Yarra Valley Spring Water Pty Ltd v Paterson
[2012] VSC 135
•12 April 2012
| Not Restricted | |
| IN THE SUPREME COURT OF VICTORIA COMMERCIAL AND EQUITY DIVISION |
S CI 2009 05987
BETWEEN:
| YARRA VALLEY SPRING WATER PTY LTD (in liquidation) (controller appointed) | Plaintiff |
| – and – | |
| HELEN PATERSON and JAMES PATERSON | Defendants |
| AND BETWEEN: | |
| HELEN PATERSON | Plaintiff by counterclaim |
| – and – | |
| YARRA VALLEY SPRING WATER PTY LTD (in liquidation) (controller appointed) and RICHARD HACK | Defendants by counterclaim |
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JUDGE: | MUKHTAR AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 2, 3, 6, 7, 14, 15, 16, 17, 20 June 2011 | |
DATE OF JUDGMENT: | 12 April 2012 | |
CASE MAY BE CITED AS: | Yarra Valley Spring Water Pty Ltd v Paterson and anor | |
MEDIUM NEUTRAL CITATION: | [2012] VSC 135 | |
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CONTRACT ― Sale of business ― Sale to trustee of unit trust in which vendors became unit holders ― Distinct agreement to sell business assets including groundwater extraction licence in exchange for units in trust ― No cash consideration ― Obligation on seller to transfer licence to trustee on application to responsible authority ― Seller prevented processing of transfer with responsible authority ― Whether sale agreement was void for lack of consideration ― Alleged pre contractual misrepresentations by purchaser concerning retention of licence ― Alleged pre contractual misrepresentation by purchaser concerning application of funds to business ― Sale of business agreement valid and enforceable ― Misrepresentations not proved ― No loss and damage suffered ― Case suitable for making declaration of contractual rights.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Ms J E Treleaven | Russell Kennedy |
| For the Defendants | Litigants in person | (Not represented) |
TABLE OF CONTENTS
Introduction......................................................................................................................................... 2
Four features of the case.................................................................................................................... 5
The Court’s decision........................................................................................................................ 10
The beginnings of the business.................................................................................................... 12
The insolvency of Glenmorton Holdings.................................................................................... 15
The Fleming syndicate of investors.............................................................................................. 16
Fleming sues Helen and James Paterson..................................................................................... 19
The involvement of Richard Paterson......................................................................................... 21
Attracting Richard Hack to invest................................................................................................. 24
The negotiations and documentation of the deal...................................................................... 27
The documents signed.................................................................................................................... 37
The sale agreement in isolation..................................................................................................... 39
Helen and Richard Paterson’s evidence...................................................................................... 41
The transfer of the licence.............................................................................................................. 47
The prime mover and the tanker................................................................................................... 51
Events in 2006 to 2008...................................................................................................................... 57
The later attempt to transfer the licence....................................................................................... 60
The plaintiff’s case........................................................................................................................... 65
Was there consideration?................................................................................................................ 66
The misrepresentation case about purchasing the licence....................................................... 69
The estoppel and misrepresentation case concerning the truck and tanker........................ 72
The damages claim........................................................................................................................... 75
Non est factum.................................................................................................................................. 76
Declaratory relief.............................................................................................................................. 77
HIS HONOUR:
Introduction
This lengthy, and factually extensive trial, concerned a failed business venture between close personal friends. The business, very much in its developmental stage, was in producing (capturing) ground water from bores at a 160 acre property at 45 Reserve Road in Launching Place in Victoria. The water was sold and delivered in bulk to bottlers for retail sale, and later, the business tried to turn to bottling on site. The label was “Yarra Valley Spring Water”.
The business had initially been the pursuit of the Paterson family as I shall occasionally call them, namely, Mrs Helen Paterson (the first defendant and a widow since 2002) and her middle son James Paterson (the second defendant). Later the affairs of the business came to involve her youngest son Richard who is not a defendant but, as I will expose later, he was the activist in making the deal for his family that is the subject of this action.
The business was initially in the hands of Helen and James Paterson as an informal partnership. It was being conducted at a rudimentary level on the land, that is, very much a “hands on” affair between mother and son without much plant and equipment, and no automation. Much of the business had been in selling bulk water. The Paterson family lacked the financial means to inject working capital or put fixed capital into the business, and were dependant on cash flow to meet expenses and debts. That put them on the lookout for other investors to share the risk. In that pursuit, the business became entrenched in fractious legal disputes with an investment syndicate from Sydney. But the Patersons were convinced that an opportunity existed to enter the glass bottled mineral water market (as distinct from the plastic bottled water in the retail market) for the better or boutique end of the restaurant and hospitality trade in Victoria and elsewhere. That led to the need, come late 2002, for an investor to be attracted to extricate them from their serious problems with the investment syndicate from Sydney, and to advance the potential to make a business for glass bottled mineral water. That investor was their close personal friend Mr Richard Hack an ex motor mechanic and tour operator who had no previous experience in the beverage industry but had spent years working as a property developer with his father at Noosa in Queensland. He had come by some money to invest.
The events that necessitated the search for an investor, and the fate of the business after Hack made agreements to, in effect, become the financier and risk taker of the business can truly be described as a saga. And every part of it came to be revisited in this trial. For Mrs Helen Paterson (whose solicitors ceased to act, and who conducted the case as a litigant in person) it is apparent this business has been her life naturally bringing with it emotional and family attachments. Her son James Paterson was present in Court but played no active part in the trial. He was made bankrupt in May 2007. Her other son Richard Paterson, the deal maker, was a principal witness.
As he gained interest in becoming involved in the business, Hack had the good sense to engage high grade legal advisors to structure the deal and prepare the multitude of documents to set up a new business structure. That was all done in consultation with Richard Paterson. There were three lawyers involved from Messrs Minter Ellison, whose dealings with the Patersons was the subject of much documented evidence. There was eventually prepared a suite of documentation (11 agreements or instruments on my count) which also involved an agreement to purchase the land and chattels from the Sydney syndicate with whom Helen Paterson had been in legal dispute. In circumstances I will expose later, the syndicate had bought the land and chattels from the Patersons, and had their own legal and financial interests to protect in an adversarial setting. They were separately legally represented in the deal.
