabilities. It was in Mr Damien’s commercial interests to keep his bargaining cards close to his chest and not to disclose to Mr Elia how much the NAB was pressing him. It was equally in Mr Elia’s commercial interests to find out as much as he could during negotiations about Mr Damien’s financial position. As the Court has already observed, both were commercially astute individuals who would have taken advantage of whatever information was available to each about the other.

125. The Court accepts Mr Elia’s evidence that this conversation did not take place. Mr Damien was never as open as this with Mr Elia about the NAB. His subsequent conduct concealing the Hotray mortgage showed his willingness to keep information from Mr Elia when he chose. The same habit was evident with the forbearance deed.

126. For Mr Damien to have mentioned the forbearance deed to Mr Elia would have immediately invited Mr Elia to request a copy of it. Mr Elia could read commercial documents well enough. Mr Damien would readily have appreciated that once Mr Elia had access to the forbearance deed he would be able to determine whether the contract for sale was inconsistent with it, whether the contract for sale was likely to be acceptable to the NAB, and whether the NAB would proceed to exercise its power of sale. For Mr Damien the safer course was not to mention the forbearance deed at all, so in the Court’s view he kept it to himself.

127. But it was impossible for Mr Damien to conceal from Mr Elia all the financial pressures upon him. Mr Damien was keen to negotiate within the timeframe the bank had placed on him. He knew that he could not afford to miss the forbearance deed’s settlement date at the end of 2012.

128. Mr Elia was likely to have picked up some of the urgency driving Mr Damien once the forbearance deed had been signed. It is probable that whether or not Mr Damien specifically mentioned the forbearance deed in conversation, Mr Elia is likely to have discerned Mr Damien’s need to have a deal done by the end of 2012. The late December timing of three of the four disputed transactions between the two men, the December 2012 deed, the contract for sale and the JKAM mortgage, would have tended to convey to a counterparty such as Mr Elia that Mr Damien was keen to conclude transactions with him before the end of 2012.

129. Mr Damien says, and the Court accepts that in August 2012 he passed the detail of his negotiations with Mr Elia over to Mr Alcorn to prepare documentation on his behalf. Mr Damien says that more communications occurred directly between Mr Alcorn and Mr Elia than between himself and Mr Elia. The email record from this time confirms frequent communications between Mr Alcorn and Mr Elia, in which Mr Alcorn is drafting transaction documents for the parties.

130. At one stage about this time the parties discussed the purchaser not being Mr Elia but his wife, Mrs Teresa Elia. But that structure was abandoned in the discussions and JKAM became Mr Damien’s counterparty.

The Lease to JKAM of 1 September 2012

131. Mr Damien leased the Camden property to JKAM for 15 years commencing on 1 September 2012. The September 2012 lease was witnessed by Mr Alcorn on behalf of the lessor, Mr Damien. Mr Elia’s brother, Mr Johni Elia signed it as the Secretary of JKAM.

132. Few of the terms of the September 2012 lease to JKAM were controversial. The detailed terms are not included in these reasons. After an initial 15-year term, the lease afforded JKAM a further option to renew for five years, giving a total potential term of 20 years. The lease provided for an initial annual rent of $385,000 per annum, being $32,083.34 monthly in advance, inclusive of GST (clause 4 and Appendix item 1). The rent was reviewable annually in accordance with a formula provided for under the lease (clause 22 and Appendix Item 5). The December 2012 deed, clause 2(d) and (k) amended JKAM’s rental obligation to the amounts payable by the lessor to the NAB and other outgoings.

367. Although the range of circumstances giving rise to a duty to speak cannot be exhaustively defined, Gilmore and White JJ offered a useful list of examples in Addenbrooke Pty Ltd (ACN 055 973 576) v Duncan and Others (No 2) (2017) 348 ALR 1; (2017) 121 ASCR 406; [2017] FCAFC 166 at [428(e)]:

“Such circumstances may exist when either the law or equity imposes a duty of disclosure, when a statement conveying a half-truth only is made…when the representor has undertaken a duty to advise, when a representation with continuing effect, although correct at the time it was made, has subsequently become incorrect, and when the representor has made an implied representation.”

374. The whole of the relevant circumstances, including the relationship between the parties and the nature of the transaction, must be assessed objectively in order to determine whether a failure to disclose amounts to misleading and deceptive conduct: see Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477; (1986) 68 ALR 77; (1986) ASC 55-501; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; 110 ALR 608 at 610.

