Kocalidis (aka Kay) v Andrews
[2012] VSCA 127
•20 June 2012
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2011 0010
| ANDREW KOCALIDIS (also known as ANDREW KAY) | Appellant |
| v | |
| JOHN ANDREWS | Respondent |
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JUDGES: | MAXWELL P, MANDIE JA and CAVANOUGH AJA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 17 May 2012 | |
DATE OF JUDGMENT: | 20 June 2012 | |
MEDIUM NEUTRAL CITATION: | [2012] VSCA 127 | |
JUDGMENT APPEALED FROM: | Andrews v Kocalidis [2010] VCC 0982 and Andrews v Kocalidis (No 2) [2010] VCC 1616 (Judge Ginnane) | |
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CONTRACT – Joint venture – Failure and termination of joint venture – Valuation of joint venture real estate – Whether judge erred in assessing the parties’ financial contributions to be repaid – Whether judge erred in assessing the parties’ proportionate entitlements to the balance after repayment of contributions.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr J J Isles | George M Livaditis |
| For the Respondent | Mr R J Moore | McNab McNab & Starke |
MAXWELL P:
I agree with Mandie JA.
MANDIE JA:
Introduction
This appeal and cross-appeal from a decision of a judge in the County Court arises out of a failed joint venture agreement between Andrew Kocalidis, the appellant (the defendant below), and John Andrews, the respondent (the plaintiff below). The appellant is also known as Andrew Kay and it will be convenient to refer to him as either ‘the appellant’ or ‘Mr Kay’.
Mr Kay, a chartered accountant, and Mr Andrews, a builder, had been friends for many years. In 2003 they made an arrangement to purchase a residential property (on which a house was erected) at 55 Foch St, Box Hill South (‘the Property’) for the purpose of demolition of the existing house and construction of a three-unit or town house development for re-sale at a profit. On 15 November 2003 Mr Kay purchased the Property at auction, signed a contract of purchase and subsequently became registered as the sole proprietor. In due course a planning permit for the proposed use was obtained (and later renewed). Mr Kay obtained finance for the purchase of the Property and subsequently obtained finance for construction of the development. Mr Kay also entered into a building agreement with Mr Andrews for construction of the units. Construction was never commenced and the relationship and the arrangement between the parties broke down, leading to the litigation now the subject of appeal.
A long trial was conducted in and between August and December 2009[1] and judgment was handed down on 4 August 2010.[2]
Although there were some other witnesses, the bulk of the trial was taken up by the evidence and very lengthy cross-examination of the two parties. There were substantial factual disputes between the parties – in particular, Mr Andrews said that it had been agreed that Mr Kay would provide or obtain all of the finance for the purchase and the project whereas Mr Kay said that Mr Andrews had agreed, but had failed, to provide one half of the necessary funds. Further, Mr Kay alleged and Mr Andrews denied that Mr Andrews had been at fault in progressing the development.
[1]19-20, 24-25 August, 11 September, 12 October and 1-4, 7-8 December 2009.
[2]Andrews v Kocalidis [2010] VCC 0982 (‘Reasons’).
Reasons of trial judge
The judge found that there was an oral agreement and that:[3]
When Mr Kay acquired the property on 15 November 2003, Mr Andrews and Mr Kay had agreed to develop it by erecting three town houses for profit, using their separate skills of a builder and accountant. In their telephone conversation late on 15 November 2003, Mr Andrews and Mr Kay agreed that that Mr Kay was [to] provide the funds to purchase the property. The parties later agreed that all of the construction costs would be raised through borrowings.
The net profit deriving from the development was to be divided equally. The net profit was the sum remaining after Mr Andrews had been reimbursed for the costs incurred in obtaining planning and building permission, and the cost of building the project, together with his margin, and Mr Kay reimbursed for the purchase price and interest on borrowings to purchase the property and undertake the construction.
[3]Reasons [147]-[148].
Mr Kay had contended at trial that the agreement (if any) reached between himself and Mr Andrews was void for uncertainty. The judge dealt with that contention[4] and applied the principles summarised by Tobias JA in Thompson v White.[5] The judge concluded that the essential terms of the bargain had been agreed between the parties and were not uncertain.
[4]Reasons [125]-[150].
[5][2006] NSWCA 350 [94], [96], [100].
The judge accordingly held that the agreement between the parties was a binding contract. He said that the relationship between Mr Andrews and Mr Kay was a fiduciary one, that they were both joint venturers in a commercial enterprise with a view to profit, that profits were to be shared (equally) and that the Property was to be held as a joint venture asset.[6] It should be emphasised, as quoted above,[7] that the judge expressly found as a fact that the parties had agreed that Mr Kay was to provide the funds to purchase the Property.
[6]Reasons [149]-[150].
[7]See [5].
