Moorstone Financing Partners Pty Ltd v Stable Properties Pty Ltd

[2018] NSWSC 582

Supreme Court

New South Wales

Medium Neutral Citation:	Moorstone Financing Partners Pty Ltd v Stable Properties Pty Ltd [2018] NSWSC 582
Hearing dates:	1 May 2018
Date of orders:	01 May 2018
Decision date:	01 May 2018
Jurisdiction:	Equity
Before:	Pembroke J
Decision:	Judgment for plaintiff
Catchwords:	CONTRACT – construction COSTS – discretion to deny a proportion of costs to successful party
Legislation Cited:	Uniform Civil Procedure Rules (2005)
Cases Cited:	Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968-9) 118 CLR 429
Category:	Principal judgment
Parties:	Moorstone Financing Partners Pty Ltd - plaintiff Stable Properties Pty Ltd – defendant
Representation:	Counsel: N Kirby – for the plaintiff A P Cheshire SC – for the defendant   Solicitors: Carmody Lawyers – for the plaintiff Mills Oakley Lawyers – for the defendant
File Number(s):	2017/103842

Judgment

1. This is a claim for damages for breach of contract. The plaintiff is in the business of procuring funding for interested parties. The defendant is a property developer. Its managing director is Mr Flynn. The plaintiff’s claim for breach of contract arises out of a fee agreement made on 31 March 2015. It related to a project at Rosebery known as the ‘Wrigley Factory/Rosebery Unit Development’.

2. The evidence suggests that the plaintiff’s standard fee agreement was markedly different from the arrangement that was reached in the 31 March 2015 agreement. The parties had entered into a fee agreement in relation to another project in 2013. It provided for the defendant to pay an arrangement fee of 5.5% including GST of equity capital and 2.2% including GST of debt capital from the fund proceeds at settlement.

3. That agreement, which was not used in relation to the Rosebery project, also provided that in the event that the defendant obtained a further advance of funds from the funder, or varied the term of the funding by an extension of the term of more than three months, or continued any term funding for more than three months beyond its expiry date, then a further brokerage fee was payable to the plaintiff.

4. In early March 2015, the parties undertook negotiations in relation to the role of the plaintiff in connection with the Rosebery project. Mr Flynn, on behalf of the defendant, made clear that putting aside senior debt funding, he was looking for $16 million. This was on the basis that he needed a further $20 million of which the first ‘equity piece’ of $4 million was already in hand. He said ‘Target additional project equity is $16 million (preferably from one player)’. He also said to Mr Mennes, on behalf of the defendant, that a meeting with the representatives of a financing group of companies called Qualitas would be worthwhile and added:

Just confirming that your role herein is acknowledging the introduction and essentially we will be doing all the work, your fee would be $320,000 plus GST for the $16 million project equity piece.

5. It was clear that there was already some familiarity between the defendant and Qualitas. It was also clear that the financing of the Rosebery project was well advanced, the senior debt funding, for example, was in place. In response to Mr Flynn’s suggestion that the plaintiff’s fee would be $320,000 plus GST for ‘acknowledging the introduction’, Mr Mennes pointed out that the plaintiff could offer more services including being involved to ensure a financial close is achieved and managing the process between the defendant and Qualitas to get the deal done. He was clearly seeking to ensure that he achieved the highest fee possible for the plaintiff.

6. As it turned out, the parties agreed in late March to a much reduced fee compared to that which the plaintiff appears to have normally commanded. By his email sent on 30 March 2015, Mr Mennes set out the terms of what became the agreement. The email was headed ‘Fee Proposal’. It stated that:

We confirm the engagement between Moorstone and Stable Properties consists of an introduction to Qualitas to enable Stable Properties to present the proposed Wrigley Factory/Rosebery Unit Development and the review of documentation as required.

