Muriti v Prendergast - [2005] NSWSC 281

CITATION:
Muriti v Prendergast [2005] NSWSC 281

HEARING DATE(S): 21/02/05, 22/02/05, 23/02/05, 02/03/05, 03/03/05

JUDGMENT DATE :

11 April 2005

JUDGMENT OF:
White J

DECISION:
See paras 199 - 201 of judgment.

CATCHWORDS:
CONTRACT - RECTIFICATION - Common intention - Mutual mistake - Whether clear and convincing evidence of intent displaced presumption that the parties intended to be bound by the terms of their written agreement - Relevance of agreement containing obvious mistakes - Whether intention as to effect document was to achieve clearly predominated over intention to be bound by the terms in the instrument - Whether common intention sufficiently precise to permit rectification - Proposed term must give effect to the parties' intention and not go beyond it - Alternative formulations of proposed term did not indicate that common intention lacked necessary precision - Parties agreed on literal construction - Rectification available for more abundant caution. - RES JUDICATA - Previous proceedings for specific performance - Prior consent orders - Anshun estoppel - Issue estoppel - Whether there has been a merger of the cause of action in the decree for specific performance - whether the issues raised in these proceedings should have been raised before the order for specific performance was made - Whether plaintiffs had elected between inconsistent remedies - Whether the degree of conformity between the instrument and the true agreement was an issue raised in the previous proceedings - Whether previous order was a final order which completely disposed of the proceedings - Scope of liberty to apply - Held previous order final - Order for rectification can be made in new proceedings after a decree for specific performance. - RES JUDICATA - Issue estoppel - Defendants estopped from denying that the conditions precedent to a consent order for specific performance had been met. - IMPLIED TERM - Release or indemnity of mortgagor - Whether term is necessary for the reasonable or effective operation of the contract - Whether term is so obvious as to go without saying. - EVIDENCE - Failure of the defendant to give evidence in civil proceedings - Jones v Dunkel applied.

CASES CITED:
Deutsche Bank und Disconto Gesellschafft v Banque des Marchands De Moscou (1931) 107 LJKB 386 Fitzgerald v Masters (1956) 95 CLR 420
Westpac Banking Corporation v Tanzone Pty Ltd (2000) 9 BPR 17,521
Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181
Pacific Carriers Ltd v BNP Paribas (2004) 208 ALR 213
Standard Portland Cement Co Pty Ltd v Good [1982] 2 NSWLR 668
Pukallus v Cameron (1982) 180 CLR 447
Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336
Fowler v Fowler (1859) 4 De G & J 250; 45 ER 97 Australian Gypsum Ltd & Australia Plaster Co Ltd v Hume Steel Ltd (1930) 45 CLR 54
Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662
Crane v Hegeman-Harris Co Inc [1939] 4 All ER 68
Joscelyne v Nissen [1970] 2 QB 86
The Olympic Pride [1980] 2 Lloyds Rep 67
Australasian Performing Right Association v Austarama Television Pty Ltd [1972] 2 NSWLR 467
Westland Savings Bank v Hancock [1987] 2 NZLR 21
Bush v National Australia Bank (1992) 35 NSWLR 390
Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329
Jones v Dunkel (1959) 101 CLR 298
MacDonald v Shinko Australia Pty Ltd [1999] 2 Qd R 152
Slee v Warke (1949) 86 CLR 271
Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd [2001] 3 VR 526
GPI Leisure Corp Ltd v Herdsman Investments Pty Ltd (No. 4) (1990) 9 BPR 17,461
State Bank of South Australia v MacIntosh (NSWSC, 31/5/95 unreported, BC9504827)
Commonwealth Bank of Australia v Cluness (1997) 8 BPR 15,467
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589
Issa v Berisha [1981] 1 NSWLR 261
Montgomery v Beeby (1930) 30 SR (NSW) 394
Blair v Curran (1939) 62 CLR 464
Spencer Bower, Turner & Handley, Res Judicata 3 ed
Re South American and Mexican Company: Ex Parte Bank of England [1895] 1 Ch 37
Cloutte v Storey [1911] 1 Ch 18
Bailey v Marinoff (1971) 125 CLR 529
Gamser v Nominal Defendant (1977) 136 CLR 145
Meehan v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146
Fry on Specific Performance 6 ed paras 1170-1181 Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 JAG Investment Pty Ltd v Strati [1981] 2 NSWLR 600
Riltang Pty Ltd v L Pty Ltd [2004] NSWSC 977
Phillips v Walsh (1990) 20 NSWLR 206
Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245
Henderson v Henderson (1843) 3 Hare 100; 67 ER 313
Caird v Moss (1886) 33 Ch D 22
B & B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd (31/08/95, Young J unreported at BC9505386)
Market Terminal Pty Ltd v Dominion Insurance Co of Australia [1982] 1 NSWLR 105
Nulty Securities Ltd v Carpenter (NSWSC, 10/12/96, unreported, BC9606187
Butts v O'Dwyer (1952) 87 CLR 267
Kennedy v Vercoe (1960) 105 CLR 521
Brown v Heffer (1967) 116 CLR 344
Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600
Byrne v Australian Airlines Ltd (1995) 185 CLR 410

PARTIES:
Vincent Carl Muriti & 1 Or
v
John Francis Prendergast & 2 Ors

FILE NUMBER(S):
SC 5094/04, 2271/05

COUNSEL:
Plaintiffs: JWJ Stevenson SC, K L Andronas
Defendants: C R C Newlinds SC, A P Coleman, P Newton

SOLICITORS:
Plaintiffs: Henry Davis York
Defendants: Phillips Fox Lawyers

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WHITE J

Monday, 11 April 2005

5094/04 VINCENT CARL MURITI & 1 Or v JOHN FRANCIS PRENDERGAST & 2 Ors
2271/05 VINCENT CARL MURITI & 1 Or v JOHN FRANCIS PRENDERGAST & 2 Ors

JUDGMENT

1 HIS HONOUR: These proceedings concern the construction, and a claim for rectification, of an agreement made between the plaintiffs and the defendants on 4 August 2004. The agreement is called a Heads of Agreement, but it is legally binding. It provides for the separation of the interests of the first plaintiff, Mr Muriti and the first defendant, Mr Prendergast in various partnerships and companies which own land and carry on profitable businesses. The principal issue concerns how certain inter-company loan accounts are to be dealt with on the completion of the agreement.

The Businesses

2 The first plaintiff, Mr Muriti, and the first defendant, Mr Prendergast, are the sole directors and shareholders of Marshalls Motors Pty Ltd (“Marshalls Motors”) and Perfect Auto Body Pty Ltd (“Perfect Auto Body”). Marshalls Motors sells Mercedes Benz motor vehicles, and spare parts for those vehicles, from premises at Parramatta and Alexandria. Perfect Auto Body Pty Ltd is an authorised Mercedes Benz motor vehicle repairer. It carries on business from other premises in Alexandria. Each of Marshalls Motors and Perfect Auto Body is a party to an agreement with DaimlerChrysler Australia/Pacific Pty Ltd (“Daimler Chrysler”) from which it derives its right to be an authorised seller or repairer of Mercedes motor vehicles. The businesses are highly profitable.

Corporate Structures and Inter-Company Loans

3 Marshalls Motors conducts its business as trustee of a unit trust called the PGM Unit Trust. The trust deed was not in evidence. However the evidence established that 50% of the units in the trust are held by Rolcross Pty Ltd (“Rolcross”) and 50% are held by Keanlong Pty Ltd (“Keanlong”). Rolcross is the trustee of a discretionary family trust for Mr Prendergast’s family. Keanlong is the trustee of two discretionary family trusts for Mr Muriti’s family.

4 Up to 30 June 2003, the business now carried on by Perfect Auto Body was carried on by another company, then also called Perfect Auto Body Pty Ltd. On 2 July 2003 that company changed its name to Santee Pty Ltd (“Santee”). On or about 1 July 2003, Santee transferred the trading business to Perfect Auto Body. Perfect Auto Body carries on its business as trustee for a unit trust called the PAB Unit Trust. The units in that trust are held by Elesium Pty Ltd (“Elesium”). All of the shares in Elesium are held by Santee. Rolcross and Keanlong each holds 50% of the shares in Santee.

5 The financial statements of Santee as at 30 June 2003, disclosed that it had assets which included receivables, both current and non-current, totalling $13,441,119.36. These included trade debtors of less than $1,000,000 and a small amount of sundry debtors. The balance of the receivables consisted of loans due to it by a number of companies or partnerships associated with Mr Muriti or Mr Prendergast, as well as moneys held on trust for it by the Prendergast family trust and the Muriti family trust.

6 The properties upon which Marshall Motors and Perfect Auto Body carry on their respective businesses are owned by various partnerships of which the partners are Rolcross, Keanlong and Worthbrook Pty Ltd (“Worthbrook”). Worthbrook is the trustee of a trust called the Giovannini family trust. Mr Prendergast controls Worthbrook. There are other properties which are also owned by partnerships comprising some or all of Rolcross, Keanlong and Worthbrook. A block of land at 330-336 Botany Road, Alexandria is owned by Botany Road Developments Pty Ltd. It is a trustee of a unit trust, the beneficiaries of which are Keanlong, Rolcross and the trustee of another Prendergast family trust.

7 A partnership, called the Benzcorp Properties partnership, owns land and buildings at 312-316 Church Street, Parramatta. The partners in it are Rolcross, Keanlong, and Worthbrook. The financial statements for the Benzcorp Properties partnership as at 30 June 2003 record loans from Santee and the PGM unit trust. Its assets included debts owed to it by three other partnerships, Botany Road Developments, and the Muriti family trust.

8 Another of the partnerships is the Green Square partnership. Again, the partners are Rolcross, Keanlong and Worthbrook, although in different proportions from the Benzcorp Properties partnership. The Green Square partnership owns land in O’Riordan Street and Botany Road Alexandria (or Beaconsfield). Its financial statements as at 30 June 2003, disclosed that it owed money to Santee, the Benzcorp Properties partnership, and Mr Muriti. Its assets included moneys owed to it by Santee and Botany Road Developments.

9 The Rosehill Property partnership had two partners, Rolcross and Keanlong. It owned property at 42-46 Rosehill Street, Parramatta. It was owed money by Marshall Motors. It owed money to the Benzcorp Properties partnership.

10 The partners of the Vidal partnership were Keanlong and Rolcross. It owned land and buildings at 334-336 Church Street, Granville. It owed money to the Benzcorp Properties partnership and to Marshalls Motors.

11 At 30 June 2003, Botany Road Developments owed money to the Benzcorp Properties Partnership, the Green Square Partnership and Pamela Prendergast.

12 The financial statements of Marshall Motors as trustee for the PGM Unit Trust for the year ended 30 June 2003 disclosed that its assets included debts owed to it by Benzcorp Properties Partnership and the Vidal Partnership. It had liabilities to Santee and to the Rosehill Properties Partnership, amongst others. It held moneys described as “vested funds”, of $8,376,454, on trust for the Prendergast family trust, and $6,037,043 for the two Muriti family trusts.

13 Santee’s assets at 30 June 2003 included debts owed to it by the Benzcorp Properties Partnership, Marshall Motors, the Green Square Partnership, Prendergast Pty Ltd and Muriti Pty Ltd. Substantial moneys were held on trust for it by the Prendergast Family Trust, (i.e. Rolcross), and the Muriti Family Trust (i.e. Keanlong). Its liabilities included loans from the Green Square Partnership.

14 There was thus a web of loan accounts between Marshall Motors, Santee, Botany Road Developments, the various partnerships, Rolcross, Keanlong and other companies controlled by Mr Prendergast or Mr Muriti.

