Queenfield Pty Ltd v Gordon Finance Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT

S ECI 2018 01312

BETWEEN

QUEENFIELD PTY LTD (ACN 060 472 644) AS TRUSTEE FOR THE TRAVEL INN MOTEL UNIT TRUST (ABN 88 978 411 295)	Plaintiff First Defendant by Counterclaim
and
GORDON FINANCE PTY LTD (ACN 006 407 272)	First Defendant
and
GORDON NOMINEES PTY LTD (ACN 004 707 617) AS TRUSTEE FOR THE GORDON FAMILY TRUST (ABN 58 145 003 904)	Second Defendant Plaintiff by Counterclaim
and
TLP NOMINEES PTY LTD (ACN 005 111 017)	Second Defendant by Counterclaim

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JUDGE:	RIORDAN J
WHERE HELD:	Melbourne
DATE OF HEARING:	9-12, 18-19 September 2019
DATE OF JUDGMENT:	24 December 2019
CASE MAY BE CITED AS:	Queenfield Pty Ltd v Gordon Finance Pty Ltd
MEDIUM NEUTRAL CITATION:	[2019] VSC 857

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EQUITY – Rectification – Principles – Whether available if mistake induced by claimant’s own negligence – Contract rectified.

ESTOPPEL – Conventional estoppel – Whether available on the basis of pre-contractual communications.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M Scott QC with Mr H Forrester	Collins & Collins
For the Defendants	Mr H Austin QC with Mr A Segal	Hall & Wilcox

TABLE OF CASES

Australian Co-operative Foods Ltd v Norco Co-operative Ltd (1999) 46 NSWLR 267
B & B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd(1994) 35 NSWLR 227
Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424
CG Mal Pty Ltd v Sanyo Office Machines Pty Ltd [2001] NSWSC 445
Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2006] QCA 194
Fitzgerald v Masters (1956) 95 CLR 420
FJ & PN Curran Pty Ltd v Almond Investors Land Pty Ltd [2019] VSCA 236
Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603
Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004] NSWSC 149
Heimann v Commonwealth of Australia (1938) 38 SR (NSW) 691
Johnson Matthey Ltd v AC Rochester Overseas Corp (1990) 23 NSWLR 190
Jsam (AMC) Pty Ltd v Australis Marketing Corp (Int) Pty Ltd (Supreme Court of Victoria, Hayne J, 23 February 1995)
MAAG Developments Pty Ltd v Oxanda Childcare Pty Ltd(As Trustee for Oxanda Education Services Trust) [2018] VSCA 289
Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336
McRae v Commonwealth Disposals Commission (1951) 84 CLR 377
Partenreederei MS Karen Oltmann v Scarsdale Shipping Co Ltd (The Karen Oltmann) [1976] 2 Lloyd’s Rep 708
Perpetual Limited v Myer Pty Ltd [2019] VSCA 98
Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd (2012) 37 VR 486
Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd (2012) 37 VR 486
Saleh v Romanous (2010) 79 NSWLR 453
Samm Property Holdings Pty Ltd v Shaye Properties Pty Ltd (2017) 345 ALR 633
Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85
Skywest Aviation Pty Ltd v Commonwealth of Australia (1995) 126 FLR 61
State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170
Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444

Whittet v State Bank of New South Wales (1991) 24 NSWLR 146

TABLE OF CONTENTS

Summary.............................................................................................................................................. 1

Background......................................................................................................................................... 3

Question 1 - Rectification................................................................................................................ 20

Defendants’ submissions on rectification................................................................................ 20
Plaintiff’s submissions on rectification.................................................................................... 23
Principles of rectification........................................................................................................... 25
Was there an ‘agreement’ in the sense that the parties had a ‘common intention’?.......... 29
9 June 2015 meeting........................................................................................................... 30
Credibility of Mr Paolacci................................................................................................ 31
Credibility of Mr Beed...................................................................................................... 34
Credibility of Mr Langmaid............................................................................................. 35
Credibility of Mr Gordon................................................................................................. 37

Conclusion on the Common Intention..................................................................................... 37
Did the parties intend that the written instrument would conform to that agreement?.. 40
Does the written instrument not reflect the agreement because of a common mistake?. 41

Question 2 – Estoppel...................................................................................................................... 41

Defendants’ submissions on estoppel..................................................................................... 41
Plaintiff’s submissions on estoppel......................................................................................... 43
Can pre-contractual communications give rise to an estoppel by convention?................ 44

Orders................................................................................................................................................. 52

HIS HONOUR:

Summary

The plaintiff, Queenfield Pty Ltd (‘Queenfield’), as trustee of the Travel Inn Motel Unit Trust (‘Unit Trust’), is proprietor of the Travel Inn Motel in Carlton (‘the Motel’).

Before 1 July 2015, the second defendant, Gordon Nominees Pty Ltd (‘Gordon Nominees’), as trustee of the Gordon Family Trust, was the sole shareholder in Queenfield and sole unitholder in the Unit Trust. Moishe Gordon was a director of Gordon Nominees.

By a Sale of Units Deed executed on 1 July 2015, Gordon Nominees transferred to TLP Nominees Pty Ltd (‘TLP’), a company associated with the Paolacci family, 50% of the shares in Queenfield and 50% of the units in the Unit Trust.

At the time the Sale of Units Deed was executed, Queenfield’s books recorded that it had made the following intercompany loans to other entities associated with Mr Gordon (together ‘the Gordon Debts’):

(a)A loan of $4,347,611 (‘the Gordon Finance Debt’) from Queenfield to the first defendant, Gordon Finance Pty Ltd (‘Gordon Finance’); and
(b)A loan of $2,000,786 (‘the Gordon Nominees Debt’) from Queenfield to Gordon Nominees.

In 2017, entities associated with the Paolaccis acquired majority ownership of Queenfield, and on 8 March 2017, Queenfield demanded repayment of the Gordon Debts.

On 12 September 2018, Queenfield filed:

(a)a writ in proceeding S ECI 2018 01312 against Gordon Finance claiming repayment of the Gordon Finance Debt, plus interest from the date of demand; and
(b)a writ in proceeding S ECI 2018 01313 against Gordon Nominees claiming repayment of the Gordon Nominees Debt, plus interest from the date of demand.

By order of 6 May 2019, the two proceedings were consolidated into proceeding S ECI 2018 01312.

The defendants deny the Gordon Debts and allege that when the Sale of Units Deed was executed, there was either:

(a)a common intention (‘the Common Intention’); or alternatively
(b)a common assumption (‘the Common Assumption’);

that the sale of units in the Unit Trust by Gordon Nominees to TLP would exclude any interest of the Unit Trust in the Gordon Debts recorded in its books as being owed to it by Gordon Finance and Gordon Nominees, and that such debts would instead be held by Queenfield solely on trust for the benefit of Gordon Nominees as trustee of the Gordon Family Trust.

By counterclaim filed on 11 April 2019, Gordon Nominees seek a declaration that Queenfield holds the Gordon Debts on trust for Gordon Nominees as trustee of the Gordon Family Trust. Alternatively, Gordon Nominees seeks an order that the Sale of Units Deed be rectified to include the following term:

The parties acknowledge, and the Trustee declares, that the Trustee holds on trust for the Vendor [Gordon Nominees Pty Ltd] all of its right, title and interest in debts owed to it by Gordon Finance Pty Ltd and Gordon Nominees Pty Ltd, and that those assets do not form part of the assets of the Unit Trust but are instead held on a separate trust by the Trustee as stated.

By third party notices filed on 15 May 2019, the defendants claim damages to the extent of the Gordon Debts claimed by the plaintiff in the principal proceeding on the basis of alleged breaches of duties of care by:

(a) its accountant, MJM Financial and Business Services Pty Ltd (‘MJM’); and
(b) its solicitor, Efron & Associates.

On the first day of trial, the claim against MJM was dismissed with the consent of the defendants and MJM, without objection by the other parties. On the fourth day of trial, counsel for Efron & Associates informed the Court that it had resolved its dispute with the defendants.

I am called on to determine two questions:

(a)Question 1 – the rectification question: did the parties share the Common Intention, and if so, should the Sale of Units Deed be rectified accordingly; and
(b)Question 2 – the conventional estoppel question: did the parties share the Common Assumption, and if so, should the plaintiff be estopped from demanding repayment of the Gordon Debts.

For the reasons that follow, I find that:

(a)the parties shared the Common Intention and that the Sale of Units Deed should be rectified; but
(b)conventional estoppel cannot be based on pre-contractual negotiations.

Accordingly, the plaintiff is not entitled to call on the Gordon Debts.

Background

At all relevant times, Mr Gordon was a director of Queenfield, Gordon Finance and Gordon Nominees.

In 1994, Mr Gordon’s mother purchased the Motel for approximately $4.5 million.

In 2000, after Mrs Gordon died, Mr Gordon acquired the Motel through Gordon Nominees which, as trustee for the Gordon Family Trust, acquired 100% of the shares in Queenfield and 100% of the units in the Unit Trust. Queenfield, as trustee of the Unit Trust, owned the Motel business and freehold.

In 2014, Mr Gordon and his wife divorced. On 18 February 2015, the Family Court of Australia (‘Family Court’) ordered Mr Gordon and Gordon Nominees to make the following payments to Mr Gordon’s former wife:

(a)$250,000 on or before 27 February 2015;
(b)$5,000,000 on or before 17 August 2015;
(c)$1,000,000 on or before 17 February 2016; and
(d)$1,100,000 on or before 17 May 2016.

The obligation to pay the settlement sum was secured by a mortgage over the Motel freehold, which was registered on 24 April 2015.

In or about March 2015, Mr Gordon caused Queenfield to engage CBRE as estate agents to sell the Motel business and freehold. Scott Callow was the CBRE agent principally responsible, and Mr Gordon instructed him to offer the Motel business and freehold for sale for $25 million.

On 22 April 2015, there was a meeting at the Motel between Helen Williams, the general manager of the Motel, Lina Paolacci, and Dennis Beed, who had been the Paolacci family accountant for almost 20 years, relating to the proposed sale of the Motel. Mr Beed gave evidence of the meeting as follows:

We then went to the Travel Inn and met with Helen Williams. Ms Williams said that Mr Gordon was going through a divorce and that he needed to sell the business to pay off his wife. She also said that Mr Gordon was in financial difficulties, needed to sell quickly and that Lina should consider buying the business. Ms Williams briefly showed us some parts of the Travel Inn including the conference room, restaurant and a couple of other rooms.
At some point Ms Williams showed us some of the Travel Inn financial statements. I recall looking at profit and loss statements and balance sheets. I noticed a large NAB loan, some intercompany loans and other liabilities.

The ‘large NAB loan’ referred to by Mr Beed was a liability of Queenfield to NAB consisting of commercial bills totalling $10,978,011 as at 30 June 2014.

Mr Beed also gave the following evidence about a meeting with Ms Paolacci and her son John Paolacci after the meeting at the Motel:

I then returned to the Crest [a hotel owned by the Paolacci family] with Lina. I spoke with John Paolacci and Lina about the meeting at the Travel Inn. I said that I had seen some financial documents which Helen had shown us. I said that it looked good on paper from a profit and loss perspective, however, I had seen a number of loans and other possible liabilities. I said that we have no idea what liabilities might be attached to the business. I said that we didn't know what Mr Gordon would have to pay to his wife under the divorce terms. I said "it all looks too hard". I said that the only way the Paolaccis should consider any deal is if they set up a new entity and transferred the land and the business as a going concern.

