Lahoud v Lahoud
[2010] NSWSC 1297
•10 November 2010
CITATION: Lahoud v Lahoud [2010] NSWSC 1297 HEARING DATE(S): 28 & 29 October 2010
JUDGMENT DATE :
10 November 2010JURISDICTION: Equity JUDGMENT OF: Ward J DECISION: Declare that the Independent Auditor's Report dated 24 August 2010 is valid. Order that Joseph Lahoud pay the sum of $346,027.17 to Victor Lahoud. Order that Joseph Lahoud pay the reasonable costs of (or fees rendered by) the auditor in relation to the audit. Amended Second Cross-Claim brought by Joseph Lahoud and Joseph Lahoud & Associates be dismissed. Order that cross-claimants pay the fourth cross-defendant's costs of the cross-claim. To hear submissions on other costs orders as necessary. CATCHWORDS: PRACTICE and PROCEDURE - whether audit conducted pursuant to orders previously made is valid or should be set aside - whether audit in conformity with contract - whether an obligation of natural justice owed by auditor - HELD - audit was in conformity with contract as previously construed - no obligation of natural justice - receipt of submissions assumed at best an obligation to give due consideration and a reasonable opportunity to respond - there was no breach of any such duty - the sum repayable by Joseph Lahoud consequent upon the audit is $346,027.17 - costs of the audit are the reasonable costs of the auditor in the conduct of the audit (including his costs of considering and responding to the various submissions put to him) - RESTITUTION - whether entitlement to a 'freestanding' award of interest for restitution of interest on sum retained in accordance with Terms of Settlement but repayable upon subsequent audit determination - HELD - no unjust enrichment - no restitution of interest LEGISLATION CITED: Civil Procedure Act 2005 (NSW) CASES CITED: Alati v Kruger [1955] HCA 64; (1955) 94 CLR 216
Andrews v Queensland Racing Limited [2009] QSC 364
Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662; 78 ALR 157; [1988] HCA 17
Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485
Barber v Kenwood Manufacturing Co Ltd [1978] 1 Lloyds Rep 175
Boreland v Docker [2007] NSWCA 94
Cadorange Pty Ltd (in liq) v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26
Capricorn Inks Pty Limited v Lawter International (Australasia) Pty Limited [1989] 1 Qd R 8
Chow and Ors v Yang and Ors [2010] SASC 96
Commercial Bank of Australia v Younis [1979] 1 NSWLR 444
Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd (1994) 182 CLR 51; 126 ALR 1; [1994] HCA 61
Commonwealth Homes and Investment Ltd v Smith (1937) 59 CLR 443
Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285
Cornwall v Rowan (No 2) [2005] SASC 122
David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353
Delbridge v Low [1990] 2 Qd R 317
Dextra Bank & Trust Company Limited v Bank of Jamaica [2002] 1 All ER (Comm) 193
Enron Australia Finance Pty Limited (in liq) v Integral Energy Australia [2002] NSWSC 753
Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230 CLR 89
Fletcher Construction Australia Limited v MPN Group Pty Limited (unreported, NSWSC, 14 July 1997)
Fryer v Sturt (1855) 16 CB 218; 139 ER 740 743
Gett v Tabet (2009) 254 ALR 504; [2009] NSWCA 76
Gould v Vaggelas (1985) 157 CLR 215
Haxton v Equuscorp (formerly Equus Financial Services Ltd) (ACN 006 012 344) (2010) 265 ALR 336; [2010] VSCA 1
Henville v Walker (2001) 206 CLR 459
Hermann v Charny (1976) 1 NSWLR 261
Hermann v Charny (1976) 1 NSWLR 261
Heydon v NRMA Ltd (No 2) [2001] NSWSC 445; (2001) 53 NSWLR 600
John Nelson Developments Pty Limited v Focus National Developments Pty Limited [2010] NSWSC 150
Karenlee Nominees Pty Ltd v Gollin & Co Ltd [1983] 1 VR 657
Kelly v Solari (1841) 9 M & W 53; 152 ER 24
Kioa v West (1985) 159 CLR 550,
Kleinwort Benson Ltd v Lincoln City Council [1998] 4 All ER 513, [1999] 2 AC 349
Lactos Fresh Pty Ltd v Finishing Services Pty Ltd (No 2) [2006] FCA 748
Lahoud v Lahoud [2006] NSWSC 126
Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314
Lexane Pty Ltd v Highfern Pty Ltd [1985] 1 Qd R 446
Lumbers v W Cook Builders Pty Ltd (in liq) [2008] HCA 27; (2008) 232 CLR 635; (2008) 247 ALR 412
McClelland v Burning Palms Surf Life Saving Club [2002] NSWSC 410
Morgan Equipment Company v Rodgers (No2) (1993) 32 NSWLR 467
Murdocca v Murdocca (No 2) [2002] NSWSC 505
National Australia Bank Ltd v Bond Brewing Holdings Ltd [1991] 1 VR 386
National Australia Bank Ltd v Budget Stationery Supplies Pty Ltd (23 April 1997, unreported)
Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; (1987) 162 CLR 221
PC Developments Pty Ltd v Revell (1991) 22 NSWLR 615
R v Companies Auditors Board; Ex Parte Viney (1978) 3 ACLR 745
Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234
Roads and Traffic Authority v Ryan (No 2) [2002] NSWCA 128
Rodger, Carnie and Gilman v Comptoir D'Escompte de Paris (1871) LR 3 PC 465
Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 ; 185 ALR 335; [2001] HCA 68
Salib v Gakas; Newport Pacific Pty Ltd v Salib [2010] NSWSC 505
San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340
SCI Operations Pty Limited and Aci Operations Pty Limited v Commonwealth of Australia [1996] FCA 1739
Seltsam Pty Limited v Ghaleb [2005] NSWCA 2008
Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Her Majesty's Commissioners of Inland Revenue and another [2007] UKHL 34, [2007] 4 All ER 657
Sibley v Grosvenor (1916) 21 CLR 469
State Bank of New South Wales Ltd v FCT (1995) 62 FCR 371; 132 ALR 653
Sutcliffe v Thackrah [1974] AC 727
The Autothrepetic Steam Boiler Cp., Limited and Townsend, Hook & Co, In re an Arbitration between (1888) 21 QBD 182
Triarno Pty Limited v Tridon Contractors Limited (unreported, NSWSC, 22 July 1992)
Ucar v Nylex Industrial Products Pty Limited [2007] VSCA 181
Walker & Son & Brown, In re an Arbitration between (1882) 9 QBD 434
Wasada Pty Limited v State Rail Authority of New South Wales (No.2) [2003] NSWSC 987
Westdeutsche Landesbank Girozentrale v Islington London BC [1996] 2 All ER 961, [1996] AC 669, [1996] 2 WLR 802, HL
Woolwich Equitable Building Society v IRC (No 2) [1992] 3 All ER 737, [1993] AC 70
Xuereb v Viola (1989) 18 NSWLR 453
Ying v Song [2009] NSWSC 1344TEXTS CITED: Birks, Introduction to the Law of Restitution, Oxford Clarendon Press, 1985
Burrows (ed), Essays on the Law of Restitution, Oxford Clarendon Press, 1991
Finn (ed), Essays on Restitution, Law Book Co., 1990
Goff and Jones, The Law of Restitution, 4th ed, Sweet & Maxwell, 1993
Halsbury's Laws of England, 4th ed, vol 9, Butterworths
Mason, Carter and Tolhurst, Mason & Carter’s Restitution Law in Australia, Butterworths, 1995PARTIES: Victor Lahoud (First Plaintiff/First Cross-Defendant)
Castle Constructions Pty Ltd (Second Plaintiff/Second Cross-Defendant)
Solidare Pty Ltd (Third Plaintiff/Third Cross-Defendant)
Joseph Lahoud (First Defendant/First Cross-Claimant)
Joseph Lahoud & Associates Pty Ltd (Second Defendant/Second Cross-Claimant)
Stephen Roger (Fourth Cross-Defendant to Second Cross-Claim)FILE NUMBER(S): SC 07/255809 COUNSEL: M Einfeld QC with S Philips (Victor Lahoud parties)
S Epstein SC (Joseph Lahoud parties)SOLICITORS: McLachlan Thorpe Partners (Victor Lahoud parties)
Robertson Saxton Primrose Dunn (Joseph Lahoud parties)
Ian Harold Congdon (Stephen Roger) (submitting appearance save as to costs)
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
WARD J
WEDNESDAY 10 NOVEMBER 2010
07/255809 VICTOR LAHOUD & 2 ORS V JOSEPH LAHOUD & ANOR
JUDGMENT
1 HER HONOUR: Before me for hearing on 28 and 29 October 2010 were two opposing applications in relation to the outcome of an audit carried out by an accountant (Mr Stephen Roger) pursuant to orders I made last year in these proceedings (then numbered 3582/07).