15 Another significant debt was one owed by Santee to Perfect Auto Body (Canberra) Pty Ltd, (“Perfect Auto Body (Canberra)”), as trustee for Laon Pty Ltd (“Laon”), a company owned and controlled by Mr Prendergast. The debt arose from a complicated restructure of the ownership of the business of Santee (then called Perfect Auto Body Pty Ltd) in 2002. Prior to the restructure, the shares in Santee were held as to 20% by Keanlong as trustee for the Muriti family trust, as to 37.5% by Rolcross as trustee for the Prendergast family trust, and as to 42.5% by Mr Prendergast personally. The shares in Santee held by Mr Prendergast were transferred by him to Laon. He became the sole shareholder in Laon. On 10 May 2002, dividends were declared in respect of the accumulated profits held by Santee to Rolcross, Keanlong and Laon. Those dividends were then lent back to Santee. Laon, Muriti Pty Ltd and Marshall Motors Wholesale Pty Ltd (a wholly owned subsidiary of Marshall Motors) subscribed for debenture stock issued by Santee. The stock was issued to Perfect Auto Body (Canberra) as trustee for the holders of the debenture stock. The debt due by Santee to Perfect Auto Body (Canberra) was secured over the assets of Santee. Following the declaration of dividends and the issue of debentures, Perfect Auto Body (Canberra), as trustee for Muriti Pty Ltd, Marshall Motors Wholesale Pty Ltd and Laon, became a secured creditor of Santee. The debt held for Laon was initially $5,809,750. On 10 July 2002, Santee bought back the 42.5% shareholding of Laon and also bought back part of Rolcross’s shareholding. Laon became an unsecured creditor of Santee in the amount of $344,250 following the buyback. The debt of $5,809,750 owed by Santee to Perfect Auto Body (Canberra), (which held it on trust for Laon), was reduced by $1,162,427.41, leaving Laon as a secured creditor of Santee in the sum of $4,647,322.59, and an unsecured creditor for $344,520.

16 When, on 1 July 2003, the business of Santee, (then called Perfect Auto Body Pty Ltd) was transferred to the new company of that name, only the trading assets of the business were transferred. Perfect Auto Body also assumed liability for the trading debts. The trading assets and liabilities transferred and assumed, consisted of trade debtors, stock, trade creditors, provision for holiday pay and items specifically referable to the operations, and the business. The intercompany loans between Santee and the other group entities were not transferred.

DaimlerChrysler Forces a Negotiation

17 On 23 June 2004, DaimlerChrysler held a social function to which customers and dealers were invited. Following that event, Daimler Chrysler alleged that Mr Prendergast had assaulted one of its employees. DaimlerChrysler called a meeting with Mr Muriti and Mr Prendergast for 25 June 2004. It appears from a letter written by DaimlerChrysler on 29 June 2004, that it had purported to terminate its agreements with Marshall Motors and with Perfect Auto Body with effect from 30 July 2004. In its letter it stated that Messrs Prendergast and Muriti had accepted DaimlerChrysler’s oral termination of those agreements. It stated that it would be prepared to enter into new dealer agreements in relation to the current operations, subject to Mr Prendergast disposing of all his current Mercedes-Benz business interests to a party acceptable to DaimlerChrysler before 30 July. Otherwise, the asserted termination of the agreements would take immediate effect.

18 As a result of DaimlerChrysler’s actions, Mr Muriti and Mr Prendergast negotiated for the transfer of Mr Prendergast’s interests in the two businesses. The matters to be negotiated were complex. The parties were under pressure from DaimlerChrysler, which threatened to close the businesses. There was a threat that about 140 employees engaged in the two businesses would lose their jobs. Mr Muriti and Mr Prendergast agreed in principle that entities controlled by Mr Muriti would purchase Mr Prendergast’s interests in the two businesses, and that Mr Prendergast would acquire Mr Muriti’s interests in the partnerships which owned the properties upon which the businesses were conducted. Thereafter, Marshall Motors and Perfect Auto Body would lease the various premises under long-term leases.

The Heads of Agreement

19 On 4 August 2004, an agreement was entered into between Mr Prendergast and Mr Muriti. They signed the agreements in their own right, and as sole directors of Rolcross, Keanlong and Worthbrook, who were also parties to the agreement.

20 The agreement made on 4 August 2004 was called a “Heads of Agreement”. A paragraph under the heading “Background” recited that the Heads of Agreement set out the broad commercial basis upon which Mr Prendergast and Mr Muriti agreed to separate their respective interests, and the various transactions which were required to enable settlement to occur should be the subject of separate agreements. This paragraph was added late in the negotiations, when Mr Prendergast was expressing reluctance to sign the agreement. The words were included by a representative of DaimlerChrysler. The amendments did not detract from clause 3 of the agreement, which provided that it was a legally binding contract between the parties, although they intended to negotiate and execute collateral documents to implement the transactions referred to in the agreement. It is common ground that the Heads of Agreement does contain a legally binding contract. An order has already been made for its specific performance.

21 In the Heads of Agreement, Mr Prendergast was called “JFP”. Mr Muriti was called “VCM”. Clause 2 set out various background matters describing the structure and ownership of the businesses which I have set out in more detail above. Clause 2(a) stated that:

“JFP and VCM are both directors and shareholders of Marshall Motors Pty Ltd ACN 072 983 272 (“Marshalls”) and Perfect Auto Body Pty Ltd ACN 105 162 034 (“Perfect”).”

22 This definition is significant. The company defined as “Perfect” was the company which, on 1 July 2003, acquired the motor vehicle repair business formerly carried on by the other company of that name, which is now called Santee.

23 Clause 2(d) stated that each of Rolcross and Keanlong owned 50% of the shares in Santee which, through Elesium, owned all of the units issued by the PAB Unit Trust of which Perfect is the trustee.

24 Clause 2(e) recited that Rolcross, Worthbrook and Keanlong owned in different shares, six properties called the Partnership Properties.

25 Clause 2(f) provided:

“JFP and VCM have agreed to separate their respective interests in Marshalls, Perfect and the Partnership Properties on the terms of this agreement.”

26 Clause 4 provided that Rolcross would sell and Keanlong would buy all of the units in the PGM unit trust, and all of the shares in Santee, for a price which was the sum of the following amounts:

(i) 50% of the agreed value of the goodwill of the businesses of Marshalls and Perfect, fixed at $8,000,000;

(ii) 50% of the value of the net tangible assets of the PGM Unit Trust and of Santee as at 30 June 2004, as recorded in the special purpose financial reports of those companies for the year ended 30 June 2004 in accordance with clause 5: an amount estimated to be $2,180,000; and

27 At the date of the agreement the accounts for the various entities as at 30 June 2004 and the management accounts for July 2004 had not been completed. Hence the value of the net tangible assets of the PGM Unit Trust and of Santee, and of the July profits of the unit trust and of Santee could only be estimated.

28 Clause 6 was headed “Sale of Shares in Marshalls and Perfect”. It provided for the shares in Marshalls, Perfect and Perfect Auto Body (Canberra) Pty Ltd to be transferred from Mr Prendergast, or any entity owned or controlled by him, to Mr Muriti for nominal consideration of $1.

29 Clause 7 provided for the sale of plant and equipment at a proportion of its written down value. No issue was raised in these proceedings in relation to that clause.

30 Clause 9 provided that Keanlong would sell and Rolcross would buy all of Keanlong’s interest in each of the partnership properties including the units in the Botany Road Unit Trust for a price of $3,600,000, which would be deemed to have been paid by Rolcross and received by Keanlong on completion of the transactions contemplated by the agreement. The shares in Botany Road Developments Pty Ltd (which was a trustee company) were to be transferred from Mr Muriti to Mr Prendergast for $1.

Clause 10 of the Heads of Agreement

31 Clause 10 dealt with the repayment of loan accounts. The plaintiff seeks to rectify it. The clause provides as follows:

“

10. Repayment of Loan Accounts

(a) VCM will cause the outstanding net balance of the loan accounts of JFP and any entity owned or controlled by JFP with Marshalls, Perfect and any entity interested in the Partnership Properties as at 30 June 2004 to be repaid on or before the date of completion of the transactions contemplated by this Agreement.

(b) JFP will cause the outstanding net balance of the loan accounts of VCM and any entity owned or controlled by VCM with any entity interested in the Partnership Properties as at 30 June 2004 to be repaid on or before the date of completion of the transactions contemplated by this Agreement. This debt may be off set to reduce the amount payable under paragraph (a) of this clause.

(c) The parties will cause the debts due by the entities which own the Partnership Properties to Marshalls and Perfect to be repaid on or before the date of completion of the transactions contemplated by this Agreement.

(d) JFP will prior to completion cause Laon Pty Limited to do all things and sign all documents necessary to unwind its indebtedness to Perfect Auto Body Canberra Pty Limited and/or Santee Pty Limited.

32 There is a number of features about clause 10, if it is interpreted literally, which should be noted.

33 First, clause 10(a) deals with the net balance of loan accounts between the following entities:

(a) Marshall Motors on the one hand, and Mr Prendergast or any entity owned or controlled by him on the other;

(b) Perfect Auto Body on the one hand, and Mr Prendergast or any entity owned or controlled by him on the other;

34 Secondly, clause 10(a) contemplates that it will be a net balance of loan accounts which is to be repaid. Hence, there can be a set-off between debts owed by Mr Prendergast, or entities owned or controlled by him, to each of Marshalls, Perfect or any entity interested in the partnership properties, and debts owed by any of them to Mr Prendergast, or entities owned or controlled by him;

35 Thirdly, if the word “Perfect” means Perfect Auto Body Pty Ltd, the loan accounts between Santee and Mr Prendergast or any entity owned or controlled by him were not caught by clause 10(a).

36 In fact, there were no debts owed by Perfect Auto Body to Mr Prendergast or any entity owned or controlled by him, nor was there any debt owed by him, or any entity owned or controlled by him, to Perfect Auto Body.

37 Fourthly, unless the expression “loan accounts” is interpreted widely, it would not include the obligation of a trustee to account for moneys held on trust for another entity, such as Marshall Motors’ liability to account for moneys held on trust for Rolcross, referred to in paragraph 12.

38 Fifthly, in clause 10(a) the obligation to cause the outstanding net balance of the loan accounts to be repaid was placed on Mr Muriti. At completion Mr Muriti would control Marshall Motors and Perfect Auto Body. It appears to have been assumed that there would be a balance owing in favour of Mr Prendergast, or entities owned or controlled by him, from Marshalls, Perfect or any entity interested in the partnership properties as at 30 June 2004.

39 Sixthly, clause 10(c) dealt only with the debts due by the entities which owned the partnership properties to Marshalls or to Perfect. Again, if Perfect meant Perfect Auto Body Pty Ltd and not Santee, the clause did not deal with debts due by the partnerships to Santee. Nor did it address debts due to the partnerships by Marshalls or Santee.

40 In fact, there were no debts owed between the partnerships and Perfect Auto Body.

41 Seventhly, clause 10(d) referred to a debt owed by Laon to Perfect Auto Body (Canberra) or Santee. In fact, Santee owed a debt to Perfect Auto Body (Canberra) which it held for Laon.

42 The plaintiffs contend that clause 10 should be rectified to achieve the parties’ agreement and common intention, that on settlement all loan accounts, (which expression includes moneys held on trust), would be repaid to separate the parties’ interests in the companies which owned the businesses and those which owned the properties. In particular, this meant, according to the plaintiffs, that debts owed by Santee, debts owed by the partnerships to Santee, debts owed by companies controlled by Mr Prendergast to Santee, and moneys held by Rolcross on trust for Santee, should be paid on settlement.

Payment of the Purchase Price

43 Clause 5 of the Heads of Agreement dealt with payment to Rolcross. Clause 5(a) provided that the minimum aggregate amount payable by Keanlong to Rolcross under clauses 4, 7 and 10 of the agreement would be $14,200,000. Clause 4, it will be recalled, dealt with the sale of the units in the PGM Unit Trust and of the shares in Santee. Clause 7 dealt with the sale of the plant, equipment, furniture and fittings owned by Rolcross or Worthbrook to Keanlong. Clause 10 dealt with the repayment of loan accounts.

