Laidlaw Holdings Pty Ltd v Fieschi
[2016] VCC 1598
•18 November 2016
| IN THE COUNTY COURT OF VICTORIA | Revised Not Restricted Suitable for Publication |
AT MELBOURNE
COMMERCIAL DIVISON
GENERAL LIST
Case No. CI-14-04456
| LAIDLAW HOLDINGS PTY LTD & ANOR | Plaintiffs |
| v. | |
| JOHN FIESCHI & ORS | Defendants |
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JUDGE: | His Honour Judge Anderson | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 24 – 28 October 2016 | |
DATE OF JUDGMENT: | 18 November 2016 | |
CASE MAY BE CITED AS: | Laidlaw Holdings Pty Ltd & Anor v. Fieschi & Ors | |
MEDIUM NEUTRAL CITATION: | [2016] VCC 1598 | |
REASONS FOR JUDGMENT
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Catchwords: Joint venture – Purchase of land and construction of 58 apartments as student accommodation – Informal arrangement between friends generally recorded in emails – Profit of joint venture distributed to one party in six payments as project management fees – Claim for repayment of part of these payments, as GST on sales of apartments wrongly included in the calculation of profit – Whether restitution should be ordered because of the party’s change of position – Dispute as to basis upon which interest on advances by other party was charged to the project and used to calculate the profit.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr J. Twigg QC and Dr K. Weston-Scheuber of Counsel | Ferdinand Zito & Associates |
| For the Defendants | Ms P. Neskovcin of Counsel | Kyriacou Lawyers |
HIS HONOUR:
1Dean Laidlaw and John Fieschi had been close friends for about 25 years. In 2010, they entered a joint venture arrangement to develop land at Box Hill for student accommodation (“the joint venture”). Although the project was successfully concluded, this litigation has resulted and Mr Laidlaw and Mr Fieschi are no longer friends.
2The arrangement between the parties was informal and each of them seeks to establish what was agreed by reference to conversations, emails and other documents generated during the project.
3Since 1993, Mr Laidlaw has conducted his business as a developer of residential and commercial projects through Laidlaw Holdings Pty Ltd (“Laidlaw Holdings”), a company of which he is the sole director and shareholder. Mr Laidlaw says that, between March 2010 and March 2011, an agreement was reached in relation to the joint venture between Laidlaw Holdings and Mr Fieschi.
4Mr Fieschi is a developer and registered builder, although on a much smaller scale than Mr Laidlaw. Mr Fieschi is the sole director and shareholder of two companies, Accom Developments Pty Ltd (“Accom”) and Gateway Drive Pty Ltd (“Gateway”), through which he conducts his businesses. By their defence, Mr Fieschi (and Accom and Gateway) allege that the agreement for a joint venture was between Mr Laidlaw and Mr Fieschi.
5There was no disagreement that the joint venture project was completed pursuant to an arragement between Mr Fieschi on the one hand, and Mr Laidlaw on the other hand, either on his own behalf or on behalf of Laidlaw Holdings, and that each joint venturer would receive 50% of the profit from the project before tax.
6There is, however, substantial dispute in relation to certain critical matters relating to the joint venture, including –
a.the corporate vehicle by which the joint venture project would be completed and whether Mr Fieschi would be a director or shareholder of the company;
b.the basis upon which funds would be advanced by Laidlaw Holdings towards the purchase of the property at Box Hill and the completion of the building works for the project;
c.the basis upon which the 50% profit of the joint venturers would be calculated.
7The ultimate purchaser of the development property at Box Hill was Elgar Road Pty Ltd (“Elgar Road”). Laidlaw Holdings was the sole shareholder, and Mr Laidlaw was the sole director of the company. All but $30,000 of the purchase price of $1.5 million for the property and all of the building costs and other expenses, totalling about $8 million, were advanced to Elgar Road by Laidlaw Holdings.
8The amended claim in the proceeding is by Laidlaw Holdings and Elgar Road against Mr Fieschi and his companies for the return of part of the monies distributed to Mr Fieschi’s companies as his 50% share of the joint venture. Mr Fieschi’s share of the profit was paid by Elgar Road to Accom and Gateway upon the submission by the companies to Elgar Road of six separate invoices for “project management” services totalling $566,818.18 (or $623,500 inclusive of GST). These invoices, were submitted at a time and in an amount suggested to Mr Fieschi by Mr Laidlaw.
9Elgar Road claims that a mistake was made in calculating the profit share. It was done on the basis that the receipts for the project from the sale of the 58 apartments included GST. However, the project was conducted as a “Margin Scheme”, which meant that GST should have been taken into account as a project expense. Therefore, it is said that the profit share for each venturer was a lesser sum. Elgar Road claimed that Mr Fieschi’s companies were overpaid $261,593.77.
10It was not an issue at the trial that the receipts for the project should have been calculated on the basis that GST on the “margin” was to be claimed as a project expense. However, the claim is denied by the defendants on the grounds that, even if a mistake had been made, Elgar Road was not entitled to repayment because:
a.Elgar Road had not established that it was the appropriate party entitled to any repayment;
b.the basis for calculating the profit from the joint venture was incorrect, and therefore repayment was not justified;
c.as interest payments on advances from Laidlaw Holdings had not been included in the books of account of either Laidlaw Holdings or Elgar Road, they should not be included in the calculation of the profit of the joint venture;
d.if a repayment were otherwise justified, it should not be ordered because Accom and Gateway had altered their positions after receiving the payments.