Under the business structure established under the agreements, the plaintiff, Yarra Valley Spring Water Pty Ltd (which is now in liquidation, with a controller appointed by Hack) is the company that was especially incorporated as a trustee of a unit trust to operate the business as a venture between the three Patersons and Hack. The idea was to transform the business organisation from a partnership between mother and son to a trading trust arrangement. Avoiding details, the three Patersons and Hack each took a 25% unit holding in the trading trust and were all directors and equal shareholders of the trustee company. Richard Hack’s company Seamore Pty Ltd became the owner and lessor of the land, as well as a secured lender to the trustee company under a fixed and floating charge. He lent the company substantial amounts for capital and operating expenses. Hack was not only the landlord and in effect the financier of the business, as well as a 25% unit holder with the Patersons, but he became the risk taker and vulnerable to the fortunes of the business as managed largely by the Patersons.
When the documents were signed and the deal was done Richard Paterson made this memorable commendation to the lawyers engaged by Hack:
On behalf of all now involved in Yarra Valley Spring Water, I would like the opportunity to say thank you to all those involved in cleaning up what was an absolute dog’s breakfast.
That may not be a sublime form of expression, but it is not at all inaccurate. The dog’s breakfast came to be revisited in detail in this trial because of the case pleaded by the Patersons which the plaintiff came to Court to meet. The facts are complicated as they are tangled. The Court cannot recite a life story, so as I set about in this judgment to recite the facts, most of which are documented, I do not intend to go into every fact and every document that was tendered, nor to expose every twist and turn and subtlety in the case. That approach may bring with it some imperfections, but that is unavoidable. The facts I recite can be taken to be apparent in the many documents tendered in evidence. I shall confine myself to what I regard as salient legal facts, or facts that help illustrate the elements of the commercial deal which, faithful to legal principle, were those objective facts and circumstances commonly known to both parties. There are locations where the facts might appear to be irrelevant to the ultimate clinical legal analysis, but one way or another they give an understanding of this peculiar case.
As it turned out, the case was not dependant on the calibre or credibility of witnesses. The widespread course of evidence, in chief and in cross examination, was predominantly aligned with the contents of documents rather than unwritten facts or events. But it should be said here that Hack was, in my view, a most credible and reliable witness, not prone to exaggerate or become defensive or dissemble. He dealt with the facts in a straight talking way. For the Patersons, the challenge was to now face the facts about their failed business venture. For the plaintiff (over whom Hack had appointed a controller under a debenture charge) it was simply a case of asking the Court to enforce an explicit and uncomplicated provision of a signed agreement for the transfer of a water licence. The Patersons were looking to undo the agreement or be relieved from the obligation to transfer the licence.
As an aid to better understanding the facts and the nature of the case, four things need to be said at the outset.
Four features of the case
First, this case is all about a groundwater licence issued under s 51 of the Water Act 1989 (Vic). That licence was an asset essential to the conduct of the business. It is a “Groundwater Licence No. 4007891” issued originally by Gippsland and Southern Rural Water to James Paterson and Helen Paterson personally. It was issued on 17 December 1998 and was valid for 15 years from 1 September 1998. It authorises the licensees to take and use water from a specified bore on the land at Reserve Road, Launching Place for commercial purposes up to an annual volume of 62 mega litres. Under the Water Act, such a licence can be renewed[1] and it can be transferred to another person.[2]
[1]See s 58.
[2]See s 62.
Secondly, amongst the suite of documents prepared by the lawyers and signed by the parties and discussed beforehand, one of them was an inelaborate sale of business agreement which provided for the transfer of assets used in the operation of the business from the Paterson family to the plaintiff company. The agreement calls it interchangeably a sale and a transfer. Under that agreement, James and Helen Paterson agreed explicitly, and unmistakably, to transfer to the plaintiff company (of which they would simultaneously become directors and shareholders with Richard Paterson and Richard Hack) all assets of the business including the water licence. There was no cash consideration for the transfer. The consideration was expressed to be the issuing of units by the plaintiff to Helen and James and Richard Paterson in the unit trust.
The effectuation of the transfer of the water licence would require the involvement of the responsible authority (“the Water Authority”), Southern Rural Water. The agreement also included a typical clause obliging the Patersons to do all such things and sign all documents as would be necessary to effect that transfer to the plaintiff. The plaintiff looks to enforce that agreement.
Thirdly, faithful to that agreement, it is the fact that Helen and James Paterson signed an application to transfer the water licence to the plaintiff. But the facts are a little muddled about precisely what happened with the lodgement process and the administration of the matter with the water authority. In circumstances I shall expose later ― which do Mrs Paterson no credit ― it appears that unknown at least to Richard Hack and his lawyers she personally and unilaterally interfered with and stopped the processing of the transfer by the water authority. The transfer was not registered by the water authority at the time this proceeding was commenced in April 2009 almost 6 years after the deal was done, and it is a mystery why things were not discovered much earlier.
When this proceeding was commenced in April 2009, the water authority was sued as third defendant for failing to process and approve the transfer of the water licence. The plaintiff sought an order, in effect a mandatory injunction, to compel the water authority to consider and approve the transfer of application. Then, on 29 June 2009 the water authority transferred and reissued the ground water licence to the plaintiff thus rendering legal action unnecessary as against it. The action as against the water authority was therefore discontinued.
The matter did not rest there. On 14 July 2011 Helen Paterson, no stranger to litigation, lodged with the Victorian Civil and Administrative Tribunal a claim expressed to be under the Water Act and s 74(1) of the Water Industry Act to reverse the decision to transfer the licence. In essence she contends that the water authority should not have approved the transfer of the licence because she as transferor had revoked her authority for the transfer to proceed. That proceeding in VCAT awaits the outcome of this case. The question in this case is whether she and her son James were bound under the sale of business agreement to transfer the water licence, in which case she had no right to withdraw the transfer application and interfere with the transfer process in the first place.