7. I should interpolate here to say that that statement made clear that the ‘engagement’ was limited to the introduction of the defendant to Qualitas and, if it were required, the review of documentation. It is not clear if any such review was ever required. The email went on to say:

We acknowledge that a reduction in the standard fee arrangement (from the previous mandate for Project 308) has been proposed given the advanced stage of the Rosebery project in financing which requires a lower level of engagement by Moorstone. Assuming Qualitas is agreeable, Stable Properties has proposed that they will undertake the bulk of the workload associated with managing the funding to a financial close.

8. The reference to the ‘bulk of the workload’ being carried out by the defendant is consistent with the limited role proposed for the plaintiff set out in the first paragraph of the email. The email went on:

‘The arrangement fee as proposed by Stable Properties is 2% plus GST of the total capital raised - being $320,000 plus GST based on the currently proposed $16 million capital raising.

9. This raises an issue to which I will return about the calculation of the fee to which the plaintiff might be entitled. It is clear from that statement, and from the syntax and context, that the $16 million capital raising was an upper limit and that it was not necessarily guaranteed. Secondly, it is clear that the plaintiff’s fee was to be based on the capital amount of the funding that was raised, not an amount which included the addition of capitalised interest. That would be unusual, but more significantly, it is inconsistent with the actual language.

10. Finally, and importantly, the email went on to say:

If any additional engagement with our funding partner (Qualitas) or a capital raising from other parties is required, that will be negotiated in a separate fee agreement and scope of works.

11. That statement has generated another issue in the proceedings to which I will return, namely, whether the phrase ‘additional engagement’ could possibly cover the loan funding that was ultimately arranged with Qualitas in August 2016 in the sum of $13.6 million. For reasons which will become clear, I do not think that it does. It is not justified by the language or the context.

12. The agreement was concluded when Mr Flynn signified his acceptance of the terms by sending an email response on 31 March 2015 stating ‘Agreed’. Mr Flynn may possibly have been hasty but he is bound by the terms to which he agreed.

13. In May further discussions occurred between the parties when it became clear that the full amount of $16 million was not attainable. Qualitas, after carrying out a valuation, was prepared to offer only $13 million in mezzanine debt. Mr Flynn needed an additional $3 million and began negotiations with the plaintiff in relation to procuring that funding.

14. Mr Mennes, on behalf of the plaintiff, stated that if the defendant required the plaintiff to progress negotiations in relation to the $3 million component of the required funding then a new fee agreement to cover the amount raised would be required. This caused some consternation and debate. The plaintiff contended that the fee for any such further agreement would be 7% plus GST. Mr Flynn stated that 7% was unacceptable and stated that ‘The 2% was for a structure that delivered the capital stack, however it was structured’. He was referring to the capital stack comprised of the proposed $16 million component of the overall funding. There appears to have been no resolution of that issue and it may have soured relations.

15. In any event, on 29 May 2015 Qualitas provided a letter of offer known as a “Mandate letter” to the defendant. It expressly contemplated a two-stage process. The first stage would consist of a facility for $7.46 million plus capitalised interest to assist with the purchase of the land and the funding of soft costs associated with the project. The first stage was described as the ‘Tranche 1 facility’. The second stage was described as a $13 million facility plus capitalised interest to ‘refinance the Tranche 1 facility and fund development costs of the project’. It was known as the ‘Tranche 2 facility’. They were referred to collectively in the Qualitas letter of offer as the facilities.

16. The letter of offer consisted of a number of annexures including the term sheets for the Tranche 1 and Tranche 2 facilities, the standard terms and conditions and an agreed project feasibility. Mr Flynn signed and accepted the letter of offer on 4 June on behalf of the defendant. His acceptance expressly acknowledged that the Mandate letter incorporated the term sheets for both Tranche 1 and Tranche 2 facilities. The term sheet for the Tranche 1 facility stated that the facility limit was $7.46 million principal plus the capitalised interest provision. The term sheet for the Tranche 2 facility stated that the facility limit was $18.22 million comprising principal of $13 million plus the capitalised interest provision. The term sheet stated that the purpose of the Tranche 2 facility was to refinance the Tranche 1 facility fund development costs, and fund capitalisation of interest and fees.