The judge said that, in or after July 2007, Mr Kay decided that he did not wish to proceed with the joint venture but that the agreement did not expressly provide for the possibility that one party might not wish to proceed.[8] The judge held that it was an implied term of the joint venture agreement that either party could terminate if they chose, certainly prior to the commencement of construction.[9] The judge found that Mr Kay had terminated the joint venture agreement pursuant to this implied term[10] and therefore rejected a plank of the case advanced on behalf of Mr Andrews that Mr Kay had repudiated the joint venture agreement.[11] His Honour added that, in the absence of such an implied term, he would nevertheless have found that the circumstances that prevailed in July 2007 had caused the collapse of the joint venture and the same equitable principles would then apply (see below).[12]
[8]Reasons [151], [153].
[9]Reasons [170].
[10]Reasons [174].
[11]Reasons [176]. His Honour also rejected Mr Andrews’ contentions that Mr Kay was estopped from ending the joint venture: Reasons [179]-[183].
[12]Reasons [194].
The judge then turned to consider the entitlements of the parties to the joint venture property following termination of the joint venture. His Honour referred to and relied upon what was said by Deane J in Muschinski v Dodds.[13]The judge said that the following principles applied upon the premature collapse of a joint venture where fault could not be attributed to the parties:[14]
First, that to the extent that the joint funds allow, the joint venturers are entitled to the proportionate repayment of their capital contributions to the abortive joint venture.
Second, equity requires that the rights and obligations of the parties be adjusted to compensate for disproportion between the parties’ contributions to the purchase and improvement of joint venture property. That adjustment requires that the parties be proportionately repaid their respective contributions to the extent allowed by the proceeds of any sale. In appropriate cases, contributions other than financial contributions can be brought into account.
Third, that equity will not permit a party to assert a right to, or retain the benefit of, joint venture property to the extent that it would be unconscionable for the party to do so.
Fourth, the entitlement of the parties in equity to share in any surplus after the discharge of any debts incurred in their joint undertaking and the repayment to them of their respective contributions is only qualified to the extent to which it positively appears that it would be unconscionable for one party to assert or retain the benefit of property contributed by the other party. There could well be circumstances in which equity and good conscience would require that the party who has made the major contribution to a joint endeavour should obtain a correspondingly greater share of any surplus remaining after repayment of the respective contributions.
Fifth, the four principles set out above are not displaced because it was the common understanding or agreement of the parties that the funds advanced were to be applied for the purpose of the joint venture and that the return from them would take the form, not of a repayment of capital contributed, but of a share in the proceeds of the joint venture when it was carried to fruition.
[13](1985) 160 CLR 583, 619 et seq.
[14]Reasons [189]-[193].
His Honour then considered the facts as to the parties’ contributions to the joint venture. He found that Mr Kay had contributed from his own funds the sum of $463,780 to the joint venture, as at December 2009. That sum included the deposit paid to purchase the Property, loan repayments, interest on monies borrowed, rates, taxes and other outgoings, less rental received.[15] The judge found that Mr Andrews, as at December 2009, had contributed $24,473. This amount included fees paid for land surveying, drawings and architectural drafting, obtaining the planning permit and arranging the demolition permit. The sum also included a builder’s insurance premium of $2,990 paid on 29 May 2007 in relation to the period of 1 May 2007 to 1 May 2008. The judge said that this insurance payment ‘did not’ relate to the Foch Street development but that the Westpac Bank had required proof of builder’s insurance in order to approve construction finance and the judge said that he considered that it should be brought into account in Mr Andrews’ favour.[16]
[15]Reasons [195]-[196].
[16]Reasons [197].
The judge said that a frequent means of distributing the assets of a failed joint venture was for the property to be sold and contributions repaid and remaining equity to be distributed from the proceeds. However, the judge said that he would hear the parties on whether the sale should be ordered and the terms of any such sale. The judge proceeded to consider how the net equity in the Property, whether pursuant to a sale or taken from valuations, should be distributed. The judge said that it was necessary to consider whether it had been established that it would be unconscionable to divide the net equity in the Property (or the proceeds of sale) equally.[17]
[17]Reasons [203]-[206] – referring inter alia to what was stated by Deane J in Muschinski v Dodds, 621.
The judge referred to a number of matters that needed to be considered in that regard as follows:[18]
[18]Reasons [207]-[218].
First, there is the disparity in the financial contributions made by Mr Andrews and Mr Kay. …
Second, there is Mr Kay’s claim for the opportunity cost of capital. This claim is not a capital contribution and falls for consideration in determining the distribution of the net residue of the equity in the property. As previously stated, Mr Kay gave evidence that he would have purchased a property in Mont Albert if he had known that the joint venture was not going to proceed and would thereby have avoided paying approximately $64,000 in rent. His first method of calculating this cost of capital was the price increase on a Mont Albert property for $500,000 if he had made such a purchase. He put this at $230,000. Alternatively, he calculated his cost of capital as the amount of $116,049, which was the amount of interest that the joint venture, or Mr Andrews, did not have to pay because he applied his personal funds to the purchase, maintenance and enhancement of the property. This sum was calculated using the CBA/Colonial interest rate until June 2007 and the Westpac rate thereafter.