375. Further, although a degree of secretiveness is inherent in commercial transactions given parties will often have conflicting interests, the bargaining process is not a “licence to deceive”: Poseidon Ltd v Adelaide Petroleum NL (1991) 105 ALR 25; (1992) ASC 56-140; (1992) ATPR 41-164 at [26] per Burchett J. See also Lam v Ausintel Investments Aust Pty Ltd (1990) 97 FLR 458; (1990) ATPR 40-990.

376. The Statement of Claim pleads six categories of alleged conduct by silence, which JKAM claims was misleading and deceptive and led JKAM to enter the September 2012 lease and the December 2012 transactions. It is enough for the purpose of these reasons to consider together these various categories of alleged conduct by silence, in three groups relating respectively to the Denham Court property, the prior encumbrances and the NAB loan facility. Many of the categories of conduct by silence are admitted in the Defence but the defence case was not entirely conducted in conformity with the admissions. But no admission was made of any misleading or deceptive conduct. The main question in issue was whether Mr Elia had a reasonable expectation of disclosure to him.

The Denham Court Misleading Conduct

377. JKAM’s misleading and deceptive conduct case about the Denham Court property is based on a contention that Mr Damien expressly represented that the construction costs would be secured over both the Camden and the Denham Court properties by a second mortgage. It is said that contrary to that representation the Denham Court property was not referred to in the December 2012 deed or in the JKAM mortgage documents prepared by Mr Alcorn and given to Mr Elia. And it is alleged Mr Elia was not informed of the omission in circumstances where Mr Damien owed him an obligation to highlight the omission.

378. The Court’s findings in the narrative of facts in relation to the events between 10 December 2012 and 21 December 2012 compel the conclusion that there was no Denham Court misleading conduct inducing JKAM’s transactions with Mr Damien. Neither Mr Damien nor Mr Alcorn positively represented to JKAM that Mr Damien would grant JKAM a mortgage over both the Camden property and the Denham Court property as part of these December 2012 transactions.

379. Mr Elia, the principal actor on behalf of JKAM in negotiations, asked for a second mortgage over the Denham Court property to secure JKAM’s construction costs on the Camden property. But the proper inference from the narrative of facts is that Mr Elia was made aware both on 10 December 2012 and 21 December 2012 that Mr Damien was not prepared to grant such a mortgage and Mr Elia accepted that situation.

380. In the Court’s view, JKAM did not become a party to the JKAM mortgage under any misapprehension that Mr Damien had or would provide security over the Denham Court property. Mr Damien did not mislead Mr Elia either expressly or by silence to give the impression that the Denham Court property was being offered as security or would become security. JKAM’s allegations about the alleged Denham Court misleading conduct therefore fail.

The Prior Encumbrances Misleading Conduct

381. An outline of JKAM’s contentions on the prior encumbrances misleading conduct is set out earlier in these reasons. The prior encumbrances misleading conduct relates to both the Champion charge and the Hotray equitable mortgage. It is useful to examine the alleged prior encumbrances misleading conduct by reference to each of these encumbrances separately, starting with the Champion equitable charge.

382. The Champion Equitable Charge. Mr Damien’s responses to Mr Elia’s questions in July 2012 were actively misleading in relation to the Champion charge, which then already existed. Mr Elia was aware that there had been a prior builder engaged on the Camden property, who had left the site after a dispute with Mr Damien. Mr Elia was also aware that this builder had probably not been paid all that was claimed by it and that there was a genuine dispute. But Mr Damien had not told Mr Elia about the 4 April 2012 acknowledgement of debt that created the Champion equitable charge. Nothing in Mr Damien’s answers to Mr Elia’s questions in their various conversations in July 2012 or earlier had informed Mr Elia of Champion’s equitable charge either directly or indirectly and to that extent his conduct was misleading and deceptive. Mr Elia assumed that this encumbrance did not exist when he entered these transactions.

383. Applying the relevant legal principles, Mr Elia had a reasonable expectation that the creation of the Champion equitable charge was a fact that would be disclosed to him before JKAM’s entry into the December 2012 deed, the contract for sale and the JKAM mortgage. This conclusion follows from the following matters.

