R K Property Holdings Pty Ltd v BCOOL Pty Ltd
[2015] VSC 754
•21 December 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2012 02682
| R K PROPERTY HOLDINGS PTY LTD (ACN 120 088 959) | Plaintiff |
| v | |
| BCOOL PTY LTD (ACN 077 803 162) | Defendant |
and
| BCOOL PTY LTD (ACN 077 803 162) | Plaintiff by Counterclaim |
| v | |
| R K PROPERTY HOLDINGS PTY LTD (ACN 120 088 959) | First Defendant by Counterclaim |
| and | |
| ROBERT KUKAS | Second Defendant by Counterclaim |
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JUDGE: | ALMOND J |
WHERE HELD: | Melbourne |
DATES OF HEARING: | 11, 12 June 2015 |
DATE OF JUDGMENT: | 21 December 2015 |
CASE MAY BE CITED AS: | R K Property Holdings Pty Ltd v BCOOL Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2015] VSC 754 |
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JOINT VENTURE – Taking of final accounts – Unsubstantiated expenditure – Determination of items in dispute – Content of fiduciary duty – Net assets to be applied first to defendant’s equity and then to plaintiff’s equity.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | S A Kirton | Johnston Construction Lawyers |
| For the Defendant | W F Gillies | RB Legal Pty Ltd |
HIS HONOUR:
These reasons are ancillary to, and should be read in conjunction with, my reasons for judgment delivered in this proceeding on 28 October 2014. [1]
[1]R K Property Holdings Pty Ltd v BCOOL Pty Ltd [2014] VSC 548 (‘reasons for judgment’), [8].
In these reasons I will not restate the background facts in any detail. It is enough to note that the proceeding arose out of disputes between the plaintiff and the defendant as joint venturers developing properties known as the Ultimo Project in South Yarra and the Shipley Project in Toorak.
At the time of the trial, the parties agreed on their respective contributions, drawings and on some issues but were unable to agree upon other issues and as a result a final account of the joint venture could not be taken. Initially, six issues remained in dispute. In final submissions at the trial, the defendant conceded one of these issues. The five remaining issues were determined by the Court and a chartered accountant, Mr A.L. Law, (nominated by the parties) (‘the Accountant’)[2] was served with the reasons for judgment and directed to file and serve a report setting out the final accounts of the joint venture.[3]
[2]The Accountant was appointed pursuant to the order of Almond J dated 3 May 2013, which was made by consent.
[3]Order of Almond J dated 19 December 2014.
Pursuant to this court direction, the Accountant filed and served a report dated 21 March 2015.[4] It was apparent from the joint venture balance sheet in the March 2015 report that there was a significant item described as a ‘balancing adjustment’, which the Court was informed represented expenses claimed but not allowed by the Accountant. As there remained a dispute as to the status of the balancing adjustment, a regime was put in place to resolve or at least reduce the dispute between the parties to facilitate the taking of final accounts. Among other things, the Accountant was then directed to:[5]
[4]Report of A.L. Law, Chartered Accountants, dated 6 March 2015, which was amended by Amended Report of A.L. Law, Chartered Accountants, dated 21 March 2015 (collectively ‘March 2015 report’).
[5]Pursuant to the order of Almond J dated 22 May 2015.
· accept certain items which had been agreed between the parties;
· meet with the representatives of the parties;
· consider items not agreed by the parties;
· adjust for expenditure relating to construction of the plaintiff’s apartment (not part of the joint venture costs) and for consequential apportionment of GST;
· include, if possible, actual figures with respect to settlement of the sale of one of the joint venture apartments;[6] and
· propose some final accounts after considering whether amounts not agreed by the parties appeared to have been validly spent on the joint venture and were justifiable on primary source documents provided.
[6] Apartment 3, Shipley Street.
Pursuant to the order, the Accountant filed a further report (‘June 2015 Report’). Notwithstanding the best efforts of the Accountant to finalise a set of joint venture accounts, the June 2015 Report, which sets out an adjusted equity position as between the parties, includes a Joint Venture Balance Sheet with a balancing adjustment of $1,096,572, reflecting claimed but unsupported expenditure which the accountant has disallowed. It is convenient to set out the final adjustment equity statement and simplified Joint Venture Balance Sheet below (substantially) in the final form prepared by the Accountant.