11The issues for determination in the proceeding are as follows:
a.who were the parties to the joint venture;
b.what agreement was reached by the relevant parties on the following issues:
i.the corporate vehicle for the joint venture;
ii.whether Mr Fieschi was to be a director or shareholder of the company;
iii.what interest was to be charged in respect of the monies advanced to the joint venture by Laidlaw Holdings, including for Mr Fieschi’s contribution to the purchase of the property and for the building costs and other expenses;
iv.how interest would be taken into account in relation to calculation of the profit of the joint venture, or alternatively Mr Fieschi’s share of the profit;
v.how Mr Fieschi’s share of the profit would be calculated and paid;
c.whether a mistake was made by Elgar Road in the calculation of the profit share of Mr Fieschi, and his interests, in the joint venture;
d.was the amount claimed by way of repayment correct having regard to the treatment of interest on the advances made by Laidlaw Holdings to Elgar Road, in the books of account of those companies;
e.even if otherwise entitled, should repayment not be ordered on the basis of defences of:
i.change of position;
ii.estoppel;
iii.the assertion of inconsistent positions;
f.is a taking of accounts necessary to determine the profit of the parties to the joint venture?
Witnesses and issues of credit
12The plaintiffs’ witnesses were Mr Laidlaw, Janine Bermingham (the bookkeeper of Laidlaw Holdings), Bradley Lawrence (the project manager employed by Laidlaw Holdings), David Thompson (the partner at Pitcher Partners responsible for Mr Laidlaw’s taxation returns) and Owain Stone (an accounting expert). The defendants’ witnesses were Mr Fieschi and an accounting expert, Campbell Jackson.
13Mr Laidlaw and Mr Fieschi were both credible witnesses. They were understandably vague about details of conversations which had occurred some years ago. Much of their communication was by email and the exchange of documents (including forecasts and estimates). Both gave their evidence by reference to the emails and other documents. I have generally relied upon the correspondence as the most reliable record of what the parties were discussing during the project.
14Mr Laidlaw and Mr Fieschi remained friends until after the project was completed. It is likely that each of them was unhappy about certain actions of the other during the project, including Mr Laidlaw advising that interest of 20% would be charged by Laidlaw Holdings on its advances for the project. In the email from Mr Laidlaw to Mr Fieschi dated 20 June 2013, two controversial issues were raised; confirmation that because of the “Margin Scheme”, Mr Fieschi “might have to pay some money back” and the refuting of Mr Fieschi’s assertions that 10% rather than 20% interest should be charged to the project. After this, relations between them deteriorated.
15Notwithstanding their long friendship, Mr Laidlaw and Mr Fieschi did not take the prudent steps that other joint venturers might have taken to record their agreement or to even fully discuss the details of their business relationship. This has created difficulties for the determination of whether the parties had reached agreement and the substance of what had been agreed.
The joint venture agreement
16Contracting parties: Mr Laidlaw and Mr Fieschi agreed in early 2010 that they would purchase the property in Elgar Road, Box Hill for the purpose of erecting student accommodation. On 13 March 2010, Mr Fieschi signed a contract of sale whereby the Box Hill property was purchased in the name of “John Fieschi and or nominee” at a price of $1.5 million, with a deposit of $150,000 payable on 17 March 2010 and the balance on 16 March 2011.
17On 20 March 2010, Mr Laidlaw emailed Mr Fieschi as follows:
“Agreement between Dean Laidlaw and John Fieschi
Dean Laidlaw (Laidlaw Holdings) and John Fieschi (company TBC) have jointly purchased a property at 490 Elgar Rd Box Hill, the deposit of $150,000 has been paid by LH and around end May early June JF will pay LH ½ the deposit ($75k) back plus interest (calculated at what rate I have been paying) for the days totalling from deposit cheque being deposited to JF $75K being received.
John can you return this email to me with your acceptance”.
18On 22 March 2010, Mr Fieschi responded:
“I John Fieschi agree and accept attached agreement between myself John Fieschi (structure TBC) and Dean Laidlaw (Laidlaw Holdings) on this day 20th March 2010”.
19This was one of the few occasions on which the parties attempted to record their agreement on matters relating to the joint venture. It is clear from the email exchange that Mr Laidlaw was entering into the arrangement on behalf of Laidlaw Holdings and that Mr Fieschi would also use a corporate entity. The only companies that Mr Fieschi was associated with during the course of the project were Accom and Gateway.
20Therefore, I consider it appropriate in the absence of a specific contrary intention being expressed, to regard the contracting parties in relation to the joint venture as being Laidlaw Holdings of the one part and, on the other, Mr Fieschi until corporate entities were nominated by him. When the project was substantially complete, Mr Fieschi submitted six invoices to Elgar Road between 15 June 2012 and 26 April 2013 for amounts totalling $566,818.18 (or $623,500 inclusive of GST). Three of the invoices were in the name of Accom and three were in the name of Gateway.
21Corporate vehicle for the joint venture: On 30 April 2010, a nomination form pursuant to the contract of sale of the Box Hill property was signed by Mr Fieschi as “purchaser” and by Mr Laidlaw as a director of the “nominee”, Laidlaw Holdings.
22Mr Fieschi said in evidence that his expectation was that he would become a director and shareholder of Laidlaw Holdings and that this would be how the distribution of profit would be made to his interests. Mr Laidlaw denied that this matter had been discussed or agreed between them. He said that Laidlaw Holdings was the trustee of his family trust with substantial assets and had been used by him for his business pursuits since 1993.
23I consider that Mr Fieschi has not established that him becoming a director and/or shareholder of Laidlaw Holdings was discussed with or agreed by Mr Laidlaw. It is unlikely, in my view, that Mr Laidlaw would have contemplated that Mr Fieschi would become involved in Laidlaw Holdings as a director or shareholder. Mr Fieschi may have assumed that this might have been the arrangement by which he would share in the profits of the joint venture. However, I do not consider that the evidence justifies the conclusion that this was likely to have been the intention of both parties.
24Mr Laidlaw gave evidence that his usual practice was to use a separate company for each development project in which he became involved. Elgar Road was incorporated on 29 September 2010. Mr Laidlaw was the sole director and Laidlaw Holdings was the sole shareholder.
25On 9 November 2010, Mr Laidlaw signed a “replacement” contract of sale whereby Elgar Road purchased the Box Hill property from the original vendor. The original contract of sale was set aside. The purchase price was still $1.5 million, but with a deposit of $450,000, “of which $150,000 has been paid”.