44 Clause 5(b), (c), and (e) provided as follows:

“

5. Payment to Rolcross

….

(b) The minimum amount of $14,200,000 will be paid as to:

(i) a deposit of $1,400,000 by Marshalls on the date of this Agreement to the trust account of Einfeld Symonds Vince as stakeholders to be accounted for to Rolcross on completion of the transactions contemplated by this Agreement;

(ii) as to $3,600,000 by completion of the sale of Keanlong’s interest in the Partnership Properties to Rolcross pursuant to clause 9;

(iii) by the relief from debt of the entities which own the Partnership Properties by repayment of sums totalling $5,100,000 due to Marshalls and Perfect on or before completion of the transactions contemplated by this Agreement; and

(iv) as to the balance of $4,100,000 in cash on completion of the transactions contemplated by this Agreement.

(c) For the purposes of this Agreement special purpose financial reports for the PGM Unit Trust and Santee for the year ended 30 June 2004 will be prepared by Einfeld Symonds Vince, Chartered Accountants, as soon as practicable after the date of this Agreement on the same basis as the financial reports for those entities for the year ended 30 June 2003 with the inclusion of work-in-progress as at 30 June 2004 of approximately $2,000,000 and a provision for tax on that work in progress and the inclusion of seven twelfths of the annual Mercedes Benz bonus to Marshalls for calendar year 2004 and agreed by Bedford Titley, Chartered Accountants. The determination of those firms will be made by them as experts not as arbitrators and their joint decision will be final and binding on the parties.

…

(e) Any amount payable by Keanlong to Rolcross pursuant to clauses 4, 7 or 10 of this Agreement in excess of the minimum of $14,200,000 will be determined by reference to the special purpose financial reports referred to in paragraph (c) and the management accounts referred to in paragraph (d) and will be agreed by Einfeld Symonds Vince and Bedford Titley acting as experts and not as arbitrators and the joint decision of those firms will be final and binding on the parties.”

45 The plaintiffs also seek to rectify clause 5(b)(iii) to provide for payment from the property partnerships of moneys due to Santee.

46 The Heads of Agreement provided that settlement of the transactions contemplated by it would be completed by no later than 30 September 2004.

Institution of Proceedings

47 On 16 September 2004 the plaintiffs (Mr Muriti and Keanlong) instituted proceedings against Mr Prendergast, Rolcross and Worthbrook seeking a declaration that the parties had entered into a binding and enforceable agreement dated 4 August 2004 and entitled Heads of Agreement and an order that it be specifically performed and carried into effect. That summons came on for hearing before Windeyer J on 24 September 2004. It appears from the plaintiff’s outline of submissions before Windeyer J that the defendants’ contentions then were:

“(a) A

point regarding the Heads of Agreement;

(b) Specific performance can not be decreed because the accountants [Clause 5(c) and (d)] have not yet agreed and may not agree;

(c) The proceedings are premature;

(d) The conditions precedent [Clause 12] have not been met.”

48 The proceedings before Windeyer J were resolved by consent. By consent, on 24 September, 2004 the Court ordered:

“1. Each party to the Heads of Agreement dated 4 August 2004 do everything necessary or reasonably required by another party to give effect to the agreements of the parties therein expressed on or before 29 October 2004 and, for that purpose, the parties accept DaimlerChrysler’s extension offer.

2. Liberty to restore the matter to the list on 48 hours’ written notice by either party.

…

4. In the event that any collateral documents are not settled by 14 Otober 2004 then that matter be referred to the Master in Equity to settle the terms of any such documents,

5. In the event of any failure by Messrs Einfeld Symonds Vince and Grant Thornton, Chartered Accountants, to agree in terms of clause 5(c), (d) and (e) of the Heads of Agreement by 29 October 2004, then the minimum sum of $14.2 Million is to be paid on completion of the transactions and any dispute as to any additional sum is to be resolved by a partner of Lonergan Edwards & Associates, appointed by the Managing Partner of that firm (the costs of that determination to be borne equally by the parties) and any such determination shall be made by that partner as an expert, not as an arbitrator, and that decision will be final and binding upon the parties and, failing determination by Lonergan Edwards, by a partner of such firm of Chartered Accountants as is appointed by the Court.

6. Any sum in excess of $14.2 million determined to be payable is to be paid within seven days of that determination.”

49 DaimlerChrysler’s extension offer was not in evidence before me. There was evidence that, on 5 August 2004, DaimlerChrysler agreed to extend the expiry of a notice of termination which it had apparently given, to the close of business on 30 September 2004, if certain undertakings were given to it. I infer that it had offered to extend that date further.

The Main Dispute

50 On 15 September 2004, Messrs Einfelds Symonds Vince, the accountants for the group of companies who also advised Mr Muriti during the negotiations, forwarded a set of calculations they had prepared for the purpose of identifying what sums would be payable on settlement of the Heads of Agreement. There have been subsequent adjustments to those figures, but the concepts which they embody have remained unchanged and represent the plaintiffs’ case as to the basis for calculating the amounts to be paid on settlement. The parties prepared a statement of the amounts which they each contended should be paid on settlement. The critical differences are that the plaintiffs contend that on or prior to settlement, the debt totalling $4,991,573 owed by Santee to Laon should be repaid, and amounts totalling $7,978,507 owed to Santee should also be repaid or be set off against other debts. Secondly, the plaintiffs contend that an amount of $162,204 owed by Mr Muriti to Mr Prendergast should be repaid or set off against other amounts owing. The plaintiffs say that the total amount to be paid by Keanlong to Rolcross will be $14,761,511 made up as follows:

Transfer of Interest in Business
Santee Pty Ltd and related entities
Goodwill 4,000,000
Net tangible assets at 30 June 2004 2,289,275
50% of net profit for July 2004 156,455
6,445,730
Marshalls Motors Pty Ltd
Goodwill 4,000,000
Net tangible assets at 30 June 2004 160
50% of net profit for July 2004 100,360
4,100,520
10,546,250
Transfer of Fixed Assets
Benzcorp Properties 510,547
Greensquare Partnership 197,928
708,475
Payment of Loan Accounts
Prendergast to Santee (7,978,507)
Santee to Prendergast 4,991,573
Prendergast to Marshalls -
Marshalls to Prendergast 6,380,540
Muriti to Prendergast 162,204
Properties to Muriti (49,024)
3,506,786
14,761,511

51 The defendants say that the amount payable on settlement is $17,586,241. The difference lies in the defendant excluding the so-called loan accounts between Prendergast and Santee, and the loan account between Mr Muriti and Mr Prendergast. The net balance of those loan accounts is the sum of $2,824,731, being a balance payable by entities controlled by Mr Prendergast to Santee.

52 The plaintiffs say that the sum of $14,761,511 is to be paid in the following way:

(a) the deposit of $1,400,000, paid when the Heads of Agreement was entered into, is to be released to Mr Prendergast;

(b) the amount of $3,600,000 owed by Rolcross to Keanlong from the sale of Keanlong’s interest in the partnership properties is to be deemed to have been paid;

(c) the loan accounts between the property partnerships and Santee would be paid, with a net amount of $1,952,893 being due to Santee;

(d) the loan accounts between the property partnerships and Marshall Motors would be repaid with a net amount of $3,385,782 being payable to Marshall Motors;

(e) net cash of $4,422,836 would be payable on settlement, in addition to the release of the deposit.

Deposit (to be released by ESV) 1,400,000

(242,142)

3,600,000

(705,796)

5,338,675

4,422,836

14,761,511

53 The difference between the plaintiffs and the defendants in relation to these matters, is that the defendants exclude from their calculations the debts owed by the property partnerships and Santee, and owed by Santee to the property partnerships. On the defendants’ figures there is an additional $4,777,624 to be paid by cash on settlement. This is because the defendants exclude the net amount of $1,952,983 shown as due by the property partnerships to Santee, as well as the net amount of $2,824,731 shown as due by entities controlled by Mr Prendergast to Santee.

54 If the figures in the schedules prepared by the accountants are correct, there should be no difference to the parties’ ultimate financial positions. On the defendants’ case they receive an additional $4,777,624 on settlement, but the debts between the entities controlled by Mr Prendergast and Santee, and between the partnerships, (which after settlement Mr Prendergast will control), and Santee, will not be discharged. On the accountants’ figures, there is a net $4,777,624 owing by the entities which are, or will be controlled, by Mr Prendergast to Santee, a company which will be controlled by Mr Muriti.

55 What then lies behind the dispute? It is to be found in clause 5(c). The various debts owed by or to Santee are recorded in its financial statements for the year ended 30 June 2003, although there have been movements in those debts since that date. If the debts owed by or to Santee were included in clause 10, then the effect of clause 5(e) is that the amount payable pursuant to clause 10, is to be determined by reference to the special purpose financial reports referred to in clause 5(c). Those financial statements are to be prepared on the same basis as the financial reports for the PGM Unit Trust and Santee for the year ended 30 June 2003. Mr Prendergast wishes to investigate the amounts claimed to be owing to and by Santee, and for that purpose, not to be bound by the statement of those debts in the financial statements as at 30 June 2003, even though he signed those financial statements only after extensively questioning the accountants.

56 An odd feature of the proposed settlement sheets is that both parties treat the net amount of debts owed and to be paid by the property partnerships to Marshalls of $3,385,782 as a means of discharging the debt owed by Keanlong to Rolcross. If the debts owed between the property partnerships and Santee are also to be repaid on settlement, the repayment of those debts is also to be taken into account in making up the payment of the purchase price. As the effect of the agreement is that Mr Prendergast will control the property partnerships, and Mr Muriti will control Marshalls, and Santee, it is odd to treat a repayment by the property partnerships to Marshalls or Santee as a payment to be credited against Keanlong’s obligation to pay a minimum amount of $14,200,000 to Rolcross. I was told however that the parties were in agreement as to how the money should be paid on settlement, except for the difference which I have identified.

57 I was forcefully reminded by senior counsel for the defendants, that the parties had agreed upon the issues that needed to be determined. Those issues did not include whether, on the proper construction of the agreement, moneys were payable on settlement in the way for which the plaintiffs contended. The plaintiffs accepted that on the principal issue, namely what moneys, had to be paid on settlement, they had to succeed in their case of rectification if they were to be successful. It was put by senior counsel for the defendants, that an agreement had been reached that the plaintiffs would not maintain a case based upon the construction of the agreement, except in relation to certain collateral matters. It was said that in accordance with that agreement, the defendants did not advance other arguments as to the proper construction of the agreement which might have been open to them. One such argument would be that, on the proper construction of the agreement, the payment of the purchase price by Keanlong could not be met by the property partnerships paying debts owed by them to Marshall Motors or Santee, but that they were entitled to be released from those debts. This contention was not advanced.

58 Accordingly, neither party contended that on the proper construction of clauses 10 and 5(b)(iii) of the Heads of Agreement, the debts owed by and to Santee were to be repaid on settlement. This was apparently the result of a negotiation as to what issues would be advanced. I doubt that the parties can tie the Court’s hands in the way they have attempted. Whilst the context was admittedly very different, Scrutton LJ said in Deutsche Bank und Disconto Gesellschafft v Banque des Marchands De Moscou (1931) 107 LJKB 386 at 389 that: “… the Court is not a mere machine to decide such issues, genuine, fictitious or collusive, as the parties choose to put before it …. without any power of enquiry into the truth of the matters…”. Whilst a party is free to decide not to advance a particular construction of a contract, I do not think that where rectification of a contract is sought, the parties can, by agreement, bind the Court to decide that the contract, properly construed, does not have the meaning or effect which the plaintiff says it should have by rectification. In this case, the principal issue concerns the repayment of debts owed to and by Santee. Clause 10(a) and 10(c), and clause 5(b)(iii), do not refer to Santee. However they refer to the repayment of debts owed by or to Perfect Auto Body when there are no such debts. On established principles of construction, the literal meaning of a clause can be departed from to avoid absurdity (Fitzgerald v Masters (1956) 95 CLR 420 at 426; Westpac Banking Corporation v Tanzone Pty Ltd (2000) 9 BPR 17,521 at 17,524, [19]-[22]). The agreement must be construed against the objective matrix of facts in which it was entered into. (Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188; Pacific Carriers Ltd v BNP Paribas (2004) 208 ALR 213 at 221, [22]). This matrix includes what debts were in fact owing.