384. First, in the conversations between Mr Elia and Mr Damien in July 2012, Mr Damien had created an impression that he would disclose “outstanding matters regarding the property”, which would include any present or future encumbrances over the Camden property. Mr Elia had a corresponding expectation of disclosure. So much follows from the fact that Mr Elia made enquiries about matters that were broad enough to include existing encumbrances and the possibility of such encumbrances being created and Mr Damien gave him assurances in those conversations that there was nothing to disclose. Mr Damien knew from the nature of Mr Elia’s inquiry that Mr Elia was interested not only in the present state of the register but in whether the creation of future encumbrances was likely.

385. Second, the statements that Mr Damien had made to Mr Elia in July 2012 were in substance continuing representations. To the extent they were correct when made they had subsequently become incorrect in relation to the Hotray mortgage. Without correction, they had become misleading by changing circumstances over time.

386. Third, communications and negotiations between the parties between April and December 2012 had led to an ambiguous situation in which Mr Elia was relying upon Mr Alcorn, for assistance with legal drafting of transaction documents, as if Mr Alcorn was a lawyer acting for both parties. The circumstances were clear enough to Mr Damien that Mr Elia was looking to Mr Alcorn in this additional role throughout those transactions. Mr Alcorn in fact performed the drafting for both sides and Mr Elia’s email correspondence with Mr Alcorn confirms this. By performing the drafting for Mr Elia, Mr Alcorn had taken upon himself a semi-advisory role. Important support for this conclusion flows from the lack of any disclaimer on Mr Alcorn’s part that he was not guarding Mr Elia’s interests. He did not seek at any stage to limit the degree of reliance that Mr Elia placed upon him.

387. The Hotray Equitable Mortgage. But for the application of the issue-estoppel, the Court would find that Mr Damien concealed the existence of the Hotray equitable mortgage from Mr Elia. The probable explanation for the timing of the creation of the Hotray mortgage was the imminent execution of the contract for sale and the JKAM mortgage. Mr Damien was well aware that the execution of this document would give him a material financial advantage over the interests that JKAM proposed to create through the contract for sale and the JKAM mortgage. Mr Elia and anyone in his position must have appreciated that the existence of the Hotray mortgage was material to Mr Elia’s decision to proceed with the deed on 10 December and the two transactions on 21 December.

388. Similar logic applies here to Mr Damien’s non-disclosure to Mr Elia of the creation of the Champion equitable charge. Mr Elia had a reasonable expectation that the Hotray equitable mortgage was a fact that would be disclosed to him before JKAM’s entry into the December 2012 deed, the contract for sale and the JKAM mortgage. Similar factors applied: Mr Damien creating an impression that he would disclose encumbrances to Mr Elia; the fact that Mr Damien’s continuing representations of July 2012 had become incorrect; and Mr Alcorn’s role as a lawyer apparently acting for both parties were all in play again, creating a reasonable expectation on Mr Elia’s part of the disclosure to him of the existence of the Hotray mortgage. But for the issue-estoppel, the Court would have found the non-disclosure of the Hotray mortgage to be misleading and deceptive.

The NAB Loan Facility Misleading Conduct

389. In this group of contentions relating to the NAB loan facility, JKAM alleges that before entry into the September 2012 lease and into the three transactions in December 2012 Mr Damien engaged in misleading and deceptive conduct by not disclosing to JKAM that:

1. Mr Damien had signed the forbearance deed with the NAB;

2. Mr Damien was in default to the NAB under the loan facility secured by the NAB mortgage; or

3. Entry into the four transactions with JKAM would place Mr Damien in default to the NAB under the forbearance deed.

390. JKAM’s contentions relating to the NAB loan facility are made out with respect to (1) and (3) above, but not (2).

391. As to (2), the forbearance deed shows that Mr Damien was in default to the NAB by late August 2012. The narrative of findings above is a basis to infer that Mr Elia was aware of Mr Damien’s default to the NAB. Mr Elia was generally aware in the first half of 2012 of Mr Damien’s financial distress. The probability that Mr Damien was in default to the NAB must have been obvious to Mr Elia from not long after he, Mr Damien and Mr Haddad had begun talking together in December 2011. Mr Damien was open with Mr Elia at times about the pressure being applied to him by the NAB. By mid-2012 Mr Elia was working on the basis that Mr Damien was probably in default to the NAB.

392. Several factors point to Mr Elia working this out for himself. By April/May 2012. JKAM was negotiating to undertake construction work on the Camden property by extending credit to Mr Damien secured over the Camden property (and initially also over the Denham Court property). Mr Elia’s April/May 2012 proposal to Mr Damien that JKAM might acquire the Camden property was grounded on the assumption that Mr Damien was not in a financial position both to meet all his existing financial obligations and to complete the construction required on the Camden property from his own resources.