2 The first is an application brought by way of Notice of Motion filed on 16 September 2010 by the plaintiffs in these proceedings (to whom I will refer for convenience as the Victor Lahoud parties) seeking declaratory and other relief against the defendants (the Joseph Lahoud parties) predicated on the validity of the audit. The second is a claim by the Joseph Lahoud parties pursuant to an Amended Second Cross-Claim, to which they have joined Mr Roger as the fourth cross-defendant, seeking declaratory and other relief as to the alleged invalidity of the audit on the basis that it was not in accordance or in conformity with the contract pursuant to which it was conducted (because Mr Roger failed to address the proper subject matter of the audit and/or because he denied the Joseph Lahoud parties natural justice).
3 No relief is sought directly against Mr Roger, who has filed a submitting appearance (except as to costs) and whose legal representative sought to be, and was, excused from attendance at the hearing (following confirmation from Senior Counsel appearing for the Joseph Lahoud parties (Mr Epstein SC) that no claim for damages or compensation was sought to be made against Mr Roger consequent upon any finding that might be made to the effect that there had been a breach by him of his contract of retainer in relation to the audit).
Background to the present applications
4 Briefly, by way of background, there were before me last year two separate proceedings, both involving the two brothers (Victor and Joseph Lahoud) and entities associated with each (in the case of Victor, those being Castle Constructions Pty Limited and Solidare Pty Limited; and in the case of Joseph, that being Joseph Lahoud & Associates Pty Limited (“JLA”)). The current applications are made in what were referred to in the substantive hearing as the audit proceedings (formerly 3582/07 now 07/255809). (The other proceedings, referred to as the damages proceedings, are of no relevance for present purposes.) The two proceedings were heard together.
5 The history of the disputes between the parties is set out in some detail in my reasons for judgment published on 3 July 2009 in the substantive proceedings and I do not propose here to repeat that, other than as necessary for the purposes of the current applications.
6 On 6 February 2001, Terms of Settlement were signed by the parties recording an agreement for the dismissal by consent of proceedings then before the Industrial Relations Commission of New South Wales. Those Terms of Settlement (which in May 2005 were held by Palmer J to be binding on the parties) provided, among other things, for the payment to Joseph Lahoud of the sum of $570,000 and for the parties to enter into a deed in accordance with their agreement but with the inclusion of some additional terms including a mutual release. In consideration for the entry into the Terms, the then proceedings were dismissed.
7 The sum of $570,000 coincided in amount with (and, as I accepted in the substantive proceedings, in Victor’s eyes represented) Victor Lahoud’s then estimate of a half share of the profits of the Cammeray property development in which the brothers had been involved (and over which they had been for some time in dispute). Joseph Lahoud did not accept that estimate.
8 Victor Lahoud had indicated to Joseph Lahoud, shortly before the Terms of Settlement were agreed, that the net profits of the Cammeray development would be in the order of $1.5 million. However, on the morning the Terms of Settlement were signed, certain “figures” were provided to Joseph Lahoud (which later formed part or all of Annexure “A” to the Terms of Settlement) that showed a lower profit for the project. Joseph Lahoud did not accept that those “figures” were accurate. His legal advisers told him that he could seek to have a provision included in the Terms of Settlement allowing for an audit and on his behalf they made such a request. The Victor Lahoud interests acceded to that request on the basis that there should be a right on both sides to elect to have an audit carried out.
9 Paragraph 1 of the Terms of Settlement thus came to include provision for either party “to elect to have the figures audited” (my emphasis) and for what was to occur by way of repayment or adjustment as between the respective parties once the outcome of any such audit was known. The provision for adjustment thus contemplated that one outcome of any audit was that the audited profit might be less than the profit calculation referred to in the Terms of Settlement.
10 Thus far, there seems to be no real factual dispute. Nor is there any dispute that the sum of $570,000 was paid to Joseph Lahoud on 6 February 2001. However, there is a dispute as to what that sum should now be seen as representing in the context of the question as to what amount is repayable by Joseph Lahoud if the Roger audit is valid.
11 Joseph Lahoud’s evidence in cross-examination in the substantive proceedings as to his understanding of this amount focussed not on the relationship that this particular amount bore to the profits of the project but rather on the fact that it was “half of the figures in annexure A” – T 127.21. He accepted that the payment he received as half of the gross profit was in the order of $346,000 (T 134.36) but said that it did not matter to him how the components of the $570,000 were categorised in Annexure A - it was the total figure with which he was concerned (T 134.39). That evidence is consistent with the purpose of any audit under clause 2 being to produce a determination of the overall profits of the project (from which Joseph Lahoud was to recoup his half share), as I held in the substantive proceedings, since it is clear that what Joseph Lahoud maintained an entitlement to was a half share of the profits.
12 In the present context, the question as to what should be taken (objectively speaking) to have been understood by the parties as being represented by the sum of $570,000 paid in 2001 pursuant to the Terms of Settlement becomes relevant when considering what was meant by the words “said profit calculation” in clause 2 of the Deed, an issue addressed later in these reasons.
13 As I say, the sum provided for under the Terms of Settlement was duly paid. However, the parties were initially unable to agree on the terms of the deed to be entered into pursuant to paragraph 7 of the Terms of Settlement. There then arose a dispute as to whether there had been a repudiation by the Joseph Lahoud parties of the agreement recorded in the Terms of Settlement and that dispute was heard by Palmer J, who made orders in October 2005 for the execution of a deed by way of specific performance of the Terms of Settlement. A Deed of Settlement was (finally) executed on 5 February 2007, pursuant to the orders that had been made by his Honour in October 2005 (the delay occasioned by an unsuccessful appeal brought by the Victor Lahoud interests from his Honour’s decision).
14 Clause 2 of the Deed of Settlement, which acknowledged the $570,000 payment, gave each party a right (in the same terms as had the Terms of Settlement) to elect to have an audit carried out. The Victor Lahoud parties almost immediately invoked that right and there was then a dispute as to whether there was a subsisting entitlement on their part to elect for an audit (notwithstanding the terms of the Deed) in the events which had happened and, if there were to remain a right to an audit under the Deed, as to what was to be the subject of the audit. Those questions came before me in the substantive proceedings (and the latter seemingly remains in dispute notwithstanding the findings I made last year).
15 The Joseph Lahoud parties (who had denied any subsisting entitlement on the part of the Victor Lahoud parties to an audit pursuant to clause 2 of the Deed) contended in the substantive proceedings that if there did remain any entitlement to an audit then this was to be limited to an audit of the “figures” contained in Annexure A to the Deed (as opposed to an audit of the profit of the Cammeray development to which those “figures” related).
16 Annexure A (to both the Terms of Settlement and Deed of Settlement), which has been the centre of much attention on the current application, comprised a two page document headed “Costs” and 28 pages of what seem, on their face, to be what could best be described as supporting documentation (MYOB printouts and certain invoices) for the calculations set out in the preceding two page document.