59 If this were the only difficulty of construction, there would be a strong case for construing the references in clause 10 and clause 5(b)(iii) to Perfect, to include Santee. It used to be called Perfect Auto Body Pty Ltd. It transferred its business to Perfect Auto Body. It incurred or was entitled to the debts. However, there are other difficulties of construction. One such difficulty is that clause 10(a) imposes an obligation on Mr Muriti to cause the net outstanding balance of loan accounts referred to in that clause to be paid, whereas if the debts due by and to Santee are included, it is Mr Prendergast who should cause the net balance due to Santee to be paid.

60 It is difficult to decide whether the Heads of Agreement should be construed other than literally, when neither party supports that course. Rectification may be available for more abundant caution, to make clear what might be implicit in the construction of a contract. (Standard Portland Cement Co Pty Ltd v Good [1982] 2 NSWLR 668 at 672). I will therefore put aside questions of construction, to examine the plaintiffs’ rectification case.

61 The plaintiffs start with the advantage that clauses 10(a), 10(c) and 5(b)(iii) contain an apparent absurdity in their reference to the loan accounts and debts of Perfect Auto Body, when none existed. There is also a mistake in clause 10(d), which refers to indebtedness of Laon to Perfect Auto Body (Canberra). Something appears to have gone wrong. That does not mean the plaintiffs’ rectification case should succeed. But it is relevant when assessing the strength of the presumption that the parties intended to be bound by the words of the document they signed.

Mr Prendergast’s Review of Loan Accounts

62 Mr Vince of Einfeld Symonds Vince prepared draft accounts for all of the relevant entities for the financial year ended 30 June, 2003. On 3 November 2003, Mr Prendergast instructed Mr Vince that until further notice, the draft 2003 financial statements were not satisfactory and required further explanation. On 5 November 2003, he identified numerous items which would be required to be addressed prior to a meeting to be held on 17 November 2003. These included the statement of the loans between related entities contained in Santee’s draft financial statements, and its receivables. Detailed questions were raised in relation to the financial statements of Marshall Motors, and the debts owed by and to it. Detailed questions were also asked about the draft financial statements of the various partnerships. Mr Prendergast retained an accountant, Mr Paul Bedford, to assist him in his review of the financial statements. In a facsimile to Mr Muriti dated 15 January 2004, Mr Vince described Mr Prendergast as having been particularly concerned about various inter-company loans. On 23 January 2004, Mr Vince sent to Mr Prendergast a summary of the loan account balances and movements for the years ended 30 June 2002 and 30 June 2003 between the “Prendergast Group” and the PGM Unit Trust, Santee, Malcolm Marshall Wholesale Pty Ltd (a subsidiary of Marshall Motors) and the property partnerships. He also enclosed a summary of the loan accounts between the “Muriti Group” and each of those entities. The financial statements for Santee were signed by Mr Prendergast and Mr Muriti on 11 February, 2004. They also signed the financial statements of Marshall Motors and the property partnerships.

The Negotiation of the Heads of Agreement

63 Mr Muriti, Mr Vince, and Mr Muriti’s solicitor, Mr Hilton, gave evidence before me. They were all honest witnesses. On one point, referred to in paragraphs 70 and 71 below, which is ultimately immaterial, I have not accepted the evidence of Mr Muriti. However that does not affect his general credibility. Messrs Hilton and Vince were reliable witnesses, whose evidence I accept. The same is true of Mr Muriti, save for the one matter to which I will refer. Mr Prendergast did not give evidence. His solicitor, Mr Kemp, gave evidence. He was not cross-examined. I accept his evidence.

64 On 9 July 2004, Mr Muriti and Mr Prendergast had a meeting with the companies’ accountants, Messrs Vince and Ryan of Einfeld Symonds Vince. Mr Prendergast said that, in principle, he was agreeable to buying Mr Muriti’s property interests, and to Mr Muriti purchasing his shares in the trading companies. He proposed that Messrs Henry Davis York prepare documentation, including leases. During the meeting, one of Mr Muriti and Mr Prendergast said in the presence of the other, and of Mr Vince, that what they had agreed to that point was that Mr Muriti’s interest in the properties be sold to Mr Prendergast, that Mr Prendergast’s interests in the businesses were to go to Mr Muriti, that commercial leases were to be put into place, and that all the loan accounts were to be repaid. At the end of the meeting, Mr Muriti, in the presence of Mr Prendergast, asked Mr Vince to finalise all of the end of year financial accounts and all loan accounts.

65 A further meeting between Mr Muriti and Mr Prendergast was held on 16 July 2004. It was a lengthy meeting in which many matters were discussed. During the course of the meeting Mr Prendergast said words to the effect of:

“Of course we have to balance out all the loan accounts. All the loans payable to me need to be repaid. All the loans to the property interests and businesses will need to be repaid.”

“Yes that’s right. This whole deal has to be a complete separation of our interests.”

66 `Mr Muriti deposed that Mr Prendergast offered to leave some of the money he was owed in the companies for six to twelve months. Mr Muriti said that he preferred to have “all the loans paid out so that we can bring it back to square and we have a complete, clean separation of our interests.”

67 On 22 July 2004, Mr Muriti’s personal assistant, Ms Walker, sent instructions to a Mr Hilton, a solicitor with Henry Davis York. Attached were what were described as terms to which the parties had agreed. They included the commercial terms upon which Marshall Motors and Perfect Auto Body would rent the various properties, the purchase price for Mr Prendergast’s 50% interests in Marshall Motors and Perfect Auto Body, the price for the transfer of Mr Muriti’s interests in the various properties, and a statement that all outstanding loan accounts to different entities were to be balanced out.

68 On 23 July 2004, Mr Hilton sent to Mr Muriti the first draft of what became the Heads of Agreement. He asked Mr Muriti to review it. He sought comments from Mr Vince on “structural, financial and taxation issues”. The draft agreement included a clause 10 in the following terms:

“10. Repayment of JFP loan accounts.

VCM will cause the outstanding net balance of the loan accounts of JFP and any entity owned or controlled by JFP with Marshalls, Perfect and any entity interested in the Partnership Properties as at 30 June 2004 to be repaid on or before a date which is 18 months after the date of completion of the transactions contemplated by this agreement. This debt will be interest free and unsecured.”

69 This was the only clause dealing with the repayment of loan accounts.

70 Mr Muriti deposed that he read the draft and thought that it gave effect to his instructions conveyed in the email sent by Ms Walker on 22 July. Plainly it did not do so. It only dealt with the net balance of loan accounts between Mr Prendergast and any entity owned or controlled by him with “Marshalls”, “Perfect” and any entity interested in the partnership properties. It did not deal with any debts payable to Mr Muriti or any entity owned or controlled by him, unless such debts were reflected in the notion of payment of a “net balance” of the loan accounts. It did not provide for repayment of debts between the property partnerships on the one hand, and Marshalls or Perfect Auto Body on the other hand. Nor, if “Perfect” meant Perfect Auto Body, as prima facie it would do having regard to the definition of that company, did it include debts owed to or by Santee. Further, Mr Muriti deposed that from the meeting with Mr Prendergast on 16 July, it was his clear understanding that the balance of the loan accounts would be paid out on completion. Clause 10 provided for the loan accounts to be repaid 18 months after completion. In a covering email to Mr Muriti, Mr Hilton said that he understood that no agreement had yet been reached on security and interest for the debt.

71 I am satisfied that Mr Muriti’s evidence that it was agreed on 16 July, and understood by him from that date, that the loan accounts would be paid out on completion, was not correct. Clearly, this raises the question as to whether his evidence of his understanding that all loan accounts between the parties were to be paid out was also incorrect.

72 Clause 10 of the first draft has to be read with clause 2(f) of that draft (a clause which did not change). It provided that JFP and VCM had agreed to separate their respective interests in Marshalls, Perfect and the partnership properties on the terms of the Agreement.

73 Mr Muriti gave evidence about his understanding of that paragraph when he read the draft agreement. He understood at the time that it covered their partnership properties and their business interests. He also said that he perceived that the paragraph did accurately capture what he was trying to achieve by the agreement, although he acknowledged that, with the benefit of hindsight, clause 2(f) did not do that because not all the relevant entities were caught.

74 Mr Muriti told Mr Hilton that in relation to paragraph 10 of the draft agreement, all entities needed to repay their loans, and that he was to be repaid his loans from the partnerships and trusts that owned the properties. Mr Hilton’s file note of 23 July 2004 records his having received instructions in relation to paragraph 10 of the draft in the following terms:

“- all entities need to repay loans. VCM to be repaid his loans from PTY entities”.

75 Mr Muriti was not to retain any interests in the partnerships which owned the properties. The instruction to Mr Hilton that all entities needed to repay their loans, and that he was to be repaid his loans from the property entities, shows that it was then his intention that all loans were to be repaid, where the creditors or debtors were not entities which he was to control after settlement.

76 On 26 July 2004, Mr Muriti received an email from Mr Hilton attaching a further draft of the agreement. The second draft amended the existing clause 10 by making it clause 10(a) and by changing the date for repayment from 18 months after completion to 90 days after completion, with the debt to be interest free. An additional clause 10(b) was inserted reflecting the second of the instructions given by Mr Muriti to Mr Hilton on 23 July:

“JFP will cause the outstanding net balance of the loan accounts of VCM and any entity owned or controlled by VCM with any entity interested in the Partnership Properties as at 30 June 2004 to be repaid on or before the date which is 90 days after the completion of the transactions contemplated by this agreement. This debt will be interest free and may be offset to reduce the amount payable under paragraph (a) of this clause.”

77 Later, on 26 July 2004, a meeting was held at the office of Einfeld Symonds Vince. Mr Muriti and Mr Hilton were present, as were Messrs Vince, Ryan and Symonds from Einfeld Symonds Vince. Mr and Mrs Prendergast were both present with Mr Kemp, the solicitor acting for Mr Prendergast, and Mr Bedford, an accountant advising Mr Prendergast. A further draft of the Agreement (at that stage called a sale and purchase agreement) was tabled. Although there were changes from the second draft they are not material to the present issue. Neither Mr Prendergast nor Mr Kemp had seen a draft of the Agreement before. It was tabled by Mr Hilton about half an hour into the meeting. There was no detailed discussion of the Agreement, clause by clause. Mr Prendergast rejected a non-competition clause which would have bound him. He tore the relevant page out of his copy of the Agreement. Mr Prendergast was also unhappy about the amount of money which the draft agreement provided should be paid to him. After the meeting, he telephoned Mr Muriti and told him that he wanted certainty about what he would get, and that he wanted all of his money up front.

78 The draft agreement tabled at the meeting of 26 July included put and call options for the sale of Keanlong’s interests in the partnership properties. During the meeting held on 26 July 2004, Mr Prendergast rejected the put and call options. He said that he wanted all of the loans paid back and did not want to leave any money in the companies. Mr Muriti replied by saying that he was happy to pay back all of the loans and that he had sent a schedule of their personal drawings to Mr Vince so that he could work out the outstanding balances to be paid back.