17. On 3 June, just before signing and accepting the Mandate letter, Mr Flynn sent an email to Mr Mennes stating that he was disappointed with the ‘7% grab’ for the work involved in procuring funding for the $3 million component. He added that ‘Given the fact that we brought you into this deal when in fact we didn’t have to leads to a disappointing conclusion’. This is clearly a reference to the fact, as the agreement itself acknowledges, that the role of the plaintiff was primarily to glad-hand the relationship between Qualitas and the defendant in the sense of facilitating the introduction of the two parties. The email continued:

Also your introduction fee for Qualitas (which we did not need to do) is as agreed at 2% of the capital raised. Interest is not capital nor funds raised. Interest is an output paid from profit. The representations of raising $16 million in principal has fallen short and the final amount will now be reduced to $13 million principal. Thus your fee is $260,000 plus GST and payable on final close and receipt of all project moneys.

18. He added ‘To make the deal happen both Qualitas and Stable have reduced and deferred fee payments’. He might have added that the plaintiff had also reduced its fee. It is obvious from that statement, that for what it is worth, Mr Flynn recognised that notwithstanding the plaintiff’s limited role, it was entitled to its fee of 2% on $13 million, being the principal amount of the then contemplated loan funds from Qualitas.

19. In due course, the first of two facility agreements was agreed between Qualitas and the defendant. It is dated July 2015. It provides for a loan facility in the sum of $7.99 million and refers expressly to the Tranche 2 facility contemplated by the Mandate letter. It states that the Tranche 2 facility:

Means the facility which may be made available to the borrower by the financier (whether as a separate Tranche under this document by varying the terms of the facility or by provision of a new facility) to assist with the construction of the project.

20. The purpose of the first facility was stated to be the acquisition of the site and soft costs to secure development approval and pre-sales. This is consistent with the language of the Mandate letter. Relevantly, it also ensured that the defendant was almost inevitably bound to proceed with the Tranche 2 facility, because it provided for a break fee of $2 million if the defendant did not proceed.

21. As had been contemplated in the Mandate letter, a second facility was subsequently entered into to refinance the first facility. It is dated 25 August 2016. The principal sum advanced was $13.6 million. The capitalised interest was $5.32 million. The ‘Total Facility Limit’ was defined to mean the aggregate of the Facility Limit and the Capitalisation Limit. This is in accordance with normal practice. The Total Facility Limit is the full amount which the financier makes available broken up into principal and capitalised interest. It is an entirely different thing to the concept of ‘total capital raised’ referred to in the agreement between the parties and set out in the email dated 30 March 2015.

22. For reasons which were not explained, Mr Flynn chose not to cause the defendant to pay any fee to the plaintiff. However, the plaintiff appears to have sought more than it was entitled to and that may have been the problem. The defendant’s defence sets out a number of contentions to which I will come shortly, but for present purposes it is sufficient to mention that by paragraph 4(f) the defendant pleaded, and Mr Flynn verified by his affidavit appended to the defence, that the ‘total capital raised was $13.6 million’.

23. I mention this at this stage because one of the defendant’s arguments at the hearing was that the plaintiff was only entitled to a fee on the amount of the principal advance pursuant to the first facility and not pursuant to the second facility for which the principal sum was $13.6 million. In effect, it argued that the ‘total capital raised’ was only $7.99 million and that the plaintiff’s fee should be limited to 2% of that amount.

24. The defendant also contended that the agreement embodied in the exchange of emails on 30 and 31 March 2015 was uncertain and therefore void. In commercial agreements, the law is reluctant, unless the circumstances make it necessary, to conclude that an agreement is void for uncertainty. Barwick CJ explained in Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968-9) 118 CLR 429 at 437, adopting the words of Lord Wright, that in order to be void for uncertainty, an agreement must be ‘so obscure and so incapable of any definite or precise meaning that the court is unable to attribute to the parties any particular contractual intention.’

25. He added a rider of his own which was that ‘In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Thus will uncertainty of meaning, as distinct from absence of meaning or of intention, be resolved.’