Equity Statement Plaintiff Defendant Total Agreed position as at 31 March 2015 Contributions and Drawings 3,018,895.20 2,561,649.00 5,580,544.20 Share of profit -1,261,068.00 -1,245,100.00 -2,506,168.00 Ultimo adjustments Interest -11,452.20 -7,634.80 -19,087.00 Project management Commission -144,896.00 -144,896.00 Furniture package -41,880.00 -41,880.00 Shipley adjustments Project management -309,580.00 -309,580.00 GST on Shipley Apartment 1
-34,620.80
-34,620.80
-69,241.60
2
-81,317.71
-81,317.71
3
-34,699.22
-34,699.72
-69,398.44
4
-37,149.73
-37,149.73
-74,299.46
5
-97,824.35
-97,824.35
Equity 1,470,200.90 666,650.74 2,136,851.64 less Reconciliation Items Plaintiff Defendant Interest on drawings -48,632.51 -43,836.00 -92,468.51 Variation in share of profits and costs -319,246.17 -240,834.83 -560,081.00 Project management -100,420.78 -100,420.78 Interest on project management -3,826.50 -17,317.67 -21,144.17 Conservatory -10,024.00 10,024.00 0.00 Subtotal 482,149.96 291,964.50 Adjusted Equity subtotal 988,050.94 374,686.24 1,362,737.18 plus GST removed from contributions -257,401.00 -257,401.00 Apt 3 proceeds of sale 914,456.00 914,456.00 1,828,912.00 less Drawing (to pay NAB) -621,690.00 -645,606.00 -1,267,296.00 Final Adjusted Equity 1,023,415.94 643,536.24 1,666,952.18
Joint Venture Balance Sheet
Adjusted
Assets
$
Cash in MA Legal Trust Account
265,319
Cash in SC Trust Account
562,463
Total Assets
827,782
Liabilities
-
GST owing to RK (paid on behalf of the Joint Venture)
-257,401
Net Assets
570,381
Equity
Plaintiff
1,023,416
Defendant
643,536
Total Adjusted Equity
1,666,952
Balancing adjustment
-1,096,572
The Joint Venture Balance Sheet reflects the fact that whilst there is total adjusted equity of $1,666,952 the net assets available to satisfy the equity is only $570,381. The difference between the total adjusted equity and net assets is $1,096,572, characterised by the Accountant as a ‘balancing adjustment’, which reflects unsubstantiated expenditure.
Counsel for the plaintiff informed the Court that ‘substantiation’ of components of the balancing adjustment was necessary to meet a contention by the defendant that approximately $1 million was ‘missing’ and needed to be accounted for by the plaintiff. The plaintiff contended that there was no ‘missing’ amount and that components making up the $1,096,572 balancing adjustment item represented actual expenditure, even though the plaintiff did not seek to recover any part of this amount or to have any of the components brought to account as part of joint venture expenses.
At a further hearing, the parties were given an opportunity to adduce further evidence and make submissions on the June 2015 Report (including submissions as to the status of the balancing adjustment) and to propose final orders.
To that end, the plaintiff adduced evidence from Mr Dowsley (chartered accountant, who had assisted Mr Law, the Court-appointed Accountant, in the preparation of the relevant reports), the plaintiff’s accountant, Mr Walker (previously the joint venture accountant), Mr Kukas, a director of the plaintiff, and the plaintiff’s site manager, Mr Lau.
The plaintiff submitted that the Court should determine each party’s equity position and make orders for the distribution of the assets of the joint venture in amounts proportionate to the equity position so determined.
The defendant agrees with the June 2015 Report, and in particular agrees to all the items which the Accountant has determined are substantiated on the documents. It submits it should be paid the full value of its equity as assessed in the Joint Venture Balance Sheet ($643,536), together with an adjustment based on re-assessing the metreage of the floor area of Mr Kukas’ apartment in the Shipley Street development, with consequential changes which would have the effect of increasing the defendant’s monetary entitlement. I will deal with that issue separately.
