King Network Group Pty Ltd v Club of the Clubs Pty Ltd
[2008] NSWCA 344
•10 December 2008
NEW SOUTH WALES COURT OF APPEAL
CITATION:
King Network Group Pty Limited v Club of the Clubs Pty Limited [2008] NSWCA 344
FILE NUMBER(S):
40482/07
HEARING DATE(S):
31 March, 1 and 2 April 2008
JUDGMENT DATE:
10 December 2008
PARTIES:
King Network Group Pty Limited (First Appellant)
Harry Stamoulis (Second Appellant)
King Development Group Pty Limited (Third Appellant)
Harry Stamoulis and Helen Stamoulis as representatives of the Estate of Spiros Stamoulis deceased (Fourth Appellant)
Club of the Clubs Pty Limited (First Respondent)
IMF (Australia) Limited (Second Repondent)
JUDGMENT OF:
Hodgson JA Campbell JA Young CJ in Eq
LOWER COURT JURISDICTION:
Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):
SC 50131/04
LOWER COURT JUDICIAL OFFICER:
Bergin J
LOWER COURT DATE OF DECISION:
9 November 2006; 11 July 2007
LOWER COURT MEDIUM NEUTRAL CITATION:
Club of the Clubs Pty Limited v King Network Group Pty Limited [2006] NSWSC 1138
Club of the Clubs Pty Limited v King Network Group Pty Limited (No 2) [2007] NSWSC 574
COUNSEL:
I M Jackman SC and I G Waller SC (A)
B A Coles QC and H Stowe (R)
SOLICITORS:
Clayton Utz (A)
Ebsworth & Ebsworth (R)
CATCHWORDS:
CONTRACTS [120]- Parties enter into joint venture for the purchase and development of land- Joint venture agreement provides that the management of the project will be conducted by the Steering Committee except for certain matters, inter alia, any amendment to the joint venture agreement, that are to be determined by the joint venturers personally (clauses 13.2 and 13.3)- An "Overriding Supplementary Joint Venture Agreement" (OSJVA) was procured by the appellants' interests being the majority of the joint venture company that has the effect of expropriating shares of the respondents failing the provision of certain irrevocable bank guarantees by a certain time- Whether trial judge erred in finding that the OSJVA was not within the amending power of the joint venture agreement- Held that clauses 13.2 and 13.3 ought to be construed widely and commercially so as to encapsulate alterations to the joint venture agreement.
EQUITY [247]- Fraud on the power- Whether the trial judge erred in finding that the OSJVA was invalidated under the doctrine of "fraud and power"- Discussions on whether principles in Gambotto v WCP Limited applicable- Traditional fraud on the power not made out as the first appellant was the only joint venturer able and willing to provide guarantees and that the development of the project was no longer feasible- Held that the OSJVA should not be set aside.
LEGISLATION CITED:
Corporations Act 2001 (Cth), s 198A
CATEGORY:
Principal judgment
CASES CITED:
Arakella Pty Ltd v Paton [2004] NSWSC 13; (2004) 60 NSWLR 334
Barlow Clowes International Limited v Eurotrust International Limited [2005] UKPC 37; [2006] 1 WLR 1476
Barnes v Addy (1874) LR 9 Ch App 244
Briginshaw v Briginshaw (1938) 60 CLR 336
British Equitable Assurance Co Ltd v Baily [1906] AC 35
Cachia v Westpac Financial Services Limited [2000] FCA 161; (2000) 170 ALR 65
Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178
Citco Banking Corp v Pusser's Ltd [2007] 2 BCLC 483
Coal Cliff Collieries Pty Ltd v Sijehama (1991) 24 NSWLR 1
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
Farah Constructions Pty Ltd v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89
Gambotto v WCP Limited (1995) 182 CLR 432
General Assembly of the Free Church of Scotland v Lord Overtoun [1904] AC 515
Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89
Houghton v Immer (No 155) Pty Limited (1997) 44 NSWLR 46
Kearns v Hill (1990) 21 NSWLR 107
Little v Courage Ltd (1994) 70 P & CR 469
Permanent Trustee Co Ltd v National Australia Managers Ltd (M McLelland CJ in Eq, 8 August 1994, unreported)
Peters' American Delicacy Co Limited v Heath (1939) 61 CLR 457
Porter v Gullivers Travel Group Ltd [2007] NZCA 345; 13 BCB 15
UDC Limited v Brian Pty Limited (1985) 157 CLR 1
Walford v Miles [1992] 2 AC 128
Warman International Limited v Dwyer (1995) 182 CLR 544
Wellington City Council v Body Corporate 51702 (Wellington) [2002] 3 NZLR 486
TEXTS CITED:
DECISION:
1. Appeal allowed in part.
2. Order (1) below varied by substituting for the words "each of KNG, Harry Stamoulis and Spiros Stamoulis jointly and severally" the word "KNG".
3. Set aside orders (3), (4) and (5) below.
4. Order that payment by KNG to KCOTC of the amount ordered by order (2) below to be paid by COTC to KCOTC to be pro tanto satisfaction of order (1) below, as varied.
5. Cross-appeal dismissed.
6. As regards the costs below and costs of the appeal and restitutionary orders, written submissions are to be provided as follows: submissions from the respondents within seven days, submissions in response from the appellants within a further seven days, and submissions strictly in reply within a further seven days.
JUDGMENT:
IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
40482/07
HODGSON JA
CAMPBELL JA
YOUNG CJ in EQWednesday 10 December 2008
KING NETWORK GROUP PTY LTD v CLUB OF THE CLUBS PTY LTD
Judgment
HODGSON JA: On 12 July 2007, pursuant to reasons given on 9 November 2006 and 11 July 2007, Bergin J made the following orders in proceedings in which the first respondent (COTC) and the second respondent (IMF) had sued the first appellant (KNG), the second appellant (Harry), the third appellant (KDG) and the late Spiros Stamoulis (Spiros) the representatives of whose estate are now the fourth appellant, alleging breaches of fiduciary duties and other causes of action, and in which KNG had put on a cross-claim against COTC:
1.Judgment for COTC against each of KNG, Harry Stamoulis and Spiros Stamoulis jointly and severally in the sum of $631,123.91 plus interest at Court rates from 25 June 2002 to 12 July 2007 (both days inclusive), in the amount of $289,841.44.
2.COTC is to pay KCOTC the amount of $49,323.04 plus interest at Court rates from 16 August 2001 to 12 July 2007 (both days inclusive) in the amount of $26,797.27. And KNG is to pay KCOTC the sum of $230,174.17 plus Interest at Court rates from 16 August 2001 to 12 July 2007 (both days inclusive) in the amount of $125,053.92.
3.Judgment for COTC against KDG in the sum of $2,146,637.22 plus interest at Court rates from 11 November 2003 to 12 July 2007 (both days inclusive) in the amount of $720,093.74.
4.The Court notes in respect of orders 1 and 3 that the plaintiff is not entitled to recover any amount in excess of the amount payable pursuant to order 3.
5.The Defendants are to pay the Plaintiff’s costs of the Proceedings.
6.The above judgment and orders are stayed for 28 days from the date of these orders.
The appellants (all of whom are associated with the Stamoulis family) have appealed from those orders, seeking orders that the proceedings against them be dismissed. The respondents have put on a cross-appeal, seeking the following orders:
1.Paragraph 1 of the orders of Justice Bergin on 12 July 2007 be varied by deleting the figures "$631,123.91" and "$289,841.44" and substituting for them (respectively):
(a) the figures "$3,108,652.30" (being 15% of [$14,310,914.80 + $2,4313,435 + $4,000,000]) and "$1,429,128.37"; or in the alternative
(b) some other figures which the Court deems fit.
2.Paragraph 3 of the orders of Justice Bergin on 12 July 2007 be varied by deleting the figures "$2,146,637.22" and $720,093.74" and substituting for them (respectively):
(a) the figure "$14,310,914.80" and "$4,800,625.78" or in the alternative
(b) some other figures which the Court deems fit.
3.Further order that there be judgment for IMF (Australia) Ltd against each of Harry Stamoulis, Spiros Stamoulis and KDG jointly and severally in the sum of $14,310,914 plus interest at Court rates from 23 April 2001.
4.Orders of Justice Bergin on 12 July 2007 be otherwise affirmed.
5.Appellants to pay the respondents' costs of the appeal.
The circumstances giving rise to the proceedings are set out in some detail in the judgment of Young CJ in Eq, and in my recounting of the facts and issues I will focus on what I consider to be most significant.
Outline of circumstances
The proceedings arose out of a joint venture for the purchase and development of certain land in the Cudgen Lake area of Kingscliff in the far north of New South Wales. The original parties to the joint venture were COTC (a company controlled by Mr Dalglish), Jandawn Pty Limited (Jandawn, a company controlled by Mr Shannon), Arts Investments Pty Limited (Arts, a company controlled by Mr Mancuso) and AWD Springwater Pty Limited (AWD, a Stamoulis company which was later replaced in the joint venture by KNG). The corporate vehicle for this venture was a company KingsHeath Club of the Clubs Pty Limited (KCOTC). IMF is a litigation funder which took an assignment of certain of KCOTC’s rights.
On 22 June 1999, COTC and Jandawn signed heads of agreement with Lenen Pty Limited (Lenen) which provided for an option for the sale by Lenen of the subject land for $22.5 million.
On 4 August 1999, a joint venture agreement was executed, providing for a venture in which the shares were to be 25 per cent each for COTC and Jandawn, 37½ per cent for AWD and 12½ per cent for Arts. The shares of COTC and Jandawn were said to be granted in consideration of the provision of an option for the purchase of the land and COTC’s contribution of “Intellectual Property Rights” (broadly, the idea for the development, know-how and the name “Club of The Clubs”) and money expended to acquire these things. The shares of AWD and Arts were said to be granted in return for specific financial contributions: from AWD, payment of $500,000 and provision of a standby letter of credit of $2 million, and from Arts a financial guarantee of $4 million.
The “management and overseeing” of the joint venture Project was to be conducted by the “Joint Venture”, and decisions of a “Steering Committee” were, subject to clause 13 of the agreement, to bind each of them. The Steering Committee consisted of five persons, one nominated by each venturer and one nominated by KPMG Corporate Finance Australia Pty Limited (KPMG) (which had and would be providing accounting services to the venture), and resolutions of the Steering Committee were to be carried by majority. Clauses 13.2 and 13.3 of the agreement provided as follows:
13.2 Powers of Participant Meetings
The Participants agree that the management and control of the Project and the Joint Venture will vest with the Steering Committee, save for the following matters, in respect of which a determination by a meeting of all Participants under this clause will be final and binding:
(a)any proposals regarding the raising of additional equity or capital for the purposes of the Project or the Joint Venture;
(b)any decision regarding the acquisition of the Additional Land;
(c)any proposals regarding the raising of any funding for the purposes of the Project (including the acquisition of the Additional Land) which require the provision of any form of security or encumbrance over any Joint Venture assets;
(d)any decision, resolution or action relating to the undertakings or guarantees given pursuant to paragraph 3.1(b), including any calls, any reduction of the amount of the undertaking or guarantee or the release of parties from those undertakings or guarantees as the case may be;
(e)approval of the prospectus to be issued by the .' Company;
(f)determination of the timing of the sale of, and approval of the selling campaigns for, each of the stages of the Project;
(g)any amendment to this Agreement;
(h)the admission of a new Participant to the Joint Venture;
(i)the sale or disposal of the Joint Venture's entire interest in the Project, prior to the completion of that Project; and
(j)the termination of the Project or this Agreement.
13.3 Resolutions at Participants' Meetings
All matters and resolutions put before a meeting of Participants will be deemed to have been approved or passed by the Participants if Participants representing more than fifty per cent (50%) of the total interests in the Joint Venture present and voting at that meeting, vote in favour of it. Notwithstanding the previous sentence, a resolution in relation to the matters listed in clause 13.2 will be deemed to have been passed only if Participants representing more than seventy-five per cent (75%) of the total interests in the Joint Venture (whether or not present) vote in favour of it.
The agreement also contained provisions as to default, which included a procedure by which other joint venturers could (after the obtaining of a valuation and certain lapses of time) acquire the interest of the defaulter.
On 18 August 1999, the joint venturers signed two agreements, one with Lenen and one with a company apparently associated with it, namely Richtech Pty Limited (Richtech).
