Papadopoulos v Hristoforidis
Case
•
[1999] NSWSC 1017
•8 October 1999
No judgment structure available for this case.
CITATION: PAPADOPOULOS v HRISTOFORIDIS [1999] NSWSC 1017 CURRENT JURISDICTION: Civil FILE NUMBER(S): 20951/95 HEARING DATE(S): 23/8/99; 25/8/99; 26/8/99/30/8/99 JUDGMENT DATE:
8 October 1999PARTIES :
Sofia Papadopoulos and Dimitrios Tsesmetzis
John HristoforidisJUDGMENT OF: Wood CJatCL
LOWER COURT JURISDICTION: Supreme Court LOWER COURT FILE NUMBER(S) : LOWER COURT JUDICIAL OFFICER:
COUNSEL : C.J. Hockey (P)
J.W. Stevenson (D)SOLICITORS: Mavrakis & Assoc
Kemp & StrangCATCHWORDS: DECISION: Verdict for Defendant.; Order Plaintiff to pay Defendant's costs
IN THE SUPREME COURT
No. 20951/95
OF NEW SOUTH WALES
COMMON LAW DIVISION
WOOD CJ at CL
FRIDAY 8TH OCTOBER ortio19991 WOOD CJ at CL: In 1989 the plaintiffs, Sofia Papapopoulos and her brother Demetrios Tsesmetzis, purchased a parcel of land known as 72 to 74 Corrimal Street Wollongong, with an eye to its development for home units. They entered into a joint venture with the defendant, John Hristoforidis, also known as “John Christo”, who was a licensed builder by trade. By July 1991, the home units were completed. By this time, however, there was serious disharmony within the venture. In October 1991, the defendant commenced proceedings to wind up the joint venture company, leading to the appointment of a Receiver and Manager, and later of a liquidator. 2 Now that the units have all been sold off, the plaintiffs have brought these proceedings whereby they seek recovery of damages for negligent misstatement, and for breach of fiduciary duty on the part of the defendant. Needless to say, the proceedings have been hotly contested.
PAPADOPOULOS & ANOR v HRISTOFORIDES
JUDGMENT
3 Certain facts have been agreed, others have been established from the documents placed into evidence. What is not in dispute is that:
THE UNDISPUTED FACTS
· the plaintiffs in the sum of $105,000 (Sophie $20,000 and $60,000 and Demetrios $25,000) · the defendant in the sum of $35,000
(b) On 7 June 1989, Development Approval was obtained for the construction of ten home units on the site. This DA was amended on 16 August 1989, 18 December 1989, 12 February 1990, 30 January 1991, and 10 May 1991.
(a) On 23 March 1989 the plaintiffs purchased the Corrimal Street properties for $335,000, of which $155,000 was contributed by Sophie Papadopoulos on behalf of herself and her brother, and the balance of which ($180,000) was borrowed from Mercantile Credits.
(c) On 17 July 1989 Burgess and Jaye valued the lands for an intending mortgage, on Mrs. Papadopoulos’ instructions, in the sum of $320,000.
(d) On 21 July 1989, the purchase of the lands by the plaintiffs was settled and a mortgage was given to Mercantile Credits to secure the loan made by it.
(e) Steps were initiated to convert the titles to the lands from Old System to Torrens and Strata title.
(f) The plaintiffs’ attempts to secure finance for the development were unsuccessful.
(g) The defendant was approached by the plaintiffs, to whom he had been known for thirty years or so, in about September 1989, with a view to securing his assistance with the project.
(h) Between September and November 1989 there were a number of discussions between the plaintiffs and the defendant, which ultimately led to them entering into a joint venture to construct and sell the units. In particular there were meetings at the City Pacific International Restaurant, it would seem on 16 September, and at the Elsinor Motor Inn (or Lodge, as it was variously named) on 23 September, at which the project and the defendant’s involvement in it were discussed.
(i) On 14 November 1989, the plaintiffs and the defendant executed a letter of agreement, under which BCE Constructions Pty Ltd (BCE) a company beneficially owned and controlled by the defendant, was appointed as builder for the venture, at a rate of $50 per hour plus 7.5% of the cost of construction. The agreement recorded, additionally, that the books, invoices and paperwork should be available to the partnership, at any time, and that the units were to be sold as soon as possible, and the loan repaid “as a priority”.
(j) On 28 November 1989, Burgess & Jaye provided a valuation, “for an intending mortgage to Mercantile Credits under instructions from J. Christo”, in which the construction costs were estimated in the sum of $1.401m (plus non construction fees and costs of $45,000), and an estimate of the total gross sales value was given, in a sum of $2m.
(k) On 30 November 1989, an application was lodged with the Wollongong City Council for Building Approval.
(l) On 13 February 1990, Building Approval was obtained from the Council.
(m) On 6 April 1990, the Defendant obtained a valuation of his home from Carritt Taylor & Associates Pty Ltd for mortgage purposes, in the sum of $320,000.
(n) On 23 April 1990 a shelf company, Emery Park Pty Limited (Emery Park) was acquired, of which the plaintiffs and defendant became shareholders and directors.
(o) On 4 May 1990, Burgess & Jaye prepared further valuations of the two Corrimal Street properties in the sums of $165,000 and $175,000 respectively;
(p) On 18 May 1990, the plaintiffs entered into a contract for the sale of the two properties to Emery Park for the amounts recorded in these valuations.
(q) On 18 May 1990, Emery Park entered into a contract to sell the penthouse unit to Daphne Innes for $470,000.
(r) On 23 May 1990, Sophie Papadopoulos and her father entered into an agreement with Daphne Innes to borrow $140,000 from her, at an interest rate of 20% per annum, to be secured by a mortgage over the house of the father.
(s) On 23 May 1990, Emery Park entered into an agreement with BCE, whereby the latter agreed, upon the face of the document, to construct the units for $1.45m.
(t) On 24 May 1990, Emery Park opened a bank account with the ANZ Bank at its Earlwood Branch. Pursuant to an authority signed by the parties, the defendant was authorised to sign cheques by himself to an amount of $10,000. Cheques over this amount required the signatures of both the Defendant and the First Plaintiff.
(u) On 24 May 1990, deposits were made to the bank account of Emery Park on behalf of:
· the first plaintiff in the sum of $40,000 (10,000 and $30,000) · the defendant in the sum of $20,000
$140,000
(v) On 31 May 1990, the solicitors for Mercantile Credits confirmed the availability of a loan to be made to Emery Park in the sum of $1.63m, to be disbursed as to $180,000 to pay out the existing mortgage over the premises, and as to the balance of $1.45m. for construction of the units. The conditions for approval of the finance included a requirement for production of a fixed price contract with BCE in a sum not exceeding $1.45m, and for confirmation that the borrower held the sum of $240,000.(w) On 1 June 1990, the plaintiffs and the defendant executed two documents, each headed “To Whom it may concern”, the first of which set out the respective contributions of the partners to the project, which after offsets produced a working capital of $288,624 as well as the cash outlays required and the balancing amounts due to them; and the second of which noted that the defendant was to be credited, by way of a contribution to the joint venture, with the sum of $53,976 to cover his wages, plus 7.5%, plus operating expenses to 1 June 1990, together with a further sum of $70,000 as a fee for making his home available, by way of security for the Mercantile Credits loan. It also noted that he was to receive vehicle expenses for one year referable to a nominated utility.
(x) The sum of $53,976 was calculated by the defendant so as to include the following components:
Wages 8/1/90 to 1/6/90 @ $2,000 per week $42,000
Interest @ 17.5% 1,410
Expenses (as recorded in the yellow book) 6,538
Interest $ 17.5% ___ 262
50,210
7.5% commission 3,766
$53,976
(y) The “loan fee” was calculated upon the basis that the value of the defendant’s home was tied up for 1.5 years, and should attract interest at 17% per annum, against which there should be an offset for rent:
$320,00 x 3/2 x 17/100 = $81,600
less rent (at $644 per month) $11,600
$70,000(z) At the same time a similar exercise was undertaken in relation to the first plaintiff, to calculate the monies that she had paid out to that date in respect of the properties. The amount struck, as drawn from a brown book kept by her and then carried over to the yellow book, in which the records for the venture were effectively kept by the defendant, was $204,458, which was then apportioned equally between the plaintiffs in the sum of $102,230.
(ba) On 4 June 1990, the defendant deposited $13,624 to the Emery Park bank account.
(bb) On 4 July 1990, Emery Park entered into an agreement with the defendant and his wife whereby, in consideration of them providing security for the Mercantile Credits loan, it agreed to complete the sale of the units by the end of December 1991, to enter into a program for their auction and if necessary to reduce the sale prices sufficiently so as to pay out the loan by 31 December 1991.
(bc) On 17 July 1990 further deposits were made to Emery Park’s bank account as follows:
4 The plaintiffs’ claim was pursued on several bases.
(bd) On 25 July 1990, Burgess & Jaye provided a further valuation report as to the construction costs in the sum of $1.446m, of which they assessed the value of work to date in the sum of $196,700, the cost to complete being $1,249,300. Similar valuations were provided at intervals thereafter, against which draw downs were progressively made to meet the costs of construction and the servicing of the interest debt.(be) On 31 July 1990, the plaintiffs executed a transfer of the land to Emery Park for a total consideration of $340,000, which was registered on 22 August 1990.
(bf) On 1 August 1990, Emery Park executed a mortgage in favour of Mercantile Credits to secure a borrowing of $1.63m.
(bg) On the same date the defendant and his wife executed a second mortgage over their home by way of further security for the Mercantile Credits loan.
(bh) From about this time construction of the units commenced, following demolition of the cottages and excavation of the site. Subsequently, and before completion of the building, the defendant began to advertise the units for sale. It would seem that the first such advertisement was placed in September 1990.
(bj ) On 9 October 1990, Richardson & Wrench provided a report to the defendant of suggested selling prices for the units, in a total of $1,502,600 (excluding the penthouse).
(bk) On 4 March 1991, Peter Fitzgerald Real Estate wrote to the solicitors for Emery Park advising that Unit 3 had been sold for $175,000.
(bl) On 2 May 1991, a contract for sale of this unit was exchanged, recording a sale price of $220,000 subject to reduction to $125,000 in the event of settlement prior to 31 August 1991;
(bm) On 7 May 1991, BCE obtained a guarantee from the ANZ Bank in the sum of $50,000 in favour of the Wollongong City Council, such guarantee being required against release of the Strata Plan.
(bn) On 9 May 1991, BCE lodged $50,000 with the ANZ Bank, in its name, by way of a term deposit.
(bo) On 14 June 1991, Peter Fitzgerald Real Estate provided a pricing agenda for the units excluding the penthouse, in the sum of $1.577m.
(bp) On 20 June 1991, the Council advised that the Strata Plan had been registered.
(bq) By about July 1991, construction of the units was completed, for a total cost initially calculated by Mr. Woodgate to be $1,580,774 (including commission of $110,286 at 7.5%), but later reduced by $3,150 to allow for an adjustment downwards of the commission. The calculation of Mr. Rees, based on the yellow book, was $1,562,452. The sales of the ten units achieved, it would seem, a gross return of $2,002,000 (ie exclusive of commission, advertising, holding and legal costs).
(br) On 3 July 1991, the sale of Unit 3 was settled, according to the settlement statement for a price of $125,000 but according to the memorandum of transfer executed that date for a consideration of $220,000.
(bs) On 10July 1991, the sale to Daphne Innes was settled.
(bt) On 1 August 1991, the bank account of Emery Park went into overdraft, and at the request of the defendant, although it would seem without reference to the plaintiffs, the limit was from time to time increased.