Mr Paolacci gave evidence that at that meeting, Ms Paolacci told him that Ms Williams had suggested that the Paolaccis should consider buying ‘50 to 100% of the freehold and business’. He also deposed that Mr Beed gave advice at that meeting in the following terms:

Dennis Beed then said that Ms Williams had shown him some financial documents and that Mr Beed thought “it all looks too hard” because of various loans and unknown liabilities.
Mr Beed said that the only way we could consider investment was if there was a new entity and transferred the assets into that entity. He also said that the business looked as though it was run well and profitable.

On 8 May 2015, there was a meeting between Mr Paolacci, Ms Paolacci, Ms Williams and Mr Gordon at which Mr Paolacci deposed that he ‘put a general “ball park” offer to Mr Gordon to test the waters’ which was ‘not near enough to the figure Mr Gordon wanted’.

By email of 8 May 2015 to Mr Paolacci, Mr Gordon said: ‘Nice to meet up with you and your mother this morning. Await your improved offer.’

By email of 9 May 2015 to Mr Gordon, Mr Paolacci replied saying: ‘Thanks for the email. It was nice to meet you too, Moishe. We will revert back imminently.’

By email of 13 May 2015 at 12:12 pm to Mr Gordon, Mr Paolacci attached an offer noting that the offer was not subject to due diligence, valuations or finance. The attached offer was for TLP, a company associated with Mr Paolacci, or its nominee, to acquire a 50% interest in the freehold and business of the Motel as a going concern for $11 million. The terms of the offer included that the purchaser would ‘assume 50% of the liability, repayment of existing mortgage payments and provide company and director guarantee for 50% of the Bank loan’.

By email of 13 May 2015 at 3:43 pm to Mr Gordon, Mr Callow of CBRE said that he had been in discussions with another property advisory firm, who proposed to inspect the Motel on behalf of an overseas client Jinshan Asset Investments Pty Ltd (‘Jinshan’). He raised concerns about aspects of the contract of sale produced by Efron & Associates. At 6:06 pm, Mr Gordon forwarded this email to Graeme Efron, the sole principal of Efron & Associates.

Between 13 May 2015 and 17 May 2015, there was a meeting at the Motel between Mr Paolacci, Ms Paolacci, Mr Gordon and Ms Williams. Mr Gordon deposed that Mr Paolacci said that ‘they valued the freehold and business at $22 million (less $11.5 million of debt), which translated to an offer of $10.5 million’ for which a 50% interest was $5.25 million. It is common ground that Mr Gordon said that was not sufficient to pay the $7.35 million he owed under the Family Court orders and that Mr Paolacci needed to increase his offer. Mr Paolacci refused to increase his offer and the meeting ended without a deal.

By email of 18 May 2015 at 1:07 pm to Mr Gordon, Mr Paolacci attached an amended offer and in the covering email explained: ‘Amended offer as discussed to include business. Thus delivering the figure circa 7 mil as suggested.’ The offer was in substance the same as that made on 13 May 2015, except:

(a)TLP increased the purchase price to $12,750,000; and

(b) TLP acquired a 50% interest in the freehold and a 100% interest in the business.

By email of 18 May 2015 at 1:54 pm to Mr Callow, Mr Efron responded to issues raised with respect to the proposed contract with Jinshan. Subsequently there was an email exchange between Mr Efron and Mr Callow in which Mr Efron confirmed that he would prepare a new contract to satisfy the requirements identified.

By email of 18 May 2015 at 10:30 pm to Mr Callow, Jinshan’s solicitors identified issues with Mr Efron’s responses regarding the contract.

By email of 19 May 2015 to Mr Gordon and Mr Efron, Mr Callow forwarded the email from Jinshan’s solicitors, stating: ‘These issues raised are very relevant to achieving a sale and will have immediate impact on whether this buyer will submit an unconditional offer’.

On or about 26 May 2015, there was a further meeting at the Motel between Mr Gordon, Ms Williams, Mr Paolacci and Ms Paolacci. Mr Gordon deposed that he put forward a proposal that the Paolaccis acquire units in the Unit Trust. Mr Paolacci deposed that he could not recall what was said at the meeting. Mr Gordon deposed that, at or around the time of this meeting, Mr Paolacci said that he was not prepared to pay any more for 50% of the freehold and business but, in order to allow Mr Gordon to meet the obligations to his former wife, he would loan him $2.1 million.

By email of 26 May 2015 at 5:53 pm to Mr Callow, Jinshan’s property agent attached a letter of final offer to purchase the Motel freehold and business for $23,300,000 (‘the Jinshan offer’), and stated:

We believe the price offered is very attractive when considered against the current market valuation obtained by our client (just under $20m) and the need to spend $500k-$600k on capex and other outstanding refurbishment and maintenance works on the building now the responsibility of the purchaser.

The offer suggested an exchange of contract within 24 to 48 hours and settlement on 1 July 2015.

By email of 26 May 2015 at 7:46 pm, Mr Callow forwarded the Jinshan offer to Mr Gordon and asked if he was available to meet in the morning. By email of 27 May 2015, Mr Gordon forwarded the Jinshan offer to Ms Williams. By email of 28 May 2015, Ms Williams forwarded the Jinshan offer to Mr Paolacci.

By email of 29 May 2015 to Mr Callow, Mr Efron attached draft sale contracts for the proposed sale to Jinshan.

By email of 1 June 2015 at 10:14 am to Mr Efron, Alex Collins, the solicitor for TLP, stated:

As you know, I act for TLP Nominees Pty Ltd.
My client has reached an in principle and verbal agreement with your client, being the owner of the land and operator of the hotel at 225-245 Drummond Street, Carlton, to acquire a 50% interest in each of the freehold and business.
I am instructed that your client departs overseas tomorrow.
As a term of the parties’ agreement is that settled of this transaction occur on 1 July 2015, I propose that the parties agree, by way of an exchange of signed and binding letters to the process to effect the transaction they have contemplated. Specifically, I propose that the parties agree and sign on terms that provide result in:

1. the property being withdrawn from sale;
2.my client being granted 30 days exclusively to negotiate with your client;
3. binding confidentiality obligations (with appropriate exceptions for bankers and other advisers);
4. identify the proposed structure of the transaction and as a result, the necessary documentation;
5. deadlines for the preparation and negotiation of documentation (which will likely be substantial) to effect this process;
6.designated responsibilities between the parties for preparing such documentation;
7.reasonable cost coverage for my client in the event that the parties do not enter into the transaction documents.

I am of the view that such an exchange of letters should only bind the parties into the above and clearly state that the parties must negotiate in good faith and use all reasonable endeavours to agree terms for documentation, but that the letters should not bind the parties into executing sale contracts when so many of the critical terms are yet to be specifically discussions or documented.
Please let me know when is a convenient time for you to discuss the above.
I am happy to commence drafting such a letter for your consideration as a matter of urgency.

There is no evidence of the negotiation, presumably over the weekend before 1 June 2015, resulting in the ‘in principle and verbal agreement … to acquire a 50% interest in each of the freehold and business’.

By email of 1 June 2015 at 10:45 am to Mr Paolacci, Mr Collins stated:

I have just spoken with Graeme [Efron].
His client is coming to his office to sign over power of attorneys for each of his company and himself personally to his lawyer while he is away.
Graeme said he needed to seek instructions on my earlier email.
Graeme noted the following:
•the vendor has stamp duty implications to consider about a JV company buying him out and may prefer to transfer 50% of the units in the trust underlying the current registered proprietor to you instead; and
•he needs to speak with his client’s family lawyers about whether it is possible for him to agree to withdraw the property from the market (as it is subject to court orders).

Graeme said he would likely need until this afternoon to get back to me on the above points.
I will keep you updated.

It is apparent from this email that the ‘in principle and verbal agreement’ had not resolved whether the sale would be effected through a transfer of 50% of the units in the Unit Trust rather than an acquisition of the whole of the freehold and business by a joint venture company.

By email of 1 June 2015 at 12:51 pm to Mr Paolacci, Mr Collins said that he had again spoken to Mr Efron about the Family Court orders, and continued:

Graeme again proposed that you purchase half of the unit trust and half of the corporate trustee. I raised the issues of that exposing you to significant and potentially unknown liabilities for claims that may not have even been brought against the vendor’s company yet. He said he can address by way of warranties and indemnities but in my view, that carries far more risk as opposed to selling everything into a new JV company or companies which have no pre-existing liabilities.
Graeme also said there was an issue as to whether the business could be sold separate from the land but he said he needed to clarify further with his client before he could elaborate on that more to me. I suspect it is to do with the vendor’s financing arrangements with its bank.
If you have any interest in purchasing the land and business by way of 2 new companies and then selling back 50% in each to the vendor, please let me know.
I am expecting a return call from Graeme shortly. I am about to step into a brief meeting.

By email of 2 June 2015 at 10:01 am to Mr Efron, Mr Collins stated:

Further to our last telephone conversation yesterday, please let me know when I can expect to receive a binding letter on behalf of your client that sets out the structure and timeframe necessary to complete this deal.
My client wishes to sign such a letter today and for us to immediately progress with documentation.
John Paolacci has instructed me to make every endeavour to facilitate a smooth and timely transaction that is mutually beneficial to all parties.

By emailed letter of 2 June 2015 at 5:49 pm to Mr Collins, Efron & Associates stated as follows:

We refer to the above matter and to your email correspondence of 2 June 2015.[1]
[1]Underlined in original.
We are instructed by our client to accept your client’s offer made under-cover of the above mentioned letter.
We note the following terms:
A.TLP Nominees Pty Ltd (ACN 005 111 017) will acquire a fifty per-centum interest in the freehold and business to be effected through the acquisition of a fifty (sic) interest of the units in the Travel Inn Motel Unit Trust.
B.Your clients will be entitled to:
a.Nominate a person to serve as a board member on the board of QUEENFIELD PTY LTD atf the Travel Inn Motel Unit Trust.
b.Purchase fifty per-centum (50%) of the shares in the trustee, QUEENFIELD PTY LTD for a nominal sum.

C.TLP Nominees Pty Ltd, RAFFAELINA PAOLACCI and TORINO PASQUALINO PAOLACCI shall each jointly and severally guarantee fifty per-centum (50%) of the debts of the business as follows:
a.Debt pursuant to first registered mortgage in favour of the National Australia Bank (estimate $11.5 million);

D.At settlement it is expected that save an except (sic) to the N.A.B. mortgage which your client’s will guarantee fifty per centum of, the title will be free of any encumbrances unless by written agreement of all parties.
E.The parties agree to keep the current management structure in place. Specifically Helen Williams shall remain the manager of the business on a salary not less competitive than her current salary.
It is acknowledged by the parties that Helen Williams whilst maintaining her role as the manager of the Travel In as her principal focus is authorised and will continue to assist Mr. Gordon in other Hotel Ventures as and when required:
F.Settlement scheduled for on or before 1 July 2015.
G.At settlement your clients make a bank cheque available at the direction of our client in the sum of $5,250,000.
H.The parties will enter into a Unit Holder Agreement which shall include inter alias terms as follows:
a.Option to purchase unit holding
The parties agree that:
i.any party (“offering party”) may serve a notice (“Notice”) on the other party specifying the price upon which the Offering party will purchase the units held by the other party in the Travel Inn Motel Unit Trust.
ii.The party receiving the Notice may:
a.accept the offer; or
b.reject the offer. Upon the party rejecting the offer, that party is taken to have automatically made an offer to the Offering party and conditions offered by the Offering party.

This acceptance shall now be binding on all parties and accordingly, our clients will instruct its agents to withdraw the property from the market.
The terms and conditions contained herein are confidential save and except that the parties may reveal this information to their legal and financial advisors.