One of those agreements was a put and call option, whereby subject to certain conditions, the joint venturers could exercise options to purchase the subject land from Lenen in two stages (the “Option A” land for $8 million, and the “Option B” land for $12 million), and Lenen could exercise options to require the joint venture to buy those parcels of land in the same stages at the same price. This agreement contained a condition that the joint venturers within seven days provide an irrevocable bank guarantee or letter of credit for $4 million.
The other agreement signed on that day was an agreement with Richtech for certain works to be done in relation to the land for $2.5 million.
On 24 August 1999, KCOTC was incorporated, with shareholdings proportional to the shares in the joint venture.
Arts did not provide the $4 million guarantee required by the joint venture agreement, and the $4 million guarantee required by the put and call option was not provided within the seven day period or for some months thereafter. Extensions of time were granted. Eventually, by 10 December 1999 KNG paid $2 million to Lenen on a basis that was later set out in an agreement between the joint venturers signed on 10 February 2000 (apparently having also been previously signed on 17 January 2000).
The 10 February 2000 agreement amended the joint venture agreement by providing for payment by KNG of $2 million to Lenen subject to the right of the joint venture to substitute for it a guarantee of $4 million, in which event the $2 million was to be returned to be applied to fund the joint venture Project. By this amendment, KNG was also to pay a further $250,000 to fund the Project.
In consideration of these payments, the shares in the joint venture were adjusted to 52.5 per cent for KNG, 15 per cent for COTC, 12.5 per cent for Jandawn, 10 per cent for Arts and 10 per cent for KPMG. This agreement made further provision in the event that the $4 million bank guarantee was not provided by an incoming joint venturer, namely that the shareholding be further adjusted to 75 per cent for KNG, 12.5 per cent for KCOTC, 7.5 per cent for Jandawn and 5 per cent for Arts, and that KNG could elect to proceed in one of three ways. The third way, which was available only if there was failure to achieve by 1 August 2000 committed pre-sales of trust units in the joint venture Project equivalent to 40 per cent of construction costs, was “to complete the Purchase Contract (PC) as a Real Estate Transaction only”.
On 27 May 2000, the Steering Committee unanimously adopted further amendments to the joint venture agreement. These amendments included that COTC was to have a 15 per cent share in the venture (and also to be paid start-up and out-of-pocket expenses of $317,500), KNG was to have 70 per cent, Jandawn to have 7.5 per cent and Arts to have 7.5 per cent; and that each was to be responsible for a proportionate share of the debt. Another provision of this amendment was that “It is the responsibility of each JV partner to meet their % share of all further funding requirements by utilising the resources at their disposal.” This amendment also provided that, in the event of sale of the land due to circumstances set out in the 10 February 2000 agreement, the proportions in the venture were to be 80 per cent for KNG, 15 per cent for COTC, 2.5 per cent for Jandawn and 2.5 per cent for Arts. These amendments were signed on behalf of all the joint venturers.
On 15 June 2000, one call option (option A) was exercised, resulting in a contract for the purchase by the joint venturers from Lenen of the Option A land for $8 million. A Stamoulis company associated with KNG provided to Lenen a bank guarantee for $4 million (so that the $2 million previously paid was released for the purposes of the joint venture). The contract required $4 million to be paid by 1 September 2000.
By 1 August 2000, there had been no committed pre-sales of trust units in the proposed development.
On 25 August 2000, Lenen granted a variation of the requirement of payment of $4 million by 1 September, substituting a requirement for a bank guarantee for $10.7 million by 29 September 2000.
On 6 September 2000, the put and call option with Lenen was amended to include an obligation on the joint venture to lodge with Lenen on or before 1 April 2001 an unconditional bank guarantee for $12 million, the price for the Option B land.
On 18 September 2000, KNG sent a letter to the other venturers electing pursuant to clause 5 of the supplementary agreement (that is, the agreement of 10 February 2000) to proceed to complete the project as a real estate transaction only.
On 29 September 2000, there was a meeting of the joint venturers apart from COTC, and a document entitled “Overriding Supplementary Joint Venture Agreement” (OSJVA) was executed by them. This document noted that the joint venturers were required, under the current variation of their agreement with Lenen, to provide irrevocable bank guarantees for $10.7 million on or before 29 September 2000 and for another $12 million on or before 1 April 2001, and specified certain conditions on which the joint venture agreement could proceed, failing which KNG was given an irrevocable right to deal with the subject land and to have the other joint venturers transfer their interest in the joint venture at the direction of KNG, in which event KNG indemnified the other joint venturers in respect of payments to be made to Lenen and Richtech (as well as not continuing with the “Club of the Clubs” idea that had originated from COTC).
On 6 October 2000, KNG procured a bank guarantee for $10.7 million in favour of Lenen, and this was accepted by Lenen although it was some days late.
On 12 October 2000 there was a meeting of all the joint venturers. A vote was taken on the OSJVA. Three of the joint venturers voted for it, and COTC voted against it: it was noted that this meant that, in terms of interests in the joint venture, 85 per cent were for the OSJVA and 15 per cent against. Mr Dalglish expressed the view that the OSJVA was without validity or legality.
On 21 February 2001, Lenen signed a put and call option between it and KCOTC for the purchase and sale of the subject land for $20.2 million; and it subsequently terminated the put and call option with the joint venturers. KCOTC subsequently nominated KNG as the purchaser of the land.
On 23 January 2002, KNG granted to a new syndicate (which included Spiros’ company KDG) an option to purchase the land for $25 million. That option was exercised, and that syndicate subsequently completed a venture that yielded a profit for KDG of $14,310,914.80.
Findings of primary judge
The primary judge found:
(1)The OSJVA was not within the amending power in the joint venture agreement.
(2)Even if it had been with that power, it was invalidated under the doctrine of “fraud on the power”.
(3)KNG breached its fiduciary duty to COTC and breached its contract with COTC, and also breached a fiduciary to KCOTC, in subsequent dealings, by selling the land at an under-value and preferring the interests of KDG to that of the joint venture and in particular COTC; but the liability to KCOTC was nominal only.
(4)The value of the subject land at the relevant time was $30,135,000.
(5)KNG was liable to COTC for 15 per cent of KNG’s profit (this profit being $2,413,435) plus a further sum in respect of the under-value, giving a total of $631,123.91.
(6)Harry and Spiros were liable to COTC in the same amount, as accessories to the breach of fiduciary duty.
(7)Harry, Spiros and KDG were also liable for inducing the breach of contract by KNG, involving no separate damages.
(8)KDG was liable as an accessory to the breach of fiduciary duty to account for its profit, giving rise to a liability to COTC for 15 per cent of $14,310,914.80, being $2,146,637.22.
(9)KNG and COTC were liable to pay certain amounts due to KCOTC.
Issues on appeal
The appeal as argued raised the following issues:
(1)Was the OSJVA within the amending power?
(2)Even if it was, was the OSJVA nevertheless invalid? This involved certain sub-issues, notably whether the principles in Gambotto v WCP Limited (1995) 182 CLR 432 apply; what was the true contractual position between the parties immediately prior to the purported adoption of the OSJVA; and in all the circumstances, whether there was a fraud on the power.
(3)Was there a breach of fiduciary duty and/or contract by KNG to COTC and/or to KCOTC? Further, if there was a breach of fiduciary duty to KCOTC, should it be treated as merely nominal?
(4)What was the value of the land at the relevant time?
(5)Was KNG liable for the amount awarded by the primary judge, or for some larger amount?
(6)Were Harry, Spiros and KDG liable as accessories?
(7)Were Harry, Spiros and KDG liable for inducing breach of contract?
(8)Is KDG liable in respect of its profit, and if so how much?
(9)What, if any, order should be made in respect of KNG’s liability to KCOTC?
Amending power
I agree with Young CJ in Eq that the adoption of the OSJVA was, subject to the doctrine of fraud on the power, within the powers dealt with in clauses 13.2 and 13.3 of the joint venture agreement; and I agree substantially with his reasons. In addition, I think this view is confirmed because, contrary to the view of Young CJ in Eq, in my opinion the principles stated in Gambotto do apply, taking away possible grounds for a narrow construction of the powers in clauses 13.2 and 13.3.
In particular, in my opinion, clauses 13.2 and 13.3 were intended to deal with every situation that might arise during the joint venture project, with those matters involving the most radical alterations to the joint venture arrangement requiring the support of 75 per cent of the total interests. On that basis, in my opinion the OSJVA clearly fell within the words “any amendment to this Agreement”. I do not think this is altered by the circumstance that there had been previous amendments to the joint venture agreement. In my opinion also, the existence of default provisions concerning the acquisition of interests of defaulters does not justify a narrower construction of the words, particularly where circumstances could arise requiring much quicker action than permitted under those provisions and where the power to amend is subject to the doctrine of “fraud on the power” including Gambotto principles.
Fraud on the power
The primary judge was of the view that the principles stated in Gambotto were principles of company law, referring to what Hely J said in Cachia v Westpac Financial Services Limited [2000] FCA 161; 170 ALR 65 at [85]-[88].
While not questioning Hely J’s view that the Gambotto principles did not apply to a unit trust, I think the better view is that Gambotto was applying the general doctrine of “fraud on the power” in the context of a situation where a majority can exercise a power to affect the property rights of a minority: Peters’ American Delicacy Co Limited v Heath (1939) 61 CLR 457 at 506; Gambotto at 444; Houghton v Immer (No 155) Pty Limited (1997) 44 NSWLR 46 at 53; Arakella v Paton [2004] NSWSC 13; 60 NSWLR 334 at [127].
Gambotto states principles to be applied where a majority of shareholders amend articles of association of a company so as to permit expropriation of shares of a minority. Shareholders do not owe any fiduciary duties to each other, whereas joint venturers who are substantially in the position of partners do: UDC Limited v Brian Pty Limited (1985) 157 CLR 1. In those circumstances, I do not think any lower requirements should be imposed where a majority of joint venture partners amend the joint venture so as to permit expropriation of the shares of a minority in the joint venture. Accordingly, such an amendment must be for a proper purpose and must not be oppressive: that is, generally, it must be to secure the joint venture from significant detriment, and must be fair, both procedurally and substantively.
In order to apply these principles, it is appropriate to consider the contractual position prior to the amendment. It was contended for the respondents that it was not open to KNG to bring about such an amendment, because it had already elected to carry the venture through as a real estate transaction only, and because this election bound KNG to meet all the obligations necessary to achieve this (so that KNG’s undertaking in the OSJVA to meet obligations and to indemnify other joint venturers was doing no more than it was already bound to do). In my opinion, the fact of the previous election to carry through the transaction as a real estate transaction only would not preclude the exercise of a power to amend the joint venture agreement. There is force in the contention that the election by KNG that it would complete the purchase contract as a real estate transaction only meant that it alone would do whatever was necessary to so complete the matter; but in my opinion, the better view is that this would not displace the express provision in the 27 May 2000 amendment that each joint partner should meet their percentage share of further funding requirements.
There is some merit in the view that the OSJVA was justified as being to secure the joint venture from significant detriment and was fair. COTC’s previous major contribution, the idea of a “Club of the Clubs” had wholly failed; none of the other joint venturers had met their share of funding requirements or were proposing to do so; KNG was already exposed to the extent of about $6.5 million, and unless it immediately risked a further $10.7 million the joint venture would fail with probable substantial losses for all; and KNG was reluctant and possibly unwilling to provide this additional sum for the benefit of the joint venture partners who were unable or unwilling to meet their commitments. If this further commitment of $10.7 million was not provided, the shares of the joint venture partners could be regarded as having substantial negative value.
However, I think the better view is that the OSJVA was not justified, according to Gambotto principles. As things stood, KNG had total control, and a 70 per cent (or perhaps 80 per cent) interest in the venture, and had an entitlement to a 30 per cent (or perhaps 20 per cent) contribution to any loss that might be made; so that the expropriation of the interests of the minority would leave KNG better off only if a profit was made and thus if the shares of the minority did have positive value. In those circumstances, willingness to risk the further $10.7 million if, and only if, the minority lost their interests in the project was not in my opinion entirely reasonable. Furthermore, it appears that not only would the other joint venturers get nothing for their interests in the joint venture, but they were left with some liability in respect of past expenses.
