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NSW Crest

Court of Appeal
Supreme Court
New South Wales

Medium Neutral Citation:
Folari Pty Ltd & Anor v St Jude Property Investments Pty Ltd & Anor [2012] NSWCA 120
Hearing dates:
5 April 2012
Decision date:
03 May 2012
Before:
McColl JA at [1]
Whealy JA at [2]
Tobias AJA at [75]
Decision:

(1) Appeal dismissed.

(2) The appellants to pay the respondents' costs.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Catchwords:
JOINT VENTURE - appeal - joint venture to obtain development consent for residential units prior to sale - whether evidence supported apportionment of profit under joint venture - whether expenses to be deducted from account of net profit extended beyond time at which development consent was obtained to include expenses relating to subsequent sale or disposition - whether expenses relating to development consent included those that had accrued but not been paid - whether primary judge erred in calculation of 'sale price' for the purpose of accounting for net profit - whether orders made were justified.
Cases Cited:
Fox v Percy [2003] HCA 22; 214 CLR 118
Category:
Principal judgment
Parties:
Folari Pty Ltd (First Appellant)
Kevin Zouki (Second Appellant)
St Jude Property Investments Pty Ltd (First Respondent)
Michael Saklaoui (Second Respondent)
Representation:
Counsel:
M. Cashion SC, S.F. Hughes (Appellants)
A.F. Fernon (Respondents)
Solicitors:
Legal Recovery Solutions (Appellants)
Shanahans Solicitors (Respondents)
File Number(s):
2008/279220
Decision under appeal
Jurisdiction:
9111
Citation:
[2011] NSWSC 328
Date of Decision:
2011-04-20 00:00:00
Before:
Tamberlin AJ
File Number(s):
2008/279220

Judgment

1McCOLL JA: I agree with Whealy JA.

2WHEALY JA: This is an appeal from the decision of Acting Justice Tamberlin (the primary judge) given on 20 April 2011. The appellants are Folari Pty Ltd and Kevin Zouki. I shall refer to them in these reasons as "Folari" and "Kevin" respectively.

3The respondents are St Jude Property Investments Pty Ltd and Michael Saklaoui. I shall refer to these respondents as "St Jude" and "Michael" respectively.

4In the proceedings below the plaintiffs were St Jude and Michael. The appellants were the defendants in those proceedings.

5The nature of the dispute below and the claims made by the disputing parties are comprehensively and thoroughly stated by the primary judge in his decision, as follows (Red 44-46):

"1 The plaintiffs seek a declaration that pursuant to an agreement made in about November/December 2001 the first plaintiff and/or the second plaintiff are entitled to 20 per cent of the profits on the purchase and sale of property at 58-64 John Street Lidcombe (the properties) after development approval had been granted and the properties had been sold prior to construction. They seek judgment in an amount of $103,588.83 or such other sum as the Court finds owing or, alternatively, an account in respect of the profits after taking into account the costs of purchase and the expenses in obtaining the development approval for the erection of residential units on the properties.
2 The plaintiffs allege that the agreement was partly oral and partly implied arising from conversations between Mr Saklaoui on behalf of St Jude Property Investment Pty Ltd (St Jude), Mr Kevin Zouki on behalf of the first defendant, Folari Pty Ltd (Folari) and Mr Abbi Saab, who originally introduced the properties 58-60 John Street to Mr Zouki as a prospective investment. Both Mr Zouki and Mr Saklaoui had engaged in mutual business dealings prior to this arrangement. Mr Saklaoui introduced Mr Abbi Saab to Mr Zouki.
3 The agreement alleged is that Folari would enter into agreements to acquire the properties for the purpose of obtaining development approval and that the purchase of the properties would be funded by Mr Zouki or a company nominated by him, and that the purchaser would do all things necessary to obtain a development approval for development of the properties for construction of approximately 40 residential units. It is alleged the arrangement was that after obtaining the development approval the net profit would be divided between St Jude as to 20 per cent, Mr Abbi Saab as to 30 per cent and Folari as to 50 per cent. The arrangement was to be a joint venture. A term of the agreement was claimed to be that interest would be charged to the joint venture on all moneys spent in respect of the expenses of purchase of the properties and obtaining development approval and this would be taken into account in the calculation of the profits from the properties. Mr Zouki and his company were to take all steps necessary to obtain the development approval and provide a full and accurate accounting report to the parties to the agreement in respect of the profit earned including details of all moneys spent and expenses incurred in purchasing the properties and obtaining the development approval.
4 Pursuant to the agreement 58 John Street was acquired on 21 February 2002 for $700,000 and on the same day 60 John Street was acquired for $550,000. Folari arranged an option agreement on 30 January 2002 for the acquisition of 62 John Street for $530,000 and acquired that property in October 2002. At about the same time the property 64 John Street was acquired for $510,000.
5 In about December 2002, Mr Zouki bought out the interest of Mr Abbi Saab for $275,000 as a result of discussions with Mr Abbi Saab carried out by Mr Saklaoui and himself.
6 On 18 November 2003 development approval was obtained for the construction of 41 strata title residential units on the properties.
7 On or about 25 May 2004, Folari paid Mr Saklaoui on behalf of St Jude an amount of $429,000. Mr Saklaoui says this was in payment of his share of profit earned from the properties. On about 8 June 2004, Mr John Zouki on behalf of his father Kevin and the Zouki company, Folari, requested that St Jude repay to it $89,620 which they claimed had been overpaid as a result of a miscalculation by Mr Kevin Zouki. It is alleged by the plaintiffs that at the time of making the request for a refund Folari as a condition of the payment of $89,620 undertook to provide an accounting of the profit calculation relating to the agreement. This is said to have been an oral undertaking by Mr John Zouki made on behalf of Folari. In accordance with this undertaking Mr Saklaoui on behalf of St Jude paid the amount of $89,620.
CROSS-CLAIM
8 On 17 September 2008, Folari filed a cross-claim in which Folari alleges that in about December 2001, St Jude and Folari (not including Mr Abbi Saab) entered into a partly oral partly implied agreement relating to the purchase of properties whereby St Jude, as an acknowledgement of its role in introducing Folari to the opportunity to purchase and develop the properties, would be paid 10 per cent of the profit, net of expenses that Folari made from the selling of the properties with a development approval in place. Folari alleges an oral term that in calculating the net profit it was entitled to charge interest on the money spent by it from the date of each item of expenditure.
9 Folari also alleges that the payment of $429,000 paid to Mr Saklaoui was a loan repayable on demand and not a payment on account of any entitlement to a share of profits. It says that on 8 June 2004 Mr Saklaoui agreed to repay $89,620 of that sum which was paid as the result of the miscalculation. Mr Kevin Zouki says that in paying the $429,000 he acted on the basis that there would be an adjustment of the payment when the final profit was worked out from the joint venture. He says that St Jude has been unjustly enriched in an amount of about $234,000 and seeks repayment as calculated on that basis or alternatively on the basis that this amount remains outstanding on the loan."

