Military Road Island Pty Ltd v Priority Plus Capital Pty Ltd; Priority Plus Capital Pty Ltd v Military Road Island Pty Ltd

[2008] NSWDC 268

CITATION:	Military Road Island Pty Ltd v Priority Plus Capital Pty Ltd; Priority Plus Capital Pty Ltd v Military Road Island Pty Ltd [2008] NSWDC 268
HEARING DATE(S):	26 November 2008
JUDGMENT DATE:	22 December 2008
JURISDICTION:	Civil
JUDGMENT OF:	Goldring DCJ
DECISION:	(1) Verdict for the plaintiff against the defendants for $200,000 plus interest to the date of judgment. (2) Dismiss cross claim.
CATCHWORDS:	CONTRACTS - Total failure of consideration - interpretation
CASES CITED:	Baltic Shipping Co v Dillon (1993) 179 CLR 344 David Securities Pty Limited v Commonwealth Bank of Australia (1992) 175 CLR 353
PARTIES:	Military Road Island Pty Ltd (Plaintiff/Cross Defendant) Priority Plus Capital Pty Ltd (First Defendant/Cross Claimant) Anthony Brian Fleiter (Second Defendant) Phillip Thomas Austin Whittaker (Third Defendant)
FILE NUMBER(S):	1519 of 2008
COUNSEL:	N Ford, solicitor (Plaintiff) S Bliim (First, Second and Third Defendant)
SOLICITORS:	Brischetto & Ford (Plaintiff) Macquarie Legal Practice (First, Second and Third Defendant)

JUDGMENT

Issues

1 The issues in this case are, first, whether the plaintiff (“MRI”) is entitled to recover $200,000, being what is called in the relevant contract a "success fee", and, secondly, whether the first defendant and cross-claimant (“Priority Plus” or “PP”) is entitled to a refund of some $267,000 or part thereof, being what is called a "know-how" fee. MRI contends that PP has resold the subject matter of the agreement to a third party, which awakens clause 4.9 of the agreement. PP contends that MRI failed to supply what it expected by way of "know-how".

The contract

2 The contract contains the following provisions:

Background:
A. MRI has undertaken work on the development of the Island (the "Development"), including:
(i) conducting feasibility studies with regard to the purchase of the Properties;
(ii) obtaining Information and Knowledge concerning the requirements of the Development;
(iii) undertaking negotiations and discussions with the owners of the Property (the "Owners"), the North Sydney Council (the "Council") and the Roads and Traffic Authority of New South Wales [sic] (the "RTA");
(iv) arranging the drafting of complete documents required to affect and/or facilitate the development, including contract for sale of land and option agreements (see "Documents"); and
(v) providing the Owners with the Documents regarding the purchase of their respective Properties;
(together the "Work").

B. As a result of the work undertaken by MRI, MRI has obtained the Know-how (as defined below) in relation to the Development.

C. Priority Plus has indicated to MRI that it wishes to take over the Development, and accordingly MRI has agreed to provide the Know-how to Priority Plus, and Priority Plus has agreed to accept that Know-how from MRI, on the terms and conditions set out in this Agreement . . .

Other relevant provisions of the contract are the definitions, and clauses 4.7 and 4.9. They read:

"Know-how" means all information and knowledge held by MRI in relation to the Development and the Work, including,
(a) records of negotiations, discussions in correspondence with the Owners, the Council and the RTA; and
(b) the Documents.

“Documents” is an expression defined only in A(iv) above.

"Success fee" means the amount of two hundred thousand dollars ($200,000).

4.7 Notwithstanding any other provision of this agreement, Priority Plus must proceed with the Development unless it considers in its reasonable opinion that the development is uncommercial or otherwise unviable.