For those reasons, in my opinion, the requirements of Gambotto to justify expropriation of the interests of a minority were not satisfied. Subsequent willingness, on terms not clearly defined, of KNG to allow participation of the other joint venturers, could not affect the validity of the OSJVA; and in my opinion would not do away with the fiduciary and contractual obligations owed to them.
Breaches by KNG
In my opinion, the sale of the land to the new syndicate for $25 million was a breach by KNG of its fiduciary duty owed to the joint venture (or at least, in circumstances where there may have been waiver by Jandawn and Arts, to COTC) and also a breach of contract. This was because the sale was effected at an under-value, without KNG taking reasonable steps to obtain a proper value; and, so far as the breach of fiduciary duty is concerned, also because KNG favoured the interests of Spiros’ company KDG in accepting the sale price.
The primary judge found also a breach of fiduciary duty to KCOTC, in circumstances where KCOTC obtained a put and call option to purchase the land for $20.2 million. However, the primary judge found this breach to be of nominal concern only, because KCOTC did not have a beneficial interest in that transaction but was merely used as a means to carry through the transaction in favour of KNG.
It was submitted on the cross-appeal for the respondents that the correct inference was that KCOTC had a beneficial as well as a legal interest in this put and call option, in circumstances where KNG regarded itself as entitled to the full shareholding in KCOTC by reason of the OSJVA.
In my opinion, the primary judge’s view that this aspect of the transaction did not give rise to any substantial interest in KCOTC was correct. There is nothing to suggest an intention on the part of KNG to lend money to KCOTC to finance it in a purchase of the land; and the primary judge’s view that the use of KCOTC was merely a device to carry through the transaction in favour of KNG was the correct one.
Value
The appellants challenged the primary judge’s view as to the true value of the land and the date at which the value was to be assessed. In my opinion, for reasons given by Young CJ in Eq, no error is shown in the conclusion reached on this matter by the primary judge.
Increased liability of KNG
In their cross-appeal, the respondents submitted that the primary judge’s calculation of the profit made by KNG was $4 million too low, because the primary judge treated the provision of the $4 million guarantee by KNG and the provision of $4 million pursuant to that guarantee, as an expense by KNG; whereas she should have treated it as the price paid by KNG for increasing its share in the joint venture.
It seems that this was ultimately not pressed, but in any event, in my opinion, the primary judge was correct to treat the price of KNG’s increased share in the venture as being the provision of a guarantee, not the payment of $4 million pursuant to that guarantee. Accordingly, she was not in error in this respect.
I note that in other respects, the figure of $631,123.91 was an agreed figure, and thus not properly subject to challenge on this appeal.
Accessorial liability
It does not appear that any case for accessorial liability against Harry was put on the basis that he was the alter ego of KNG. Rather, it was claimed against each of Harry, Spiros and KDG that they were liable on the basis of the second limb in Barnes v Addy (1874) LR 9 Ch App 244 at 251-2, requiring that “they [assisted] with knowledge in a dishonest and fraudulent design on the part of” KNG.
The primary judge very carefully considered Harry’s knowledge and beliefs. She did not accept that Harry believed what KNG was doing was in accordance with its duty to COTC (Judgment [277]). She was satisfied he “knew there were difficulties with the September resolution” (Judgment [278]). She concluded:
[283] Stamoulis was at the meeting of 12 October 2000 in which Dalglish said in no uncertain terms that the OSJVA was not valid or legal and that the meeting of 25 September 2000 was an “illegal” meeting. I do not accept Stamoulis’ evidence that “at no stage” did he think that COTC/Dalglish regarded itself as not bound by the OSJVA.
[284] The whole of the evidence extracted above may be read as a fairly robust approach to KNG’s perceived rights but I have no doubt that Stamoulis was very concerned at the time of these events that KNG was not acting in accordance with its fiduciary duty to COTC. His secrecy or furtiveness about the KCOTC Put and Call Option, his disingenuous performance at the 15 March 2001 meeting and his claims in his letter of 28 March 2001 evidence his mindset at that time. Additionally his statement to Mr Ray on 25 January 2001, referred to later, that he wanted to wait until the “contractual situation” was resolved is a clear indication that he was aware that a “situation” existed and that it needed resolution. I have no doubt that the “situation” that he was referring to when he spoke to Mr Ray was the fact that COTC did not consent to the OSJVA and did not consent to KNG pursuing the OSJVA Land Play and that he knew that COTC did not regard itself as bound by the OSJVA. The payment of $1.5 million plus GST to Arts/Mancuso is also evidence that Stamoulis knew that KNG owed a duty to share the gains from the Land Play with the other participants.
[285] I am satisfied that Stamoulis knew at the time the Land was sold that KNG was in breach of its fiduciary duty to COTC. He knew that KNG was accepting less than the asking price for the Land specifically to facilitate his father’s entrée to the Macquarie Joint Venture. He caused KNG to compromise its fiduciary duty to COTC.
In Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89 (decided after the primary judge’s decision in this case), the High Court of Australia has stated at [163] that Australian courts should continue to apply the formulation of the second limb of Barnes v Addy, requiring that there be both a dishonest and fraudulent design of the trustee or fiduciary, and knowledge of this dishonest and fraudulent design by the third party. The High Court of Australia also made it clear (at [179]) that while “dishonest and fraudulent design can include both breach of trust and breach of fiduciary duty, any breach of trust or breach of fiduciary duty relied on must be dishonest and fraudulent”.
The primary judge did not address the question of whether there was a dishonest and fraudulent design of KNG, or of Harry its principal. The finding that Harry “knew” that KNG was in breach of its fiduciary duty to COTC does necessarily imply a finding that KNG itself “knew” (in the same sense) it was in breach of its fiduciary duty; but not necessarily a finding that KNG was carrying out “a dishonest and fraudulent design” or that Harry knew this.
It seems clear that a person may have acted dishonestly, judged by the standards of ordinary decent people, without appreciating that the act in question was dishonest by those standards: Farah at [173]. However, it appears necessary that the person must at least have such knowledge of the transaction as to render his or her participation contrary to normally acceptable standards of honest conduct: Barlow Clowes International Limited v Eurotrust International Limited [2005] UKPC 37; [2006] 1 WLR 1476 at [15].
Even if one accepts that the words “and fraudulent” do not add anything substantial to the requirement that the fiduciary’s design be dishonest, there is, in my opinion, a real question here whether what KNG (and Harry) did was “dishonest”.
The purported adoption of the OSJVA was done openly; and although I have found it to be invalid, it cannot be considered obvious that it was invalid. As I noted in considering the question of fraud on the power, there were respectable arguments supporting its validity. KNG consulted solicitors, Mallesons, and received advice at the risk of successful action by one or more of the joint venturers was “relatively small” (although, as the primary judge commented, Mallesons were not given some relevant material, and did not notice that Mr Dalglish had asserted that the OSJVA was invalid and illegal, and that Harry “must have known” this).
In reaching her conclusion that Harry knew KNG was in breach of fiduciary duty, the primary judge relied on the secrecy or furtiveness of dealings following the OSJVA, such as arranging the put and call option with KCOTC, and on payment of $1.5 million plus GST to Arts. The latter matter was the subject of particular findings by the primary judge that an invoice dated 22 February 2004 for this amount was a device to facilitate payment by KNG to Arts of a share of $1.5 million plus GST in the gains of the real estate transaction, and that Harry’s denial of involvement in this was unbelievable.
However, as indicated above, although the primary judge did state that, at the time the land was sold, Harry “knew” KNG was in breach of its fiduciary duty to COTC, she did not find in terms that Harry knew the OSJVA was invalid; but merely that he knew there were difficulties with the September adoption of it, that he knew COTC did not regard itself as bound by it, and that he was concerned that KNG was not acting in accordance with its fiduciary duty to COTC. And the primary judge did not in terms find KNG’s conduct either dishonest or fraudulent. If her assertion that Harry “knew” KNG was in breach of its fiduciary duty was intended to include a finding that Harry knew the OSJVA was invalid and/or was acting dishonestly, in my opinion the primary judge would have needed to address these questions directly, which she did not do. I think the preferable view is that the primary judge’s assertion that Harry “knew” KNG was in breach of fiduciary duty is correctly understood as asserting knowledge in one of the attenuated senses sufficient for the second limb of Barnes v Addy.
In the absence of a specific finding that Harry knew the OSJVA was invalid and/or was acting dishonestly, and in particular where dishonest and fraudulent conduct was not even alleged in COTC’S pleading, in my opinion it is open to this Court to reach its own view on these matters. I think it is clear that Harry knew there was a real question as to whether the OSJVA was valid; but in circumstances where in my opinion reasonable minds could differ on the issue of its validity, I would not myself conclude that Harry knew it was not valid. And if Harry did not know the OSJVA was invalid, this must mean he did not know that KNG’s conduct in reliance on the OSJVA was in breach of fiduciary duty. Of course, “knowledge” for the purpose of the second limb of Barnes v Addy can fall short of actual knowledge in the ordinary sense of the word; but here I am dealing not with the question of Barnes v Addy “knowledge” but with the question of whether KNG’s conduct was dishonest and fraudulent.
But for questions concerning the Arts invoice, I would not find, to the Briginshaw standard, that KNG’s conduct was dishonest and fraudulent. The OSJVA was adopted openly, and was at least arguably effective to put an end to the fiduciary relationship (although I have reached the contrary conclusion). It was adopted at a time when an immediate further commitment of $10.7 million was required and when the other joint venturers were unable or unwilling to contribute anything. Subsequent “secrecy or furtiveness” would not weigh heavily in my mind, in circumstances where Mr Dalglish was also trying to turn events to his favour. KNG consulted solicitors on the matter. Some ordinary decent people might regard what KNG did as dishonest, but others might not.
The Arts invoice was dated nearly three and half years after the OSJVA, and had not been particularised as a ground for inferring dishonesty. It seems clear that it was Spiros who had the financial resources to support KNG’s participation and was calling the financial shots; and in the circumstances where no allegation had been made concerning the Arts invoice, Spiros did not make a statement for the purpose of giving evidence in the case. By the time of the hearing, when Harry was challenged concerning the Arts invoice, Spiros was very ill, and he has since died. Even accepting that Arts had a 7.5 per cent interest in the project, not a 2.5 per cent interest (as possibly suggested by the 27 May 2000 amendment), $1.5 million to Arts would represent a profit of $20 million on the real estate transaction, which could only have been produced by a sale price of over $42.5 million, far in excess of what was achieved and of the value of the land. Although I do not consider there are sufficient grounds to overturn the primary judge’s view that the invoice was a device to facilitate payment to Arts for a share of the real estate transaction, and that Harry’s denial of involvement in this was unbelievable, I do not think that this is, in all the circumstances, sufficient to justify a finding that what KNG did concerning the OSJVA and the sale of the land was “dishonest and fraudulent”.
For those reasons, I do not think the basis for accessorial liability under the second limb of Barnes v Addy was established.
Inducing breach of contract
In relation to this matter, there is a similar problem. In circumstances where there was doubt about the validity of the OSJVA, but not knowledge that it was invalid, I do not think Harry can be found guilty of inducing breach of contract. In my opinion, the same applies to Spiros and KDG.
KDG profit
The question whether KDG should account for its share in the profit made by the new syndicate which purchased the land from KNG does not arise, in circumstances where I have found no accessorial liability in KDG.
However, I would reserve my opinion as to whether, in any event, KDG would be liable to account for this profit. I note that in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 397, Gibbs J said:
I therefore conclude, on principle, that a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation.
That principle certainly applies where the profit made by the accessory is within the scope of the fiduciary duty owed by the original fiduciary, but I am not certain that it applies in all cases where that profit is entirely outside the scope of that fiduciary duty. The primary judge in this case held that, once KNG had elected for a real estate transaction, either KNG or any other of the joint venturers could have participated in the purchase of the property and further development of it, so long as no breach of fiduciary duty was involved in the sale itself; and in that sense the profit made by KDG was outside the scope of KNG’s fiduciary duty.
I would add that, in my view, the respondents’ cross-appeal seeking that COTC be awarded the whole of KDG’s profit, not merely 15 per cent of it, is without merit. The main case relied on, Warman International Limited v Dwyer (1995) 182 CLR 544, does not support the proposition that one party in a joint venture to which a fiduciary duty is owed can claim for itself, to the exclusion of the other joint venturers, the totality of the profit made by a fiduciary in breach of its fiduciary duty owed to the whole joint venture.