393. As to (1) and (3), Mr Elia was unaware that Mr Damien had signed the forbearance deed, was unaware of its terms and was unaware that Mr Damien would breach the terms of the forbearance deed through the four transactions with JKAM in the second half of 2012. As the narrative of findings shows, the Court does not accept Mr Damien’s evidence that he disclosed information about the forbearance deed to Mr Elia in about late August 2012. The course of events better supports the inference that disclosures relating to the forbearance deed were not made to Mr Elia in 2012. Had the forbearance deed been disclosed to Mr Elia, he is the kind of person who would have asked questions of Mr Damien to ascertain more about it and to enquire whether the transactions JKAM and Mr Damien were about to enter were compatible with it.

394. The nondisclosure of facts (1) and (3) was misleading or deceptive. Mr Elia had made enquiries of Mr Damien in July 2012 about his relationship with the NAB and he was given the impression there was nothing of concern with the NAB. Given this inquiry and Mr Damien’s answer, Mr Elia had a reasonable expectation that Mr Damien would further disclose to him on this subject, if the situation with the bank materially worsened.

395. And like the situation with the Champion and Hotray encumbrances, what Mr Damien had said about the NAB needed to be corrected, because if it was not misleading when it was first said in July, it had become misleading by the time the forbearance deed was executed and Mr Damien was contemplating entry into a contract for sale that was incompatible with the forbearance deed. The incompatibility arose at least for the following reasons. Mr Damien had not sought the NAB’s consent to his entry into the contract for sale and the contract for sale was not unconditional – for example, it allowed deferral of settlement for two years; and was subject to the lease to JKAM, inconsistent with the forbearance deed, clause 6(e). Under the contract for sale, Mr Damien was to receive $300,000 of the sale proceeds: this was inconsistent with clause 6(h) requiring the NAB to receive all proceeds. Under the contract for sale, and the December 2012 deed, the building works were treated as a deposit: this was inconsistent with clause 6(f) requiring a deposit of 10% to be paid on deposit with settlement within 42 days.

396. And like the situation with the Champion and Hotray encumbrances, the same elements of Mr Elia obviously trusting Mr Alcorn to act in his interests, as well as in Mr Damien’s interest were present, such that Mr Elia had a reasonable expectation of disclosure of the forbearance deed and the probability of its breach.

The No Debts to Champion Misleading Conduct

397. JKAM also alleges that Mr Damien engaged in early positive conduct between December 2011 and March 2012 that was misleading and deceptive. JKAM alleges that between those dates Mr Damien, both orally and by implication, represented to JKAM (a) that Mr Damien did not owe any money to Champion and (b) that the Camden property was not burdened with any security obligation to Champion for debts owing to Champion for construction works.

398. As to (a), the Court does not accept that Mr Damien represented to JKAM at any time that Mr Damien did not owe any money to Champion. Quite the contrary, Mr Damien’s early conversations with Mr Elia through Mr Haddad as an intermediary between December 2011 and March 2012 revealed to Mr Elia that Champion had left the Camden property as a result of disagreements about money which had not yet been resolved. This was enough for Mr Elia then to infer that Mr Damien and Champion still had money disputes. Subsequent conversations were to similar effect. Mr Elia was not under the misapprehension that Mr Damien did not have debts outstanding to Champion. He was under the impression that Champion had some money claims against Mr Damien but they were contested.

399. As to (b), Mr Damien did not say to Mr Elia between December 2011 and March 2012 that the Camden property was not burdened with a security obligation to Champion for debts owing to Champion for construction works. In December 2011 Mr Damien did not go into the subject of security over the Camden property for his financial obligations to Champion or any other creditor. But this subject did come up later between the two in July 2012 as the Court’s narrative of findings shows.

400. JKAM’s contention that between December 2011 and March 2012 it was misled by Mr Damien that he did not owe any money to Champion and that the Camden property was not burdened with any security obligation to Champion fails.

The Plus Fitness Lease Registration Misleading Conduct.