17 Relevantly, for present purposes, that two page costs calculation set out a series of amounts totalling a sum of $4,745,875.02 (described as ‘Total Cost’, but which did not include all of the costs of the project, having omitted at least to include the stamp duty payable); a series of amounts producing a net sale proceeds figure of $5,437,929.36; and then the following:
- Gross profit: 5,437,929.36
4,745,875.02
692,054.34
------------------------------------------
50% of gross profit = $346,027.17
Reimbursement = $ 223,402.90
$569,430.07
18 The last figure on the page (the $569,430.07 figure) as rounded up, provides the logical explanation for the $570,000 payment for which provision was made in the Terms of Settlement (and which was paid in February 2001) and seems to have been treated as such, at least by the Victor Lahoud parties. The thrust of Joseph Lahoud’s cross-examination in the substantive proceedings was also to accept that this was the case. If so, then on the face of Annexure A the sum of $570,000 represents both a 50% share of the estimated gross profit of the project and a reimbursement of project costs shown as being attributable in some fashion to JLA. (I note that in cross examination in the substantive proceedings it seemed in effect to be put to Joseph Lahoud, and accepted by him, that the sum of $223,000 was for reimbursement of costs (T 174.29) with the balance representing a share of gross profit.)
19 In the determination of the substantive issues in the audit proceedings, I held that the Victor Lahoud parties were entitled to an audit pursuant to clause 2 of the Deed of Settlement and, relevantly for present purposes, that such an audit was to be of “the profits of the Cammeray project (and not merely an audit of the figures appearing in Annexure “A” of the Terms of Settlement alone)”. In due course I made a declaration in those terms. The question so determined had been posed by agreement between the parties and the subject of submissions by both sides. If I may say so, the construction I placed on the meaning of clause 2 in that regard represented a considered view on my part and one which I had thought to be expressed in very clear terms.
20 Following that decision in July 2009, the parties (not without further dissension along the way) appointed Mr Roger to carry out the clause 2 audit. One of the matters of dissent was as to the terms of the instructions to be given to Mr Roger in the form of a joint letter of instructions and, in particular, whether it was to include a statement requested by the Victor Lahoud interests to the effect that “The Parties will not make submissions of any kind, nor interfere in any way with the conduct of the audit, except to respond to any query which you may have in the process of conducting the audit” (a statement to which the Joseph Lahoud parties now point as indicative of a desire of the Victor Lahoud parties effectively to shut Joseph out of the audit process).
21 The Victor Lahoud parties, exercising the liberty to apply that I had granted in July, then brought the matter back before me on 12 November 2009, seeking various directions as to the appointment of the auditor to carry out the audit and, in particular, a direction that the procedure to be followed in making the audit be determined by the auditor and a direction (along the lines that the Joseph Lahoud parties had rejected) in relation to the ability or otherwise of the parties to make submissions to the auditor. On that occasion I directed (by consent) that the procedure to be taken in undertaking the audit was to be determined by the auditor. I also directed that Mr Roger be provided with a joint instruction letter in the terms of that which had been prepared but omitting the proposed limitation on the making of submissions to the auditor (the question whether the auditor considered it appropriate to call for or entertain submissions by the parties being, in my view, a matter of procedure for him to determine).
22 That joint instruction letter, dated 12 November 2009, provided, relevantly, as follows:
- Both parties hereby request that, pursuant to the orders of Ward J made on 31 July 2009, you undertake an audit of the profits of the Cammeray Project . (my emphasis)
- The manner in which the audit is to be conducted is entirely a matter for your determination.
23 Mr Roger then proceeded to conduct the audit (which took some 9 months and in the course of which he received various submissions from the parties) and published his conclusion in a document headed Independent Auditor’s Report, dated 24 August 2010, the sub-heading to which was “Report on the Property Development Statement” under which appeared the following:
I have audited the accompanying Property Development Statement [that being a document which had been prepared by the project development company’s accountants, Castletons, and forwarded by them to Mr Roger on 2 October 2009 prior to the joint appointment letter and without the Joseph Lahoud parties’ knowledge] … for the period from 1997 through to 2001.
24 The Audit Report identified a number of discrepancies in or adjustments to be made to the Property Development Statement (to which I will refer as the PDS), attached an Adjusted PDS disclosing a net development loss of $16,454.89 and concluded that:
In my opinion, except for the effects on the Statement of the matters referred to in the preceding paragraph, the [PDS] gives a true and fair view of the profits of the Cammeray Project as required by Order 3 of Ward J dated 31 July 2009.”
25 Not surprisingly, perhaps, given the history of the disputes between the brothers, issue was taken by the Joseph Lahoud parties throughout the course of the audit as to various aspects of the audit process; the Victor Lahoud parties generally took an opposing stance on those matters; there was an unedifying exchange of acrimonious correspondence throughout the course of the audit from both sides; and the Joseph Lahoud parties have not accepted that the outcome of the audit process is binding upon them. Hence the applications now before me.
26 In particular, the Joseph Lahoud parties contend that:
(i) it was an implied term of Mr Roger’s retainer that, in his conduct of the audit, he would accord the parties natural justice and would not receive material relating to the audit from one party without ensuring that the adverse party was also provided with that material and given a reasonable opportunity to answer it (paragraph 8 of the Amended Second Cross-Claim);
(iii) alternatively, the Audit Report does not give rise to any rights under the Deed on the grounds that Mr Roger denied natural justice to the Joseph Lahoud parties (in that he received material relating to the audit from the Victor Lahoud parties without ensuring that the Joseph Lahoud parties were provided with that material and given a reasonable opportunity to answer it) (paragraph 13 of the Amended Second Cross-Claim).(ii) the Audit Report “was not an audit of the profit calculation of $692,054.32 referred to in clause 2 of the Deed”, as said to be required by the instruction letter (paragraph 11 of the Amended Second Cross-Claim) and, not being in accordance with the contract constituted by the Deed, does not give rise to any rights under the Deed (paragraph 12 of the Amended Second Cross-Claim);
27 The material with which it is said that the Joseph Lahoud parties were not provided and were not given a reasonable opportunity to answer was pleaded as being:
(b) a document entitled “Explanatory Notes and Disclosures” (contained in the attachment to the document at tab 115 to Exhibit 2 on these applications) and ‘the source documents referred to therein’. (I should add that it is accepted that the quantum of the amounts the subject of complaint on this aspect of the matter is somewhere in the order of $17,000, in the context of a project the overall loss on which, as indicated in the Audit Report, is in the order of $16,000. Therefore, it is difficult to see how any error in the inclusion of this amount as an expense of the project could have materially affected the outcome of the audit.)
(a) the MYOB files identified in a letter dated 16 December 2009 from the Victor Lahoud parties to Mr Roger (contained at tab 56 of Exhibit 1 on the present applications); and
28 It is relevant to note that there is no allegation (and nor on the facts could there have been) that the Joseph Lahoud parties were not permitted to inspect the material itemised in paragraph 13(a) and (b) of the Amended Second Cross-Claim or to make submissions on such material. The complaint is that they were not given copies of the material (or some of the material, since they accept that they were provided with the Explanatory Notes statement itself) and as to the form in which some of the material was presented for inspection. There is also a complaint as to the manner in which a request for re-inspection of material was treated.
29 No complaint is made in the pleading as to any bias or collusion on the part of Mr Roger, although emphasis was placed (in the course of Mr Epstein’s written and oral submissions) on what was said to have been the ‘unilateral’ and ‘covert’ provision of information to, and ‘surreptitious dealings’ with, Mr Roger (and an earlier nominated auditor) on the part of the Victor Lahoud parties or on their behalf. It was submitted by Mr Epstein that this had ‘led’ Mr Roger to “misconceive his proper function”. It was further asserted in submissions, though nowhere was it pleaded, that Mr Roger had been induced to ‘acquiesce’ in the Victor Lahoud parties’ “tactics” (those allegedly being to shut out the Joseph Lahoud parties from effective participation in the audit process). Reference was also made to the steps taken by the Victor Lahoud parties in relation to the so-called Baker Taylor “audit” (the subject of comment in the substantive proceedings), this seemingly being put forward as indicative of a tendency on the Victor Lahoud parties’ interests to seek to exclude participation by the Joseph Lahoud parties from any audit process.