I do not give overwhelming importance on Mr Kay’s loss of an opportunity to purchase a property in Mont Albert. He took the risk of entering into the joint venture rather than following an alternative path. He let the joint venture drift. There was always a risk that Mr Andrews would end the joint venture just as I have decided that Mr Kay did. I give some importance to the fact that Mr Kay’s loan repayments saved Mr Andrews from contributing to the repayment of loans.
Third, there is the obtaining of the Planning Permit and Mr Andrews’ contribution in time in obtaining the Planning Permit and later its renewal which increased the value of the property. That was not a capital contribution and its significance falls to be considered in determining how the net residual equity in the property should be divided. The Valuers called by the parties, Mr Cocks for Mr Andrews and Mr Brindley for Mr Kay, gave evidence as to the increase in value of the property attributable to the Permit. Mr Cocks put that increase in value as at September 2007 as $150,000 and as at July 2009, as $114,000. Mr Brindley put the increase in value as at June 2007, as $140,000. I propose to adopt the figure of $114,000.00 which is closest in time to the calculations being undertaken.
Mr Kay argued against any sum being paid to Mr Andrews in recognition of his obtaining the Planning Permit. Mr Kay contended that obtaining the Permit had eliminated a risk in holding the land and the Permit’s value was to be only regarded as the elimination of a time constraint. Alternatively, Mr Kay submitted that any division of the increase in its value should be confined to the current increase in the value of the property caused by the Permit, discounted for the possibility that it may not be renewed. The increase should be calculated by applying the contributions that the parties had made, which were said to be 2.04 per cent by Mr Andrews and 97.96 per cent by Mr Kay, and that this amounted be discounted by an amount of $7,000.00 representing the cost of the Permit extension. This methodology was said to produce a figure of $11,738.09.
Mr Andrews, through the engagement of planners and surveyors, obtained the Planning Permit. That event was a significant step in the development of the property. He later obtained the renewal of the Permit. This was a form of contribution to the property, applying the principles in Muschinski v Dodds.
However, to treat Mr Andrews as contributing the full $114,000 takes no account of the fact the increases in value of the property due to the grant of the Planning Permit occurred because Mr Kay continued to pay the loan repayments. If he had not been able to finance the property development, no planning permission could have been obtained.
Fourth, Mr Andrews did not have to carry out the construction of town houses which was a cause of the original agreement that he would receive an entitlement to a fifty per cent share of any net profit.
Mr Kay submitted that Mr Andrews should only be awarded substantial damages if he, Mr Kay, had engaged in unconscionable conduct, and relied on cases such as Yeoman’s Row Management Ltd v Cobbe[19] and Donis v Donis.[20] Those cases do not assist where there has been a collapse of a joint venture, rather the approach in Muschinski v Dodds is applicable.
Mr Kay did argue that Mr Andrews should not receive any part of the proceeds of the property because he had acted unconscionably. A number of these arguments were determined by the conclusion that Mr Kay was entitled to terminate the joint venture. Most of the others were matters that Mr Kay accepted in the course of the joint venture.
These arguments included that Mr Andrews had breached the agreement by failing to pay half the purchase price, by not keeping to the construction cost estimate of $10,000 per square and not giving the project priority. Further, the arguments went that Mr Andrews did not purchase the property in joint names with Mr Kay, did not borrow the loan funds jointly with him, did not provide documents for the progress of the project and did not contribute equally to the repayments of interest.
Mr Kay accepted or acquiesced in each of these actions of Mr Andrews and decided to proceed with the joint venture, including entering into the building contract of August 2006. The actions of Mr Andrews on which Mr Kay relies cannot, in those circumstances, provide a basis for a claim of unconscionable conduct. The argument that Mr Andrews breached his duties as a fiduciary to disclose material matters to Mr Kay is not made out for reasons given below.
[19][2008] UKHL 55.
[20][2007] VSCA 89.
The judge concluded that the net proceeds should be divided as to one-fifth to Mr Andrews and as to four-fifths to Mr Kay, stating his reasons as follows:[21]
Taking all these matters into consideration, it has been established by Mr Kay that it would be unconscionable to distribute the residual equity in the property equally. This is because Mr Kay made the overwhelming amount of capital contributions in respect of the property. This has in large part enabled it to increase in value and produce any net equity. The second reason for this conclusion is that Mr Andrews did not carry out any construction work.
A division of the net proceeds of the property as to one fifth to Mr Andrews and four fifths to Mr Kay overcomes the unconscionable result of an equal distribution. It takes into account of the loss of opportunity pleaded by Mr Kay and the fact that Mr Kay has made the overwhelming financial contributions.
This division also recognizes that Mr Andrews was principally responsible for achieving the grant of the Planning Permit and the resulting increase in the value of the property. I say principally, and not solely, to take account of Mr Kay’s role in this aspect of the matter. Throughout the joint venture and thereafter he has been responsible for and has paid the loan repayments. There would have been no increase in value due to a Planning Permit if he had not done so.
…
Mr Andrews relied on the fact that the parties had entered the joint venture expecting a profit of $100,000. But that expectation has little relevance when the scale and duration of Mr Kay’s capital contributions are considered.
[21]Reasons [219]-[223].