26Mr Fieschi said that he had assumed he would be a director and shareholder of Elgar Road. He said that this belief arose because he was to be a director and shareholder of Laidlaw Holdings, when that company was to be the owner of the Box Hill property. Mr Fieschi said that he did not know that he was not a director and shareholder of Elgar Road until about May 2012 when an application for a certificate of occupancy he had signed on behalf of Elgar Road was rejected, because he was not a director of the company.
27I do not consider that Mr Fieschi had a reasonable basis for assuming he would be involved in the ownership or control of Elgar Road. Insofar as his belief was based on what he thought would be his position with Laidlaw Holdings, it is likely that belief had no foundation. Otherwise, there is no evidence to support the assumption about Elgar Road. The public record of the company did not support his view and it is likely Mr Fieschi was never called upon to make a decision as to which of his companies would be a shareholder in Elgar Road.
28Mr Fieschi said that he had signed a number of documents on behalf of Elgar Road at the request of Mr Laidlaw. In my view, the execution of documents with the authority of Mr Laidlaw, does not justify a finding that the parties intended that Mr Fieschi or his companies would be a shareholder in Elgar Road, or that this would be his means to receive a distribution of the profits of the joint venture.
29In these circumstances, it would not be expected that Mr Fieschi, or his interests, would receive their 50% profit share by a distribution to shareholders, and that another method of payment was required.
Interest charged on advances by Laidlaw Holdings
30From about 13 May 2010, Mr Laidlaw and Mr Fieschi exchanged profit forecasts. The first forecast prepared by Mr Fieschi did not specifically refer to “interest”, but according to Mr Fieschi, the entry “$500k Holding costs” included an interest component.
31On 3 June 2010, Mr Laidlaw asked Mr Fieschi to calculate his “budgeted cost/profit sheet at 20% financing costs”. Mr Fieschi responded later that day with figures which included “20% finance” which, he said in evidence, were “based on 1 year to complete the development”. Mr Laidlaw replied, “Let’s talk about the finance now in case we go ahead with the build [rather than simply re-selling the property with permits], so there is no confusion. Keep in mind the finance will be progressive and the bulk will be for 6-8 months only”. On 10 June, Mr Laidlaw emailed saying, “I have done a quick calculation and agree the finance cost at 20% will be about $720k”.
32On 11 June 2010, Mr Fieschi emailed a “new estimate work sheet for Elgar Rd”. The work sheet included $314,000 “interest on purchase”, which Mr Fieschi said was about 20% over one year, and $505,000 “interest on build” which he said was also calculated at 20%, but would only be if the interest period was about 6 months.
33Mr Laidlaw said in evidence that in relation to the property purchase the interest rate he would charge Mr Fieschi until he paid his half share of the deposit, as set out in the email dated 20 March 2010, would be “at what rate I have been paying”, which was about 7%. Mr Laidlaw said that in relation to other costs, the rate of 20% was appropriate. The major banks did not lend for student accommodation projects. To finance such a development, “Mezzanine” finance would be required at an interest rate of about 20%. Mr Laidlaw would self-fund the joint venture through Laidlaw Holdings. This was apparently what he had done for earlier projects where he was the developer, or for projects completed by others which he had financed.
34The critical communication on this matter was an email from Mr Laidlaw to Mr Fieschi dated 30 August 2010. The email was copied to the accounts department of Laidlaw Holdings and read as follows:
“It has been agreed that Laidlaw Holdings is to charge a 20% interest rate on 50% (John F ½ share) of all Elgar Rd accounts, The interest charge and receipt of funds will be charged at the completion of the job once all other bills have been paid. John Fieschi has the flexibility to repay any portion of his 50% share at any time. John Fieschi will be paying $30k early September, as part repayment of deposit funds originally paid by LH (therefore that amount will incur interest for 135 days = $2,169 total $32,169). So Wendy when we pay this amount back to John Fieschi we only need to pay the $30k”.
35The more significant part of the email was the recording in the first paragraph that Laidlaw Holdings would charge 20% interest on “all Elgar Road accounts” and would relate to Mr Fieschi’s half share. Later in the project, Mr Laidlaw would assert that the email had not accurately recorded their agreement. Mr Fieschi would rely upon his reading of the email.
36In a discussion shortly before the email, Mr Laidlaw told Mr Fieschi that he would be charging him 20%. Mr Fieschi said that he had been “shocked” and had only reluctantly agreed. Mr Laidlaw had called him into his office and said, “Laidlaw Holdings are going to change the holdings 20% interest on your 50% share of the funds… I know you’re not happy, but that’s the way it’s going to be”. However, Mr Fieschi did not express his reservations to Mr Laidlaw by responding to the email dated 30 August 2010.
37On 31 August 2010, Mr Fieschi paid the sum of $32,169 to Laidlaw Holdings. This represented $30,000 towards Mr Fieschi’s share of the deposit for the property purchase plus $2,169 interest on the balance for 135 days, apparently for the period the deposit had been paid by Laidlaw Holdings. This calculates as an interest rate of about 7.6%.
38On 30 June 2011, Mr Laidlaw copied Mr Fieschi in on an email asking Laidlaw Holdings’ accounts department to make a number of adjustments to “the Elgar Rd feasibility/Box Hill Estimate sheet”, including to:
a.“change the land interest amount to $630,000” [which would represent a rate of about 20% over 2 years];
b.“change interest on build to $570,000” [which on a “build cost” of $4,912,000 would represent about 20% over a 7 month period].
39On 16 December 2011, Mr Laidlaw sent Mr Fieschi a spreadsheet setting out the funds advanced by Laidlaw Holdings for the expenses of the project. The spreadsheet showed interest “calculated @ 20%”, including for the purchase price of the Box Hill property. Mr Fieschi did not respond to the email.
40On 31 May 2012, near the completion of the project, Mr Fieschi raised with Mr Laidlaw the appropriateness of excluding the GST component “in the interest and calculations”, as the GST component had been “refunded during the project”. The email did not, however, comment on the interest rate of 20%.