26. The email sent on 30 March 2015, when read together with the exchanges between the parties in early March makes clear that the plaintiff was lending its weight and reputation to the defendant’s approach to Qualitas but was not required to do very much at all. It may have been easy money but clearly Mr Flynn saw a benefit in having the plaintiff onside. Some borrowers, in some situations, are happy to pay for the privilege. The defendant clearly was, but at a mutually agreed reduced fee.

27. There was no uncertainty about the work required of the plaintiff and no uncertainty because the supposed issue of capitalised interest was not addressed in the email. There was no ambiguity about that question. The 2% fee was payable on total capital raised not capitalised interest. The language and syntax of the 30 March email make clear that the proposed capital was $16 million not $16 million plus interest.

28. Among the further arguments, there was a contention that the plaintiff did not satisfy its performance obligations. I do not think there is any factual basis for this contention. The ‘engagement’ was expressly stated to consist only of ‘an introduction to enable Stable Properties to present the proposed Wrigley Factory/Rosebery Unit Development and a review of documentation as required’. The plaintiff did not have to ‘seek’ funds. That is not what the agreement required. Whatever Mr Flynn may now think about the matter, his assent to the terms of the agreement was clear.

29. Further, there is no foundation in the language of the agreement for the contention that it was a condition precedent to the entitlement of the plaintiff to receive a fee, that funding be obtained in the sum of $16 million. Nor is it supported by the prior contextual communications. It was clearly contemplated that $16 million was an amount that was hoped to be achieved, not one that was guaranteed.

30. Nor is there any foundation for the contention that the plaintiff’s only entitlement was to $320,000. Its entitlement could vary up or down depending on the precise amount raised through the funding process. In fact, I have concluded that it is entitled to less than $320,000. On the other hand, for reasons that I have already made clear, the plaintiff is not justified in claiming a fee calculated by reference to the amount of capitalised interest. It is simply not “total capital raised” within the meaning objectively intended by the language of the agreement embodied in the 30 March email. The language is compelling and the arguments to the contrary that were advanced on the plaintiff’s behalf had an air of commercial unreality about them.

31. Finally, the defendant’s argument that the second loan from Qualitas was not covered by the fee agreement is also hopeless. Indeed it was not pleaded. And for what it is worth, as I have mentioned, it clearly never occurred to Mr Flynn. His communications and admissions are to the opposite effect. The sequence of events from the 30 March 2015 email to the Mandate letter on 29 May, to the facility agreement for Tranche 1 in July 2015 followed by the facility agreement for Tranche 2 in August 2016, indicate that what happened is exactly what was contemplated.

32. In the context that existed in March 2015, and having regard to the language, syntax and purpose of the fee agreement, it is clear that the “additional engagement” referred to in the 30 March email could not mean the second loan from Qualitas for $13.6 million which was entered into to refinance the initial loan.

33. The result is that the plaintiff should have judgment for damages based on its fee of 2% of $13.6 million plus GST. This amounts to $299,200. Interest should run from the date of Financial Close, namely 25 August 2016.

34. The plaintiff has succeeded but in a sum less than $500,000. The defendant has invoked the provisions of Uniform Civil Procedure Rules (2005) rule 42.34. Whether or not that rule applies, I have a discretion in relation to costs. I have formed the view that it was inappropriate for the plaintiff to go to all of the trouble and expense of amending its statement of claim to introduce supposed equitable causes of action in order to have the proceedings transferred from the District Court to this Court. The case was always only about a simple claim for breach of contract; it could have been decided only on that basis, pleaded on that basis and in fact was ultimately heard and determined only on that basis.

35. There is far too much prevalence among pleaders for introducing unnecessary estoppels and equitable causes of action into straight forward contractual claims. If that had not been done, this matter would have remained in the District Court and would have been determined there, presumably with the same outcome. So for those reasons, in the exercise of my discretion, not relying on rule 42.34, but more broadly, I propose to allow the plaintiff only 60% of its costs.

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Decision last updated: 30 May 2018