(bu) On 19 August 1991, the defendant wrote to the plaintiffs requesting the payment of construction accounts in the sum of $15,283.51.
(bv) On 24 August 1991, the second plaintiff sent a demand to the defendant to produce the plans, specifications, invoices, cheques and correspondence relating to the venture.
(bw) On 4 September 1991 a meeting of Directors of Emery Park was held, on the requisition of the Second Plaintiff. The defendant refused the request which had been made to him to produce the financial records in respect of the venture, for the stated reason that he did not trust the other directors. He did, however, produce some unpaid invoices. “Resolutions” were then passed by the plaintiffs to the effect that all future sales required their approval, that a new bank account be opened for which the plaintiffs were to be the signatories, that a solicitor, Mr. Walter, and an accountant, Mr. Hackleton, be appointed to inquire into the venture, and that the payment of outstanding accounts be held in abeyance.
(bx) On or about 26 September 1991, the defendant issued a notice of demand upon Emery Park pursuant to S460 of the Corporations Law (as it then provided) in respect of the contributions of $68,624 ($35,000, $13,624 and $20,000 noted above) made by him to the venture, and deposited into Emery Park’s bank account, which were said to be “funds advanced … pursuant to a shareholders’ agreement”.
(by) On 15 October 1991, an accountant, Andrew Chiu of Joseph Yuen Pty Ltd, advised the defendant that Emery Park had been trading at a loss and was insolvent.
(bz) On 17 October 1991, the Defendant filed a summons in the Equity Division of the Supreme Court for an order that Emery Park be wound up.
(ca) On 25 October 1991, Mr. Hackleton delivered to Mr. Walters a report on the financial affairs of Emery Park.
(cb) On 30 October 1991, the Court appointed a receiver and manager to Emery Park .
(cc) On 18 March 1992, a quantity surveyor, Trevor Hilaire prepared an estimate of the reasonable costs required to construct the units in accordance with the Council approved plans, based on construction during the period June 1990 to June 1991, in the sum of $1,635,797, adjusted down to $1,567,797, to take into account deviations from the approved drawings. Letters of this date including a costs schedule were sent to “ Mrs. S. Papadopoulos and Mr. J Christo, Cnr of Carters Lane and Towradgi Road, Towradgi ”. The estimate was exclusive of any project management fee and of all acquisition, legal and finance costs.
(cd) On 24 March 1993, a meeting was held with Mr. Hilaire at the office of the accountant at which the report was discussed.
(ce) On 25 March 1993, Mr. Hilaire wrote to the First Plaintiff and “Mr. J. Christo” stating that his company was not prepared to issue a report disclosing a reasonable construction cost for less than $1m.
(cf) On 25 March 1992, the plaintiffs’ solicitors wrote to Mr. Hilaire expressing dissatisfaction with the report and advising that the cheque for part payment of his fees that had been earlier provided was to be stopped.
(cg) On 2 June 1992, Mr. Hilaire commenced proceedings in the Local Court for recovery of the fees incurred in preparing the report and later obtained a default judgment for the sum of $3,575.69.
(ch) On 26 October 1992, the Supreme Court appointed a liquidator to Emery Park.
(ci) On 27 December 1994, the defendant sent a letter to the Liquidator of Emery Park noting that while the asking price for Unit 3, was $220,000 “the agreement was that the unit would be sold to David at the discounted price of $175,000” which was to be paid in the following way:
$125,000 which is referred to as the settlement funds, to Esanda (formerly Mercantile Credits.
$50,000 which was used to issue a bank guarantee to Wollongong Council….”
(cj) The letter further advised that the $50,000 plus accrued interest was used to pay:
$24,176.36 to BBC Hardware
$19,800.00 to Dave’s Plumbing Service
$7,045.41 to Emery Park
(ck) Supporting documentary records were identified in respect of those payments which confirmed that the sum of $50,520.56 was paid into BCE’s account, on maturity of the deposit, on 23 July 1991, and that the sums mentioned above were paid out of that account between 23 July and 31 July.(cl) In September 1995, the plaintiffs commenced these proceedings.
(cm) On 26 November 1996, the Liquidator provided a final report showing a balance of $23,030 which was applied against the Liquidator’s costs incurred in the winding up of $92,808, the balance being written off.
(cn) As a result of the interest and holding costs, the costs involved in the repair and sale of the units, and the costs of the receivership and liquidation, there was no return to the partners on account of their capital contributions, let alone any component for profit in relation to the venture. The only party to reap any actual benefit was the defendant, so far as he, or BCE, received remuneration assessed by Mr. Woodgate to have been in the order of $233,347, in respect of the construction works. The net result to the plaintiffs was the loss of the lands and of the monies they had contributed.
(co) A further valuation of the lands, made by Terence Wetherall, was tendered, which placed a market value upon them as undeveloped lands but with development and building approval for ten units, as at May 1997, in the sum of $420,000.
THE LEGAL BASIS FOR THE PLAINTIFFS’ CLAIM
5 The duty of care in relation to misstatements sounding in economic loss has its genesis in the decisions in Hedley Byrne & Co. Ltd v Heller & Partners Ltd (1964) AC 465; Mutual Life & Citizens Assurance Co. Ltd v Evatt (1970) 122 CLR 628; Shaddock & Associates Pty Ltd v Parramatta City Council (No.1) (1981) 150 CLR 225. These decisions were reviewed in San Sebastian Ltd v The Minister (1986) 162 CLR 340, and it is in reliance upon the statements of principle there expressed, that the plaintiffs’ claim , in this respect, is pursued. Of particular relevance is the passage in the joint judgment of Gibbs CJ, Mason, Wilson and Dawson JJ at 356-357.
Negligent Misstatement
6 Their Honours referred to the appellants’ submission to the effect that:
“In Evatt and Shaddock the misstatement on which the plaintiff relied was made in response to a request - in the case of Evatt for information and advice, and in the case of Shaddock for information alone, although the distinction between information and advice is an unnecessary and often difficult one to draw: …. (65)But there is no convincing reason for confining the liability to instances of negligent misstatement made by way of response to a request by the plaintiff for information or advice. The existence of an antecedent request for information or advice certainly assists in demonstrating reliance, which is a cornerstone of liability for negligent misstatement. However, such a request is by no means essential, though it has been suggested that instances of liability for misstatement volunteered negligently will be “rare”: …The maker of a statement may come under a duty to take care through a combination of circumstances or in various ways, in the absence of a request by the recipient. The author, though volunteering information or advice, may be known to possess, or profess to possess, skill and competence in the area which is the subject of the communication. He may warrant the correctness of what he says or assume responsibility for its correctness. He may invite the recipient to act on the basis of the information or advice, or intend to induce the recipient to act in a particular way. He may actually have an interest in the recipient so acting.”
7 The deficiency in the first submission, their Honours said (at 358):
“…. where A engages in conduct which is intended to cause B or a class of persons to act in a particular manner, A comes under a duty of care to B or any member of the class who is induced to act in that manner. Alternatively the appellants submit that A comes under a duty of care where he has an interest in inducing such action.”
8 As to the alternative way in which the appellants put their case, their Honours observed:
“… may be expressed by saying that it is necessary not only that A intends that B or members of a class of persons should act or refrain from acting in a particular way, but also that A makes the statement with the intention of inducing B or members of that class, in reliance on the statement, to act or refrain from acting in the particular way, in circumstances where A should realize that economic loss may be suffered if the statement is not true. In cases where the defendant intends the statement to operate as a direct inducement to action, the reasonableness of the reliance will not be a critical factor, although in other cases the defendant’s appreciation of the reasonableness of reliance will be relevant.”
9 Their Honours noted, in relation to this leg of the argument, that the general interest which a local authority had in promoting or encouraging development within its area, would not normally be classed as a “pecuniary interest”; and hence would not be enough to support the existence of a duty of care in relation to statements made in development plans. Its applicability otherwise was not the subject of comment. 10 It followed then, their Honours said, in relation to the matter on appeal, that:
“The appellants’ alternative proposition derives from the American Restatement of the Law of Torts (2d) 552, which speaks of the liability of a person who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, for pecuniary loss caused to them by their justifiable reliance on the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.”
11 Brennan J (as he then was) stated the relevant principle (at 372) after referring to the judgment of Barwick CJ in Mutual Life & Citizens Assurance Co v Evatt in the following terms:
“…if the appellants’ case is to succeed they must establish at least, amongst other things, (1) that the alleged representation was made, and (2) that the Authority and the Council made the representation with the intention of inducing members of the class of developers to act in reliance on the representation.”
12 Although the law of negligence has moved on considerably since these decisions, and there has been a questioning of the extent to which notions of foreseeability, proximity and general reliance provide the touchstone for, or the universal identifier of, the existence of a duty of care in decisions such as Burnie Port Authority v General Jones Pty Ltd (1994) 179 CLR 520; Hill v Van Erp (1997) 188 CLR 159); Pyrenees Shire Council v Day (1998) 192 CLR 330; Romeo v Conservation Commission of the Northern Territory (1988) 192 CLR 431; W.D. & .H.O. Wills (Aust) Pty Ltd v State Rail Authority of New South Wales (1998) 43 NSWLR 338, I do not see these decisions as limiting the principles identified in San Sebastian. 13 In this regard, it may be noted that in Pyrenees Shire Council, Gummow J observed, at 385-386:
“Where a representor gives information or advice on a serious or business matter, intending thereby to induce the representee to act on it, the representor is under a duty of care in giving that advice or information if three conditions are satisfied. First (corresponding with the first condition expressed by Barwick CJ), if the representor realises or ought to realise that the representee will trust in his especial competence to give that information or advice; second, (corresponding with the third condition), if it would be reasonable for the representee to accept and rely on that information or advice; and third (applying the underlying principle of the law of negligence), if it is reasonably foreseeable that the representee is likely to suffer loss should the information turn out to be incorrect or the advice turn out to be unsound.”
14 Although not referred to in argument, the High Court returned to the subject of economic loss in Perre v Apand Pty Ltd (1999) 164 ALR 606. The members of the Court did not speak with one voice as to the circumstances in which a duty of care arises in this context, agreeing however, that upon the facts of the case on appeal, a duty was owed. McHugh J said (at 76) that:
“… the primary significance of reliance is in cases of alleged negligent provision of advice or information where reliance aids the formulation of a duty of care and detrimental reliance enters into the question of causation of loss”.
15 The existence of the divergent views seen in this appeal leaves a Judge, at first instance, in some difficulty. So far as I can determine the relevant principles were stated as follows:
“… the differing views of the members of this Court in the present case suggest that the search for a unifying element (in determining the duty of care question) may be a long one.”