After dealing with certain claims by the parties under the Fair Trading Act 1999, the judge considered and rejected Mr Kay’s allegations that Mr Andrews had acted in breach of his fiduciary duty[22] and also considered and rejected Mr Kay’s contentions that Mr Andrews had by his conduct repudiated the joint venture agreement.[23] In the course of doing so, his Honour said that there were very significant delays by Mr Andrews in providing the building contracts and obtaining council approval and that the building permit and engineering drawings were never obtained. His Honour then said:[24]
At a number of points along the way Mr Kay might well have been justified in claiming that the contract had been repudiated because of Mr Andrews’ failure to give attention to it. But both of them let matters drift. The evidence indicated that each party acquiesced in or waived the other’s breaches.
[22]Reasons [238]-[246].
[23]Reasons [247]-[249].
[24]Reasons [248].
There was a counterclaim by Mr Kay for the sum of $15,000 lent by him to Mr Andrews on or about 4 November 2005 and the judge held that Mr Kay was entitled to judgment for that sum together with interest.[25]
[25]In the Court’s order dated 15 December 2010, the amount of interest that Mr Andrews was ordered to pay Mr Kay was the sum of $8,468.
In a subsequent judgment,[26] after a further hearing conducted on 11, 13 and 15 October 2010, the judge decided that Mr Kay should be entitled to retain the Property subject to paying an appropriate amount to Mr Andrews. For this purpose, it was necessary for the judge to determine the value of the Property on the basis of evidence led at trial and also during the further hearing.[27]
[26]Andrews v Kocalidis (No 2) [2010] VCC 1616 (‘Reasons (No 2)’).
[27]Reasons (No 2) [11].
The judge said that the valuer called by Mr Andrews, Mr P Buchanan, provided a valuation as at 23 September 2010 of $1.35M excluding GST as an ‘as is’ current market valuation with the town planning permit in place. Mr Buchanan valued the Property at $1,420 per square metre, based on an area of 951 square metres. Mr Buchanan’s evidence was that the Property was worth $1.1M or $1,150 per square metre without the planning permit.[28]
[28]Reasons (No 2) [18].
The judge said that Mr Buchanan adopted a Gross Realisation Value model, working back from the value of the Property with three units constructed.[29] Mr Buchanan considered that the Gross Realisation Value (once the units were constructed) would be $2.45M from which he deducted estimated development costs, stamp duty and other costs resulting in his valuation of $1.35M.
[29]Reasons (No 2) [19].
Mr Buchanan said that the highest and best use of the Property was as a development property and that the existing house added no value to it. He looked at other relevant sales in the area, although not closely comparable, in reaching his conclusions.[30]
[30]Reasons (No 2) [18], [20].
The judge said that the valuer called by Mr Kay, Mr D Brindley, had given evidence at the trial and was recalled for the subsequent hearing. Mr Brindley valued the Property at $946,000 excluding GST, or less than $1,000 per square metre – this was based on a comparison of sales of residential properties, some with permits and some without. Mr Brindley considered that the planning permit added about $140,000 to the value of the Property.[31]
[31]Reasons (No 2) [21].
The judge said that Mr Brindley expressed the view that the Gross Realisation Valuation method was not satisfactory but, using that method, he differed with Mr Buchanan on comparable sales of completed units, with the result that his Gross Valuation of the units once constructed was about $2 million to $2.1 million (that is, some $350,000 to $450,000 less than Mr Buchanan).[32]
[32]Reasons (No 2) [22].
The judge said that Mr Brindley gave evidence that the property market was showing signs of retraction but he also agreed that none of the properties he had considered, which were sold in 2010, achieved a value of less than $1000 per square metre. The judge said that Mr Brindley was unable to explain why the value of the subject property was less than that, save to say that it was a matter of opinion.[33]
[33]Reasons (No 2) [24].
The judge then referred to the submissions of the parties on the question of valuation, noting that Mr Andrews had submitted that Mr Brindley’s valuation was out of step with comparable sales in Box Hill South and that Mr Kay had criticised Mr Buchanan’s method of valuation and referred to authority that his method was more prone to error because of the number of variables requiring consideration.[34]
[34]Reasons (No 2) [25]-[26].
The judge concluded:[35]
I adopt a value of the property between those given by Mr Buchanan and Mr Brindley. Mr Buchanan’s valuation is based on working back from a Gross Realization Value. It gains some support from comparable sales. However, I do not adopt that method of valuation, because it does depend on hypothetical costs.
While Mr Brindley’s valuation did not depend on the Gross Realization Value, it appears to underestimate the value of the property by reference to comparable sales. The evidence from comparable sales, indicated sales in 2010 above $1,000 per square metre, even for properties without planning permits for the construction of units, whereas Mr Brindley’s valuation put the figure at less than $1,000.
In my 4 August 2010 judgment, I adopted $114,000 as the value added by the Planning Permit.
I consider that the appropriate valuation of the property with a planning permit is $1,100,000. In adopting that figure, I have taken into account the risk that the Planning Permit will not be renewed in 2011. Mr Buchanan had not taken into account that risk, whereas Mr Brindley had.