Liability to KCOTC
The only substantial basis I see in the appellants’ challenge to these orders is the suggestion that COTC should be required to do justice by paying its share to KCOTC, as a condition for the requirement that KNG pay what it owes to KCOTC. In my opinion, that contention can be appropriately dealt with by ordering that it will be pro tanto satisfaction of KNG’s liability to COTC under the order for compensation for breach of fiduciary duty for KNG to pay to KCOTC the amount owed to KCOTC by COTC.
CONCLUSION
It follows from my reasons that the cross-appeal must be dismissed, and the appeal must be allowed to the extent of setting aside the judgment against KDG and the judgments against Harry and Spiros. The judgment for COTC against KNG will stand, and likewise the judgments in favour of KCOTC, with the adjustment indicated above. This amounts to substantial success on the appeal for the appellants, and there is no severable issue, which increased the costs of the appeal, on which the appellants failed. A detailed consideration of the validity of the OSJVA was necessary in order to determine whether KNG’s conduct was dishonest and fraudulent. In those circumstances my tentative view is that the respondents should pay the costs of the appeal and cross-appeal.
As regards the trial, my tentative view is that KNG should pay one-half of the plaintiffs’ costs of the proceedings, with no order concerning the costs of the other appellants.
The matter has some complexity, and I would be prepared to receive further submissions as to costs: submissions from the respondents within seven days, submissions in response from the appellants within a further seven days, and submissions strictly in reply within a further seven days. These submissions should also address the matter of appropriate restitutionary orders.
Otherwise, the orders I propose are as follows:
(1)Appeal allowed in part.
(2)Order (1) below varied by substituting for the words “each of KNG, Harry Stamoulis and Spiros Stamoulis jointly and severally” the word “KNG”.
(3)Set aside orders (3), (4) and (5) below.
(4)Order that payment by KNG to KCOTC of the amount ordered by order (2) below to be paid by COTC to KCOTC to be pro tanto satisfaction of order (1) below, as varied.
(5) Cross-appeal dismissed.
(6)As regards the costs below and costs of the appeal and restitutionary orders, written submissions are to be provided as follows: submissions from the respondents within seven days, submissions in response from the appellants within a further seven days, and submissions strictly in reply within a further seven days.
CAMPBELL JA: I have had the benefit of reading the reasons for judgment of Hodgson JA and Young CJ in Eq. In light of those reasons, I need not identify the facts of the case or the issues it raises.
I prefer to withhold agreement from paras [32]-[37] of the reasons of Hodgson JA. A reading of the reasons of the majority in Gambotto does not seem to me to show that the majority saw themselves as applying a general doctrine of fraud on a power. Rather, the reasoning was focused upon the circumstances in which there could be an alteration of the Articles of Association of a company that had the effect of expropriating some of the members. It may be that the outcome of Gambotto could one day be explained in terms of a general doctrine of fraud on a power, but that is not the course taken by either the majority judgment in Gambotto or the detail of the argument in the present case.
Further, I am wary about making a finding in general terms about the conditions that must be met before there can be a valid amendment to a joint venture agreement, entitling one joint venturer to expropriate another.
The joint venture in the present case was in its death throes at the time the OSJVA was entered. The Project, as defined in the original joint venture agreement, had proved unviable, and by far the most significant asset of the joint venture, its rights under the option agreement, was on the point of disappearing. Even so, just as partners owe each other a fiduciary duty until the partnership is not only dissolved but actually wound up (Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178), so joint venturers can owe each other a fiduciary duty until the affairs of the joint venture have been wound up. And similarly, powers contained in a joint venture agreement remain subject to the equitable doctrine of fraud on a power even when the joint venture is clearly unviable and approaching its end.
In accordance with that doctrine, the power of amendment is one that equity would require be used bona fide for the purpose for which it was conferred: General Assembly of the Free Church of Scotland v Lord Overtoun [1904] AC 515 at 695; British Equitable Assurance Co Ltd v Baily [1906] AC 35 at 42. The question of whether a power has been exercised bona fide for the purpose for which it was conferred is not the same as whether it was commercially reasonable to exercise the power. In my view, it was no part of the purpose for which the power of amendment in clause 13.2 was conferred to enable one of the joint venturers, in the dying days of the joint venture, to salvage for itself a significant benefit, such as the benefit of the option, even if that benefit would otherwise have been lost, and even when the salvaging was done in circumstances that incidentally resulted in other joint venturers being relieved of liabilities that would otherwise have fallen upon them. It is for this reason that, in my view, the purported exercise of the power of amendment was ineffective. When the power of amendment was ineffective, the OSJVA did not effectively bring to an end the fiduciary duties that KNG owed to the other joint venturers.
Subject to those remarks, I agree with the reasons of Hodgson JA. I agree with the orders he proposes.
YOUNG CJ in EQ: This is an appeal from Bergin J hearing a matter in the Commercial List of the Equity Division of this Court between former joint venture partners.
The first respondent, Club of the Clubs Pty Ltd (COTC) is a company controlled by a Mr Dalglish.
Mr Dalglish appears to have hit upon the idea that the NSW clubs could be convinced that they could together be involved with a holiday resort in a pleasant part of NSW. He considered that that idea was “intellectual property” which could be matched with cash to provide a viable project.
The first appellant, King Network Group Pty Ltd (KNG) is a company controlled by Harry Stamoulis.
The second appellant, Harry Stamoulis is the son of Spiros Stamoulis, now deceased, an experienced property developer.
The third appellant, King Development Group Pty Ltd (KDG) is a company of which both Spiros and Harry Stamoulis were at one time directors.
The fourth appellant is the estate of Spiros Stamoulis, represented by Harry and Helen Stamoulis.
The essential dispute is that the respondents say that, as joint venturers, in a project, the corporate vehicle for which was a company King Club of the Clubs Pty Ltd (KCOTC), they were excluded from profits by breaches of fiduciary duties by the appellants over a development in the Kingscliff/Cabarita/Cudgen areas of far northern NSW where land over which they had rights was sold to South Kingscliff Developments Pty Ltd (SKD). I will refer to it as “Land”.
The second respondent is IMF (Australia) Pty Ltd, a litigation funder which took an assignment of certain of KCOTC’s rights.
Unfortunately, it is difficult to define the ambit of the dispute between the parties until after a rather lengthy excursus into the relevant facts and documentation.
However, the claims made by the now respondents as plaintiffs are summarised in the primary judge’s reasons. I will set them out in the succeeding paragraphs.
(1) First, COTC claims that KNG breached its fiduciary duty to it by selling the Land to SKD. It is claimed that there was a conflict between KNG’s duty to the participants in the joint venture and KNG’s private interests arising from the participation of “a Stamoulis company” in the Macquarie Bank Joint Venture (COTC claim against Stamoulis for breach of fiduciary duty);
(2) Secondly, KCOTC claims that Harry Stamoulis, as a director of KCOTC, breached his fiduciary duty to KCOTC by causing KCOTC to nominate KNG to exercise the put and call option whereby KCOTC transferred a valuable asset, the Land, to KNG for no consideration (KCOTC claim against KNG for breach of fiduciary duty);
(3) COTC claims that KNG has breached its contract with COTC by reason of: (a) its failure to share the profits from the sale of the Land on a pari passu basis; and (b) the sale of the Land to SKD at an undervalue (COTC claim against KNG for breach of contract);
(4) COTC and KCOTC claim that KNG has breached its contract in failing to honour contractual undertakings to indemnify KCOTC in relation to debts incurred (COTC and KCOTC debt claims against KNG); and
(5) COTC makes claims against various parties for assisting KNG and Harry Stamoulis in breaches of fiduciary duties (accessorial claims).
Central to the decision was the primary judge’s consideration of a document called the Overriding Supplementary Joint Venture Agreement (OSJVA).
Her Honour’s basic findings were that the OSJVA was not a valid agreement binding on COTC, that KNG had breached its fiduciary duties to the COTC by selling the joint venture land at an undervalue and that KNG was also liable for other breaches of contract.
After further submissions, the primary judge made orders on 12 July 2007 that the appellants or some of them pay the respondents a sum in excess of two million dollars.
It is of little value to outline the matters argued on appeal until after an understanding of the facts has been achieved.
I thus turn to the facts. Unfortunately, as the arrangements between the parties were adjusted almost from month to month, it is not possible to summarise the facts briefly.
In order to exploit his so-called “intellectual property”, Mr Daglish and a Mr Shannon (who controlled a company, Jandawn Pty Ltd) were searching for a suitable site to be developed as a club of the clubs resort.
Mr Salvatore Mancuso who controlled a company Arts Investments Pty Ltd (Arts) and had access to finance, joined in the venture.
They were made aware of some land at Kingscliff in the Cudgen Lake area in the far north of NSW then owned by a company controlled by the Barclay Brothers through their company, Lenen Pty Ltd (the Cudgen Land).
In June 1999, Heads of Agreement were entered into, the parties being Lenen, COTC, Jandawn, Arts and a company AWD Springwater Pty Ltd (AWD) another Stamoulis company (subsequently replaced by KNG) whereby Lenen granted an option to sell the Cudgen Land for $22.5 million.
Her Honour noted that the parties I have just named entered into a Joint Venture Agreement which relevantly provided as follows:
“RECITALS
A COTC and Jandawn hold an option to acquire the Site at Kingscliff in the State of New South Wales, and certain intellectual property rights relating to the development of that land as a tourism and leisure precinct. COTC and Jandawn wish to form a joint venture to be known as 'KingsHeath Club of the Clubs Syndicated Joint Venture' to undertake and oversee the development of the Site under the auspices of the Project.
B Each of AWD and Arts Investments wish to invest and participate in that joint venture.
C The Participants have agreed that the joint venture will proceed in the form of an unincorporated joint venture, but that they will incorporate a public company to hold any interest in the Site necessary to carry out the Project.
D The Participants in this agreement wish to set out the principal terms and conditions upon which the joint venture will be conducted.
AGREEMENT
1. Interpretation
1.1 Definitions
…
Intellectual Property Rights means:
(a) the know-how in relation to the Project and the marketing and sale of the properties and interests created as a result of the Project; and
(b) the rights to use the name "Club of the Clubs".
Joint Venture means the joint venture established under this Agreement and known as the "KingsHeath Club of the Clubs Syndicated Joint Venture".
Manager means the company appointed by the Steering Committee to fulfil the role of manager of the Project under a management agreement.
Participants means each of COTC, AWD and Arts Investments.
Project means the development of the Site, and the subsequent sale of properties or interests in properties on the Site once the development is completed, in the manner described in the document entitled "Club of the Clubs — Executive Summary and Marketing Concept", a copy of which is annexed as Schedule 2.
…
Property Rights means the rights of COTC under the option referred to in Recital A of this Agreement.
…
Steering Committee means the committee consisting of a representative of each of the Participants, with the powers and functions specified in clause 6.
…
2 Formation and Structure of the Syndicate
2.1 Formation of Joint Venture
The Participants hereby agree to form the Joint Venture for the purpose of carrying out the Project including:
(a) application for development consent for the Project, which incorporates a plan of subdivision that will optimise income and minimize costs to the Joint Venture;
(b) the appointment of the Manager under a management agreement acceptable to the Participants;
(c) negotiation of a development contract which will include a Trust Agreement and Trust Management Agreement with the Company which will be empowered to act as the Single Responsible Entity for the Project;
(d) the compilation and registration of a printed and electronic prospectus for the sale of properties and/or interests in sections of the Site, once the Project is completed;
(e) the organisation of an appropriately trained sales force; and
(f) to oversee the development of the Project and all aspects and requirements necessary in the completion of the Project.
2.2 Structure of Joint Venture
The Participants agree that each of them will be tenants in common holding a share in the undivided assets and interests of the Joint Venture, the size of that share being determined in accordance with clause 2.3.
2.3 Interests in the Joint Venture
(a) The Participants agree that in consideration of:
(i) COTC and Jandawn agreeing to exercise, or deal with, the Property Rights in a manner that procures that the Company will own the Site; and
(ii) COTC agreeing to grant a licence to use its Intellectual Property Rights to the Joint Venture,
and in consideration of moneys expended by COTC and Jandawn to acquire the Property Rights and Intellectual Property Rights, COTC and Jandawn will each be granted a twenty-five per cent (25%) share in the assets and interests of the Joint Venture.