For the avoidance of doubt, it is not suggested and I do not find that the plaintiff misappropriated the proceeds of the joint venture. Nevertheless, I consider that accounting for the expenditure of the joint venture has been seriously deficient.
Indeed the joint venture accountant, Mr Walker, was obliged to concede in cross-examination that in the process of accounting for the joint venture he had overlooked $1 million, which he asserted was made up of variations to contributions, drawings and expense items. In relation to the largest of these items, ($686,000) for an asserted variation to the parties’ respective contributions and drawings, Mr Dowsley examined spreadsheets and support documents provided by Mr Walker’s firm. He was not shown any bank statements, but a reconstructed ledger based not on primary source documents but on summaries posted to the ledger. Mr Dowsley gave evidence that he looked through the documents that were provided and compared that information with the previous position and found no evidence of extra contributions or drawings that needed to be accounted for.
The same problem arose in relation to asserted expenditure with respect to the Shipley Project ($499,674) and with respect to the Ultimo Project ($102,067). Both rely on a reconciliation based on the reconstructed general ledger sourced from summaries. Accordingly, the figures are not verifiable. This is most unsatisfactory.
In relation to the Shipley Project, Mr Dowsley allowed $477,169 as supported expenditure and disallowed $499,674 as unsupported expenditure. In relation to the Ultimo Project, Mr Dowsley allowed $82,912 as supported expenditure and disallowed $102,067 as unsupported expenditure.
Mr Dowsley gave evidence for and on behalf of the Accountant as he had greater familiarity with the materials. He was an impressive witness. He gave his evidence as an independent expert should: carefully, methodically and objectively. He was questioned in relation to the following items which he had disallowed:
(1) Shipley Project
Accountancy fees
Mr Dowsley disallowed two invoices for accountancy fees for $11,770 and $9,277 respectively.[7]
[7]Exhibit P10.
The invoice for $11,770 is dated 31 October 2011 and includes the description ‘for fees for ongoing matters in respect of the finalisation of the Shipley Street Project’. The invoice for $9,277 includes the description ‘numerous phone calls, emails and discussions in respect of finalisation of the Shipley Project with respective solicitors, Robert Kukas and Steve Calfas’. Mr Dowsley considered that these invoices were for fees incurred after the project had finished, bearing in mind that the construction had finished in 2010. Mr Dowsley accepted there would be matters to attend to after construction including finalising matters with the taxation office, finalising accounts between joint venturers and updating project spreadsheets during the period 1 February to 31 October 2011. Mr Dowsley agreed that the properties had not all been sold at that stage and that the work could be part of the joint venture project.
In relation to the invoice for $9,277, Mr Dowsley conceded that an item referred to in the narration in the invoice ‘Reviewing information on settlement of apartment 1 together with possible dispersal of funds’ would be part of the work required to be carried out as part of the joint venture. At the foot of this invoice there is a statement, ‘Refer attached detailed listing of matters’. Mr Dowsley said that he was not provided with, and never saw, a detailed listing of matters.
Mr Dowsley did not take issue with the reasonableness of the amounts of these invoices; rather, he said that he was not entirely comfortable that the amounts would all be attributed to the joint venture project; that by October 2011 the relationship between the parties had broken down and Mr Steve Calfas (referred to in the invoice), an accountant, was then representing Mr Khouri’s interests and Mr Walker, also an accountant, was then representing Mr Kukas’ interests.
In my view, the first of the two tax invoices (dated 31 October 2011 for $11,770) probably should have been allowed as an expense of the joint venture. Mr Dowsley conceded the nature of the matters do reflect the description of ongoing matters in respect of the finalisation of the Shipley Street Project. Mr Dowsley was correct to disallow the second of the two invoices (dated 28 September 2012 for $9,277) in the absence of the detailed listing of matters which may have made it possible for Mr Dowsley to determine what, if any, amount should have been allowed.
As the plaintiff only seeks to explain the expenditure that has not been substantiated to the satisfaction of the Accountant, it is not necessary to make a finding with respect to either of these amounts. Nevertheless, for the purposes of getting an accurate picture of the extent of the balancing adjustment for unsupported expenditure, $11,770 of accountancy fees should move from the unsupported category in to the supported category. Different considerations apply with the respect to the second invoice. By September 2012 it is apparent that the parties were dealing with their respective solicitors and the legal proceedings and a subpoena had been issued.