41The interest rate issue finally came to a head in an email from Mr Laidlaw to Mr Fieschi on 25 June 2012. The email traversed the history of the interest rate issue, as follows:
“1) You put up a proposed expense sheet (around April 2010 I think) that had a total interest calculation on it at 10%, which I made comment on and suggested that I wouldn’t lend the money to the job at that rate, The expense sheet also had the sell out option. I think at that stage I said it was going to be 20%. You didn’t like it and came back and asked for a lower rate (maybe 15%) and I explained that I was getting 20% on Mez finance elsewhere and basically Elgar Rd was Mez finance as the bank wasn’t involved and we agreed (although you didn’t like it) that 20% was the figure.
2)On the 3rd June 2011 you got an indicative build cost price from Madden and I suggested you put the build cost and the 20% finance cost in your spread sheet and see what the bottom line looked like. Which we did.
3)On the 21/12/12 [in fact 2011] I emailed you a expense sheet with the 20% interest rate calculations. (no comment from you)
Why did I type that original letter indicating 20% interest on your funds only. Honestly I have no idea. The only thing I can think of was I lent you the money for your ½ of the deposit and I agreed to charge ½ interest of my current rate on the deposit until it was paid back. Maybe I got confused with that.
But as I said John why would I charge you 20% on your funds and charge myself only 10% as a) I can get 20% on my funds at any stage b) Brad and to a lesser degree Janine are an expense to Elgar Rd and at a guess that has cost me about $85k for 2 years.
In summary I think we both know it’s always been 20%, as we have discussed it and joked about it and I made a mistake with the email dated 30/10/2010. [in fact 30/8/2010]. But happy for your thoughts prior to doing the 95% summary, prior to the end of the year”.
42On 26 June 2012, Mr Fieschi responded, “I’ll agree to disagree” with the interest question but did “ask that the interest on GST component be sorted”. Mr Laidlaw replied later that day, “John, noted your comments on agreeing to disagree, not the answer I was looking for but need to move forward”.
43On 15 June 2012, Mr Fieschi through Accom had submitted on invoice to Elgar Road claiming $55,000 (including GST) for “project management”. A further claim was submitted by Accom on 26 June 2012 for $110,000 (including GST) and by Gateway on 29 June 2012 for $200,000 (including GST).
44On 29 June 2012, Mr Laidlaw sent Mr Fieschi updated work sheets, noting that “interest stopped accruing on the 22nd June”. Mr Fieschi queried the date to which interest should be calculated and the inclusion of GST in the calculations and concluded, “I’m sure there will be a bit of fine tuning prior to finalising all figures”. On 20 August 2012, Gateway submitted a further invoice for “project management” in the sum of $82,500 (including GST).
45Over the following months, Mr Laidlaw and Mr Fieschi discussed various aspects of the interest calculations. On 25 September 2012, Mr Laidlaw forwarded updated interest calculations. On 26 November 2012, Mr Fieschi asked for “a copy of the backup MYOB file for all Elgar Rd expenses so I can go over the profit & loss statement”, and queried the “interest calculation for the $30,000 loan from me to Elgar Rd P/L [for part of the deposit]”. On December 2012, Mr Fieschi invoiced Elgar Road for $10,684.90 being “interest payable on $30,000 loan @ 20% for 650 days”.
46On 5 March 2013, Mr Laidlaw submitted an updated “profit and loss breakdown” and noted, “So the profit number using forecast sales of the remaining 4 units is $755,550 and I think we have paid you $400K already so that will mean you need to pay some back”. In fact, by that date Mr Fieschi’s companies had been paid project management fees of $406,818.19 plus GST of $40,681.81, a total of $447,500.
47Later on 5 March 2013, Mr Fieschi responded by querying certain figures and stating, “You need to add the project management fee of $412,266 to the profit of $755,550 = $1,167,816 then divide that by 2 = $583,908 per share less $412,266 already drawn leaves a surplus of $171,642 for my share (this is only round figures of course until the final sale is settled)”. This led to a debate between Ms Bermingham, Laidlaw Holding’s bookkeeper, and Mr Laidlaw as to the appropriate method of dealing with the project management fees in the accounts.
48On 15 March 2013, Mr Fieschi submitted an amended profit and loss statement with his profit share shown as $457,989.78. A handwritten notation on the document corrects the amount received by Accom and Gateway to $406,8148.19 (excluding GST) leaving a balance owing of $51,171.59.
49Later on 15 March 2013, Mr Laidlaw responded stating, “Adjusted P&L [profit and loss statement] to be resent next week. I will do a total up to date one as Janine [Ms Berminham] thinks she hasn’t added in one of the sales in which case we [owe] you close to $100k, but let me check the numbers first. In the meantime you might want to send a claim of $50k to get some funds”. Mr Fieschi submitted a further invoice for project management on 16 March 2013 on behalf of Gateway for $50,000 plus GST. In an email to Mr Laidlaw, Mr Fieschi noted that he was “no longer confident in Janine’s figures; seems to be large discrepancies each time a P&L is prepared”.
50On 22 April 2013, Gateway submitted a further account for “profit management” in the sum of $110,000 plus GST of $11,000, total $121,000. Later that day, Mr Fieschi wrote to Mr Laidlaw asking him to “hold off paying…until I can confirm if it’s all to be paid to Gateway Drive or part paid to Accom Developments”. On 24 April 2013, Accom submitted a duplicate invoice in its name.
51The invoices in April 2013 related to work performed, following the builder for the project going into liquidation, to rectify defective or incomplete work. This work was performed by Mr Fieschi. In his 15 March 2013 email, Mr Laidlaw had noted, “We had added your defects bill to your profit payment [in the profit and loss statement], that’s because you have invoiced us under Acc[om], Gateway and John F[ieschi], so our system picked them up as payments”.