6Having identified the nature of the claim and cross claim involved in the dispute, the primary judge set out the issues for decision as follows:

"(a) Was any agreement made between the plaintiffs and the defendants and Mr Abbi Saab in late November or early December 2001 concerning the purchase of the properties and the obtaining of development approval and the sharing of profits?
(b) If so what were the terms of that agreement, particularly in relation to the percentage shares that the parties were to have in the profits resulting from the purchase and the obtaining of development approval?
(c) Was the agreement varied to fix a sale price at $115,000 per unit making a total sale price out of which net profits were derived of $4,715,000 for the purpose of calculating profits?
(d) Are the plaintiffs entitled to be paid any further amount than the amount in the order of $339,000 received by them and/or is Folari entitled to a refund?
(e) What was the net profit from the arrangement? This raises questions as to the nature and amount of expenses which could be deducted to determine net profit from which the shares of profit would be paid."

The primary judge's decision

7The 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. This was in late 2002, and prior to the granting of residential development consent for the development of the John Street properties. His Honour further accepted that, as claimed by Michael, the terms of the joint venture entitled St Jude to a 20% share of the net profits from the sale of the forty-one units generated by the development approval on 18 November 2003. In this regard, his Honour accepted that the negotiations between Michael and Kevin were carried out on behalf of their respective companies, St Jude and Folari, and were not undertaken in their personal capacities.

8The primary judge was critical in relation to the credibility and reliability of both Michael and Kevin. As to this, his Honour said (Red 50-51):

"20 Both these witnesses impressed me as being experienced businessmen with a keen commercial sense in relation to property development and it is clear that they have been engaged in a number of substantial property ventures.
21 Mr Saklaoui was at times evasive in his answers concerning the payment of finder's fees. He said he regarded tax invoices and receipts as much the same thing when questioned about a tax invoice. This is difficult to accept from such an experienced businessman. He did not accept that he prepared a document identified as MS1 which is a print out of calculations. In my view the evidence establishes that this was his document which he refuses to acknowledge. I therefore approach his evidence with considerable caution and would accept his assertions only where there is an inherent probability that they are correct, or there is documentary support or some reliable corroboration of them.
22 In relation to Mr Zouki, I find his evidence to be generally unacceptable. He asserted that there was a loan and yet made no claim for the unpaid loan for several years. There are no detailed terms as to this loan as one might expect. Nor is there any written record. He alleged that he suffered from a disabling depression but this did not prevent him from acting as a supervisor of the substantial development at Lidcombe and other financial activities in this period. I do not accept this as a sufficient explanation in relation to the cheque for $429,000. The obliteration of the description and the substitution of the word "loan" on the butt of the cheque for $429,000 is very significant in assessing credibility and his evidence to explain this was internally inconsistent. ...
23 Having regard to these and numerous other matters pointed to in the course of cross-examination I do not accept any evidence from Mr Kevin Zouki which is not established by records, corroboration, objective facts or the context."

