Morgan and Banks Developments Pty Limited v Kenoss Pty Limited - [2010] NSWSC 1476

No judgment structure available for this case.

CITATION: Morgan & Banks Developments Pty Limited v Kenoss Pty Limited [2010] NSWSC 1476

HEARING DATE(S): 23-24 November, 8 December

JUDGMENT DATE :
15 December 2010

JURISDICTION: Equity Division

JUDGMENT OF: Rein J

DECISION: 1. Held that the first defendant is entitled to have the proceeds of sale of the six lots held in the O’Connor Harris account applied in the manner specified in cl 8 of the Development Agreement, with due allowance for GST repayable to the second defendant.
2. Held that the remaining three lots are the property of the joint venture, and any proceeds of sale from those lots should be treated as funds of the joint venture.
3. Matter stood over for orders to be prepared based upon the conclusions contained in the reasons for judgment.

CATCHWORDS: CONTRACTS - construction and interpretation of contracts - interpretation of miscellaneous contracts and other matters - where joint venture agreement and development agreement between plaintiff and first defendant - whether plaintiff or first defendant entitled to three undeveloped lots and proceeds of sale of six lots after termination of development agreement - whether first defendant entitled to specific performance of alleged agreement giving it proceeds of sale of six lots

CATEGORY: Principal judgment

CASES CITED: Codelfa Construction Pty Limited v State Rail Authority of New South Wales (1982) 149 CLR 337
Franklins Pty Ltd v Metcash Trading Ltd (2009) 264 ALR 15
Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61

PARTIES: Morgan & Banks Developments Pty Limited (plaintiff)
Kenoss Pty Limited (first defendant)
Canberra Land Developments Pty Limited (second defendant)

FILE NUMBER(S): SC 2008/277858

COUNSEL: R R I Harper SC, A R Gee (plaintiff)
D M Loewenstein, Y Shariff (first defendant)

SOLICITORS: Hones La Hood (plaintiff)
Gillespie-Jones & Co. (first defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Rein J

Date of Hearing: 23-24 November, 8 December 2010
Date of Judgment: 15 December 2010

2008/277858 Morgan & Banks Developments Pty Limited v Kenoss Pty Limited and anor

JUDGMENT

1 REIN J: The plaintiff, Morgan & Banks Developments Pty Limited (“MBD”), and the first defendant, Kenoss Pty Limited (“Kenoss”), entered into a joint venture agreement dated 27 March 2003 (“the JV Agreement”) in connection with the development of a site in the Australian Capital Territory: see Tab 1 of Exhibit A. It was envisaged that the site would cost in the order of $25 million to purchase. MBD and Kenoss each agreed to contribute $4 million to the joint venture, with the balance of the funds to be borrowed. It was agreed that Kenoss would have the right to obtain the construction works contract for the development.

2 The parties created a new corporate vehicle, Canberra Land Developments Pty Limited (“CLD”), to carry out the project. CLD did carry out the project, and some 311 lots were sold.

3 As a result of sales of the lots, there was approximately $4.2 million available for distribution to MBD and Kenoss as at August 2006. On 7 August 2006, two agreements were entered into between MBD and Kenoss:

4 Essentially, what was agreed between MBD and Kenoss was that Kenoss would take over the development of the remaining 10 lots and retain for itself any profit made on that “mini project”, as I will call it. The mini project was to be completed within a period of nine months, and any lots not developed in that period were to be returned to the joint venture for further action by the joint venture. This was described in the plaintiff’s submissions as a “nine-month window of opportunity” for Kenoss. In return for this opportunity, Kenoss agreed to advance an amount of $1.635 million to CLD. Under the Acknowledgement Agreement, CLD agreed to pay $1.635 million to each of MBD and Kenoss.

5 The combined effect of the Development Agreement and the Acknowledgement Agreement was that the amount to be paid by CLD to Kenoss (the $1.635 million) was to be met by the advance (of precisely the same amount) to CLD that Kenoss had agreed to make. This was recorded by means of a book entry in CLD’s accounts, so that the Kenoss’ obligation to pay $1.635 million to CLD as an advance for its right to develop the remaining 10 lots was met by the debt owed by CLD to Kenoss under the Acknowledgement Agreement: see pages 87-88 of Exhibit A. No cash funds were actually paid or received by CLD or Kenoss.

