S&C Nicola Pty Ltd v Peter Holmes Investment Pty Ltd

[2022] NSWCA 72

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:

S&C Nicola Pty Ltd v Peter Holmes Investment Pty Ltd [2022] NSWCA 72

Hearing dates:

23 February 2022

Date of orders:

6 May 2022

Decision date:

06 May 2022

Before:

Macfarlan JA at [1];
Leeming JA at [22];
White JA at [59].

Decision:

(1)    Allow the appeal.

(2)    Set aside Orders 1 and 2 made in the Equity Division on 20 September 2021.

(3)    Direct the referee that, in the taking of the Partnership accounts, the interest entitlement due to the respondent is to be treated as an expense of the Partnership which is to be paid from the Partnership assets before the division of profits and not from the appellant’s share of the Partnership profits.

(4)    Order the respondent to pay the appellant’s costs of the appeal.

Catchwords:

CONTRACTS – construction and interpretation –partnership agreement – whether interest on funds provided to the partnership by one partner to be treated as a partnership expense or as an independent debt to be paid by the other partner – whether inconsistency between agreement’s recitals and operative provisions and how any such inconsistency to be resolved

Legislation Cited:

Partnership Act 1892 (NSW), s 24

Cases Cited:

Commissioner of State Taxation of South Australia v Cyril Henschke Pty Ltd (2010) 242 CLR 508; [2010] HCA 43

Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460; [1967] HCA 3

Down Town Visuals Pty Ltd v Panorama Investments Pty Ltd [2018] VSC 427

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7

Ex parte Dawes (1886) 17 QBD 275

Fitness First Australia Pty Ltd v Fenshaw Pty Ltd (2016) 92 NSWLR 128; [2016] NSWCA 207

Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407

Harpur v Levy (2007) 16 VR 587; [2007] VSCA 128

Hurts v Bryk [2002] 1 AC 185

In re Gulbenkian’s Settlements [1970] AC 508

Mackenzie v The Duke of Devonshire [1896] AC 400

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37

Norton Property Group Pty Ltd v Ozzy States Pty Ltd (in liq) [2020] NSWCA 23

OneSteel Manufacturing Pty Ltd v Blue Scope Steel (AIS) Pty Ltd (2013) 85 NSWLR 1; [2013] NSWCA 27

Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47

Tom Elvin Pty Ltd v Knell [2003] ACTSC 36

Texts Cited:

J Carter, The Construction of Commercial Contracts (Hart Publishing, 2013)

P Herzfeld and T Prince, Interpretation (2nd ed, 2020, Law Book Co)

K Fletcher, Higgins and Fletcher the law of partnership in Australia and New Zealand (8th ed, 2001, LBC Information Services)

Category:

Principal judgment

Parties:

S&C Nicola Pty Ltd ACN 055 802 205 ATF S&C Nicola Family Trust (Appellant)
Peter Holmes Investments Pty Ltd CAN 000 500 283 (Respondent)

Representation:

Counsel:
P Braham SC / C Carroll (Appellant)
B Coles QC / E Keynes (Respondent)

Solicitors:
New South Lawyers (Appellant)
Stuart Latham Solicitors (Respondent)

File Number(s):

2021/288698

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity

Citation:

[2021] NSWSC 1174

Date of Decision:

15 September 2021

Before:

Sackar J

File Number(s):

2020/151708

Judgment

1. MACFARLAN JA: For many years the appellant, S&C Nicola Pty Ltd, and its related company, Manotik Pty Limited, acted in partnership with the respondent, Peter Holmes Investments Pty Ltd, in the acquisition and development of residential properties. Their practice was for the respondent to fund the acquisition and development, the appellant to find the property and coordinate the construction and Manotik to carry out the building work. The respondent seeks the taking of accounts in the Equity Division in respect of two of the partnership properties, situated at Dee Why in Sydney. There is a narrow, single issue only which arises for determination on this appeal.

2. The issue concerns the construction of the partnership agreement dated 10 April 2017 between the appellant and the respondent relating to the two properties. By judgment of 15 September 2021, Sackar J determined the issue favourably to the respondent and made declarations accordingly.

3. For the reasons that appear below, I have taken a different view to the primary judge and therefore propose that the appeal be allowed.

The partnership agreement

4. The relevant portions of the partnership agreement are as follows. The appellant is referred to as the “First party” and the respondent as the “Second party”.

“… RECITALS

A.   The Parties have agreed to enter into this Partnership for the purposes of the Project being Development of the properties at 20 & 22 Clyde Rd, Dee Why NSW (‘the Properties’) into 12 units.

B.   The Parties have agreed that the Second Party has purchased the properties and will fund all of the costs and expenses for the Development (‘Capital’);

C.   The First party found and designed the Property and will support the Second Party in the Project.

D.    In consideration of the Second Party entering into this Partnership the First party will [enter] into the Partnership agreement, support the Second Party in the Partnership and indemnify the Second party from half of the costs of the development, plus pay the Second Party 5% interest per annum on all monies spent on the project by the Second Party.

E.    After completion of the Development Project the units will be sold and the proceeds will be paid first towards return of the capital invested by the Second party, then toward 5% interest calculated per annum on a monthly basis on that Capital and finally distributed equally between the Partnership parties.