30 In that regard, it hardly needs to be said that allegations of fraud or collusion between the auditor and the Victor Lahoud parties or of actual bias on Mr Roger’s part would have needed to have been expressly pleaded in order now to be maintained. They were not. Although said to be put as ‘context’ from which I could draw certain conclusions as to the issue whether the audit was conducted in accordance with the contract (or to see how it was that Mr Roger had come to act otherwise than in conformity with the contract), it is hard to see this evidence as anything more than symptomatic of the ongoing suspicion and distrust on the part of the Joseph Lahoud parties towards the Victor Lahoud parties (which, of course, may well be mirrored on the latter’s part). I accept the submission by Senior Counsel for the Victor Lahoud interests (Mr Einfeld QC) that those matters are irrelevant to the issues I presently have to determine. How Mr Roger came to determine what it is that he was required to audit seems to me to have nothing to with whether he audited what he was required to do in accordance with the contract.
31 The Joseph Lahoud parties say that if any amount is payable as a result of the audit it is limited to the sum of $346,027.17 (that being a half share of the difference between the amount described in Annexure A to the Terms of Settlement (and Deed) as the gross profit ($692,054.34) and the amount of the profit as audited (i.e. nil).
32 The Victor Lahoud parties, on the other hand, contend that Joseph Lahoud is liable to repay the whole of the sum of $570,000 (or, alternatively, $570,000 plus half of the audited loss of $16,454.89 on the basis that the losses were also to be shared by the brothers).
33 There is also a dispute as to what is meant by ‘the reasonable costs of the audit’ which are payable by Joseph Lahoud in the event that the audit is upheld as being valid (since it discloses a profit figure less than that in Annexure A). The Victor Lahoud parties, by their notice of motion, sought an order in that regard which would include their legal and other costs of preparation for the audit and not just Mr Roger’s fees. Mr Epstein submits that the ‘costs of the audit’ relate solely to the costs of the auditor in carrying out the order (and that, in any event, I could not on the material before me perform any form of costs assessment as to the reasonableness of the other fees claimed).
34 Finally, a claim is made by the Victor Lahoud parties for interest on the sum of $570,000 (or the lesser sum of $346,027.17 if that be the appropriate figure) at Supreme Court rates from February 2001. It was conceded by Mr Einfeld that there could be no contractual claim for interest until after the audit had concluded and a sum was determined to be repayable by Joseph Lahoud in accordance with clause 2 of the Deed of Settlement. The basis on which the interest claim for the period from 2001 was ultimately put was on a restitutionary basis. Interest has been calculated at a total of $519,996.16 (on the higher amount) or $315,671.58 (on the lesser amount) in accordance with a schedule handed up by Mr Einfeld. Mr Epstein denies that there is any ‘free-standing’ restitutionary right to interest.
Issues
35 The following issues now arise for determination:
- 1. Was the audit carried out otherwise than in accordance with the contract constituted by the Deed? In particular:
- (a) was the audit an audit of “the profits of the Cammeray project” as required pursuant to the orders that I made last year or was it an audit of something else (such as the PDS, as the Joseph Lahoud parties assert)?
- (b) was there an obligation on the part of Mr Roger to accord the parties natural justice in the conduct of the audit and, if so, was there a breach of that obligation?
- 2. If the audit is valid:
- (a) what is the amount payable under clause 2 of the Deed of Settlement by Joseph Lahoud ($570,000 or $346,027.17) (and is there any further amount payable by Joseph Lahoud referable to a share of the net losses as determined on the audit?)
- (b) do the “costs” of the audit for which Joseph Lahoud is liable include anything other than the costs of or fees rendered by the auditor?
- (c) are the Victor Lahoud parties entitled to interest in equity on the principal sum repayable as determined in (a) above from the date of the payment to him in February 2001 on a restitutionary basis and, if so, at what rate?
36 In summary, I am of the view that the audit was conducted in conformity and in accordance with the contract constituted by clause 2 of the Deed of Settlement and is not liable to be set aside. It was an audit on the “profits” of the development (that being the construction I had placed on the clause) and was determined in the manner Mr Roger seems to have considered, in the exercise of his expertise, most appropriate. (The fact that another auditor might have carried out that function in a different way is not to the point.)
37 I do not consider that Mr Roger, by reason of his appointment to carry out the audit, had an obligation to afford the parties natural justice in the conduct of the audit and nor did he by his conduct assume such an obligation. At the highest, I consider that, by calling for and/or receiving submissions from the respective parties, Mr Roger was required to give due consideration to those submissions and afford a reasonable opportunity to the opposing parties to respond to those submissions. I find that he did so.
38 I do not consider that Mr Roger had any obligation to provide the Joseph Lahoud parties with copies of the MYOB files referred to in paragraph 13(a) or the material referred to in paragraph 13(b); nor do I consider that the Joseph Lahoud parties were denied a reasonable opportunity to consider and answer the material referred to in paragraph 13(b) of the Amended Statement of Cross-Claim.
39 As to the remaining issues, I consider that the sum repayable by Joseph Lahoud pursuant to clause 2 of the Deed of Settlement consequent upon the determination of the audit is $346,027.17; that the costs of the audit which Joseph Lahoud is obliged to pay are the reasonable costs (or fees) of the auditor in the conduct of the audit (including his costs of considering and responding to the various submissions put to him); and that there is no entitlement to interest from February 2001 on the sum now repayable to Victor Lahoud (there being no injustice in the retention by Joseph Lahoud of the sum paid to him in February 2001 as part of the agreed resolution of the then Industrial Relation Commission proceedings until such time as the audit was completed). (A claim for interest under s 100 of the Civil Procedure Act 2005 (NSW) would lie from the date on which the cause of action for payment under the Deed arose, which in my view would be a reasonable time after the making of the audit determination and/or a demand for the amount payable under that determination.)
Issues
40 I turn then to the issues before me for consideration and, as its construction is yet again in issue, I first set out the relevant part of the text of clause 2 of the Deed of Settlement:
- …The [Victor Lahoud parties] have provided written details of the profit calculation for the Cammeray Project which is Annexure “A” to the Terms of Settlement, and as at 6 February 2001, verily believed that those details were accurate. Either party may elect to have the figures audited by an accountant to be agreed, or in default of agreement as nominated by the President of the Institute of Chartered Accountants. If on audit, the audited profit exceeds the said profit calculation, [Joseph Lahoud] is to be paid one half of the difference by [the Victor Lahoud parties]. If the audit profit is less than the said profit calculation , [Joseph Lahoud] will pay the [Victor Lahoud parties] one half of the difference. The reasonable costs of the audit are to be paid by [Joseph Lahoud] in the event that the audited profit figure is the same or less than the said profit calculation. (my emphasis)
41 At the outset, I also note that it seemed to be accepted by the parties (although the Joseph Lahoud parties do not accept that this has the consequence that there is no obligation to observe the principles of natural justice) that in carrying out the audit Mr Roger was in the position akin to an expert or appraiser (and not an arbitrator as such), a distinction that is of some relevance when considering the existence of any obligation to accord procedural fairness in the conduct of his audit, for the reasons explained in my analysis of the relevant case law in John Nelson Developments Pty Limited v Focus National Developments Pty Limited [2010] NSWSC 150 (from [206]). There was certainly no suggestion that Mr Roger had been appointed to carry out an arbitration, as that process is generally understood, of the dispute as to the profits of the project.
42 It was further accepted by way of general principle that, absent actual fraud or collusion, an expert determination will be rendered ineffective and liable to be set aside only if it is affected by a mistake which renders it not in accordance or in conformity with the contractual contemplation of the parties in the sense considered in Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314; and that apprehended bias is not sufficient (Andrews v Queensland Racing Limited [2009] QSC 364, McMurdo J). As no actual fraud or collusion was pleaded, the criticisms made of the so-called covert or surreptitious behaviour of the Victor Lahoud parties, whether or not they have foundation, seem to me to be irrelevant.
1. Was the audit in accordance with the contract?
(a) Was there a mistake as to the subject matter of the audit?
43 In Karenlee Nominees Pty Ltd v Gollin & Co Ltd [1983] 1 VR 657, at 671, (which was approved by McHugh JA in Hudson, at 335A), it was said that an expert determination will not give rise to enforceable consequences, if the expert is guilty of a “mistake …as to the subject matter or terms or effect of the contract”. This is because a determination tainted by such a mistake is “not in accordance with the contract”. The example often given in this context is of a rent review valuation/determination where the valuer makes a mistake as to the premises to be valued (as dealt with in Hudson).