6 Later in August 2006, in accordance with the Acknowledgement Agreement, CLD paid to MBD the $1.635 million to which MBD was entitled.

7 Within the nine-month period, contracts were exchanged and completed for one of the lots of the mini project, contracts for six of the lots were exchanged but not completed, and three of the lots were not developed or sold. The proceeds of sale of the first lot were provided to Kenoss. The proceeds of the six lots sold were paid into the account of O’Connor Harris, which was the firm of solicitors acting for CLD on the conveyance, and those proceeds (then approximately $1.1 million and now, with interest, approximately $1.3 million) remain there pending the outcome of these proceedings.

8 MBD (for whom Mr R Harper SC appears with Mr A Gee of counsel) submits that the three lots which were not developed and the proceeds of sale of the six lots fall back into the scope of the joint venture and are assets held equally for itself and Kenoss. Kenoss (for whom Mr D Lowenstein of counsel appears with Mr Y Shariff of counsel) claims that it is entitled to the exclusive benefit of the three undeveloped lots and the proceeds of sale of the six lots.

9 CLD was joined as the second defendant by the plaintiff, and it has taken no active part in the proceedings because one of its two directors is appointed by MBD and one by Kenoss, and no agreement could be reached between them about any matter once the dispute about the Development Agreement arose.

10 The following clauses of the Development Agreement are of particular significance:

5. PAYMENT OF THE AGREED TOTAL AMOUNT
The Developer shall on the date of this agreement advance to the Owner the Agreed Total Amount upon the following terms:
(a) the advance will be only be repayable from proceeds of sale of the Property and the Developer has no further recourse to the Owner for Repayment of the Agreed Total Amount;
(b) the advance will be interest free;
(c) the advance will be unsecured. Without limiting the generality of this subparagraph the Developer acknowledges that neither the Property or any other property of the Owner shall be security for this advance;
(d) The Developer acknowledges that the provisions of this clause exclusively and completely state the rights of the Developer with respect to the advance. This clause supersedes all negotiations and prior agreements whether written or oral in respect of the advance.

8. PROCEEDS OF SALE
Proceeds of sale of any part of the Property shall be applied in the following sequence:
(a) Firstly in repayment of the Development Loan;
(b) Secondly in repayment of the Advance; and
(c) Thirdly to the Developer.

11 In its recent decision in Franklins Pty Ltd v Metcash Trading Ltd (2009) 264 ALR 15, the Court of Appeal has, following High Court authority, reiterated the importance of giving commercial contracts a businesslike interpretation (see pages 25-27 ([19]-[23]) per Allsop P and page 99 ([361]-[362]) per Campbell JA, Giles JA agreeing with Campbell JA at page 29 ([42]-[43]) and with Allsop P at page 33 ([63])) and the sway of the objective approach to the interpretation of contracts in Australian law: see page 21 ([4]-[5]) per Allsop P and pages 30 ([50]), 32-33 ([58]) and 89 ([322] per Campbell JA). I think that the first defendant’s contention that it is exclusively entitled to the benefit of the three lots (as well as the proceeds of sale of the six lots) and the plaintiff’s argument that the proceeds of sale of the six lots (as well as the three lots) are the property of the joint venture both involve interpretations that are not businesslike.

12 Leaving aside the effect of cl 13.8, there can be no doubt that by the Development Agreement, Kenoss was required to complete the development of the 10 lots within nine months of 7 August 2006 and that on the lapse of that period, Kenoss was to vacate the property and “have no claim against [CLD] for any work that has been carried out or any improvements to the Property”, and “any work or improvements shall remain with the Property”. Further, in the event of termination as provided for by cl 10.4, Kenoss “shall not be entitled to a refund of any monies paid by [it]”.

13 I think that the combined effect of cll 5 and 10 was to leave Kenoss in the position that if it did not complete the mini project within nine months from 7 August 2006, it would obtain no further benefit from the lots which had not been sold, and it was at risk of not receiving back all of the advance to CLD.

14 However, Mr Lowenstein argued that cl 13.8(b) had the effect that Kenoss could continue to develop all of the remaining lots that had not been sold after the nine-month period, even if the conditions for operation of cl 10.1(b) had been met. I think that the meaning of cl 13.8(b) is unclear, but the construction contended for by Kenoss would produce the remarkable result that notwithstanding the clear terms of cll 5 and 10, after termination under cl 10.1(b), Kenoss would be able to insist on remaining on the property, developing the lots and progressing the sale of the lots. I am not able to accept that cl 13.8(b) could have a meaning so inimical to the effective operation of cll 5 and 10, since it would make the effect of termination nugatory and is unrealistic and uncommercial. I shall deal later with what I think cl 13.8 should be construed as dealing.