F.    The parties are partners and are responsible for the[ir] own tax obligations, but will do all things necessary to ensure a partnership tax return [is] properly completed.

OPERATIVE PART

…

4. Overview of the purpose of the Partnership

The Partnership proposes:

(a)   To acquire properties at 20 & 22 Clyde Rd, Dee Why NSW (‘the Properties’);

(b)   To design and construct a complex of 12 strata title units on the Properties and to sell either the subdivided lots or the developed buildings (the ‘Partnership Development’);

(c)   To appoint Manotik Pty Ltd to design and construct the Partnership development and pay Manotik Pty Ltd 10% on top of the Partnership Development costs;

(d)   In consideration for a discounted rate of 10% rather than 25% the Partnership will provide a Maintenance account in the sum of $80,000 at all times to be retained in the partnership for payment of defects and maintenance for a period of 6 years;

(e)   To divide the expected profits from the sale of strata title lots or buildings amongst the Partners.

…

6. Contribution of capital and share of profits and losses

(a)   The parties must contribute the capital required to complete the project in the following proportions and will share in the profits and losses of the venture in the same proportions.

(i)   Party 1 50%

(ii)   Party 2 50%

(b)   If a Partner pays money on behalf of the Partnership, the other Partners must make a contribution as soon as practicable after being informed of the payment, to restore equality of contribution between them.

(c)    Despite (a) and (b) above Party 2 has agreed to fund the whole capital of the project on behalf of the parties until completion of the Partnership project and in consideration therefor Party 2 is entitled to be the sole owner of the properties and entitled to 5% interest on … all capital expenditure to be repaid before any profits are distributed.

(d)   The Partners will retain $80,000 at all times for defects and maintenance of the Partnership development for [a] period of 6 years but only to pay up to 15% of the project costs towards any defects in the Partnership Development being the amount of the discount provided by the builder. …”

5. The issue between the parties is whether the interest of 5% per annum on funds provided to the partnership (which Recitals D and E and cl 6 permit the respondent to charge) is to be treated as a partnership expense (and therefore in practical terms borne equally by the appellant and respondent) or is to be paid by the appellant to the respondent as a debt separate from partnership expenses (in which case the appellant would bear the whole burden of the interest obligation). The parties have proceeded on appeal on the basis that the declarations made by the primary judge reflect the latter view although his Honour’s reasons do not make that view explicit.

The primary judgment

6. The essence of his Honour’s reasoning was as follows:

“[31]   Recitals D and E are in my view, a clear recognition of the primacy financially to be accorded to PHL [the respondent] and importantly as to the timing of its recoupment of the costs and expenses it has agreed to incur for the purpose of the project. This is the unifying theme in this agreement.

[32]   Recital D requires S&C to ‘support’ PHL. The support as such is not defined but it is a term used in the context of S&C also agreeing to ‘indemnify [PHL] from [sic] half of the costs of the development’. In addition to that obligation, S&C has agreed to ‘pay [PHL] 5% interest per annum on all monies spent on the project by [PHL]’. Leaving aside the inelegance of the wording it bears some parallel to S&C’s obligations in cl.6(a), being its liability for 50% of the losses incurred by the project. I accept, however, Recital D is not entirely clear as to precisely what the indemnity is intended to involve.

[33]   Recital E makes it plain, however in my view, that all units are to be sold and that from the ‘proceeds’, PHL is ‘first’ to be paid a ‘return of the capital invested…then toward 5% interest’ on that ‘Capital’. From a timing perspective the Recital, importantly in my view, states ‘…and finally distributed equally between the Partnership parties’.

[34]   I am satisfied the better view of yet another inelegant clause is that PHL is to be immediately (first) paid its capital expended plus interest on that ‘Capital’ calculated on a monthly basis, at a rate of 5%, before (finally) there is any distribution of what will be profits, if any.

[35]   In my view that unifying theme as it were is continued into cl.6 of the agreement. I accept that cl.6(a) on one view makes no sense in the light of Recital B in particular, except perhaps in a notional sense.

[36]   In any event it has to be read in the context of cl.6(c) which commences with the words ‘[d]espite (a) and (b) above [PHL] has agreed to fund the whole capital…..until completion’. The clause then expressly states that as a result it (PHL) is ‘entitled to be the sole owner of the project’. More to the point it is also according to the clause ‘entitled to 5% interest on all capital expenditure to be repaid before any profits are distributed’ (emphasis added).

[37]   Clause 6(c) determines the timing and method of PHL’s recoupment if its outlay and the sole ownership of the real estate is not only the legal but the commercial level of control PHL is intended to have over the timing and method of recoupment.”

The appellant’s submissions on appeal

7. The appellant submitted that, if the respondent had not accepted the role of funder, the partnership would have had to borrow from an external party such as a bank, in which case the partnership would have incurred repayment and interest obligations. Under ordinary partnership arrangements (and under the present partnership agreement) the cost of discharging these obligations would have been part of the costs and expenses of the partnership and would have been borne equally by the partners. The appellant submitted that there was no clear indication in the partnership agreement of an intention to depart from this structure and to provide that the interest payable to the funder was not a partnership expense but was a separate obligation of the developer. The appellant submitted that if, on its proper construction, the partnership agreement so provided there would be a “windfall gain to the partnership” at the developer’s expense.

