St Jude Property Investments Pty Limited v Folari Pty Limited
[2013] NSWSC 957
•15 July 2013
Supreme Court
New South Wales
Medium Neutral Citation: St Jude Property Investments Pty Limited v Folari Pty Limited [2013] NSWSC 957 Hearing dates: 15 July 2013 Decision date: 15 July 2013 Jurisdiction: Equity Division Before: Kunc J Decision: Accounts determined
Catchwords: CONTRACTS - Joint venture - Taking of accounts to determine net profit share payable - No issue of principle Cases Cited: Folari Pty Ltd & Anor v St Jude Property Investments Pty Ltd & Anor [2012] NSWCA 120 Category: Principal judgment Parties: St Jude Property Investments Pty Ltd (First Plaintiff)
Michael Saklaoui (Second Plaintiff)
Folari Pty Ltd (First Defendant)
Kevin Zouki (Second Defendant)Representation: Counsel:
First defendant:
Mr A.F. Fernon (First Plaintiff)
Mr S.F. Hughes (First Defendant)
Solicitors:
First plaintiff:
Shanahans Butlers Solicitors
Boyd House & Partners
File Number(s): 2008/279220 Publication restriction: No
EX TEMPORE Judgment
HIS HONOUR: These proceedings are the taking of an account to determine the amount ultimately payable pursuant to a declaration made by Tamberlin AJ in the primary hearing of these proceedings. His Honour's orders (inter alia) were:
1. Declares that the first plaintiff is entitled to be paid by the first defendant an amount equal to 20 percent of the net profits from the sale of the properties 58-64 John Street, Lidcombe less expenses relating to the development approval up to the date that approval was granted.
2. Orders that an account be taken to ascertain the net amount payable to the first plaintiff.
3. Orders that the amount so ascertained be paid by the first defendant to the first plaintiff forthwith together with interest.
The parties have agreed on many of the items in the ultimate calculation as to what is 20 percent of the net profits from the sale of those properties. There remain a number of areas of disagreement which are to be resolved in the course of the hearing before me. I propose to deliver reasons in relation to each of those disputed items as the parties address me on them.
The Payment To Mr Abbi Saab
The first issue for determination is whether or not a payment to Mr Abbi Saab of $275,000 is to be taken into account as an expense relating to the development approval. The first defendant submits that the payment was in fact a payment to Mr Abbi Saab for consultancy fees relating to his introduction of the properties to the joint venture which Tamberlin AJ found was originally entered into between the interests of Mr Saklaoui, Mr Zouki and Mr Abbi Saab. The first plaintiff submits that Tamberlin AJ made a finding, from which the first defendant cannot now resile, that the payment was in fact to pay out Mr Abbi Saab's 30 percent interest in the joint venture.
The starting point to determine this question is the pleadings that were before his Honour. Paragraph 11 of the Amended Statement of Claim alleged:
In about December 2002, Zouki acquired the interests of Abi [sic] Saab in the Agreement for $275,000. St Jude and/or Saklaoui continued to hold an entitlement to 20% of the profits made from the Properties and the Development Application.
That allegation was met in paragraph 15 of the defence:
The defendants admit that Abbi Saab was paid a fee of $275,000 by the first defendant for the agency services provided by him and otherwise denies paragraph 11.
It follows that there was a live issue before Tamberlin AJ as to the characterisation of the $275,000 payment.
Mr S.F. Hughes of Counsel, appearing for the first defendant, submitted that there was no finding by Tamberlin AJ as to the characterisation of the $275,000 payment. He submits that it was not in fact necessary for his Honour to have done so. He submits that the only place where something which might be described as a definitive finding on the question was made is to be found in para [7] of the judgment of the Court of Appeal in these proceedings, Folari Pty Ltd & Anor v St Jude Property Investments Pty Ltd & Anor [2012] NSWCA 120 where Whealy JA (with whom McColl JA and Tobias AJA agreed) said:
The primary judge found that at all relevant times there was a joint venture on foot and that the parties to it, as originally formulated, were Folari, St Jude and Mr Abbi Saab. The last mentioned was "bought out" of the venture by the payment to him of $275,000 in full satisfaction of his claims in respect of his introduction of the parties to the properties.