16 The plaintiffs pursued their claim upon the basis that the defendant was negligent in relation to the advice, given to them in September 1989, concerning the construction costs and return from the project (specifically in not making proper investigations into those costs or into the value of the units) and in not bringing to their attention the November 1989 valuation, before they became finally committed to the project. In this regard they placed particular reliance upon the decision of Casey J in J & C Abrams Ltd v Ancliffe (1978) 2 NZLR 421, in which a comparable duty of care was found to have existed. 17 The following factors may, in my view, properly be taken into account in determining whether a duty of care of the kind asserted, arose in the present case: · the existence of a joint venture between the parties; · the experience of the defendant as an engineer, builder and developer; · the comparative lack of experience of the plaintiffs in the development of land; · the fact that the plaintiffs sought and obtained from the defendant an estimate of the construction costs (the terms of which were in dispute) before deciding to go ahead with the venture; · the significance for the joint venture in terms of its profitability, and for the parties in terms of the financial contribution they made, of the construction costs and sales returns; · the fact that the defendant was effectively in control of the project, from the time a decision was made to proceed with it. 18 The plaintiffs additionally relied upon a submission to the effect that the defendant gave them a ‘guarantee’ as to the construction cost and as to their anticipated net return. As I do not accept their evidence in this regard, I have excluded it from the considerations relevant to the existence of a duty of care. Otherwise, it appears to me that the circumstances identified were sufficient to give rise to a duty of care, in relation to the provision of any advice as to the construction costs and sales returns. Clearly, the possibility of loss, in the event of the information being incorrect, was foreseeable. Equally clearly, the relationship was one of potential vulnerability and of reliance on the part of the plaintiffs. Moreover, the case is not one of indeterminate liability, such that policy or other considerations should intervene to exclude liability. 19 In my view, the duty owed was properly to be considered as a continuing duty such that, in the event of it becoming apparent that any information previously supplied concerning construction costs or sales values was incorrect, then that fact should have been drawn to the notice of the plaintiffs. 20 To the question of breach of the tortious duty I shall return.
Gleeson CJ:
“[7] If there once was a bright line rule which absolutely prevented recognition of a duty of care in any case where the negligent conduct of one person caused financial loss to another, not associated with injury to the other’s person or property, and which assigned claims to recover such loss to the field of contract rather than tort, the line gave way in an area where there is a clear potential for carelessness to cause financial harm: negligent misstatements made to a person who, to the knowledge of the maker of the statement, relies upon the advice or information provided. However, there is no convincing reason why conveying advice or information should be treated as the solitary exception to an otherwise absolute exclusionary rule.
[10] In Caparo , Lord Oliver emphasised that, in this field of discourse, the mere foreseeabillity of possible damage, without some further control (which he summarised as ‘proximity’, after explaining what he meant by that term) would not be useful as the test of liability. At the same time, however, his Lordship made it clear that ‘in some cases the degree of foreseeability is such that it is from that alone that the requisite proximity can be deduced’. In relation to the giving of advice or information, questions of reliance and actual foresight of the possibility of harm (or, what is the same thing, the foresight that a reasonable person would have) are closely related. Moreover, knowledge (actual, or that which a reasonable person would have) of an individual, or an ascertainable class of persons, who is or are reliant, and therefore vulnerable, is a significant factor in establishing a duty of care.”
Gaudron J:
“[27] It is clear that foreseeability does not, of itself, suffice to render a defendant liable for negligently inflicted economic loss. This notwithstanding, the notion of proximity, which has generally been adopted by this court to describe the special feature or features that attract a duty of care in economic loss cases, has been criticised as being incapable of constituting a universal criterion of liability and, also, as having only limited utility in determining whether there exists a duty of care in a particular case. It may well be that, at this stage, the notion of proximity can serve no purpose beyond signifying that it is necessary to identify a factor or factors of special significance in addition to the foreseeability of harm before the law will impose liability for the negligent infliction of economic loss.
[42] In my view, where a person knows or ought to know that his or her acts or omissions may cause the loss or impairment of legal rights possessed, enjoyed or exercised by another, whether as an individual or as a member of a class, and that that latter person is in no position to protect his or her own interests, there is a relationship such that the law should impose a duty of care on the former to take reasonable steps to avoid a foreseeable risk of economic loss resulting from the loss or impairment of those rights.”
McHugh J:
“[101] Until 1963, the almost universal rule was that, absent contract or fiduciary relationship, a person owed no duty to avoid causing economic loss to another person, and although no longer a universal rule, no duty is the general rule. Judges and academic commentators have subjected this exclusionary rule to an intense scrutiny which has yielded a broad consensus on the rationale for the rule. They generally agree that the theoretical underpinnings of the exclusionary rule are the need to avoid imposing indeterminate liability and the need to avoid imposing unreasonable burdens on the freedom of individuals to protect or pursue their own legitimate social and business interests without the need to be concerned with other persons’ interests.
[103] Nevertheless, when a court is satisfied that the economic loss suffered by the plaintiff was reasonable foreseeable by the defendant, that no question of indeterminacy of liability arises and that the defendant was not legitimately protecting or pursuing his or her social or business interests, it will often accord with community standards and the goals of negligence law, as an instrument of corrective justice, to hold that the defendant should have had the plaintiff’s interests in mind when engaging or refusing to engage in a particular course of conduct. However, the common law in its desire to give effect to the autonomy of each individual does not generally require a person to act as if he or she were ‘my brother’s keeper’. That is particularly so when the defendant would have to take affirmative action to save a person from suffering harm.
[104] What is likely to be decisive, and always of relevance, in determining whether a duty of care is owed is the answer to the question, “how vulnerable was the plaintiff to incurring loss by reason of the defendant’s conduct?” So also is the actual knowledge of the defendant concerning that risk and its magnitude. If no question of indeterminate liability is present and the defendant, having no legitimate interest to pursue, is aware that his or her conduct will cause economic loss to persons who are not easily able to protect themselves against that loss, it seems to accord with current community standards in most, if not all, cases to require the defendant to have the interests of those persons in mind before he or she embarks on that conduct."
Gummow J:
“[172] The decision of this court in Caltex Oil is authority at least for the proposition that, in a case such as the present, one does not begin with an absolute rule that damages in negligence are irrecoverable in respect of economic loss which is not consequential upon injury to person or property. The same may be said of more recent decisions of this court and the House of Lords, as well as of the Supreme Court of Canada and the New Zealand Court of Appeal.
[200] The emergence of a coherent body of precedents will be impeded, not assisted, by the imposition of a fixed system of categories in which damages in negligence for economic loss may be recovered. In Canada, it appears that what is identified as ‘contractual relational economic loss’ is recoverable only in special circumstances and these can be defined by reference to three categories. The first is whether the claimant has a possessory or proprietary interest in the damaged property; the second is the general average cases in shipping law; and the third comprises cases where the relationship between the claimant and the property owner constitutes a joint venture. However, it has been necessary to add that the categories are not closed….”
[201] I prefer the approach taken by Stephen J in Caltex Oil. His Honour isolated a number of ‘salient features’ which combined to constitute a sufficiently close relationship to give rise to a duty of care owed to Caltex for breach of which it might recover its purely economic loss. In Hill v Van Erp and Pyrenees Shire Council v Day I favoured a similar approach, with allowance for the operation of appropriate ‘control mechanisms’. In those two cases, the result was to sustain the existence of a duty of care.
Kirby J:
“[259] The foregoing analysis brings me to the third (of the three options identified by his Honour in para 247 of his reasons) … It was expressed in my reasons in Pyrenees Shire Council v Day . As an approach or methodology for deciding whether a legal duty of care in negligence exists, I suggested that the decision-maker must ask three questions:
1. Was it reasonably foreseeable to the alleged wrongdoer that particular conduct or an omission on its part would be likely to cause harm to persons who have suffered damage or a person in the same position?
2. Does there exist between the alleged wrongdoer and such a person a relationship characterised by the law as one of ‘proximity’ or ‘neighbourhood’?
3. If so, is it fair, just and reasonable that the law should impose a duty of a given scope upon the alleged wrongdoer for the benefit of such a person?
[269] Even in England, since Hedley Byrne , an increasing number of judges have begun to reconceptualise negligence claims involving pure economic loss in terms of the general approach established by Caparo which I followed in Pyrenees . Thus in Spring v Guardian Assurance Plc Lord Lowry considered the question of whether a legal duty of care existed in negligence in that case by reference to the foreseeability and proximity tests. He then rejected the defendant’s argument that public policy required that recovery be denied:
‘This argument falls to be considered on the assumption that, but for the overriding effect of public policy, a plaintiff who is in the necessary proximate relation to a defendant will be entitled to succeed in negligence if he proves his case. To assess the validity of the argument entails not the resolution of a point of law but a balancing of moral and practical arguments. This exercise could no doubt produce different answers but, for my own part, I come down decisively on the side of the plaintiff’.
[288] In this area of the law, there has been a candour about the influence of legal policy which surprises some commentators, and even some judges, used to the pretence that the law provides for every problem a simple rule yielding an unarguable outcome. In this field of negligence law, at least, it does not. This is not the time to return to pretended classifications, narrow ‘exceptions’, newly invented ‘principles’ or rules derived from the apparent justice of a hard case, or unconceptual categories. The law of negligence in cases of claims for pure economic loss is completely unsatisfactory. This court’s duty is not to search for more ‘rules’ which will last a moment but fail to afford more than fleeting and particular guidance as new and different circumstances present themselves for decision. Our duty is to afford an approach or methodology which is universal to the tort of negligence and appropriate to the particular sub-category of negligence where the breach in question has occasioned pure economic loss. Only the Caparo formulation achieves that goal. We should adopt it. In doing so we will be taking no bold step. The methodology or its variants are, as I have shown, already applied in England, New Zealand and Canada - the countries of the common law whose legal systems most closely approximate that of Australia. Striking out with our own new ‘principles’ is in my view quite the wrong way to go. It is doomed to fail.”
Hayne J:
“[333] It is because of the lack of definition of terms like ‘proximity’ and ‘fairness’ that it has been said that the law in this area should develop incrementally. And so it must for as long as no unifying principle emerges. But that is far from saying that the law should develop without explicit recognition of the factors that are considered important in deciding whether there is a duty to take care to avoid pure economic loss. The identification of those factors is essential to any ordered development of the law in this area. In particular, if the matter were to be described in terms of whether to impose a duty would be ‘fair, just and reasonable’ it is essential to identify what are the factors that lead to the application of these epithets. Without that identification the words state no principle, only a qualitative description of the intended result of any and every application of law.
334 It is not enough to say that compensating those who are injured, deterring wrongdoing or spreading loss are values that are reflected in the law of negligence. They may be. But these do not assist in deciding whether a duty of care exists. They do not assist because each of them is a corollary of a finding that a duty does exist and none, therefore, helps to say whether a duty should be found to exist. Equally, references to the possibility that there are many persons in the same position as a particular plaintiff, or that the losses sustained by a plaintiff and others in like case are very large, do not help any more than do references to floodgates or the like.
[335]As I have said, the search for a control mechanism in addition to foreseeability is driven by at least two considerations - the desire to avoid indeterminate liability and the concern not to establish a rule that will render ‘ordinary’ business conduct tortious. If those are the concerns, then the criterion or criteria devised by the courts should address them directly rather than obscure their significance behind expressions such as ‘fair, just and reasonable’. It may be that there are additional considerations that may have to be taken into account as this area of law develops but for present purposes the two that I have mentioned are critical: whether the liability is indeterminate and whether the liability is consistent with basic assumptions about the economy in which the conduct takes place.”
Callinan J:
“[402] The cases subsequent to Caltex in this country show that all judges are united in their opinions that, for policy reasons, there is a need for a control mechanism to limit the availability of relief for pure economic loss so that commerce, providers of services, courts and society generally will not have to bear the burden and uncertainty of incalculable claims by a mass of people whose identity or very existence may be unknown to the defendant. It is not surprising, having regard to the different factual situations in which pure economic loss has been suffered and will no doubt be suffered in the future, and the frank judicial acknowledgments that have been made of the relevance of public policy and social issues, that the principles governing or controlling the mechanisms to limit liability have not always been stated identically.
[404] In her essay ‘Duty of Care Factors: a Selection from the Judicial Menus’, Professor Stapleton discusses some of the difficulties which have confronted the courts in trying to find, and express one clear principle which judges may readily apply in cases of pure economic loss. There is much I think to commend her view that:
‘while the listing of these judicial menus of sound factors relevant to the duty issue help unmask the substantive determinations being made by judges in this field, they cannot operate as some sort of mechanical guide as to how a novel case will be decided in the future … (A)t the end of the day, even if judges agree on the relevant factors to be weighed in the individual case, different judges may well place different weight on competing factors and do so quite reasonably.’