[35]Reasons (No 2) [27]-[31].
After considering a number of further issues (mainly dealing with taxation matters), his Honour’s final conclusions were:[36]
[36]Reasons (No 2) [69]-[75].
I calculate the entitlements of the parties as follows:
Value of the Property $1,100,000.00
Amounts to be deducted from the value of the property:
- Balance of Mortgage: $249,789.00
- Joint Venture contributions:
Mr Andrews $24,473.51
Mr Kay $476,636.50__________
Total deductions: $750,899.01 -$750,899.01
_________
Net equity, or surplus, in the property: $349,100.99
=========
Mr Andrews is entitled to 20 per cent of that sum, which equals $69,820.00, plus his expenses of $24,473.51, totalling $94,293.51.
Mr Kay is entitled to retain the property and is liable for the outstanding debts, subject to paying that sum to Mr Andrews.
Subject to providing the parties with an opportunity to check these arithmetical calculations, I propose to order that Mr Kay pay to Mr Andrews within sixty (60) days, the sum of $94,293.51 plus any applicable interest, in respect of Mr Andrews’ interest in the joint venture property. This payment will extinguish Mr Andrews’ interest in the joint venture property.
If that payment is not made, I will reserve liberty to apply to enable Mr Andrews to apply for a sale of the property.
Mr Andrews is obliged to pay to Mr Kay the sum of $15,000, plus any applicable interest, in respect of the counterclaim.
I will give the parties an opportunity to consider the calculations set out above and hear them in respect of those calculations, costs and any associated matters.
On 15 December 2010 orders were made reflecting the above conclusions, together with certain orders for costs.
Grounds of appeal and cross-appeal
By amended notice of appeal dated 22 March 2011, Mr Kay set out grounds of appeal which were described in the notice as ‘questions of law upon which this appeal is brought’. The grounds of appeal relating to the orders made on 15 December 2010 were as follows (omitting one ground that was abandoned on the hearing of the appeal):
(2)Whether the trial judge erred in law in holding that the respondent was entitled to a one-fifth share in the division in the net residual equity in [the Property];
(3) Whether, in determining that the respondent was entitled to a one fifth share in the division in the net residual equity in the [P]roperty, His Honour failed to take into account in assessing the plaintiff’s entitlement to a share of the profits:
(a) the plaintiff’s serial breaches of the joint venture agreement;
(b) the plaintiff’s minimal monetary contribution to the joint venture agreement and the fact that of the sum of $24,473.31 alleged to have been contributed to the joint venture agreement by the respondent, $15,000.00 had been lent to the respondent by the appellant;
(c)the plaintiff’s minimal non-financial contribution to the joint venture agreement.
(d)the plaintiff’s refusal to accept any risk at all in relation to either the acquisition, financing, development or economic viability of the [Property], whether such risk is strategic, financial, contractual, operational, economic or other.
(4) Whether the learned Judge erred in failing to allow the appellant’s claim for the opportunity cost of capital (paragraph 208 of His Honour’s Judgment) in assessing the extent of the appellant’s contribution towards the joint venture agreement.
(5) Whether the learned Judge erred in finding that the appellant acquiesced in the breaches of the joint venture agreement by the respondent.
(6) Whether the learned Judge misdirected himself in holding that as the appellant acquiesced in the breaches of the joint venture agreement by the respondent (paragraph 217-218 of His Honour’s Judgment) the respondent’s breaches should therefore not be taken into account in determining whether the respondent’s entitlement to a share in the division in the net residual equity in the [P]roperty should therefore have been reduced or extinguished.
(7) Whether the learned Judge erred in failing to find that the respondent’s breaches of the joint venture agreement were the reason for the failure of the joint venture agreement and that such breaches were relevant to determining whether or not the respondent’s entitlement to share in the division in the net residual equity in the [P]roperty should therefore have been reduced or extinguished.
(8) Whether the learned Judge misdirected himself in failing to take into account the respondent’s breaches of the joint venture agreement in calculating the respondent’s entitlement to a share in the division in the net residual equity in the [P]roperty.
(9) Whether the leaned Judge erred in law in holding that the respondent had not breached his fiduciary obligations to the appellant in failing to inform the appellant in November 2003 of the likelihood of delays that may affect the performance of the work under the joint venture agreement in accordance with the principles of Hill v Rose [1990] VR 129, including the likelihood of any delays being caused or exacerbated by activities unrelated to [the Property] including the respondent’s other dealings with the City of Whitehorse and the respondent’s other building commitments.
(10) Whether the learned Judge erred in law in holding that in assessing the value of [the Property] as being $1.1 million in determining the net residual equity in respect of which the respondent was entitled to one fifth no deduction should be made for the selling and advertising costs (including GST on such selling and advertising costs) that would be incurred in realising that sum.
(11) Whether the learned Judge erred in law in including the sum of $2990.00 in respect to an insurance premium paid by the respondent as a contribution made by the respondent in respect to the joint venture agreement when such insurance was partly refunded, was entirely unrelated to the joint venture agreement and was not the insurance required by Westpac as referred to in paragraph 197 of His Honour’s Judgment.