It is notable that there is no evidence of the email correspondence on 2 June 2015 containing the offer which this letter purports to accept. However, this letter evidences the first occasion on which the parties reached a consensus that TLP would acquire a 50% interest in the Motel freehold and business by acquiring 50% of the units in the Unit Trust.

By email of 2 June 2015 at 6:01 pm to Mr Paolacci, Ms Williams attached financial statements of the Unit Trust, comprising:

(a) for each of FY 2012, FY 2013 and FY 2014, an unaudited balance sheet, supplementary notes, a profit and loss statement, profit and loss notes, notes to and forming part of the accounts, a statement and a report by the trustee company’s directors, and an unsigned tax return dated 19 November 2014; and

(b) minutes of directors’ meetings of 8 June 2009, 14 June 2012, 14 June 2013, 14 June 2014 and 30 June 2014.

By emails of 3 June 2015 at 2:54 pm and 4:54 pm to Mr Beed, Mr Paolacci forwarded the financial statements and the Unit Trust deed which he received from Ms Williams.

By email of 2 June 2015 at 6:09 pm to Efron & Associates, Mr Collins replied to the letter of acceptance and stated:

Thank you for your letter.
My client is pleased to have agreed key terms with the vendor.
We look forward to moving swiftly together towards settlement on 1 July 2015.

By email of 3 June 2015 to Mr Gordon, Mr Callow advised that Jinshan had increased its offer to $23,375,000.

By email of 5 June 2015 to Mr Efron, Mr Paolacci referred to the letter of acceptance of 2 June 2015 and stated:

We confirm our position to negotiate the terms contained in your letter of 2 June 2015 and our offer to purchase.
As you can appreciate the structure of the deal Mr Gordon has proposed means that, without appropriate protections, we are exposed to all liabilities of Queenfield Pty Ltd (both known and unknown).
Following our meeting at the travel inn it was indicated that warranties and indemnities with a view to limiting our exposure to pre-existing liabilities and claims over Queenfield Pty Ltd would be entered into.
Obviously we understand the pending claim and 2^nd mortgage from Mrs Gordon in excess of 7mil.
We assume that there is no further actions against Queenfield pty ltd but in any event would like clarity and as to how this and any other matters will be resolved prior to our entering a binding contract to purchase the 50% interest in Queenfield pty ltd.
We would appreciate if you would confirm, what warranties and indemnities Mr Gordon will enter into in addressing the above issues.
Could you please confirm.
•What liabilities Queenfield Pty Ltd has other than the NAB mortgage;
•assurances that all such loans and liabilities will be discharged at settlement other than that of 11.6mil to NAB.

Obviously we are eager to complete this deal but only if appropriate safeguards and protections are provided to us.
I look forward to your response. I can be contacted directly on [phone number] to discuss further.

On 9 June 2015 at approximately 8:00 am, there was a meeting at the Motel between Mr Beed, Mr Paolacci and Michael Langmaid, the then accountant for Mr Gordon. Ms Williams also attended, but only intermittently because of her management responsibilities at the Motel. During the course of this meeting, the Gordon Debts were discussed. The substance of what was said about those debts is disputed and will be referred to below.

By email of 9 June 2015 at 4:15 pm to Mr Gordon, Mr Efron stated:

You need to decide which way to go.
50/50 JV ongoing income stream.
OR
Walk away from the Travel Inn altogether with cash in hand??
You will need to invest wisely to maintain income stream and lifestyle.
Big call.

By email of 10 June 2015 to Mr Gordon, Mr Callow asked for instructions that he could pass on to Jinshan that day. By email of 12 June 2015 at 4:53 pm, Mr Gordon replied: ‘Tell them that I need a further nudge in price.’ There would be no further negotiation with Jinshan.

By email of 11 June 2015 at 11:32 am to Ms Williams, Mr Langmaid set out the following proposed terms which he requested she review before sending:

I have called Graeme, and left message to call me back.
Believe a deal can be structured as follows, which will meet everybody’s requirements.
These are draft I estimated figures as I do not have any proposals in front of me.
Purchase price is $22.0m, to be paid as follows
a)Take over 50% of the debt of $12.0m, contribution would be $6.0m, which will save time and money associated with a refinance and the necessary valuation.
b)Pay balance of purchase price being $5.0m to TCF trust account, as part settlement of the Divorce matter.
c)Pay by way of a loan, an additional $2.1m to TCF Trust account, as final settlement of the Divorce matter, which will remove monthly payment requirement and second mortgage from Queenfield Pty Ltd. This loan should not exceed two years in duration.
d)Indemnity from Moishe Gordon, re Warranties, etc., to be provided for five years, based on a mortgage of 10% of the total units in Travel Inn Motel Unit Trust, those units held by Moishe Gordon or an entity related or has an interest in or controlled by him.
e)Security for the Loan under point c) to be based on a mortgage of 20% of the total units in Travel Inn Motel Unit Trust, those units held by Moishe Gordon or an entity related or has an interest in or controlled by him, with interest to be calculated at the rate of the last calendar quarter interest rate as charged by the financier of the $12.0m, to be adjusted quarterly, for that quarter, or at a fixed interest rate of 7% per annum which under these formulae would mean a deduction of $12.25k a month from the profit distribution.
f)Profit to be split monthly or quarterly or by an agreed payment amount on 50/50 basis, with an adjustment for point e) amending the 50/50 split, in favour of the purchaser.
g)Any partner will have the option of buying out the other, after five years at market or an agreed value.

h) Any modification or change to structure will be by mutual agreement.
i)intercompany loans, to be transferred to Gordon Family Trust, with any balance to be treated as an equity adjustment. [‘Clause (i)’][2]
[2]Underlining and definition added.

The benefits of the above are as follows:
1) It meets time constraints of Moishe Gordon re divorce matter.
2)It does not require any external refinancing, which will delay settlement of the sale.
3)It provides immediate settlement of the Divorce matter, and reduces Queenfield payments by $20K a month.

4) It provides internal funding for the balance of the Divorce settlement.
5) Profit will be split 50/50, before interest adjustment.
6)Mortgage of units, without cost, is a cheap form of finance and security, to achieve all parties aims.

By emails of 11 June 2015 at 2:38 pm and 3:54 pm respectively, Ms Williams forwarded the proposed terms to Mr Beed, and Mr Langmaid sent the proposed terms to Mr Paolacci in the same form as he had suggested to Ms Williams.

By email of 12 June 2015 at 11:50 am to Mr Paolacci, Mr Beed stated: ‘I have put together a combination of our thoughts. Interesting enough we all seem to be on the same page. I believe you should send to Efron our proposal so we can get this over the line.’ In particular:

(a)he suggested that the ‘right figures’ should be put in for the NAB debt of approximately $12 million; and
(b)he added a tenth paragraph being:
(j)establish within 90 days after settlement of the above a new entity for the Travel Inn business.

By email of 12 June 2015 at 5:56 pm to Mr Gordon, Mr Efron stated:

Have you reached an agreement with [your former wife] to ensure you will be able to obtain a discharge of mortgage at settlement?
Have you taken advice on the CGT implications of a sale, albeit 50% of units or straight out sale of the freehold and business?
I am concerned for you about CGT.
Speak to Langmaid, Mort or Phil Leigh.
Please let me know what you are planning to do as Helen has staff issues.
You need to find a way to maintain an income stream to support your lifestyle one way or another.

By email of 15 June 2015 at 11:53 am to Mr Gordon, Mr Efron and Ms Williams, Mr Paolacci noted that it was necessary to meet points 1 to 6 in Mr Langmaid’s email of 11 June 2015, and stated that ‘we have committed and amended our offer to suit’. The attached amended offer was as follows:

TLP Nominees Ply Ltd (ACN 005 111 017) or nominee, (Purchaser) C/- of Crest on Barkly 47 Barkly Street St Kilda 3182 hereby offer to Purchase a 50% interest in the freehold and 50% interest in the business as a Going Concern of the Best Western Travel Inn situated at 225-245 Drummond Street Carlton
Subject to the following terms:
The Purchase Price: $11,000,000 being the 50% share of $22,000,000
Payment of the Purchase Price paid as follows
a) Take over 50% of the debt of circa $11.5m,
b)Pay balance of purchase price being circa $5.250m to TCF trust account, as part settlement.
c)Pay by way of a loan, an additional circa $2.1m to TCF Trust account, as a loan secured by a second Mortgage from Queenfield Pty Ltd. This loan is for two years in duration.
d)Indemnity from Moishe Gordon, re Warranties, etc., to be provided for five years, based on a mortgage of 10% of the total units in Travel Inn Motel Unit Trust, those units held by Moishe Gordon or an entity related or has an interest in or controlled by him.
e)Security for the Loan under point c) to be based on a mortgage of 20% of the total units in Travel Inn Motel Unit Trust, those units held by Moishe Gordon or an entity related or has an interest in or controlled by him, at a fixed interest rate of 10% per annum.
f)Profit to be split monthly or quarterly or by an agreed payment amount on 50/50 basis, with an adjustment for point e) amending the 50 / 50 split, in favour of the purchaser.
g)Any partner will have the option of buying out the other, after five years, at market or an agreed value.

h) Any modification or change to structure will be by mutual agreement.
i)Intercompany loans, to be transferred to Gordon Family Trust, with any balance to be treated as an equity adjustment.

This offer is made subject to the following conditions
1)The Vendor and Purchaser agree that one contract be entered into, being for the freehold land and Buildings, and the Business including plant equipment chattels and goodwill. The price split between freehold and business shall be mutually agreed. The general terms of the Law Institute Contracts of Sale (Freehold and Business) will apply.
2)The Purchaser and its solicitor being satisfied with terms and conditions of a proposed partnership agreement.
3)The Purchaser and its solicitor being satisfied with the terms and conditions of Partnership agreements for the Freehold owners within 30 days from the date of acceptance of this offer. The Partnership agreement will include an option at 5 years from settlement for either party to purchase each other’s interest in the freehold.
4)The Purchaser and its solicitor being satisfied with the Section 32 Vendor Statement within 10 days from the date of acceptance of this offer.
5)Subject to Bank approval the existing mortgage of approximately $11,500,000 secured by the property shall remain in place. The Purchaser shall assume 50% of the liability, repayment of existing mortgage payments and provide company and director guarantee for 50% of the Bank loan.
6)It is agreed to keep the current management structure in place, specifically Helen Williams shall remain the Manager of the business at a salary not less competitive than her current salary.
7)It is acknowledged by the parties that Helen Williams whilst maintaining her role as the manager at The travel Inn as her principal focus is authorised and will continue to assist Mr Gordon with other Hotel ventures as required at her discretion.

By email of 16 June 2015 at 9:59 am to Mr Efron, Mr Gordon stated: ‘Please consider the attachment and action accordingly.’ The attachment was the amended offer attached to the email of 15 June 2015 at 11:53 am with annotations. The annotations were as follows:

(a)       The word ‘Agreed’ was inserted after clauses a), b), f), and h).
(b)      The reference to 10% was changed to 5% in clauses d) and e).
(c)       The words ‘This loan is for two years in duration’ in clause c) were crossed out.

(d) The words ‘GD Efron to modify’ was inserted after clause g).
(e) The words ‘Advice from Mort’ was inserted after Clause i).

There were also amendments to conditions 1), 3), 6) and 7), which are not presently relevant. The reference to Mort after Clause (i) is to Mort Schwartzbord, Mr Gordon’s family accountant and Queenfield’s tax accountant from 1994 until 2012.