Interest
Mr Dowsley disallowed $85,689 interest relating to interest paid on loans from Mr Claus Newhouse ($23,825 of interest), and interest payable to Mr Kukas of $61,864 (comprising two amounts of $30,932). These claims were rejected by Mr Dowsley as joint venture interest expense because Mr Dowsley was not provided with any documentation for the transactions.
Interest expenses were dealt with and allowed at trial. Mr Kukas gave evidence that he made an error and did not include the second amount of $30,932 in a summary of payments though it was included in the spreadsheets relied on at trial. Whether this is so is unclear, but as a category the interest payable to Mr Kukas was accepted. Accordingly, for the purposes of getting an accurate picture of the extent of the balancing adjustment for unsupported expenditure, these expenses should move from the unsupported category into the supported category.
Legal expenses
Mr Dowsley disallowed $12,425 for claimed legal expenses of the joint venture. These expenses comprise expenses relating to legal proceedings brought by Mr Claus Newhouse with respect to a loan he provided to the joint venture, and in relation to proceedings brought by Hibar Court Pty Ltd (trading as Earthlift) with respect to the joint venture. Both of these should be allowed. I am not satisfied that expenses of Mr Kukas’ legal counsel with respect to proceedings against Stonnington Council do not relate to a town planning dispute concerning Mr Kukas’ apartment. Mr Kukas gave no evidence to clarify this. Accordingly, I accept that $9,825 of these legal expenses are supported and should move from the unsupported category into the supported category.
Mediation costs
Mr Dowsley disallowed conciliation conference and mediation conference costs incurred in October and November 2012 respectively. The defendant objected that these costs are not properly to be considered at this time. I uphold this objection. The costs of the mediation are properly costs of the proceeding which are not, for present purposes, being considered.
Rates
The parties, through their counsel, agreed that $5,536 with respect to rates should be allowed.
Office expenses
Mr Dowsley considered that office expenses are properly considered part of project management fees and disallowed the claim for $57,412 made with respect of this item.
Office expenses were dealt with at trial and were allowed to the extent of $37,635.69 (with respect to the Shipley Project) and $30,191.44 (with respect to the Ultimo Project). Counsel for the plaintiff submitted that the $57,412 claimed with respect to this item for the Shipley Project was in addition to the $37,635 allowed with respect to this item at trial. I am not satisfied that there is any basis to allow an additional $57,412 to the Shipley Project office expenses. There is no evidence to suggest that Mr Dowsley had any of the documents purporting to support additional office expenditure explained to him or distinguished in any way from documents supporting the office expenses allowed at trial. Accordingly, this item should remain in the unsupported category.
Motor vehicle expenses
Mr Dowsley disallowed motor vehicle expenses because there were no primary source documents and he thought they should be part of the project management fee. Motor vehicle expenses were dealt with at trial. $2,960 was allowed for this item. Counsel for the plaintiff sought to have a further $22,038 with respect to motor vehicle expenses based on an assertion with no primary source documents to support the assertion. In my view, this item should remain in the unsupported category.
Tax
Mr Dowsley disallowed this claim for $5,572. In cross-examination, it was suggested that as part of the accounting to the Australian Tax Office for GST and PAYG payments, and after taking into account credits made to the plaintiff, there was a difference of $5,572 that had not been accounted for. Mr Dowsley said he would probably have to look into it before he could say the item should be accepted.
At trial, $27,385 was allowed for tax with respect to the Shipley Project. In my view, the posited additional claim for $5,5,72 was not established on the balance of probabilities. In my view, this item should remain in the unsupported category.