(13) Whether the learned Judge erred in law in attributing any value to the planning permit in assessing the value of [the Property] as being $1.1 million, in instances where the permit may not be renewed and would have expired by the time any realisation of the property could occur.
(14) Whether the learned Judge erred in law in failing to find that the lack of any agreed terms at 15 November 2003 meant that there was no more than a mere intention to conduct possible development activities at such time when any such activities could be assessed for their ability to be executed as well as their economic viability upon full execution.
By notice of cross-appeal dated 28 January 2011, Mr Andrews raised the following grounds of appeal (also primarily put in terms of questions of law):
1.Whether the Learned Judge erred in law in holding that the Respondent was entitled to a one fifth share and the Appellant a four fifth’s share in the division of the net residual equity in [the Property].
2. Whether, in determining that the Respondent was entitled to a one fifth share in the division of the net residual equity in the Property, His Honour has misapplied the principles enunciated by the High Court in Muschinski v Dodds.
3.Having found that the Respondent did not engage in any unconscionable conduct [paragraph 218 of His Honour’s Judgment], whether His Honour erred in law in finding that it would be unconscionable to distribute the net residual equity in the Property equally.
4.Whether His Honour erred in law in taking into account the Appellant’s claim for the opportunity cost of capital in determining the division of the net residual equity in the Property in circumstances where he had found that the Appellant:
(a)took the risk of entering into the Joint Venture rather than following an alternative path;
(b) let the Joint Venture drift;
(c) took the risk that the Respondent would end the Joint Venture;
(d)accepted or acquiesced in actions of the Respondent, which may have otherwise entitled the Appellant to end the Joint Venture.
5. Whether the Learned Judge erred in law in determining that the value of the Property was $1.1 Million for the purpose of assessing the net residual equity, in circumstances where he gave no reasons or no proper reasons for such determination.
The approach taken by the appellant
At the outset of the hearing of the appeal it was put to counsel for the appellant that the area of dispute on the appeal was limited in that there appeared to be no issue about the existence of a contract and of the implied term found by the judge, nor any issue that the matter was to be approached as a joint venture which had been brought to an end by the appellant pursuant to that implied term. Counsel for the appellant responded that one of the grounds of appeal raised was the uncertainty of the agreement but he acknowledged ‘that there may not be significant utility in that point because you end up being in the box of the failed joint venture and the principles relevant to that …’ Counsel for the appellant was also asked whether any factual findings of the court below were specifically challenged such that the Court would need to examine the evidence for that purpose. Counsel for the appellant responded that by and large the case for the appellant was to be argued by reference to the facts as found, although he would be pointing to what he contended were some contradictory findings by the judge and to some implications from his findings that were not expressed.
It will be convenient now to turn to the grounds of appeal and deal with them in the order (and in the groups) argued on behalf of the appellant.
Grounds of appeal 2, 3, 6, 7 and 8
These grounds involve a challenge to the judge’s determination that Mr Andrews was entitled to a one-fifth share in the net equity in the Property after repayment of the parties’ contributions. The principal basis for this challenge was the alleged ‘serial breaches’ of the joint venture agreement by Mr Andrews. The difficulty faced by the appellant is that the judge did not find that there were any breaches of the joint venture agreement by Mr Andrews, or at least relevant breaches, and the appellant’s argument depended on interpreting the judge’s reasons in such a way as to show that there were such breaches. The appellant did not in any way seek to have resort to the evidence or to suggest that the judge should have made findings about breaches that he had failed to make.
That the appellant’s argument that the judge had erred in allowing Mr Andrews a one-fifth share of the net equity in the Property depended on the contention that he disregarded the breaches by Mr Andrews can be seen from the express language of grounds 3(a), 5, 6, 7 and 8. The only other basis for the argument was the minimal monetary and other contribution made by Mr Andrews to the joint venture (see grounds 3(b), (c) and (d)).[37]
[37]It is true that, in the appellant’s outline of argument dated 17 May 2012 and provided at the beginning of the hearing, there is also a reference to proprietary estoppel principles but, in discussion between the bench and counsel for the appellant, it became clear that these principles were not the subject of any defence pleaded by Mr Kay, and, to the extent that such principles were relied upon on behalf of Mr Andrews, they had not found favour with the trial judge.
Insofar as these grounds rely upon the existence of breaches of the joint venture agreement by Mr Andrews, I consider that the grounds cannot be made out. The judge did not make any finding that Mr Andrews had committed any breach of the joint venture agreement, let alone that there were ‘serial breaches’ by Mr Andrews.[38] Nor, as I have said, is there any ground of appeal that the judge ought to have so found. Additionally, in my opinion, the factual findings made by the judge do not support a conclusion that Mr Andrews was in breach of the joint venture agreement or that his conduct was such as to render it unconscionable to allow him any share, or the share in fact allowed, in the net equity of the Property. Indeed, those findings negatived that conclusion. In particular, the judge’s findings preclude any contention that Mr Andrews was in breach of the joint venture agreement by failing to make any monetary contribution to the purchase of the Property or by failing to contribute to any interest payments upon monies borrowed. Further, the judge’s findings that both parties let the project drift and that, in effect, neither party brought to bear any urgency to complete the project[39] preclude the contention that any delays by Mr Andrews rendered his conduct blameworthy so as to bar him from a share in the net equity of the Property.