401. JKAM alleges that in December 2011 Mr Damien orally represented to JKAM that Mr Damien had leased the Camden property to Plus Fitness under a lease recognised by the NAB. The Court is not confident of Mr Elia’s account of his early conversations with Mr Damien in December 2011. Moreover, if the Plus Fitness lease registration misleading conduct had occurred and Mr Elia was of the view that Mr Damien had leased the Camden property to Plus Fitness, and the NAB had consented to that lease, it would be expected that some later discussion would have taken placed between the two of them about how the proposed lease to JKAM would replace the lease to Plus Fitness. But the Court does not accept that any such conversation took place. JKAM was not misled in late 2011/early 2012 to hold an impression that the NAB would later consent to the registration of the September 2012 lease.

402. But even if Mr Damien had made such representations, it would not follow from such a finding that Mr Damien also impliedly represented to JKAM that Mr Damien was in a position, without likely opposition from the NAB, to register any lease that Mr Damien might grant in the future to companies incorporated by Mr Elia, such as JKAM.

403. Mr Damien’s bare statement that he had leased the Camden property to Plus Fitness and that this lease had been recognised by the NAB would represent just that and no more. The statement does not bring with it the implication that Mr Damien believes that the NAB would consent to the registration of any lease Mr Damien might grant in the future to JKAM. This implication cannot reasonably be drawn from such a statement. Whether the NAB would consent to a future lease to JKAM would always depend on the terms of the lease and the state of accounts between Mr Damien and the NAB at the time.

404. JKAM’s misleading and deceptive conduct case based on the NAB’s consent to the registration of the Plus Fitness lease therefore fails.

Future Matters, Implied Representations and Reliance

405. JKAM pleads that Mr Damien’s misleading conduct involves in part representations as to future matters and there were no reasonable grounds for making those representations.

406. These submissions are not persuasive. Both the prior encumbrances misleading conduct (with respect to the Champion charge) and the NAB loan facility misleading conduct relate to states of affairs which were said to exist at the time of the conduct in question and at the time of the September and December 2012 transactions. The questions and answers Mr Elia asked and Mr Damien answered on 13 July 2012 are only capable of founding inferences about states of affairs (about then existing securities and debt) up to the time that JKAM entered into the transactions. The submission is correct to the extent that it seeks to argue the representations were continuous for that period. But they were not representations about future matters in the sense of predicting that the future state of affairs would come to pass.

407. Moreover, JKAM cannot claim reliance upon the misleading and deceptive conduct much beyond the time that it appreciated that it had been misled. Subsequent reliance conduct may include JKAM taking steps to extract itself from the consequences of Mr Damien’s prior misleading conduct. JKAM was aware of the real situation in 2013.

408. The implied representations that JKAM relies upon add little to the expressly pleaded claims of misleading and deceptive conduct. The implied representations set out the steps by which Mr Elia relied upon the other misleading conduct. The implied representations do not appear to the Court to require additional analysis in these reasons. But further consideration is reserved if the parties seek to have further findings made in relation to them.

409. Mr Elia acted upon the prior encumbrance misleading conduct (with respect to the Champion charge). Reliance upon misleading conduct involving non-disclosure may not be the most apt terminology: Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No. 3) (2006) 67 NSWLR 341 at [81]; [2006] NSWCA 282. Had non-disclosure not occurred and had he been aware of the Champion charge he would not have entered the September 2012 lease, nor would he have undertaken construction work at the Camden property. Moreover, he would not have entered the December 2012 deed, the contract for sale or the JKAM mortgage.

405. Had he been aware of the prior encumbrances, his investment interest in the Camden property would have dissolved. The business case for investing in the Camden property by undertaking $528,000 in building works made little financial sense if his interests in the property were deferred behind the combined value of the NAB mortgage, the Champion charge and the Hotray mortgage. Taken together the combined value of these prior encumbrances represented well over $2.6 million. Even assuming Mr Elia expected capital gain upon completion of the work at the Camden property, these encumbrances were significant hurdles.

406. Mr Elia also relied on the NAB loan facility misleading conduct. Had this misleading conduct not occurred, Mr Elia would have been aware of the terms of the forbearance deed and been able to compare them with the transactions that JKAM was about to enter with Mr Damien. This would have revealed to him that the NAB was itself apparently not aware of the September 2012 lease. The September 2012 lease is not mentioned in the forbearance deed. Moreover, the forbearance deed only covers the possibility of a contract for sale being signed and does not mention the JKAM mortgage.