44 What then is the mistake that is said to infect Mr Roger’s audit and render it liable to be set aside? Although a number of issues were taken as to the audit process (including a dispute as to whether the contract provided for a ‘statutory’ audit or one carried out in accordance with the relevant statutory audit obligations (which was the approach seemingly adopted by Mr Roger) as opposed to an ‘engagement’ (not strictly an audit so-called) as an independent referee to determine the profit of the project in accordance with accounting standards and any necessary enquiries (of the kind which the first prospective auditor, Mr Cully Gower, said he was prepared to undertake) and a dispute as to whether the auditor had appropriately had regard to the correct auditing standard that would have been applicable to a statutory audit undertaken in the relevant period), what Mr Epstein in substance relies on for the assertion that what Mr Roger did was not in accordance with clause 2 of the Deed turns on the focus placed by Mr Roger on the PDS.
45 Mr Epstein expressed this criticism in a number of ways. In his written submissions, Mr Epstein submitted that the function of auditing a particular “profit calculation” for a particular property development project is not identical with the function of auditing a different “profit calculation” for that same project and that (Mr Roger having carried out an audit of the calculation in the PDS and not that set out in Annexure A) there was a material departure from his instructions. In oral submissions it was similarly emphasised that what Mr Roger was not entitled to perform was an audit on an ‘entirely different profit calculation’ to that referred to in clause 2 of the Deed of Settlement.
46 When asked what Mr Roger should have done, Mr Epstein’s response was that he needed to have regard to the Annexure A profit figures and to perform his audit function by reference to those figures (and not by reference to the figures in the PDS furnished by the Victor Lahoud parties). Expanding on that, Mr Epstein said that what was required was that the subject matter of the audit should have been the profit calculation of $692,054.34 as contained in the Annexure A calculation and that Mr Roger was wrong to perform a statutory audit of a property development statement showing a loss of $13,000 and to perform that audit having regard to the then current auditing standards.
47 Mr Epstein seemed to accept that it would have been open to Mr Roger to determine what type of audit he was going to perform (T 70) or to choose to carry out the audit by reference to whatever auditing standards were applicable at the time (see T 69; T 74) or by way of an assurance engagement if he saw fit (T 74) (though it did seem that there was complaint at one stage as to this being treated by Mr Roger as an assurance engagement involving various parties); or indeed to carry out his audit in whatever manner he thought appropriate (T 75) even by reference, if he chose to do, to the PDS (T 75.49).
48 However, Mr Epstein’s fundamental complaint was that the audit was not a determination of whether the profit described in clause 2 was a profit with which Mr Roger agreed (T 74.36). He submitted (drawing a distinction between profits and profit figures, which was a constant refrain during the course of address) that Mr Roger was not there “to determine what the profit was” but was there to “audit a profit which was the prima facie position”. Thus, while he says that, consistent with my earlier rulings it was open to Mr Roger to introduce or have regard to a whole set of new items, he submits that it was not open to Mr Roger to ‘disregard’ the profit calculation of $692,054.34 or to treat as the subject matter of the audit the revised profit figures in the PDS.
49 Mr Epstein submits that nothing in my earlier judgment entitled an audit of anything other than the profit calculation figures or profit calculation in Annexure A (see T 71). At T 76, Mr Epstein submitted that nothing in what Mr Roger had been shown to have done confirmed that what he did was what he was required to do under clause 2 (“namely, audit someone else’s profits, profit calculation or profit figures and describe whether he was satisfied with that”).
50 Mr Epstein says that what Mr Roger did was to audit a profit calculation provided by the Victor Lahoud interests conformably with the framework for an assurance engagement. For the purpose of demonstrating this, I was taken in some detail through what was said to be the full documentary record (Exhibit 1) to show that Mr Roger’s understanding of what he was required to do was erroneous and that he had audited a profit calculation which did not conform to the profit calculation the deed required to be audited.
51 It seems to me what the submissions put for the Joseph Lahoud parties on this aspect of the matter boil down to is an insistence upon the auditor’s audit focus being primarily on the “figures” in Annexure A (that being said to be the only legitimate starting point for the enquiry) and (whatever else the auditor may have been able to take into account when so doing and whatever process the auditor may have wished to adopt in so doing) that all the auditor could then properly do is to say whether or not he agreed with the profit calculation set out in those particular figures.
52 I expressed the view, during the course of argument, that if such a submission were to be accepted this might be said to be a triumph of form over substance, by which I meant that if the Annexure A ‘figures’, as they appear on their face to do, describe a profit calculation of $692,054.34 for the project and if the adjusted PDS, as on its face it does, describes a net loss of around $16,000, then confirmation by the auditor that the latter represents a true and fair view of the profits of the project must logically carry with it the conclusion that the auditor does not accept the former (Annexure A) profit calculation and thus does not agree that the profit of the project is the figure set out in Annexure A. Mr Epstein does not accept that this is a tenable view. He submits (as he did in the substantive hearing) that management can put before an auditor a range of numbers or interpretations of “profit”, which may influence the auditor’s ultimate conclusion. It seems to me thereby to be suggested that an auditor might legitimately express a variety of different views as to the profits of a project each being said to be a true and fair view, based on the materials before the auditor, of what the profit is (so as to suggest that one could not conclude what the profit was, for the purposes of the clause 2 audit, by reference to anything other than the Annexure A figures).
53 I expressed the view last year, in response to a similar submission by Mr Epstein (that the concept of “profit” is not sufficiently precise to make it susceptible to audit), though there directed to the question whether an audit of profits could have been intended by the parties at all, that I would have expected an auditor appointed to carry out an audit of the “profits” of the Cammeray development should be able to form a view as to what, ordinarily, would be regarded as the audited profit of a development project. I considered it a matter for the auditor appointed to determine what properly should be treated as project costs to be taken into account in determining the net profit of the project (by reference to accepted industry standards and having taken into account whatever submissions might be made). I remain of that view.
54 Moreover, to the extent that the auditor’s views might be based on assumptions as to matters put to him by the Victor Lahoud parties, as reflected in the PDS, there is nothing to suggest that the Joseph Lahoud parties would not have been able to put forward submissions as to why those assumptions should not have been adopted (such as to the percentage of shared costs as between the various projects or the like) and there was nothing to suggest that Mr Roger’s view as to profit was not an acceptable view based on his expertise. Rather, what the Joseph Lahoud parties appear to cavil with is that he expressed a view as to the profits of the project at all (even though that is what I had concluded the audit under clause 2 required).
55 While the Audit Report might have been better expressed or headed, the conclusion expressed by Mr Roger can only fairly be read as a conclusion that the overall profit/loss of the project was accurately and fairly represented by the PDS as adjusted. In so concluding, Mr Roger has implicitly rejected the contention that the calculation in Annexure A represents a true and fair view of the profits of the project (to use the terminology adopted by Mr Roger in the audit report).
56 Mr Roger was apprised of the position taken by the Joseph Lahoud parties in relation to the subject matter of the audit. In his letter of 19 February 2010, he confirmed that he was treating the PDS as the ‘starting point’. Mr Epstein suggests that this was not merely the starting point but the main focus of the enquiry. However, there is no suggestion that Mr Roger did not have before him all the relevant MYOB or other business records (including those in Annexure A) or that he had not reviewed those carefully with any other underlying source material. A data room had been set up and Mr Epstein, in a different context referred to the vast quantity of transactions or items to be reviewed. Mr Roger could hardly have failed to appreciate that there was a significant dispute as to the quantum, if any, of the profits made out of the project and that different calculations of the profit figures were in existence. In his audit report he confirmed that he accepted his responsibility was to express an opinion on a statement (PDS) based on his audit. To the extent that opinion necessarily encompasses a conclusion to the contrary of the statement in Annexure A, then it surely does not need to be articulated for the purpose of providing a valid response in conformity with the contract. A net loss of some $16,000 is clearly not a profit of $692,054.34.