It should be made clear, however, that the determination of a claim for pure economic loss is not a merely discretionary matter; it requires the application of the principles stated in Caltex and the subsequent cases in this court to the various factual situations as they arise in the courts.
[405] And it must be accepted that this is an area of the law in which the courts should move incrementally and very cautiously indeed. It is not yet possible to identify a bright line of demarcation between those cases of pure economic loss in which damages are recoverable and those in which they are not. The law is still developing in the somewhat piecemeal fashion that Stephen J predicted in Caltex :
‘As the body of precedent accumulates some general area of demarcation between what is and is not a sufficient degree of proximity in any particular class of case of pure economic loss will no doubt emerge; but its emergence neither can be, nor should it be, other than as a reflection of the piecemeal conclusions arrived at in precedent cases.’
[406] I turn now to a consideration of the factors which in combination I think relevant in this case and which establish a sufficient degree of proximity, foreseeability, a special relationship, determinacy of a relatively small class, a large measure of control on the part of the respondent, and special circumstances justifying the compensation of the appellants for their losses.”
21 The plaintiffs’ claim in this regard was pursued upon the basis that the existence of a joint venture, or partnership, between the parties, gave rise to a fiduciary duty on the part of the defendant, requiring the utmost candour and honesty on his part in his dealings with them. This, it was submitted, extended to any statements made in relation to the venture, to the disclosure of any adverse circumstances or of any change in relation to important information concerning the viability of the venture, that came to light; and to any abuse of his position so as to acquire a personal gain (other than proper payment for services rendered in relation to the construction of the units). 22 More specifically, it was submitted that the duty resting upon the defendant was one: · to act bona fide in the interest of the plaintiffs as a whole; · to exercise his powers as a joint venture partner for the purpose for which they were conferred and not for any collateral or improper purpose; · to avoid being placed in a position of conflict of interest; · to disclose to the joint venture partners the costs of construction and any variation therefrom during the progress of construction; · to disclose to the joint venture partners variations to the estimated total sales value of home units. 23 The breach of this duty arose, so it was submitted, in not disclosing the Burgess and Jaye valuation of November 1989 to the plaintiffs, and in pointing out the differences that it revealed in the construction costs and sales values that had previously been advised to them. The exercise of the defendant’s power in remaining silent in this regard, it was submitted, was for a collateral or improper purpose, in that it permitted him, or the company of which he was the owner and controller, to receive the wages and the percentage of construction costs that were generated once the venture continued (and which would not have been earned had the valuation been disclosed). 24 In support of the submission that the defendant stood in a fiduciary relationship to the plaintiffs and owed the duties outlined above, reliance was placed on the judgment of Einstein J in Schipp v Cameron and Ors 9 July 1998 unreported, at paras 695 to 718. There his Honour applied a number of observations in the authorities, pertinent to situations where the parties had treated together, both before and after entering into a joint business relationship. They included the observations of Mason J in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96-97:
Fiduciary Relationship
25 As Brennan J put it in Wik Peoples v Queensland (1996) 187 CLR 1 at 95 to 96, to establish a fiduciary duty:
“The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf Phipps v Boardman) viz, trustee and beneficiary agent, and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.”
26 In United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1, Mason, Brennan and Deane JJ observed, in their joint judgment, at 11:
“It is necessary to identify some action or function the doing or performance of which attracts the supposed fiduciary duty to be observed. The doing of the action or the performance of the function must be capable of affecting the interests of the beneficiary and the fiduciary must have so acted that it is reasonable for the beneficiary to believe and expect that the fiduciary will act in the interests of the beneficiary (or, in the case of a partnership or joint venture, in the common interest of the beneficiary and fiduciary to the exclusion of the interest of any other person or the separate interest of the beneficiary.”
27 It was the conclusion of Einstein J, in Schipp at par 707, with which I respectfully agree, that:
“…whether or not the relationship between joint venturers is fiduciary will depend upon the form which the particular joint venture takes and upon the content of the obligations which the parties to it have undertaken. If the joint venture takes the form of a partnership, the fact that it is confined to one joint undertaking as distinct from being a continuing relationship will not prevent the relationship between the joint venturers from being a fiduciary one. In such a case, the joint venturers will be under fiduciary duties to one another, including fiduciary duties in relation to property the subject of the joint venture, which are the ordinary incidents of the partnership relationship, though those fiduciary duties will be moulded to the character of the particular relationship: see, generally, Birtchnell v Equity Trustees, Executors Agency Co. Ltd (1929) 42 CLR 384 at pp 407-409.”
Their Honours continued, at 12:
“A fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangement between them. In particular, a fiduciary relationship with attendant fiduciary obligations may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled. Indeed, in such circumstances, the mutual confidence and trust which underlie most consensual fiduciary relationships are likely to be more readily apparent than in the case where mutual rights and obligations have been expressly defined in some formal agreement. Likewise, the relationship between prospective partners or participants in a proposed partnership to carry out a single joint undertaking or endeavour will ordinary be fiduciary if the prospective partners have reached an informal arrangement to assume such a relationship and have proceeded to take steps involved in its establishment or implementation.
Dawson J, in the same case, said, at 16:
“Although the relationship between participants in a joint venture which is not a partnership will be governed by the particular contract rather than extrinsic principles of law, the relationship may nevertheless be a fiduciary one if the necessary confidence is reposed by the participants in one another. Of course, in a partnership the parties are agents for each other and this may constitute a separate reason for the fiduciary character of a partnership. There may be no such agency between participants in a joint venture, but, as Dixon J pointed out in Birtchnell v Equity Trustees, Executors & Agency Co. Ltd even in a partnership it is really the mutual confidence between partners which imposes fiduciary duties upon them and the same confidence may, in appropriate circumstances, be found to exist between participants in a joint venture.
The only other thing which I wish to add is that in my view it is quite clear that a fiduciary relationship may arise during negotiations for a partnership or, for that matter, a joint venture, before any partnership or joint venture agreement has been finally concluded if the parties have acted upon the proposed agreement as they had in this case. Whilst a concluded agreement may establish a relationship of confidence, it is nevertheless the relationship itself which gives rise to fiduciary obligations. That relationship may arise from the circumstances leading to the final agreement as much as from the fact of final agreement itself.”
28 The present case, upon the facts outline above, is such a case in my view. However, even if I am incorrect in concluding that it was an arrangement analogous to a partnership, then I am satisfied that the mutual trust and confidence which the parties placed in each other, and their commitment to act in the joint interest of each other in the joint venture, were such as to give rise to a fiduciary relationship. 29 The contrary was not seriously argued by the defendant, and I will not spend any further time on this aspect of the case. I am satisfied that a fiduciary relationship did exist, giving rise to duties in the terms of the first three of those identified by the plaintiffs, as set out above. To the question of any breach of those duties, I will return. In that regard, the fourth and fifth items identified seem to me to be incidents of potential breach rather than duties themselves.
“The principle appears to be that a Court will find that a fiduciary relationship existed between the parties to a joint venture when it is analogous to a partnership”.
So it was that in United Dominion Corporation a joint venture agreement for the development of a parcel of land was held analogous to a partnership, and that the relationship between the parties was fiduciary in character.
30 The plaintiffs conceded that this head of claim was out of time, and it was not pursued.
Fair Trading Act 1987
31 Evidence was given by the plaintiffs and by the defendant as to the circumstances surrounding the creation of the joint venture, and concerning the disclosure by the defendant to the plaintiffs of the cost of construction of the units. This evidence was very much in dispute, and upon it the plaintiffs’ claims critically turn.
THE MATTERS FACTUALLY IN DISPUTE
32 The second plaintiff said that after he had obtained some quotations for the construction of the units, he asked the defendant, for whom he had done some kitchen installation work, whether he was interested in quoting on the job. The defendant’s initial response was negative, but some weeks later he phoned asking for a copy of the plans, and said that he might change his mind. The defendant, according to him, said that he would come back to Wollongong one weekend and look around at the units that were being built in the area. 33 A week or two later, the second plaintiff said, the defendant phoned him, said that he had looked around at some units with the agents, and was interested in the project. Arrangements were made for a weekend meeting. On the Friday night they met in the defendant’s motel, where a decision was made for a meeting over dinner the following night, (16 September 1989) at the City Pacific International Restaurant, with other family members. According to him there was no site inspection that night. 34 It was the evidence of each of the plaintiffs that this meeting proceeded as a dinner meeting. On their version there were present also the defendant’s wife, and the first plaintiffs’ son. They said that, at this meeting, they showed the defendant their plans for the units, along with the Development and Building Approvals, and advised that they had received three verbal quotes, namely from Arnold Hanson for $1.45m, Bill Bundis of Carrington Constructions for $1.5m, and Burnshore Constructions for $1.4m. (according to the first plaintiff) or $1.45m (according to the second plaintiff). 35 They said that the defendant advised them that he could build the units cheaper, and indicated that he would make some inquiries with local agents as to the going price for comparable units. In response to the defendant’s request, the plaintiff said that her costs to that point were $204,000 and that she had borrowed $180,000. It was the second plaintiffs’ account that the defendant said, at this meeting, that he would think about entering into a partnership to build the units. There was no commitment by him at that stage, they conceded. 36 In two respects, this account was accepted to be incorrect in that the Building Approval had yet to be issued, and the plaintiffs’ outgoings were not at that point crystallised at $204,000. 37 The following day, the plaintiffs said, they had a further conversation with the defendant, at the factory of the first plaintiff, in the course of which he confirmed his interest in the project, and said that he would work out the construction costs. The first plaintiff said to him that the units in contemplation had to be luxury units, with quality inclusions - a requirement the defendant said that he could more than keep. 38 The second plaintiff said that, about a week later, the defendant phoned him, stated that he thought a partnership was a good idea, and asked him to book a restaurant and a motel for a further meeting. 39 This meeting, (on 23 September 1989) was held over dinner at the Elsinor Travel Lodge, and was attended by the three of them, along with the defendant’s wife, his three children, and two others, John Sofianopoulos and Rosie Tsesmetzis. In the course of discussions that night, they said that the defendant advised them that the venture was good, that he estimated the building costs to be roughly $1.24m, that the cost of the required finance including the existing loan, would be in the order of $380,000, and that he expected to be able to squeeze 5 to 10 per cent off the building costs because there was not much work around. Additionally, he said that he had checked the worth of the units and expected that they could be sold for between $180,000 and $300,000 with the penthouse bringing about $420,000, thereby achieving total sales of $2.4m. These prices they said were noted on a piece of paper shown to them. The plaintiffs added that the defendant said, during this dinner, that the units could be sold off the plan. Mr. Sofianopoulos suggested making a model for this purpose. 40 According to the first plaintiff, the defendant also said at this meeting:
Pre agreement meetings
41 In an earlier affidavit, filed in the winding up proceedings, the first plaintiff had attributed a slightly different conversation to the defendant this day along the lines that he said:
“I guarantee if you go with me that we will each make $150,000 and anything up to $260,000; we’ll have to form a company so we will become equal shareholders and you will have to transfer the land into that company, whatever you spent to now I’ll put in half of that so [we] have equal shares of a third each.”
She said that she informed the defendant that she had put in $204,000 for herself and for her brother, and as a consequence he said that he would put in $102,000. She added that the defendant said that he had been building for many years, that he could get references from people who could recommend his work, and that he had just completed six units in Mittagong.