Mr Hughes nevertheless properly concedes that there was no issue before the Court of Appeal requiring that Court to determine the characterisation of the $275,000 payment. Nor does he go so far as to suggest that if para [7] of Whealy JA's judgment does constitute a finding, it is one that is binding upon me.
Mr A.F. Fernon of Counsel, appearing for the first plaintiff, submits that Whealy JA's reference is a finding about what the primary judge found and needs to be read in the context of the entirety of the primary judge's judgment. I agree.
The language used by Whealy JA in para [7] of his Honour's judgment reflects exactly the language used by the primary judge in para [13] of the primary judgment, where Tamberlin AJ said:
Thereafter in late 2002 Mr Zouki negotiated with Mr Abbi Saab as a result of which an amount of $275,000 was paid to him in full satisfaction of his claims in respect of the introduction to the properties.
I accept Mr Hughes' submission that para [13] of Tamberlin AJ's judgment is not a finding but rather is part of a recitation of the alternative positions of the parties. However, I am of the view that on a fair and complete reading of Tamberlin AJ's judgment, his Honour did find that the $275,000 payment to Mr Abbi Saab was a payment out to Mr Abbi Saab of his interest in the joint venture which his Honour found was originally constituted by three parties. I reach this conclusion on the basis of a complete reading of paras [24] to [48] of Tamberlin AJ's judgment which is set out under the heading "Reasoning".
The high point of that part of the judgment for present purposes is para [31], where I am satisfied his Honour makes a finding in these terms:
At the time of this document in December 2002, Mr Zouki was anxious to pay out Mr Abbi Saab and the negotiations culminated in a cash payment to him by Mr Zouki of $275,000.
His Honour's reference in para [31] has to be read in the context of his earlier description in para [28] of what was being done as "negotiating for payments to be made to buy out Mr Abbi Saab" and in para [32] his Honour's reference to it being "... in the interest of Mr Zouki at that time to negotiate a low price for the pay out to Mr Abbi Saab leaving a greater profit to himself".
I have not forgotten that Mr Hughes points to the actual cheque butts which are in evidence before me of the three payments constituting the $275,000 payment to Mr Abbi Saab, each of which is recorded in the handwriting of Mr Zouki as being for consultancy services. However, having observed Mr Zouki in the witness box and mindful of the findings as to credit made by Tamberlin AJ, I am not prepared to accept that Mr Zouki's characterisation of the cheque butts is determinative of the matter. This was an issue that was properly considered by Tamberlin AJ and which, on a fair reading of the judgment, necessarily leads to the conclusion that his Honour found that the payment to Mr Abbi Saab was for Mr Abbi Saab's interest in the joint venture.
There does not, in fact, seem to me to be a necessary inconsistency between how Mr Zouki recorded the transaction in the cheque butts and their ultimate characterisation. The analysis undertaken by Tamberlin AJ makes it clear that his Honour was proceeding on the basis that the 30 percent interest attributable in the joint venture to Mr Abbi Saab was to recognise Mr Abbi Saab's efforts in introducing the properties to the joint venture. In those circumstances it does not seem to me to be contrary to the evidence for his Honour to have concluded that Mr Abbi Saab did in fact have a 30 percent interest in the joint venture (accepting that part of the conclusion is implicit rather than explicit in his Honour's reasons) and that Mr Abbi Saab was in fact bought out in respect of that interest by the payment of $275,000. His Honour's use of the expression "buy out" is entirely consistent with that conclusion. It would not be a natural use of English to say that consultancy fees were being "bought out" or "paid out".
Because of Tamberlin AJ's finding as to the characterisation of that payment, I am of the view that the $275,000 payment to Mr Abbi Saab is not an amount which is to be treated as an expense for the purpose of the accounting exercise before me.
Item 40 - Home Warranty Insurance
The first defendant claims that a payment of $41,184 for home owners warranty insurance in relation to the subject properties is properly claimable as an expense of the joint venture.