8. The appellant’s principal written submissions in reply were to the following effect.

9. First, imposition on the developer of an obligation to pay the relevant interest from its own funds cannot be reconciled with Recital E which identifies the funds from which the interest payment is to be made as the proceeds of sale of the units.

10. Secondly, at best for the respondent’s argument, the separate obligation on the appellant to pay is found in Recital D only and not under the heading the “Operative Part” in the partnership agreement.

11. Thirdly, cl 6(c) addresses the priority to be given to the interest payment, that is, it is to be made “before the profits are distributed”. It would have been irrelevant to state this if the interest was not to be paid out of partnership assets, but by the appellant out of its own funds.

The respondent’s submissions on appeal

12. The respondent supported the primary judge’s reasoning and added that the decision below was consistent with the intent of the agreement that the respondent receive 5% interest on “all capital or monies the respondent invested into the project”. It argued that this could only be achieved by its construction of the agreement because otherwise the respondent itself would effectively have to pay interest in respect of half of its funding.

13. The respondent further submitted that under the agreement it was “financing the development, it [was] not contributing the monies as part of its obligations as a party to the development”. It submitted that Recital D and cl 6(c) support this approach. It added that Recital E “is not concerned with creating or subtracting rights of the parties to that money, nor is it determining from whom the money comes from to pay amounts due”.

14. It continued:

“To construe the Agreement in the manner asserted by S&C results in PHL not receiving the 5% interest on its capital expenditure as a separate payment from the other amounts it is to receive under the Agreement, being the equal distribution of profits (or losses, as the case may be). If the 5% interest is paid from the proceeds and those remaining proceeds are inevitably reduced as a result, PHL would be in effect paying a part (only one half) of the interest payment due to it. PHL would not receive its full 5% interest.”

Consideration

15. If the partnership involved in the present case had been wound up immediately after the respondent paid for and acquired the properties, each of the two parties would, to put the position in simplistic terms, have been entitled to half the net proceeds of sale of the properties after deduction of the respondent’s costs of purchasing them. The respondent could not reasonably have argued that it was entitled to be paid the costs that it had incurred and then in addition receive half of the gross proceeds of sale of the properties. The costs of acquisition would thus have been treated as a partnership expense, with the profits remaining after their deduction to be divided equally. The result would have been that each party bore one half of the costs of acquisition of the properties.

16. The position is the same in respect of the interest of 5% per annum that the partnership agreement provided be paid to the respondent. Just as the respondent could not reasonably have argued that the cost of acquisition of the properties was not a partnership expense, so also it cannot successfully contend that the agreed 5% interest be treated differently. A reference to the 5% interest appears in Recital E, wedged between references to the return of the respondent’s capital (equivalent to the costs of acquisition and development of the properties) and division of the balance remaining between the partners. Its terms are consistent with the next reference to the 5% interest, which is in cl 6(c). Again the reference appears between references to the respondent’s capital contribution (and by implication to its return – as the contribution is only “until completion of the Partnership project”) and the division of profits.

17. The placement of the references to 5% interest after references to repayment of capital in my view suggests, in the absence of anything indicating otherwise, that the interest payment relevantly is intended to have a similar character to the repayment of capital, that is, of a partnership expense. Its placement immediately before the reference to division of profits also suggests that the 5% interest is to be treated as a partnership expense to be deducted in the usual way before division of partnership profits. It is thus similar in character to the 10% “on top of the Partnership Development costs” which cl 4 provides to be paid to Manotik Pty Ltd (the appellant’s related company). Both the 10% and the costs themselves would constitute partnership expenses to be deducted from the proceeds of sale of the properties before arriving at the profit available for division between the partners.

18. The respondent’s construction requires a finding that the references to 5% interest are to an independent obligation of the appellant, quite separate from questions of partnership expenses and the division of partnership profits. In light of the context in which they appear, that would in my view require a clear contractual indication that that was what was intended and I can see none. Recital D is arguably such a provision but in my view it does no more than raise a question as to whether the 5% interest obligation was to stand as an independent obligation, rather than as a partnership expense. Recital E and cl 6(c) are, for the reasons I have given, clear and must therefore prevail. In these circumstances there is not in my view any inconsistency between the agreement’s recitals and operative parts that needs to be resolved.

19. The construction which I favour recognises the “primacy financially” accorded to the respondent and its expenses (as referred to by the primary judge – see [6] above) but that primacy is reflected in the stipulation for those expenses to be treated as partnership expenses and deducted before profits are divided. On this basis, the ultimate burden of the 5% interest is borne by the partners in equal shares. This is no more surprising than the undoubted effect of the agreement (see particularly cl 6(a)) that the partners bear equally the acquisition and development costs paid by the respondent. The construction that I favour does not mean that the stipulation that the respondent is entitled to 5% interest is without benefit to it but it does mean that ultimately it does not receive the benefit of the whole 5% interest, as it has to bear one half of that, like any other partnership expense.

Conclusions

20. It is inappropriate and unnecessary that this Court make any order relating to the costs of the parties at first instance because there were before the primary judge a number of issues in addition to that dealt with above and the primary judge has reserved determination of the question of costs. In making his determination he will be able to take this judgment into account.