57 In other words, it seems to me that what Mr Roger did was to approach the question as to how the overall project profit/loss was to be determined (and hence his “audit” of the profits of the project) by adopting as his starting point the calculations provided by the company’s accountants in the PDS and then determining (by reference to source documents and with the benefit of submissions from the respective parties) whether in his view that reflected a true and fair view of the profit/loss of the project. In so doing, he had before him the calculation in Annexure A and the supporting documentation provided in Annexure A together with other material. The terminology used by Mr Roger in his response is unsurprising given that, as an auditor, expressing a view as to the true and fair representation of profits is what Mr Roger would commonly be asked to do as part of an audit of a company’s accounts. However, it does not seem to me that this means that what he ended up doing (however infelicitously he may have expressed it) was other than expressing or making a relevant determination (after an audit process) as to the profits of the project. Mr Roger was aware (from the letter at 165-166) that the purpose of his appointment was ‘to audit the final outcome of the residential project’.
58 The fact that Mr Roger might equally have commenced his task by reference to other material (such as the financial statements of the company or the source material or the documents forming part of Annexure A) or without the benefit of the company’s accountants’ attempt to apportion or allocate the cost items referable to this particular project as between other projects in which the company was involved, seems to me to be irrelevant. In accordance with the joint letter of instructions, it was a matter wholly within Mr Roger’s discretion to determine how best he considered that the audit exercise was to be carried out. In Triarno Pty Limited v Tridon Contractors Limited (unreported, NSWSC, 22 July 1992), Cole J held that where the parties had not agreed the procedure for the expert to follow it was then a matter for the expert and not the court to determine. Here, the parties expressly left the matter of procedure for Mr Roger to determine.
59 (Although in Fletcher Construction Australia Limited v MPN Group Pty Limited (unreported, NSWSC, 14 July 1997), Rolfe J, having referred to the decision of Cole J, commented that “in devising procedures the expert is no doubt obliged to ensure that he or she affords natural justice to both parties but, subject to that, he or she is to enter upon the determinative task as an expert and not as an arbitrator”, his Honour did not explain the basis on which there was said to be no doubt as to an obligation to afford natural justice in that instance and I do not understand such an obligation automatically to follow, having regard to what has been said in Hudson.)
60 Provided that in reviewing (or, if, as Mr Epstein contends, that be what he did, auditing) the PDS and expressing a view as to its accuracy, Mr Roger was in fact expressing his conclusion as to what was the net profit or loss of the project (which, after all, is what the PDS represented), then in my view he was carrying out the task he was instructed to do and in accordance with clause 2 of the Deed as I had construed it. (I had, last year, expressly rejected the suggestion that what the clause required was an audit of “figure” as opposed to “profits”.)
61 It seems to me to be artificial to suggest that all Mr Roger was doing was auditing the ‘figures’ in the PDS and not the profits of the project when the latter was the very subject addressed by the PDS (and where, on the submissions advanced by Mr Epstein, a similar process directed principally to the figures in Annexure A would have been consistent with clause 2 as I had construed it). (Had the PDS been directed to a wholly different subject matter – say, only to one category of profit or loss in relation to the project or as to a different project or as to a different group entity and had Mr Roger not then gone beyond the contents of that document in his enquiries to address matters relevant to the profits of this particular project, then that might be a different matter. It would then seem arguable that this exercise would not have been of the profits of the project and hence not in accordance with the contract; such that the case might more readily fall within the category of mistake which Mc Hugh JA had given by way of example in Hudson as vitiating an expert determination. However, there is no suggestion that this is what happened in this case.)
62 Insofar as the Joseph Lahoud parties take issue with the auditor making a determination as to the “profits” rather than the particular “profit figures”, the Joseph Lahoud parties’ position seems perilously close to seeking a re-agitation of the construction of clause 2 for which they had unsuccessfully contended in the substantive proceedings. This seems to me to be evident from their solicitors’ letter of 16 November 2009 to Mr Roger. Notwithstanding that I had expressly construed the reference to an audit in clause 2 of the Deed of Settlement as “an audit of the profits of the Cammeray project and not merely an audit of the figures appearing in Annexure A to the Terms of Settlement”, what was put to Mr Roger by the Joseph Lahoud parties’ solicitors was that “The audit function under clause 2 of the Deed is to audit those profit figures” (and those profit figures to which the letter referred can only be those to which reference was made in the preceding paragraph of the letter, namely the profit calculation set out in the Terms of Settlement of $692,054.34, detailed calculations of which were said to have been annexed in the form of MYOB accounting records and otherwise).
63 I frankly struggle to see this as anything other than an assertion completely to the contrary of my earlier findings in that regard (by which Mr Epstein conceded the Joseph Lahoud parties are bound) nor, despite his best endeavours, was Mr Epstein able to persuade me otherwise. If the Joseph Lahoud parties considered that the construction I had placed on the clause in this regard was incorrect then they were well versed in the avenues for challenging that construction (as the history of this matter reveals) and could have done so. They did not do so and therefore any attempt to persuade Mr Roger to depart from the construction I had placed on that clause would itself be to suggest a departure from the terms of the contract constituted by the Deed (and, had Mr Roger accepted this submission, liable to render his audit open to challenge by the Victor Lahoud parties).
64 Mr Roger, in his letter of 19 February 2010, himself noted that while the ‘starting point’ of his audit was the version of the financial report (PDS) that had been provided to him by the Victor Lahoud parties, this is no way limited the extent of his ‘audit procedures’ and did not preclude him from reviewing data not currently disclosed in that report. There is no suggestion that he did not act as he had indicated he would in that regard.
65 JLA’s letter dated 28 July 2010 expressed the view that the only ‘legitimate’ starting point was the profit figures provided in the Terms of Settlement themselves. Again, apart from this being a matter of process in my view, it harks back to the construction for which the Joseph Lahoud parties had unsuccessfully contended in the first place. It was for Mr Roger to determine the ‘starting point’ for his audit. His task, under clause 2 as construed by me, was not, as asserted in the letter, to audit “the profit figures provided in the Terms of Settlement” whether or not those figures might have provided a useful starting point for the audit but, rather, was to audit the profits of the project (as emphasised, correctly in my view, by the Victor Lahoud parties’ solicitors in their letter of 29 July 2010 and accepted by Mr Roger by his own letter of that date).
66 I am not persuaded that Mr Roger failed (by reference to the manner in which he approached his task having reference to the PDS and making adjustments he considered necessary to that document (following his review of the PDS, source documents and the like) to reflect his view as to the accurate statement of the profits/losses of the project) to carry out his audit in accordance with the contract.
67 Accordingly, the first basis on which the Joseph Lahoud parties challenge the validity of the audit report fails.
(b) Duty to accord procedural fairness?
68 The next question is whether Mr Roger had an implied contractual obligation to accord procedural fairness (whether arising by reason of the role he was contractually retained to perform having regard to the nature or requirements of that role or, as Mr Epstein also contended, as part of the implied duty that there seems no doubt as someone in the position of an expert, he had, to act honestly and impartially).
69 Mr Epstein’s submission is that the better view is that the implication of an entitlement to receive natural justice is to be made ‘generally’ in the case of expert determinations (not only those in which the receipt of submissions is contemplated or required) and further that this follows as a matter of course as soon as submissions are contemplated or required. That broad statement of principle does not seem to me to be supported by the authorities in this area, which I had cause recently to review in John Nelson Developments, nor does it sit well with Mr Epstein’s observation in submissions that it is an open question whether an expert is bound by the rules of natural justice.
70 In John Nelson Developments, I observed that, in the absence of express agreement, the question whether an expert (or, for that matter, appraiser) is under a duty to accord procedural fairness had been said to depend on whether the task being carried out by the expert is in the nature of a judicial enquiry. I noted that, speaking extra-curially in 2007 to the Institute of Arbitrators, the Hon. Michael McHugh AC commented that the fact that a determination was being carried out as an expert and not as an arbitrator pointed against the rules of natural justice being generally applicable to expert determinations but considered that there was a strong case for saying that where the expert was required (my emphasis) to receive submissions from parties then the rules of natural justice should apply (on the basis that the expert determination in that latter situation was then analogous to a quasi-judicial enquiry). This was the approach accepted by Einstein J in Enron Australia Finance Pty Limited (in liq) v Integral Energy Australia [2002] NSWSC 753, namely that:
It is plain that when one is examining the conduct of a judicial or quasi-judicial hearing, there is an expectation of impartiality and adherence to procedural fairness (or what was formerly referred to as natural justice).