By email of 16 June 2015 at 12:21 pm to Mr Paolacci, Efron & Associates referred to the email of 15 June 2015 and attached the offer with the following amendments:

(a)the loan of $2.1 million had an option of early repayment and redraw; and
(b)the interest on the loan was reduced from 10% to 5% or the costs of the loan, whichever was higher.

By email of 18 June 2015 at 5:41 pm to Mr Paolacci, Efron & Associates confirmed that ‘an agreement has now been reached … [for TLP] to [p]urchase a 50% interest in the freehold and 50% interest in the business as a Going Concern of the Best Western Travel Inn’. The terms were identical to those proposed in the email from Mr Paolacci of 15 June 2015, including the interest rate of 10%, except the first amendment for an option of early repayment and redraw of the $2.1 million loan was adopted.

By email of 23 June 2015 to Mr Paolacci, Efron & Associates attached a Draft Sale of Units Agreement and noted that they were in the process of preparing a Loan Agreement and a Unit Holders Agreement.

By email of 24 June 2015 at 9:42 am to Mr Efron, Mr Paolacci commented on the Draft Sale of Units Agreement, in particular requiring more detailed warranties by the vendor.

On 1 July 2015, settlement was effected with:

(a)a Sale of Units Deed which was executed by Gordon Nominees, TLP, Queenfield, Ms Paolacci, Torino Paolacci and Mr Gordon;
(b)a Unit Holders Agreement which was executed by Gordon Nominees, TLP and Queenfield as trustee for the Unit Trust;
(c)a Deed of Loan which was executed by Gordon Nominees, TLP, Mr Gordon and Queenfield;
(d)a Deed of Guarantee and Indemnity which was executed by TLP and Mr Gordon; and
(e)a General Security Deed which was executed by Gordon Nominees and TLP.

These documents were all executed on behalf of Queenfield, Gordon Nominees and Mr Gordon by Mr Efron pursuant to powers of attorney dated 1 June 2015, 24 June 2015 and 9 December 2014 respectively.

By Deed of Cancellation & Transfer of Unit Trust Units and Unit Transfer Form signed 2 February 2017, the loan of $2.1 million to Gordon Nominees was discharged and Gordon Nominees transferred 20% of the units in the Unit Trust to JPA Finance Pty Ltd, an entity associated with the Paolaccis.

The minutes of the directors’ meeting of Queenfield on 23 February 2017 record with respect to the relevant loans the following discussion:

At John Paolacci’s invitation, Dennis Beed raised queries in relation to two loan items that have appeared in the company's financials in recent years. Mr Beed asked Graeme Efron to provide details on the following loan items:
·a loan from the Company in 2011/2012 to Gordon Finance Pty Ltd for in excess of $4.3 million; and
·a loan from the Company in 2013/2014 to Gordon Nominees Pty Ltd for in excess of $2 million.

Mr Beed said that after reviewing the financials that he was of the view that there were no terms attached to these loans, unless Graeme Efron had records that proved to the contrary.
Mr Beed stated that the Company had borrowed these monies from NAB, before loaning them to interests controlled by Moishe Gordon, and was paying interest on them and claiming that interest as a tax deduction. Ms Barrett queried whether the interest the Company had paid to NAB should be charged back to Moishe Gordon’s interests.
Graeme Efron confirmed the dates on which the monies had been lent to each of Gordon Finance Pty Ltd and Gordon Nominees Pty Ltd and stated that he presumed that there were no terms attached to these loans.
Mr Beed outlined the tax implications for the Company if the loans were undocumented and used by Moishe Gordon’s interests for personal benefit.
Owing to tax implications for the Company, John Paolacci and Dennis Beed asked Graeme Efron to revert to the board with information on these loans once he had spoken to Moishe Gordon. Mr Efron agreed to do so.

The minutes of the directors’ meeting of Queenfield on 7 March 2017 record a resolution that Queenfield immediately call due the relevant loans owing by Gordon Finance and Gordon Nominees and pursue all means necessary to recover these funds.

By statutory demands dated 11 August 2017, Queenfield demanded repayment of the Gordon Debts.

By Originating Processes each filed 1 September 2017, Gordon Finance and Gordon Nominees applied to set aside the statutory demands pursuant to s 459G of the Corporations Act 2001 (Cth) (‘Statutory Demand Proceedings’).

On 22 June 2018, Randall AsJ set aside both statutory demands.[3]
[3]Gordon Finance Pty Ltd v Queenfield Pty Ltd [2018] VSC 341 (Randall AsJ).

Question 1 - Rectification
Defendants’ submissions on rectification

The following was submitted on behalf of the defendants.

During the negotiations between Mr Gordon (on behalf of Queenfield, Gordon Nominees and Gordon Finance) and Mr Paolacci (on behalf of TLP), each of Queenfield, Gordon Nominees, Gordon Finance and TLP shared the Common Intention that the sale of units in the Unit Trust by Gordon Nominees to TLP would exclude a sale of any interest of the Unit Trust in the Gordon Debts, which would instead be held by Queenfield on trust solely for the benefit of Gordon Nominees.

The Common Intention is demonstrated by the following:

(a)All of the offers referred to in the correspondence between the parties were based on the premise that:
(i) the unencumbered value of the Motel freehold and business, and later
(ii)the unencumbered value of the assets of the Unit Trust which were to be sold to the Paolaccis (instead of a direct sale of the Motel freehold and business);

was $22 million. This draws support from the terms of all of the relevant offers and correspondence.

(b)All communications between the parties contemplated only a sale of the Motel freehold and business and not the Gordon Debts.
(c)The underlying subject matter of the transaction was not varied when the negotiations changed from an asset sale to a sale of units in the Unit Trust.
(d)It was contemplated that the Queenfield accounts would be ‘cleaned up’ to ensure that the Unit Trust’s balance sheet consisted of only the Motel freehold and business and liability to NAB.
(e)It would have been ‘suicidal’ for Mr Gordon to sell an interest in the Unit Trust and become exposed to its trustee, Queenfield, then seeking repayment of the Gordon Debts from his family companies.
(f)An agreement to sell 50% of the units in the Unit Trust without excluding the Gordon Debts, at the same price as the Paolaccis had already expressly agreed to pay for a 50% interest in the Motel freehold and business, would give the Paolaccis a windfall gain.
(g)Mr Gordon was not ‘over a barrel’ and had a continuing opportunity to sell the Motel freehold and business to Jinshan.

The Common Intention is ‘clear and precise’. Clause (i) is part of the ‘fabric of evidence’ which makes the Common Intention clear. It specified that the intercompany loans were to be transferred to Gordon Nominees.

All parties to the Sale of Units Deed made the same mistake:

(a)With respect to Mr Gordon, his evidence in the context of the above circumstances proves that he was so mistaken.
(b)With respect to Mr Paolacci, it should be inferred that he was similarly mistaken, for the following reasons:
(i)He included Clause (i) in a document expressed to contain the elements of the sale transaction in his email of 15 June 2015.
(ii)There was no alteration to the consideration for the bargain which purportedly included the Gordon Debts.
(iii)Mr Paolacci made no reference to the Gordon Debts in the period from his email of 15 June 2015 to the execution of the Sale of Units Deed on 1 July 2015.

Any issue of negligence by the defendants or their agents is irrelevant. The plaintiff’s reliance on McRae v Commonwealth Disposals Commission is misconceived because:

(a)the High Court was there concerned with whether there had been a mutual mistake vitiating a contract; and
(b)the relevant ‘reckless and irresponsible’ conduct of the defendants’ officers had caused the plaintiff’s mistake on which the defendants sought to rely.[4]
[4](1951) 84 CLR 377, 408-10 (Dixon and Fullagar JJ) (‘McRae’).

In this case, the plaintiff’s allegation is simply that it was the negligence of the defendants’ agent which resulted in the defendants’ failure to include the relevant term in the Sale of Units Deed.
Plaintiff’s submissions on rectification

The following was submitted on behalf of the plaintiff.

The Court should find that Mr Gordon did not have the Common Intention alleged because he was prepared to execute the Sale of Units Deed without excluding the Gordon Debts, for the following reasons:

(a)He was concerned about capital gains tax and Division 7A of the Income Tax Assessment Act 1936 (Cth).
(b)He was ‘over a barrel’ because the offer from Jinshan had expired and he needed the funds to meet his obligations under the Family Court order.
(c)He signed the Unit Trust’s FY 2015 financial statements in March 2016 which recorded the Gordon Debts on its balance sheet.
(d)He gave evidence that he could not understand Clause (i) and, according to his email of 16 June 2015 at 9:59 am to Mr Efron, he was waiting for ‘advice from Mort’, his accountant.

The Court should find that Mr Paolacci did not have the Common Intention, for the following reasons:

(a)The evidence of Mr Paolacci and Mr Beed was to the effect that, at the meeting of 9 June 2015, Mr Langmaid had said that the Gordon Finance Debt would be transferred to Gordon Nominees to enable it to be recovered by Queenfield.
(b)Mr Paolacci’s negotiation was directed to price and not value. Nothing should be inferred from the fact that there was no increase in consideration with the inclusion of the Gordon Debts because the sale of units exposed the purchaser to a risk of unknown liabilities which offset the prospect of recovering the debts. In particular, Mr Paolacci was aware of the risk of potential tax liabilities for Queenfield arising from the improperly deducted interest on the NAB loan.

Even if Clause (i) is construed as contended for by the defendants, there is no evidence that the alleged intention to transfer the Gordon Debts to Gordon Nominees continued up to the date of execution of the Sale of Units Deed. The Court should conclude that no such continuing intention has been established, for the following reasons:

(a)A number of the other clauses and conditions set out in the letter dated 15 June 2015 were not incorporated in the Sale of Units Deed including:
(i)the warranty was not secured in accordance with paragraph (d);
(ii)there was no ‘adjustment for point e) amending the 50/50 split in favour of the purchaser’ in accordance with paragraph (f);
(iii)the option to buy out referred to in paragraph (g) was not included;

(iv) paragraphs 1, 6 and 7 of the proposed conditions were not included; and
(v)the reference in paragraph 3 of the proposed conditions to a partnership agreement, not an option to buy out, was not included.

(b)It was inherently unlikely that both parties would be under the same mistake where they were represented by solicitors during the negotiation and drafting of the agreement.

The Common Intention was not sufficiently precise. Its incorporation required at least the following additional steps to be taken:

(a)A meeting of directors to forgive the Gordon Debts and to set them off against the Asset Revaluation Reserve.
(b)The Sale of Units Deed needed to expressly provide for the time in which the Gordon Debts would be transferred.
(c)Transfer of the Gordon Debts would have required consequential indemnities from liabilities such as adverse tax consequences.
(d)Transfer of the Gordon Debts would have required indemnities for new directors.

Further, the defendants cannot point to a form of words which adequately and comprehensively comprehends the Common Intention alleged.

Rectification should not be granted where it would result in other clauses operating in a different way.[5] The alleged Common Intention is at odds with other clauses in the Sale of Units Deed. In particular, the vendor warranties effectively included a warranty that the Gordon Debts were part of the assets of the Unit Trust as at the date of the deed and immediately before completion. A transfer of the Gordon Debts would be inconsistent with this warranty.
[5]Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603, 711 [450] (Campbell JA with whom Allsop P and Giles JA agreed) (‘Franklins v Metcash’).

A party cannot rely on a mistake induced by its own fault or that of its agents.[6] The mistake made by the defendants was induced by their own fault or that of their agent, Mr Efron.
[6]McRae (1951) 84 CLR 377, 410 (Dixon and Fullagar JJ).