(b) The Participants agree that in consideration of them performing their respective obligations under clause 3.1, each of AWD and Arts Investments will be granted their respective Agreed Shares in the Joint Venture.
(c) The Participants agree that if additional funding is required by the Joint Venture in order to complete the Project, (which may also include any funding required in order to acquire the Additional Land), the nature of the additional funding and their respective obligations with respect to that additional funding will be determined at a meeting of Participants convened under clause 13.
(d) The Participants will procure that the Manager obtains quotations from consultants it proposes to retain for the purposes of the Project, and uses its best endeavours to include a provision in each engagement of such a consultant that, any fees charged by that consultant which are in excess of its quotation will be due only after the Project is completed.
…
3 Obligations of Participants
3.1 Obligations of AWD and Arts Investments
(a) AWD agrees that it will:
(i) deposit in the KPMG Legal Melbourne Trust Account, the sum of five hundred thousand dollars ($500,000), on behalf of Ray William and Maja Dalglish, within three Business Days of the execution of this Agreement, provided that it receives from Ray William and Maja Dalglish a research and development invoice for that sum; and
(ii) subject to Arts Investments complying with its obligations under paragraph 3.1(b), on or before 13 August 1999 (or such later date as is agreed by the Participants), procure or provide a standby letter of credit (or comparable instrument), in favour of, and exercisable by, the Company, upon terms acceptable to the other Participants for the amount of two million dollars ($2,000,000). The Participants agree that they will procure that the Company does not exercise its rights under, or otherwise enforce, such standby letter of credit (orcomparable instrument) for a period of two (2) years commencing on the date of that this Agreement is executed.
(b) Arts Investments agrees that, on or before 13 August 1999 (or such later date as is agreed by the Participants), it will procure a financial guarantee, upon terms acceptable to the other Participants, in favour of, and exercisable by, the Company, for a minimum amount of four million dollars ($4,000,000) and up to such maximum amount as the Participants consider appropriate.
(c) The Participants agree that no distributions of any property, whether in the form of cash or assets, may be made to the Participants by or on behalf of the Joint Venture, until all amounts invested or committed by AWD under paragraph 3.1(a) have been returned or reimbursed to AWD. To the extent that the Joint Venture has property available to be distributed to the Participants, that property must first be applied for the purposes of returning or reimbursing such amounts to AWD.
3.2 Obligations of COTC
(a) Once each of AWD and Arts Investments has complied with their obligations under clause 3.1, COTC will grant to the Company (as the nominee and trustee for the Participants) a non-exclusive licence to use, commercialise and exploit all of the Intellectual Property Rights and will provide to the Company a copy of all the documentation and information in the possession, custody or control of COTC relating to those Intellectual Property Rights. The licence granted under this clause will continue until this Agreement is terminated.
(b) COTC will procure that, at the time at which the Property Rights must be exercised, those rights are exercised so that the Company purchases the interest in the Site.
3.3 Application of Funds
The Participants agree that the amount invested pursuant to paragraph 3.1(a) may be drawn down by, and used for the sole benefit of, Ray and Maja Dalglish in partial recognition of amounts expended for the purposes of the Project. The Participants further agree to procure that Ray and Maja Dalglish will pay the sum of five hundred thousand dollars ($500,000) to AWD when a contract is entered into for the construction of the Project.
4 Conduct of Joint Venture
(a) The Participants agree that, unless specified or provided otherwise in this Agreement, the principles upon which the Project is to proceed, and those concerning the relationship of each Participant to the others, will be those specified in the Statement of Principles.
(b) The Participants agree that the management and overseeing of the Project will be conducted by the Joint Venture, and that the decisions of the Steering Committee in relation to the Joint Venture will, subject to clause 13, bind each of them. The Participants acknowledge that certain property and other interests may, from time to time, be held by the Company, and they agree that they will procure that the Board will implement and follow all decisions made by the Steering Committee in respect of the Project.
(c) Each participant covenants and agrees with each other Participant:
(i) to diligently observe and perform its obligations and commitments pursuant to this Agreement;
(ii) not to engage (whether alone or in association with others) in any activity in respect of the Project except as provided or authorised by this agreement or as agreed by a majority of the Participants; and
(iii) each Participant hereby commits to use its best endeavours to ensure the Project is carried out successfully and agrees to do all things necessary to enable the Project to be carried out.
…
6 Steering Committee
(a) The Participants agree to establish the Steering Committee, whose function will be to:
(i) procure and ensure that the Joint Venture pursues and achieves its purposes as stated in clause 2.1;
(ii) oversee the conduct and progress of the Project;
(iii) make decisions on behalf of the Participants regarding all matters arising in the course of the Project;
(iv) procure the preparation of the accounts and financial statements recording the revenue, expenditure and activities of the Project;
(v) liaise with the Manager, and receive progress reports in relation to the Project;
(vi) determine all business and other policies relating to the conduct of the Project and dealings with the Site after the Project is completed; and
(vii) such other functions as the Participants may delegate to the Steering Committee from time to time.
(b) The Steering Committee will, unless otherwise agreed, consist of five (5) persons. Each of the Participants will be entitled to nominate one representative to the Steering Committee, and the fifth representative will be a person nominated by KPMG Corporate Finance (Australia) Pty Ltd (KPMG). The person so nominated by KPMG will be the Chairman of the Steering Committee. Each member of the Steering Committee appointed by the respective Participants will hold office until such time as the Participant that appointed him or her removes his or her nomination to the Steering Committee.
(c) If a particular member of the Steering Committee retires, is removed or is unable to attend meetings of the Steering Committee, a person nominated by the Participant who originally nominated that member will replace him or her.
(d) Each member of the Steering Committee, save for the person nominated by KPMG, will be entitled to cast one vote in relation to any resolution put to the Steering Committee. In the event that there is an equality of votes in relation to a given resolution put to the Steering Committee, the person nominated by KPMG will have a casting vote, and the Participants agree to be bound by the casting vote of that person.
7 Conduct of Meetings of Steering Committee
(a) Each member of the Steering Committee will be entitled to one vote at a meeting of the Steering Committee, and in the event that there is an equality of votes in relation to a resolution or matter being considered by the Steering Committee, no Steering Committee member will have a casting vote.
(b) The Participants agree that a meeting of the Steering Committee may not proceed unless a quorum of members is present in person or by means of a telephone conference or other appropriate means of communication technology recognised as being appropriate for the conduct of such meetings. For the purposes of this Agreement, the presence of at least three members of the Steering Committee, of which at least one must be a representative nominated by either COTC or Jandawn, on the one hand, at least one must be a representative of either AWD or Arts Investments, will constitute a quorum.
(c) An agenda of each meeting of the Steering Committee must be circulated to each committee member at least two Business Days before the date on which the meeting is to take place. Such agenda will list all the matters to be considered and determined by the Steering Committee, and must be accompanied by such documents as are necessary to enable each committee member to make an informed decision as to each matter being considered by the Steering Committee.
…
11 KingsHeath Limited
11.1 Incorporation of the Company
The Participants agree that, as soon as practicable after the execution of this Agreement, they will procure the incorporation of the Company. The Participants agree that the Company will fulfil the role(s) outlined the document annexed in Schedule 2 and the Statement of Principles.
11.2 Board of the Company
(a) Upon incorporation the members of the Steering Committee will be appointed as the first Board. From that time onwards, until the prospectus (referred to in paragraph 2.1(d)) is registered (or this Agreement is terminated, whichever occurs first), any person nominated to the Steering Committee will, by virtue of that nomination, be appointed as a director of the Company. A person who ceases to be a member of the Steering Committee, for any reason, must resign or may be removed by the Shareholders.
(b) The Participants agree that if a member of the Steering Committee is ineligible under the Corporations Law to be appointed as a director of the Company, that person’s nomination to the Steering Committee must be revoked, and he must be replaced by a person who is so eligible.
11.3 Shareholding in the Company
As soon as practicable after the Company is incorporated, the Participants will procure that the Board meets and issues Shares to each of the Participants. The percentage shareholding to which each Participant is entitled will be the same as their percentage interest in the Joint Venture.
11.4 Relationship of Joint Venture and Company
For the avoidance of doubt, the Participants agree that, in their respective capacities as Shareholders, they must exercise their rights as Shareholders in a manner that is consistent with the objectives of the Project and the Joint Venture, and consistent with any decisions or resolutions made by the Steering Committee or a meeting of Participants, as the case may be.
…
13 Meetings of Participants
13.1 Convening Meetings
The Participants will meet monthly to discuss and review the Project and to receive a report from the Steering Committee. Any two Participants may, by notice to the other Participants, convene a meeting of Participants on occasions other than the monthly meetings. Any such notice must state the nature of business, and any resolutions, to be discussed at such meetings.
13.2 Powers of Participant Meetings
The Participants agree that the management and control of the Project and the Joint Venture will vest with the Steering Committee, save for the following matters, in respect of which a determination by a meeting of all Participants under this clause will be final and binding:
(a) any proposals regarding the raising of additional equity or capital for the purposes of the Project or the Joint Venture;
(b) any decision regarding the acquisition of the Additional Land;
(c) any proposals regarding the raising of any funding for the purposes of the Project (including the acquisition of the Additional Land) which require the provision of any form of security or encumbrance over any Joint Venture assets;
(d) any decision, resolution or action relating to the undertakings or guarantees given pursuant to paragraph 3.1(b), including any calls, any reduction of the amount of the undertaking or guarantee or the release of parties from those undertakings or guarantees as the case may be;
(e) approval of the prospectus to be issued by the Company;
(f) determination of the timing of the sale of, and approval of the selling campaigns for, each of the stages of the Project;
(g) any amendment to this Agreement;
(h) the admission of a new Participant to the Joint Venture;
(i) the sale or disposal of the Joint Venture’s entire interest in the Project, prior to the completion of that Project; and
(j) the termination of the Project or this Agreement.
13.3 Resolutions at Participants’ Meetings
All matters and resolutions put before a meeting of Participants will be deemed to have been approved or passed by the Participants if Participants representing more than fifty per cent (50%) of the total interests in the Joint Venture present and voting at that meeting, vote in favour of it. Notwithstanding the previous sentence, a resolution in relation to the matters listed in clause 13.2 will be deemed to have been passed only if Participants representing more than seventy-five per cent (75%) of the total interests in the Joint Venture (whether or not present) vote in favour of it.
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15 Default
(a) A participant will be in default under this agreement if:
(i) the Participant transfers the whole or part of its interest in the Joint Venture otherwise than in accordance with this agreement;
(ii) the Participant continues to breach any obligation under this agreement (other than an irremediable breach) for seven (7) days after receiving notice from the other Participants or the Manager specifying the breach and requiring it to be remedied;
(iii) the Participant repeats a breach after having received notice from the other Participants or the Manager warning that repetition of the breach will, or is likely to result, in the other Participants or the Manager regarding that Participant as being in default under this clause 15(a).
(iv) an order is made for the winding up or dissolution of the Participant;
(v) a receiver, receiver and manager, voluntary administrator, trustee, provisional liquidator or similar officer is appointed for all or any part of the assets or undertaking of the Participant;
(vi) the Participant enters into, or resolves to enter into, an arrangement, composition or compromise, or assignment for, the benefit of its creditors generally, or any class of creditors, or proceedings are commenced to sanction such an arrangement or compromise;
(vii) the Participant stops payment of or is unable to pay its debts as and when they fall due; or
(viii) the Participant ceases to carry on business.
(b) If a Participant is in default (the defaulting Participant) the other Participants may give:
(i) a notice in writing setting out the default (default notice) to the defaulting Participant; and
(ii) a copy of the default notice to the Auditor together with an instruction to determine within thirty (30) days of the Auditor’s receipt of the copy of the default notice:
(1) the value of the default Participant’s interest in the Joint Venture as at the date of the default notice; and
(2) the damages sustained by the other Participants (the non-defaulting Participants) resulting from the default by the defaulting Participant (the damages).