It is of assistance to address this issue by first asking whether the … task is to be seen as that of an arbitrator, i.e. a quasi-judicial determination which will automatically invoke the principles of impartiality, or whether the task is merely that of an expert , valuer or appraiser. (my emphasis)However, where what is involved falls outside the realm of judicial or quasi-judicial determination, the issue is whether the principle of procedural fairness can be or should be maintained…
71 I was not taken to any authority which suggested that in general it should be accepted that experts are required to afford natural justice (other than English authority to suggest that they have an implied obligation to act fairly as well as impartially). Rather, at least in Australia, the question turns on what role the expert is retained to play in the particular events in question.
72 Here, there is no suggestion that the parties were appointing Mr Roger as an arbitrator per se (although equally the clause itself does not refer to the appointment of an expert). Mr Epstein contends that the task Mr Roger was to be appointed to perform under that clause necessarily called for the making of submissions by the parties and the ruling on those submissions in some fashion – since he says that it would have been impossible to determine the profits of the project simply by reference to source documents. I am by no means convinced that that is the case. Leaving aside the complication as to the group company’s business undertakings being contained in the central group records or accounts, there seems to me no reason why the auditor could not call for the production of documentary records and attempt an assessment on the face of those records. In any event the fact that the auditor might seek submissions (or perhaps more accurately information) from the company does not suggest to me that an arbitral or quasi-judicial process was contemplated.
73 Certainly, the clause would seem to indicate that the parties had in mind the appointment of someone with accounting expertise, given that the nomination of the party to carry out the audit was to be made by the Institute of Chartered Accountants. This suggests that more than a mere bookkeeping exercise was contemplated. Therefore, in the absence of a clear expression of intention to appoint an arbitrator for the purpose of carrying out the clause 2 audit, I would construe the appointment as being that of an expert not that of an arbitrator (and, hence, as not prima facie nor necessarily carrying with it the implication of a duty to accord natural justice in the conduct of the audit).
162 It was in this context that written submissions were received after the close of the hearing from both sides.
163 As clarified by the supplementary submissions on interest served by the Victor Lahoud parties, the entitlement to interest from 2001 on any amount that Joseph Lahoud was obliged following the audit to repay, was maintained on the basis that on the basis that equity has an ability to award interest on monies of which another party has had use over time by way of a ‘freestanding’ award (relying on the reasoning of Mason P in National Australia Bank and Heydon and what was said by the House of Lords in Sempra). However, it did not seem to be suggested that an entitlement to restitution depended on any factor beyond that of the retention of the principal sum. The enrichment of Joseph Lahoud (by the receipt of the monies and their deposit in an interest-bearing account) was said to be unjust because Victor Lahoud had thereby had no access to the funds in the interim. The ‘unjustness’ to which the Victor Lahoud parties pointed, therefore, was the fact that Joseph Lahoud had earned interest over the period and that Victor Lahoud had been deprived of the opportunity to earn interest over that same period.
164 Mr Epstein, in response, submitted in summary that it was necessary that an ‘unjust factor’ (beyond the mere fact of receipt of the funds) be present in order for the retention of the benefit to be unjust in the relevant sense. For the reasons set out above, I agree.
165 It was not until written submissions were served in reply to Mr Epstein’s submissions on interest that any such factor was identified. It is now submitted that was renders unjust the retention by Joseph Lahoud of the benefit (in terms of the opportunity to earn interest) on whatever sum is now repayable is that the original sum of $570,000 was paid to Joseph Lahoud under the mistaken belief that the profits from the Cammeray project would be substantial.
166 The issue of mistake was not raised in oral address nor was it raised in the written submissions provided in accordance with my amended directions (those having been made in circumstances where the parties’ attention had specifically been drawn to the question as to what was contended by the Victor Lahoud parties to be the relevant factor rendering the alleged enrichment unjust). The Joseph Lahoud parties have therefore not had the opportunity to consider or respond to that submission. (It might be thought to be the ultimate irony if they were to be deprived, by reason of the manner in which this submission has now been articulated, of a reasonable opportunity to respond to such a submission in the context of an application in which they complain of a denial of procedural fairness in another forum.)
167 Had I been minded to accept the position now advanced by the Victor Lahoud interests in relation to the interest claim, I would have felt it necessary to provide the Joseph Lahoud parties with a reasonable opportunity to address me in relation to the submission based on the alleged mistake. As it is, I do not accept that submission and hence I did not see the need to invite yet a further round of written or oral submissions on the point.
168 The reason that I do not accept that a mistaken belief of the kind to which the Victor Lahoud parties have now adverted is sufficient to render unjust the benefit obtained by the Joseph Lahoud parties from the retention of the moneys in question over the period from 2001 is that I do not accept (on the evidence before me both at the substantive hearing or on the present application) that any such mistake was causative of the payment.
169 The submission now put to me is that, when the $570,000 was paid pursuant to the Terms of Settlement, both Joseph and Victor Lahoud were operating under the mistaken belief that the Cammeray project had made a substantial profit (the dispute between them being as to the amount of that profit), a belief that, upon the subsequent findings of the auditor, was found to be mistaken. It is asserted by the Victor Lahoud parties that it was in the mistaken belief that a substantial profit had been made that Victor Lahoud agreed that $570,000 (representing his estimate of half the profit) should be paid to Joseph Lahoud at the time.
170 Reliance is placed on equity’s power (as a court of good conscience) to award interest in circumstances where to do otherwise would lead to unjust enrichment. It is said that, whilst equity will not mend bad bargains, it will nonetheless intervene where the parties have acted upon a mistaken premise (there relying upon PC Developments Pty Ltd v Revell (1991) 22 NSWLR 615, at 626). In support of this submission, the Victor Lahoud parties rely upon what was said in Murdocca v Murdocca (No 2) [2002] NSWSC 505 by Campbell J (as his Honour then was) (from [7]):
- Equity has a broad jurisdiction to order the payment of interest whenever a person who is under an equitable obligation to pay a sum of money fails to do so. In Hungerfords v Walker (1989) 171 CLR 125, at 148 Mason CJ and Wilson J said:
- Equity has adopted a broad approach to the award of interest. It has long been accepted that the equitable right to interest exists independently of statue: Wallersteiner v Moir [No.2] [1975] QB 373. Equity courts have regularly awarded interest, including not only simple interest but also compound interest, when justice so demanded, eg money obtained and retained by fraud and money withheld or misapplied by a trustee or fiduciary: La Pintada [1985] AC at 116.
Some examples of the circumstances in which the equitable jurisdiction to award interest has been exercised are set out in Mason and Carter Restitution Law in Australia , page 959-964. They include requiring a defaulting fiduciary (including a defaulting trustee) to pay interest, and requiring payment of interest when effecting restitutio in integrum when a contract is rescinded. If a mortgagor came to equity to redeem, and had not given adequate notice of intention to redeem, equity would require the payment of interest in lieu of notice (Ashburner’s Principles of Equity , 2nd ed. Page 215). Equity treats an equitable charge on land as bearing interest, even if there is no specific agreement to pay interest ( In Re Drax; Savile v Drax [1903] 1 Ch 781). See also Hermann v Charny [1976] 1 NSWLR 261, at 269 per Hutley JA, with whom Glass and Samuels JJA agreed.
171 It is submitted that where there has been established some disentitlement (whether such disentitlement be by way of unjust enrichment or other equitable principles) to the sum upon which interest is claimed, an award of interest will be made.
172 One of the categories of case in which it is recognised that the facts give rise to a prima facie obligation to make restitution, as noted in Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (at p 673 per Mason CJ, Wilson, Deane, Toohey and Gaudron JJ), is the receipt of a payment which has been made under an operative mistake. In David Securities the High Court unanimously rejected the notion that such a mistake need be fundamental but emphasised at [43], the requirement that the mistake be causative.