15 Mr Loewenstein contended that the book entry in relation to the $1.635 million to which I have earlier referred was not authorised by Kenoss and did not reflect a real transaction. I reject this contention. By the Development Agreement, Kenoss agreed to advance to CLD that money, and unless the monies otherwise due to Kenoss out of the joint venture and recognised in the Acknowledgment Agreement were treated as available to pay the advance by a bookkeeping debit and credit, then Kenoss did not pay the amount due to CLD as required by the Development Agreement. As Mr Harper pointed out, the two agreements must be considered together: see Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61 at [92] per Santow JA, with whom Meagher JA and Stein AJA agreed.

16 A second strand in the argument was that somehow Kenoss remained entitled to be paid the $1.635 million from the joint venture monies. I reject that contention. The only obligation which remained on CLD’s part was to repay the $1.635 million advanced to it by Kenoss pursuant to the Development Agreement, and that repayment was agreed to occur only out of proceeds of sale: see cll 5 and 6.

17 It follows that on the expiry of the nine-month period, the opportunity given to Kenoss to develop the 10 lots (which had become 11 lots as a result of a subdivision) ceased. Kenoss sought an extension of time, but it was not given by CLD. The three lots ceased to be lots available to Kenoss, and the joint venture is entitled to those lots. Any funds which have been or will be derived from development and sales after 7 May 2007 are funds of the joint venture.

18 I turn now to the question of the six lots which were developed within the nine-month period and in respect of which contracts were exchanged between CLD as vendor and third party purchasers, but which were not the subject of settlement until after the expiry of the nine-month period. MBD’s case is that on the expiry of the nine-month period, the entitlements of Kenoss under the Development Agreement ceased, and Kenoss had no right to have the funds applied in accordance with cl 8 of the Development Agreement, with the consequence that the proceeds of sale obtained on completion of the contracts fell into the joint venture pool.

19 I have earlier dealt with Kenoss’ argument that it should be able to keep developing and selling all of the unsold lots after 7 May 2007, but there is an alternative argument that the proceeds of sale of the lots developed and sold within the nine-month period are not excluded from the provisions of the Development Agreement, notwithstanding the termination of that agreement. There is no clause in the Development Agreement dealing with contracts for sale entered into but not completed within the nine-month period.

20 Mr Harper draws attention to cl 10.4, and particularly the last sentence of it: “in the event of termination as provided in this clause, the Developer shall not be entitled to a refund of any monies paid by the Developer to the Owner” and says that this must mean the advance of $1.635 million referred to as the “Agreed Total Amount”. He also points out that when contracts of sale are exchanged, they may not proceed due to the inability of a purchaser to complete. He draws attention to cl 5, which provides that the only means by which the advance is to be repaid is out of proceeds of sale, and it gives Kenoss no beneficial interest in the proceeds. He submitted that it was a contractual entitlement to be repaid that only exists during the term of the agreement.

21 I note too that cl 10.1(b) refers to “the earlier of completion of the sale of the Property pursuant to clause 4.1 or nine (9) months after the date of this Agreement”, making completion of all lots (not exchange) the date for termination of the Development Agreement.

22 To interpret the Development Agreement as requiring Kenoss to forego the benefit of the lots developed by it and sold within the nine-month period because the contracts were not settled seems to me to produce a harsh result that is unlikely to have been the objective intention of the parties. There are a number of reasons which I think tell against such an interpretation:

23 I conclude that the proceeds of sale of the six lots should be applied in accordance with cl 8 of the Development Agreement.

The March agreement case

24 MBD claims that the amount of approximately $1.3 million (which includes interest earned since 2009) held in the trust account of O’Connor Harris is held on behalf of itself and Kenoss in equal shares. Kenoss claims that it is entitled to the full beneficial interest in the monies held by O’Connor Harris, first, because it asserts that Kenoss was permitted to continue to selling the lots after the nine-month period had expired. I have dealt with that argument. Kenoss further contends that as a result of an exchange of letters on 15 and 19 March 2010 between MBD’s solicitors, Hones La Hood, and its solicitors, Gillespie-Jones & Co., it became solely entitled to the funds, and it seeks an order that the agreement said to be constituted by the exchange of letters be specifically enforced. I shall refer to this as “the March agreement case”. In view of my conclusions on the effect of the Development Agreement, I do not strictly need to deal with this alternative basis of claim, but the matter was fully argued, so I shall express my conclusion on this argument.