Furnishings
Mr Dowsley refused to allow this item for $9700 on the basis that there was no supporting documents. The witness was shown a quote or a scope of works from the Blind Factory with respect to the provision of blinds. The quote is for $6,500 (not $9,700) and the quote is dated 16 March 2010. The receipt is dated 10 June 2015 for $9,700. There is clearly an inconsistency between the documents. Mr Dowsley said he would not have allowed the payments because he was not sure whether the documents were quotes or invoices. Further, Mr Dowsley said he would have sought confirmation that the blinds were delivered to unit 1 as indicated on the quote. Mr Dowsley also gave evidence that it is not clear how the figure of $9,700 is arrived at and there is no delivery address on the receipt. Mr Kukas gave evidence that installation of the blinds was agreed for the sale of apartment 1. He said he would have paid the Blind Factory by cheque, but that he had no other record of independent recollection that $9,700 was paid, and that the amount would be in the spreadsheets. Furnishing expenses were dealt with at trial. In the case of the Shipley Project, $29,125 was allowed with respect this item. It is not possible to know whether this item has already been allowed in whole or part or whether it should be for $6,500 or $9,700. No cheque butt was produced. I am not satisfied that this item should be moved from the unsupported category into the supported category.
Additional construction and project costs
Mr Dowsley disallowed $271,687 of additional construction and project costs claimed on the basis that there were no primary source documents to support the additional costs. In my view, this was the correct approach. The plaintiff was unable to produce comprehensive primary source documents to prove the construction costs at trial. To obviate this difficulty, the plaintiff engaged a quantity surveyor to reverse engineer the construction costs. The only allowable costs for construction are those established at trial by adoption of the WT Partnership quantity survey report.[8] This item should remain in the unsupported category.
[8]Exhibit P4.
One additional project cost, which is supported by the evidence of Mr Lau, is the cost of preparation for sale of apartment 3, Shipley Street, which involved render and plaster repairs, painting and the removal of stains and cleaning of marble. In my view $10,235 should be allowed for this item.[9] Another cost which should be allowed is the cost of the property valuation obtained to facilitate the agreement of the defendant to effect a sale.[10] In total, additional proven project costs of $12,535 as selling costs of apartment 3 at Shipley Street are allowable as supported expenditure.
[9]Witness statement of Jonathan Lau dated 4 June 2015, [15]-[17], Exhibit P11.
[10]Witness statement of Robert Kukas dated 5 June 2015, [48], RK-18.
Summary – Shipley Project
In summary, the plaintiff established that unsupported expenditure items on the Shipley Project (accountancy fees ($11,770), interest ($85,689 which was included in amounts allowed at trial), legal expenses ($9,825) rates ($5,536) and selling costs ($12,535)) or a total of $125,355 should be regarded as supported expenditure on the Shipley Project. This has the effect of reducing the unsupported expenditure on the Shipley Project from $499,674 to $374,319. This is still a very substantial component of unsupported expenditure, which includes approximately $271,000 of construction costs for which there is no primary source documents.
(2) Ultimo Project
GST
The plaintiff claimed $124,100 for GST. Mr Dowsley discounted this figure by one third to $82,733.
The total claimed amount of GST was based on applying a flat 10 per cent to the cost of construction of the Ultimo Project of $1.241 million, as assessed by WT Partnership (excluding GST).[11] This claim is plainly wrong. It makes no allowance for the fact that the costs of construction include wages paid to construction workers. GST is not payable on wages. Mr Walker accepted that in hindsight the claim for GST may be wrong. Neither Mr Dowsley nor Mr Walker calculated the exact figure payable for GST on the costs of construction. Mr Dowsley correctly identified the error and allowed two-thirds of the amount claimed as reflecting a broad brush estimate of costs subject to GST. Mr Walker said he did not know what the allowance should be, that it may be 90 per cent. On balance, I accept Mr Dowsley’s judgment on this item. Mr Walker was obviously not independent. He has been the plaintiff’s accountant for many years. He erroneously claimed the full 10 per cent for GST on the WT Partnership assessed costs for construction and clearly had not turned his mind to what the allowance should be. In my view, Mr Dowsley’s objective evidence is likely to be more reliable. Accordingly, I accept that one-third of the GST claimed ($41,367) is correctly characterised as unsupported.
[11]Exhibit P3, Verification estimate of the Ultimo project
Interest
Mr Dowsley disallowed a claim of $6,500 for additional interest. Interest expenses were dealt with at trial. $129,916.35 was allowed for interest expenses on the Ultimo Project. In the absence of primary source materials unequivocally showing that the $6,500 has not already been taken into account, I accept Mr Dowsley’s view that this item should remain in the unsupported category.