9It might also be observed that his Honour was not assisted in the resolution of the dispute by the fact that neither party saw fit to call Mr Abbi Saab as a witness.

10Nevertheless, as his Honour's reasoning shows, he was able to reach a clear conclusion as to the outcome of the dispute based on documentary material placed before him.

11The first document that his Honour considered important in this regard was Exhibit E in the proceedings. This was a document in the handwriting of Kevin. Michael said he had been given this document by Kevin when they were discussing the prospect of buying out Mr Abbi Saab from the venture. There was no doubt, at the time of the creation of this document in December 2002, that Kevin was anxious to "pay out" Mr Abbi Saab and, as was not disputed, the negotiations culminated in a cash payment to Mr Abbi Saab of $275,000. The document, however, was important because it showed a series of calculations designed to provide a relatively modest estimate of profit for the purposes of the negotiations between Kevin and Mr Abbi Saab. The document referred to a "20% share" and "30% shares". His Honour considered that this notation was inconsistent with the position asserted by Kevin that there was no agreement in relation to either 20% or 30% shares going to Michael or to Mr Abbi Saab. His Honour considered that the purpose of the calculations was to show that there would be a limited profit margin left for either Michael or Kevin, if Mr Abbi Saab received the figure of about $300,000, which he was claiming. In that regard, it was clear that the calculations were intended to be used as a negotiating lever. The documents, however, allowed for a clear inference that supported Michael's contention that the original agreement provided for a 20% share in his favour, and a 30% share in favour of Mr Abbi Saab. His Honour said (Red 54 at [34]):

"In my opinion this document provides sufficient objective support for rejecting the version of Mr Zouki as to the arrangement and accepting that there was initially an agreement whereby Mr Saklaoui was to get a 20 per cent share of net profits after calculating the costs of obtaining and relating to the development approval."

12His Honour also placed considerable reliance on a second document. This was the document Exhibit "MS1" attached to Michael's affidavit of 26 November 2009. This was the document to which his Honour had made earlier reference when he had made observations relating to the credit of Michael. However, his Honour thought it was an important document for the purposes of understanding the true nature of the arrangements between the parties. It was, in effect, a print out (using a calculator) as to the alleged expenses of the venture. The document was instructive in two respects, as his Honour found.

13First, it expressly referred to a 20% share in the following notation:

"To Buy Share From Another Person
It becomes your profit not mine.
This is based on 20 percent not 50 per cent."

14Secondly, his Honour noted that the total "sale price" of the land noted on the document was $4,715,000. He observed that this related to a development approval for forty-one units, thereby yielding a figure of $115,000 per unit. His Honour thought the document was clearly an adjustment to Exhibit E and, emanating as it did from Michael, it was designed to increase the amount of his profit by disallowing certain expenses that had been contained on Exhibit E. His Honour concluded (Red 55 Q-Y):

"[40] However, what is significant is the fact that the document refers to buying a 'share' and the reference to 'your profit not mine'. This indicates that there was some form of arrangement as to shares and profit sharing and the figures 20 per cent and 50 per cent are referred to in this connection. This is inconsistent with Mr Zouki's version that there were never any shares agreed upon as to 20 per cent or 50 per cent. The reference to a share based on 20 per cent 'which becomes your profit not mine' indicates that the profit being spoken of is that of some person other than the author. The document contemplates a buyout of a share and provides substantial support to the assertion of Mr Saklaoui that there was an arrangement whereby profit would be shared in proportions including 20 per cent to him. ..."

15His Honour also found that the calculation of profit, as between the parties, was required to be made on the basis of a "sale price" of $115,000 per unit. The primary judge then proceeded to make findings critical of Kevin in relation to the evidence given by him and his son, John, as to the so-called loan of $429,000 to Michael. These findings included reference to the alteration of the cheque butt and to the insertion of the word "loan" over the original notations which, his Honour found, were intended to conceal a payment in respect of a share in relation to John Street by making reference to a loan. There was evidence before the Court from a document examiner that confirmed the nature of the later alteration and the possible identity of the persons who had written over the original entries and inserted the word "loan". The primary judge then stated his final conclusions. At Red 57-58 he said:

"46. I find that the amount of $429,000 was a payment on account of a final settling of the entitlement of St Jude to a 20 per cent share of net profits as opposed to a loan. The obliteration reflects most adversely on the credibility of the evidence of Messrs Kevin and John Zouki and the case advanced by them that there was no share arrangement ever entered into as to the 20 per cent claimed by St Jude. It also negates their contention that there was a loan of $429,000 rather than a payment on account of profits subject to later adjustment ...
47. In paragraphs [19] to [23] above I have considered the evidence relating to the lack of credibility of both Mr Saklaoui and Mr Zouki. I have decided that this is a case on which reliance should be placed on documents and records rather than the testimony of the witnesses. However, in the principal areas of conflict I consider that the objective facts and the documents support the evidence of Mr Saklaoui.
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 that approval."