42 The first plaintiff said that the cost of construction was the most critical aspect of the venture, and determinative of whether it would go ahead. The quotes that had been obtained by the second plaintiff were too high to make it a profitable proposition, the land costs being assessed by the plaintiffs at $380,000, the interest cost to finance construction being assessed at $200,000, and the total sales value assessed at $2.2m. The partnership she said would not have proceeded had the construction costs not been as agreed with the defendant. The sum of $1.24m estimated by him included, on her understanding, the wages of the defendant as well as any commission. 43 The second plaintiff similarly said that he understood the lump sum cost of construction to have been $1.2m. He affirmed that he would not have entered into a partnership with the defendant, had the total costs of building not been agreed. 44 The defendant did not accept the plaintiffs’ version of these preliminary discussions, including the introductory conversation deposed to by the second plaintiff, as well as the events that the plaintiffs described as having occurred at the City Pacific International and the Elsinor Motor Lodge. 45 He acknowledged that at the time of the alleged meetings he was the managing director of BCE, which traded as a builder, and that he held the degree of Bachelor of Civil Engineering, although he had never practised as such. He held a gold licence issued by the Department of Fair Trading, and apart from working on private homes, he had been involved in one home unit project at Mittagong. This was a current project in which he was a joint venturer with a real estate agent, Don Ciccone. He acknowledged that he had been looking around for another such project in the Gosford or Wollongong areas, and that he had adopted for this purpose a rule of thumb assessment of the construction costs for town houses of $6,000 per square. 46 According to him, he first heard of the project in September 1989, when the second plaintiff phoned him, informing him of it, and asking whether he was interested. His reply was in the affirmative. He said that he would go down to Wollongong to see the second plaintiff and his sister. Some time later he phoned the second plaintiff and suggested they meet to talk about the project over lunch. 47 On 13 September, he made a reservation for his wife and himself at the City Pacific International Hotel, for this purpose. On Friday 15 September, they drove down to Wollongong and checked into the hotel. That evening he said that the second plaintiff picked him up, drove him to the site, and then onto the first plaintiffs’ factory, arriving there at about 11pm. On the way he said, the second defendant pointed out some units, and mentioned that units at North Bay and Sorrento were selling for $300,000 each. 48 At the factory, he said that the first plaintiff showed him some preliminary drawings. He expressed interest in building the units, and asked whether the plaintiffs wanted a lump sum contract, or hourly rate, or day labour. He said that his rates were about $50.00 an hour plus 10%. 49 When the first plaintiff asked him how much it was going to cost, he said that he did not know and asked in turn how many squares were involved. The first plaintiff replied that the units were about 10 square each, and asked whether it would cost $1m. He replied that he did not know. The second plaintiff, however, denied that there was any meeting at the factory of the first plaintiff this night, or any conversation along the lines to which the defendant deposed. 50 On Saturday 16 September 1989, the defendant said that he and his wife met with the plaintiffs over lunch at the City Pacific International. According to him the first plaintiff asked “Now you have seen the plans for the units, do you think it is a good proposal?”, to which he replied “It seems like a good proposal. Good luck with it.” 51 This was a somewhat curious response in the light of his professed interest, and his subsequent activity as recorded in his diary. For example, his diary has entries for 18 September 1999: “Ring Wollongong re computer printout, zoning plans”; and for 21 September 1989, “Ring Jimmy re pick up plans from Council … and copies of plans”. The defendant acknowledged placing these inquiries and, in particular, asking the second plaintiff to pick up zoning plans from the Council, and inquiring whether the first plaintiff had copies of the plans which she had said she would get for him. Moreover on 19 September he made arrangements for accommodation at the Dapto Inn for Saturday 23 September. 52 In the week commencing 18 September 1989, he said that the first plaintiff informed him that she was having trouble financing the project, and asked whether he could do so. He replied in the negative, but confirmed that he would be interested in becoming a partner. He said that he could not give an answer until he had “checked things”. 53 On Saturday 23 September 1989, he said that having travelled to Wollongong the previous night, he rang a real estate agent, Paul Dignam, and inquired as to the sale price of two bedroom units. He went to the factory of the first plaintiff, where he picked up some drawings, and then made further inquiry of Mr. Dignam and of Ray White Real Estate, as to sale prices. He noted some prices in his diary for second floor units in the sums of $115,000 and $103,000, which he obtained either from the agents, for from the newspaper. 54 He agreed that, on that evening of 23 September, he and his wife, who was a director and shareholder of BCE and with whom he regularly discussed business affairs, met the plaintiffs for dinner at the Elsinor Motor Lodge. This he said, notwithstanding the activities earlier that day, was a purely social occasion, at which the project was not discussed in any detail. To this stage, he had not seen any detailed plans, and had not made up any quote or estimated a building cost. Because he was fully occupied on the Mittagong units and was about to start a new project at Roseville, he said that he was unable to give any more time or thought to the project. 55 He denied being informed that the plaintiffs had already received three quotes, and said that the first he heard of them was when he read the first plaintiffs’ affidavit. It follows that he denied saying, at the City Pacific International meeting, that he could do the job cheaper. He also denied that the first plaintiff said that her expenses to that point were $204,000. 56 The defendant similarly denied that the parties had any conversation, at the first plaintiffs’ sewing factory, on the day after the City Pacific International meeting, or subsequently at the Elsinor Travel Lodge along the lines deposed to by the plaintiffs. He denied that, at various subsequent times, he confirmed or repeated, as the first plaintiff suggested, that the construction costs would be in the order of $1.24m, which he expected to cut by 5 to 10 per cent, or by some equivalent monetary amount. 57 The defendant also denied having said to the plaintiffs at the Elsinor Travel Lodge, or at any time, that they would “each make $150,000 and anything up to $260,000” from the units. However, it may be noted that the diary of the ANZ bank manager of 28 August 1991 records him saying that the profit he expected was “around $200K”. This the defendant suggested was an error of interpretation by the bank.
“I have done my work Sophie. It is a very good project. I think it should cost just over one million dollars to build. We should get just over $200,000 out of the venture”.
The first plaintiff sought to reconcile the apparent discrepancy between the two versions on the basis that, with five to ten percent cut off, the cost would be “just over $1m.”
Further investigation of the project
58 The defendant said that the first plaintiff asked him to meet the financier (Mercantile Credits), the architect (Lance Peckman) and the engineer (Reno from Sherston & Associates), on Wednesday 4 October 1989, in Wollongong. His diary noted such a meeting but he could not recall whether it took place. 59 On 9 October his diary noted “Ring Sophie re plans ready”. On 10 October, he said he called the first plaintiff again inquiring about the plans. On 12 October his diary noted “plans for Wollongong should be here today”. On 18 October, he said that he phoned the first plaintiff to arrange a meeting for Monday 23 October or Tuesday 24 October, to finalise an agreement in principle for the building of the units. Before this call he said that he had informed her that he was still happy to build the units for an hourly rate of $50 plus 7.5% of the cost of construction. 60 On 23 October, he said (in his affidavit) that he went to the site where he inspected the test bores that the engineer was making, before going on to Mercantile Credits to drop off a balance sheet for BCE, and then to Lance Peckman to pick up copies of the latest plans. After doing these things, he said that he met the plaintiffs at the factory. His diary note records, “go to Sophie preparation contracts, incl. Sep. agreement wages etc.”, but beyond this he had no recollection of what was discussed. 61 In his evidence at the trial he was somewhat uncertain as to whether the various events recorded in his diary occurred, in fact, on the days noted, or in some cases at all, or whether they were merely notes of matters that were planned. 62 On 26 October, he said (again, in his affidavit) that he returned to the Corrimal site and inspected the test bores. He then went to the office of Mercantile Credits, where he was asked to provide another set of plans. He collected them from Lance Peckman and returned them to Mercantile Credits. He also met with the first plaintiff, but did not provide any details of the meeting. Somewhat curiously, he said that it was his recollection that the events recorded in his diary for 23 October, may have occurred on 26 October, even though he had earlier asserted the contrary. Perhaps not too much turns upon this beyond noting that he did meet with Mercantile Credits, the engineers, the architect and the plaintiffs this week. 63 On 29 October, he said that he returned to Wollongong, and as noted in his diary obtained a copy of the plans from the plaintiff, took some levels at the site, assessed the demolition of the cottages and the clearing of the site, wrote out on a piece of paper a deal with the plaintiffs, and possibly on this day took the financial statements to Mercantile Credits which he had earlier stated were taken to it on 23 October. 64 On 29 October, he said that he obtained the plans from the first plaintiff. On 1 November he said that he discussed the visitors parking layout with the Council, and spoke to the plaintiffs’ solicitor about the consolidation of the site and its mortgage to Mercantile Credits. 65 During this month he said that the first plaintiff phoned him and said that as soon as he was ready they would like him to get going on the project. 66 Between 2 and 13 November 1989, he said that he made phone calls and visits, concerning the project, to or with the plaintiffs’ solicitors, the engineer, the Council, Mercantile Credits, and an alternative financier. He also placed an advertisement in the local newspaper for demolition tenders.
67 On 13 November 1989, the defendant said that he prepared the letter of agreement which was signed on the following day at the factory of the second plaintiff, and witnessed by an employee of the latter. It was his evidence that they each approved of the agreement, under which BCE was to construct the units at the rate of $50 per hour plus 7.5% of the costs of construction. There were several discussions concerning these rates, he said, before the agreement was prepared and signed. Once the agreement was signed he said that the he felt confident that he had won the job and could go ahead in anticipation of securing the finance. 68 Thereafter he said that he had various further discussions with Mercantile Credits, the engineer, the architect, the Council, the plaintiffs, their Solicitors, their accountants, the valuer and others. 69 The plaintiffs acknowledged that the document signed on 14 November recorded the basis upon which BCE was to build the units, but said that they took it for granted that the defendant’s wages were included in the $1.24m which they understood to be the total costs of construction. No explanation was provided, if that was the case, as to why the letter of agreement did not simply note a cost of $1.24m.
Agreement of 14 November 1989
70 The next significant event prior to execution of the loan documents, was the preparation by Burgess & Jaye of the valuation of the construction costs and sales projections dated 28 November 1989. The defendant said that this had been requested by Mr. McLaughlin of Mercantile Credits at a meeting attended by him and by the first plaintiff on 13 November 1989. According to him, the first plaintiff asked him to organise the valuation with Mr. Burgess. This led to him contacting Mr. Burgess on 15 November and meeting with him on 23 November, a date against which his diary records “12.00 Malcolm Burgess Tues valuation to G. Smart”. On 28 November, his diary notes “go to Malcolm Burgess re valuation”. On 30 November there is an entry “10.00. Ed Smart at Wollongong, valuation by Malcolm”. 71 The first plaintiff admitted meeting Mr. McLaughlin, with the defendant, at Mercantile Credits. Although initially she said, in cross examination, that she recalled him saying something to the effect that they would need to get a valuation, later she said that she could not recall the details of the discussion. 72 It was the defendant’s evidence that he discussed the valuation with the plaintiffs. He said that when he asked them what they thought of the sales figures, the first plaintiff replied “I think they’re a bit low”. In particular, he said that the plaintiffs considered Mr. Burgess’ valuation of the penthouse at $325,000 as being too low and suggested that they put $600,000 on it. It was later offered to Mrs. Innes at this sum, but reduced after negotiation to $470,000. 73 The diary contains no entry that would expressly support the defendant’s evidence in this regard. It does, however, contain entries for 23 November: “discussion with Sofie re shelf company”; for 24 November: “ring Sofie re accountant shelf company”; for 28 November: “ring Sophie and Jim … ring Pat Quinn”; for 29 November: ”go to Sophie, Jimmy contract prepared, shelf company, financial statements”; and for 1 December: “go to Wollongong 9.00am. Sophie financial statements, water diagram 10.00am. Ed. Smart - valuation by Malcolm”. 74 The plaintiffs denied seeing the valuation or being aware, at any time before May 1998, that the construction costs had been valued by Mr. Burgess at $1.45m. The first plaintiff said that had she seen the valuation she would not have gone ahead with the project. 75 Mr. Burgess said that the valuation was requested by the defendant, with whom he discussed some modifications to the plans. He did not have any dealings with the plaintiffs in relation to this valuation. 76 Although no invoice from Mr. Burgess for this valuation was placed into evidence, it would seem that it was paid for by Emery Park, being part of a sum of $1,050 paid on 11 May 1990. The cheque butt suggests that this sum represented payments for three valuations in sums of $675, $250 and $125; the larger of which the defendant suggested related to the November valuation. Three valuations had in fact been prepared by Burgess & Jaye to that point, namely the two relating to the subject lands which had been prepared in support of the sale to Emery Park, and the November valuation. 77 Although the defendant seemed in his evidence to have had little recollection of the terms of this valuation, he was prepared to accept, as one would think he must have done, that if the total sales value was $2m; and that, to a construction cost of $1.4m, there had to be added a land cost of $325,000, interest of $200,000 and the costs of the sale of the units, the venture would not have been profitable. He further acknowledged that had the venture not proceeded, then he (or BCE) would not have received the $2,000 per week or the commission of 7.5% on the building costs.