Additional construction costs
Mr Dowsley disallowed $54,200 of additional construction costs claimed on the basis that there were no primary source documents to support the additional costs. In my view, this was the correct approach. I accept Mr Dowsley’s view that this item should remain in the unsupported category.
Summary – Ultimo Project
In summary, the plaintiff has not established that any of the items which Mr Dowsley rejected as unsupported should be allowed. Accordingly, with respect to the Ultimo Project, $102,067 is properly characterised as unsupported expenditure.
Again, it must be observed that the extent of unsupported expenditure on the Ultimo Project reflects seriously deficient account keeping with respect to the project.
Consequential adjustments
The total amount of supported expenditure of $125,355, not presently accounted for with respect to the Shipley Project, will increase costs brought to account to the extent of $62,677 for each joint venture party. It will be recalled that in the case of the Shipley Project the agreed percentage split was 50/50.
In the circumstances, the final adjusted equity position of each party will be reduced by $62,677 to reflect these additional supported costs. The value of the plaintiff’s equity will therefore be reduced from $1,023,416 to $960,739. The defendant’s equity will be reduced from $643,536 to $580,859.
Outstanding liability for GST owing to the plaintiff
In the June 2015 Report, Mr Dowsley and Mr Law re-characterised GST which had been paid by the plaintiff (or an entity associated with the plaintiff) on behalf of the joint venture by deducting the appropriate amount ($257,401) from contributions made by the plaintiff and adding it to liabilities of the joint venture.
The plaintiff accepts that the GST of $257,401 should be reimbursed to RK Property Developments Pty Ltd. The defendant opposes the treatment proposed by the Accountant.[12] The defendant submitted that the plaintiff should have ‘no priority for its payment to the ATO’. The underlying basis for this argument seems to be that the plaintiff should be punished because it ‘drained the joint venture’s cash flow or simply failed to retain records of where it expended the joint venture’s funds’.[13] I am not persuaded by this submission. I accept the Accountant’s view that GST is properly characterised as an expense of the joint venture. It is no different to any other expense item. It is appropriate that all creditors are paid before any final proceeds of the joint venture are distributed to the joint venturers. Accordingly, I accept that the amount of $257,401 represents a liability that must be accounted for before arriving at net assets. This amount is properly payable to RK Property Developments Pty Ltd.
[12]Despite its submission that it agrees with the June 2015 Report.
[13]Written submissions of the defendant dated 10 June 2015, [16].
Floor area
In final submissions, the defendant proposed that the Court revisit the issue of the floor area of the Shipley Street building based on a valuation report prepared by Charter Keck Cramer. If accepted, this would have the effect, it was submitted, of adjusting the costs of construction of unit 5 by $136,588, based on an assumed area of 263.5 square metres.
I reject this submission. It has no evidentiary foundation and I am not persuaded it has any underlying merit.
First, the valuation report was not tendered as part of either case in the proceeding.
Secondly, the trial was conducted on the basis of evidence given by Mr Kukas that the respective shareholdings were proportionate to the floor areas of each apartment and were derived from town planning drawings; that the plaintiff’s interests held 255 undivided shares, which related to a floor area of 255 square metres for apartment 5 and that the defendant held 203 undivided shares, which related to a floor area of 203 square metres for apartment 2. This evidence was reflected in an historical search statement from Land Victoria, which shows that the relevant parties own an estate in fee simple as tenants-in-common in proportions reflected by those shareholdings. Mr Kukas gave evidence that as costs on the Shipley Project were incurred they were proportionally allocated to each apartment by reference to floor area referred to above. This evidence was not challenged at trial[14] and it is inappropriate to raise the issue now in final submissions.
[14]See reasons for judgment, [34].
Thirdly, the defendant has failed to establish the asserted floor area of apartment 5 by any survey evidence, which would be necessary if an issue of this kind were to be pursued.