52On 3 June 2013, Mr Laidlaw sent Mr Fieschi a “final summary” asking, “If you all ok can you send me a tax invoice for the balance”. Mr Fieschi queried a matter. On 11 June, Mr Laidlaw responded to the query but then raised the issue that now forms the claim in the present proceeding. Mr Laidlaw stated, “One thing we have picked up is we have paid your profit share on the gross sales ie including GST but as we are using the Margin Scheme we are waiting on a figure from Pitcher Partners as to what the net sales were, and that’s the figure we should be paying the profit share amount on”.
53Mr Laidlaw asked Pitcher Partners for “up to date accounts” and, on 14 June 2013, he was advised that, “The total GST on the overall project appears to be $797,521.44. (This has been calculated using total sales per the spreadsheet provided by you)”. The figure of $797,521.44 was the GST component of the “total margin” of $8,772,736 representing total sales of $10,272,736 less the purchase price of the property ($1,500,000).
54On 20 June 2013, Mr Fieschi and Mr Laidlaw exchanged emails. Mr Fieschi wrote:
“I know we have discussed the email below [dated 30 August 2010] previously but I feel it’s only fair that we sit down and discuss it again as I believe what was agreed too (sic) is clearly setout by yourself to Wendy and how the P&L has been calculated to present is incorrect”.
55Mr Laidlaw responded:
“John happy to discuss and as I have said before it does read like its only for 50% on your share, but we did discuss it face to face and its in the original cost sheets. But why would I charge 20% just on your portion, when I can get 20% on my money on second mortgage loans without doing any work.
The first 10% on any loans is gone to the bank and my costs. The project was fully funded from the bank as you know, (or happy to show you my loans for it), where I incurred compounding interest at about 7 – 8%, then Brad cost me about $80k for the project. Wendy/Janine might have cost me $12 – 15k and I have paid about $600k tax on the project, so don’t think I’m making all this money John, I will be lucky to make 10% for taking all the risk, yes all the risk. I’m sure you remember we started and committed to build prior to presales, so for that risk and any other project I do when I know it’s going to be banks money I wouldn’t look at it unless it’s going to return 20% plus and we discussed this and you came to my office to see if I would drop the rate and I said I wouldn’t for the reasons above, but happy to talk if you want.
Problem is this bloody margin scheme has confused things and it looks like you might have to pay some money back, but let’s get all the figures done first and see what the result really is”.
56On 24 June 2013, Mr Laidlaw sent Mr Fieschi a letter of advice he had received from Pitcher Partners as to how the Margin Scheme operated. Mr Laidlaw stated that, “It looks like we have to get some money back from you”. The advice from Pitcher Partners was as follows:
“The GST Margin scheme was calculated as follows:
Margin calculation
·Total sale price per unit (including GST)
·Less purchase price per Unit (the purchase price of the property was apportioned across each unit that was constructed)
GST on Margin
· Margin calculated per the above divided by 11.
The expenses involved in completing the project are not to be included in the Margin Scheme calculation… In regards to when the GST is payable, for property the GST Is payable in the BAS period applicable to when the property is settled. Therefore the GST was payable over the project as all of the units settled at different times”.
57By email dated 24 July 2013, Mr Laidlaw stated to Mr Fieschi, “We have overpaid you $321,147.28. When do you think you could get that back to us as I’m paying interest on it currently. John, please don’t try and hold me at ransom as we have overpaid you”.
58In Mr Fieschi’s response that day, he stated:
“[W]hen I presented the initial deal to you it was agreed that I would do all the work and you would supply the money as per your comment email dated 19/3/13 then once the contract was signed you came up with the notion of charging me 20% interest on my 50% share of the project (email dated 30/8/10) at which point I was in fact held at ransom. Once I inspected the P&L figures you actually charged the project 20% interest at which point I made the comment that was incorrect… [A]fter adding the 50% refund from 20% interest incorrectly calculated I make it a total of $1,222,125 profit @ 50% share $611,062 owing without final figures being confirmed of which $566,818 has been paid. At this stage monies owing to me $44,244”.
59By their further amended defence, Mr Fieschi (and his companies) pleaded that he and Mr Laidlaw had agreed that:
a.each of their respective companies would “be responsible for funding [50%] of the cost of acquiring and developing the land”;
b.“Laidlaw Holdings would provide the initial funding for both [parties’] share of these costs”;
c.“Laidlaw Holdings would be entitled to charge 20% per annum on the funds it advanced in respect of Fieschi’s Nominee Company’s share of the cost of acquiring and developing the land, namely, 10% per annum on the total funds advanced by Laidlaw Holdings on the basis that Fieschi’s Nominee Company was to hold a 50% interest in the land”.
60The first two allegations are not contentious. The third matter is said to arise from a plain reading of the email dated 30 August 2010 and the fact that Mr Fieschi “constantly objected” to Mr Laidlaw’s assertions in relation to the interest component in the calculations.
61In my view, this latter submission should not be accepted. The interest rate of 20% had been discussed and agreed by Mr Fieschi before the email on 30 August 2010. The email does not in my view support the pleading in the further amended defence set out above.
62The email dated 30 August 2010 states that Laidlaw Holdings would “charge a 20% interest rate” on Mr Fieschi’s share. Laidlaw Holdings was providing the finance and would not be paying interest itself on the advances it made to Elgar Road. The reference to Mr Fieschi’s “half share” only makes sense in the context that, “at the completion of the job once all other bills have been paid”, the interest charged on the advances for the project expenses would be used in order to calculate the profit share of Mr Fieschi.
63This conclusion may not sit particularly well with the words used by Mr Laidlaw in the email. However, the email was purporting to express the terms of an agreement reached shortly before and after previous discussions about the interest rate of 20% and the fact that it would be applied in respect of the advances made for all project expenses.
Did a mistake occur in the calculations of Mr Fieschi’s profit share?
64The plaintiffs’ claim in the amended statement of claim dated 22 May 2015 is that:
a.Elgar Road paid to Mr Fieschi, through Accom and Gateway, his share of “the anticipated profit, in the sum of $566,818.18 (or $623,500 inclusive of GST)”;
b.“the actual profit of the project after paying all costs of acquiring and developing the land (including capital gains tax assessable by reason of the Joint Venture) was $610,449.82 and [Mr] Fieschi’s 50 per cent profit share is the sum of $305,224.91”;
c.Elgar Road was entitled to “payment from [Mr Fieschi] of the sum of $261,593.77 overpaid”.