21. For the reasons above, I propose the following orders:

1. Allow the appeal.

2. Set aside Orders 1 and 2 made in the Equity Division on 20 September 2021.

3. Direct the referee that, in the taking of the Partnership accounts, the interest entitlement due to the respondent is to be treated as an expense of the Partnership which is to be paid from the Partnership assets before the division of profits and not from the appellant’s share of the Partnership profits.

4. Order the respondent to pay the appellant’s costs of the appeal.

22. LEEMING JA: I agree with Macfarlan JA that the appeal should be allowed because, on its proper construction, the partnership agreement provides that the 5% interest to which the respondent Peter Holmes Investments Pty Ltd (PHI) is entitled is to be treated as a partnership expense to be paid from partnership assets before distribution of profits, rather than as a personal obligation of the appellant S&C Nicola Pty Ltd (SCN).

22. The pleadings make two things plain. The first is that the same two parties engaged in a number of business dealings prior to entering into the partnership agreement, including one styled “The 20 October 2016 Loan Agreement” in which PHI was lender and SCN was borrower at rates of 9% reducing to 7% if payment was made in time (Statement of Claim and Defence, paragraphs 22 and 23). The second is, that some six weeks prior to entering the partnership agreement, the same parties had entered into “The Clyde Road JV”. The Statement of Claim alleges that under that agreement, SCN and PHI were not partners. The Statement of Claim does not mention the partnership agreement dated 10 April 2017 which is the subject of this appeal, while the Defence accepts that the Clyde Road JV bound the parties until 10 April 2017 after which the parties’ rights were governed by the partnership agreement (Statement of Claim and Defence, paragraphs 52 and 53). The Statement of Claim refers to recitals D, E and clause 6(c) of the earlier “Clyde Road JV” in terms which suggest that it was a document upon which the partnership agreement was based.

23. However, the partnership agreement falls to be construed without regard to extrinsic material. I intend no criticism of the course taken in this litigation. The parties are free to restrict the scope of the contextual considerations which will be brought to bear upon the task of construction, and their decision is to be respected; cf Fitness First Australia Pty Ltd v Fenshaw Pty Ltd (2016) 92 NSWLR 128; [2016] NSWCA 207 at [32]. It may very well be that the mass of material leading up to the execution of the partnership agreement was equivocal, and both sides have taken the decision that their cases stand or fall on the contractual text alone.

24. Hence, the task of construction in essence amounts to resolution of the conflict between provisions of the contract dealing with PHI’s entitlement to interest which point in different directions.

25. The first impression most readers of the partnership agreement would obtain is that it is poorly expressed. It is replete with syntactical or typographical errors. The defined terms “Capital” and “the Properties” are sometimes used, but not always, and, where they are, capitalization is haphazard. Similarly, the terms “development”, “project”, “Development Project” and “Partnership Development” (only the latter of which is defined) appear to be used interchangeably. Recital F states “tax return I properly completed”. “Partnerships” is plural in cll 1(i), 2(d) and 8(b), but in each case a reference to “Partners” seems to have been intended. The indemnity referred to in Recital D is not explicitly found elsewhere in the document, although it may perhaps be implied from cl 6(a). The address of SCN has been left blank, and so on.

26. Readers would also come to appreciate that the errors are not merely typographical, but also conceptual. For example, cl 1(i) provides that “The company means the company incorporated to carry on the Partnership described in this agreement, in which each of the Partnerships [sic] holds a parcel of shares”. But there is no suggestion in the balance of the agreement of a separate company which carries on the business of the partnership, and as will be seen cl 6(c) provides that PHI is “entitled to be the sole owner of the properties”.

27. Sometimes typographical and conceptual errors are combined. Thus cl 8(b) provides that “The rights and obligations of the parties under this agreement are individual and nothing in this agreement constitutes the parties as partners of one another nor do they have any other relationship except that of Partnerships” [sic]. Happily this appeal may be resolved without construing that koanic clause.

28. Nonetheless, the parties chose to express their bargain in writing, in a document which has the form of having been drafted by a solicitor (to be clear, not one of the firms acting in this litigation, and it is even possible that the parties themselves altered the joint venture agreement which had been drafted by a solicitor, without seeking further advice as to its form). The Court’s task is to give legal effect to the parties’ words. It turns on an objective intention to be imputed to the parties, by reference to the contractual text construed in light of its context and purpose: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[51] and [108]-[109]; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [18] and [78]. The lack of care and precision and apparent lack of understanding of legal concepts in the document informs the task of construction in a number of ways.

29. First, where errors are numerous, and the drafter’s approach to grammar and syntax is casual, it would be wrong to place great weight on considerations turning on the precise form of the clauses. “Legal meaning should not turn on arguments based on semantic exactitude where it is plain that the parties have recorded their bargain in loose, ungrammatical language”: see Norton Property Group Pty Ltd v Ozzy States Pty Ltd (in liq) [2020] NSWCA 23 at [49]. As it was put in Down Town Visuals Pty Ltd v Panorama Investments Pty Ltd [2018] VSC 427 at [94]:

“Nor, where parties have recorded their agreement in loose and ungrammatical language, should meaning turn on ‘semantic exactitude’. To read ‘repaid’ as ‘paid’, in a document bedevilled by inelegant drafting and internal inconsistencies, requires considerably less contortion than accepting the overall interpretation proposed by the Receivers of Native Bond.”