79 At the meeting of 26 July, Mr Vince raised the fact that Santee had given a charge in favour of Perfect Auto Body (Canberra) as trustee for Laon to secure the debt of about $4,600,000 as at 30 June 2003. Mr Vince said that that was one of the inter-company loan accounts which would be paid out. There was no dissent to that statement. Mr Kemp’s note of the meeting records Mr Prendergast as having made a point which Mr Kemp recorded as “amounts owing to JFP from operating companies on loan accounts”. I infer that Mr Prendergast said that the amounts owing to him from the operating companies on loan account should be repaid. The reference to “operating companies” in the plural is significant. Perfect Auto Body did not owe any money to Mr Prendergast or any entity controlled by him, nor had it borrowed any. It was only Marshall Motors and the former operating company, then called Santee, who had such loan accounts with Mr Prendergast and his entities.

80 On 27 July 2004, Messrs Muriti, Vince and Hilton had a telephone conversation in which Mr Vince said that the property partnerships should repay the loans made to them by the trading entities, and that all the loan accounts needed to be repaid between the parties. Mr Hilton had the task of preparing a further draft of the Agreement. Mr Muriti asked him to send the revised draft to Mr Bedford and Mr Kemp without further review from him. On the basis of the first of the statements made by Mr Vince, Mr Hilton prepared a further draft of the Agreement in which clause 10, (wrongly renumbered in one version as clause 9), was amended in two respects. First, the date for repayment of the net balance of loan accounts in the existing sub-clauses (a) and (b) was made the date of completion, rather than 90 days after that date. Secondly, a new sub-clause (c) was added in the same terms as the clause which became clause 10(c) in the final agreement. There were two problems with the draft. The first was that it did not deal with loans made by the property partnerships to the trading entities, but only debts due to the trading entities by the property partnerships. The second was that Mr Hilton translated Mr Vince’s instructions about the repayment of loans made to the partnerships by the “trading entities”, as being loans made by Marshall Motors and Perfect Auto Body. In fact the trading entities which had made loans to the partnerships were Marshall Motors and Santee, the former trading entity. No such loans had been made by Perfect Auto Body.

81 At no stage did Mr Hilton attempt to draw a wider clause to deal with his instructions that all loan accounts needed to be repaid between the parties.

82 This draft, (by my count the fourth, not the third as the parties submitted), with the correct clause numbering, was sent by Mr Hilton to Messrs Kemp and Bedford on 27 July 2004 under a covering email. The email addressed how much money would be payable to Rolcross for its 50% interests in Marshalls and Perfect. The amount was said to be at least $14,000,000 and, on current information, approximately $14,475,000 comprising:

“(a) Half share goodwill - $8,000,000;

(b) Half share net tangible assets of Marshalls and Perfect as at 30 June 2004 – estimate $2,180,000;

(c) 50% of trading profits for July 2004 for Marshalls (pre-tax) and Perfect (after tax through Santee) – estimate $150,000 and $70,000 respectively - $220,000;

(d) Half share of written down value of plant and equipment owned by the property partnerships and used by Marshalls and Perfect – estimate $425,000;

(e) Repayment of net amount of JFP and related entity loan accounts – estimate $3,650,000.”

83 The email went on to explain how the purchase price would be paid. Mr Hilton said:

“2. The purchase price will be paid as to:

(a) a 10% deposit of $1,400,000 into the trust account of Peter Kemp Solicitors on 30 July 2004 on signature of the Agreement. The deposit will be accounted for to Rolcross on completion of the transactions.

(b) $3,600,000 by the transfer of Keanlong’s interests in the Partnership Properties which will take place on completion;

(c) $5,100,000 by relief from the liability for debt owed by the Property Partnerships to Marshalls and Perfect which relief increases the owners’ equity in the Partnership Properties (this relief will be achieved by a round robin of repayments on completion).

(d) the balance in cash on completion.

3. Although the precise amount of the purchase price for the interests in Marshalls and Perfect requires completion of the financial reports of those companies for the year ended 30 June 2004, Keanlong agrees that the purchase price will be not less than $14,000,000 to be paid in the manner set out in paragraph 1.”

84 Mr Ryan, of Einfeld Symonds Vince, sent an email to Mr Bedford attaching schedules to support the calculations in Mr Hilton’s email. The schedule showed a net amount of cash to be paid by Mr Muriti to Mr Prendergast of $5,743,524. This was calculated as $10,250,000, said to be the price for the transfer of Mr Prendergast’s interests in Perfect Auto Body and the PGM Unit Trust to Mr Muriti; less $3,638,752 for the transfer of Mr Muriti’s interests in the partnerships to Mr Prendergast (a figure calculated after Mr Muriti repaid “vested funds”); plus $3,871,152, being the difference between the amount payable by the PGM Unit Trust to Mr Prendergast entities, ($6,824,867), and the amount which the JP entities were to repay Santee, ($2,953,115); less the amounts which the property partnerships would repay to Santee and the PGM Unit Trust of $5,164,476; plus the amount of $425,000 payable to Properties for the written down value of equipment.

85 Thus the calculations behind the estimated moneys which would be payable on completion, took into account debts owed by and to Santee. This must have been known to Mr Bedford, who was Mr Prendergast’s adviser. Neither he nor Mr Prendergast gave evidence, but I can infer that Mr Prendergast ascertained how the amount of money he was to be paid was calculated.

86 The amount of $2,953,115 shown as the amount which the Prendergast entities would repay to Santee was calculated after taking into account the debt which Santee owed to Laon. The loan account schedules sent by Mr Vince to Mr Prendergast on 23 January 2004, showed that at 30 June 2003, a balance was then owing by Prendergast entities to Santee of $866,796. This was a movement from an opening balance of $738,918 which Prendergast entities owed Santee as at 1 July 2002. That in turn was a balance arrived at after taking into account the debt owed by Santee to Laon of $4,647,323, which arose in the financial year ended 30 June 2002. The financial statements of Santee at 30 June 2003, signed by both Mr Muriti and Mr Prendergast, showed that Santee had receivables as at that date which included $631,395 owed to it by Prendergast Pty Ltd and $5,386,241 as moneys held on trust for it by the Prendergast Family Trust. The sum of these two figures is $6,017,636. Santee owed Laon $4,991,573, a difference of $866,796 as at 30 June, 2003. The figure of $2,953,115 was an estimate made by Mr Vince of the amount owing as at 30 June, 2004, taking into account the loan account movements during that financial year. I can infer that Mr Prendergast knew what were the drawings on the loan accounts. Accordingly, I infer that it was apparent to Mr Prendergast that the calculation of the moneys which would be payable to him on settlement took into account the debt owed by Santee to Laon, the loan from Santee to Prendergast Pty Ltd and the debt described as “moneys held on trust” owed to Santee by Rolcross (the trustee of the Prendergast Family Trust).

87 Mr Vince testified that the figure of $3,871,752 referred to in para 84 was derived from the account balances as at 30 June 2003, together with movements to 30 June 2004.

88 A meeting was held between Mr Vince and Mr Bedford on 28 July 2004, but the discussions related to matters other than the outstanding loan accounts.

89 These negotiations and the amendments to the draft documents were conducted under pressure from the threat of DaimlerChrysler to terminate the dealership agreements with effect from Friday 30 July 2004.

90 On 27 July 2004, DaimlerChrysler wrote to say that it was concerned that Messrs Prendergast and Muriti had not provided written details as to the way the sale of Mr Prendergast’s shares was to occur and the identity of the proposed purchaser of the shares. Mr Prendergast replied on 29 July 2004 by enclosing a draft schedule of the envisaged terms and conditions of the leases to be entered into by Marshalls and Perfect, and a draft of the sale and purchase agreement. On 29 July 2004, DaimlerChrysler said that subject to a receipt of a copy of the agreement to be entered into and some further details from both Mr Muriti and Mr Prendergast which was satisfactory to DaimlerChrysler, it would be prepared to agree to Mr Muriti being appointed as the sole Dealer Principal for both businesses.

91 On 29 July 2004, Mr Prendergast sent to Mr Kemp a copy of the draft of the sale and purchase agreement. The clause dealing with repayment of loan accounts was the same as that sent by Mr Hilton to Mr Kemp on 27 July, 2004.

92 On 29 July 2004, Mr Hilton received an instruction from Mr Ryan in relation to clause 10. Mr Ryan said to him that the Perfect Auto Body (Canberra) loans would need to be repaid, and that Mr Prendergast would need to sign documents for Laon to redeem bills of exchange. Mr Ryan said that there was no need for the charge over Santee to be released as it protected Santee from creditors. On 30 July 2004, Mr Hilton sent to Mr Muriti a further draft of the sale and purchase agreement, which included in the clause dealing with the repayment of loan accounts a new paragraph (d) stating “JFP will prior to completion cause Laon Pty Ltd to do all things and sign all documents necessary to unwind its indebtedness to Perfect Auto Body Canberra Pty Ltd”.

93 Mr Kemp met Mr Prendergast on Monday 2 August 2004. During that discussion, Mr Kemp made various handwritten notes on the draft agreement which reflected the instructions given to him by Mr Prendergast. Mr Bedford was also present at this meeting. The notes which Mr Kemp made against clause 10(a) and (b) dealing with the repayment of loan accounts were “No. Cheques to repay all loan accounts on complet”. He also crossed out in hand the words “or before” in clause 10(c) and made a note “not including ANZ Bank”.

94 It was submitted by senior counsel for the defendants that the recording of Mr Prendergast’s instructions that cheques were to be drawn to repay all loans accounts on completion, did not mean that Mr Prendergast intended that loan accounts other than accounts between the entities named in clause 10 should be repaid. Rather, it was submitted, the reference to “all loan accounts” was to all of the loan accounts between the specified entities and that the emphasis of the instruction was that all of the repayments were to be made on completion.

95 I accept that Mr Prendergast may have instructed Mr Kemp that all loan accounts were to be repaid on completion, rather than before completion, as the draft clauses provided. However, I do not consider it a reasonable explanation of Mr Prendergast’s instructions that all loan accounts were to be repaid, to say that this meant all loan accounts between the named entities. There was nothing in the clause that would indicate that only some of the loan accounts between the specified entities should be repaid. The inference which I draw is that it was Mr Prendergast’s intention that all loan accounts were to be repaid. I more readily draw that inference because Mr Prendergast did not give evidence.

96 On 2 August 2004, Mr Kemp wrote to Mr Hilton. He commented upon the draft of the sale and purchase agreement, which was the draft sent by Mr Hilton on 27 July 2004. Mr Kemp identified twelve separate transactions which were contemplated by the draft agreement. He proposed that each of the transactions should be the subject of a separate agreement. He commented that the draft prepared by Mr Hilton had set out some of the principal provisions in the agreements in a general way which represented the state of negotiations from his client’s point of view at the time of submitting the document. He said he was instructed to make certain comments in relation to that document. Those comments included:

3.7 Repayment of loans is not to be effected by ‘Relief from Debt’. All loans are to be repaid in cash on completion.

…

3.10 All loan accounts are to be repaid in cash on completion.

3.11 Debts due to Marshalls Motors Pty Ltd and Perfect Auto Body Pty Ltd by the owners of property to be repaid on completion in cash, but this provision will not include moneys owing to ANZ Bank.”

97 Paragraph 3.7 of this letter was directed to the clause 5(b)(iii) of the agreement. Paragraph 3.10 appears to have been directed to clause 10. Paragraph 3.11 referred to clause 10(c).

98 Mr Hilton replied to Mr Kemp’s facsimile by email on 3 August 2004. In that email he said:

“8. There is no need for a cash payment to be made by Rolcross and Worthbrook to Keanlong for its interest in the partnership properties when there is an available offset for amounts due by Keanlong to Rolcross for the sale of interests in Marshalls and Perfect Auto Body. Likewise there is no necessity for other cash payment except for the net amount due to any party under the agreement.

9. All loans will be repaid by a round robin of cheques on or before completion. The reference to “Relief from Debt” is simply to illustrate the benefit which accrues to JFP and his entities by virtue of those repayments.”