4.9 Notwithstanding any other provision of this agreement, Priority Plus must pay to MRI the success fee within seven (7) days of:
(a) commencing work pursuant to the development consent;
(b) selling, assigning or transferring, or otherwise divesting itself of, any rights in the know-how to any other party, or otherwise of admitting any other party to take over at the development (or to take part in and or conduct any aspect of the development); or
(c) receiving a benefit (whether financial or otherwise) in relation to the know-how.

Part 5 is a guarantee by the Second and Third Defendants, Mr Fleiter and Mr Whittaker, to perform all the obligations of PP to MRI.

Factual background

3 MRI, is a company formed by Mr Stokes and his wife. In about 2000 they were the registered proprietors of the property located on what has come to be known as the "Military Road Island". This is a parcel of land upon which there are about 27 semi-detached houses and some apartment blocks, situated between Falcon Street and Military Road in Neutral Bay, immediately to the east of the Northern Freeway. In about 2000 the North Sydney Council, the relevant local government authority, tried to establish a public-private partnership to re-route the main road by demolishing the buildings on the island, changing the alignment of the road, and developing the remainder of the land.

4 The public-private partnership did not eventuate. Mr Stokes believed that he could exploit the situation and formed MRI. Later in 2003, Mr Peter Zervos contacted him.

5 Mr Zervos was not called to give evidence in these proceedings and no explanation was offered for his absence. Mr Fleiter said that he had contact with him earlier this year. The inference I draw is that any evidence Mr Zervos might have given would not have assisted PP. In particular, the fact that he was not called means that I must accept Mr Stokes’ evidence as to what information, or “know-how” was provided to Mr Zervos, as agent for PP, and when it was provided. There is no contrary evidence, except that Mr Fleiter, whose knowledge of Mr Zervos’ activities on behalf of PP was admittedly limited, said that he did not receive any “know-how”. As will become apparent, I cannot accept Mr Fleiter’s view of what PP received as being correct. I accept Mr Stokes as an honest and reliable witness. The comments I make about Mr Zervos are derived from the evidence of other witnesses, especially Mr Stokes, who was not challenged on these matters.

6 Mr Zervos was a property consultant. He had been involved with the plan to develop a public-private partnership. However, at the relevant time he was working as a consultant to PP. When Mr Fleiter, a solicitor, who is a director of PP, gave evidence, he was aware of the relationship between PP and Mr Zervos in general terms, but he could not be specific about the details of the relationship. On Mr Stokes's evidence, which was unchallenged on this point, there were discussions between Mr Stokes and Mr Zervos at a coffee shop on two occasions, in the course of which Mr Zervos, purporting to act on behalf of PP, offered Mr Stokes $1 million for his property, on the condition that Mr Stokes would assist PP in a project to redevelop the Military Road Island.

7 It is clear from the evidence that the market value of most of the semi-detached houses on the island was between $600,000 and $700,000 each. Clearly, if Mr Stokes had been able to take advantage of this offer, it would have been extremely beneficial to him.

8 Mr Zervos made it clear that any arrangements were subject to the approval of the directors of PP.

9 Mr Zervos continued to negotiate with Mr Stokes on behalf of PP.

10 Mr Fleiter gave evidence that he was not prepared to pay the Stokes $1 million for the property, because he was convinced that if the owners of other houses learnt of this they would want a similar price. He directed Mr Zervos to negotiate a different structure for the agreement. Mr Stokes's evidence confirmed this. The resulting structure was that the price for the property would be in the order of $600,000, but Mr Stokes would be entitled to two other payments, a "know-how" fee, which he would be paid when he provided PP with information and introductions to the property owners, the local council, and the Roads and Traffic Authority. MRI, which was to be a party to the contract, would also be entitled to a "success fee" in the event that the development progressed to a profitable conclusion, or otherwise in the circumstances set out in paragraph 4.9 of the agreement. The agreement must be read in its own terms, but I accept Mr Stokes’ evidence that the structure of the agreement was a devise designed to accommodate PP’s desire not to inflate property prices and Mr Stokes’ wish for what he regarded as adequate remuneration.