173 To establish a right to restitution on the basis of a mistake, the plaintiff must not only have held the relevant mistaken belief (whether that be a mistake of fact or law) but also the mistake must be causative of the payment or conferral of the benefit (David Securities, per Mason CJ, Deane, Toohey, Gaudron, at 378-379 and per McHugh JJ, at [43] making it clear that the prima facie entitlement to recover moneys paid under a mistake depends upon the appearance that the moneys were paid by the payer “in the mistaken belief that he or she was under a legal obligation to pay the moneys or that the payee was legally entitled to payment of the moneys”).
174 A plaintiff may be relevantly mistaken, and entitled to restitution, even where the mistaken belief is his or her own fault, provided that payment was made as a result of the mistake (Commercial Bank of Australia v Younis [1979] 1 NSWLR 444, at 450; David Securities; Kelly v Solari (1841) 9 M & W 53, at 59; 152 ER 24, at 26, per Parke B).
175 In Kelly v Solari, Baron Parke noted in this regard:
If, indeed, the money is intentionally paid, without reference to the truth or falsehood of the fact, the plaintiff meaning to waive all inquiry into it, and that the person receiving shall have the money at all events, whether the fact be true or false, the latter is certainly entitled to retain it; but if it is paid under the impression of the truth of a fact which is untrue, it may, generally speaking, be recovered back , however careless the party paying may have been, in omitting to use due diligence to inquire into the fact. (my emphasis)
176 As I noted in Salib v Gakas; Newport Pacific Pty Ltd v Salib [2010] NSWSC 505, at [328], in David Securities the High Court did not expressly address the appropriate test for causation in this context, remitting the case to the trial judge to determine whether the payments were made ‘because of’ the mistaken belief (David Securities, at 386), but I considered that it could be inferred, from the High Court’s rejection of the requirement that the mistake be fundamental in nature, that the question would turn on whether the mistake was a ‘significant’ or ‘dominant’ cause of the relevant payment. By way of analogy in Gould v Vaggelas (1985) 157 CLR 215, at 216, per Wilson J; at 250-251, per Brennan J; San Sebastian Pty Ltd v The Minister (1986) 162 CLR 340, at 366, per Brannan J; Henville v Walker (2001) 206 CLR 459, at 493, per McHugh J, the test was whether the mistake was a reason for the enrichment.
177 On the evidence before me in the substantive proceedings, it is clear that both parties held (or at least expressed to each other) the belief that the Cammeray development had resulted in a profit; the dispute being as to the amount of the profit. Both parties seem to have held the view that the profit was at least in the order of $1.14million, a half share of which would be $570,000. Joseph Lahoud believed it was considerably more.
178 On one view, the relevant mistake might well be said to have been a mistaken belief that the project had made a profit at all (though that is not the mistaken belief which the Victor Lahoud parties now contend was the operative cause of the payment). However, the request by the Victor Lahoud parties for there to be a mutual right to elect for an audit (which would not have been necessary had there been no prospect that the project had made a loss or less of a profit than the stated amount) and the provision in the Terms of Settlement for what was to happen if the audited profit were to be less than the profit calculation in Annexure A) indicates very clearly that at least Victor Lahoud must have had in mind the possibility (however likely or unlikely he may have considered that to be) that the outcome of the audit would be that the project was found not to have made a profit in the order of $1.14m or more. With that in mind, he nevertheless chose to enter into an arrangement whereby Joseph Lahoud was to have the benefit of the interim payment until such time as an audit resulted in an obligation to repay some or all of that amount and did so without making any provision for what was to happen in relation to any interest on the moneys. He did so in the context of a settlement of the proceedings then on foot.
179 In those circumstances, even accepting that there was a mistaken belief as to the amount of profits that had been earned from the project, it seems to me that the mistake was not causative of the payment in that I would infer that the payment was made in order to compromise the then proceedings and thus was a voluntary payment in the sense referred to in David Securities. In effect, the Victor Lahoud parties chose to make the payment, knowing that there was a risk that it might represent more than half of the profit (if any) of the project on the basis of an arrangement whereby the principal amount was to be adjusted in accordance with an audit process if either party elected to have such an audit. In the meantime, there is nothing to suggest that it was not the intention of the arrangement that Joseph Lahoud should have the benefit of use of the moneys in question.
180 Indeed, insofar as it might be said that the Victor Lahoud parties took the risk (based on an erroneous assumption or prediction that, upon an audit in the future, the profits from that Cammeray project would be confirmed as being substantial) when agreeing to pay the sum of $570,000 sum, there might have been available to the Joseph Lahoud parties an argument that the parties were not operating under a mistake of fact as presently existing but instead were operating under a misprediction as to the outcome of future events. A mere misprediction will not give rise to a basis for unjust enrichment (Cadorange Pty Ltd (in liq) v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26, at 32; Dextra Bank & Trust Company Limited v Bank of Jamaica [2002] 1 All ER (Comm) 193). However, it is not necessary for me to consider such an argument in light of the view I have taken as to the non-operative nature of any mistaken belief of the kind adverted to by the Victor Lahoud parties.
181 The payment was made in the context of settlement of the Industrial Relations Commision proceedings then on foot and was expressly made in recognition of the fact that the profit calculations were incomplete or inaccurate. The parties made express allowance for further determination of the profit figure, by way of audit (as was ultimately done). The fact that they may not have turned their minds to the interest effect if such an audit were to be delayed (as it was by a combination of events) for a considerable period) is not to the point. Bearing in mind that it is not necessary for the mistake to be fundamental, but rather that it must be causative of the payment, for a claim in restitution to lie in this context, I find it difficult to accept that the asserted mistake was causative of the payment. The operative cause of the payment seems to me to have been the agreement to settle the proceedings then on foot.
182 Absent the existence of any causative mistake, in my view it cannot be said that there is anything that warrants the conclusion that would be inequitable or unconscionable for the Victor Lahoud parties now to bear the burden of the outcome that interest is not repayable on the sum to be repaid, to borrow the words of Mahoney JA in PC Developments, at [626].
183 Therefore, having had regard to the exchange of supplementary submissions, I remain of the view expressed earlier above that the retention of the benefit of the moneys in question by Joseph Lahoud (though with hindsight it certainly operates to Victor’s financial disadvantage) is not unjust for the purposes of the claim in restitution.
184 (For completeness, I note that the finding that there has been no relevantly unjust retention of the benefit of moneys, due to the fact of the agreement by which it was agreed that Joseph Lahoud should have and retain the benefit of such a sum, points to another issue which was not directly addressed during the oral submissions – namely, whether a claim for restitution can be made at all given the contractual context of the dispute. Mr Einfeld submits that the contractual background to the dispute does not preclude a claim for interest in equity (having regard to the Hermann v Charny (1976) 1 NSWLR 261 and Morgan Equipment Company v Rodgers (No2) (1993) 32 NSWLR 467). However, there is authority for the proposition that restitution is not available in a contractual situation where the contract is still on foot if such restitution would otherwise subvert the parties’ contractual allocation of risk (Lumbers v Cook). That said, given the view I have reached as to the enrichment not being unjust I do not need to consider the question whether to grant interest in these circumstances would have been to subvert the contractual risk in this situation.)
Orders
185 For the reasons set out above, I make the following declarations and orders:
2. Order that Joseph Lahoud pay the amounts referred to in the declaration made in 1 above.
1. A declaration that, on the proper construction of clause 2 of the Deed of Settlement dated 5 February 2007 and having regard to the Independent Auditor’s Report dated 24 August 2010 completed by Mr Stephen Roger, the first defendant (Joseph Lahoud) is liable to repay to the first plaintiff (Victor Lahoud) the sum of $346,027.17 and to pay the reasonable costs of the audit (those costs being the costs of or fees rendered by Mr Roger as auditor).
3. Dismiss the Amended Second Cross-Claim.
4. Order the cross-claimants to pay the fourth cross-defendant’s costs of the Amended Second Cross-Claim.
186 I will otherwise hear from Counsel as to any further costs or other orders to dispose of the Notice of Motion.
33