31. As it happens, cl 6(c) also refers to “repaid” and may suffer from a similar defect.

32. Secondly, Mr Coles QC suggested that little weight should be given in this contract to the rule that where a recital is in conflict with an operative provision, the latter prevails. To the contrary, he submitted that “a safer guide may be to accept the golden rule almost of commercial instrument construction: namely, you’ve got to read the instrument as a whole and give appropriate attention and effect to every part of it”. There is some force in the submission, because it is clear that quite elaborate attention has been given to Recitals D and E dealing with the 5% return on “Capital” provided by PHI including an indemnity which bears directly upon the allocation of commercial risk, and it might be thought to follow that the intention to be imputed to the parties would not discount the effect of the recitals. Why should the parties be taken to know of the different weight to be given to recitals and operative clauses when they seem to have taken such little effort to attend to both the formal and substantive aspects of their written bargain? Mr Coles’ approach is supported by what was said in Tom Elvin Pty Ltd v Knell [2003] ACTSC 36 at [19] and endorsed in Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407 at [381]:

“Despite the apparently unequivocal statements in some of the authorities … I am not persuaded that operative parts of a deed, even if otherwise apparently clear and unambiguous, could never be read down by reference to the recitals. I am inclined to think that there may be cases in which the recitals may so clearly spell out the scope of the intended transaction that it would be an affront to common sense not to treat them as providing a context within which operative provisions in the deed should be construed.”

33. However, as that passage recognises, Mr Coles’ submission is at odds with familiar statements of principle, perhaps the strongest of which was Lord Halsbury’s speech in Mackenzie v The Duke of Devonshire [1896] AC 400 at 405-406:

“[I]t seems to me to be absolutely unarguable that the true meaning of those words, and the purposes of the trust so set forth, can be in any way controlled, qualified, or modified by the initial statement of what the motive of the author of the deed was. It would to my mind be disastrous to introduce such a system of construing a deed.”

34. The inability of a recital to control the operation of an operative clause when the latter is clear and unambiguous was more recently reiterated in Harpur v Levy (2007) 16 VR 587; [2007] VSCA 128 at [16], [63] and [102] and OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd (2013) 85 NSWLR 1; [2013] NSWCA 27 at [63]. The traditional approach is criticised in J Carter, The Construction of Commercial Contracts (Hart Publishing, 2013), pp 445-446, but endorsed in P Herzfeld and T Prince, Interpretation (2^nd ed, Lawbook Co, 2020), pp 497-498.

35. Further, in its application to this poorly drafted document, the parties have chosen to call some of their provisions “Recitals” and the remainder are found under the heading “Operative Part”, and it cannot be right to discard that structural division in the form of the document. Accordingly, both as a matter of authority and principle I am disinclined to accept Mr Coles’ submission. That said, although the tension between recitals and operative clauses was central to the submissions on this appeal, no argument was addressed to the authorities and commentary mentioned above, or to the more general question of principle. I think that if it mattered to my conclusion, I would have invited further submissions from the parties. On the view I take, this appeal can be resolved without expressing a concluded view one way or the other as to the correctness of Mr Coles’ submission.

36. Thirdly, sometimes the imprecision and indeed ignorance of a drafter may lead to a threshold question about what the literal or grammatical meaning of the words used actually is. The trusts established by Mr Calouste Gulbenkian considered in In re Gulbenkian’s Settlements [1970] AC 508 and the licence agreement drafted by Mr Arthur Coulls considered in Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460; [1967] HCA 3 are examples. Clause 8(b) reproduced above which simultaneously asserts and denies a partnership may fall into this category. However, that issue does not arise on the limited point raised for determination in this appeal. For all of its infelicities, it is tolerably clear that PHI had contributed the whole of the capital for the project, including the land (which it continued to own) and all development costs and expenses, and was to receive a return of 5% per annum on the whole of that investment. The question is whether the partner SCN was to pay that return, or whether the partnership as a whole was to pay that return.

37. Another way of putting this is to ask whether SCN was required to bear the whole of the agreed cost of financing the particular development, or whether that was to be borne by the partners, in the same way as the other costs of acquisition, construction and selling.

38. In those circumstances, the starting point is to consider the clauses which directly bear on PHI’s entitlement to interest. Those clauses are Recitals D and E and cl 6(c), which it is convenient be reproduce below:

“D. In consideration of the Second Party entering into this Partnership the First party will entered into the Partnership agreement, support the Second Party in the Partnership and indemnify the Second party from half of the costs of the development, plus pay the Second Party 5% interest per annum on all monies spent on the project by the Second Party.

E. After completion of the Development Project the units will be sold and the proceeds will be paid first towards return of the capital invested by the Second party, then toward 5% interest calculated per annum on a monthly basis on that Capital and finally distributed equally between the Partnership parties.

…

6. Contribution of capital and share of profits and losses

(c) Despite (a) and (b) above Party 2 has agreed to fund the whole capital of the project on behalf of the parties until completion of the Partnership project and in consideration therefor Party 2 is entitled to be the sole owner of the properties and entitled to 5% interest on the all capital expenditure to be repaid before any profits are distributed.” [sic]

39. Nothing turns on the use of “Party 2” and “the Second Party” (and “Second party”); these inconsistencies are typical of the way the agreement has been drafted. Both terms refer to PHI. “Capital” was defined in Recital B (“The Parties have agreed that the Second Party has purchased the properties and will fund all of the costs and expenses for the Development (‘Capital’)”) and must be taken to mean all of the costs and expenses including the initial purchase price of the land.