[38]See the extract from the judge’s reasons set out in [12] above.
[39]Reasons [81], [171], [209].
Insofar as these grounds of appeal rely upon the minimal monetary and other contribution made by Mr Andrews to the joint venture, the judge expressly took that matter into account.[40]
[40]See again the extract from the judge’s reasons in [12] above.
To the extent that, under cover of these grounds, the appellant submitted that the judge had misapplied the principles stated by Deane J in Muschinski v Dodds, I would reject that submission. His Honour correctly decided that the joint venturers were entitled to the repayment of their capital contributions to the abortive joint venture. He then decided to adjust the rights of the parties to compensate for the disproportion between the parties’ contributions both financial and non-financial. He did so by reducing Mr Andrews’ entitlement from 50 per cent (the prima facie position) to 20 per cent. Another way of looking at the same point is that the judge adjusted the entitlement of the parties to share in any surplus after repayment to them of their respective contributions on the basis that it was unconscionable for Mr Andrews[41] to share to the extent of 50 per cent in that surplus because of his limited contributions. His share was therefore reduced by the judge to 20 per cent. The process adopted by the judge can thus be seen to be a correct application of the relevant principles.
[41]See Reasons [219]-[220].
Ground of appeal 14
As mentioned earlier, the appellant accepted that the assertion that the contract was void for uncertainty had ‘limited utility’. In those circumstances, I think that it is sufficient to say that in my opinion the judge did not err in finding that the agreement was not void for uncertainty. The case relied upon by the appellant, Luxury Homes Pty Ltd v Lanham,[42] was a case in which the arrangements between the parties were of much greater complexity than the present and I consider that it provides little assistance on the facts of this case. On the other hand, I think that the judge was correct in applying the principles stated by Tobias JA in Thompson v White[43] and coming to the conclusion on that basis that the contract was not void for uncertainty.
[42][2009] NSWSC 873.
[43][2006] NSWCA 350 [94], [96], [100].
Ground of appeal 4
Mr Kay submitted that the judge had erred in failing to allow his claim for the opportunity cost of capital in assessing the extent of Mr Kay’s contribution. The judge had said that this claim was not a capital contribution and fell for consideration in determining the distribution of the net residue of the equity in the Property. The judge (rightly I think) rejected the calculation advanced by Mr Kay based on the supposition that he would have purchased a property in Mont Albert. The judge then said that, alternatively, Mr Kay calculated his cost of capital as the amount of $116,049 which was the amount of interest that the joint venture, or Mr Andrews, did not have to pay because Mr Kay had applied his personal funds.[44] The judge expressly took into account ‘loss of opportunity’ without putting a specific figure on it.[45]
[44]Reasons [208].
[45]Reasons [209]-[220].
The Court raised with counsel for both parties whether the judge should have allowed interest at a reasonable rate (say 5 per cent) on the financial contributions of each party to compensate for them being held out of their funds for relevant periods – in this regard, of course, Mr Kay was the main party affected. The Court asked the parties to provide calculations of interest and these have been provided.[46] The judge took a number of non-monetary and somewhat imponderable factors into account in deciding that Mr Andrews’ share of the net residue should be limited to 20 per cent but it is hard to explain the judge’s division of the net residue without adverting to Mr Kay’s entitlement to at least an allowance of interest on his capital. I do not think that the judge erred in law by taking into account Mr Kay’s ‘loss of opportunity’ in the way that he did rather than by calculating the interest and treating it as part of the monetary contribution to be deducted before arriving at the notional residue, although it would have been clearer if he had done so. Looking at the interest calculations in the context of the approach in fact taken by the judge, I am not persuaded that the allowance of 20 per cent of the net residue to Mr Andrews can be regarded as excessive as contended by the appellant. In other words, I think that the division of the net residue as to 80 per cent to Mr Kay and as to 20 per cent to Mr Andrews justly accommodated all aspects of their respective contributions including the loss of interest on their financial contributions – at any rate, no error has been made out. I would therefore reject this ground of appeal.
[46]In round figures, at the rate of 5 per cent per annum, the interest on Mr Kay’s capital contributions would be $109,000 and the interest on Mr Andrews’ capital contributions (excluding the insurance premium – see later) would be $6,500.