Finally, on its face, the argument put by the defendant appears to be baseless. It does not account for the fact that there was evidence given during the trial that Mr Kukas carried out renovations or modifications to his apartment in relation to a roof conservatory. The roof conservatory was costed separately and accounted for separately against the plaintiff’s interests. I note that the quantity surveyor allocated a costing for 30 square metres for floor tiles with respect to the conservatory.[15] This is likely to account for any difference in floor area.
[15]WT Partnership Report, Appendix 1 page 2 item 7.2
For all of these reasons, I reject the defendant’s submissions based on increased floor area.
Breach of fiduciary duty
The defendant submits that the plaintiff has breached its fiduciary duty by failing to give accurate and timely information to the defendant and to properly account for the joint venture.
In written submissions of the plaintiff, the plaintiff submitted that the content of the duty was that the plaintiff should keep the defendant properly informed and to properly account to the defendant with respect to the joint venture projects. The plaintiff submits that there is no such fiduciary duty and if there is a duty it must be properly defined by reference to the agreement between the parties. The plaintiff further submits that the evidence establishes that the parties agreed that the plaintiff would provide the defendant throughout the project with financial information by way of spreadsheets and invoices and regular meetings. The plaintiff submits that it complied with that duty.[16]
[16]The plaintiff’s position on the nature of the relationship is unclear. In its written submissions dated 19 June 2015, the plaintiff submits that it has already conceded that the parties were in a fiduciary relationship.
It is convenient to set out the character of a fiduciary relationship and the nature of fiduciary obligation.
In Hospital Products Limited v United States Surgical Corporation, Mason J referred to the well recognised fiduciary relationships of trustee and beneficiary, agent and principal, solicitor and clerk, director and company, and partners. Mason J characterised the critical feature of these relationships as follows:
The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.[17]
[17]Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41, 96-7.
In Pilmer v Duke Group Limited,[18] the majority (McHugh, Gummow, Hayne and Callinan JJ) observed that it was important to recognise the distinct character of the fiduciary obligation which sets it apart from contract and tort, citing Norberg v Wynrib,[19] where McLachlin J said:
The foundation and ambit of the fiduciary obligation are conceptually distinct from the foundation and ambit of contract and tort. Sometimes the doctrines may overlap in their application, but that does not destroy the conceptual and functional uniqueness. In negligence and contract the parties are taken to be independent and equal actors, concerned primarily with their own self interest. Consequently the law seeks to balance between enforcing obligations by awarding compensation when those obligations are breached, and preserving optimum freedom for those involved in the relationship in question. The essence of a fiduciary relationship, by contrast, is that one party exercises power on behalf of another and pledges himself or herself to act in the best interests of the other.[20]
[18](2001) 207 CLR 165.
[19][1992] SCR 226, 272.
[20]Pilmer v Duke Group Limited (2001) 207 CLR 165, 196-7 [71].
A fiduciary relationship may exist between joint venturers but engagement in a joint venture is not of itself determinative of whether parties are in a fiduciary relationship. In United Dominions Corporation Ltd v Brian Pty Ltd,[21] Mason, Brennan and Deane JJ observed:
The term “joint venture” is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture (or, under Scots’ law, “adventure”) will often be a partnership. The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership such as a company, a trust, an agency or joint ownership. The borderline between what can properly be described as a “joint venture” and what should more properly be seen as no more than a simple contractual relationship may on occasion be blurred. Thus, where one party contributes only money or other property, it may sometimes be difficult to determine whether a relationship is a joint venture in which both parties are entitled to a share of profits or a simple contract of loan or a lease under which the interest or rent payable to the party providing the money or property is determined by reference to the profits made by the other. One would need a more confined and precise notion of what constitutes a “joint venture” than that which the term bears as a matter of ordinary language before it could be said by way of general proposition that the relationship between joint venturers is necessarily a fiduciary one:
...
The most that can be said is that whether or not the relationship between joint venturers is fiduciary will depend upon the form which the particular joint venture takes and upon the content of the obligations which the parties to it have undertaken.[22]
[21](1985) 157 CLR 1.
[22]Ibid, 10-11.