In passing, I should also say there is another proceeding awaiting the outcome of this one. It is in the County Court of Victoria between Helen Paterson and Hack’s company Seamore Pty Ltd, originally commenced in the Magistrates’ Court but transferred from there because a counterclaim by Seamore exceeded the $100 000 jurisdictional limit of that Court. Her case against Seamore is in conversion and detinue. She says that when Seamore exercised rights under the lease and the charge to enter the land and take assets of the plaintiff, it wrongfully took her personal property and not property of the company. I am told that no part of that case involves a question of the meaning or enforceability of the sale agreement. It is not clear to me, but I am told a County Court Judge has heard the counterclaim, reserved judgment, and awaits the decision in this Court before proceeding with or deciding the claim in conversion and detinue.
Thus, as things stand, the plaintiff has the water licence. But that is subject to the VCAT proceeding. There being a justiciable controversy, the plaintiff now modifies its case to now seek declaratory relief from this Court to extinguish any controversy about its entitlement to have such a water licence under the sale of business agreement. I can only suppose that should this Court declare that the Patersons were obliged to transfer the water licence that would in effect sterilise the VCAT application and bring finality to this dispute.
Fourthly, it follows that Helen Paterson as counterclaimant was the real protagonist in the case. The plaintiff’s case was by nature simple: the sale of assets agreement was plain in its meaning and operation, and as a matter of law James and Helen Patersons are bound by it. Underlying the plaintiff’s case was the portrayal of the deserving justice of Hack’s position. That is, on the faith of that agreement, he bought the land and made a substantial investment to “bail out” his friends the Patersons, and then put more money into the business that could not pay its way, only to see the Patersons dishonour their promise to transfer the water licence. The trial really concerned the counterclaim brought by Helen Paterson which was not clear; but seems to be looking to impeach either the whole agreement or at least to isolate and be excused from the contractual obligation to transfer the water licence to the plaintiff.
Although Mrs Paterson is a litigant in person, her defence and counterclaim were drawn by counsel. She pleaded: (i) the agreement was void for want of consideration; (ii) she and James Paterson should not have to transfer the water licence because (despite the plain words of the agreement) the plaintiff and Hack made pre-contractual unwritten representations that the water licence would remain with the Patersons and be purchased by the plaintiff some time in the future under an independent valuation when the plaintiff’s cash flow permitted; (iii) the plaintiff and Hack also made unwritten representations he would raise working capital by selling a truck and tanker previously used by the Patersons for bulk water transport, but he did not, with the result that the business could not pay its debts and fell prey to Hack as secured lender and landlord; (iv) those representations were misleading and deceptive in contravention of s 52 the Trade Practices Act; (iii) the same representations also formed the foundation of an estoppel; and as a result (iv) she and James Paterson ought be relieved of an obligation to transfer the water licence to the plaintiff, and ought be paid damages.
Throughout this trial Mrs Paterson was reminded repeatedly by the Court about the significance of the contents of her defence and counterclaim and the expectation that it was for her to adduce the evidence in support of all the defences, and impeach the plaintiff’s case accordingly. It was also incumbent on her, she was reminded, to put questions squarely to the plaintiff’s witnesses to support her case especially on the alleged oral misrepresentations.
The problem was that her case became estranged from the case as pleaded. The facts of the misrepresentation and estoppel case concerning the retention or buy back of the licence was never really put to the plaintiff’s witnesses and not adduced as part of her case. This really was troubling for the Court. It seemed to me towards the end of the trial that Mrs Paterson was tending to make a different case of having signed a document mistakenly believing it meant something else. That is, a plea of non est factum (“the signature is not mine”). She seemed to be saying two things. She signed so many documents on the day that she did not appreciate the water licence was going across to the plaintiff as part of the corpus of assets to enable the plaintiff to run the business. Secondly, she did not appreciate that the agreement obliged her to sell or transfer the water licence. She thought, she said, that she was only agreeing to let the plaintiff company “use” the water licence but it would always be hers to reclaim once the business became established.
It is here that something must be said about the invidious position in which Mr Hack was placed in the conduct of the case. The defences as pleaded by the Patersons required the plaintiff’s lawyers to unavoidably engage in exploring and pulling apart meticulously the facts before, and after, the making of the agreements, in order to substantively and forensically meet the defences. A misrepresentation case usually involves issues of reliance and causation, assuming the representation was made and was promissory. The case was not split (and just as well I think), and counsel for the plaintiff had to disprove a case not properly or clearly put by an adversary. It is here I wish to say that were it not for the able and sedulous efforts of the plaintiff’s counsel, Ms Treleaven, this Court would not have been exposed properly to the facts in order to get to the truth of the matter and assess the legal rights and obligations as pleaded or otherwise.
As this is a long judgment, it is appropriate to state at the outset my decision and a précis of my reasons.
The Court’s decision
This case comes to be decided essentially on the facts. I would hold that none of the defences as pleaded are made out. The sale of assets agreement stands unimpeached. James and Helen Paterson cannot deny their contractual obligation to transfer the water licence to the plaintiff, and their ancillary obligation “to do all things necessary to give effect to” that agreement. Dealing in summary with each of the elements of the defence I would hold:
(a)the defence that the agreement was void for an absence of consideration is misconceived. It is repugnant to the facts which show the real benefits of the bargain to the Patersons by the agreement to transfer the licence to the plaintiff, and the assumption of risks by Hack in what truly was a rescue by him of their financial and legal problems. The sale of business agreement was integral to multi-faceted deal as originally solicited by the Patersons. The transfer of assets including the water licence to the plaintiff was part of the design to put the partnership business into a trading trust for the benefit of all concerned. The plaintiff incurred the responsibility of trustee and the burden of conducting the new business, and issued units to the Patersons to enable them to obtain the benefits of the trust business. The issue of units was real and valuable consideration.