Burgess & Jaye valuation of 28 November 1989
78 By January 1990, the defendant said that he had finished the Mittagong and Roseville jobs, and advised the first plaintiff that, once finance was approved, he would get on with the job. To that point he said that the only costs discussions, that had been undertaken with the plaintiffs, were general discussions about the rates of the tradesmen he was considering using, or rough estimates of the costs of specific parts of the building, such as the kitchens. He added that before this he neither had the opportunity, or the plans, to work out the full construction costs. 79 He said that thereafter he spoke on several occasions to Mr. Smart of Mercantile Credits, and in the meantime got on with preparations for the project. During the month of January, he said that the first plaintiff said to him, “If the job takes off we will pay you your wages as agreed until the job starts.” He did not take on any other work between January and June 1990, but busied himself with obtaining quotations, working up the drawings, speaking to the Council, the architect and the engineer, and negotiating a sale of the penthouse to Daphne Innes, who he said was introduced to him by the first plaintiff. He said that the first plaintiff came to the site office almost daily and discussed these matters with him. He acknowledged that he had not kept time sheets, or diary entries for those activities. 80 It was only after he received a copy of the Building Approval in February 1990, and the more detailed drawings which had accompanied it, that he could calculate a rough estimate of the construction costs. At about this time, he said that he informed the first plaintiff, “I think the costs are going to be about $1.4m to $1.45m, plus or minus 10%”. Upon his case this was the first time that he had given any indicative costing for the units. The plaintiffs each denied that there was any such conversation, either then or at any other time. It was their case that the defendant had given the price of $1.24m back in September 1989, and that this was the agreed construction cost. 81 Between January and June 1990, he said that the three of them had numerous discussions about the prices that might be obtained for the units, as well as discussions with several real estate agents, although he could not recall whether any overall valuation was given. These discussions also extended, he said, to the timing of the sales so as to pay off the loan. It was arising out of these discussions, he suggested, that the agreement of 4 July 1990 was prepared by Mr. Quinn and signed by the parties. 82 As events turned out, notwithstanding their attempts to sell units off the plan, only the penthouse and unit 3 were sold during the construction phase, the penthouse in May 1990, and unit 3 in May 1991. According to the defendant the latter sale was agreed to even though the offer was much lower than the price they wanted, because of their desire to get the sales under way. 83 In the middle of March 1990, the defendant said that he contemplated moving off the site to take on a development in the Central Coast, as the loan approval had yet to materialise. The first plaintiff, he said, asked him not to go away. Thereafter he had various discussions with Mercantile Credits concerning the loan finance. 84 The first plaintiff agreed that between October 1989 and May 1990, there were several discussions about the project, and that from about January 1990 the defendant moved into one of the houses on the site. She said that, in the course of these conversations the defendant repeated that the construction costs would be $1.24m and that they should be able to sell the units for $2m.
Work undertaken between January and May 1990.
85 On 20 April 1990, the defendant said that he informed the plaintiffs that Mercantile Credits required a mortgage over his Belmore home. Additionally, he said that he advised them of its requirement for a lump sum building contract. There was no diary entry to support any such discussion on or about this date. 86 On 17 May 1990, the defendant said that he took a form of building contract, in the Housing Industries Association form, to Mercantile Credits. This contract he said did not represent the true agreement with him, that being the agreement recorded in the letter of agreement of 14 November 1989. It was prepared, he said, only because Mercantile Credits insisted on having a lump sum contract. Before it was signed by the parties in the office of Mercantile Credits, (on 23 May 1990) he said that it was discussed with the plaintiffs. According to him he said that he thought they should put in the estimate of $1.45m which he had discussed with them earlier. The first plaintiff asked whether that meant they were “locked into that price?” to which he said “No. This is only for the finance purposes, our agreement is the one we signed in November and, as we’ve discussed before, materials and labour will be charged at cost.” This, he said, she accepted. 87 The plaintiffs denied, in their affidavits, any such conversation. During her cross examination the first plaintiff said that she did not remember actually signing the building agreement of 23 May 1990, but asserted that the figure of $1.63m which was ultimately borrowed was based upon a construction cost of $1.24m plus $200,000 interest, and $183,000 for the land, and not upon a construction cost of $1.45m plus interest. It was for that reason that there was no protest, she said, concerning the execution of this agreement. The second plaintiff similarly said that, although he had no specific recollection of signing the document, he understood, upon the basis of the previous discussions, that the $1.45m mentioned included the 1.24m construction costs and $200,000 for interest, and not a figure of $1.45 mentioned by the defendant in February 1990.
Building Agreement of 23 May 199088 In April 1990, the defendant arranged for the plaintiffs to meet at an accountants office to form a company in which they would be equal shareholders. Soon after they said they were informed by the defendant that each would need to put a further $25,000 into the project in order to get the loan. A little while later, they met at the office which the defendant had established. They were informed that Mercantile Credits required that they have available, by way of security for the interest on the loan, a sum of $210,000. The first plaintiff said that the defendant suggested that her share of this sum be borrowed from Daphne Innes, who was the proposed purchaser of the penthouse. He denied that this was the case, suggesting that it was her own initiative to approach Ms. Innes for a loan. 89 However the seed was sown, it is the fact that the first plaintiff borrowed $140,000 from Mrs. Innes, at an interest rate of 20% per annum. It was after this that the plaintiffs paid into Emery Park’s bank account the sum of $105,000, recorded as a deposit on 24 May 1990, of which $60,000 represented an advance from Ms. Innes, $20,000 was provided by the first plaintiff and $25,000 came from the second plaintiff.
Plaintiffs’ borrowings from Dorothy Innes
90 The defendant said that the 1st June 1990 agreement was signed following discussions with the plaintiffs as to the manner in which their contributions could be equalised. Initially he said it was decided that the plaintiffs would transfer the land as their contribution and that he would put in $102,230 in cash. However, Mr. Smart, he said, indicated that the parties needed to show that they had $280,000 available as working capital, in order to get a loan. He then made the calculations recorded in the June documents, including the credits in his favour for $70,000 and $53,976 mentioned above, and a credit in favour of the first plaintiff for $35,740 for interest paid out. 91 It was his account that when these documents were handed to the plaintiffs, at a meeting arranged about this time and read over, they said “that’s OK”. He added that before agreeing to offer his house as security for the loan, he had informed the plaintiffs of his wife’s opposition and of his own concerns. It was his suggestion, he said, that they view the arrangement as one under which Emery Park would nominally purchase the property and use it as security, and under which he and his wife would be nominally credited with the proceeds of sale upon which interest could be calculated at a commercial rate, so as to determine a fee for its use as security. He suggested that the use of his premises as a security was requested by the first plaintiff since neither she nor the second plaintiff had any property to offer. He also said that it was at her request that the valuation of 6 April 1990 of his home was obtained, inferentially so as to support the calculation. 92 The plaintiffs disputed the defendant’s version of this meeting. The first plaintiff said that, when the defendant explained the basis on which he had worked out the value of his contributions in kind at $70,000 and at $53,976, she protested that this was not fair, offered her father’s house as security (which he said Mercantile Credits would not accept because her father was not involved in the project), and asserted that he had not done any work to that point. She was sufficiently concerned, she said, to walk out of the meeting, but at a meeting arranged a few days later she accepted the calculations and signed the agreement of 1 June. She did this, she explained, because she was informed that Mercantile Credits had approved the loan, and because the defendant had said that he would not commence construction unless she signed. She also said that she realised that the land had been transferred to Emery Park, and that the project would be further delayed if she tried to reverse the transfer. 93 The second plaintiff similarly disputed the defendant’s account of the meeting, and confirmed that following a heated argument, his sister had walked out. The documents he also agreed were signed about a week after the date which they bore. The defendant denied that the first plaintiff walked out of this or any meeting, and also denied that the plaintiff had offered her father’s house as security.
1st June 1990 agreement
94 On 17 July 1990, the first plaintiff said that she paid a further $80,000 to the defendant, made up by cheques for $40,000 and cash in an equivalent amount, (made up of $50 notes). It is accepted by the defendant that $40,000 was paid into the bank account of Emery Park, on behalf of the plaintiffs, at this time. The payment of the remaining $40,000 in cash was, however, disputed by the defendant, who denied the receipt of any such sum. The first plaintiff said that this payment in cash was sourced to various withdrawals from her bank account and had been kept in a box in her home, since having cash gave her a feeling of security. 95 The withdrawals were identified as follows:
Contributions
96 Although cheque butts were tendered recording payments in these sums, only the sum of $5000 drawn on 23 February 1990, can now be matched with a withdrawal recorded in the bank pass sheets. The remaining relevant statements (pages 66, 67, 69 and 70) were not produced. It was said could not be located or recovered from the bank. It is of relevance, however, to note that the account operated for most of the period either barely in credit or overdrawn, that the withdrawal of $5,500 placed it into overdraft, and that at about the time of the alleged withdrawal of $12,500, a sum in that amount was in fact credited to the account. 97 There was no documentary record to support the receipt by the defendant of a cash payment of $40,000 at this time. The alleged cash cheque withdrawal of $12,500, was of considerable significance since the statements for February and March were available and did not record its presentation between at least 5 February 1990 and 20 March 1990, even though the first plaintiff said that it had been cashed immediately. The account had a debit balance of $68.74 at 20 March and the next available statement opened with a debit balance of $15,628.72, which could be consistent with the cheque having been presented between those dates. The position in relation to this alleged payment was not, however, assisted by the inability of the first plaintiff to show how the $40,000 that was in fact deposited to the bank account of Emery Park on 17 July 1990 was sourced, or to explain how the full $140,000 borrowed from Mrs. Innes was applied. 98 Although the plaintiffs initially pursued the allegation that the defendant received, and did not account for, this cash payment of $40,000, ultimately in their submissions in reply the claim was abandoned because of the difficulty in its proof. 99 It was not in issue that an account was effectively struck between the parties as at 1 June 1990 for their respective contributions, or that it was followed by subsequently agreed payments, so as to reflect the following position:
Date Cheque No Amount5/2/90 109932 $12,500
23/2/90 109944 5,000
24/4/90 316952 5,000
11/5/90 316964 5,500
18/5/90 316966 4,500
13/7/90 371586 9,320
$41,820
100 Upon an equalisation of the monies provided by the plaintiffs, it having been the case that the first plaintiff was effectively carrying the second plaintiff, their respective shares equated those of the defendant, viz
Sophia Papadopoulos1 June 1990 - one half of the agreed value of
the net (after loan) value of the land and
expenses in securing development
and building approval: $102,230
1 June 1990 - interest on moneys outlaid to date $35,740
24 May 1990 - deposit to bank account $80.000
17 July 1990 Deposit to bank account 40,000$257,970
Demetrios Tsesmetzis
1 June 1990`- one half of agreed value of the
net value of the land plus expenses $102,230
24 May 1990 Deposit to bank account 25,000
$127,230John Hristoforidis
1 June 1990 - fee for use of family home
as security $70,0001 June 1990 wages to date 53,976
24 May 1990 deposit to bank account 35,000
4 June 1990 “ “ 13,62417 July 1990 20,000
$ 192,600
101 The first plaintiff said that, at various stages during the demolition and construction phase, i.e. between July 1990 and July 1991, the defendant assured her that he was getting cheaper prices, observing at one point that he should be able to get$100,000 off his original quote of $1.24m. The second plaintiff said that he attended the site on a regular basis during the early stages of construction, upon which occasions he was assured that “things were going according to plan”. . Each Friday he attended at the defendant’s office, where he checked the invoices which had been entered up in pencil in an exercise book, (the yellow book) and initialled that book. By about March 1991, he said that the plaintiffs no longer inspected the invoices or signed the book. 102 The first plaintiff said that, at various times, she requested but was denied, access to the accounting records and supporting vouchers for the building work. She did see that a cash book was being kept, but said that the entries were in pencil. The only time, according to her, when she saw invoices was when they were presented to her with a cheque for her signature, the bank authority requiring two signatories for cheques drawn in amounts above $10,000. 103 The defendant denied withholding from the plaintiffs the records, and said that, from time to time, they saw the invoices and initialled the cash book kept for the project.