(c) In making a valuation of the interest in the Joint Venture of the defaulting Participant the Auditor must:
(i) assume that a reasonable time is available in which to obtain a sale of that interest in the open market and for that purpose sixty (60) days will be deemed a reasonable time;
(ii) have regard to such factors as the Auditor in his sole discretion believes should properly be taken into account based on the best information available at the time;
(iii) act as an expert and not as an arbitrator.
(d) The non-defaulting Participants will have an option to acquire the interest of the defaulting Participant on a pro-rata basis.
(e) The option shall be exercisable by the non-defaulting Participants:
(i) by serving written notice of exercise on the defaulting Participant with a cheque for the purchase price for the interest in the Joint Venture being purchased by each non-defaulting Participant;
(ii) within (30) days of receipt of the Auditor’s valuation;
(iii) at a purchase price for the interest in the Joint Venture equal to the Auditor’s valuation less:
(1) any payments incurred by the non-defaulting Participants for and on account of the defaulting Participant
(2) the damages assessed by the Auditor;
(3) the costs of the Auditor in making the valuations.
(f) If the non-defaulting Participants purchase the interest in the Joint Venture of the defaulting party pursuant to the foregoing option the defaulting Participant must immediately deliver to the non-defaulting Participants such instruments of assignment or conveyance as are reasonably necessary to transfer such Shareholding to the non-defaulting Participants.”
Pursuant to cl 4(a), COTC, Jandawn, AWD and Arts agreed that their relationship to each other and the principles upon which the Project was to proceed were governed by ss 1 to 6 of the Statement of Principles (the Principles). Section 1 provided relevantly:
“ON ASSET OWNERSHIP:
They are to be owned as tenants in common with other venture syndicates. Each syndicate and its participants own a specific and undivided share of each asset.
ON RIGHTS TO INCOME
It is received separately by venture syndicates. Each syndicate participant determines its income independently of the other syndicate participants by including in its income the proceeds derived from the sale of its share of the product or resources produced by the venture.
ON LIABILITIES INCURRED
Syndicates and therefore syndicate participants are responsible only for the share of liabilities incurred by way of activities undertaken within the terms of this agreement in order to produce the sales product and resources.
ON AGENCY STATUS
Any syndicate or syndicate participants is not automatically agent for other participants and does therefore not have the authority to bind the other participants except as specified in this agreement.”
Section 4 of the Principles provided as follows:
“OBJECTIVES OF THE KINGSHEATH SYNDICATED JV
1.Form a Steering Committee on which all participants in the KingsHeath JV are represented and to appoint a Manager, then as the owner of the land comprising the KingsHeath development site located at South Kingscliff and fronting the South Pacific Ocean, and taking into account its historical background, to bring into effect contemporaneously the following objectives:
a. Make application for Development Consent (through Lenen Pty Ltd) incorporating a Plan of Subdivision which will optimize income and minimize costs to the joint venture participants.
b. Steer the majority of the land subdivided into a development contract with an unlisted public company which the KingsHeath JV Steering Committee Manager will have incorporated, and to be known as KingsHeath Club of the Clubs Limited “KingsHeath Ltd”. The development contract will also contain a Trust Agreement and a Trustee Management Agreement between the parties. Thus, KingsHeath Ltd will be empowered to act as the Single Responsible Entity (SRE), that is both trustee and manager for all stakeholders in the development, including residential and other classes of members. The shareholdings in KingsHeath Ltd are to be held by the KingsHeath Syndicated JV participants in the same proportions as their joint venture participation. The purpose being that the Syndicated JV participants will:
— share the income of the KingsHeath CotC development as it materializes after payment of costs;
—gain unfettered control of the proportionate interests which will materialize when appropriate in the form of residential allotment entitlements which in themselves arise from permission in the development consent for quality medium density residential development as ancillary and incidental to the primary intent for the zone of tourism development.
2. Proceed with the compilation and registration of a printed and electronic Prospectus, timely with the issue of development consent, for the sale of residential memberships.
3. Set up and train a sales force in terms of the residential memberships marketing plan, as well as to other principle of mutuality organizations.”
On 18 August 1999, COTC, Jandawn, AWD and Arts executed an agreement with Richtech Pty Ltd (Richtech) setting out the obligations of the parties for the "Works" (the Works Agreement). "Works" were defined in the Works Agreement as “the infrastructure works external to the Land comprising water, sewer, electricity, telecom and a made road to the Land as are required by the Local Authority to enable the Land to be further subdivided in accordance with and consistent with the purposes and concept of the Project”.
Although “Project” was not defined, the word “Projects” was defined to mean “the development of the Land into an integrated tourist facility incorporating a five star hotel, 18 hole golf course, residential developments, retail areas and other associated uses”. The “Works Price” was $2,500,000. “Land Contract” was defined as “the Contract for the purchase of Lots 1 and 2 on the VGF Land between Lenen Pty Ltd as Vendor and COTCJV [each of COTC, Jandawn, AWD and Arts] or its nominee as Purchaser”.
Clause 2 of the Works Agreement provided as follows:
“2 Engagement
2.1 Subject to and upon the execution of the Land Contract COTCJV engages Richtech to carry out the Works to a standard acceptable to the Local Authority and to bring it to Completion as promptly as possible after the date hereof.”
The draft land contract attached to the Works Agreement for Lots 1 and 2 recorded a purchase price of $8 million.
On 18 August 1999, COTC, Jandawn, AWD and Arts (referred to together as COTCJV) and Lenen entered into a put and call option in relation to the sale and purchase of the Land. It is clear that at least at this time the parties anticipated a novation of the put and call option as they anticipated the incorporation of KCOTC. Clause 1.4 provided as follows:
“1.4 COTCJV to nominate
Lenen acknowledges that COTCJV has entered into this Agreement in anticipation of the incorporation of KingsHeath Club of the Clubs Limited. Lenen agrees that upon such incorporation it will agree to enter into a new agreement with KingsHeath Club of the Clubs Limited in terms identical with this Agreement as if KingsHeath Club of the Clubs Limited was the party in place of COTCJV provided that:
(1) COTCJV shall pay to Lenen its reasonable legal costs incurred in entering into such agreement; and
(2) COTCJV shall jointly and severally guarantee the obligations of KingsHeath Club of the Clubs Limited under such agreement in such form as Lenen may reasonably require.”
The put and call option also included the following:
“3 Condition Precedent
3.1 COTCJV shall within seven days of the date hereof provide to Lenen an irrevocable bank guarantee for an amount of $4,000,000 (the “Bank Guarantee”) in such form as Lenen shall reasonably require as security for its obligations under this Agreement and the Contracts.
3.2 In lieu of the Bank Guarantee Lenen may in its discretion accept a Letter of Credit Facility.
3.3 If the Bank Guarantee or such Letter of Credit Facility reasonably acceptable to Lenen is not provided within the said period of seven days or such further period as Lenen may agree, then Lenen may by notice in Writing to COTCJV terminate this agreement in whuich event neither party will have any rights against the other.”
KCOTC was incorporated on 24 August 1999, its original shareholders were Arts (125 shares), COTC (250 shares), Jandawn (250 shares) and KNG (375 shares). Messrs Dalglish, Shannon and Harry Stamoulis were the original directors.
In October 1999, Lenen agreed to extend the time for the provision of the guarantee first until 18 October 1999 and subsequently until 29 October 1999.
This date passed without the guarantee being furnished. However, discussions were taking place which involved reworking the joint venture agreements so that Harry Stamoulis would pay Lenen $2,225,000 in cash which Lenen would accept in lieu of the provision of a guarantee.
These discussions appear to have been initiated by KPMG in its letter of 8 December 1999 to the members of the joint venture, which letter, so far as is presently relevant is as follows:
“Two revised structures are proposed. Both assume that the Stamoulis interest will pay $2.25m (10% of the purchase price) to Lenen this Friday to "secure" the Agreement with Lenen and hence give KHCotC control over the Project. It is a requirement that the Joint Venture shall have the right to exchange "deposit monies" for the $4.0m Guarantee at any time in the course of the next 3 months, ie., on or before 10 March 2000, in the event that an appropriate equity participant can be secured to underwrite the Financial Guarantee to be provided through HIH and St George Bank with Capital Finance, or other interests such as a builder.
Structure 1 — Assume Bank Guarantee is in place by 10 March 2000
* Stamoulis pays $2.25m to Lenen (subject only to the right to substitute with a Guarantee).
* The respective Director’s companies or their interests (Dalglish/Shannon/Mancuso) shall each contribute $100,000 to fund the Project over the course of the next 3 months. These funds are to be paid into the company operating account by Friday 17 December 1999.
* Upon acceptance of the Guarantee by Lenen, Stamoulis shall release its $2.0m Guarantee to enable funding of the Project.
* Stamoulis shall be granted the rights to an option for an additional 15% shareholding in the Project in the event that the Guarantee is not put in place by 10 March 2000.
Structure 2 — Bank Guarantee not provided by 10 March 2000
* Stamoulis pays $2.25m to Lenen.
* As the Guarantee has not been provided, Stamoulis will have a greater exposure to the Project and the liability to release $2.0m to fund the Project by 10 March 2000.
* In these circumstances, the equity shareholding will change as follows:
Stamoulis interest 52.5%
Dalglish interest 15%
Shannon interest 12.5%
Mancuso interest 10%
KPMG interest 10%
*If this structure arises and the Dalglish/Shannon and Mancuso interests have not contributed $100,000 respectively, then Stamoulis shall be entitled to an increased shareholding of 2.5% from each of the non-contributing entities, in which case, in the event no one interest has contributed and Stamoulis has had to fund all of the Project Costs until March 2000 (including KPMG’s costs) the shareholdings would be revised as follows:
Stamoulis interest 60%
Dalglish interest 12.5%
Shannon interest 10%
Mancuso interest 7.5%
KPMG interest 10%”
A cross-appeal was filed by COTC basically saying that the amount awarded by her Honour was too low. I will consider this under head (H).
As COTC is now in liquidation, leave was sought and given to proceed with this appeal against it.
The appeal was heard on 31 March and 1 and 2 April 2008, Mr I M Jackman SC and Mr I G Waller SC appearing for the appellants and Mr B A Coles QC and Mr H Stowe for the respondents.
I believe that the most efficient way of determining the issues raised on the appeal is to consider the matters listed (A)-(H) above, or at least so much of them that are relevant for a decision to be made on the appeal and the cross-appeal.
(A) and (B) It will be remembered that the parties had, by their initial agreement of 4 August 1999, agreed in cl 4(b) that the management and overseeing of the Project will be conducted by the joint venture and that the decisions of the Steering Committee in relation to the joint venture, will, subject to cl 13, bind each of them.
Clause 13.1 of the initial agreement entrusted the management and control of the Project and the joint venture to the Steering Committee with ten exceptions which, by cl 13.2 were to be decided by the participants personally.
The Steering Committee’s role was, inter alia, to oversee the conduct and progress of the Project. “Project” (note the capital P) was defined as “the development of the Site, and the subsequent sale of properties or interests in properties on the Site once the development is completed, in the manner described in the document entitled ‘Club of the Clubs—Executive Summary and Marketing Concept’ …”.
“Joint Venture” was defined as “the joint venture established under this Agreement and known as Kings-Heath Club of the Clubs Syndicated Joint Venture”.
The ten excepted matters were:
“(a) any proposals regarding the raising of additional equity or capital for the purposes of the Project or the Joint Venture;
(b) any decision regarding the acquisition of the Additional Land;
(c) any proposals regarding the raising of any funding for the purposes of the Project (including the acquisition of the Additional Land) which require the provision of any form of security or encumbrance over any Joint Venture assets;
(d) any decision, resolution or action relating to the undertakings or guarantees given pursuant to paragraph 3.1(b), including any calls, any reduction of the amount of the undertaking or guarantee or the release of parties from those undertakings or guarantees as the case may be;
(e) approval of the prospectus to be issued by the Company;
(f) determination of the timing of the sale of, and approval of the selling campaigns for, each of the stages of the Project;
(g) any amendment to this Agreement;
(h) the admission of a new Participant to the Joint Venture;
(i) the sale or disposal of the Joint Venture’s entire interest in the Project, prior to the completion of that Project; and
(j) the termination of the Project or this Agreement.”
The basal proposition of the respondents was that although the resolutions of 12 October 2000 were passed by the appropriate majority at properly convened meetings, the Land Play was not able to be authorised under cl 13.