(b)The misrepresentation case about retention of the licence (and the associated estoppel case) is not proved and is not credible. It was not put, maybe because it is repugnant to the facts. All pre-contractual discussions were between Richard Paterson and Hack’s lawyer’s Messrs Minter Ellison and came to find expression in the legal documentation signed. Those discussions as documented all show that a transfer of the water licence by Helen and James Paterson to the plaintiff was precisely what was intended, and it was necessary to give the deal commercial sense and efficacy.
(c)The misrepresentation case concerning the sale of the truck and tanker is not made out either, nor is it credible. The Patersons were stuck with having to buy the truck and tanker from the Sydney syndicate even though they did not want them for the bottling business. The deal could not otherwise proceed. To that end Hack agreed to lend the plaintiff, and did lend, the money ($300 000) to buy the truck and tanker on the basis that they could be resold and the money recovered and applied to the business. That is not a promissory representation by Hack. That is what Richard Paterson proposed and what he and Hack resolved to do in the predicament they were in. The attempt to say that somehow Hack had prevented the availability of funds from the sale of the truck and tanker for working capital and had thus suffocated the business was far fetched. In any case, it affords no ground to set aside the agreement or relieve the Patersons of the obligation to transfer the water licence.
(d)The Patersons case for damages was not proved, not credible and not really put. There was no wrongdoing by Hack on which any claim for damaged could be predicated. The facts show that Hack had to absorb so many financial burdens and contribute so much for capital and operating expenditure with little to no reward for his invested capital that it eventually became unbearable and led him reasonably to salvage his position and exercise his legal rights. It is not possible to hold him ― who had rescued the Patersons financially and funded the business ― legally responsible for the business failure. The Paterson family were actively running the business. They were directors of the plaintiff company and also responsible for its management and affairs.
(d)There is no estoppel case based as it was on the same facts as the misrepresentation case;
(e)Finally, an unpleaded case of mistake or non est factum is not open. The agreement which the Patersons signed was not in any way radically or fundamentally different from that which was thought to be signed. Nobody was misled or deceived. The discussions with the lawyers show that Helen and James Paterson as licence holders knew, as did Richard Paterson, and they intended that the water licence had to be transferred to the plaintiff company. Indeed, the intention was manifestly shown by Helen and James Paterson signing the application to transfer the licence (a document which they well understood) before or simultaneous with the signing of the agreement.
For remedial purposes, I think it just and useful to make declarations to that effect that James and Helen Paterson are, and always were bound under the sale agreement to transfer the water licence to the plaintiff. The Court should do what it can assist to bring finality to this saga. The precise terms of the declarations appear at the end of this judgment.
I shall now proceed to recount the essential facts.
The beginnings of the business
Although this deal was done in July 2003, the origins of the problem leading to the necessity for the Patersons to find an investor to help save their business emanates back to experiences and disputations with others going back well before then. Throughout the trial, Mrs Paterson was intent on returning to these past events in order to show to the Court her mentality or experience in going into the deal. Not all of these facts are relevant and at best might be described as “background”. However, these backgrounds facts when accumulated with others had the effect of demonstrating that the deal eventually made with the plaintiff was entirely for the benefit of the Paterson family to bail them out of financial distress and legal disputations. And, far from the Patersons being the victims of a misrepresentation, the plaintiff would say the background facts also show it was the Patersons who not only benefitted from Hack’s investment and his subsequent investment of more money, but it was they that acted unfaithfully towards him.
In about December 1998, Helen and James Paterson purchased the land in Launching Place, through their family company Glenmorton Holdings Pty Ltd. At about that time, they also obtained the ground water licence in their joint names. Glenmorton Holdings also leased a prime mover and a water tanker from Australian Guarantee Corporation (“AGC”) because the business at that time was selling and delivering bulk water to a bottling company known as “H2O”. The land was mortgaged to the ANZ Bank. The financial stability of the business and their ability to meet mortgage and other expenses was dependent on revenue from bulk water sales. There was at that time no bottling line or process on their land. Water was taken from the spring by a gravity feed system into stainless steel holding tanks, and then into the tanker ready for delivery by road haulage to the bottler.
The separate ownership of the land from the water licence is commercially significant. As holders of the water licence, Helen and James Paterson made an “Access Authority Agreement” with Glenmorton (of which they were directors and shareholders) dated 17 December 1998 giving them a right to access the land for the duration of the water licence. The agreement said:
The agreement is made for the access to the property [at 45 Reserve Road, Launching Place, Victoria] and related infrastructure such as tanks, loading facilities, filter equipment and bores located on the property to James and Helen Paterson or their agents for the purposes of extracting and selling of Spring Water under Ground Water Licence No 4007891 And is for the term of the licence (15 years or longer if renewed)
This agreement is binding on Glen Morton Holdings Pty Ltd trustee and all other future owners of the land should it be sold before the expiration of this agreement.
Come 1999, Helen Paterson and her husband Tony started bottling the water from Launching Place in 1.5 litre plastic bottles with the label “Yarra Valley Spring Water” and looking to promote the product to wineries in the Yarra Valley, and in Sydney. The business method was very basic, and not automated. They were, she explained, hand filling the bottles from holding tanks on the property with hoses. They did their own capping and labelling by hand. It was described as a boutique or “cottage business”.
This was not the Patersons’ first involvement in the mineral water business. I am not sure of the dates but Helen Paterson also had a property with her husband Tony in Gilderoy over which there were ground water licences. She said that her husband had done all the preparatory and marketing work to obtain contracts for the sale of bulk water to the well‑known bottler, Coca Cola, and they had business arranged with the bottlers of “Linton Park” and “Koala Springs” mineral water. For the Gilderoy property, they had installed stainless steel tanks, had a commitment from Swiss investors, and were ready to advance their business, but her husband unexpectedly died in late 2002. A dispute then broke out between Helen Paterson and the executors of her husband’s estate, a Mr Richard Launder and a Mr Carl Dowd. And there lies the first legal entanglement with which Helen Paterson was involved, and an experience which she says came to shape all sorts of apprehensions she had in any dealings concerning a water licence.