16The primary judge was not satisfied, however, that he had sufficient material to enable a determination to be made as to the amount which should be recovered by or on behalf of St Jude. He indicated that he would therefore grant the order sought by St Jude in the Statement of Claim that there should be an account taken of the net profit and expenditure relating to the arrangement between the parties. His Honour, however, added (Red 58 P-S, [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."

17His Honour then made the declaration and orders sought by the respondents. The appellants were ordered to pay the costs of the claim and the unsuccessful cross claim.

Grounds of appeal

18There were originally seven grounds of appeal, but only six are pressed. They are as follows.

(1) In connection with his Honour's finding that in calculating the net profits from the sale of the properties 58-64 John Street, Lidcombe the expenses to be deducted were expenses relating to the development approval up to the date that approval was granted rather than all expenses up to and including sale his Honour erred in that -
(a) no reasons or alternatively no sufficient reasons for such findings were given;
(b) such findings were not supported by the evidence in the trial below.
(2) Further or alternatively in so far as his Honour found that in calculating the net profits from the sale of the properties 58-64 John Street, Lidcombe the expenses to be deducted were expenses relating to the development approval up to the date that approval was granted that had been paid rather than accrued his Honour erred in that -
(a) no reasons or alternatively no sufficient reasons for such findings were given;
(b) such findings were not supported by the evidence in the trial below.
(3) Further or alternatively in so far as his Honour held that in calculating the net profits from the sale of the properties 58-64 John Street, Lidcombe the expenses to be deducted were expenses relating to the development approval up to the date that approval was granted his Honour erred in failing to make a finding as to whether this included expenses that had accrued but had not been paid.
(4) His Honour in finding that the sale price to be used in calculating net profits was $4,715,000 rather than $4,485,000 in that -
(a) no reasons or alternatively no sufficient reasons for such findings were given;
(b) such findings were not supported by the evidence in the trial below.
...
(6) His Honour erred, having found that an account of profits should be taken, in proceeding to make orders that on the taking of those accounts only allowed for payment of monies by the first appellant to the first respondent and not allowing for the possibility that the outcome may be the converse.
(7) His Honour erred in making a determination with respect to costs in advance of the outcome of the accounting being known."

19The written and oral arguments advanced by Mr Cashion SC on behalf of the appellants may be briefly summarised. As will be seen, there is clearly an overlap between grounds 1 to 3.

20As to ground 1, the appellants' submissions identified that, even though there was a dispute between the parties as to one of the factors relevant to the calculation of the profits to be shared (did it relate to an agreed deemed sale price or an actual sale price?) it was common ground that the scope of the joint venture initially envisaged the sale of the properties with the development approval in place. Consequently, it was argued that the expenses properly to be taken into account in calculating the net profits ought to include the costs of and associated with the sale of the properties with the development approval in place. For that reason, it was submitted that the primary judge's finding was in error.

21As to grounds 2 and 3, the appellants submitted that his Honour ought to have included in the calculation of net profits amounts which had accrued as at the date the development approval was granted, albeit not paid by that time, and it was an error for his Honour not to have done so.

22Ground 4 was argued as having two components of significance. The first was that the document "MS1" (Blue 53) - a tax invoice - was not credibly explained by the evidence so as to enable the primary judge to find that there had been a contractual variation of the original agreement. Further, neither Michael nor Kevin gave evidence which, if accepted, would justify the conclusion reached as to the contractual variation. Finally, it was said the notations in the document carried no real weight, particularly in the light of the fact that Michael denied being its author.

23The second matter of significance related to the fact that the actual "sale price" was $4,485,000 (Blue 464R-465L). Mr Cashion argued that his Honour's finding that "the fact that the land was sold for $4,715,000 with development approval for forty-one units" was unsupported on the evidence. It was directly inconsistent with the fact that the properties with development approval in place were in fact sold to the syndicate for the lesser amount of $4,485,000.

24In relation to ground 6, the appellants argued that there was a possibility that, on the taking of accounts, it might be found that, after taking into account the payment of $339,380 (net payment after return of $89,620), St Jude may be found liable to pay monies to Folari. It was an error for his Honour to make the order in the form he did for this reason.

25The final ground of appeal (ground 7) was said to be an error on the basis that the costs order should not have been made adversely to the appellants at a stage when it was not known whether the accounts would result in a further payment being required to be made by Folari.