This claim requires consideration of the terms of the joint venture as found by Tamberlin AJ and subsequently upheld by the Court of Appeal.
The joint venture was ultimately found by his Honour to be as follows (emphasis added):
[48] I am satisfied that there was a joint venture as claimed by Mr Saklaoui under which St Jude was entitled to a 20 per cent share of the net profits from the sale of 41 units. I am also satisfied that there was no loan of $429,000 from Mr Zouki to the plaintiffs but rather that it was a payment made on account of what was owed to St Jude subject to a final determination after the taking of accounts as to expenses. I am also satisfied that the relevant expenses to take into account are those relating to obtaining development approval for 41 units up to the time of obtaining the approval ...
[50] I find that the arrangement made in about December 2001 was that the expenses relating to the development approval and interest should be borne up to the date of the development consent and not to the date of sale and that the account of profits should be taken on that basis.
I have already set out the form of the order made by his Honour as to the account which should be taken. It should be noted that, on its face, it is limited to "expenses relating to the development approval up to the date that approval was granted". However, the first plaintiff accepts that it was part and parcel of the joint venture, although not expressly found by either Tamberlin AJ or the Court of Appeal, that the expenses of the joint venture would extend to the acquisition and holding costs of the properties.
That concession makes practical commercial sense. It is also consistent with the observation by Whealy JA in the Court of Appeal at para [36] that the joint venture "was not initially a construction and sale venture. The profit to be shared between the original three co-venturers was to be split up after the development consent was obtained, on the assumption that a sale could be then effected".
The first defendant accepts that it was possible to get development approval without paying home warranty insurance. Rather, it appears that the first defendant took a commercial decision to pay the home warranty insurance premium, apparently because there was an increase expected in such premiums.
I accept the first plaintiff's submission that consistently with the nature of the joint venture as found by Tamberlin AJ, the types of costs which I should allow as expenses going to the calculation of net profit over and above those which may be described as "relating to the development approval up to the date that approval was granted" should extend to the acquisition and holding costs in relation to the properties. The home warranty insurance payment is not such an expense and is therefore not to be taken into account in calculating the proportion of the net profit to which the first plaintiff is entitled.
Item 65 - Fees for Statement of Heritage Impact
The first defendant submits that a sum of $1,577.15 paid to Archnex Designs for the preparation of a Statement of Heritage Impact is properly an expense to be included in the present accounting.
Archnex Designs submitted a fee proposal on 11 December 2003 for the preparation of a Statement of Heritage Impact in the sum of $1,577.15. They subsequently issued a tax invoice on 13 January 2004 (incorrectly recorded as 2003) in that amount. By cheques drawn on 18 December 2003 and 21 January 2004 the first defendant procured payment of the amount claimed by Archnex Designs.
In determining whether this is an expense that should be taken into account on the present exercise, it is important to note that the development approval was obtained on 18 November 2003. It contained what was referred to as a "deferred commencement" condition which required, inter alia, the preparation of a Heritage Impact Statement. The Statement of Heritage Impact referred to in the Archnex Designs tax invoice is intended to refer to an impact statement that would comply with the deferred commencement condition in the development approval.
The question for present purposes is whether that expense is one "relating to the development approval up to the date that approval was granted". On its face, it is not. Furthermore, the scope of the declaration made by Tamberlin AJ must be construed in the context of his Honour's reasons. At the end of para [48] of his reasons his Honour said:
... I am also satisfied that the relevant expenses to take into account are those relating to obtaining development approval for 41 units up to the time of obtaining that approval.
I therefore consider that the expenses to be deducted from the net profits to which the plaintiff is entitled are confined to expenses which "relate to the development approval up to the date that approval was granted" understood as including those expenses which related to obtaining that development approval.
The expense for obtaining the Statement of Heritage Impact is not an expense properly to be taken into account for two reasons. First, it was an expense that arose after the date the approval was granted. Second, it does not relate to the obtaining of the development approval. Rather, it is an expense incurred in relation to satisfying a condition of the development approval once it had been obtained.