The parties seem agreed that the construction of cl 13 must be approached as a commercial document having regard to its commercial purpose. However, the appellants say that that means giving it maximum flexibility.
The primary judge held that the commercial purpose was to facilitate the implementation of the Project and to avoid delay in its progress.
The primary judge then looked at paragraphs (a), (d), (g), (h), (i) and (j) and said that the OSJVA did not fall into any of those categories.
A clause entrusting the whole management of a project to a committee or board of directors is a very common one in corporate undertakings.
A very common example is s 198A of the Corporations Act 2001 (Cth) or its predecessors in Table A to previous Companies Acts which provides that the management of the company is to be managed by or under the direction of the directors.
Such provisions have been given very wide operation. For instance in Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89 at 105, Buckley LJ said:
“even a resolution of a numerical majority at a general meeting cannot impose its will upon the directors when articles have confided to them the control of the company’s affairs.”
It seems to me that cl 13 was intended to deal with all decisions that needed to be made with respect to the Project or the joint venture. Apart from the ten matters, the decisions of the Steering Committee bound the participants to the exclusion of the participants.
However, no Steering Committee meeting was held on 12 October 2000. The two meetings held were of the participants and of the directors of KCOTC.
I should repeat part of the minutes of the first meeting of 12 October 2000 at which the joint venturers made clear what was the nature of the meetings that were being held.
The minutes read:
“At 1.55 pm all voted in favour of convening a Joint Venture Steering Committee Meeting to consider the Minutes of a Joint Venturer’s Meeting held on 25 September 2000.
It was resolved that the Meeting held on 25 September 2000 was a Joint Venturer’s (shareholders) Meeting.
RD stated that each member of the JV has an equal vote and that the Chairman has the casting vote. MH and SM both stated that they thought that 75% majority was required.
…
At this point HS made it known that this was NOT a Joint Venture Steering Committee Meeting. The JV has called a Joint Venture/Shareholders Meeting and should continue with this meeting prior to the Directors Board Meeting. HS said to MH that there was no need to convene a Joint Venture Steering Committee Meeting and that the Joint Venture Steering Committee Meeting does not tell the Joint Venture/Shareholders what to do.
…
It was then decided that the Joint Venture Steering Committee Meeting would not proceed and that the meeting be reconvened as a Joint Venture/Shareholders Meeting.”
It was common ground on this appeal that the current matter was not one for the Steering Committee, but needed to be considered by the participants.
One would have thought that this would mean that as there must be some body which could make decisions, that the participants themselves could make decisions but that they had to be unanimous.
As there was no unanimity, one needs to consider whether what was done was within the ten exceptions in cl 13.2, those matters being the only matters where the participants in the joint venture had power to make decisions by majority.
The only possibilities are the items mentioned by the primary judge.
The appellants’ primary argument was addressed to (g) namely, “any amendment to this agreement”.
The learned primary judge rejected this submission because she ruled that there was no suggestion that the parties contemplated or intended that the provisions of cl 13 were to apply to amendments to agreements other than the Joint Venture Agreement. She emphasised that cl 13.2(g) referred to this agreement and noted that the Joint Venture Agreement made no provision for a Land Play.
Appellants’ counsel point to authority such as Kearns v Hill (1990) 21 NSWLR 107 and Permanent Trustee Co Ltd v National Australia Managers Ltd (M McLelland CJ in Eq, 8 August 1994, unreported) that provisions such as cl 13.2(g) are usually construed so as to give the parties maximum flexibility to provide machinery to meet any contingency.
They further submit that the judge’s distinction between the Joint Venture Agreement as this agreement and other agreements was artificial and without substance. Furthermore it was in any event wrong to make the distinction as all the agreements by the parties went to vary and amend the original Joint Venture Agreement.
The respondents say that when considering powers of amendment one must look to: (a) the context of the overall agreement; (b) the reference to the commercial objectives of the agreement; and (c) construe any power of amendment consistently with a reasonable outcome, unless it is abundantly clear that a contrary result was intended.
No matter how wide the power to vary might otherwise be, the respondents submit that it would not extend to an alteration to the agreements by which some members of the joint venture were enabled to expropriate the interests of another member or members.
Furthermore, it is put that the authorities relied on by the appellants do not mean that in every case the power to amend must be construed flexibly and broadly. Even if that proposition is too widely expressed, the authorities do not authorise an expropriation by means of an amendment to the agreement.
One needs to look at the “true purpose” of the resolutions.
The primary judge said the true purpose of the resolutions was to have all parties accept (or agree to) and sign an agreement whereby: (1) if the imposed timeframes were not complied with, KNG would be given the right to deal with the Land at its sole discretion but in accordance with the put and call option and the variations thereto, and to require the other participants to transfer their interests at its direction; and (2) there would be a change in the nature of the benefit to be delivered to KNG in the Land Play from one in which it was required to share any profits on a pari passu basis with the other participants to one in which it did not have to share any profits.
The primary judge approached the problem by first identifying the true purpose of the resolutions and then considering whether they were “in relation to” any of the relevant matters listed in cl 13.2.
If the matter did not come within (g), the appellants submitted that it fell within (a) which referred to the raising of additional equity or capital.
The primary judge ruled that the presence of the provisions in the OSJVA in relation to the timeframes for the payments by the builder and hotelier and other provisions dealing with KNG’s agreement to underwrite the $10.7 million guarantee due to Lenen do not justify characterising the resolutions as resolutions in relation to the raising of additional capital or equity as that expression is to be understood in cl 13.2(a) of the Joint Venture Agreement.
She ruled that the expression the “raising of additional capital or equity” in the Joint Venture Agreement has the meaning well understood by commercial parties, and these participants in particular, of going to the market and/or banks and/or financial institutions with various forms of security to raise that capital or equity additional to that already in place. The purpose of these resolutions was not to raise additional equity or capital for the purposes of the Project or the joint venture. Their true purpose was as described above.
Thus, she ruled that the resolutions did not come within (a).
I consider that one needs to look at cl 13 in a broad commercial manner. The parties to my mind were setting out a scheme whereby all decisions could be made by less than the unanimous vote of the joint venturers. Administrative decisions were to be made by the Steering Committee, more fundamental decisions were to be made by the participants themselves by a majority.
Clause 13.2 contains ten core matters which were reserved to the participants.
I consider that one should construe cl 13.2 widely and globally. On this basis, the resolutions of 12 October 2000 are clearly valid.
In any event, on a broad construction, the resolutions fell under (g) and/or (a) subject to the doctrine of fraud on the power to which I will return.
In particular I agree with the submission that to confine (g) to amendments to the initial agreement is too artificial to stand. The parties were building on their initial agreement from month to month and must have intended the power of amendment to mean their Joint Venture Agreement as for the time being in force.
I should add that I do not consider that it necessarily follows that if a resolution was not validly passed under cl 13.2 it was completely invalid. However, in the circumstances, it is unnecessary to develop this thought.
However, if it is appropriate to hold that the resolutions of 12 October 2000 were passed on a fraud on the power to amend, the result in equity may be affected.
The respondents placed considerable reliance on the High Court’s approach in Gambotto v WCP Ltd (1995) 182 CLR 432.
In Gambotto, the court took a strict view as to amendment to the articles of association of a corporation which had the effect of expropriating the property of a shareholder.
In Gambotto at 445, Mason CJ, Brennan, Deane and Dawson JJ, with reference to what Dixon J said in Peters’ American Delicacy Co Limited v Heath (1939) 61 CLR 457 at 507, referred to the problem of identifying some element, the presence of which would always vitiate a resolution for the alteration of articles of association and said:
“The exercise of a power conferred by a company’s constitution enabling the majority shareholders to expropriate the minority’s shareholding for the purpose of aggrandising the majority is valid if and only to the extent that the relevant provisions of the company’s constitution so provide. The inclusion of such a power in a company’s constitution at its incorporation is one thing. But it is another thing when a company’s constitution is sought to be amended by an alteration of articles of association so as to confer upon the majority power to expropriate the shares of a minority. Such a power could not be taken or exercised simply for the purpose of aggrandising the majority. In our view, such a power can be taken only if (i) it is exercisable for a proper purpose and (ii) its exercise will not operate oppressively in relation to minority shareholders. In other words, an expropriation may be justified where it is reasonably apprehended that the continued shareholding of the minority is detrimental to the company, its undertaking or the conduct of its affairs — resulting in detriment to the interests of the existing shareholders generally — and expropriation is a reasonable means of eliminating or mitigating that detriment.”
The appellants say that the Gambotto approach is confined to alteration to the constitutions of corporations and should not be applied to joint ventures.
In support of that proposition, the appellants cited the decision of Hely J in Cachia v Westpac Financial Services Ltd (2000) 170 ALR 65 at 85 [87] where his Honour said that the Gambotto approach did not apply in trust law where the governing focus was the trust deed.
The recent decision of the Privy Council in Citco Banking Corp v Pusser’s Ltd [2007] 2 BCLC 483 reinforces the view that courts should be slow to expand the fields covered by the Gambotto approach.
Having considered his Honour’s reasons in Cachia and the remarks of Austin J in Arakella Pty Ltd v Paton (2004) 60 NSWLR 334 at 364 [127], her Honour did not apply the Gambotto approach to the joint venture documents. Despite the respondents’ submissions to us, I agree that she took the right course.
However, it is clear that there must be consideration of the doctrine of fraud on the power in the traditional sense.
That doctrine was succinctly defined by Hely J in Cachia at 83:
“74.The equitable doctrine of “fraud on the power” requires that a power, including an amendment power, reserved in a trust must not be exercised for a purpose, or with an intention beyond the scope of or not justified by the instrument creating the power: Vatcher v Paull [1915] AC 372 at 378. The same principle applies to the exercise of a statutory power. In each case, the power has to be exercised bona fide, for the purpose for which it is given: Lancedale Holdings Pty Ltd v Heath Group Australasia Pty Ltd [1999] NSWSC 609 (per Bryson J) ; [1999] NSWCA 460 (on appeal). It may be that an amendment to a trust deed enabling the majority unitholders to expropriate the minority's units for the sole purpose of aggrandising the majority might fail for want of good faith, or because it would be beyond the scope of the enabling power.”
It was submitted that the amendment power in cl 13.2 of the Joint Venture Agreement would not authorise an amendment to the whole substratum of the joint venture. In this regard reliance was placed upon the following passage of Hely J’s judgment:
“68.The power of variation conferred by this clause is apparently unconfined. There are, however, some authorities which suggest that a power to vary a trust deed may be held not to extend to a variation which would alter the substratum of the trust: see, eg, Re Dyer; Dyer v Trustees Executors & Agency Co [1935] VR 273; Re Ball's Settlement Trusts; ; Ball v Ball [1968] 1 WLR 899; Re Blocksidge [1997] 1 Qd R 234; Kearns v Hill (1990) 21 NSWLR 107; Lock v Westpac Banking Corporation (1991) 25 NSWLR 593 at 602. This may be no more than an application of the equitable doctrine of fraud on the power, referred to in [74] of these reasons.”
The appellants submit that there is no basis for the argument that cl 13.2 could not authorise the disposal of the interest in the Land, or could not authorise such a disposal or adjustment of interests in the Land in favour of one or more of the participants at the expense of the others. It was submitted that subparagraphs (a), (i) and (j) of cl 13.2 are expressed with absolute generality and subpara (h) necessarily involves the disposal in favour of any new participant of at least some of the interests held by the existing participants.
It was further submitted that to construe cl 13.2 as precluding the participants from voting in their own self-interest in relation to amendments to the agreement would completely stultify the operation of the Joint Venture Agreement.
The respondents submit that although Hely J was dealing with unit trusts, the doctrine is equally applicable to this joint venture. It was submitted that by the application of the fraud on the power doctrine, there is an unqualified prohibition on the exercise of majority power under cl 13.2 of the Joint Venture Agreement to effect appropriation of any participant’s interest.
It was further submitted that the mere fact that cl 13.2 is in some respects expressed in broad terms does not preclude the operation of the doctrine. In this regard the plaintiffs relied upon cl 15 of the Joint Venture Agreement which provided a regime whereby a participant could “acquire the interest” of a defaulting participant “on a pro-rata basis”. That regime included a process for the valuation of the defaulting participant’s interest in the joint venture by the auditor. The purchase price of the interest of the defaulting participant was to be fixed by reference to the auditor’s valuation less certain amounts (cl 15(e)(iii)).