25 MBD’s response to the March agreement case is that there was no agreement formed by the correspondence because there was no consideration given by Kenoss for any agreement. Its second argument is that as a matter of construction, MBD was not, by its letter, offering to give up its claims to 50 percent of the $1.1 million then held in the O’Connor Harris account, a construction strengthened, it submits, when regard is had to the evidence of the surrounding circumstances known to both parties.

26 The letters relied on by Kenoss are:

“’WITHOUT PREJUDICE’

We refer to previous correspondence and our recent conversation.

On a without prejudice basis, our client offers (based on the conditions set out in this letter) to authorise O’Connor Harris to release all funds it has in its possession to your client.

The release of all funds will (naturally) require an amendment to the Claim and the Order sought. Accordingly, the condition for our client to authorise release of all funds is your client’s written consent to our client amending the Claim to take into account the release of funds to your client and appropriately seeking Orders for the funds that our client clams it (or CLD) is entitled to under the joint venture agreement and also, the parties bear their own costs thrown away and arising from the amendment to the Claim and Orders sought.”

“We refer to our letters of 16 March 2010, and have now received instructions from Kenoss.

We are instructed to accept the offer contained in your letter of 15 March 2010. Please let us have the amended statement of claim and the order, for which our consent is required. It may be that an amended defence will be needed following the amendment to the claim. Please advise O’Connor Harris that agreement has been reached for the release of all funds it has in its possession, and that you anticipate being instructed to advise O’Connor Harris to release the funds in the near future.”

27 In my view, the first letter, although not well worded, is an offer to agree to the release of funds from the account of O’Connor Harris into the account of Kenoss pending the determination of the dispute between the parties about the $1.635 million and the $1.1 million. There are four aspects of the letter which I think support this construction:

(3) There is no express reference at all to the abandonment of claims; and

28 This last point links to the response from Mr Gillespie-Jones, and that response is wholly consistent with the interpretation that the claim by MBD in respect of the funds held by O’Connor Harris (but to be transferred to Kenoss) would be continuing.

29 In relation to the reliance on material other than the offer and acceptance themselves, Mr Loewenstein vigorously resisted the attempt by MBD to rely on it. He submitted that the two letters were clear in their terms and left no room for any suggestion of ambiguity. I indicated that I would receive the evidence of Mr Graham Brand (a director of MBD) and Mr La Hood and an email exchange between Mr Brand and Mr Michael Wellsmore (an agent of Kenoss), but would rule on the admissibility of the evidence in the course of this judgment. I indicated after the morning tea adjournment that Mr Brand’s evidence was inadmissible and would not be received (see T64), as it contains evidence of his intentions and understanding and was not admissible within the principles reiterated in Franklins.

30 Mr La Hood’s evidence was of two conversations with Mr Gillespie-Jones on 23 February 2010 and 12 March in which words to the following effect were spoken (see paragraphs 6 and 7 of the affidavit of Warwick La Hood sworn 22 November 2010):

Mr Gillespie-Jones did not contradict Mr La Hood’s version of the conversations.

31 The exchange of emails between Mr Brand and Mr Wellsmore (Exhibit D) contains Mr Brand’s statement to Mr Wellsmore: “I had already instructed my lawyer to discuss with your lawyer the possibility of releasing all the funds to Kenoss on a without prejudice basis and no costs thrown away in respect to the amended pleadings required in the litigation”.

32 I do not think that it is necessary to have regard to the conversations between Mr La Hood and Mr Gillespie-Jones or the emails between Mr Brand and Mr Wellsmore, but consideration of that material strongly supports the interpretation which I have outlined. Reference to the email exchange is permitted, I think, on the basis that it sets the context or matrix in which the letters comprising the March agreement were sent: see Franklins at 24 ([14]) per Allsop P and at 89 ([322]), 94 ([337]) and 99 ([361]) per Campbell JA, Giles JA agreeing with Campbell JA at 29 ([42]-[43]) and with Allsop P at 33 ([63]). In Codelfa Construction Pty Limited v State Rail Authority of New South Wales (1982) 149 CLR 337, Mason J (as his Honour then was) said at page 352:

“It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.”