65The “mistake” was claimed to arise as follows:
a.the Laidlaw Holdings bookkeeper entered the gross proceeds received for the sale of units in the MYOB files. This did not take account of any GST liability;
b.Pitcher Partners prepared regular Business Activity Statements manually calculating the GST liability using the Margin Scheme;
c.the MYOB files were not adjusted to include the GST. As a result, the GST liability was not correctly reported and was included in sales rather than being reported as a liability;
d.the calculation by Laidlaw Holdings of the joint venture profit and Mr Fieschi’s entitlement was based on the overstated sales figure in the MYOB files;
e.payments were made by Elgar Road to Accom and Gateway based on these incorrect figures.
66There is no real dispute that a mistake was made and payments were made by Elgar Road without properly taking account of the GST liability on the sales margin. When Elgar Road (through Laidlaw Holdings) became aware of the mistake, Mr Laidlaw notified Mr Fieschi in the emails dated 13 and 24 June 2013. The principal dispute is whether there had, in fact, been an overpayment to Mr Fieschi of his share of the profit of the joint venture.
67If Mr Fieschi had been overpaid, in my view, the amount of the overpayment should ordinarily be repaid as otherwise he would have been unjustly enriched. It is necessary, however, to determine whether there had been an overpayment, and if there had, whether there were other factors, by reason of which, Mr Fieschi should not be required to make restitution.
As a matter of calculation, did Elgar Road overpay Mr Fieschi his profit share?
68By its amended statement of claim, the plaintiffs claim that:
a.the actual profit of the project was $610,449.82;
b.Mr Fieschi’s 50% profit share was $305,224.91;
c.Elgar Road had paid Mr Fieschi’s companies $566,818.18;
d.Mr Fieschi should repay the overpayment of $261,593.77.
69In their written outline of final submissions, plaintiffs’ counsel claimed a greater amount, as follows:
a.actual project profit - $532,115;
b.Mr Fieschi’s 50% share - $266,057;
c.payment to Mr Fieschi - $566,818.18;
d.overpayment to Mr Fieschi - $300,761.
Net profit/(loss) before tax: | $1,109,154 |
| Add back PM [Project Management] fees: | $566,818 |
| Notional profit/(loss) with PM fees: | $1,675,972 |
| Less interest on $8m advanced at 20% p.a from 1/7/10 to 12/6/12: | $1,143,857 |
| $532,115 |
70The reduced figure for project profit uses figures derived from the joint experts’ report as follows:
71Defendants’ counsel, Ms Neskovcin, submitted that the calculation of Mr Fieschi’s share of profit was incorrect, for the following reasons:
a.the expenses of the project in the Elgar Road books of account included the project management fees paid to Accom and Gateway. Those payments were the means of distributing Mr Fieschi’s profit share, but were deducted as an expense from the income of the project before the profit was calculated;
b.Mr Fieschi’s share of profit was calculated on the basis of the deduction, as an expense, of 20% interest on the total cost of the project and not simply Mr Fieschi’s 50% share. This was not what was anticipated in the email dated 30 August 2010, recording the agreement between Mr Fieschi and Mr Laidlaw;
c.the interest charges were not recorded in the books of account of Elgar Road as an expense or in the books of account of Laidlaw Holdings as a receipt. No payment was made by Elgar Road, or liability arises for Elgar Road to pay Laidlaw Holdings, in respect of interest accruing on the advances made by Laidlaw Holdings to Elgar Road for the project costs;
d.it appeared that Laidlaw Holdings had recovered a much more substantial sum from the project as its share of profits than Mr Fieschi had received through his companies. This sum would be further reduced if restitution were ordered as a result of the alleged mistake in calculating the profit.
72Accounting for the project management fees: The two experts, in preparing the joint experts report have added back the project management fees before calculating the profit from the project. This was done because the project expenses had included the project management fees.
73The adding back of the fees effectively cancelled out the effect of the fees being included as a project expense. In fact, Mr Fieschi had acted as a project manager, liaising with the builder and the other authorities and advisors involved in the development. In addition, Mr Lawrence an employee of Laidlaw Holdings, was appointed to carry out the role of the project manager. He and Mr Fieschi shared the responsibilities, although it is likely Mr Lawrence also provided direction to Mr Fieschi.
74In the circumstances, there was nothing inappropriate about Mr Fieschi taking his profit share as project management fees and using both Accom and Gateway as the recipients. I consider that I should accept the approach the experts adopted of adding back the amount of the fees before calculating the profit, and Mr Fieschi’s share of it. This approach may in fact have worked to Mr Fieschi’s benefit.
75Interest charge of 20%: It was submitted by Ms Neskovcin that it was unfair to Mr Fieschi if the whole of the 20% interest charge was an expense to the project. Ms Neskovcin submitted that the parties’ agreement, as recorded in the 30 August 2010 email, was that only the interest on Mr Fieschi’s half share would be a project expense.
76Although Mr Fieschi’s project management fees had been treated as a project expense, to be deducted before the calculation of profit, Laidlaw Holdings has also had the advantage of the whole of the interest charge (and not simply the interest on Mr Fieschi’s half share) charged to the project.
77Both Mr Laidlaw’s interests and Mr Fieschi’s interests were to be jointly responsible for the project and were to share the profits equally. It is not suggested that the profits should have been distributed on the basis of the actual contribution each made, for example the number of hours worked by Mr Fieschi and the value of the work he performed, or on Mr Laidlaw’s part, the contribution by Mr Lawrence, Ms Bermingham and other employees of Laidlaw Holdings as well as the company’s financing of the project.
78If Mr Fieschi’s contribution to the project (the project management fees), were counted as a project expense and added back before the calculation of profit, Mr Laidlaw’s contribution might have been treated in a similar way. However, the 20% interest charges were never counted as a project expense.