Principles of rectification

The doctrine of rectification was explained in Simic v New South Wales Land and Housing Corporation, in which Gageler, Nettle and Gordon JJ said:

Rectification is an equitable remedy, the purpose of which is to make a written instrument ‘conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately’. For relief by rectification, it must be demonstrated that, at the time of the execution of the written instrument sought to be rectified, there was an ‘agreement’ between the parties in the sense that the parties had a ‘common intention’, and that the written instrument was to conform to that agreement. Critically, it must also be demonstrated that the written instrument does not reflect the ‘agreement’ because of a common mistake. Unless those elements are established, the ‘hypothesis arising from execution of the written instrument, namely, that it is the true agreement of the parties’ cannot be displaced.
The issue may be approached by asking — what was the actual or true common intention of the parties? There is no requirement for communication of that common intention by express statement, but it must at least be the parties’ actual intentions, viewed objectively from their words or actions, and must be correspondingly held by each party.[7]

[7](2016) 260 CLR 85, 117 [103]-[104] (‘Simic’).

Accordingly, the doctrine requires consideration of the following questions:

(a)Was there an ‘agreement’ in the sense that the parties had a ‘common intention’?
(b)Did the parties intend that their written instrument would conform to that agreement?
(c)Does the written instrument not reflect the agreement because of a common mistake?

In considering these questions, the approach of the Court is guided by the following:

(a)In determining whether the parties had a common intention, the Court has regard to the actual or subjective intention of each party.[8] Although it is the subjective intention of the parties, the Court does not merely accept what a party says as to his or her intention; but instead considers and weighs admissible evidence probative of intention.[9]
[8]Ibid 102 [42] (Kiefel J, with whom French CJ agreed).
[9]Ibid.
(b)The standard of proving a common intention justifying rectification is the civil standard being the balance of probabilities.[10] However, the ‘hypothesis arising from execution of the written agreement, namely, that it is the true agreement of the parties’ will not be displaced unless there is ‘convincing proof’,[11] for the policy reasons explained by the Court of Appeal in Perpetual Limited v Myer Pty Ltd.[12] The Court of Appeal quoted with approval the following statements by Campbell JA in Franklins v Metcash:[13]
[10]Franklins v Metcash (2009) 76 NSWLR 603, 711 [448] (Campbell JA with whom Allsop P and Giles JA agreed), quoted with approval in Samm Property Holdings Pty Ltd v Shaye Properties Pty Ltd (2017) 345 ALR 633, 658 [118] (McColl and Gleeson JJA and Sackville AJA).
[11]Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336, 351, quoted with approval in Simic (2016) 260 CLR 85, 117 [103] (Gageler, Nettle and Gordon JJ).
[12][2019] VSCA 98, [115] (Whelan, Niall and Hargrave JJA) (‘Perpetual v Myer’).
[13](2009) 76 NSWLR 603, 713-14 [459]-[461].
There are reasons of policy for requiring great care in making the factual findings of common intention that ground a rectification order. First, both the social institution of making contracts in writing, and the practical importance associated with it, of people ordinarily being able to rely upon a document, that is apparently regular, meaning what it says, contribute to the need for care in granting rectification. …
There is also a reason more closely tied to the facts of some individual cases why a claim by a person who has signed a written document that it does not embody what he or she really intended is the type of claim that, of its nature, needs to be looked at with care. It is connected with what is involved in making the factual finding that a common intention has been misrecorded. When an agreement is one tailored to the particular case it deals with rather than being a standard form, has been reduced to writing through a process of negotiation between solicitors over a period of months, and is clearly a matter of great commercial significance to the parties, that situation in itself is a factor that tends to make it less likely that the parties have recorded their common intention incorrectly. As Simonds J (as his Lordship then was) said in Crane v Hegeman-Harris Co Inc, a 1939 decision reported at [1971] 1 WLR 1390 at 1391, the court’s jurisdiction to award rectification:
‘… is a jurisdiction which is to be exercised only upon convincing proof that the concluded instrument does not represent the common intention of the parties. That is particularly the case where you find prolonged negotiations between the parties eventually assuming the shape of a formal instrument in which they have been advised by their respective skilled legal advisors. The assumption is very strong in such a case that the instrument does represent their real intention …’

…
To conclude that the parties have misrecorded their common intention in that sort of situation involves the solicitors on both sides of the transaction having each failed to grasp and express the intention of his or her own client. In other words, each of the solicitors has been mistaken, and, furthermore, mistaken in the same way. There is a measure of inherent unlikelihood in such an event happening. If the words of which rectification are sought are clear in meaning on their face, that unlikelihood is compounded — one would not ordinarily expect two lawyers, each professional dealers in language, to make the same mistake about the meaning of words that are clear on their face. However, we know that sometimes even experienced solicitors take or are given inadequate instructions, or misunderstand their instructions, and in consequence misrecord their client’s intention, so these matters are no more than reasons for caution in making the factual findings upon which a rectification order is based.[14]

(c)The disconformity between the common intention and the written instrument must be clearly identified,[15] and ‘[t]he rewriting should not do anything more than rewrite the contract to the minimum extent that is necessary for it to no longer fail to express the common subject of intention the parties had when the contract was entered’.[16]

(d)The Court is rectifying the whole of the agreement between the parties. Accordingly, the remedy in rectification by adding, deleting or changing some words in the document, which would result in some other words of the document operating in a different way, will only be justified if that different operation is in accordance with the common intention of the parties.[17]

[14]Perpetual v Myer [2019] VSCA 98, [115] (Whelan, Niall and Hargrave JJA) (emphasis added by the Court of Appeal).

[15]Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329, 345 (McLelland AJA).

[16]Franklins v Metcash (2009) 76 NSWLR 603, 713 [458] (Campbell JA with whom Allsop P and Giles JA agreed).

[17]Ibid 711 [450].

The above principles were not in dispute, but the plaintiff did contend that the party seeking rectification cannot rely on a mistake induced by its own fault (or that of its agents). The fault relied upon by the plaintiff was that of Mr Efron’s in drawing, and under a power of attorney, executing the Sale of Units Deed without incorporating a term to the effect of Clause (i). The plaintiff relied upon McRae,[18] in which the High Court considered whether a purported contract was nullified by mistake in the following circumstances:

(a)The defendant invited tenders for the purchase of ‘an oil tanker lying on the Jourmaund Reef, which is approximately 100 miles north of Samarai. The vessel is said to contain oil’.
(b)The defendant accepted the plaintiff’s tender with a sale advice note describing what was sold as ‘one (1) oil tanker including contents wrecked on the Jourmaund Reef approximately 100 miles north of Samarai. Price £285’.
(c)The plaintiff undertook a salvage expedition in the locality given but in fact there was no tanker there.

[18](1951) 84 CLR 377 (Dixon, McTiernan and Fullagar JJ).

The High Court found that the contract included a promise by the defendant that there was a tanker in the position specified and that the defendant could not rely upon mistake to avoid the contract because any mistake ‘was induced by the serious fault of their own servants, who asserted the existence of a tanker recklessly and without any reasonable ground’.[19]
[19]Ibid 410 (Dixon and Fullagar JJ, with whom McTiernan J agreed).

In my opinion, the principle of McRae’s case does not apply to the defendants’ claim for rectification in this case for the following reasons:

(a)In McRae’s case the High Court found that the defendants had misled the plaintiff to believe in the existence of the subject matter of the contract. No question of rectification arose.
(b)Although, in this proceeding, the defendants’ solicitors may have been at fault in failing to ensure that the Sale of Units Deed included a term to the effect of Clause (i), as was commonly intended, such a mistake will be common in claims for rectification as was referred to by Campbell JA in Franklins v Metcash.[20] It is the common mistake which enlivens the doctrine of rectification and to deprive the party of the remedy on the basis that it was party to the mistake, would be to substantially deny the remedy of utility.
[20](2009) 76 NSWLR 603.

Was there an ‘agreement’ in the sense that the parties had a ‘common intention’?

The defendants contend that the Common Intention was communicated between the parties in the form of Clause (i), which stated: ‘Intercompany loans, to be transferred to Gordon Family Trust, with any balance to be treated as an equity adjustment.’ Clause (i) was communicated by Mr Langmaid, the then accountant for Queenfield, to Mr Paolacci on 11 June 2015, and was subsequently included in the offer from Mr Paolacci to Mr Gordon on 15 June 2015, the further amended offer from Efron & Associates to Mr Paolacci of 16 June 2015 and the confirmation of the agreement from Efron & Associates to Mr Paolacci of 18 June 2015.

There is no dispute that Clause (i) was formulated by Mr Langmaid in his email of 11 June 2015 as part of his proposal for a deal, ‘which will meet everybody’s requirements’ following the meeting on 9 June 2015.

However, there is a dispute between the parties as to the conversation on 9 June 2015, which was the genesis of Clause (i). In substance, the dispute about Clause (i) relates to:

(a)       the identity of the transferor/s of the loans;
(b)      the identification of the intercompany loan/s; and
(c)       whether the subject matter of the transfer was the loan asset or loan liability.

In summary, the competing interpretations of Clause (i) based on the conversation on 9 June 2015 are:

(a)Queenfield, Gordon Finance and Gordon Nominees transfer the liability for the Gordon Finance Loan to Gordon Nominees as trustee for Gordon Family Trust (Queenfield’s contention); and
(b)Queenfield transfers the assets of the Gordon Debts to Gordon Nominees as trustee for the Gordon Family Trust (the defendants’ contention).

9 June 2015 meeting

Mr Paolacci deposed that, at the meeting on 9 June 2015:

(a) Mr Langmaid said words to the following effect:
The Gordon Finance loan came from the $12 million NAB facility. Mr Gordon used the NAB loan to fund a development for Gordon Finance. The loans are due and payable. The Loans make this JV deal attractive and a good one for you.

(b)Mr Beed responded to the effect that he was concerned about the Gordon Finance Loan and whether it would be paid.

(c) Mr Langmaid then said words to the following effect:
You should request Mr Gordon transfer to (sic) the Gordon Finance debt to Gordon Nominees. This would give TLP better security and it might allow you to obtain a larger equity interest in the Trust if Gordon Nominees can't repay the Loans.

Mr Beed gave the following evidence to similar effect:

I asked whether the Gordon Finance Loan was payable. Mr Langmaid said that the Loans were payable and that TLP should pursue them once the deal had been completed. I said that I was concerned about this particular loan to an unrelated Gordon entity.
Mr Langmaid said words to the effect that we should request that Mr Gordon transfer the Gordon Finance debt to Gordon Nominees so that a related party owed the debt.

Mr Langmaid, who attended under subpoena from the defendants, gave evidence that he believed the debts were due and payable to Queenfield from an accounting perspective; but ‘they were intercompany loans and they were not recoverable’. He stated:

Unfortunately, my recollection is very clear on the matter. I told them no intercompany loans would be recoverable and that’s why they should be moved off the balance sheets.

He said that after the transfers an equity adjustment was then required ‘because the whole lot needs to be written off for the sale purposes’. He said the words he used at the meeting were ‘written off’ but ‘by definition [the use of those words] means it has to be an equity adjustment’.

Credibility of Mr Paolacci

Mr Paolacci swore an affidavit on 17 October 2017 in the Statutory Demand Proceedings. In the affidavit, he deposed with respect to Clause (i) as follows:

My letter of 15 June 2015 sought to progress negotiations that had stalled on Moishe Gordon's insistence that TLP lend him $2.1 million as part of its acquisition.
Paragraph (i) of that letter refers to the Debt and proposes that the Debt be transferred, not cancelled or written off, to another entity outside of Queenfield, with Queenfield's books to be adjusted such that its net equity position remained constant.
In making the statement at paragraph (i) of my letter of 15 June 2015, I proposed an assignment of the Debt. My request for the equity of the unitholders in Queenfield to be adjusted was to ensure that consideration was paid for the assignment of the Debt.