11 Mr Zervos and Mr Stokes continued to negotiate. Ultimately there was a meeting involving at least Mr Stokes, Mr Fleiter, and Mr Zervos, at the offices of Mr Stokes’ then solicitors, Heidtmanns. After that meeting there were further refinements to the terms of the agreement between MRI and PP, which were reduced to writing, and although the formal agreement in evidence, which has been executed by all the parties, does not bear a date, it is common ground that it was executed in the second half of May 2005. By that time PP had spent some time and effort on the project and had retained a number of professional consultants, including architects, to investigate and develop the proposal.

The know-how

12 Mr Fleiter gave evidence that he understood and intended that the know-how to be provided by Mr Stokes would be written material, which would be handed over. This was not Mr Stokes’ understanding. Mr Stokes did have some records of discussions he had had with various property owners and others. These were notes kept in a spiral-bound notebook, which is in evidence. Mr Stokes gave unchallenged evidence that he made this available to Mr Zervos and that he was at all times prepared to make it available to PP. He was never asked to do so. I infer that Mr Zervos knew that Mr Stokes or MRI was willing and able to provide what “know-how” they had, and I find that neither Mr Zervos nor anyone else on behalf of PP ever requested Mr Stokes to provide anything more than he did.

13 PP paid MRI a know-how fee of $267,757.00.

14 I am satisfied on the balance of probabilities that Mr Stokes did provide the names and addresses of and introductions to various property owners and that he provided the information to Mr Zervos. To the extent that he did this before the agreement with PP was entered into, it is “past consideration” which cannot be consideration for the contract. In other words, MRI cannot say that by delivering information it had already supplied, it was performing its obligations under the contract. I find that while some of this information was supplied to Mr Zervos before the formal agreement between MRI and PP, some was also supplied after that formal agreement.

15 In evidence there is a copy of an e-mail from Mr Stokes to Mr Zervos dated 5 June, 2005, after the date of the agreement, in which he provides e-mail contacts for various owners, albeit in an oblique way.

16 The evidence is that, after the agreement was made, Mr Stokes also procured the assignment (twice) of an option from the Matthews family over their property; he completed the sale of the property of which he and his wife were registered proprietors. It is not disputed that he provided draft template agreements, although Mr Fleiter’s evidence was that he, in the exercise of his professional judgment, declined to use these documents but prepared his own. I also find, on the balance of probabilities, that PP would not have retained expert consultants if it had not received some know-how, but it is unnecessary for me to decide whether this know-how was provided before or after the agreement was formalised.

17 In the absence of evidence from Mr Zervos, I accept the evidence of Mr Stokes that he did provide some “know-how” after the date of the agreement. While I am prepared to accept Mr Fleiter’s view that most of the information provided by MRI or Mr Stokes was not arcane and was readily discoverable, it was still provided by Mr Stokes to Mr Zervos, and I infer that PP used it for its own benefit. Further, while some weight must be attached to the fact that the agreement provides for the supply of information, given the background and the common intention of the parties that the structure of the agreement was changed so that the amount paid to MRI and to Mr Stokes would not inflate the prices of other properties, this was sufficient to discharge their obligations under the contract. To the extent that any documents other than option agreements and contracts for sale ever existed, I am satisfied that MRI either provide them to PP, through its agent Zervos, or was at all material times prepared to do so upon request. There is no evidence of any such request.

18 I find that this was all that MRI was obliged to do under the "know-how" provisions of the contract.

19 It is quite clear that an argument that there was total failure of consideration cannot succeed. PP received and retained a substantial part of the benefit it had bargained for under the contract. Therefore there cannot be a total failure of consideration: Baltic Shipping Co v Dillon (1993) 179 CLR 344, esp per Mason CJ at 350; David Securities Pty Limited v Commonwealth Bank of Australia (1992) 175 CLR 353.