79What was anticipated was that Mr Fieschi would contribute to the financing of the project. If he were unable to contribute his half share, Mr Laidlaw would provide the finance and:
a.in respect of the deposit for the purchase price of the property which Laidlaw Holdings had paid, Mr Fieschi would pay interest on his half share of the deposit until he made his contribution. The rate was to be what Mr Laidlaw had been paying, which was an interest rate of about 7% to the bank;
b.in respect of the purchase price and the building and associated costs, an interest rate of 20%, which was the “going rate” for “mezzanine” finance and what Mr Laidlaw could have obtained if he had used the money elsewhere would be taken into account before the profit of the project was caluculated.
80In these circumstances, I consider it appropriate that before the calculation of Mr Fieschi’s half share of profit, to take account of the interest charged at a rate of 20% per annum in respect of the advances made by Laidlaw Holdings for the property purchase and the building costs.
81Project interest not recorded in the accounts: Project interest was not recorded as an expense in the accounts of Elgar Road and was not recorded as a receipt in the accounts of Laidlaw Holdings. The accounts and subsequent taxation returns prepared on this basis apparently calculated and accounted for appropriate profit and the distribution of profit, and for the payment of the necessary taxation liabilities. Similarly, Mr Fieschi has accounted for the project management fees as income of Accom and Gateway and, together with the liability for any distributions made, all necessary taxation commitments have been met.
82This, it seems to me, is in accordance with the arrangement the parties entered into:
a.they would share profits equally;
b.Mr Fieschi would contribute 50% of the deposit for the purchase price of the property, and Mr Fieschi would pay the interest rate charged by Mr Laidlaw’s bank until he made his contribution. This was the interest rate charged to Mr Fieschi when he paid the $30,000 contribution to the deposit. It seemed to me that the lower interest rate (“what rate I have been paying”) only applied to any contribution actually made and the 20% interest rate applied to “all Elgar Road accounts”;
c.the advances by Laidlaw Holdings for the purchase price of the property and the building and associated costs would be taken into account before calculating Mr Fieschi’s share of the profits.
83It was suggested that this might provide a windfall to Mr Laidlaw or Laidlaw Holdings because Mr Fieschi’s share of profit would be reduced by an allowance for interest charges which had not otherwise been paid to, or declared as income by, Laidlaw Holdings because payments were not included in the accounts of Laidlaw Holdings and Elgar Road. On the other hand, it was unclear what would had been the effect on Mr Fieschi’s tax position of his receipt of project management fees by his companies. There is no evidence as to whether he and/or his companies had paid tax on the basis that one of the expenses of earning the project management fees was the cost of Mr Fieschi’s share of the borrowings for the project. Ultimately, I do not consider that these matters have any relevance to the issue of how Mr Fieschi’s profit share should be calculated.
84It is also not clear how an order in this proceeding for the repayment of part of the project management fees would be treated by Mr Fieschi’s accountants. It was suggested that it may be too late for Mr Fieschi, Accom and Gateway to adjust these matters, and I will refer to this further when considering the specific defences raised by Mr Fieschi.
85It is my view that these matters can be best addressed by requiring both solicitors to provide to their respective clients’ tax accountants a copy of these reasons for judgment and the final orders made in the action together with a letter explaining that the Court required this to be done to ensure that the accountants were made aware of the result of the proceedings and could properly advise their clients on their taxation obligations. The solicitors will be required to file an affidavit deposing to their compliance with these directions.
86Laidlaw Holdings had received more from the project than Mr Fieschi: Ms Neskovcin referred to evidence which suggested that Laidlaw Holdings had received substantially more than the sum of $566,818.18 paid to Mr Fieschi, or that sum less the $300,761 alleged overpayment ($266,057). Mr Stone said that the effect of Laidlaw Holdings having received a dividend of approximately $760,000 would, together with a franking credit of $325,714 provide “total pre-tax income for Laidlaw Holdings of $1,085,714 compared with the project management fees of $566,818”.
87These and other comparisons appear to suggest that Mr Fieschi was disadvantaged. However, the only way of approaching the calculation of profit share is for that task to be performed in accordance with the agreement reached by the parties.
Specific defences to the claim for restitution
88The defendants assert that even if a claim for restitution were justified, no order should be made by reason of:
a.change of position;
b.estoppel;
c.assertion of inconsistent positions.
89a. Change of position: Ms Neskovsin submitted that, “The defendants were induced not to pursue their entitlement to a 50% interest in the project and profits by way of shareholder distribution and accepted payment of project management invoices instead. As a result, it is too late to pursue that entitlement – Elgar Road is a dormant company and has distributed profit from the project to Laidlaw Holdings. The defendants have issued invoices for project management fees, remitted GST on the invoices and lodged income tax returns on the basis of the project management fee income. It is too late for the defendants to reverse their position”.
90Restitution may be denied if:
a.a party has received a payment;
b.the receiving party in good faith acted, or refrained from acting, on the basis it was entitled to deal with the payment, and not necessarily on the basis of knowledge derived from the paying party;
c.that by making restitution, the receiving party would be placed in a worse position than if it had not received the payment at all, and had not acted or refrained from acting as it did;
d.the detriment resulting from the receiving party altering its position need not necessarily be financial or pecuniary, or be able to be established with precision;
e.the detriment must be substantial.
(see Australian Financial Services v Hills Industries Ltd (2014) 253 CLR 560 (“Hills Industries”), at paragraph 157 per Gageler J, and Southage Pty Ltd v Vescovi [2015] VSCA 117, at paragraphs 64 and 65).
91Mr Fieschi said in evidence that after he found out that he was not a director of Elgar Road and that Accom was not a shareholder, Mr Laidlaw told him he should issue invoices for “project management” fees to Elgar Road.