Further, Dawson J in United Dominions observed:
Although the relationship between participants in a joint venture which is not a partnership will be governed by the particular contract rather than extrinsic principles of law, the relationship may nevertheless be a fiduciary one if the necessary confidence is reposed by the participants in one another. Of course, in a partnership the parties are agents for each other and this may constitute a separate reason for the fiduciary character of a partnership. There may be no such agency between participants in a joint venture but, as Dixon J pointed out in Birtchnell v Equity Trustees, Executors & Agency Co. Ltd, even in a partnership it is really the mutual confidence between partners which imposes fiduciary duties upon them and the same confidence may, in appropriate circumstances, be found to exist between participants in a joint venture.[23]
[23]Ibid, 16.
It is to be noted that contractual and fiduciary relationships may coexist but the fiduciary relationship must be consistent with and conform to the terms of the contract.[24]
[24]Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41, 97.
In this case, the plaintiff for practical purposes was in complete control of the management of the projects including financial management. Mr Kukas of the plaintiff operated the joint account and used it to pay the joint venture expenses. The defendant did not have a cheque book nor did the defendant receive bank statements. Mr Khouri, of the defendant, relied on Mr Kukas to make all appropriate payments to manage the projects effectively and for information about how each project was progressing. They would meet from time to time and review spreadsheets provided by the plaintiff and discuss the progress of the joint venture. In my view, that regular involvement does not detract from the fact that Mr Khouri reposed absolute trust and confidence in Mr Kukas to properly account to the defendant by providing accurate financial information. Implicit in this relationship of confidence was the essential requirement that joint venture funds would be expended for the purposes of the joint venture and that the plaintiff would keep sufficient records to be able to accurately account to its joint venture partner.
Unfortunately the account keeping, with regular provision of spreadsheets, had a superficial appearance of being orderly and accurate. In fact, the underlying record keeping has been shambolic. Despite the best efforts of the Accountant, the plaintiff was unable to substantiate to the satisfaction of the Accountant more than $1 million spent on the project. The joint venture accountant Mr Walker (also the plaintiff’s accountant) admitted that he had overlooked $1 million. In a project of this scale the proportion of unsubstantiated expenditure is very high. According to the plaintiff, some of the expenditure is accounted for by additional construction costs. This argument does not assist the plaintiff, who conceded for the purposes of the trial that the cost price (ex-GST) for each project was the amount arrived at by the quantity surveyors WT Partnership. The construction costs were thus fixed. The reason it became necessary for the plaintiff to engage the services of WT Partnership was because the plaintiff was unable to substantiate the construction costs from primary source documents. This is an implied admission by conduct, that the plaintiff fiduciary had not maintained sufficient records to properly account to its joint venture partner. It is enough to say that even after hearing from Mr Walker and Mr Kukas for the plaintiff (with minor exceptions) I have no confidence that the remaining unsubstantiated items of expenditure have been properly accounted for.
In this case, it is abundantly clear that the plaintiff has failed to discharge its fiduciary obligations to properly account to the defendant. I have considered whether the plaintiff should be ordered to pay equitable compensation to the defendant.
After careful consideration, in my view a proper exercise of discretion to do justice in the circumstances of this case is to:
(1)require the amount of $257,401, representing the amount paid by RK Property Development Pty Ltd for GST on behalf of the joint venture, to be repaid in full to that company from cash reserves held in trust.
(2)require that the remaining net assets of the joint venture be applied first to satisfy the defendant’s equity with any balance remaining to be applied to satisfy the plaintiff’s equity.
As there is a shortfall of net assets in relation to total adjusted equity, the consequence is that the defendant will receive $570,381 in part satisfaction of its equity of $580,859. As there is no surplus for distribution to the plaintiff, the plaintiff will have to bear the consequences of its failure to adequately substantiate expenditure on the project. In my view, it would be unjust and inequitable to divide the net assets in proportion to the adjusted equity, as contended for by the plaintiff. This would be superimposing a further apportionment on the parties which was never agreed upon and would in the circumstances of this case be inequitable.
At the request of counsel that I tentatively rule on costs of the proceeding in an endeavour to avoid further costs, I propose to order that:
(a) the plaintiff bear the costs of the quantity survey reports of WT Partnership;
(b) the parties bear the costs of the Accountant equally;
(c) the proceeding be dismissed;
(d) each party otherwise bear their own costs.
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