In cross-examination in this proceeding, Mr Paolacci explained that, at the time he swore that affidavit, his understanding was that the intercompany loans could be transferred out, but Queenfield’s equity position had to remain constant, and therefore Mr Gordon would have to ‘inject money in’. He explained that that was his memory at the time in 2017, but his position had changed because he had ‘actually referred to all of [his] documents’.

With respect to Mr Paolacci’s evidence in this proceeding that he understood Clause (i) as reflecting what he deposed Mr Langmaid had said about novating the Gordon Finance Debt to Gordon Nominees so that it would be recoverable from a solvent debtor, he explained how that did not find its way into the Sale of Units Deed as follows:

HIS HONOUR: Just let me ask one thing arising from that, then. Your understanding of item i was that you had an entitlement to get the Gordon Finance debt transferred across to Gordon Nominees?---I would have liked to have had, yes.
Yes. And that's the effect of item i?---That's right.
Did you ever request that that happen?---In our proposals, yes.
Other than where item i is referred to – but did you suggest that it should go in the sale deed, for example, that - - -? ---No. I just assumed he left it out on purpose.
Did you ever raise with anybody the fact that it has been left out?---No.
Was there any reason why you didn't raise that?---No. I assumed that they didn't want it in there. They – they drafted the deeds.

Mr Paolacci’s evidence was unsatisfactory for the following reasons:

(a)He swore in his affidavit of 17 October 2017 in the Statutory Demand Proceedings that Clause (i) contemplated the assignment of the intercompany loans as assets of Queenfield to ‘somebody else’. Mr Paolacci was clear as to his understanding of Clause (i) when swearing his affidavit on 17 October 2017 as being as follows:
HIS HONOUR: In reading that – in reading those paragraphs now, 20 and 21 [of his affidavit on 17 October 2017], should I understand that the effect of those paragraphs were that your understanding was [that] … the Gordon Finance and the Gordon Nominees debt would both be transferred out, but the amount of those debts would be paid into Queenfield as consideration for that transfer?---Yes.

(b)His evidence to the Court two years later at the trial of this proceeding, that Clause (i) referred to the transfer of the liability for the Gordon Finance Debt to Gordon Nominees, was explained by nothing more than that he had since read his documents. There was no attempt to explain what documents had caused him to change his evidence or how the documents assisted his recollection of events that occurred in mid-June 2015.
(c)Mr Paolacci’s evidence at the trial was that Clause (i) represented the securing of the Gordon Finance Debt from an insolvent company to a solvent company. His evidence that he did not press for it to be included in the Sale of Units Deed because he ‘assumed that they didn’t want it in there’ defies credibility, and is inconsistent with his evidence that ‘[t]he debts are a key component of the whole structure. Without the debts, there’s no deal’.
(d)Mr Paolacci gave evidence that he did not discuss the Gordon Debts between 1 July 2015 and 23 February 2017 because ‘[i]t was pointless … It was a deadlock’. In my opinion, this is not consistent with Mr Paolacci understanding that the retention of the Gordon Debts in the Unit Trust was as intended by Mr Gordon and himself. It is more consistent with the fact that he well knew that Mr Gordon did not believe that the debts were recoverable by the Unit Trust after the Sale of Units Deed was executed.

Credibility of Mr Beed

Mr Beed is closely associated with the Paolacci family. He has been the Paolacci family accountant for almost 20 years and was appointed by them as the alternate director for Torino Paolacci on the board of Queenfield.

Mr Beed said that he did not consult with Mr Paolacci prior to swearing his affidavit, but the close alignment between the two versions was notable, not only with respect to the substance of the meeting on 9 June 2015. Both gave evidence of an earlier meeting on 22 April 2015 in which Mr Beed said:

I then returned to the Crest with Lina. I spoke with John Paolacci and Lina about the meeting at the Travel Inn. I said that I had seen some financial documents which Helen had shown us. I said that it looked good on paper from a profit and loss perspective, however, I had seen a number of loans and other possible liabilities. I said that we have no idea what liabilities might be attached to the business. I said that we didn't know what Mr Gordon would have to pay to his wife under the divorce terms. I said "it all looks too hard". I said that the only way the Paolaccis should consider any deal is if they set up a new entity and transferred the land and the business as a going concern.

Mr Paolacci’s evidence about the same meeting was very similar. He deposed:
Dennis Beed then said that Ms Williams had shown him some financial documents and that Mr Beed thought “it all looks too hard” because of various loans and unknown liabilities.
Mr Beed said that the only way we could consider investment was if there was a new entity and transferred the assets into that entity. He also said that the business looked as though it was run well and profitable.[21]

[21]Underlining added.

The relevance of this evidence was presumably that there would need to be strong incentives for the Paolaccis to agree to purchase units in the Unit Trust. In the witness box, Mr Beed gave evidence that:

(a)normally the purchaser would buy an interest directly in the freehold and the assets of the business (rather than in the existing holding corporation or trust);
(b)as at April 2015, it had not been suggested to him that the purchase transaction would be on any other basis; and
(c)he had no reason to assume that the Paolaccis would purchase their interest on any other basis.

Mr Beed was unable to explain why, if he assumed as at April 2015 that his client would buy a direct interest in the Motel freehold and business, he was troubled about the number of loans and other possible liabilities of the business such that both he and Mr Paolacci had summarised his advice as ‘it all looks too hard’.
Credibility of Mr Langmaid

On behalf of the plaintiff, it was submitted that I should treat Mr Langmaid’s recollection of what was said at the 9 June 2015 meeting with caution, for the following reasons:

(a)His affidavit sworn 20 August 2019 did not describe the discussions at the meeting on 9 June 2015. The affidavit simply denied that he said that the Gordon Debts were due and payable, that they made the deal attractive and that the priority should be to pursue the loans once the transaction took place.
(b)He was imprecise with respect to terminology, and the words ‘written off’, ‘adjusted-out’ and ‘transferred out’ meant the same thing to him.
(c)His evidence contradicted his affidavit of 18 October 2017 in the Statutory Demand Proceedings, because in that affidavit he said that:
(i)he never discussed with Mr Gordon that the debts would be forgiven or written off;
(ii)Gordon Finance was not a unit holder and was therefore unable to have its debt written off against the asset reserve; and
(iii)the debts were due and payable.

(d)      He used the term ‘recoverable’ in two different senses, to mean that:
(i)       the debt could not as a matter of fact be recovered; and
(ii)      more technically there was no basis for recovery.

I consider Mr Langmaid was an honest witness, who gave his evidence in a straightforward manner without attempting to craft it for the benefit of either party. In my opinion, his independence in this regard is demonstrated by the following:

(a)He terminated his accountancy retainer with Mr Gordon and his related entities in May 2014, when he told Mr Gordon that he ‘was unwilling to accept any further work from him’. Although he continued to accept instructions from Ms Williams with respect to the Motel business, his contact with Mr Gordon was limited to his past accounting and administration services. He attended to give evidence on subpoena.
(b)He had been joined by the defendants as a third party.
(c)In the Statutory Demand Proceedings, he had been prepared to swear an affidavit on 17 October 2017 in support of Queenfield against the applications of Gordon Nominees and Gordon Finance.

I accept that, even with an honest witness, the ability to recall the actual words used at a meeting over four years ago is always problematic. However, Mr Langmaid was insistent that:

(a)he did not suggest effectively novating the liability of the Gordon Finance Debt to Gordon Nominees; and
(b)he did state that the Gordon Debts should be transferred to the Gordon Family Trust.

Clause (i) supports Mr Langmaid’s evidence, including the reference to an ‘equity adjustment’, which is a matter one might expect an accountant to consider.

Mr Langmaid gave evidence that he had terminated his services to Mr Gordon from May 2014 and that, when he was asked to attend the meeting on 9 June 2015 by Ms Williams, he was not provided with any information in relation to:

(a) the identity of the potential purchaser or their advisors;
(b)the details of any negotiations for the potential sale that had occurred in the period prior to the meeting; or

(c) any particulars of the potential sale.

In those circumstances, I consider it inherently unlikely that Mr Langmaid would have volunteered that intercompany loans, which he knew to be unrelated to the business the subject of the sale, would be included as part of the sale, or that he would have suggested the means by which the Gordon Finance Debt could be effectively secured.

Mr Langmaid’s evidence, which he gave in the witness box, is not reflected in his affidavits sworn on 17 October 2017 and 20 August 2019. In my opinion, that is not surprising because:

(a)neither of the affidavits deal comprehensively with the discussions on 9 June 2015, however, the latter affidavit does state that the effect of Clause (i) was that the purchaser of an interest in the Unit Trust would not acquire any right to require repayment of the Gordon Debts; and
(b)the earlier affidavit was drawn by solicitors acting for interests adverse to the defendants, being Queenfield’s solicitors.

Credibility of Mr Gordon

Mr Gordon admitted that he forged a minute and perjured himself in his evidence in the Statutory Demand Proceedings. I have accorded his evidence little or no weight except where it is corroborated by other evidence.

Conclusion on the Common Intention

For the reasons set out above, I have accepted Mr Langmaid’s version of the conversation of 9 June 2015. I have also had regard to the following further features in rejecting the plaintiff’s version of events:

(a) The words of Clause (i) are more consistent with the defendants’ version:
(i)The expression ‘intercompany loans’ is plural and, on the plaintiff’s version, it refers only to the Gordon Finance Debt.
(ii)The transfer of the Gordon Debts out of the Unit Trust to the Gordon Family Trust would, from an accounting point of view, require an equity adjustment being a reduction of the net equity in the Unit Trust. A novation of the Gordon Finance Debt to the Gordon Family Trust would not require any such equity adjustment.

(b)The transactions were originally conceived as a sale of half of the Motel business and freehold. The proposed structure in negotiations was:
(i)TLP would purchase a 50% interest in the Motel business and freehold based on a value of $22 million; and
(ii)TLP, as purchaser, would pay $11 million by:
A. cash payment of $5.25 million; and
B.as to the balance of $5.75 million – ‘assume 50% of the liability, repayment of existing mortgage payments and provide company and director guarantee for 50% of the Bank loan’ of approximately $11.5 million.[22]

A similar structure was suggested by Mr Langmaid in his email of 11 June 2015 in which he noted a purchase price of $22 million for the Motel, of which Mr Paolacci would acquire half by assuming 50% of the NAB debt (which he estimated at $6 million) and paying the balance of $5 million.
(c)Accordingly, the plaintiff’s submission was that the true agreement between the parties, after it became a sale of units, contemplated that TLP would acquire a 50% interest in the Gordon Debts without any consideration, in addition to that originally proposed for the Motel business and freehold alone. The correspondence does refer to the risk the purchaser was exposed to by adopting the sale of units structure, and the consequent need for warranties.[23] However, there is no document or evidence of any contemporaneous conversation that supports the proposition that it was intended by the parties that the Gordon Debts would be added to the Motel as part of the purchase price.

[22]The email of 13 May 2015 at 12:12 pm from Mr Paolacci to Mr Gordon in paragraph 26 above.

[23]See, eg, the email of 1 June 2015 from Mr Collins to Mr Paolacci in paragraph 40 above; and the email of 5 June 2015 from Mr Paolacci to Mr Efron in paragraph 46 above.