26Mr Fernon, on behalf of the respondents, provided both oral and written submissions. He identified two principal areas in which the appellants maintained that his Honour erred in determining the method of calculating the amount payable to St Jude as its share of profits. These two principal areas were identified as:

"(a) The exclusion of costs incurred prior to the sale of the 41 units that did not relate to obtaining the development approval [grounds 1 to 3 of the appeal]; and

(b) Valuing each of the 41 units at $115,000 (being a total of $4,715,000) rather than a total of $4,485,000, being the price allegedly received for 39 of the 41 units from a syndicate [ground 4]."

27Mr Fernon argued that the essential nature of the respondents' claim for relief (as pleaded) had been squarely based on an agreed price of $115,000 for each of the forty-one units for which development approval had been obtained. Michael gave evidence to this effect and the documents corroborated this aspect of his evidence. This "variation" of the original agreement was accepted by his Honour as having been made. The contentions argued for by the appellants had been soundly rejected by the primary judge.

28Mr Fernon submitted that the price of $115,000 per unit was the price actually obtained by the first appellant from the syndicate for 39 of the 41 units for which approval was obtained. Exhibit B had been a document prepared by Kevin and given to Michael which recorded both development consent related and non-development consent related expenses that were being sought from members of the syndicate. Michael's evidence had been that he had been asked to be part of the syndicate but had refused, insisting that his 20% be paid to him at that time. However, what amounts the first respondent actually received from the syndicate, or otherwise in respect of the units, was unclear, Mr Fernon said. This was because Kevin failed to adduce adequate evidence of the financial affairs and dealings between himself and the syndicate.

29As between the parties, Mr Fernon said, the pleaded agreement which was found by the Court to have been entered into was an agreement for the sharing of the profit "upon obtaining the development application" (meaning, as the appellants accepted, upon obtaining the development consent). The Court's finding that expenses related to post-development consent matters, or expenses not associated with obtaining development consent, should not be included in the profit calculation was simply consistent with its finding that the terms of the agreement were as claimed by the respondents.

30Mr Fernon said that both Exhibit E and Exhibit "MS1" were consistent with the respondents' case that no account should be taken of non-development consent expense in the determination of the respondents' profit share. The Court was entitled to accept this evidence which corroborated the evidence of Michael as establishing the respondents' case.

31In relation to ground 4, Mr Fernon argued that it was important to recognise that the document "MS1" provided support for St Jude's contention that the agreed value for the purpose of calculating the profit was $115,000 per unit for each of the forty-one units for which consent was obtained. The document referred to a total sale price of $4,715,000. It had been prepared by Michael and given to Kevin for the purposes of their negotiation. To that extent, it thoroughly supported Michael's evidence and, of course, completely eliminated any support for the evidence of Kevin and John Zouki.

32Michael had given evidence concerning the agreement reached as to the valuation procedure in his affidavit of 6 July 2009 at paragraphs 18 to 20. Further, Michael's letter of demand of 16 May 2007 was based on the same premise. Mr Fernon said that Kevin had never disputed the reliance in this letter on the figure of $115,000 per unit, but had later admitted that consent had been obtained for forty-one units.

33As to the "sale price" of the units to the syndicate, Mr Fernon said no sale had taken place. In any event, Kevin had asserted that $4,485,000 related to the purchase price and $340,000 had related to other expenses. Folari had received both these amounts. However no supporting documents were put in evidence by him. The primary judge's conclusion was open to him and it could not be said that his finding was either "glaringly improbable nor contrary to incontrovertible facts": Fox v Percy [2003] HCA 22; 214 CLR 118.

34As to grounds 6 and 7, Mr Fernon argued that the orders made were fully justified in the light of his Honour's primary findings.

Resolution

35Leaving to one side for a moment the orders as to the taking of an account and costs, the appellants' principal arguments may be grouped into two principal propositions. The first is that the primary judge erred in determining that the agreement between Folari and St Jude contemplated a calculation requiring deduction of expenses relating to "obtaining development approval for 41 units up to the time of obtaining that approval". Folari argued that the expenses up to sale were relevant. The second is that his Honour erred in treating $4,715,000 as the "sale price" for the calculation of net profits. In that regard, Folari suggested that the "sale price" should have been $4,485,000. I shall deal with each of these propositions separately, although there is an obvious overlap between them.

Expenses

36The evidence given by Michael (affidavit 6 July 2009, Blue 33), if accepted, showed that the "venture" contemplated the sale of the acquired properties with the add-on of a development consent for the project. It 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. From a commercial point of view, a venture of this kind may be more attractive, in some respects, than the more elongated project involved in the construction and eventual sale of a block of home units. The profit is more immediate, even if not necessarily as great. The risks associated with the construction side of the project is then undertaken by other persons. It may safely be concluded, as Mr Cashion argued, that initially the parties contemplated an immediate sale after obtaining development consent.