40. Four initial points may be made about the construction of those provisions.

41. First, it seemed to be common ground that there was something of an ellipsis in the closing words of cl 6(c) “and entitled to 5% interest on the all capital expenditure to be repaid before any profits are distributed”. Plainly enough, PHI was to be “repaid” all of the costs and expenses which it had paid in funding the development, even though that is not expressly stated (except insofar as it is implicit in the verb “repaid” and in the notion of calculating “profits”). In addition, PHI was to receive interest together with the repayment of costs and expenses. I am inclined to doubt that this is a case of ambiguity, as opposed to casual elliptical expression. But if I am wrong about that, or if Mr Coles’ submission be correct, then regard may be had to the recitals, which confirm the sense of cl 6(c) which I would in any event reach without reference to Recitals D and E.

42. Secondly, those clauses also proceed on the basis that there will be, at the completion of the venture, a fund representing the proceeds of sale. In law the question is whether the parties’ agreement displaces the prima facie entitlement upon the taking of partnership accounts to be repaid funds lent with interest in accordance with s 24 of the Partnership Act 1892 (NSW). But there is no reason to impute that conception to the parties, and every reason to respect their chosen language, namely, of the “proceeds” from which expenses will be “paid” or “repaid” with the resultant “profit” being “distributed”, reflecting a fund being distributed. The parties’ submissions proceeded on that basis.

43. Thirdly, I do not consider that much turns on the distinction between the obligation to “pay” 5% interest in Recitals D and E and the 5% interest being “repaid” in cl 6(c). Strictly, interest was not “repaid” in the sense of reimbursement for some earlier payment made by PHI, unlike the repayment of other costs and expenses. However, there is a clear distinction in recital E and cl 6(c) between the payment or repayment of expenses and interest on the one hand, and the distribution of profits on the other.

44. Fourthly, Recital E is the only place in the partnership agreement where reference may be found to the 5% interest being calculated “on a monthly basis”. It is clear that, in accordance with conventional principles, the entitlement to “5% interest on all capital expenditure” in cl 6(c) is ambiguous as to how the interest is to be calculated, and regard may be had to Recital E to confirm that the interest rate is per annum and with monthly rests.

45. PHI emphasised the seemingly personal obligation in Recital D that SCN “pay [PHI] 5% interest per annum on all monies spent on the project”. PHI then submitted that Recital E was to be regarded as addressing timing, and did not undercut the personal obligation upon SCN, and that cl 6(c) was to be construed as being to substantially the same effect.

46. While those submissions are not without force, upon analysis I do not agree that they reflect the proper construction of the contract.

47. First, cl 6(c) speaks in terms of “any profits”. Profits are to be regarded as the surplus (if any) of revenue from sales over the costs of the development. It is plain that PHI’s entitlement to 5% interest is to be paid before profits are distributed. The conjunction of the entitlement to 5% interest and the distribution of profits tends to suggest that the interest entitlement is a partnership expense, which needs to be taken into account before the profit is determined. Another way of making this point is that if the liability to pay 5% interest is a personal liability of SCN, then there would be no need for that entitlement to be paid before profits are distributed.

48. The alternative, as exposed during oral argument on the appeal, involves some little complexity. Let there be assumed to be a notional fund representing proceeds of sale. The first task is to repay PHI its “Capital” from that fund. Only when that is done can the total amount of interest to which PHI is entitled be determined (noting that the interest is accruing at 5% per annum on a varying amount representing the difference between the total costs to date and the revenue derived from sales). If the obligation to pay interest is a personal obligation upon SCN, then there may arise a series of difficulties. If the fund after the repayment of capital is less than double the amount of interest, then on PHI’s construction, PHI is entitled to everything that remains, and will have a claim upon SCN. Even if the fund after the repayment of capital is more than double the amount of interest, it is a little unnatural to apply the provisions. This is best seen by way of two examples.

1. Suppose the fund after repayment of capital is $1,000,000 and interest is $400,000. On PHI’s construction, the $400,000 is to be paid personally by SCN. But SCN has not contributed any money to the development at all, and so the most natural way for the interest to be paid is for it to come from what would have been SCN’s share of the profits. Save for interest, each partner would be entitled to $500,000, and when SCN pays $400,000 interest to PHI, the effect is that of the $1,000,000, PHI receives $900,000 and SCN receives $100,000.

2. Alternatively, now suppose that interest is $400,000, but there is a surplus of only $700,000 after all sales are made and all costs and expenses of the development have been repaid to PHI. Then on PHI’s construction, SCN’s personal obligation to pay interest will not be capable of being satisfied from its share of the profits. It would be natural for PHI to set off SCN’s obligation to pay $400,000 against its entitlement to its share of the residue after interest, with the result that PHI would take the entirety of the $700,000 ($350,000 representing most of SCN’s obligation to pay interest and $350,000 representing PHI’s distribution of profits) and then look to SCN for the final $50,000 by way of interest.