20 The cross-claim must therefore be dismissed.

MRI’s claim to the “success fee”

21 On 25 May 2007, 14 September 2007, and 24 October 2007, PP executed three separate deeds with Winten (No 21) Pty Limited (“Winten”). In each, MRI purported to assign to Winten property, options, and what could be described as “know-how” in consideration of a “development fee” and an “assignment fee”, in each case totalling more than $2 million. The subject matter of the deed was substantially the same subject matter as the subject matter of the agreement between MRI and PP.

22 The construction of each of the deeds between PP and Winten is clearly an assignment of the bundle of rights that are included within the “development” as described in the agreement between MRI and PP. The intention is clearly that Winten take over the development. There is no doubt that pursuant to the deeds PP received a financial benefit that was greater than the benefit paid by PP to MRI.

23 PP says that the arrangements with Winten were the result of its efforts to extricate itself from a financial situation, which Mr Fleiter described as "disastrous". Mr Fleiter gave evidence that by about July or August of 2005, he had formed the view that the development was not commercial or viable. This evidence has relevance to PP's contention that clause 4.7 applied to terminate the agreement. I shall return to that point. Mr Fleiter said that he had previously tried to dispose of the development to a member of the Lend Lease group, but that had been unsuccessful. He said that he had discussed this effort with Mr Stokes, and as a result, Mr Stokes had arranged the assignment of the option given by the Matthews family. Mr Fleiter also said that the amount received by PP from Winten represented a significant loss to PP, and certainly not a financial or other benefit.

24 Whether or not I find that PP obtained a financial benefit as a result of its arrangements with Winton, I am satisfied that PP, by each of these deeds, did assign the development to a third person, and also assigned the know-how. Therefore, if clause 4.9 is to operate, MRI is entitled to the "success fee".

25 PP’s strongest argument rests on the construction of clause 4.7. It is clear that certainly by the middle of 2007, PP had formed the view that the development was commercial or otherwise unviable. Mr Fleiter was not challenged on this in Court, and it was not suggested that such an opinion was unreasonable. Nevertheless, the operation of the clause impliedly requires communication of the opinion to MRI, as well as the formation of the opinion. There is no evidence that anyone on behalf of PP ever communicated to MRI, or to Mr Stokes on its behalf, that it had formed the view that the development was uncommercial or otherwise unviable.

26 One of the distinct possibilities expressly contemplated by the agreement between MRI and PP is that the development would be assigned to a third party for a valuable consideration, in which case MRI became entitled to the “success fee”.

27 Therefore, the fact that Mr Fleiter may have told Mr Stokes that he proposed to assign the development to Lend Lease or a member of the Lend Lease group does not necessarily convey the inference that PP or anyone on its behalf had formed the view that the development was uncommercial or otherwise unviable. Indeed, Mr Fleiter’s evidence was that he took pains not to tell Mr Stokes anything that might lead Mr Stokes or MRI to commence litigation. He considered that if he told Mr Stokes that PP regarded the project as unviable, this might lead to litigation. Having adopted that course, Mr Fleiter and PP must accept the consequences.

28 The assignment could have been for many other reasons. For clause 4.7 to come into operation, so that the Court will enforce it, there must be evidence that PP, as a corporation, had formed the requisite opinion, and that this opinion had been communicated in such a way that MRI knew, or ought reasonably to have known, that it had done so. There is no evidence that either of these prerequisites had occurred. Clause 4.7 could not have come into operation. It is therefore unnecessary for me to consider the effect of the words “Notwithstanding anything” etc.

29 The consequence is that clause 4.9 (b) at least has come into operation and that MRI is entitled to the “success fee” of $200,000.

30 The first time that clause came into operation, so far as I can establish from the evidence, is the date of the first deed between PP and Winten, that is 25 May 2007, and MRI is entitled to interest from that date until the date of judgment. There will be a verdict accordingly.

31 I make the following orders:

1.Verdict for the plaintiff against the defendants for $200,000 plus interest to the date of judgment.

2.Dismiss cross claim.