As the underlying commercial purpose of the transaction was to obtain a development approval and to take the properties to market with the benefit of that development approval, the conclusion I have reached is consistent with that underlying commercial purpose. The expenses of complying with conditions in the development approval neither relate to nor are they referable to the obtaining of the development approval. Expenses incurred to satisfy its conditions are either a matter for the joint venturers to undertake on a voluntary basis should they wish to do so (i.e. outside the costs contemplated by the joint venture) or for any ultimate developer. In this case, the ultimate developer became a syndicate which grew out of the joint venture relationship.
I therefore do not allow this as an expense for the purposes of the present accounting exercise.
Items 68, 69, 71, 81, 82 and 93
These items are all expenses incurred after the date of the development approval and relate to satisfying conditions of the development approval. The first defendant accepts that, consistent with my ruling in relation to item 65, these are not allowable expenses for the purposes of the present accounting and I so find.
Items 70, 72 and 73
These items relate to bills for water rates, council rates and land tax dated February 2004. The first defendant submits that these expenses are properly to be taken into account as holding or maintenance costs, notwithstanding that they post-date the obtaining of the development approval on 18 November 2003.
There is some force in the defendant's arguments on this point. If the underlying commercial objective of the parties was to sell the properties with the benefit of the development approval, it might be thought that they would have had in mind the prospect that the sale would not necessarily occur immediately upon or even shortly after the date on which the development approval would be obtained. The argument would run that while the property was being marketed with the benefit of the development approval, those ongoing holding and maintenance costs would enure as expenses to the joint venture.
The difficulty with this argument is that it is not in accordance with the terms of the joint venture as found by Tamberlin AJ.
In support of its argument on this point, the first plaintiff draws attention to what was said by Whealy JA in the Court of Appeal (emphasis added):
[45] The fundamental flaw in the appellants' argument is that, in truth, there was no sale of the properties after the development consent was obtained. As I have pointed out, the development took a totally new direction with Kevin determining that a syndicate organised by him, and of which he would be the supervisor, would be responsible for the construction and their ultimate sale of the home units. Mr Cashion accepted that his case did not involve the claim that the various costs relating to the issue of the construction certificate were to be taken into complainant.
He accepted that such costs would be neither related to the development consent nor to the disposition arrangements with the syndicate. Secondly, Mr Cashion accepted that any costs associated with the actual building of the home unit and ultimate sale to the general public were not to be taken into account for the same reason. It is clear that Kevin's decision to switch to a syndicate arrangement occurred at about the same time as, or shortly before, the development consent issued.
[46] From Michael's and Kevin's perspective once the syndicate proposal emerged it was necessary for them to fill in the gap that resulted. If there was to be no sale of the properties (with development consent attached), then there had been had been to a line drawn in the sand to reflect the point at which expenses would cease to be taken into account for the purposes of calculating net profit. The primary judge found that this point had been agreed as the date of the development consent.
That this was so follows logically from the nature of the significant change which occurred.
With respect, Whealy JA in the passage just quoted correctly describes Tamberlin AJ's finding in relation to the terms of the joint venture agreed between the parties.
I am bound in this accounting by his Honour's findings on this point.
Accordingly, notwithstanding that there may be some commercial justification for the propositions advanced by the defendant in relation to these expenses, the Court has found that the terms of the joint venture "drew a line in the sand" as at the date of the development consent. Accordingly, I decline to allow these expenses because they arose after that date.
If I am wrong in this conclusion, then the commercial logic to which I have referred would have resulted in my finding that these expenses should only be allowed up to the date of the syndication (which took the place of the originally contemplated sale) on 23 February 2004 on a pro rata basis.
Items 77- 80 - Removal of Caveat
These items relate to costs incurred during 2004 in relation to removing caveats that had been lodged on the title to one of the properties by its previous owner. These costs include legal fees and the payment of a capital sum to the former owner by way of settlement of the rights asserted by that owner as giving him the entitlement to lodge his caveats.