In my opinion, the plaintiff’s version that what was intended was that TLP would pay $5.25 million for 50% of the net equity in Queenfield and would be immediately entitled to recover debts totalling $5,723,845 (being the total of the Gordon Finance Debt of $4,347,611, and the Gordon Nominees Debt of $1,376,234, recorded as intercompany loans in the 2014 Balance Sheet disclosed to Mr Paolacci), such debts being unrelated to the Motel business or freehold, is inherently improbable.

It was submitted on behalf of the plaintiff that the Gordon Finance Debt had caused the Unit Trust to incur a substantial part of the NAB debt because finance obtained from NAB flowed through the Unit Trust to Gordon Finance for its benefit. So much may be accepted, but TLP received a full offset for assuming 50% of the NAB debt against 50% of the equity in the Motel business and freehold. Accordingly, the plaintiff’s submission does not commercially justify why the vendor would contemplate:

(a)adding an entitlement to approximately $5.7 million in debts; and
(b)volunteering that approximately $4.3 million, being the Gordon Finance Debt, should be secured by Gordon Nominees;

without additional consideration.

I also reject the plaintiff’s submission that the plaintiff’s entitlement to the Gordon Debts was in consideration of TLP being exposed to ‘significant and potentially unknown liabilities for claims that may not have even been brought against the vendor’s company yet’.[24] It may be accepted that purchasing an interest in an existing company carries risks of unknown liabilities, but the evidence establishes that that risk was proposed to be dealt with, and was dealt with, by warranties provided by Gordon Nominees under the Sale of Units Deed.
[24]See the email of 1 June 2015 from Mr Collins to Mr Paolacci in paragraph 40 above.

In the circumstances, I find that the parties’ Common Intention, as reflected in Clause (i), was that the Sale of Units Deed would include the following term:

The intercompany loans, being the loans to Gordon Finance and Gordon Nominees, be assigned to Gordon Nominees as trustee for the Gordon Family Trust.

Did the parties intend that the written instrument would conform to that agreement?

Clause (i) was last confirmed as being an intended term of the Sale of Units Deed between the parties in the email of 18 June 2015 from Efron & Associates to Mr Paolacci. I reject the plaintiff’s contention that there was any change in the Common Intention between that date and execution of the Sale of Units Deed on 1 July 2015, for the following reasons:

(a)There was no documentary or other evidence that either party contemplated that Clause (i) should not be incorporated and that TLP would, through its interest in Queenfield, acquire a 50% interest in the Gordon Debts. In fact, Mr Paolacci gave evidence that the non-inclusion of Clause (i) was never raised.[25]
(b)It is inherently unlikely that parties would agree to a substantial change without any negotiation or discussion, written or oral.

[25]See paragraph 96 above.

I do not consider that the fact other terms referred to in the email of 18 June 2015 were not included in the Sale of Units Deed leads to any different conclusion, for the following reasons:

(a)The other terms, which were not included, were not the subject of any pleading or evidence. Accordingly, I am unable to reach any conclusion as to the reason for their exclusion. Their exclusion may have been the subject of negotiation or their exclusion could have been an oversight (as I have found the non-inclusion of Clause (i) to be). In any event, I do not consider their non-inclusion to be a basis for inferring that the exclusion of Clause (i) was consistent with the parties’ Common Intention.
(b)None of the other terms which were not included approached the significance of Clause (i), which I have referred to above.
(c)The non-inclusion of Clause (i) in the Sale of Units Deed is consistent with TLP assuming that Mr Gordon would effect the assignment prior to settlement (as he later purported to do).

Does the written instrument not reflect the agreement because of a common mistake?

The Sale of Units Deed did not include the term reflecting Clause (i) and, for the reasons set out above, I am satisfied that was the result of a common mistake of each of the parties to the Sale of Units Deed.

Question 2 – Estoppel
Defendants’ submissions on estoppel

On behalf of the defendants, it was submitted that by conventional estoppel the plaintiff is estopped from claiming an entitlement to the Gordon Debts as assets of the Unit Trust, for the following reasons:

(a)The Common Assumption is identical to the Common Intention alleged with respect to rectification.
(b)The relevant parties who proceeded on the basis of the Common Assumption for the purpose of conventional estoppel are Queenfield, Gordon Nominees and Gordon Finance, and it is the assumption of Mr Gordon which is attributed to each of these three entities.

It should be found that Mr Gordon adopted the Common Assumption and proceeded to enter the Sale of Units Deed on the basis of it, for the same reasons as contended with respect to rectification.

Detriment has been suffered by Gordon Nominees for the following reasons:

(a)Gordon Nominees would not have entered the Sale of Units Deed if the Unit Trust retained the Gordon Debts because the purchase price did not take into account the value of the Gordon Debts.
(b)Under the Sale of Units Deed, Gordon Nominees incurred liability to immediately repay Queenfield the Gordon Debts and lost the benefit of the Gordon Debts being assigned to it.
(c)With respect to the Gordon Finance Debt, Gordon Nominees suffered detriment in that its related company, Gordon Finance, became immediately liable to repay Queenfield the Gordon Finance Debt.

An estoppel was also raised to the benefit of Gordon Finance because it, through Mr Gordon, would not have allowed Gordon Nominees to enter the Sale of Units Deed but for the Common Assumption. It has suffered detriment by being required by Queenfield to repay the Gordon Finance Debt.

It would be unconscionable to allow Queenfield to depart from the Common Assumption and demand repayment of the Gordon Debts because the parties conducted themselves on the basis that the intercompany loans did not form part of the sale and would not be recoverable.

With respect to the availability of conventional estoppel arising from pre-contractual communications, it was submitted as follows:

(a)The Common Assumption in this case did not arise from pre-contractual communications, being bilateral negotiations between two counterparties. Here, the Common Assumption arose through Mr Gordon, between Queenfield on the one hand and Gordon Nominees and Gordon Finance on the other hand. There were no negotiations.
(b)The availability of estoppel arising from pre-contractual communications is approved by Saleh v Romanous,[26] and Chartbrook Ltd v Persimmon Homes Ltd.[27]
[26](2010) 79 NSWLR 453 (Giles JA, Handley and Sackville AJJA).
[27][2009] 1 AC 1101 (Lords Hope, Hoffmann, Rodger, Walker and Baroness Hale).

Plaintiff’s submissions on estoppel

On behalf of the plaintiff, it was submitted that the defence based on conventional estoppel should be dismissed, for the following reasons:

(a)There was no Common Assumption, for the same reasons as were submitted that there was no Common Intention with respect to rectification.
(b)There can be no detriment to Gordon Nominees or Gordon Finance in being required to repay due and payable debts. The true detriment would be to Queenfield and its unit holders if Gordon Nominees or Gordon Finance were not required to repay the Gordon Debts.
(c)Gordon Nominees is a party to the Sale of Units Deed which includes an entire agreement clause. Conventional estoppel is not available to estop a party from enforcing a deed with a whole of agreement clause.
(d)To estop the plaintiff from recovering the outstanding Gordon Debts would be a windfall to Gordon Nominees and Gordon Finance. Queenfield continues to owe its debt to NAB.

With respect to the availability of conventional estoppel arising from pre-contractual communications, it was submitted that the Court is bound by Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd.[28]
[28](2012) 37 VR 486.

Further, it was submitted that the defendants were estopped by deed because of the entire agreement clause in cl 13 and the vendors’ warranties in cl 9.2 of the Sale of Units Deed.

Can pre-contractual communications give rise to an estoppel by convention?

I reject the defendants’ contention that the Common Assumption in this case did not arise from pre-contractual communications because the Common Assumption and the estoppel by convention arose between Queenfield on the one hand, and Gordon Nominees and Gordon Finance on the other hand. The Sale of Units Deed was executed by Gordon Nominees, TLP, Queenfield, Ms Paolacci, Mr Paolacci and Mr Gordon. Each of these parties and/or representative entered the deed mistakenly on the Common Assumption.

With respect to the issue of whether the defendants are precluded from alleging an estoppel by convention in these circumstances, I have had reference to the following authorities.

In State Rail Authority of New South Wales v Heath Outdoor Pty Ltd,[29] McHugh JA held that:

(a)The parol evidence rule did not apply to preclude pre-contractual communications that constituted a collateral oral contract because ‘[t]he tendering of oral evidence to prove a contractual term … cannot be excluded until it is determined that any terms in writing record the whole of the parties’ agreement’;[30] and
(b)The pre-contractual communications can give rise to a promissory estoppel if it is ‘unconscionable for a promisor to insist on his strict rights if he has induced the promisee to give them to him by an assurance that they will only be used in a particular way or in particular circumstances and the exercise of those rights is contrary to the assurance’.[31]

[29](1986) 7 NSWLR 170 (Kirby P, McHugh and Glass JJA).

[30]Ibid 191 (McHugh JA).

[31]Ibid 193E (McHugh JA, Kirby P and Glass JA assuming without deciding).

In Johnson Matthey Ltd v AC Rochester Overseas Corp,[32] McLelland J considered that the parol evidence rule operated to exclude evidence of pre-contractual communications in support of an allegation of estoppel by convention. He observed that estoppel by convention ‘is in the nature of an agreement’[33] and therefore evidence of pre-contractual communications should be excluded for the reasons of certainty and the avoidance of unnecessary costs, similar to those identified by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales[34] with respect to the rule excluding proof of the actual, as opposed to the presumed, intention of parties.
[32](1990) 23 NSWLR 190, 195 (‘Johnson Matthey’).
[33]Ibid 195B.
[34](1982) 149 CLR 337, 352 (‘Codelfa Construction’).

In Whittet v State Bank of New South Wales,[35] Rolfe J disagreed with McLelland J in Johnson Matthey and held that evidence of pre-contractual negotiations was admissible in support of an allegation of estoppel by convention. His Honour reasoned as follows:

Whilst I appreciate the significance to be accorded to written contracts and, in general terms the undesirability of their terms being varied save in the case of clear and convincing evidence, it seems to me that it is this very factor, which has been regarded as the touchstone for ordering rectification, which, in the case of estoppel by convention, requires the court to have regard to pre-contractual negotiations. It would be strange, so it seems to me, if matters arising out of pre-contractual negotiations, which could be proved to the extent necessary to justify rectification, namely, by clear and convincing proof, could not be relied upon to found an estoppel by convention because of the source from which they arose.[36]

[35](1991) 24 NSWLR 146 (‘Whittet’).

[36]Ibid 153.

Johnson Matthey was followed in Skywest Aviation Pty Ltd v Commonwealth of Australia;[37] and Australian Co-operative Foods Ltd v Norco Co-operative Ltd.[38] In both cases their Honours held that the parol evidence rule would preclude reliance on both equitable estoppel and common law conventional estoppel.
[37](1995) 126 FLR 61, 104-105 (Miles CJ).
[38](1999) 46 NSWLR 267, 279 [51]-[52] (Bryson J).

In Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd, Allsop J opined, without deciding, that there was ‘force in the views of McHugh JA in his rejection of the exclusion of a role for estoppel (at least in equity) where the detriment founding the estoppel is, in effect, the entry into an agreement’.[39] He appears to have identified a distinction between estoppel in equity and common law estoppel, such as conventional estoppel, observing:

If that be correct, as I think that it plainly is, it is difficult to see why another remedy of equity based on unconscionability and equally arising out of pre-contractual communications should be defeated by a common law rule about the construction of documents.[40]

[39](2001) 117 FCR 424, 544 [447] (with whom Drummond and Mansfield JJ agreed).

[40]Ibid 543-4 [446].

In CG Mal Pty Ltd v Sanyo Office Machines Pty Ltd,[41] Young CJ in Eq rejected a claim in equity for proprietary estoppel on the basis that it was precluded by the entire agreement clause. He preferred to follow Johnson Matthey rather than Whittet, which he noted did not include an entire contract clause.[42]
[41][2001] NSWSC 445.
[42]Ibid [52]-[55].