407. The Court does not accept Mr Elia’s evidence that had he realised Mr Damien was in default to the NAB in about July/August 2012, that he would not have entered into the various transactions in September and December 2012. Mr Elia had concluded that Mr Damien was in default to the NAB by mid-2012 and he proceeded with the transactions anyway.

408. Mr Elia says he would have enquired of Mr Damien how he was going to clear the default. But Mr Damien would not have been able to give assurances he could clear his default. Had he been able to clear the default, he would have done so. But the Court does accept that Mr Elia would not have entered into the agreement had he realised Mr Damien could not clear his default. Moreover, if Mr Elia had known the NAB was actively considering taking action on Mr Damien’s default to the point of binding Mr Damien to the forbearance deed, he would not have entered into the transactions.

409. Absent the NAB loan facility misleading conduct Mr Elia would not have entered the September 2012 lease, nor would he have undertaken construction work at the Camden property. He would not have entered the December 2012 deed, the contract for sale or the JKAM mortgage. As first mortgagee, the NAB had priority over JKAM and could refuse to register the September 2012 lease or to recognise the contract for sale. The lease and the contract for sale were mechanisms for JKAM to derive economic value from its construction expenditure on the Camden property. The JKAM mortgage was a safety net to secure the return of the construction expenditure on the property. As was discussed earlier in these reasons, the forbearance deed would have readily revealed to Mr Elia that the contract for sale directly conflicted with the NAB’s requirements of Mr Damien.

410. In the face of the high risks of the NAB refusing to register the September 2012 lease or to recognise the contract for sale there was no business case for JKAM investing substantial construction expenditure into the Camden property or entering any of these transactions. Despite the incentive of capital gain from this investment, Mr Elia would have recognised that and would have refused to proceed further.

411. JKAM therefore suffered loss and damage by proceeding to undertake construction expenditure on the Camden property and entering these transactions.

Loss and Damages JKAM Allegedly Suffered and a Damages Hearing

417. The parties have not yet presented to the Court detailed calculations of the loss that JKAM has suffered as a result of the two forms of misleading and deceptive conduct in which the Court has found Mr Damien engaged, the prior encumbrance misleading conduct and the NAB loan facility misleading conduct. The Further Amended Statement of Claim seeks an order that there be an inquiry as to damages, principally in relation to the alleged breach of the lease and the breach of the JKAM mortgage. But an inquiry would also be necessary in relation to the loss and damage suffered as a result of the misleading and deceptive conduct that has been established.

418. Ordinarily such an inquiry as to damages will be undertaken based on the existing evidence from both sides. Neither party should have the opportunity of adding to the lay evidence already adduced in the proceedings. It is undesirable for the Court to reassess the parties’ credibility at a separate later damages hearing. Based on the Court’s existing findings the parties should be able to advance their competing submissions and calculations of damage.

419. The parties will be directed to agree upon short minutes of order to enable such an enquiry to take place. If the parties seek the determination of any other matters not dealt with in these reasons, those matters should be identified in these short minutes of order.

420. An important preliminary question arises. If there is to be an inquiry as to damages, in relation to the action on the JKAM mortgage and in relation to the misleading and deceptive conduct, a fundamental inconsistency between these two remedies may require JKAM to make an election between them. This issue has not yet been canvassed in the parties’ submissions. But it is now clear as a result of the Court’s findings. The need for a successful party to elect between inconsistent remedies is a familiar question in some forms of equitable relief: Warman International Ltd v Dwyer (1995) 182 CLR 544 at 559; (1995) 128 ALR 201; (1995) 69 ALJR 362; [1995] HCA 18.

421. The proven misleading and deceptive conduct here may result in an award of compensation or other relief on the basis that Mr Damien induced JKAM to enter into transactions (such as the contract for sale and the JKAM mortgage) which it would not have entered into but for the misleading and deceptive conduct. A normal measure of loss for such misleading and deceptive conduct would be the expenditure JKAM incurred as a result of entry into the transactions in question, including the costs of unwinding those transactions. The relief may include the taking of steps to declare void or discharge mortgages or to otherwise bring to an end the impugned transactions. With the contract for sale, that has already happened by agreement.

422. But it is not consistent with seeking relief for misleading and deceptive conduct to sue upon the impugned transaction. The Court does not readily see how it can give JKAM relief to set aside the impugned transactions and then to give JKAM relief on the basis that the transactions are not set aside. Subject to hearing further submissions, JKAM will probably have to elect between these remedies. The Court wishes to hear submissions about this question in the damages hearing.