Helen Paterson and her three sons were the beneficiaries under her husband’s will. As best as I can gather the facts, there was some question within the executorship whether the Gilderoy water licence was properly finalised or properly put in the correct person’s name. She said the water licence for the Gilderoy property came to be put in the names of her and her three sons by arrangement with the executor and the water authority. The ANZ Bank as mortgagee of the Gilderoy land was willing to withhold action under the mortgage, which was presumably in default, on the faith of the Patersons securing satisfactory cash flow from bulk water contracts within six months. That is, the bank was willing to let the Patersons or the executors trade their way out of difficulty.
The facts now become more unclear. One or both of the executors, Helen Paterson says, purchased a substantial interest in the bottled water label “Linton Park”, bought the Gilderoy property from the bank, and took a transfer of the Gilderoy water licence. She says the executors acted entirely in their own interests and not for the beneficiaries and took away the land and the business at Gilderoy that she and her husband had developed. What added to her woes was that she then lost the Launching Place water supply contract with H2O. She believed that loss occurred as a result of Launder or Dowd dealing with H2O and taking business away from her. What is worse, she says, is that her signature on the transfer of the Gilderoy water licence was forged.
That led Helen Paterson to sue Launder and Dowd in this Court. I have not concerned myself with the precise elements of that case but the Court heard evidence in cross‑examination from Mr Michael Main a partner of Messrs Russel Kennedy who acted for the Patersons in October 2003. (He is now the solicitor for the plaintiff in this case against them.) According to Main, the central issue in that case was whether Helen Paterson’s signature on the transfer of the Gilderoy water licence was forged. It appears her case was beset with problems, so much so that by the time Main came to be involved, the Court had summarily struck out her case against Dowd. She then changed solicitors. The Court made a substantial costs order against her in the remaining litigation, and the case did not proceed to trial.
According to Helen Paterson she did not persist with that case as she wished to concentrate on rescuing the Yarra Valley Spring Water business and put the Gilderoy experience behind her. But at that time, having lost the contract with H2O, her company Glenmorton Holdings was put into voluntary administration.
The insolvency of Glenmorton Holdings
The company was put in administration in August 2001. The Patersons, more particularly James, remained in occupation in a house at Launching Place under the access agreement between them and the company and attempted to keep the business going. As the water licence was held by Helen and James Paterson it was not an asset of the company. Any attempt by an administrator or creditor to sell the land would suffer the disadvantage that the land would have to be sold separately from the water licence, and maybe subject to it. Yet, the grant of water licence was a commercially exploitable advantage which would enhance the value of the land. It is in that sense that the land and the groundwater licence go hand in hand.
As between the Patersons and the administrator, the thinking was that rather than have a distress sale of the land and have the prime mover and tanker idle and be repossessed by the lessor AGC, it was better to find a buyer to whom the business could be sold as a going concern, with potential. Thus, what came available for sale were the Launching Place property and the separate sale of the water licence owned by Helen and James Paterson. This leads to the next legal entanglement with one George Fleming and a syndicate of investors. The time setting is March 2002.
The Fleming syndicate of investors
According to Helen Paterson, friends of hers let it be known to George Fleming that the Launching Place property and the water business were for sale. At that time her husband was still alive and showed Fleming the property and the activities on the land. Thought turned to a joint venture between the Patersons and Fleming under which Fleming would form a syndicate of which Helen Paterson would be a 25% member. The syndicate would buy the land and assets of Glenmorton Holdings; and Helen and James Paterson would bring into the venture the water licence and run the water business as operator. This idea entailed Mrs Paterson having a share in the ownership of the land as well as the business and the water licence. But she did not have the money to buy into the syndicate and thus needed to come to terms with Fleming about how her interest would be financed.
In evidence is a “heads of agreement” dated 19 March 2002 made between Helen Paterson and George Fleming. That document was signed both by Helen Richardson (she was then using her maiden name) and Fleming. It is an exiguous document but it is important to see that she agreed, for herself and for her son James, to sign documents required to transfer the groundwater licence to Fleming. Omitting irrelevant details the document says (with my underlining):
In consideration of a loan by Fleming for interests of George Fleming to Paterson of $153,750.00 with interest at 7.5 per centum per annum and of Richardson’s agreement to enter into a contract for the purchase of the property known as 45 Reserve Road, Launching Place from Glenmorton Holdings Pty Ltd … (in liquidation) and the purchase of one water-storage tank, one set of three water filters, one 1999 Iveco Power star 7,500 bogey drive prime mover and one 10/200 Marshal Lethlean tri-axle water tanker from Australian Guarantee Corporation Limited on behalf of a Syndicate in which Richardson will have an interest equal to 25 per centum thereof on terms yet to be finalised by the parties Richardson on her own behalf and on behalf of her son JAMES PATERSON agrees to sign any documents reasonably required in order to transfer to Fleming for and on behalf of the Syndicate Groundwater Licence No 4007891 issued by Southern Rural Water for a total of 62 mega litres to enable Fleming as nominee for the Syndicate to take and use water from the bore or bores on the property and when available to transfer the business name Yarra Valley Spring Water and subject to her obtaining control, the trademark for Yarra Valley Spring Water to Fleming as nominee for the Syndicate.
Breaking that down the elements of the deal were that, of the one part, Fleming or his syndicate would:
(a)lend $153 750 to Helen Paterson (to enable her to buy into the syndicate);
(b)she would obtain a 25% interest in the syndicate (and her percentage share of the business earnings would enable her to repay the loan);
(c)the syndicate would buy the land at Launching Place from the administrator of Glenmorton Holdings; and
(d)the syndicate would buy the prime mover and tanker from AGC Limited.