99 At the same time, Mr Hilton sent a second email responding to Mr Kemp’s letter of 2 August 2004. Amongst the points which Mr Hilton made was that Mr Kemp’s position did not recognise the gravity of the situation where DaimlerChrysler had given notice to terminate the dealer agreements and that termination would de-value the businesses of Marshalls and Perfect and would probably lead to the loss of employment of 150 employees engaged in those businesses. Mr Hilton deplored what he characterised as an attempt to re-negotiate a number of commercial and financial issues which he contended the parties had already agreed on and had told DaimlerChrysler had been resolved.

100 Mr Muriti read the correspondence between Mr Kemp and Mr Hilton. He said that that correspondence confirmed to him that all loans, including the Laon debenture, were to be repaid on completion and had been taken into calculation in determining the final purchase price. I accept that evidence.

101 Later, on 3 August 2004, Mr Hilton sent a revised version of the sale and purchase agreement to Mr Kemp. Clause 10 was in the same form as the 27 July 2004 version, except for the additional paragraph 10(d) referred to above. There were changes to the previous drafts of clauses 4 and 5. Previously clause 4 had provided for payment of 50% of the value of the net tangible assets of Marshalls and Perfect as at 30 June 2004 and clause 5 had provided that special purpose financial reports for Marshalls and Perfect for the year ended 30 June 2004 and management accounts for the month of July 2004 should be prepared by Einfeld Symons Vince for the purposes of the agreement. By this draft, those clauses were amended to substitute the PGM Unit Trust and Santee for Marshalls and Perfect. Whilst these changes indicate that attention was being paid to the different entities, it is also apparent that up to this very late stage in the drafting of the agreement there was confusion as to how the intended separation of the parties’ interests in the trading entities was to be effected.

102 This was the last version of the sale and purchase agreement which was sent to Mr Kemp. He sent an email that evening to Mr Hilton saying that Mr Hilton’s emails served only to confirm the complexities involved in the transactions and that caution was necessary in the execution of all of the transactions.

103 Mr Kemp started working on drafts of agreements in relation to each of the transactions contemplated by the draft sale and purchase agreement. However events moved more quickly. On 30 July 2004, DaimlerChrysler had agreed to extend the time in its notice of termination to 5 August 2004, having noted the parties statement of their intention to execute the sale and purchase agreement by no later than Wednesday 4 August 2004. On 4 August 2004, Mr Muriti and Mr Prendergast met at the offices of Perfect Auto Body with a Mr Campbell, the National Sales Manager of DaimlerChrysler. The meeting lasted for over six hours. Neither Mr Hilton nor Mr Kemp attended the meeting. Amendments were made to the then draft of the sale and purchase agreement. Mr Muriti sent those amendments to Mr Hilton so that he could incorporate them into the sale and purchase agreement, which he then emailed back. At one stage during the day, Mr Prendergast refused to sign an agreement. However at about 8.00pm that evening both he and Mr Muriti signed the Heads of Agreement. No changes were made to clause 10, or to clause 5(b)(iii).

Rectification Issues

104 The plaintiffs’ rectification case raises the following questions:

(a) Does the evidence demonstrate with the necessary clarity, that it was the common intention of the parties that at settlement all loan accounts would be repaid to effect a separation of the parties’ business interests, save only for their continued relationship under the commercial leases?

(b) If yes, was it nonetheless also the parties’ intention to be bound by the words of the Heads of Agreement, and if so, did the parties’ former intention clearly predominate over the latter?

(c) Was the parties common intention sufficiently precise to permit rectification?

Common Intention to Repay all Loan Accounts Necessary to Separate the Parties’ Business Interests

105 Rectification on the basis of the parties’ common intention requires proof that at the time when the contract was executed, both parties had an intention to include in their agreement, a term which, by mutual mistake, was omitted from the agreement, or not properly expressed. (Pukallus v Cameron (1982) 180 CLR 447 at 452, 456; Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 at 350-351). The alleged common intention must be established “in the clearest and most satisfactory manner” (Fowler v Fowler (1859) 4 De G & J 250 at 265; 45 ER 97 at 103; Australian Gypsum Ltd & Australia Plaster Co Ltd v Hume Steel Ltd (1930) 45 CLR 54 at 65; Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662 at 669; Joscelyne v Nissen [1970] 2 QB 86 at 98; The Olympic Pride [1980] 2 Lloyd’s Rep 67 at 73; Pukallus v Cameron at 452.)

106 The plaintiffs relied also upon an antecedent agreement between the parties expressed in their meeting on 16 July 2004 in which Mr Prendergast and Mr Muriti agreed that all the loan accounts should be balanced out, that the loans payable to Mr Prendergast should be repaid and the loans to the property interests and businesses would need to be repaid so that there was complete separation of their interests. However, where rectification of an instrument is sought on the ground that the instrument does not properly reflect an antecedent agreement, if the antecedent agreement is not a concluded agreement, the principles for determining whether rectification should be ordered are the same as those where rectification is sought on the ground of the parties’ continuing common intention. In such a case, it is necessary for the plaintiff to show that the parties’ common intention as reflected in the antecedent, but not concluded, agreement, continued up to the date of execution of the instrument. In the present case, it could not be, and was not, suggested that on 16 July 2004, the parties had reached a concluded agreement for the separation of their interests. There were further discussions and drafts of the agreement prepared after 16 July. It is not sufficient for the plaintiff to point to an agreement made between the two principals on 16 July 2004. That agreement demonstrates their intention as at that date. The plaintiff must show that they continued to hold that intention up to the time the instrument was executed, and that it was by their mistake that the instrument did not properly reflect that intention.

107 In Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662 Simonds J said (at 669) that the Court’s jurisdiction to award rectification was:

“… to be exercised only upon convincing proof that the concluded instrument does not represent the common intention of the parties. That is particularly the case where one finds prolonged negotiations between the parties eventually assuming the shape of a formal instrument in which they have been advised by their respective legal advisers. The assumption is very strong in such a case that the instrument does represent their real intention.”

108 In the present case there were negotiations over a period of weeks with each party having legal advice. However, in assessing the strength of the assumption that the instrument represents the parties’ real intention, I take into account that the negotiations were conducted under pressure from DaimlerChrysler, that the defendant’s legal adviser did not subject the document to detailed scrutiny due partly to lack of time and partly to his view that each of the transactions contemplated by the document should be the subject of separate documentation, and that clause 10 and clause 5(b)(iii) contain evident mistakes. In those circumstances, the additional strength of the assumption that the instrument represents the parties’ real intention, due to the matters referred to by Simonds J, is diminished.

109 The defendants submitted that the plaintiffs must establish an identical corresponding contractual intention in both parties, evidenced by acts or conduct sufficient to establish their consensual relationship in an objective way, (Australasian Performing Right Association v Austarama Television Pty Ltd [1972] 2 NSWLR 467 at 473; Westland Savings Bank v Hancock [1987] 2 NZLR 21 at 29-30; Bush v National Australia Bank (1992) 35 NSWLR 390 at 406). That is to say, the defendants submitted that it must be objectively apparent from what the parties have said or done that they each held a continuing common intention that all loan accounts be repaid on settlement, so as to effect a separation of the parties’ business interests. The suggested need for such an outward expression of the parties’ intentions appears to have developed when it was uncertain whether rectification was only available to give effect to an antecedent agreement between the parties, as distinct from giving effect to their common subjective intentions where the instrument sought to be rectified constitutes the only agreement between the parties. I doubt that in all cases this is a separate requirement. In Pukallus v Cameron (at 452) Wilson J said that so long as there is a continuing common intention of the parties, it may not be necessary to show that the accord found outward expression. (See also Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 at 335-6). However, in many cases, including the present, such objective evidence of the parties’ intentions will be necessary, as a practical matter, to provide the clear and convincing evidence of the parties’ intentions sufficient to displace the presumption that they intended to be bound by the agreement expressed in the document which they signed.

110 It was not disputed that rectification is available where the parties’ mistake is as to the effect which the instrument would have, even though they were not mistaken as to the words which were included in it. (Commssioner of Stamp Duties (NSW) v Carlenka at 332, 340, 343, 345; Bush v National Australia Bank (1992) 35 NSWLR 390 at 406).

111 The defendants submitted that the plaintiffs had not shown that Mr Muriti intended that all of the loan accounts should be repaid at settlement so as to separate the business interests of the parties. I do not agree. The evidence clearly shows that that was Mr Muriti’s intention. On 16 July, he agreed with Mr Prendergast that all of the loan accounts would have to be balanced out, the loans payable to Mr Prendergast be repaid, and the loans to the property interests and businesses be repaid. He agreed that that should be done to effect a complete separation of their interests. That conversation is also an outward expression of the accord of each of Mr Prendergast and Mr Muriti on that matter. Mr Muriti gave instructions for that to be done. The email sent by his personal assistant to Mr Hilton on 22 July 2004 contained the instructions that all the outstanding loan accounts to different entities were to be balanced out. Mr Hilton’s file note of his instruction of 23 July 2004, which instruction was given after Mr Muriti had read the draft agreement sent by Mr Hilton on 23 July, included the instruction that “all entities need to repay loans”. At the meeting held on 26 July 2004, Mr Prendergast said that he wanted all of the loans paid back and did not want to leave any money in the companies. Mr Muriti replied that he was happy to pay back all of the loans and that Mr Vince had been asked to work out the outstanding balances to be paid back. This is further evidence of the parties’ outward accord. Mr Muriti did not contradict Mr Vince’s instructions, given to Mr Hilton in a telephone conversation in which they all participated on 27 July 2004, that all the loan accounts needed to be repaid between the parties. Mr Muriti testified, that it was always his intention to pay back all our loans between each other, and that the loans would be paid out on settlement. I accept that evidence.

112 The defendants submitted that this evidence should not be accepted because Mr Muriti understood the corporate structure and the inter-company loans. He understood the difference between Perfect Auto Body and Santee. He read each of the drafts of clause 10 which clearly, except in relation to clause 10(d), did not include any of the loans or debts owed to or by Santee. The defendants submitted that rather than instructing Mr Hilton to provide that any net amount due to Mr Prendergast, or any entity controlled or which would be controlled after settlement by Mr Prendergast, should be repaid, and that any net amount due to Mr Muriti, or any of the entities which he controlled or would control after settlement should be repaid, which would have the result that debts owed by and to Santee would be repaid, Mr Muriti gave more limited instructions to Mr Hilton, to the effect that the debts covered by clause 10 should be repaid.

113 However that is not the evidence. The contemporaneous written records of Mr Hilton’s instructions are consistent with Mr Muriti’s evidence that he wanted all of the loan accounts to be repaid. In addition to giving that instruction, Mr Muriti also identified some of the loans which the prior drafts of the agreement had not picked up. Mr Hilton amended the drafts so as to pick up those specific loans, albeit that he made a mistake about the Laon debt. But the amendments were insufficient to give effect to Mr Muriti’s instructions.

114 The most powerful evidence showing that it was the intention of both parties that all loan accounts would be repaid at settlement so far as necessary to effect a separation of the parties’ interests is the provision in clause 5(b) of the Heads of Agreement. It provides that of the minimum amount of $14,200,000 to be paid to Rolcross, $5,500,000 would be paid by way of release of the deposit and the balance in cash on completion. That figure is only consistent with the plaintiffs’ contention as to which loan accounts were to be repaid on settlement.

167 In Caird v Moss (1886) 33 Ch D 22 money had been paid under a judgment of the Court of the County Palatine, based on a claim for money said to be owed under an agreement for the building of a ship. No claim for rectification was made before that Court although it could have entertained such a claim. The judgment was paid. After payment, the plaintiff sought to rectify the agreement. The essential ground upon which it was held that the plaintiff was not entitled to succeed, was that as there was nothing further to be done under the agreement, it was too late for it to be rectified, (at 34, 35, 36; Crane v Hegeman-Harris Co Inc at 670). The case is not authority that the claim for rectification was too late because it was not raised in the Palatine Court, when it could have been, before judgment was given. (Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662 at 670; B & B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd (31/08/95, Young J unreported at BC9505386 at 8).