423. It may assist the parties in formulating their submissions, for the Court to observe that the true measure of JKAM’s damages for misleading and deceptive conduct may be little more than its expenditure on parts of the litigation and various other costs which it has also sought to recover under the JKAM mortgage. It is improbable that the assessment of damages for misleading and deceptive conduct could involve any compensation for loss of part of the bargain which Mr Elia thought JKAM might be securing in his dealings with Mr Damien.

424. But the parties have not yet had an opportunity to put to the Court submissions about damages based upon the Court’s actual findings, which have now been made. The Court therefore looks to the parties to put in their competing contentions (and calculations) about what loss and damage has been suffered on JKAM’s misleading and deceptive conduct claim. And in that regard, it is also not clear why the Court needs to consider the various issues raised in argument by JKAM about the course of events in relation to specific performance of the contract for sale and the ultimate abandonment of that contract. If the contract for sale was induced by misleading and deceptive conduct, then the appropriate course is for the Court to consider what compensation, if any, JKAM should be awarded to put it in the position as if the contract for sale had not been made.

425. Other pleaded claims may cause confusion in the damages hearing. The Further Amended Statement of Claim, paragraphs [24], [25] and [26] pleads various acts of reliance upon misleading and deceptive conduct. Recovery for some of these acts of reliance is problematic. The Court has found as to paragraph [24](a) and (b) that Mr Damien’s misleading and deceptive conduct may have caused JKAM to incur the costs of entering into legal relations with him pursuant to the various instruments. But whether JKAM could also recover the expenses pleaded in [24](c) of engaging in litigation to challenge the priorities judgment asserted by the competing interests is another question. It may well be argued in further submissions by Mr Damien that as soon as JKAM discovered the misleading conduct, to mitigate its loss it should have sought to rescind the JKAM mortgage and the contract for sale, long before pursuing the priorities proceedings.

426. JKAM also pleads in paragraphs [24](d) and (e) that it commenced and continued to develop the Camden property up to an agreed value of $528,000 as a result of the misleading and deceptive conduct and continued that development with a view to profit. But whether that loss can be recovered will depend upon when JKAM found out the truth about the prior encumbrances misleading conduct or the NAB loan facility misleading conduct. Once JKAM found out that this conduct was misleading and deceptive, reliance may cease and recovery of further loss may be precluded. But the parties have not addressed their submissions to these consequential issues. These will also need to be dealt with at the damages hearing.

427. The Further Amended Statement of Claim paragraph [25] asserts that the completion of the contract for sale was commercially feasible in September 2013 but became impossible at the specified purchase price of $2.081 million, given the combined value of the interests asserted by the NAB, Champion and Hotray. But as the misleading, deceptive conduct was occasioned by Mr Damien and the contract for sale was between Mr Damien and JKAM, a claim for loss of opportunity to complete the contract for sale is unlikely to be an available measure of damages.

428. Similarly, the claim in the Further Amended Statement of Claim, paragraph [26] may not be sustainable. This pleaded claim suggests that JKAM has suffered loss and damage because of the loss of the security that the JKAM mortgage would have otherwise provided in respect of the Camden property and the Denham Court property. If contrary to what has occurred, JKAM’s claim for misleading and deceptive conduct in relation to the Denham Court property had succeeded, and the other misleading and deceptive conduct relief was not pursued, it may have been possible to rectify the JKAM mortgage to include the Denham Court property.

429. But that is not what the Court has found. To the extent that paragraph [26] alleges that the set off judgment is not secured against the Camden property and the costs ordered against JKAM are not secured against the Camden property, that claim is incorrect. The Court has now found that those securities do exist under the JKAM mortgage. This will have to be clarified by JKAM before the damages hearing commences.

430. Other issues will arise in the damages hearing. In final submissions, JKAM claimed different categories of costs to those claimed in the Further Amended Statement of Claim. These included the following: the range of costs awarded in various proceedings against JKAM; all JKAM’s counsels’ fees and disbursements, solicitors’ fees for the Champion and Hotray proceedings; solicitors’ costs for the NAB proceedings; and solicitors’ costs for the Court of Appeal proceedings. If these costs are all claimed on the JKAM mortgage they must be properly summarised, tabulated and quantified so that any challenges to their recoverability by Mr Damien can be readily identified.