37The enterprise, however, was poised to take a new direction when, on Michael's evidence, Kevin informed Michael in November 2003 he was intending to "syndicate" the construction of the home units: Black 36 A-H. Michael refused to be part of this new direction. He did not wish to be part of any syndicate. He demanded his 20% share, as originally contemplated, upon the basis that the development consent had been obtained (for forty units, he thought, although it was in fact a consent for forty-one units) and upon the basis that a figure of $115,000 per unit had been suggested by Kevin as the "sale price" to the syndicate. He was not altogether happy with the "price" but ultimately accepted it as the basis of calculation. The calculation, however, required Kevin to provide full details of expenditure.

38By May 2004, Michael had still not received payment of his share. On his evidence (Black 36 M-Z) he went to Kevin's home to finalise the details of the payment for his share. Once again, the conversation revolved around two principal components: first, the $115,000 figure per unit (as the sale price) and, secondly, the estimate of expenses for purchasing the properties and for obtaining the development consent. As to the latter, the final figure, however, remained elusive: Black 37 A-G. Nonetheless, Kevin paid Michael $429,000 as representing the then estimate of his share of the profits from the venture.

39Later, on 18 June 2004, Kevin's son (John) suggested that there had been a miscalculation resulting in an over payment. Michael arranged for a refund cheque by way of a loan for $89,620, pending satisfactory provision of details of the development consent related expenses.

40Kevin's evidence on these matters was entirely contrary to that of Michael. In his affidavit of 14 September 2009 (Black 229 D-G), Kevin had disputed that there was any joint venture at all between the three men. Mr Abbi Saab was simply to receive a commission for introducing the properties, and St Jude was not to get anything for its involvement. However, Kevin claimed that, after Mr Abbi Saab had left, he offered Michael 10% of the net profit "because he alerted me to the opportunity of 58-60 John Street, Lidcombe only".

41Kevin revealed in this affidavit that consent had been given by the Council after three major redesigns. The consent was dated 18 November 2003 and it related, in fact, to 41 units.

42Kevin denied the conversations alleged by Michael in November 2003 and May 2004. In relation to the May payment, he maintained (as he did in his cross claim) that this was a loan to Michael who had needed the money urgently. He maintained that Michael had presented him with an invoice for $339,379.70. In his evidence, however, Michael denied that there was any loan and denied that he had supplied any invoice.

43The primary judge rejected Kevin's evidence. He found it was totally inconsistent with the documents Exhibit E and "MS1". As I have said earlier, he was highly critical of both Kevin and John in relation to the alterations that were made to the cheque butt, obliterating the true nature of the payment made to St Jude.

44In my opinion, his Honour was entitled to conclude, based on the documentary material and its ability to corroborate Michael's evidence, and in the light of his case as pleaded, that the relevant expenses to be taken into account were those relating to obtaining development consent for forty-one units up to the time of obtaining that consent. The rejection of Kevin's evidence meant that the primary judge was entitled to reject also the contention that the relevant expenses were those to the time of sale.

45The 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 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 a construction certificate were to be taken into account. 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 units and their 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.

46From 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 to be 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.

47In my opinion, no error has been demonstrated in relation to grounds 1 to 3 of the grounds of appeal. His Honour's reasons, though briefly stated, were adequate to discharge his obligation to provide reasons. There was no requirement for the primary judge to determine whether there were any expenses relating to the development consent which had accrued but not been paid at the time it was granted. That would be a matter to be determined when the accounts were taken, as ordered by his Honour.

48At the direction of the Court, Mr Cashion, following the conclusion of the appeal, supplied a category of expenses associated, it was claimed, with "the disposition of the properties". The list, however, did not itemise any particular expense, nor was it related to the expenses in "MS1". There was no evidence before the primary judge that would have enabled him to relate any of these categories to the "disposition" of the properties in favour of the syndicate. Indeed, there was no evidence to show when such "disposition" occurred, if it occurred at all. Accordingly, Kevin's supplementary submissions do not advance his case in relation to these grounds of appeal.

The calculation of "sale price"

49As I have said, the venture involving the three men initially contemplated that the properties would be sold to another developer when the development consent issued. The quantum of the sale price resulting from that transaction would have been the focus for the resulting division of profits. It is apparent from the evidence before the primary judge that Folari had, by the time the development consent was granted, determined to take a different course. The conversation deposed to by Michael is set out in his affidavit at Black 30:

"In or about November 2003 I had a conversation with Zouki at a coffee shop in Strathfield to the following effect:
I said: 'How is it going?'
Zouki said: 'It's going well. I am going to form a syndicate to build the development and I want to sell the properties to that syndicate for $115,000 per approved unit. I am going to put 10% of your share into the syndicate and I will pay you the for other 10%.'
I said: 'As regards the price per unit, I had a buyer at $134,000 per unit for forty units and you said no. Now you want to sell the properties to a syndicate for less and only 39 units and not 40 which was what was approved. If you want to discount the properties to the syndicate it can come out of your share, not mine. Anyway, I don't want to go into a building syndicate. Please pay me my 20% share, thank you, and I will be happy with that.'
He said: 'Yeah, no problem.'"