For her part, in exchange, Helen Paterson would:
(a)transfer the water licence to Fleming or the syndicate (the water licence and the benefits she takes is by the exploitation of that licence by the syndicate for which she gains a 25% interest); and
(b)she would transfer the business name and the trade mark.
Faithful to the heads of agreement, a contract of sale of real estate was made between George Fleming as purchaser and Glenmorton Holdings as vendor of the land at Launching Place. The price was $575 000 payable by deposit of $57 500 on signing of the contract on 19 March 2002 with the balance to be paid within 30 days. There were some ancillary agreements the most material of which was an agreement between Fleming and AGC dated 18 March 2002 under which he or his nominee agreed to purchase from AGC for $300 000 the water storage tank, a set of three water filters, the prime mover and the water tanker. These were all the subject of a pre-existing hire purchase agreement. There was also “Nomination Form – Chattels” dated 18 March 2002 under which Fleming nominated Eyesis Pty Ltd, a company incorporated in New South Wales, to be the purchaser of the chattels. Thus, Fleming as purchaser paid a total of $875 000 to buy the land and chattels on the faith of the heads of agreement.
The next step was for the parties to reduce into writing the terms upon which Helen Paterson would have an interest equal to 25%, and for the preparation and signing of all other documents to transfer the water licence, the business name and the trademark. But come June 2002, Helen Paterson disputed the legal enforceability of the heads of agreement. She could not agree on the terms of how the business was going to be run and began to distrust the other members of the syndicate. She said the deal with Fleming became destabilised when more people were showing interest in joining the syndicate including those who had their own water company in competition. She, mindful of the Gilderoy experience, apprehended those others might deceive her or put the interests of their own businesses ahead of Yarra Valley Spring Water. As I understood her evidence, she was apprehensive about relinquishing her interest in the water licence in return for a share of the syndicate for which she would have to borrow money from Fleming. She wanted to be satisfied that the syndicate was going to establish sufficient cash flow to enable her as syndicate member to pay the interest accruing on her loan. She was concerned that a slow uptake of profitability in the new venture would result in her not being able to pay the interest under the loan and then be in default, in which case she might lose her interest in the venture completely. She did not wish to release her interest in the water licence because that was her only real business leverage.
Accordingly, she (and James) refused to transfer the water licence. To add to the problems, she also refused to sign a transfer of the land that Fleming had purchased. It is not clear to me, but I gather that the transferees of the land had to include all the syndicate members of which Helen Paterson would have a 25% interest, and her signature was necessary to create a tenancy in common of the property. Without her signature the registration of the transfer could not proceed. Fleming had, as agreed, arranged for the incorporation of Eyesis Pty Ltd (of which Helen Paterson was a director) to buy the chattels to operate the business but could not lodge documentation with ASIC because of her refusal to sign documentation. This led to Supreme Court litigation.
Fleming sues Helen and James Paterson
George Fleming filed a writ in this Court on 7 August 2002. He sued on the heads of agreement alleging that in performance of that agreement he advanced Helen Paterson loan funds of $153 750 on about 23 April “by paying such sum, on her behalf, towards the purchase price of the land”; he entered into the sale of land agreement; and he made the sale of chattels agreement with AGC. He sought an injunction to restrain them from dealing or otherwise using the water licence, the business name “Yarra Valley Spring Water” or the trademark. He also sought a declaration that the Patersons were bound to sign all necessary documents for the transfer of the water licence. There is a resemblance to the present case.
The Court file in that proceeding[3] was brought into Court and I have examined it. The facts are complicated but a brief reference to them is worthwhile I think because it shows the experience and the predicament that Helen Paterson brought with her when eventually making the agreements which are the subject of the present case. In summary, Fleming was saying:
[3]No. 6685 of 2002.
(a)on 23 April 2002, he paid the purchase price of $575 000 plus GST under the sale of land agreement, and also paid AGC the purchase price for the chattels.
(b)Helen Paterson did not have any funds to acquire an interest in the syndicate so he was prepared to loan her and James their share of the equity required for their entry into the joint venture.
(c)The framework for the venture was to incorporate a company and that persons investing in the joint venture would acquire shares in the company.
(d)He dealt with Glenmorton’s liquidator and reached agreement for $875 000 for the land and the assets.
(e)After meetings held in early 2002, it was determined there would be seven families having an interest in the venture including the Richardson family to the extent of 25%. That would include the share of the ownership of the land, the chattels, the water licence and the operating company to be formed.
(f)Helen Richardson refused to sign the transfer of the water licence until a five year business plan was prepared and because she was concerned about her ability to pay back the loan for her 25% interest in the land. She wanted to be satisfied there was sufficient working capital being injected into the business so as to generate returns to enable her to repay her loan.
The material that was filed in opposition by both Helen and James is discursive. In substance Helen Paterson swore she was resisting Fleming’s case as follows. She said she had no authority or consent from her son to deal with his 50% share of the licence. She did not regard the heads of agreement as binding. She took the view that negotiations had not been concluded and deals were continually changing and questions being raised whether the venture was going to support the bottling of water on site and invest further capital and whether bottled water sales would be restricted to the domestic market. She was concerned about provisions which would result in her losing her 25% share if she did not repay her debt, or provisions which would perhaps entitle the syndicate to buy her interest out. She denied ever receiving the loan of $153 500 and said that relations between her and Fleming had become abusive after she refused to sign a transfer for the ground water licence.
On 25 October 2002, the Court dismissed Fleming’s application for interlocutory injunctions. I do not know if that was on the merits, but the proceeding certainly remained alive. The situation really was at a standoff and an odd and unbusinesslike situation was obtained. Helen Paterson was refusing to proceed with the agreement, regarding it as not legally binding. Yet Fleming had bought the land and the chattels. He could not register a complete the transfer of land, or obtain the water licence and other documentation. But on the land, James and Helen continued running their own business bottling water by hand (and maybe selling bulk water) because they regarded the pre existing access agreement with Glenmorton Holdings (in administration) as still binding, even as against Fleming.