The respondents submit that, in the light of the provisions of cl 15 of the Joint Venture Agreement, the parties could scarcely have contemplated that the powers in cl 13.2 would be used to appropriate the interests of minorities who were not “pulling their weight” in the joint venture in a manner so inconsistent with cl 15.
The respondents claimed the resolutions were void as a fraud on the power conferred by cl 13.2 of the Joint Venture Agreement by reason of the following matters:
(1) the interest in the Land arising from the put and call option as amended by the contract for the purchase of Lots 1 and 2 of the Land were assets of the joint venture held for the benefit of all participants;
(2) clause 4(K) of the OSJVA purported to confer upon KNG the right to appropriate the Land for its own benefit;
(3) COTC did not consent to the appropriation either as a participant in the joint venture or as a shareholder of KCOTC;
(4) the authorisation of KNG to appropriate the Land for its own benefit was not necessary to secure any benefit for the joint venture or otherwise fulfil any proper purpose of the joint venture;
(5) the OSJVA did not provide for the provision by KNG of adequate (or any) compensation to the participants of the joint venture in respect of the appropriation of the Land; and
(6) the purported authorisation of KNG to appropriate the Land for its own benefit would, if effective, permit KNG to obtain a windfall benefit at the expense of the other participants in the joint venture.
The appellants submit that the respondents’ reliance on these matters fundamentally misconceives the effect of cl 4(K) of the OSJVA and what it achieved in the circumstances. It was submitted that the following matters establish that misconception:
(1) KNG was relieving the other participants of liabilities to Lenen under the contract ($8 million) and the put and call option and to Richtech under the Works Agreement ($2.5 million);
(2) KNG was the only participant with the ability and willingness to meet those liabilities, and to provide the guarantees and the purchase money necessary to acquire the Land;
(3) the “Club of the Clubs” concept was no longer feasible or realistic;
(4) the call option to acquire the Land was about to lapse and thus be worthless to the joint venture;
(5) KNG undertook not to continue with the original “Club of the Clubs” concept notwithstanding there was a lack of any basis to COTC’s claim for so-called “intellectual property”;
(6) KNG did not on its own constitute the 75+% majority required to effect the amendment to the Joint Venture Agreement and the position taken by Jandawn and Arts demonstrates the commercial fairness and reasonableness of cl 4(K); and
(7) KNG continued to offer to the other participants the opportunity to share in the acquisition and on-sale of the Land, in return for some financial contribution.
In the circumstances, the appellants submit that the suggestion by COTC that KNG was seeking to obtain a windfall was particularly ironic. The appellants submitted that there was no improper purpose and no lack of bona fides in making the amendments, even if the amendments effected a fundamental restructuring of the participants’ rights.
The respondents also relied upon Harry Stamoulis’ admission that the purpose of the OSJVA was “simply to protect KNG’s interest” because it was “safer” to provide the $10 million with the protection of the OSJVA (T234–235). The respondents submitted that this was “naked majority aggrandisement”.
Had it been necessary for her to do so, the learned primary judge would have held that the doctrine applied and that for this reason also, the resolutions of 12 October were not for a proper purpose and therefore void.
The appellants say that the point of their submissions set out in [267] above was to indicate that KNG was conferring a tangible benefit on the other participants in relieving them of liabilities which the primary judge found they lacked the ability or willingness to meet.
Furthermore, her Honour’s finding, which I have already explored, that the Arts vote was bought through the $1,500,000 fake invoice, a matter which caused her to dismiss the appellants’ point 6, overlooks the fact that Mr Dalglish’s friend, Mr Shannon (Jandawn) voted in favour of the resolutions.
It seems to me that the second of the points made by the appellants which the primary judge accepted and the third point (about which she said was not clear) are extremely telling. That is that (2) KNG was the only participant with the ability and willingness to meet those liabilities, and to provide the guarantees and the purchase money necessary to acquire the Cudgen Land and that (3) the “Club of the Clubs” concept was no longer feasible or realistic.
Although the learned primary judge said that (3) was not clear, she seems to have based this on the fact that Mr Dalglish was still arguing about the point. Well he might as his so-called “intellectual property” depended on the concept having some relevance and some value. However, we know that as at 1 August 2000, despite the activities of KPMG, not one pre-sale was made.
The scenario presented was clearly that no one was willing to put up any money to save the Project other than the Stamoulis interests. In particular, Mr Daglish had not put up one cent. A lot of money could be lost if the Project was not salvaged. KNG was the only offeror of salvage and, even then, it offered other participants the opportunity to continue their involvement, if they too were prepared to put up funding.
The appellants complain that her Honour repeats on a number of occasions a statement which they say is quite erroneous.
An instance is in [230] of the judgment where her Honour says:
““It is true that KNG was relieving the other participants of the liabilities to Lenen, but that is what it agreed to do by reason of its election on 18 September 2000 for the Land Play.”
The appellants say correctly that this statement fails to recognise that the election of 18 September 2000 involved all participants contributing their respective proportions to the bank guarantee by 29 September 2000. The quid pro quo for the participants sharing in the gain (if any) from the Land Play was that they discharge their proportionate financial responsibilities.
In my view, the suggestion that the resolutions of 12 October 2000 should be set aside as a fraud on the power, fail.
Accordingly, I would uphold the appellants’ contention that the OSJVA was valid.
(C) The next grounds of appeal focus on whether KNG achieved a fair or market value for the Cudgen Land by selling it to the Macquarie Joint Venture for $25 million.
The primary judge summed up the valuation evidence at [332]-[334]. She said that the respondents’ final submissions did not contest the valuation made by Mr Love, the appellants’ valuer, of $27.1 million (being the $28.5 million less the 5% discount of $1.4 million) subject to three qualifications.
The first qualification related to the amount of discount for the “town planning risk”. The respondents accepted that any quantum of reduction is difficult and endorsed Mr Love’s suggestion that it is very much “opinion based”. Both experts agreed that some discount should be applied. The respondents submitted that an appropriate risk would be no more than half of what was allowed by Mr Love being $1.5 million resulting in a figure of $750,000. The primary judge accepted that as an appropriate figure by which to adjust the amount.
The second qualification related to the alleged erroneous assumptions by Mr Love in relation to projected sales rates. Mr Love assumed a sales rate of 8 per month and agreed that if such rate were doubled, it would have a very significant impact on the overall discounted value. Mr Cox, the respondents’ expert valuer reviewed the Casuarina sales schedules and concluded that the rates of sale within the relevant periods were in the order of 16–20 per month. The judge notes that the respondents’ submission was that a reasonable adjustment would be in the order of $1 million. She made an adjustment of what she held was a reasonable amount in the circumstances is $850,000.
The third qualification was that there should be an adjustment to the value of $27.1 million to reflect the “Put and Call Price”.
The primary judge accepted that there should be an adjustment in this regard and that an appropriate premium is 5%.
The primary judge’s valuation with the adjustments of $750,000 and $850,000 results in a figure of $28,700,000. Adjusting that figure by 5%, $1,435,000, results in a final figure of $30,135,000.
The appellants accept this finding. However, it must be realised that this is the value of the land as at January 2002.
The primary judge said more than once, see [253] and [335] that KNG’s best endeavours were compromised by the desire to facilitate Spiros Stamoulis’ entry into the Macquarie Joint Venture. He calculated that it was better to sell to the new joint venture at a discount and make up the sum discounted from profit from the joint venture.
Thus, she held, KNG did not use its best endeavours to sell the Land at fair or market value. It knew that the Ray Group was interested as early as January 2001. It was steered on a course by its director who, the judge was sure, felt constrained in the way that he marketed the Land because of his concern over the “contractual situation”. KNG promised in the MOU that it would not seek to negotiate with any other parties once the figure of $25 million was struck in June 2001. It ceased any further efforts to market the Land in July 2001.
The primary judge noted that KNG/Stamoulis had little difficulty persuading the prospective Macquarie Joint Venturers to pay $25 million and she had little doubt that if Spiros Stamoulis had not stepped in and ended the negotiations by stating that he was comfortable with $25 million and a part of the joint venture, the market value could have been achieved.
Thus the primary judge was satisfied that KNG breached cl 5 of the Supplemental Agreement by failing to sell at fair or market value of $30.135 million and failing to share the gains on a pari passu basis with COTC.
The appellants say that Spiros Stamoulis’ asking price was $28,000,000, but this is really of no moment. The judge accepted that he had used his best endeavours to get the best price. His last valuation, which was in 2000 valued the land at $20,000,000. He negotiated with Mr Ray at figures between $23 and $28 million and, ultimately there was agreement on $25 million.
Mr Jackman put that, bearing in mind the valuation of $20,000,000, it was appropriate to do a deal for $25,000,000. He put that it is wrong to reason back from a valuation as of January 2002 to consider the fair value in June 2001.
The price of $25,000,000 was agreed in principle on 21 June 2001. The final binding agreement was reached on 23 January 2002. In that six month period, it is clear that the value of the Land was rising: all the experts agreed on this.
The appellants say that the vital date is the date of the Memorandum of Understanding of 21 June 2001.
I have already set out a summary of the Memorandum of Understanding. It will be remembered that, although the document was explicitly said not to be a binding contract, it did contain an agreement that KNG would not during the due diligence investigation period grant to any other party a legal or equitable interest in the Land or undertake any negotiations with any other party to grant such an interest in the Land.
The appellants say that it is implicit in that Memorandum of Understanding and the agreement within it that the price at which the Land would be sold to the new joint venture was fixed.
The proposition was akin to saying that an agreement to negotiate in good faith on an understanding that one is selling land at $25,000,000 involves the proposition that it would be a breach to sell at a higher price even if the value of the land increases.
There is no authority which was cited to us which would support this proposition. However, the concepts of non contractual Memoranda of Understanding and Obligations to deal in good faith are still in the infancy of their development.
The concept of an agreement to negotiate has been touched upon by a number of cases in the past twenty years.
The Court of Appeal considered the law in Coal Cliff Collieries Pty Ltd v Sijehama (1991) 24 NSWLR 1. Broadly speaking the court held that such an arrangement normally was too illusory to be enforceable, but that a particular arrangement might, on its true construction show that one or more matters constituted enforceable obligations.
In England, a similar view has been taken, see Walford v Miles [1992] 2 AC 128 and Little v Courage Ltd (1994) 70 P & CR 469.
In Wellington City Council v Body Corporate 51702 (Wellington) [2002] 3 NZLR 486 at 491 [14], Tipping J giving the reasons of the New Zealand Court of Appeal said:
“A contract purporting to bind the parties to negotiate, whether expressed in terms of good faith, best endeavours or otherwise, is in substance a contract to try and agree. Breach lies in failure to try, either at all or according to what may be required. Breach does not lie in failure to agree.”
The principles have recently been again considered in New Zealand in Porter v Gullivers Travel Group Ltd [2007] NZCA 345 (noted in 13 BCB 15).
Thus, the prevailing view is that, whilst it may be a breach of a collateral contract, sometimes referred to as a “process contract”, to withdraw from negotiations without cause, there is no obligation to conclude the deal, let alone conclude the deal at the price suggested. A person who has agreed to negotiate in good faith is not prevented from taking the position that as the market is rising so should the price.
Accordingly, I must accept that the vital date is January 2002 rather than June 2001 and, at that date the value of the land was over 30 million dollars.
Does that fact, if it be the fact, that the Stamoulis interests believed that they were bound to sell at $25 million alters the situation. I cannot see why it should.
Likewise, if the Stamoulis interests thought it was prudent not to rock the boat with the prospective Macquarie Bank Joint Venture, then the same comments would flow as were made by the learned primary judge about the motives of the sale at a discount.
Thus, I would not uphold this part of the appeal.
(D) The appellants say that questions of breach of fiduciary duty only arise if the judge’s finding that the OSJVA was invalid is itself wrong.
This must be correct.
(E)-(G) For similar reasons, these aspects of the appeal have fallen away.
(H) For the above reasons and those of Hodgson JA, the cross-appeal should be dismissed.
It follows from what I have said that the appeal must be allowed.
Various orders were paid for payment of monies pending the appeal: these must now be reversed.
As to costs, I agree with Hodgson JA.
I agree that the orders stated by Hodgson JA are appropriate.
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10 December 2008
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