431. Another issue for the damages hearing is the calculation of interest on the judgment debt of $138,000. JKAM claims an entitlement to interest on that unpaid amount from the date it gave vacant possession of the Camden property by the NAB on 22 May 2015. Why interest is calculated from that date has not been made clear. Calculations of interest and the basis for them will need to be provided to Mr Damien’s legal representatives.

432. Finally, some financial issues will have no obvious relevance at a damages hearing so far as the Court can see on the pleadings. JKAM’s final submissions include complaints about JKAM’s expenditure (a) of the unexpected additional sum of $200,000 in electrical installations; and (b) of the costs of resurfacing the carpark area, at the Camden property. This is an example of the parties’ tendencies to travel in submissions beyond the pleaded cases which will have to be reined in on any damages hearing.

Conclusions and Orders

433. For these reasons the Court makes the following declarations orders and directions:

1. Note that for the purpose of these orders (a) the “priorities judgment” is a reference to the judgment of Darke J in Champion Home Sales Pty Ltd v JKAM Investments Pty Ltd [2014] NSWSC 952; and (b) the “set off judgment” is a reference to the judgment of Rein J, Karl Damien vJKAM Investments Pty Ltd [2015] NSWSC 272.

2. Declare that the following are part of the Secured Money as defined in the mortgage made between the plaintiff as mortgagee and the defendant as mortgagor on 21 December 2012, namely (a) the sum of $138,000 found due by the defendant to the plaintiff in the set off judgment, (b) the plaintiff’s own costs of these proceedings, and (c) the plaintiff’s own costs of the proceedings resulting in the priorities judgment and the costs ordered against the plaintiff in the priorities judgment.

3. Direct the parties to agree upon the quantum of costs outstanding under the JKAM mortgage in the proceedings leading to the priorities judgment, as defined in these reasons, or upon an appropriate program for the assessment of those costs and in default of such agreement the parties shall relist this matter for further directions for these costs to be ascertained, including if necessary through the inquiry as to damages.

4. Direct the plaintiff to provide to the defendant a full list or summary of the plaintiff’s costs of these proceedings, together with all memoranda of fees and other primary accounting materials reasonably required by the defendant to establish the incurring of the plaintiff’s costs and disbursements, with a view to the plaintiff’s costs of these proceedings being agreed or referred for costs assessment on the indemnity basis.

5. Direct the plaintiff to provide its calculations of interest due under the mortgage between the plaintiff and the defendant dated 21 December 2012, ensuring in such calculation that interest already claimed pursuant to the Court’s judgment in Karl Damien v JKAM Investments Pty Ltd [2015] NSWSC 272 is not double counted.

6. Direct that JKAM provide to the defendant particulars of any further costs or expenses the plaintiff claims have not been dealt with in these reasons and which may need to be the subject of an inquiry as to damages, upon which issue the Court will reserve for further consideration.

7. Dismiss the plaintiff’s claim for breach of the covenant for quiet enjoyment, clause 9.1 of the lease between the plaintiff and the defendant dated 1 September 2012.

8. Dismiss the plaintiff’s claim for breach of clause 6.15 of the unregistered mortgage made between the plaintiff and the defendant on 21 December 2012.

9. Direct the parties to bring in short minutes of order providing for the procedural directions for a hearing as to damages in relation to the plaintiff’s successful claims for misleading and deceptive conduct and on the JKAM mortgage and in relation to any other matters which the parties submit still require determination.

10. To the extent that these orders do not cover all the orders the parties seek as a result of the Court’s reasons, further consideration is reserved and the parties are at liberty to bring in short minutes of order to give further effect to these reasons.

11. Direct the defendant/cross-claimant to file a Notice of Discontinuance of the Amended Statement of Cross-Claim filed 16 October 2017.

12. Adjourn these proceedings for further directions on 17 March 2021 in preparation for a hearing as to damages.

13. Grant liberty to apply.

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Amendments

23 February 2021 - [24] – line 7, "executed" not "execution"

Heading above [84] - capitalisation fixed

[107] - lines 1 and 4, Elderslie not Ellerslie

[277] – line 1, spelling correction

Heading above [291] – removal of full stop

[340] – line 3, "supply" not "supploy"

[388] – line 5, mortgage decapitalised

[400] - line 1, "fail" moved to line 4

[403] - line 8, insertion of "the"

[418] – line 5, apostrophe removed

[426] – line 5, comma removed

Order (1) – "reference" not "refence"

Decision last updated: 23 February 2021