$257,970127,230
$385,200
One half each $192,600
The Construction and Sale Period
104 In May 1991, the second plaintiff said that he phoned the defendant and asked how much would be left over on completion of the job. The defendant said that they should have about $100,000 each. A week or two later, he was informed by the defendant that it was now only $70,000 each, as there were some bills for which he had not provided. The defendant thereafter proved evasive when the topic was raised, causing the second plaintiff to insist on seeing the books. The defendant at this stage produced a bundle of unpaid invoices which totalled about $51,000, and a bank statement which he recalled having a balance of $50,000. When the second plaintiff asked where was the $70,000 each was supposed to receive, the defendant said “I’ve got to go”. The defendant denied that there were any conversations along these lines. According to him, the only inquiry made by the second plaintiff was in May 1991, when he was asked by him whether he could take $5,000 out of the company, to which he replied in the negative. 105 The first plaintiff said that in June 1991, while on holiday in Greece, she telephoned the defendant, after receiving news from the second plaintiff of his conversation. She said that she had been informed by her brother that there was no money left. The defendant replied to the effect that her brother did not know what he was talking about, but said that he would phone her back on Monday, as it was 3am.when the call came through. This did not occur. When she phoned him again, she said that he hung up on her. The defendant denied that events unfolded in this way. Rather, he said that he had spoken to her brother and asked him to bring her up to date. 106 Upon her return to Australia the first plaintiff made an inspection of the units and then rang the defendant to complain of their state, and to ask him to bring down the books so that they could go through them together. According to her, he refused to produce them to her or to her accountant. Her threat of legal action was met with the response, according to her “You haven’t got enough money for one solicitor, I have enough for fifteen solicitors”. The defendant admitted that the first plaintiff rang him, on her return from Greece, and asked for the books. He said that he offered to go through them with her rather than hand them over. 107 When she went to the ANZ Bank to request copies of the bank statements for Emery Park, being the account into which monies drawn down from the loan were deposited, and from which progress payments were made, she discovered that the account was held with the Earlwood branch where the defendant banked, contrary to her belief that it had been opened at Wollongong. She also found that, without her knowledge, the account was overdrawn by about $35,000. 108 It was in consequence of these developments that the meeting of directors was requisitioned by her brother, at which the defendant was requested, but refused to produce the books. This he said occurred because he did not trust the plaintiffs. The resolutions that were “passed” this day, he said, were dealt with without any opportunity for debate, and led ultimately to Mr. Walter, the plaintiffs’ solicitor, telling him, “This meeting’s over. You’re out.” These events were followed, it was common ground, by the appointment of a receiver and manager, and ultimately of a liquidator, it having become apparent that the parties were in serious dispute over the project.
The venture unravels
109 The position in relation to Unit 3 is somewhat curious. Although the contract provided for a sale price of $220,000 reduced to $125,000 for early completion, the defendant said that the reduction was to $175,000 of which $50,000 was paid in cash. The memorandum of transfer recorded a sale price of $220,000 yet the letter from the agent advising of the sale mentioned a sale price of $175,000. The notice of transfer prepared by the solicitor for Emery Park recorded a sale price of $125,000. 110 If in fact the sale price was $220,000, of which $50,000 was received in cash, then $45,000 was not accounted for. If on the other hand the sale price was $175,000 of which $50,000 was received in cash, then there was no failure to account. 111 It was the evidence of the first plaintiff that the defendant said that he had negotiated the price down to $220,000 because $100,000 was to be paid in cash, a sum which he later said was to be paid “under the table” to him, at a time when he and the buyer did not want the plaintiffs present. Although she initially denied that there had been any conversation in relation to the requirement for a Council bond, ultimately she acknowledged that there had been such a discussion. 112 The second plaintiff gave a somewhat different account, in so far as he said that the defendant had informed him that he had sold Unit 3 for $220,000 for which a discount of $50,000 was given, and $50,000 was being received in cash. This sum, he acknowledged, the defendant said would be given to the Council as security for the strata title. 113 The defendant denied that there was any conversation along the lines of those deposed to by the first plaintiff. On the contrary, he said that he explained to her why the $50,000 was required and how it was used to obtain a bank guarantee to which she said “fine”. It was his evidence that the price for the unit, wrongly referred to in his first affidavit as Unit 1 (one of the 1992 sales) was $175,000, of which $50,000, he said, was provided in cash on settlement and then used to obtain the bank guarantee. This explanation must have been incorrect in that the bank deposit was made, and the guarantee was obtained, in May 1991, yet the sale was not settled until July. It was corrected in his May 1999 statement, in which he said that it was he who collected the $50,000 on exchange. In this document he asserted that the arrangement was discussed with the plaintiffs, so that Units 3 and 10 could be settled immediately upon completion of the works, thereby reducing the interest payable to Mercantile Credits. It was his evidence that it was the first plaintiff who had in fact made the suggestion that they ask for $50,000 to be paid on exchange, and that it be used to pay for the bond required by the Council. This the first plaintiff denied. 114 I observe that Unit 3 was a three bedroom ground floor unit. Had it been sold for $220,000 then it would have achieved a price equivalent to that for Unit 9, a three bedroom unit on the third floor, that was sold in August 1991 for $222,000. It would have been the third most expensive unit in the building. The first plaintiff however, said that she regarded the price as acceptable for a ground floor unit. 115 The documents do support the defendant’s account that the sum of $50,000 was used for a deposit in BCE’s name, against which a bank guarantee was obtained in favour of the Council, so as to secure release of the Strata Plan. They similarly support the subsequent application of those funds, and the interest earned, for the benefit of the Emery Park project. 116 Some concerns initially arose in relation to arrangements apparently being made for a purchase of land being effected partially for cash, and as to those moneys having been diverted from the vendor (Emery Park) to the builder (BCE). It does, however, appear from the transfer that the consideration was not understated so as to avoid stamp duty, that the monies were applied in the way outlined for the benefit of Emery Park, and that the transaction was so structured because the Bank required to deal with a customer it knew (BCE) in issuing its guarantee. While the documentation is inconsistent, and the transaction suspicious, in the absence of evidence from the purchaser as to the amount paid, I am not prepared to find that the defendant misappropriated, or failed to account for any portion of the proceeds of sale of the unit.
The sale of Unit 3
117 A curious feature, which has more relevance to credit than anything else, relates to a request made by the plaintiffs of the quantity surveyor, Tevor Hilaire in March 1992, to provide an estimate of the construction costs. The first plaintiff explained that this request was initiated by their solicitors, and led to her meeting Mr. Hilaire, with her brother, on the site. 118 It was Mr. Hilaire’s account, however, that they met at the Towradgi chicken shop and not on the site. Moreover, he said that the second plaintiff was introduced to him on 27 February 1992, as John Christo, rather than as Jim Tsesmetzis, the implication being, for reasons that are not readily apparent, that the second plaintiff was impersonating the defendant in their discussions. His recollection of this was based upon his practice of writing down the names of people immediately he met them. 119 Mr. Hilaire said that, during their first meeting, he was informed that they had a block of ten units that they were building, that they thought they had paid too much, and they wanted him to have a look at the plans and give them an idea of what the cost should have been. He performed some rough calculations and then said, based upon the drawings provided and industry rates, that the cost for construction during 1990/1991 was somewhere between $1.5m and $1,778,250. The first plaintiff, he said, replied “we received a quote of $1.45m”. His note does not bear this out entirely, the actual entry recording “quotes had been approx $1,450,000”, this being more consistent with the three verbal quotes which the second plaintiff had received than with a single quote in this sum from the defendant. It was Mr. Hilaire’s account that they then went to the site that night but were not allowed access. 120 On 13 March Mr. Hilaire said that he visited the site again, where he inspected three units. He then prepared a detailed estimate, after examining the engineers plans, in the sum of $1,635,797, which he said was delivered to the first plaintiff at the Towradgi chicken shop on about 19 March 1992. In a letter to her on 18 March, he recorded the adjustments for the changes that had been made during the works, which reduced the total costs by $53,237. This report he said complied with the request made by the plaintiffs for an estimate of the cost of the units as constructed. 121 On 24 March 199, he said that he met the first plaintiff and the man he thought to be Jim Christo at the office of Hackletons, where he was introduced to the solicitor Bruce Walter. He saw that the solicitor had the detailed cost estimate. Mr. Walter said to him, “This report is no good to us. We need you to give a revised report showing the reasonable construction costs to be less than $1,000,000 so that we can commence legal action against the builder.” 122 He refused to comply. Mr. Walter then said “Don’t worry. It will be six or eight months before anything happens. You can adjust your report then.” 123 When he said that he was not interested, he was asked to leave the room. Later he was told by Jim that he should leave, and that they would call him when they had sorted out some interim problems as the builder was their cousin. 124 He sent a letter, on the following day ,confirming his opinion that as a reasonable construction cost would be in excess of $1m, his company was not prepared to issue a report indicating a cost less than that sum. The terms in which this letter were written tends to support his evidence that he had been asked to provide a report estimating the construction costs in a sum less than $1m. 125 The plaintiffs denied this version of events, and suggested that Mr, Hilaire may have mistakenly assumed that he was dealing with John Christo and Mrs. Papadopoulos because those were the names shown on the plans which were provided to them. There is some force in this suggestion, since Mr. Hilaire acknowledged that he was not good with names, and the spelling Papadopolos in his hand, in the note of 27 February 1992, does appear in some of the plans. Additionally, it is the fact that the name he wrote on the note made on the first meeting was “Jim Christo”, not John Christo, and that in the note of his next meeting he did not record the surname of the solicitor, the entry being “Bruce? Solicitor” 126 The plaintiffs said that their concern with his valuation was that it did not value the works as they were actually constructed. They denied receiving his detailed report, although the first plaintiff accepted that she must have received one or other of the two letters that he sent to them on 18 March 1992. 127 There were some other differences between the accounts. For example, the first plaintiff asserted, although Mr. Hilaire denied, that they obtained access to the building on 27 February and then inspected one or two unfinished units. Mr. Hilaire said that they tried to gain access after the meeting at the chicken shop, but were told by an occupant to go away. Additionally, he disputed the first plaintiffs’ account that his claim for payment of his fees, was “settled”. He acknowledged however, that her application for time to pay the judgment debt by instalments led to an agreement before that application reached the Court. In that sense the claim was “settled”. 128 Somewhat unsurprisingly, each of the plaintiffs said that they did not remember the meeting at which Mr. Walters was present. Although not initially willing to acknowledge that she had received the detailed costs estimate referred to in the covering letter of 18 March, ultimately the first plaintiff agreed that it looked as though this document was returned by Mr. Walters to Mr. Hilaire upon her instructions, on 25 March 1992. It would follow that despite her denials, she must have received this document. Moreover, it is likely that it was against its receipt by her, that she drew the cheque for Mr. Hilaire’s fees, that was later stopped.