168 In B & B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd, Young J (as he then was), refused to strike out the plaintiff’s claim to rectify a contract upon which, in earlier proceedings, the defendant had obtained judgment for a debt owing under the agreement. His Honour said that it has always been permissible, even after a judgment had been obtained at law, for a person to commence rectification proceedings, and that the right to seek rectification only ceases when money due under the common law judgment has been paid.

169 None of these cases is directly in point. Each concerns a judgment at law, whose enforcement, in pre-Judicature Act days, might have been restrained by common injunction. In Market Terminal Pty Ltd v Dominion Insurance Co of Australia [1982] 1 NSWLR 105, the plaintiffs sued the defendant on insurance policies and a dispute arose as to whether the policies provided cover in the events which occurred. After judgment was given deciding the question of construction in favour of the defendant, the plaintiffs sought and were granted leave to amend the statement of claim, to claim rectification of the contract. It does not appear whether the declaration made had been entered, prior to the plaintiffs having sought leave to amend.

170 In Nulty Securities Ltd v Carpenter (NSWSC, 10/12/96, unreported, BC9606187), McLelland CJ in Eq dealt with a similar problem. A declaration had been made as to the proper construction of a deed. The declaration amounted to a final determination of the issues in the proceedings, although the proceedings were referred to a Master and there was a reservation of further consideration of the matter before an order for specific performance could be made. The plaintiff sought to file a new summons propounding a claim for rectification of the deed. McLelland CJ in Eq rejected that application. His Honour did so on the ground that for the plaintiff to seek rectification at that late stage was contrary to the principles in Port of Melbourne Authority v Anshun (No. 2). For the reasons I have given, in this case, the plaintiffs’ application does not offend those principles.

171 In principle, and on such authority as there is, I am of the view that notwithstanding the final disposition of the proceedings instituted on 16 September 2004 by the final orders made on 24 September 2004, it is open to the plaintiff in new proceedings to seek rectification of the instrument in which the agreement which the Court has ordered be specifically performed is expressed.

172 The new proceedings were commenced by the filing of a summons on 21 February, 2005. The proceedings have been numbered 2271 of 2005. In those proceedings I will order that the Heads of Agreement be rectified by deleting clause 10 and clause 5(b)(iii) and substituting the wording contained in annexure A and annexure C to the summons.

Construction Issues: Clause 5(c) of the Heads of Agreement

173 Clause 5(e) provides that any amount payable by Keanlong to Rolcross in excess of $14,200,000, is to be determined, inter alia, by reference to the special purpose financial reports referred to in clause 5(c). Clause 5(c) provides that special purpose financial reports for the PGM Unit Trust and Santee for the year ended 30 June 2004 are to be prepared by Einfeld Symonds Vince. Those reports are to be prepared “on the same basis as the financial reports for those entities for the year ended 30 June 2003…”. Clause 5(c) provides for those reports to be agreed upon by Einfeld Symonds Vince and Bedford Titley. Another firm of chartered accountants, Grant Thornton, has been substituted for Bedford Titley. As part of the agreement leading to the orders of 24 September 2004, the parties agreed that any dispute between Messrs Einfeld Symonds Vince, and Grant Thornton, would be resolved by a partner of Lonergan Edwards & Associates.

174 The parties have requested the Court to determine the following issue:

“Whether, on the proper construction of clause 5(c) of the Heads of Agreement and of the agreement noted by the Court on 24 September 2004, Mr Lonergan is entitled to investigate the transactions underlying the accounts of 30 June 2003 referred to in clause 5(c).”

175 The issue thus framed is very wide. The argument in relation to it was confined to whether the partner of Lonergan Edwards & Associates was entitled to satisfy himself as to the accuracy of the statements in the 2003 financial reports as to the amounts, as at 30 June, 2003, of the debts to be repaid or set off pursuant to clause 10, or whether he was required to accept the statements in those financial reports of such debts. The argument focused on the debts owed to and by Santee, against the possibility that the agreement would be rectified.

176 There was little evidence about how the 30 June 2003 financial reports, so far as they related to the debts owed to and by Santee, were prepared. The auditors, Messrs Einfeld Symonds Vince, reported on the 30 June 2003 financial statements of Santee Pty Ltd, by saying that they had compiled the financial statements in accordance with “APS 9 ‘Statement on Compilation of Financial Reports’”. That statement was not in evidence. The auditors said that their procedures used accounting expertise to collect, classify and summarise the financial information provided by the client into a financial report. Their procedures did not include verification or validation procedures and no audit or review had been performed. The 30 June 2003 financial statements for the other entities contained the same statement.

177 The financial statements for 30 June 2003 of Santee and the other companies and partnerships, had been finalised only after extensive questioning by Mr Prendergast.

178 As part of that process, Mr Vince sent to Mr Prendergast a summary of the loan accounts for himself and Mr Muriti for the years ended 30 June 2002 and 30 June 2003, together with a breakdown of the drawings on each respective loan account. In the summary of the loan movements for the Prendergast Group for the year ended 30 June 2003, the schedule provided by Mr Vince showed that an opening balance was owed by the “Prendergast Group” to Santee as at 1 July 2002 of $738,918. It appears from the 30 June 2002 summary of loan movements, and from the notes to the financial statements for the year ended 30 June 2003 which incorporate the corresponding figures as at 30 June 2002, that the sum of $738,918 owed by the Prendergast Group to Santee as at 1 July 2002 was the difference between the moneys held on trust for Santee by the Prendergast Family Trust of $5,386,240.61 and the debt owed by Santee to Laon Pty Ltd of $4,647,322.59. The loan schedules for the year ended 30 June 2003 showed the movements in the next financial year in respect of that net balance. The debt owed by the Prendergast Group to Santee was increased by $472,128 in respect of tax payments made by Santee to Prendergast Pty Ltd, P Prendergast and J Prendergast. These amounts are referred to in the financial statements as at 30 June 2003, although they are there all allocated to Prendergast Pty Ltd, presumably on the grounds of materiality. There is also included in the loan schedule provided to Mr Prendergast, and in the 30 June 2003 financial statements, the debt owed by Santee to Laon Pty Ltd of $344,250 arising from the selective share buy-back referred to in paragraph 15.

179 The same is true of other loan account movements, including changes to the amount of funds held on trust for the Prendergast and Muriti family trusts. By way of example, the 30 June, 2003 financial statements for Marshall Motors as trustee of the PGM Unit Trust show that the vested funds held on trust for the Prendergast family trust at 30 June, 2002 were $5,667,452.84 and at 30 June, 2003 were $8,376,484.52. The difference was attributable to that beneficiary’s share of the profit of the trust for the 2003 financial year ($5,906,636.66) less drawings of $3,197,634.98. The schedule sent to Mr Prendergast on 23 January, 2004 showing the movements in the loan accounts, shows these as “loan movements” in the 12 months to 30 June, 2003.

180 Therefore, it appears that the 30 June 2003 financial statements were prepared on the basis of the 30 June 2002 financial statements, adjusted for movements occurring in the financial year from 1 July 2002 to 30 June 2003.

181 Having regard to the extensive consideration given to the 30 June 2003 financial statements it was eminently sensible that the parties should adopt the 30 June 2003 financial statements as the base from which the 30 June 2004 financial statements should be prepared, without re-opening the 30 June 2003 figures. To adopt that methodology would be to act on the same basis as the financial reports for 30 June, 2003 were prepared, i.e., by taking the 30 June 2002 financial statements and adjusting them for movements in the next financial year. By signing the 30 June 2003 financial statements, both Mr Prendergast and Mr Muriti had certified that in their opinion they presented fairly Santee’s and the other companies’ and partnerships’ financial position as at 30 June 2003. I do not accept that Lonergan Edwards & Associates, if called upon to decide a dispute between Einfeld Symonds Vince and Grant Thornton, are entitled to satisfy itself that the entries as at 30 June, 2003 properly recorded the true financial position of the various companies. In my view, they are required to take those financial statements as the basis from which they are to proceed to consider the debts due by and to the relevant entities.

182 Accordingly, I will make a declaration that in determining the loans and other amounts due by any entity which are to be paid on settlement in accordance with clause 10 of the Heads of Agreement as rectified, Messrs Einfeld Symonds Vince, Grant Thornton, and any partner of Lonergan Edwards & Associates appointed to resolve any dispute pursuant to the agreement noted by the Court on 24 September 2004, are required to take the financial statements of the PGM Unit Trust and Santee Pty Ltd as establishing the debts due by and to the entities referred to in clause 10 as at 30 June, 2003, to the extent to which those financial statements refer to such debts, without investigating the accuracy of those financial statements.

Conditions Precedent

183 Clause 12 of the Heads of Agreement provided that its completion was subject to and conditional upon the approval of DaimlerChrysler pursuant to the dealer agreements dated 22 July 2002 between DaimlerChrysler and Marshall Motors and Perfect Auto Body, and the approval of ANZ Banking Group Limited as financier of the parties.

184 The plaintiffs submitted that these conditions precedent had been satisfied and that the relevant approvals had been given.

185 In my view, this is an issue resolved by the consent orders of 24 September 2004. As noted in paragraph 47, one of the issues before Windeyer J was whether those conditions precedent had been met. Unless the parties had agreed that the conditions had been met, the order for specific performance could not have been made in the form in which it was made. If there were outstanding conditions which had still to be satisfied before completion, the only order for specific performance which could have been made would be one which required the parties to do what was reasonable and proper to endeavour to cause the conditions precedent to be satisfied and, if they were satisfied, to complete the transactions in the Heads of Agreement. (Butts v O’Dwyer (1952) 87 CLR 267 at 283; Kennedy v Vercoe (1960) 105 CLR 521 at 529; Brown v Heffer (1967) 116 CLR 344 at 350; Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 605).

186 I will therefore declare that the defendants, by consenting to the orders of 24 September 2004, are estopped from denying that the conditions precedent in clause 12 of the Heads of Agreement have been satisfied.

Indemnity Against Keanlong’s Liability to ANZ as a Partner in the Property Partnerships

187 The partnership properties are mortgaged to the ANZ Bank. As one of the partners, Keanlong has given a mortgage to the ANZ Bank and is personally liable for the advance made by it to the various partnerships. The loans are guaranteed by Mr Muriti.

188 Clause 14 is headed “Release of JFP Guarantees to DCAuP”. It provides:

“(a) Each of JFP, VCM Marshalls and Perfect will use reasonable endeavours to procure the release of guarantees given by JFP to DCAuP and Marshalls and Perfect respectively on or as soon as practicable after completion of the transactions contemplated by this Agreement.

(b) Each of the parties will use reasonable endeavours to procure the release of guarantees given by VCM to ANZ Banking Group Limited in respect of the Partnership Properties on or as soon as practicable after completion of the transactions contemplated by this Agreement.”

189 Another potentially relevant clause is clause 15. It provides for the termination of a deed of agreement made between Mr Prendergast, Mr Muriti, Rolcross, Worthbrook and Keanlong on 19 May 1997 and the partnership agreement made between Rolcross, Worthbrook and Keanlong on 19 May 1997. It provides for mutual releases and discharges of the parties’ liabilities and obligations under those agreements. However those agreements were not in evidence before me, and neither party place any reliance upon clause 15.

190 To give effect to the parties’ intentions that Mr Prendergast and Mr Muriti separate “their respective interests in ….the Partnership Properties on the terms of this Agreement”, (clause 2(f)), Rolcross has agreed to buy Keanlong’s interest in each of the Partnership Properties and the units in the Botany Road Unit Trust.

191 The plaintiffs submit that a term should be implied into the Heads of Agreement, that the defendant should procure the release of Keanlong as a mortgagor and, if that release cannot be obtained, or if the ANZ Bank refuses to release Mr Muriti’s liability as a guarantor, Rolcross should indemnify Keanlong and Mr Muriti from their obligations to the ANZ Bank in respect of Keanlong’s obligations as mortgagor of the Partnership Properties.