Ambiguity in the contractual terms is not a prerequisite to examination of the surrounding circumstances: see Metcash at 24-25 ([14]-[18]) per Allsop P and at 70-86 ([239]-[305]) per Campbell JA. The conversations are in the same category. The material indicates that the context for the letter of 15 March 2010 was not one of proposed abandonment by MBD of its claim to 50 percent of the money held in the O’Connor Harris account. To the extent that the emails or conversations preceding the letter of 15 March 2010 were without prejudice, I do not think that the privilege survived the acceptance of the offer on 19 March. All the discussions shortly before the letter of an acceptance cease to be the subject of the claim for privilege.

33 On the view I take, namely that Kenoss was agreeing to hold the disputed amount in its own account pending the hearing, I am inclined to think that Kenoss was providing consideration, albeit of a limited kind, but I do not have to determine this point given my conclusion as to the meaning of the exchange of correspondence. I should also note that after the exchange of letters, Mr Gillespie-Jones asked Mr La Hood for the proposed amended Statement of Claim. Mr La Hood advised him that MBD was awaiting further evidence before the amendment: see annexure C to Mr La Hood’s affidavit. The matter did not arise again until the cross-claim served two weeks before the hearing raised for the first time the argument now advanced. On the view of the agreement that I have taken, Kenoss might have been able to insist on the transfer of funds to it, but quite apart from the issue of laches, Mr Loewenstein accepted that there would only be a point in seeking specific performance if the funds which are transferred to Kenoss are to be beneficially held, so there is no need to consider this issue further.

Goods and Services Tax

34 The only other source of contention was the question of GST repayable by Kenoss to CLD, but Mr Loewenstein made no submissions to rebut CLD’s entitlement to recover an amount of $35,000 paid by CLD for GST and not deducted from Kenoss’ account (see T97.49), and he seemed to accept that Kenoss is required to account for this amount.

Conclusion

35 In my view, Kenoss is entitled to have the proceeds of sale of the six lots held in the O’Connor Harris account applied in the manner specified in cl 8 of the Development Agreement, with due allowance for GST repayable to CLD. The remaining three lots are the property of the joint venture, and any proceeds of sale from those lots should be treated as funds of the joint venture.

Costs

36 I will hear the parties on the issue of costs and on the form of the orders to be made.

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Citations

Morgan and Banks Developments Pty Limited v Kenoss Pty Limited [2010] NSWSC 1476

Cases Citing This Decision

0

Cases Cited

3

Statutory Material Cited

0

Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407

Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61

CITATION:	Morgan & Banks Developments Pty Limited v Kenoss Pty Limited [2010] NSWSC 1476
HEARING DATE(S):	23-24 November, 8 December
JUDGMENT DATE :	15 December 2010
JURISDICTION:	Equity Division
JUDGMENT OF:	Rein J
DECISION:	1. Held that the first defendant is entitled to have the proceeds of sale of the six lots held in the O’Connor Harris account applied in the manner specified in cl 8 of the Development Agreement, with due allowance for GST repayable to the second defendant. 2. Held that the remaining three lots are the property of the joint venture, and any proceeds of sale from those lots should be treated as funds of the joint venture. 3. Matter stood over for orders to be prepared based upon the conclusions contained in the reasons for judgment.
CATCHWORDS:	CONTRACTS - construction and interpretation of contracts - interpretation of miscellaneous contracts and other matters - where joint venture agreement and development agreement between plaintiff and first defendant - whether plaintiff or first defendant entitled to three undeveloped lots and proceeds of sale of six lots after termination of development agreement - whether first defendant entitled to specific performance of alleged agreement giving it proceeds of sale of six lots
CATEGORY:	Principal judgment
CASES CITED:	Codelfa Construction Pty Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 Franklins Pty Ltd v Metcash Trading Ltd (2009) 264 ALR 15 Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61
PARTIES:	Morgan & Banks Developments Pty Limited (plaintiff) Kenoss Pty Limited (first defendant) Canberra Land Developments Pty Limited (second defendant)
FILE NUMBER(S):	SC 2008/277858
COUNSEL:	R R I Harper SC, A R Gee (plaintiff) D M Loewenstein, Y Shariff (first defendant)
SOLICITORS:	Hones La Hood (plaintiff) Gillespie-Jones & Co. (first defendant)