In Equuscorp Pty Ltd v Glengallan Investments Pty Ltd,[43] the Court considered whether the defendant could rely on an anterior oral agreement in the following circumstances:

(a)The respondents/investors had subscribed for units in limited liability partnerships formed to operate an agricultural farm in Queensland.
(b)For the purpose of paying the subscription moneys and interest in advance, the respondents/investors had entered into written loan agreements with the appellant/lender related to the promoter of the scheme.
(c)The respondents/investors alleged that, prior to entering into the written loan agreement, they had each entered into an oral loan agreement in which the lender had limited recourse to the prepaid interest and two capital repayments.

[43](2004) 218 CLR 471 (Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ) (‘Equuscorp’).

The Court held that, in the absence of allegations of fraud, mistake or misrepresentation (which were not made in that case), the respondents/investors were bound by the written contract they had executed and could not rely on alleged earlier oral agreements.[44]
[44]Ibid 483 [33].

The Court explained:

The respondents each having executed a loan agreement, each is bound by it. Having executed the document, and not having been induced to do so by fraud, mistake, or misrepresentation, the respondents cannot now be heard to say that they are not bound by the agreement recorded in it. The parol evidence rule, the limited operation of the defence of non est factum and the development of the equitable remedy of rectification, all proceed from the premise that a party executing a written agreement is bound by it. Yet fundamental to the respondents’ case that the operative agreements between the parties were wholly oral, and reached earlier than the execution of the written agreements, was the proposition that the written agreements subsequently executed not only may be ignored, they must be. That is not so. Having executed the agreement, each respondent is bound by it unless able to rely on a defence of non est factum, or able to have it rectified. The respondents attempted neither.[45]

[45]Ibid (underlining added).

In my opinion, it is doubtful that the High Court intended by the underlined words to foreclose reliance on common law conventional estoppel arising out of pre-contractual communications. With respect, I would adopt the following analysis of the issue by Campbell JA in Franklins v Metcash:

The underlined portion is not part of the ratio decidendi of the case. Reading Equuscorp v Glengallan Investments as a whole, one has a real doubt about whether the underlined portion was intended by their Honours to be an exhaustive statement of the circumstances in which someone who has executed an agreement can fail to be bound by it. Their Honours seem (at [32]) to have contemplated ways, other than rectification or non est factum, in which a person who has executed an agreement might fail to be bound by it. Their Honours said (at 482 [32]):
“Yet it was not said that the written agreement should be rectified. It was not said that a defence of non est factum was available. It was not said that the written agreement was executed by mistake, or that its execution was procured by misrepresentation as to its contents or effect. (The misrepresentation alleged was as to what had been said in the conversations, not what the document was or provided.)” (Emphasis supplied)

Later, their Honours speak (at 483 [35]) more generally than they did in the portion emphasized from par [33], when they say: “Where parties enter into a written agreement, the Court will generally hold them to the obligations which they have assumed by that agreement. At least, it will do so unless relief is afforded by the operation of statute or some other legal or equitable principle applicable to the case.” Their Honours also spoke more generally (at 483 [35]), “the exceptions must be proved according to established categories”.
It would be surprising, and a major departure from the law as previously understood, if the words that the judge underlined at the end of par [33] were intended to bear the implication that a party who executed a written agreement under the influence of a fraudulent misrepresentation as to a fundamental matter was nonetheless bound by the agreement.[46]

[46](2009) 76 NSWLR 603, 739 [579]-[581].

It is also notable that the High Court in Equuscorp remitted the matter for further consideration of the issues not decided at trial,[47] which included a defence based on conventional estoppel.[48]
[47]Equuscorp (2004) 218 CLR 471, 491.
[48]Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2006] QCA 194, [30] (McPherson JA).

In the appeal from the remittal, the Queensland Court of Appeal gave some consideration to whether the defendant could rely on a conventional estoppel based on an ‘earlier, oral, consensus’. McPherson JA held that ‘[t]he defendants cannot assert a “common assumption” falling short of a contract that is at odds with the express contract to which they agreed and into which they afterwards entered in the knowledge of its terms’.[49] A conclusion he said was supported by the decision of McLelland J in Johnson v Matthey. However, he considered that promissory estoppel was available.[50]
[49]Ibid.
[50]Ibid [31].

Holmes J referred to the divergence of authority between Johnson v Matthey and Whittet, but expressed no preference. She resolved the issue on the basis that the evidence did not reflect a common understanding.[51]
[51]Ibid [114]-[117].

In Franklins v Metcash, Campbell JA held that an equitable estoppel based on previous negotiations and representations would overcome an entire agreement clause in a contract.[52] With respect to the question of whether an estoppel by convention can arise from pre-contractual negotiations, without expressing a concluded view, he considered that the debate might be resolved by determining whether estoppel by convention is a common law or equitable remedy. He observed:

It may be that in considering the correctness of Johnson Matthey closer attention should be paid to whether estoppel by convention is a doctrine of the common law rather than of equity. This examination might be helpful because it seems more in accord with principle that a common law doctrine like the parol evidence rule should restrict the operation of estoppel by convention if estoppel by convention were itself solely a common law doctrine.[53]

[52](2009) 76 NSWLR 603, 734 [554] (Campbell JA), 621 [33] (Allsop P).

[53]Ibid 738-9 [577] (citations omitted).

In Saleh v Romanous,[54] Handley AJA considered the respective histories and concluded that:

(a) estoppel by convention was a common law doctrine;[55] and
(b) promissory estoppel was an equitable doctrine.[56]
He held that promissory estoppel, as an equitable doctrine, could restrain the enforcement of contractual rights based on pre-contractual conduct; and ‘trumped’ the legal rules about parol evidence and entire contracts.[57] He distinguished Johnson Matthey on the basis that it related to estoppel by convention that was a common law doctrine.[58]

[54](2010) 79 NSWLR 453 (Giles JA, Handley and Sackville AJJA).

[55]Ibid 459 [53] (with whom Giles JA and Sackville AJA agreed).

[56]Ibid 459 [54].

[57]Ibid 459-60 [56]-[57].

[58]Ibid 459 [52]-[53].

In Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd,[59] the Court of Appeal found that estoppel by convention did not arise on the facts of the case. However, the Court preferred the approach of Johnson Matthey to the approach of Whittet and agreed that the parol evidence rule excludes evidence of estoppel by convention alleged to arise from pre-contractual communications.[60]
[59](2012) 37 VR 486 (Warren CJ, Harper JA and Robson AJA) (‘Retirement Services Australia’).
[60]Ibid 522 [137]-[139].

In FJ & PN Curran Pty Ltd v Almond Investors Land Pty Ltd,[61] the Court of Appeal considered the authorities relating to the question of whether evidence of oral pre-contractual communications may be given in support of alleged estoppel by convention. It did not consider itself bound to follow the decision in Retirement Services Australia because the Court, in that case, had rejected the conventional estoppel on the basis that it was not made out on the facts; and therefore that Court’s comments were obiter. Similarly, the Court there was able to determine the issue before it on the facts and declined to finally decide the question.
[61][2019] VSCA 236 (Whelan, Niall and Ashley JJA) (‘FJ & PN Curran’).

The defendants relied on the decision in Chartbrook Ltd v Persimmon Homes Ltd.[62] In that case, the House of Lords considered a dispute as to the meaning of the expression ‘additional residential payment’ in a contractual term. The defendants/appellants sought to rely on documents exchanged in pre-contractual negotiations in support of their construction of the term, and alternatively claimed rectification of the contract.
[62][2009] 1 AC 1101 (Lords Hope, Hoffmann, Rodger, Walker and Baroness Hale) (‘Chartbrook’).

The House of Lords noted that the exclusionary rule did not prevent evidence of pre-contractual negotiations for the purpose of establishing:

(a)that parties habitually used words in an unconventional sense, which is known as the ‘private dictionary’ principle,[63] or evidence of linguistic usage in a trade or among a religious sect;[64] or
(b)a claim for rectification or estoppel by convention.[65]

However, it was not permissible to admit evidence of previous communications for the purpose of drawing inferences about what the contract meant.[66]

[63]Ibid 1122 [45]; Partenreederei MS Karen Oltmann v Scarsdale Shipping Co Ltd (The Karen Oltmann) [1976] 2 Lloyd’s Rep 708, 712 (Kerr J) (‘The Karen Oltmann’).

[64]Chartbrook [2009] 1 AC 1101.

[65]Ibid 1121 [42], 1122 [47].

[66]Ibid 1121 [42].

Similarly, in Vector Gas Ltd v Bay of Plenty Energy Ltd, the majority of the Supreme Court of New Zealand expressed the view that pre-contractual communications could be relied on in support of an allegation of estoppel by convention, on the basis that it related to or subsumed the ‘private dictionary’ principle.[67]
[67][2010] 2 NZLR 444, 459 [25] (Tipping J), 472 [74], 475 [84] (McGrath J) and 483 [124] (Gault J).

In my opinion, the state of the law with respect to the admissibility of pre-contractual communications in support of a common law estoppel by convention may be summarised as follows:

(a) The question has not been definitively resolved on the Australian authorities.
(b)The predominant view is that pre-contractual communication may be relied on in support of an equitable estoppel but not a common law conventional estoppel.
(c)The law in England and New Zealand does not recognise any prohibition on the admissibility of pre-contractual communications in support of an estoppel by convention.

Although the Court of Appeal in FJ & PN Curran[68] was correct to observe that the statement by the Court in Retirement Services Australia was obiter, I consider the clarity of the statement was such that I should not diverge from it.
[68][2019] VSCA 236 (Whelan, Niall and Ashley JJA).

Accordingly, I shall dismiss the defendants’ claim based on estoppel by convention.

I do observe that with the Court’s powers to ensure that the terms of the contract are justly interpreted to accord with the parties’ intentions by:

(a)       supplying, omitting or correcting words to avoid absurdity or inconsistency;[69]
(b)      admitting evidence that a particular interpretation was:
(i)       rejected;[70] or
(ii)      accepted;[71]
by the parties; and
[69]Fitzgerald v Masters (1956) 95 CLR 420, 426-7 (Dixon CJ and Fullagar J); MAAG Developments Pty Ltd v Oxanda Childcare Pty Ltd(As Trustee for Oxanda Education Services Trust) [2018] VSCA 289, [53]-[55] (McLeish, Hargrave JJA and Almond AJA).
[70]Heimann v Commonwealth of Australia (1938) 38 SR (NSW) 691, 695 (Jordan CJ); Jsam (AMC) Pty Ltd v Australis Marketing Corp (Int) Pty Ltd (Supreme Court of Victoria, Hayne J, 23 February 1995) 20-1; Codelfa Construction (1982) 149 CLR 337, 352-3 (Mason J).
[71]The Karen Oltmann [1976] 2 Lloyd’s Rep 708, 712 (Kerr J); B & B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd(1994) 35 NSWLR 227, 235-6 (Kirby P); Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004] NSWSC 149, [182] (Einstein J).

(c) rectifying the contract;
the need for the additional remedy of estoppel by convention based on pre-contractual negotiations is not readily apparent.
Orders

In the circumstances, the defendants are entitled to have the Sale of Units Deed rectified by the inclusion of the following clause:

The intercompany loans, being the loans to Gordon Finance and Gordon Nominees, be assigned to Gordon Nominees as trustee for the Gordon Family Trust.

I will hear the parties on the consequential orders.

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[2019] VSC 857

24 December 2019