The Hilaire Cost Estimate
129 In relation to many of the matters in issue, evidence that might otherwise have been expected to be available was not called. For example:
Credit
130 A Jones v Dunkel inference is, in my view, properly to be drawn to the effect that this evidence, if called, would not have assisted those who might have been expected to proffer it. That, however, produces a somewhat neutral effect in relation to the September 1989 meetings. 131 The plaintiffs’ claims ultimately come down to a determination of whether they are to be believed in preference to the defendant, since it is they who bear the onus of proof. The case is one in which none of these three witnesses made a particularly favourable impression upon me. Each, I am satisfied, was determined to place the best face upon the various events and to reconstruct where memory was lacking. 132 The plaintiffs in particular were obviously very resentful that the venture had soured, and they were determined to pass the blame to the defendant, even though on the basis of the independent expert valuations, and taking into account all development, holding and sales costs, the true fact is that the venture was, at best, always very marginal. It was such that experience and expertise, well beyond that possessed by the parties, was required if a development on this site was to be profitable to any significant extent, and particularly to the extent which the plaintiffs said they had in mind. The defendant, however, was somewhat defensive, and it appeared to me, prepared to reconstruct where a real memory was lacking. 133 In relation to the plaintiffs, the following matters, it seems to me, rebounded to occasion serious doubt as to their credibility:
(a) The defendant’s wife was not called, nor were the relatives of the plaintiffs who were at the September 1989 meetings at the City Pacific International and Elsinor Motor Inn meetings.(b) The Bank pass sheets for the alleged cash withdrawals by the first plaintiff were not provided, and no explanation for their loss was provided.
( c) The purchaser, agent and/or solicitors acting on the sale of Unit 3 were not called, even though each could have established the correct price paid for that unit.
(d) None of the Mercantile Credits staff were called , nor were any of its internal documents concerning, for example, the building agreement and valuation, produced.
(e) Mr. Walters was not called in relation to the Hilaire valuation.
(f) The brother in law of the first plaintiff was not called, although she said that he was present when she handed over the $40,000 in cash.
134 Together, these matters cause me to prefer the evidence of the defendant where it is in conflict with the oral evidence of the plaintiffs. His evidence I find more likely to have fitted in with the manner in which the venture developed, and to a significant extent (but not wholly), to be consistent with his contemporary diary records. 135 Although the manner in which his contributions to the project were calculated were somewhat favourable to him, they clearly were accepted by the plaintiffs, as the documentation records. The circumstances in which the building contract was prepared were satisfactorily explained upon the basis that Mercantile Credits required a lump sum contract. The amount recorded reflected his evidence as to the estimate that he said that he provided, once he had the building plans, and was in a position to move onto this project. Its existence was not necessarily inconsistent with the actual costs plus agreement which the parties signed, so far as the lump sum was understood to be an estimate, and so far as the contract was provided to meet the lender’s needs. 136 So far as the plaintiffs sought to rely upon the “rule of thumb” calculation used by the defendant for the possible Gosford project, as lending credibility to their assertion that a figure of $1.24m was quoted, this is not borne out upon the figures. A rate of $6,000 per square equates to $645 per square metre. Applied to Mr. Burgess’ calculation of a total area of 2,150 square metres for the Corrimal project, the cost would be as follows:
(a) the acknowledged error in the account, to which each initially deposed, that at the first meeting in September 1989, they informed the defendant that the building application had been issued, and that their costs to date were $204,000;(b) the first plaintiff’s attempt to cling to that version when it was challenged in cross examination, which extended to an assertion that entries in the cash book were hers, when, self evidently, that could not have been true;
(c) the inherent improbability that by the time of the second meeting, the defendant would have made the calculations suggested without the benefit of building plans, or that he would have quoted a construction cost in the order of $1.24m, from which “5 to 10 per cent could be squeezed off”, in the face of external quotations each of in excess of $1.4m;
(d) the difference between the version given by the first plaintiff in these proceedings as to a cost being quoted in the region of $1.24m, and as to a return to each of them being promised in the order of between $150,000 and $260,000, compared with her affidavit in the winding up proceedings, where she said that the cost estimate given was “just over $1m”, without any suggestion of a five to 10 per cent reduction, and that the defendant said they should get “just over $200,000 out of the venture”;
(e) the inconsistencies between the alleged $1.24m quotation (and its alleged repetition), the cost plus agreement of 14 November 1989 that was entered into, and the lump sum building agreement provided to Mercantile Credits, which recorded a construction cost more in accordance with the external quotes, the valuer’s calculations, the quantity surveyor’s calculations and the actual construction costs;
(f) the somewhat hedged evidence given by the plaintiffs as to whether they saw the lump sum building contract, even though it bears their signatures;
(g) the similarly hedged evidence of the first plaintiff as to whether she was aware of the 28 November 1989 valuation, or whether she had been present in meetings with Mr. Smart of Mercantile Credits, at which the need for it was discussed;
(h) the inherent unlikelihood of the plaintiffs having gone ahead with the venture if the first plaintiff had been as troubled over the fairness of the arrangements proposed by the defendant concerning the calculation of their contributions to the point where, on her account, (denied by the defendant) she walked out of the meeting preceding the execution of the 1 June 1990 agreement, even though it was not too late, at that stage, for the venture to be stopped.
(i) the wholly unsatisfactory evidence of the first plaintiff concerning the $40,000 (in bank notes of $50) which she said she contributed in July 1990, and which was said to represent cash held at her home and withdrawn from her bank in instalments, between 5 February 1990 and 13 July 1990. The unexplained absence of the critical pass sheets, the state of the balance in that account, and the ultimate withdrawal of this claim, seriously undermine this party’s credibility, as does the withdrawal of her earlier claim that all of the monies paid by Emery Park to BCE in respect of the construction of the units was misappropriated by the defendant.
(j) the claim of the first plaintiff to the effect that the defendant misappropriated portion of the proceeds of the sale of Unit 3, and her eventual concession (despite earlier evidence to the contrary) that she had known of the manner in which the $50,000 was used, when viewed in the light of documentary records, the sale price for other units, and the Jones v Dunkel inference mentioned above.
(k) the first plaintiff’s reluctance to accept that Mr. Hilaire, an independent professional quantity surveyor, had in fact provided her with the detailed estimate of the costs of the building as constructed and her denial of his account as to the request made of him to produce a report showing a construction cost in the order of $1m, in the light of the contemporary records, which tend to show his account to have been correct.
CONCLUSIONS ON LIABILITY
137 One matter of concern I had related to the circumstance that the November valuation, on its face suggested that the venture was almost certainly bound to be unprofitable. The obvious question arises, if that was the case, why did the parties proceed with it? Is the answer that it was withheld from the plaintiffs? I am not persuaded that was the case. Rather, it seems to me, the answer lies in the evidence of the defendant, that the plaintiffs, most particularly the first plaintiff, who effectively carried the second plaintiff, took a bullish view of the likely sales values, an attitude that was borne out by the obvious expectations they had in this regard that show through their evidence. 138 Another matter of concern related to the bank diary as to the profit forecast, which on one view might lend support to the plaintiffs’ account of the profits that the defendant held out as anticipated. The answer, however, lies in the fact that this document was made two years after the September 1989 discussions, and hence is not corroborative of anything that had been held out at that time. Moreover, it is equivocal as to whether the defendant was speaking to the bank, of the profit to the venture as a whole or to the defendant alone, 139 In order to make out their claim in tort, the plaintiffs have to show that the defendant was negligent in any advice given concerning the construction costs and expected sales, for example in not making sufficient inquiries or investigations, and also that the estimates given were in fact those that they alleged he supplied; and/or that he negligently omitted to disclose the November 1989 valuation to them. 140 To make good the claim for breach of a fiduciary duty, they have to establish that the defendant failed to act in good faith in the supply of information to them concerning his estimate of the construction costs and sales values, and/or in withholding the November valuation, and/or in so acting generally in relation to the venture as to encourage them to go ahead with it, for the collateral purpose of enriching himself. 141 In the circumstances outlined above, I am not persuaded that there was any breach of the duty of care owed under general law, or of the fiduciary duty owed concerning either the advice given pre contract as to the construction costs or likely sales return, and profitability of the venture, or concerning disclosure of the November 1989 valuation. 142 In particular, since I prefer the defendant’s version to that of the plaintiffs, I am not persuaded that he ever quoted any figure other than the “$1.4m, to $1.45m plus or minus 10%” that he said he gave in about February 1995. Nor am I persuaded that he ever gave any firm estimates of a total sales value in the sum of $2.4m. or of the likely profits to each partner. Additionally, I am not persuaded that he withheld the November valuation from the plaintiffs. On the contrary, I accept his evidence that he discussed it with the first plaintiff, and that she said that the sale estimates were too low. Its inclusion within the Coopers & Lybrand material when inspected in 1992, is inconsistent with any attempt by the defendant to conceal it. Moreover, in view of the later valuations obtained for subsequent draw downs, any such suppression would have been likely to have proved fatal. 143 The plaintiffs’ claim accordingly fails, and it is unnecessary to deal with their claim for damages, save to note that the amounts claimed (variously as tortious damages or as equitable compensation in accordance with the principles stated in United States Surgical Corporation v Hospital Products International Pty Ltd (1982) 2 NSWLR 766 at 816) were as follows:
$645 x 2,150 = $1,386,750
This sum is more consistent with every other calculation made for the job, and with the defendant’s own evidence, than it is with the plaintiffs’ evidence.
144 If I am in error in my assessment of the factual issues, and they should be found as the plaintiffs contend, then these claims would in my view be made good. In that respect, it would be proper to find the relevant issues of causation in the plaintiffs’ favour. 145 There will be a verdict for the Defendant. I will hear further argument as to costs.
First PlaintiffCost of the land $204,458
Cash contributions $ 120,000
$324,458
Second Plaintiff
Cash contributions $25,000
So claimed, the damages were confined to the monies which the plaintiffs lost in the venture, ie the monies outlaid for the land and for their development contributions, all having been wholly absorbed in the costs of construction, receivership and winding up.
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Last Modified: 10/08/1999
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Mutual Life & Citizens' Assurance Co Ltd v Evatt
[1968] HCA 74
Jenyns v Public Curator (Qld)
[1953] HCA 2