49. My point in spelling that out is that introducing a personal obligation upon one partner to pay another partner’s entitlement at the conclusion of the partnership makes the provisions dealing with interest quite different from the way of dealing with other expenses of the development. It is difficult to reconcile that difference with cl 6(c), which treats the repayment of capital and the repayment of interest in a rolled up way.

50. Further, if SCN is subject to a personal obligation to pay interest, then in circumstances where it has hitherto contributed nothing to the costs of the development, the ordinary approach would be for that liability to PHI to be discharged out of the profits which PHI already holds (as vendor) rather than looking separately to SCN for payment. But that sits ill with the words “before any profits are distributed”. That is to say, PHI’s construction most naturally involves SCN paying the entirety of the interest out of its profits, which is quite awkward in light of the express agreement that interest is to be repaid before any profits are distributed.

51. Secondly, SCN’s approach accords with the natural reading of Recital E. Recital E envisages a fund representing the proceeds of sale of the lots, from which is to be deducted the costs and expenses paid by PHI, then PHI’s entitlement to interest, with the balance being distributed equally between SCN and PHI. That too reflects interest as being treated as a partnership expense.

49. Thirdly, I am conscious of the limited weight to be given to a precise textual analysis in this casually drafted agreement, but Recital E identifies three things that will happen to the proceeds of sale: (a) payment first towards return of capital, (b) paid secondly towards 5% interest and (c) finally distributed equally. The structure of the clause, the repeated use of “towards” in respect of the first and second payments, and the use of a new verb “distributed” in relation to the third payment, all suggests that the return of capital and the payment of interest are to be regarded as occurring in the same way.

50. Fourthly, when looking to other clauses aside from those which are squarely directed to the 5% interest entitlement, cl 4 (which is reproduced in Macfarlan JA’s judgment) tends to confirm that this is a case where the partners share the expected profits after the costs of the development have been paid from the sale of the property. Implications from silence are equivocal, but if there were a personal obligation upon SCN to pay the entirety of the interest on funds deployed to acquire and undertake and sell the development, it might be expected that mention would be made of that in a clause described as “Overview of the purpose of the Partnership” which starts at the acquisition, then deals with the costs of construction and concludes with the division of profits.

51. Fifthly, as noted above, this is a case where contextual considerations have little force. However, if the development had been funded by an external lender, then interest would inevitably be regarded as a partnership expense. There is no compelling reason in the contractual text to depart from that approach merely because one of the parties was the financier, and obtaining the benefit of interest on its investment in addition to a share of the profits.

52. Telling against all of the above is the ordinary meaning of Recital D. If Recital D is regarded as being insufficient to control the operation of cl 6(c), in accordance with the conventional approach to the construction of recitals and operative clauses, then that is not to the point, and the appeal must be allowed.

53. If alternatively I proceed on the basis of Mr Coles’ submission, then contrary to SCN’s submission, it is difficult to read Recital D as a “true recital” which merely expresses the intent of the operative clauses, because aside from anything else it contains the only explicit reference to an indemnity. However, there is an apparent direct conflict between Recital D insofar as it obliges SCN to pay the interest, and Recital E, which speaks unequivocally of the interest being paid from the same source as the return of capital. That is to say, Recital E is not merely speaking about timing or priority; it is speaking of the source of funds to be used to discharge PHI’s entitlement to repayment of capital, and PHI’s entitlement to interest, and both partners’ entitlements to the distribution of profits. All are to be paid from the proceeds of sale. SCN submitted that the obligation in Recital D to “pay” fell short of imposing a personal obligation:

“The obligation in D is to cooperate in the paying of 5% interest to the first payment. That word ‘pay’ is capable of meaning pay from one’s own funds, but that’s not the only sense in which the word can be used.”

57. That may be so, but it is not the natural meaning of the recital, although in this carelessly drafted document, it is one way of reconciling the recitals.

58. If contrary to the conventional approach a recital is capable of cutting down cl 6(c), then there is still no entirely satisfactory way of construing this document. Applying that approach, I would reason in the following way. There is a direct inconsistency between Recitals D and E on the point that matters, namely, the source of the funds to pay the 5% interest. The consequence is that neither recital is sufficient to diminish the effect of cl 6(c), even if I were to disregard their status as recitals as opposed to operative clauses.

59. For those reasons, on balance I favour SCN’s construction. I agree with the orders proposed by Macfarlan JA.

60. WHITE JA: The provisions of the partnership agreement that fall for consideration in this appeal are set out in the reasons for judgment of Macfarlan JA, which I have had the advantage of reading in draft.

61. The partnership agreement is not a deed, but contains recitals and operative provisions, the latter appearing under the heading “Operative Part”. Where the operative provisions are ambiguous, the recitals can assist in their interpretation (OneSteel Manufacturing Pty Ltd v Blue Scope Steel (AIS) Pty Ltd (2013) 85 NSWLR 1; [2013] NSWCA 27 at 21, [63] (per Allsop P)). If the operative provisions are ambiguous and the recitals are clear, the recitals will govern the construction (Ex parte Dawes (1886) 17 QBD 275 at 286 (Lord Esher MR) and see generally P Herzfeld and T Prince, Interpretation (2nd ed, 2020, Law Book Co) at [23.10]).

62. The parties were partners in the development of land at Dee Why. The respondent purchased the properties and agreed to fund all the costs and expenses of the development (Recitals A and B).