This and the Court case was all happening at about the time that Helen Paterson’s husband had died. It was also happening at about the time that the youngest of the Paterson family, Richard Paterson, arrived in Melbourne to try and extricate them from the disputations and restore the business in the hands of the Paterson family by buying out the Fleming interest. It was to use his words “the last roll of the dice” for the Paterson family. He regarded himself, he said, as being able to bring some independence in dealing with the Fleming syndicate.
The involvement of Richard Paterson
Richard Paterson’s evidence traversed a lot of the background and I shall not refer to all of the facts or the subject of his evidence. In the end, as in so much of the case, the case did not turn on his calibre as a witness as the objective facts were eventually made apparent through a marshalling of the facts through the documents. But, his evidence helps better understand the provenance of the deal eventually made with Richard Hack and the availability of the alleged defences.
Up to mid 2002, Richard Paterson had not been involved in the water business at Launching Place or in the dealings between Glenmorton and the Fleming syndicate. He was a property manager and agricultural farm manager in New South Wales. But he decided to come to Melbourne and work with his mother Helen and his brother James on the water business. He explained that at the time, his mother had gained a sponsorship from the Yarra Valley Grape Growers’ Association which would aid a development of their business at various promotional events. He said that the Paterson family were looking to operate a bottled water business from the property rather than bulk water production. He explained that the risk in the bulk water industry was very high because supplies went to a single customer. His thinking was that bottling of small bottles could spread the risk by having a multitude of customers taking the product rather than one customer.
He discerned the retail market for mineral water in plastic bottles was saturated. He said he had attended trade shows and exhibitions and discovered “fantastic” opportunities in the market for a premium grade mineral water in glass bottles for restaurateurs and hoteliers. The premium end of the market was effectively only imported brands. The Paterson family decided to develop their business accordingly for sparkling and still mineral in a glass bottled premium product under the Yarra Valley Spring Water brand destined mainly for the restaurant trade or upper end hotels. But they did not have the financial means and they had a fight on their hands with the Fleming syndicate. Richard Paterson’s object was to obtain a private investor to set up the new bottling business and buy out the Fleming syndicate. Richard Paterson was, so he conveyed to me, not only the trouble shooter but also the marketing man.
To attract possible investors he prepared and put out in September 2002 a document entitled “Proposal for equity in the spring water venture for the Paterson family”. This is an important document. It states candidly that for the Patersons, this pitch was the “last roll of the dice”. He was seeking interest based on an equity model in which the Patersons would have equity in the land and a 50 per cent of the business. The document said (with my emphasis):
What the Paterson family will be bringing to the operation:
ØThe water licence – indeed this gives the opportunity to extract the ground water and are as rare as hens teeth and has a value of at least $400K.
ØThe name of ‘Yarra Valley Spring Water’ – priceless if you want to market under the name of one of the worlds most talked about food and wine regions, and according to some, worth at least $300K (witness the tussle for it between ourselves and Linton Park).
ØValuable intellectual property being:
oThe Ability to maintain the existing water supply – should it stop flowing due to ground movement, bore collapse etc.
oAbility to increase the flow rate back up to the full licence volume should it be required
oAbility to extract water of this quality from the ground – This ability proven with all the spring water sources the family have developed – currently producing some of the purest water anywhere in the world.
ØWater assets including another stainless steel tank, pump and delivery hoses, bag filters, loading gantry, and the stainless steel 44 gallon drum which forms part of the filter system.
oPlease note the Syndicate was not purchasing these assets.
ØThe ability to maintain the property
ØMarketing and sales ability
oMarketing and maintenance both subject to separate agreements.
We would also like the opportunity to be able to buy back the equity in the land as finances allow. This would naturally never affect the security of the water. It is more an old fashioned attachment to the land one works.
Without the assets and ability, and believe me the ability is a well held family secret, then there is really no other use for this property other than a nice weekender in the Yarra Valley.
This is really a last roll of the dice for the Paterson family as if this never gets up we will be left with absolutely nothing, no licence or even brand name to trade with, however the investor will still have a very nice property in which to sell to recoup some of the funds invested.
Given that we are only seeking minimal equity in the land, 10%, with the option to purchase it as and when we can, also with due consideration to the skills, licences and brand name that truly make up the spring water business, we are seeking a split of equity in the trading arm of 50/50.
We certainly hope that you understand and can appreciate the position we ultimately put ourselves in if we transfer all the assets we currently hold to the new venture.
Looking forward to discussing this with you.
He said he met with possible investors in Sydney and made a presentation to people regarded as high net worth individuals. Yet, he acknowledged, that given all the past misfortunes of the Paterson family, all they had to offer a prospective investor was the water licence and the equipment on the property in the form of water tanks and filters and, it seems, their zeal. Otherwise, they did not have any asset on which to borrow funds to plough into the venture.
But first he had to find a resolution to the conflict with the Fleming syndicate. He opened communications with the syndicate’s lawyers. Avoiding the details by October 2002, he had got to the point of a buy- out proposal along the following lines (with my interpolations):
(a)the syndicate would sell the land and the chattels for $1.25 million, unconditionally [the syndicate had paid $875 000];
(b)the property and the chattels to be sold on an “as is, where is” basis;
(c)in exchange for Fleming foregoing any interest in the water licence [which was to be transferred to him under the heads of agreement], Helen Paterson [as a syndicate member] would forego any interest in the proceeds of the sale of land and chattels; and
(d)Helen Paterson, through her company Pure Spring Investments Pty Ltd, would sign a transfer of land [which Helen Paterson had refused to do up until then] in order to enable Fleming to be on title, and thus be able to sell as vendor to Richard Paterson.