50It should be observed that in this conversation, Michael was still under the misapprehension that the consent was for forty units. However, he said in his oral evidence (Black 16-17) that he had been handed a document (Exhibit B) by Kevin at the meeting in the coffee shop at Strathfield in November 2003. This document is instructive in resolving Ground 4 of the appeal.

51Exhibit B is a document headed "Lidcombe Syndicate: Folari". It bears the date "12 November 2003". The first page of the document comprises detailed "costings" of amounts which fall into two categories. The first category is "Payment and contribution required for settlement in January". The second is entitled "Temporary payment required on settlement in January". It is clear that the document overall was constructed on the basis that:

(a) it would inform syndicate members of the amounts they would have to contribute; and

(b) tell them the total amount Folari was to receive on "settlement".

52The first section required a total payment to Folari of $4,670,000. The "costs" that were included in this amount were cost of home warranty insurance; interest on land; cost of architectural and development consent fee paid by Folari; cost of valuation report paid by Folari; cost of hydraulics paid by Folari; cost of landscape architect fees paid by Folari, and cost of the application fee to St George Bank paid by Folari. In addition, and significantly for the present argument, it included "cost of land agreed $115,000 x 39 Units only".

53The second category of payments totalled $430,000. It included, for example, legal and accountancy fees, stamp duty for registration of mortgage, and a number of professional fees relating to the issue of a construction certificate.

54Thus the total amount arising from the two categories, and required to be paid to Folari, was $5,100,000.

55As I have said, it may fairly be observed that the first series of costings (including the cost of land) was designed to show the potential syndicate members what they would have to contribute to become members in the building syndicate venture. In addition, the second category of payments might properly be described as post-development consent payments necessary for the establishment of the syndicate and the progress of the development towards the building stage.

56On the second page of the document, provision was made for an advance by the bank of $2.1M. This meant that the actual contributions required from syndicate members to enable payment to Folari of $5.1M totalled $3M, being the difference between the "costs" amount and the loan.

57Exhibit B (although dated 12 November 2003) did not represent the final form of the arrangements for the building syndicate. This can be gleaned from the later affidavit filed by Kevin which became Exhibit 1. The affidavit explains in some detail that Kevin decided to "sell the development in John Street, Lidcombe, to a syndicate who purchased via a unit trust known as the Folari Unit Trust". Syndicate members, it appears, were either family or close friends or associates of Kevin. Each syndicate member was required to make an initial contribution of $10,000 and to enter into a "syndicate agreement". This money was to be credited to each member at the time of the sale of the developed properties to various purchasers. The agreement with syndicate members was made on 23 February 2004. It was described as a "syndicate to develop the property 58-64 John Street, Lidcombe as a strata title construction".

58Kevin Zouki was named in the agreement as the "syndicate supervisor". It was clear from the terms of the agreement that he had the overall control and supervision of the building project. It does not appear that either he or Folari was a syndicate member.

59Shortly prior to the date of this agreement, there was executed a deed of unit trust. It bears the date 17 February 2004. The original unitholders' contribution to the Folari Unit Trust was the sum of $3M represented by three million units of $1 each. Consistently, however, with Exhibit B, it appears the arrangement was that the members were obliged to raise by way of cash contribution a total of $3M towards the purchase of the John Street, Lidcombe development. Kevin says that he told the syndicate members "the total purchase price is $4,485,000", meaning that, with the $3M contribution raised from members, there would remain a deficit of $1,485,000. Kevin told the contributors that this deficit would be financed by the bank.

60In this regard, the affidavit reveals that Folari was given approval by the St George Bank to obtain a credit facility of $9,571,000. An initial draw-down of $1,825,000 was made available by St George Bank to Folari "as a loan to members of the unit trust to meet the deficit of $1,485,000". Kevin stated:

"The balance of the $340,000 included in the initial draw-down was to cover Council fees and operating capital for the construction of the development by the unit trust."

61It appears that, between March 2004 and 25 March 2005, four payments were made by contributors totalling $4,485,000. There was a further payment of interest of $199,337. This was retained by Folari in respect "of payment of directors' salaries".

62There was evidence before the primary judge that one of the vendors of the John Street properties had a side arrangement with Folari that he or his interests would be entitled to one of the forty-one units approved by the Council. This may have been a factor in explaining why the "cost of land" component in Exhibit B related to less than forty-one units, although Kevin's explanation as to why the resulting figure was thirty-nine units is not entirely clear.