63. On the taking of the partnership accounts, the respondent is entitled to interest at 5% per annum on the moneys it advanced for the acquisition and development of the land the subject of the partnership (cl 6(c)). The issue is whether, on the proper construction of the partnership agreement, the liability to pay that interest is a liability of the firm or the appellant.

64. Under s 24 of the Partnership Act 1892 (NSW) where a partner makes advances beyond the amount of capital which the partner has agreed to subscribe, the prima facie position is that the partner is entitled to interest and the advances are payable by the firm and not by the other partner or partners. For this purpose, the firm is treated as an entity separate from the individual partners (K Fletcher, Higgins and Fletcher the law of partnership in Australia and New Zealand (8th ed, 2001, LBC Information Services) at 98).

65. In such a case the partner making the advance will contribute to the repayment of the advance and payment of interest to the extent he or she shares in the capital and profits or losses of the partnership business. The appellant rightly described this as an aspect of ordinary partnership arrangements (per Macfarlan JA at [7]).

66. It is convenient to set out again the key provisions.

Recital D.    In consideration of the Second Party [the respondent] entering into this Partnership the First party [the appellant] will [enter] into the Partnership agreement, support the Second Party in the Partnership and indemnify the Second party from half of the costs of the development, plus pay the Second Party 5% interest per annum on all monies spent on the project by the Second Party.

Recital E.    After completion of the Development Project the units will be sold and the proceeds will be paid first towards return of the capital invested by the Second party, then toward 5% interest calculated per annum on a monthly basis on that Capital and finally distributed equally between the Partnership parties.

67. Clause 6(a) – (c) provides:

“(a)    The parties must contribute the capital required to complete the project in the following proportions and will share in the profits and losses of the venture in the same proportions.

(i) Party 1 50%

(ii) Party 2 50%

(b)    If a Partner pays money on behalf of the Partnership, the other Partners must make a contribution as soon as practicable after being informed of the payment, to restore equality of contribution between them.

(c)    Despite (a) and (b) above Party 2 has agreed to fund the whole capital of the project on behalf of the parties until completion of the Partnership project and in consideration therefor Party 2 is entitled to be the sole owner of the properties and entitled to 5% interest on the all capital expenditure to be repaid before any profits are distributed.”

68. Recital D records the parties’ agreement that the appellant would pay the respondent 5% interest per annum on all moneys spent on the project by the respondent. That obligation is expressed as an obligation personal to the appellant and not an obligation of the firm.

69. Further, Recital D provides that the appellant is to indemnify the respondent for half of the costs of the development plus pay 5% interest on moneys spent on the project by the respondent, indicating that the interest is treated separately from and not as part of the costs of the development.

70. The appellant relies upon Recital E which provides that the 5% interest, calculated yearly, on a monthly basis, will be paid from the proceeds of sale of the units. That recital is not inconsistent with Recital D. Recital E stipulates the source from which advances are to be repaid and interest is to be paid to the respondent. That is not inconsistent with the appellant’s being liable, on the taking of partnership accounts, for the 5% interest payable on the moneys spent on the project by the respondent.

71. Under cl 6(a) the profits and losses of the venture are to be borne by the parties equally. Prima facie, interest on the moneys advanced by the respondent would be accounted for in calculating the profit or loss of the venture and hence be an expense to be borne by the partners equally. But Recital D does not treat interest as a cost of the development.

72. Clause 6(c) is equivocal. The respondent is entitled to be paid interest before profits are distributed. But that does not answer the question as to whether the interest is to be paid from the proceeds of sale as provided for by Recital E, which could, but need not, indicate that interest is an expense of the firm, or whether it is to be paid by the appellant as indicated by Recital D.

73. The operative provisions in cl 6(a) – (c) are ambiguous. Their interpretation is controlled by the recitals.

74. There is no extrinsic evidence to assist in the clarification of the ambiguities. There is no evidence whether at the time of the agreement a market rate for the provision of finance for the acquisition and development of the land would have been closer to 10% or 5%. Nor is there evidence of how interest was treated in other ventures in which the parties engaged.

75. The respondent was the legal owner of the land. It was the legal owner of the proceeds of sale of individual units, but those proceeds have to be accounted for in the taking of the partnership accounts. An amount owing to a partner by his fellow partners is recoverable only on the taking of an account (Hurts v Bryk [2002] 1 AC 185 at 194 per Lord Millett, cited with approval in Commissioner of State Taxation of South Australia v Cyril Henschke Pty Ltd (2010) 242 CLR 508; [2010] HCA 43 at 516, [22]).

76. In Cyril Henschke the High Court also said (at [23]-[25]) that a partner’s interest can only be ascertained finally on the completion of the winding up of the partnership and the identification of the surplus share of assets over liabilities.

77. The better construction of the agreement is that, although profits and losses are to be shared equally, interest on the moneys spent on the project by the respondent are treated separately from other development costs (Recital D). The respondent is entitled to charge 5% interest (cl 6(c)) and the appellant (not the firm) is obliged to pay it (Recital D). The fact that payments are to be made from the proceeds of sale (Recital E) does not affect the question of who, on the taking of the partnership account, is liable for the payment of interest.

78. For these reasons I would dismiss the appeal.

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Decision last updated: 06 May 2022