The problem for the Patersons was they simply did not have the money, or the means to obtain the money, to buy out the syndicate for $1.25 million. If they could not find an investor, they would be locked in legal disputation with the Fleming syndicate and facing the distinct risk that they would be bound to perform the heads of agreement made with Fleming with the result that the water licence would pass, as agreed, into the hands of the syndicate and Helen Paterson would have a 25% interest in the venture which, contrary to her wishes, would be selling bulk water. Yet, for the Patersons, their vision was to reclaim the land, the assets and the business and pursue the opportunity of developing a business selling still and sparkling mineral water into the niche restaurant market. This is what led them to arouse the interest of Richard Hack, their personal friend.
Attracting Richard Hack to invest
Hack was a qualified motor mechanic. But he became involved in property development with his father. He had interests in a hotel in the Northern Territory and got involved in land development activities. He was personally acquainted with Richard Paterson who would come to stay with him at his family’s farm in Noosa. Even in the 1990s, there were vague discussions that one day they might do business together.
In December 2002, Hack visited Melbourne as part of his plans to relocate from Queensland to Victoria. In early 2003 he says Richard Paterson told him of the disputations with the Fleming syndicate, and his family’s plans for the business. Paterson asked for a loan of $20 000 to help get stock moving, which Hack arranged through a family company, Kettering Pty Ltd. Later Paterson asked for and obtained another loan from Hack for $55 000. That was to enable him to buy shares in a company, Grand Elm Pty Ltd, to promote and market products of the water business through a distribution agreement.
Coming into 2003, Hack became interested, at the very least in acquiring the land at Launching Place and become the landlord to the Paterson business. The thinking seemed to be that with Hack as landlord the Patersons could, with the expectation of success in the business, eventually buy the land back from him. But in early discussions there was also the idea that Hack could have equity in the business as co‑venturer, on terms to be negotiated. Hack had the prudence to immediately call in William Alfred Heath a retired licensed estate agent and valuer to value the property. Hack also engaged lawyers, Messrs Minter Ellison to advise him on the deal. There were three lawyers of that firm involved in one way or another with the deliberations of Hack’s proposed involvement, the structuring of the deal and ultimately the preparation of the legal documents. There was a Mr Max Cameron (a witness) who I think could be regarded as the head advisor; Mr Simon Davidson, a commercial lawyer (now overseas and no longer at the firm, and not a witness); and Mr Damien Schulz (a witness), a property lawyer. The Paterson family did not have lawyers acting for them. It was largely a case of Richard Paterson looking personally to advance the deal as between himself and Hack in negotiations directly with the Minter Ellison lawyers. At the same time, Paterson was himself separately dealing with the lawyers for the Fleming syndicate to negotiate a deal to buy the land and chattels. Of course Paterson was in no position to buy, but would make a contract personally or by nominee and Hack could eventually emerge as the purchaser’s nominee. Thus there was running in tandem negotiation on two fronts: the deal to by out the syndicate; and the deal setting up the new business with Richard Hack as lessor and part owner.
All of the documented communications (letters and e-mails) that preceded the final deal between the Paterson family and Richard Hack are all consistent with the ultimate product. I shall not go into them. Overall I will say the evidence before the Court shows a most orderly approach by the lawyers, not marked in any way by combative bargaining between the parties. Of course, the Patersons and Hack were each was acting in their own interests but overall the impression is that Hack as prospective investor was not shown to be looking to exact more beneficial terms than were reasonable, nor does it appear the Patersons were looking to gain some undue advantage by exploitation of a friend. All in all, it was a case where Hack and his lawyers and Patersons were looking for the most mutually satisfactory way to structure the deal and set up the new venture where the Patersons could get rid of the Fleming syndicate and the litigation, and start and develop a new business with a personal friend who at the very least had the confidence of going into the venture knowing he had the security of ownership of land and being in business with people he knew and presumably could trust.
The Fleming syndicate was, it appears, in the position of being able to impose commercial pressure on the terms of any dealing. It had bought the land and chattels, and it had sued. The anomaly of course was that the Paterson family were still on the property, still running the bottling business and still selling the water. Yet, as far as the syndicate was concerned, there was a binding agreement requiring the syndicate to run the business, to take possession of the land and run the business in the way as planned by the syndicate using the water licence which Helen Paterson had allegedly agreed to transfer to the syndicate of which she was to be a member.
The negotiations and documentation of the deal
Richard Paterson came to deal with the lawyer for the Fleming syndicate, a Mr John Chapman. Some of the dealings were the subject of e-mail correspondence which is lengthy. It is sufficient to say that on 20 February 2003, the Fleming syndicate was willing to entertain negotiations to be bought out on the following terms:
1.A declaration that the sale of business agreement (“the agreement”) dated 2 July 2003 between Helen Paterson, James Paterson and Richard Paterson of the one part, and Yarra Valley Spring Water Pty Ltd of the other part is valid and enforceable.
2.A declaration that by operation of the agreement, Yarra Valley Spring Water Pty Ltd has acquired the assets of the business formerly known as Yarra Valley Spring Water as stated in clause 1 and described in Annexure 1 of the agreement, especially a licence (“the groundwater licence”) issued under the Water Act 1989 to take and use groundwater, identified as Groundwater Licence No 4010922 (formerly No 4007891).
3. A declaration that under the agreement, Helen and James Paterson are, and always have been, bound to do all things and execute all documents in such manner and form as may be required under the Water Act or at law to enable Yarra Valley Spring Water Pty Ltd to become a transferee of the groundwater licence.
4.An order that in the event that Helen Paterson and James Paterson are called upon and refuse or fail to hereafter do all things and execute all documents as may become necessary to enable Yarra Valley Spring Water Pty Ltd to become a transferee of the groundwater licence, then Yarra Valley Spring Water Pty Ltd shall be at liberty to apply to the Court for such orders as the Court thinks fit.
5.The counterclaim be dismissed.
I shall hear the parties on the form of these declarations, and any other ancillary orders. I note the plaintiff’s written submissions seek indemnity costs.
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