Ground of appeal 5
The appellant submitted that the judge erred in finding that the appellant acquiesced in the breaches of the joint venture agreement by Mr Andrews. In my view this ground is based on a misconception to which reference has already been made. The judge did not make any express finding that there was any particular breach by Mr Andrews of the joint venture agreement. To the extent that the appellant contends that Mr Andrews was in breach of the joint venture agreement prior to the completion of the purchase of the Property, that is precluded by the express findings of the trial judge. To the extent that the appellant contends that Mr Andrews was in breach of the joint venture agreement at any time after the completion of the purchase of the Property, that is not covered by any specific
ground of appeal identifying any such breach and the appellant did not take the court to any relevant evidence.[47]
[47]For example, it was contended at trial that Mr Andrews was in breach in various ways by failing to produce working drawings or the like for the development but this Court was not taken to any of the evidence dealing with that factual controversy.
It is true that the judge said that Mr Kay had acquiesced in the conduct of Mr Andrews in various respects. The judge so stated, I think, as part of his consideration of whether the conduct of Mr Andrews was blameworthy so as to disentitle him in whole or in part to a share of the ‘net residue’ and the judge concluded that Mr Andrews’ conduct was not blameworthy for that purpose.
I would reject ground 5.
Ground of appeal 9
The appellant argued that the judge had erred by failing to hold that Mr Andrews had breached his fiduciary obligations to Mr Kay by failing to inform him, in November 2003, of the likelihood of delays that might affect the performance of the work under the joint venture agreement, including the likelihood of delays being caused by Mr Andrews because of his dealings with the local council and his other building commitments.
As I understand it, this ground relates to conduct of Mr Andrews prior to the making of the joint venture agreement and, as such, Mr Andrews owed no fiduciary obligation to Mr Kay at that time. In any event, as his Honour said, the possibility of delays associated with the building project was self-evident. I would reject this ground.
Ground of appeal 10
The appellant submitted that the judge erred by not deducting selling and advertising costs from the value of $1.1 million that he placed on the Property. The appellant argued that as the Property had been valued inclusive of a town planning permit these costs would necessarily be incurred in realising the valuation amount. It would seem that the appellant did not make this submission at trial. In any event, the respondent submitted that, as there was no order for sale, it was appropriate to determine the value of the Property as it stood in the hands of Mr Kay. I agree with the respondent and would reject this ground.
Ground of appeal 11
The appellant submitted that the judge erred by allowing in the monetary contributions made by Mr Andrews the sum of $2990, being the alleged cost of an insurance premium for builder’s risk insurance. The appellant said that, as the judge noted,[48] the premium was for the period 1 May 2007 to 1 May 2008 and did not relate to the joint venture project. The appellant said that the insurance was insurance that Mr Andrews had to cover his liability on all building works. The judge justified this allowance because the Westpac Bank required proof of builder’s insurance in order to approve construction finance but the appellant further submitted that the Westpac loan did not in any event proceed and that the insurance policy was an annual policy which Mr Andrews had effected each year in respect of his general building works.
[48]Reasons [197].
The appellant said that the evidence also showed that the premium had been refunded to the extent of $901.21.
In my opinion, the insurance premium did not form part of Mr Andrews’ capital contribution to the joint venture project. It formed part of his overhead as a builder and Mr Andrews would have recovered a proportion of it had he carried out building construction on the Property and recovered his costs including his builder’s margin as agreed with Mr Kay. I consider that this amount should be deducted from the sum allowed to Mr Andrews for his capital contributions.[49]
[49]The somewhat limited consequence of this conclusion is that the amount of Mr Andrews’ capital contribution would be reduced from $24,473 to $21,483 and the notional residue would be increased by the sum of $2,990 and 20% of that latter sum, namely $598 would be added back to Mr Andrews’ entitlement.
Ground of appeal 13
The appellant submitted that the judge should not have attributed any value to the town planning permit in circumstances where the permit might not be renewed or would have expired by the time any realisation of the Property could occur. The permit was due to lapse within one month of the judgment given on 15 December 2010. On the other hand, the respondent argued that the evidence at trial related to the value of the Property as at September 2010 with a planning permit and that the appellant had not contended that the Property should be valued without a permit due to its expiry in January 2011. The respondent said if that submission had been made by the appellant evidence could have been led by the respondent ‘with respect to extending the permit’s life and/or valuing the Property on the basis that it did not have a permit but with the expectation that one would be granted and/or renewed.’ I think the respondent’s arguments are valid and I would reject this ground.
Grounds of cross-appeal 1, 2, 3 and 4
For the reasons already stated, I consider that the judge did not err in law in his division of the net residual equity in the Property and I would therefore reject grounds 1 to 4.
Ground of cross-appeal 5
The respondent submitted that the judge erred in not giving sufficient weight to the evidence of Mr Buchanan with respect to comparable sales as opposed to the evidence of Mr Brindley. The respondent submitted that Mr Brindley’s evidence should have been rejected, leaving the only evidence of value as that of Mr Buchanan who valued the Property at $1.35 million.
In my opinion, the reasoning of the judge on the question of the value of the Property is unimpeachable. In particular, I do not think that any error can be detected in the judge’s conclusions set out in [24] above.
Conclusion
For the foregoing reasons, I would allow the appeal to the extent necessary to vary the judgment below to take account of the acceptance of ground 11 but I would otherwise dismiss both the appeal and the cross-appeal.
CAVANOUGH AJA:
I agree with Mandie JA.
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