192 There is no express term in the Heads of Agreement to this effect. However, clause 2(g) provides that the Heads of Agreement sets out the broad commercial basis upon which Mr Prendergast and Mr Muriti agreed to separate their respective interests. It recorded that the various transactions contemplated to enable settlement to occur, should be the subject of separate agreements, and that the parties would negotiate and execute collateral documents to implement the transactions referred to in the agreement. Nothing in the collateral documents was to alter or supersede the obligations created by the Agreement. (Clause 3).

193 By these clauses the parties recognised that not all of the detail had been documented. Although the Heads of Agreement is a reasonably detailed document, it is not complete on its face. In such a case, the actual terms of the contract must first be inferred before any question of implication arises, and then, when considering what terms should be implied so as to give effect to the presumed or imputed intention of the parties, the question is whether the implication of the particular term is necessary for the reasonable or effective operation of the contract in the circumstances of the case. (Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 422, 442). A term may be implied if it is so obvious as to go without saying, such that if the subject had been raised when the contract was entered into, the parties would have replied “of course”, (Byrne v Australian Airlines Ltd at 442).

194 The defendants did not develop any submissions on this issue. In my view it is so obvious as to go without saying that after settlement, as between Mr Prendergast and Rolcross on the one hand, and Mr Muriti and Keanlong on the other, Mr Prendergast and Rolcross were to be solely responsible for the partnerships’ mortgage debts to the ANZ Bank. Given that the parties were to use their reasonable endeavours to procure the release by the ANZ Bank of guarantees given to it by Mr Muriti, it was clearly their intention that once Keanlong had sold its interests in the Partnership Properties to Rolcross, as between those parties, Keanlong was not to remain liable to the ANZ Bank for the mortgage debts. It would make no commercial sense for the parties to have intended that Keanlong should continue to have such a liability to the ANZ Bank, without an entitlement to be indemnified by Rolcross in respect of that liability. Nor would there have been an effective separation of the parties’ respective interests in the Property Partnerships. In my view it is necessary for the reasonable or effective operation of the Heads of Agreement, and a matter which is so obvious that it goes without saying, that the parties would use their best endeavours to procure the release of Keanlong’s obligation as mortgagor of the Partnership Properties to the ANZ Bank, and that Rolcross would indemnify Keanlong and Mr Muriti in respect of any obligations they may have as mortgagor of those properties, or guarantor of the partnerships’ liabilities to the ANZ Bank. I will make declarations accordingly.

195 No argument was advanced that this claim could not be maintained in proceedings No. 5094 of 2004 as it was outside the proper scope of the libert to apply. Had such a contention been made, I would have granted leave to amend the proceedings No. 2271 of 2005 to raise the same claim.

Laon’s Cross-Claim

196 Laon sought declarations that the moneys payable to Perfect Auto Body (Canberra) by Santee were owed to it, and that the debentures had validly been redeemed. It sought a declaration that Santee was obliged to pay Perfect Auto Body (Canberra), on account of Laon, the sum of money claimed to be owed under the debenture. It also sought a declaration that the moneys payable to it were in addition to the amount of $14,200,000 payable by Keanlong to Rolcross pursuant to the Heads of Agreement and were payable without set-off.

197 The case of the defendants and cross-claimant was put on the basis that success on the cross-claim depended upon the plaintiffs failing on their rectification claim. There was no dispute that the debentures had been redeemed and that moneys were owed by Santee to Perfect Auto Body (Canberra) in the amounts deposed to by Mr Vince. $4,647,323 was secured under the debenture and security trust deed and the subscription agreement, and $344,250 was an unsecured debt. The effect of the orders which I will make for rectification of the Heads of Agreement is that those debts will be discharged on settlement. They are not moneys to be paid in addition to the amount of $14,200,000 payable by Keanlong to Rolcross. There is no dispute as to part of the relief sought by Laon. The purpose of the cross-claim was to establish that the debt due by Santee to Perfect Auto Body (Canberra), and held by it for Laon, and the unsecured debt due by Santee to Laon, were not to be taken into account in determining what moneys were to be paid on settlement of the Heads of Agreement. That claim fails. I see no utility in making the other declarations sought. The cross-claim will therefore be dismissed.

198 The plaintiffs also sought declarations as to what documents were required to be handed over on settlement. It was agreed between counsel that that question was likely to be resolved by the Court’s determination of the issues referred to above, but that further consideration should be reserved in case there is a further dispute. I will take that course.

199 For these reasons, in proceedings No. 2271 of 2005, I order that the Heads of Agreement dated 4 August 2004 referred to in order 1 made on 24 September 2004 in proceedings No. 5094 of 2004 be rectified by:

(a) deleting clause 10 and substituting the wording contained in Annexure A to the summons, save that paragraphs (e) and (f) of Annexure A should be re-lettered (d) and (e) respectively; and

200 In proceedings No. 5094 of 2004, I make the following declarations and orders:

1. Declare that in determining the loans and other amounts due by any entity which are to be paid on settlement in accordance with clause 10 of the Heads of Agreement as rectified, Messrs Einfeld Symonds Vince, Grant Thornton, and any partner of Lonergan Edwards & Associates appointed to resolve any dispute pursuant to the agreement noted by the Court on 24 September 2004, are required to take the financial statements of the PGM Unit Trust and Santee Pty Ltd as establishing the debts due by and to the entities referred to in clause 10 as at 30 June, 2003, to the extent to which those financial statements refer to such debts, without investigating the accuracy of those financial statements;

2. Declare that the defendants, by consenting to the orders of 24 September 2004, are estopped from denying that the conditions precedent in clause 12 of the Heads of Agreement have been satisfied;

3. Declare that the defendants are obliged to use reasonable endeavours to procure the release by ANZ Banking Group Limited of the obligations of the second plaintiff as mortgagor of the Partnership Properties described in clause 2(e) of the Heads of Agreement dated 4 August, 2004;

4. Declare that after settlement of the Heads of Agreement the second defendant is obliged to indemnify the second plaintiff against its liability to ANZ Banking Group Limited as mortgagor of the Partnership Properties and to indemnify the first plaintiff against his liability to ANZ Banking Group Limited as guarantor under the guarantees given by him referred to in clause 14(b) of the Heads of Agreement;

5. Dismiss the cross-claim;

6. Reserve further consideration of the proceedings; and

201 The proceedings were heard together. I order the defendants pay the plaintiffs’ costs of proceedings No. 2271 of 2005 and of so much of proceedings No. 5094 of 2004 as was heard by me. Exhibits may be returned after 28 days.

******

CITATION:	Muriti v Prendergast [2005] NSWSC 281
HEARING DATE(S):	21/02/05, 22/02/05, 23/02/05, 02/03/05, 03/03/05
JUDGMENT DATE :	11 April 2005
JUDGMENT OF:	White J
DECISION:	See paras 199 - 201 of judgment.

CATCHWORDS:	CONTRACT - RECTIFICATION - Common intention - Mutual mistake - Whether clear and convincing evidence of intent displaced presumption that the parties intended to be bound by the terms of their written agreement - Relevance of agreement containing obvious mistakes - Whether intention as to effect document was to achieve clearly predominated over intention to be bound by the terms in the instrument - Whether common intention sufficiently precise to permit rectification - Proposed term must give effect to the parties' intention and not go beyond it - Alternative formulations of proposed term did not indicate that common intention lacked necessary precision - Parties agreed on literal construction - Rectification available for more abundant caution. - RES JUDICATA - Previous proceedings for specific performance - Prior consent orders - Anshun estoppel - Issue estoppel - Whether there has been a merger of the cause of action in the decree for specific performance - whether the issues raised in these proceedings should have been raised before the order for specific performance was made - Whether plaintiffs had elected between inconsistent remedies - Whether the degree of conformity between the instrument and the true agreement was an issue raised in the previous proceedings - Whether previous order was a final order which completely disposed of the proceedings - Scope of liberty to apply - Held previous order final - Order for rectification can be made in new proceedings after a decree for specific performance. - RES JUDICATA - Issue estoppel - Defendants estopped from denying that the conditions precedent to a consent order for specific performance had been met. - IMPLIED TERM - Release or indemnity of mortgagor - Whether term is necessary for the reasonable or effective operation of the contract - Whether term is so obvious as to go without saying. - EVIDENCE - Failure of the defendant to give evidence in civil proceedings - Jones v Dunkel applied.
CASES CITED:	Deutsche Bank und Disconto Gesellschafft v Banque des Marchands De Moscou (1931) 107 LJKB 386 Fitzgerald v Masters (1956) 95 CLR 420 Westpac Banking Corporation v Tanzone Pty Ltd (2000) 9 BPR 17,521 Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 Pacific Carriers Ltd v BNP Paribas (2004) 208 ALR 213 Standard Portland Cement Co Pty Ltd v Good [1982] 2 NSWLR 668 Pukallus v Cameron (1982) 180 CLR 447 Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 Fowler v Fowler (1859) 4 De G & J 250; 45 ER 97 Australian Gypsum Ltd & Australia Plaster Co Ltd v Hume Steel Ltd (1930) 45 CLR 54 Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662 Crane v Hegeman-Harris Co Inc [1939] 4 All ER 68 Joscelyne v Nissen [1970] 2 QB 86 The Olympic Pride [1980] 2 Lloyds Rep 67 Australasian Performing Right Association v Austarama Television Pty Ltd [1972] 2 NSWLR 467 Westland Savings Bank v Hancock [1987] 2 NZLR 21 Bush v National Australia Bank (1992) 35 NSWLR 390 Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 Jones v Dunkel (1959) 101 CLR 298 MacDonald v Shinko Australia Pty Ltd [1999] 2 Qd R 152 Slee v Warke (1949) 86 CLR 271 Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd [2001] 3 VR 526 GPI Leisure Corp Ltd v Herdsman Investments Pty Ltd (No. 4) (1990) 9 BPR 17,461 State Bank of South Australia v MacIntosh (NSWSC, 31/5/95 unreported, BC9504827) Commonwealth Bank of Australia v Cluness (1997) 8 BPR 15,467 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 Issa v Berisha [1981] 1 NSWLR 261 Montgomery v Beeby (1930) 30 SR (NSW) 394 Blair v Curran (1939) 62 CLR 464 Spencer Bower, Turner & Handley, Res Judicata 3 ed Re South American and Mexican Company: Ex Parte Bank of England [1895] 1 Ch 37 Cloutte v Storey [1911] 1 Ch 18 Bailey v Marinoff (1971) 125 CLR 529 Gamser v Nominal Defendant (1977) 136 CLR 145 Meehan v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146 Fry on Specific Performance 6 ed paras 1170-1181 Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 JAG Investment Pty Ltd v Strati [1981] 2 NSWLR 600 Riltang Pty Ltd v L Pty Ltd [2004] NSWSC 977 Phillips v Walsh (1990) 20 NSWLR 206 Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 Henderson v Henderson (1843) 3 Hare 100; 67 ER 313 Caird v Moss (1886) 33 Ch D 22 B & B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd (31/08/95, Young J unreported at BC9505386) Market Terminal Pty Ltd v Dominion Insurance Co of Australia [1982] 1 NSWLR 105 Nulty Securities Ltd v Carpenter (NSWSC, 10/12/96, unreported, BC9606187 Butts v O'Dwyer (1952) 87 CLR 267 Kennedy v Vercoe (1960) 105 CLR 521 Brown v Heffer (1967) 116 CLR 344 Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 Byrne v Australian Airlines Ltd (1995) 185 CLR 410
PARTIES:	Vincent Carl Muriti & 1 Or v John Francis Prendergast & 2 Ors
FILE NUMBER(S):	SC 5094/04, 2271/05
COUNSEL:	Plaintiffs: JWJ Stevenson SC, K L Andronas Defendants: C R C Newlinds SC, A P Coleman, P Newton
SOLICITORS:	Plaintiffs: Henry Davis York Defendants: Phillips Fox Lawyers