92Ms Neskovsin submitted that Mr Fieschi “had no option but to do what Mr Laidlaw had asked because, if he did not, he might not be paid for all the work he had done and would end up in expensive litigation…[Therefore] he accepted what Mr Laidlaw said because he thought that if Mr Laidlaw told him what to invoice and he was paid the invoices, that would be the end of the matter…[As a result] Mr Fieschi and Accom Developments lost the ability to control the distribution of their share of the profits from the venture”.
93Although Mr Fieschi said that when Mr Laidlaw told him to invoice Elgar Road, he was unhappy with the arrangement and felt “exposed”, he agreed that the process was not “forced upon him” and he was, at that time, keen to get his money prior to completion and finalisation of accounts. It was Mr Fieschi’s choice as to which of his companies the project management fees were paid.
94Three invoices were submitted by Accom and three by Gateway, significant payments were made prior to the end of the 2011-2012 financial year, and with the last invoice in April 2013, a Gateway invoice was substituted with an Accom invoices as Mr Fieschi changed his mind about which entity should be paid.
95Although Mr Laidlaw indicated times when money was available for distribution, in the email dated 26 November 2012, Mr Fieschi himself queried whether a payment of $50,000 could be made, or even $30,000. There is little in the email exchanges to suggest that Mr Fieschi was unhappy with the arrangements for the distribution of his share of the profits of the development by the payment of project management fees, or considered that they disadvantaged him.
96On 12 June 2013, Mr Fieschi queried in an email “how a final figure for my invoice is derived” and asked, “Should we not wait until the final figures have been collated?” Mr Fieschi’s concerns expressed in this and other emails, appeared to be related to the quantum of the profit and not to the process by which it would be paid. It was also recognised that the profit could not be finally determined until all relevant information was available.
97In these circumstances, I do not accept that the arrangement for receiving his profit share by invoicing Elgar Road through his companies for project management fees was “forced” upon him or was necessarily financially disadvantageous.
98It was suggested that it is too late for Mr Fieschi and his companies to adjust their affairs to minimise their taxation obligations, in the event that they were ordered to repay part of the money distributed to his companies as his profit share for the project. Regardless of whether that would be the position, I am not satisfied that the circumstances in the present case are comparable to those in Hills Industries where “the receipts had consequences for [the respondents] beyond the simple fact of the receipt and these consequences were irreversible as a practical matter of business [and] that it would be inequitable to require them to do so” (per the majority at [95] and [96]).
99b. Estoppel: Mr Neskovsin submitted that, “The defendants assumed that by issuing project management invoices as and when directed by Mr Laidlaw, they would be paid and that would be the end of the matter. The detriment the defendants would suffer if departure from that assumption was allowed is obvious”.
100Both parties referred to Walton Stores (Interstate) Ltd v Maher (1998) 165 387 and Ms Neskovsin referred to later decisions including Crown v Cosmopolitan (2016) 333 ALR 384 (“Crown”). In Crown, Nettle J at [217] said that “equity will not permit an unjust or unconscionable departure by a party from an assumption or exception of law or fact, present or future, which that party has caused another party to adopt for the purpose of their relations”.
101I am not satisfied that, what was said to be Mr Fieschi’s “assumption”, that his companies’ invoices “would be paid and that would be the end of the matter”, has been established. Further, if that were Mr Fieschi’s assumption, I am not satisfied that Mr Laidlaw was responsible for creating the assumption, or that any relevant detriment to Mr Fieschi arises from the decision he made to submit project management invoices through his companies.
102c. Assertion of inconsistent positions: Ms Neskovsin referred to the inconsistency in the approach of Mr Laidlaw and Laidlaw Holdings by:
a.on the one hand, “asserting in the proceeding that Mr Fieschi’s and Mr Laidlaw’s interests should be treated “as joint venture parties for the purpose of calculating their profit entitlement and the alleged mistaken overpayment”, and;
b.on the other hand, “the plaintiffs’ accounts and income tax return treat the defendants’ economic interest in the project as a deductable cost on account of project management services”.
103Ms Neskovsin submitted that the plaintiffs should not be permitted to pursue “the assertion of inconsistent positions”. She relied upon the principles applied by the High Court in Ricardson v Federal Commissioner of Taxation (1932) 48 CLR 192 per Dixon J at 205 to 206 that, as a general rule, “no person may, after obtaining an advantage by the assertion of rights in relation to another and while retaining it, set up and rely upon other rights against the same person inconsistent with the existence of those already asserted”.
104In my view, those principles have no application in the present case, where Mr Fieschi submitted invoices through his companies as the means for receiving his share of the profits of the joint venture. His companies were paid those invoices on a certain basis. It subsequently transpired that the payments were based on a mistake, and that the GST forming part of the margin receipts from the development should have been deducted as a expense before the profit of the project was ascertained.
105On the basis that this was a mistake which entitled Elgar Road to be repaid the amount overpaid, I consider that the matters raised by these specific defences are not such that Elgar Road should be denied recovery.
Is a taking of accounts necessary?
106I consider that the calculation of Mr Fieschi’s profit share made by the experts in their joint report contains the appropriate methodology. In those circumstances, the sum which Mr Fieschi should repay is $300,761. A taking of accounts is therefore not necessary.
Proposed orders
107Accordingly, I propose to make the following orders:
1.Judgment for the second plaintiff against the first defendant that the first defendant pay to the second plaintiff the sum of $300,761.
2.When the proceeding is concluded, including any appeal process, the parties’ solicitors must provide a copy of these reasons for judgment and the final orders to the parties’ tax accountants together with a letter explaining that the Court required this to be done to ensure that the accountants were made aware of the result of the proceeding and could properly advise their clients on their taxation obligations. The solicitors must comply with this direction not more than 7 days after the making of final orders in the proceeding and must file an affidavit deposing to their compliance with these directions not more than 14 days after the making of final orders.
108I shall hear further from the parties on the issues of interest and costs.
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Certificate
I certify that these 23 pages are a true copy of the reasons for decision of His Honour Judge Anderson delivered on 18 November 2016.
Dated: 18 November 2016
Mi-Lin Chen Yi Mei
Associate to His Honour Judge Anderson
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