Plainly enough, these costs do not relate to the obtaining of the development approval. The only basis they can be brought to account in the current exercise is, as the defendant submits, as an acquisition cost. This argument fails for two reasons.
First, the evidence before me does not sufficiently explain the circumstances giving rise to the caveats and why the costs incurred in relation to the removal of the caveats should have an impact upon the calculation of the net profit from the joint venture to which the first plaintiff is entitled. If anything, such evidence as is before me suggests that the costs incurred were acquisition costs incurred by the syndicate which ultimately took over the project. As a matter of simple chronology, they cannot be acquisition costs of bringing the property into the original joint venture which was the subject of these proceedings as determined by Tamberlin AJ.
Second, consistently with my reasons in paras [36] to [39], these expenses fall on the wrong side of the "line in the sand" to which the parties were found by his Honour, and accepted as correct by the Court of Appeal, beyond which expenses were not to be taken into account in determining the profits of the original joint venture.
I accordingly decline to allow these as expenses for the purposes of the present accounting exercise.
Item 83 - Demolition Costs
This item is a claim for $2,337.50 paid to a demolition company in October 2002 to demolish buildings on the properties, the subject of the joint venture. It is not suggested that these are expenses incurred in relation to obtaining the development approval. Rather, the first defendant submits that these are expenses which should be categorised as maintenance or holding expenses for the purposes of the joint venture. It is submitted that the demolition costs represent a preventative measure to avoid other expenses that would have been incurred if the property, as there seems to have been some reasonable expectation, would become inhabited by squatters or vagrants.
The first plaintiff responds that on no view can this expense be considered a holding or maintenance expense. They submit that the expense simply falls outside the scope of agreed expenses for the purposes of this accounting. I accept the first plaintiff's submissions and disallow this item as an expense for the purpose of the present accounting.
Interest
The first plaintiff concedes that in calculating the net profit, allowance should be made for interest upon each of the individual expenses paid by the first defendant. There is no evidence of the parties having agreed an applicable interest rate as part of the terms of their joint venture.
The first defendant submits that, in those circumstances, it is appropriate for the court to exercise its discretion under s 100 of the Civil Procedure Act2005 (NSW) to include interest in the amount for which any judgment is given at such rate as the court thinks fit.
The only evidence in the proceedings concerning a rate of interest that might have been applicable to the relationship between the parties is Exhibit 3P. That is a document prepared by Mr Zouki which Tamberlin AJ found was prepared as part of Mr Zouki's discussions with Mr Abbi Saab for the purposes of determining the value of Mr Abbi Saab's interest in the joint venture. Exhibit 3P refers to an interest rate of 6.25 per cent.
The concession by the first plaintiff that interest ought to be charged on expenses paid by the first defendant as part of the joint venture up to and including the date on which the development approval was obtained is correctly made. On the basis of Exhibit 3P and in the exercise of the Court's discretion I determine that interest should run at the rate of 6.25 per cent per annum on each allowable expense from the date it was paid by or on behalf of the first defendant up and to and including 18 November 2003, being the date the development approval was obtained.
Resolution
I direct the parties to bring in short minutes of order reflecting these reasons and the agreements between them within seven days. In default of agreement the parties are to provide my Associate with copies of their competing calculations within that time period and arrangements can be made for the matter to be listed for further argument.
Costs
The first plaintiff submits that costs should follow the event, namely that there be an order that the first defendant pay the first plaintiff's costs of and incidental to the taking of these accounts.
The first defendant submits there has been a process of concessions on both sides, some of which only occurred on the receipt of the plaintiff's submissions in the last day or so. In those circumstances the first defendant submits that there should be no order as to costs, to the intent that each of the parties pays its own costs of these proceedings.
The reasons advanced by the first defendant are not sufficient to displace the usual result. The first plaintiff has succeeded on all counts and I therefore direct that the short minutes to be prepared by the parties should include an order that the first defendant is to pay the first plaintiff's costs of and incidental to this taking of accounts.
oOo
Decision last updated: 17 July 2013
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