63It is significant, however, that, at all relevant times, the development at John Street, Lidcombe was owned by Folari. It does not appear that it was ever transferred into the name of the unit trust or to the syndicate. It appears, according to Kevin's evidence, that Folari eventually transferred the ownership "to the ultimate purchaser of the completed development": Blue 466 A-D.

64With this rather complicated exposition in place, it is necessary to return to the point at issue. First, it can be seen from Michael's evidence that, if accepted, it established that there was a price per unit accepted between himself and Kevin which was to form the basis of the division of profits. This was the amount of $115,000 per unit. Importantly, the notation on "MS1" (Blue 53) was entirely consistent with that unit price figure transposed into forty-one units. If there were forty-one units approved by the Council in its development consent, then the figure of $4,715,000 (mentioned in "MS1") was the correct figure for the purposes of the calculation.

65Mr Cashion argued that the conversation at the coffee shop could not be satisfactorily relied upon to establish that there had been a mutual understanding between the two men as to the agreed deemed sale price. I am unable to accept this submission. When that conversation is married up with the further conversations between the two men, and the documentary evidence I have identified, it is clear that, as between them, the price of $115,000 per unit was accepted as the basis of the calculation. This was so in the context of the number of home units that had been approved by the Council. It was not confined to the thirty-nine units that were to be made available to the syndicate for the purposes of that separate arrangement.

66The conversation between Kevin and Michael acknowledged that Kevin was now proposing to "sell" the properties with development consent attached to the syndicate on a basis which would repay him $4,485,000, being thirty-nine units at $115,000 each. As I have said above, there was a reason why the total number of units were reduced by one (having regard to the side arrangement deal with the original vendor), although it is not precisely clear why the number was further reduced from forty to thirty-nine. The fact that Kevin intended to make only thirty-nine units available to the syndicate was entirely irrelevant because Michael refused to become part of the syndicate. He was content to maintain that, as between himself and Kevin, the calculation of profits should proceed on the basis of forty-one units (or forty units as he mistakenly thought) at a price of $115,000 per unit.

67In my opinion, the primary judge was entitled to accept the evidence of Michael in relation to the discussion at the coffee shop. He was entitled to reject the denials made by Kevin and his son, John. The consequence of this is that it was plainly correct for the primary judge to conclude that $115,000 per unit was to be the agreed basis of the calculation. As I have said, the document described as "MS1" supported the respondents' contention that the agreed value in calculating the profit was $115,000 for each of the forty-one units for which approval was obtained. In that sense, it clearly provided support for a total sale price of $4,715,000.

68The arrangements Kevin came to with the syndicate were, in my opinion, completely irrelevant to the arrangements as between Kevin and Michael. In any event, it appears that Folari received $4,825,000 as the combined total from the syndicate members, and from the Bank in its initial draw-down, related to the "cost of land" price. Although Kevin claimed that $340,000 was for other expenses, there was no corroborative evidence to substantiate this asserted purpose for the receipt of those additional monies. Nor was there any explanation as to the ultimate monetary outcome in relation to the two additional units. Whether Folari received monies for those units, whether the syndicate did, or whether nobody did is simply not revealed.

69Mr Cashion was critical of the primary judge's finding (Red 55 D at [36]):

"In fact the land was sold for $4,715,000 with development approval for forty-one units."

70I accept that this finding was inconsistent with the evidence. It was so for two reasons. First, as I have said, the land was not sold to the syndicate or to the trust at all. Secondly, it is probably more accurate to say that the contributions required by syndicate members were to be on the basis of the availability of thirty-nine units at $115,000 each. To the extent that his Honour may have erred in making this finding, I do not consider that it has any material bearing on the outcome of this appeal. This is essentially because the resolution of this aspect of the dispute turns on whether the primary judge was entitled to accept Michael's version of the agreement reached between Kevin and himself in relation to the basis of the calculation, once it was learned that the syndicate plan was to replace the original proposal. In my opinion, his Honour was entitled to accept Michael on those matters for the reasons I have given.

71I turn then to the final two matters, the order for the taking of accounts and the order for costs.

72Although Mr Cashion has argued that hypothetically the situation might arise where the taking of accounts required that no monies be paid to Michael, or that he be obliged to refund amounts to Folari, he was not able to point to any of the expenses listed in his clients' claim that would lead to such a result. Mr Cashion's argument did not rise above a hypothetical level. In my opinion, no error has been shown in relation to the form of the order for the taking of accounts.

73Finally, I see no error in the costs orders made by the primary judge. These were confined to the respondents' claim and the costs of the cross claim brought by the appellants which was unsuccessful.

74I propose the following orders:

(1) Appeal dismissed.

(2) The appellants pay the respondents' costs of the appeal.

75TOBIAS AJA: I agree with Whealy JA.

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Decision last updated: 04 May 2012