Pavlis, George v Pavlis, Emanuel

MACFARLAN JA: I agree with White JA.

WHITE JA: The appellants, Mr George Pavlis and Mr Chris Pavlis, brought proceedings in the Equity Division against their parents, Mr Emmanuel Pavlis and Mrs Koula Pavlis, claiming a beneficial interest in their parents’ house in Redmyre Road, Strathfield. In these reasons I will refer to the defendants Emmanuel and Koula Pavlis as Mr and Mrs Pavlis. I will refer to the plaintiffs as George and Chris, intending no disrespect, and I will refer to Mr and Mrs Pavlis’ third son, Mr Garry Pavlis, as Garry, again intending no disrespect.

Mr Pavlis died shortly before the hearing of the appeal. Mr and Mrs Pavlis held their title to the property as joint tenants. She and Garry were named as Mr Pavlis’ executors. Mrs Pavlis consents to an order that she be appointed to represent Mr Pavlis’ estate in these proceedings, pursuant to UCPR r 7.10. That order will be made.

Mr and Mrs Pavlis purchased the Strathfield property in late 1986. It was a heritage property in need of renovation and restoration. George and Chris claimed that they made substantial contributions in time, labour and money to the works of renovation and restoration. These were carried out over two distinct periods. The first stage was conducted between 1988 and 1990 and the second between 2001 and 2008. They pleaded that they indirectly contributed to their parents’ acquisition of the property by working in a hardware business owned by their parents’ company, Pavlis & Sons Pty Ltd (“Pavlis & Sons”) and became guarantors of a loan relating to the Redmyre Road property. They pleaded that various representations were made to them by Mr Pavlis, in which Mrs Pavlis acquiesced, to the effect that they would one day receive a major interest in the property.

George and Chris also pleaded that a constructive trust existed because they were in a joint relationship with their parents in relation to the acquisition and improvement of the property which terminated from about 2013, or alternatively in 2017, when their relationship with their parents irretrievably broke down and their parents disavowed any obligation to them with regard to their having any interest in the property.

The relief claimed in the statement of claim was, relevantly, a declaration that Mr and Mrs Pavlis held the Strathfield property on constructive trust for each of George and Chris as to a 40% share or, alternatively, “as to such proportion as would prevent the unconscionable retention of property by [Mr and Mrs Pavlis]” subject to Mr and Mrs Pavlis’ right to reside at the property for life. Alternatively, they claimed a declaration that Mr and Mrs Pavlis were estopped from denying that the property was held for their benefit either as to a 40% share or as to a one third share each. Alternatively they sought a declaration that the property was held by Mr and Mrs Pavlis subject to an equitable charge or lien in their favour to the extent to which their contributions have contributed to or increased the value of the property.

The primary judge found that neither George, Chris, nor Mr Pavlis, was a credible witness. His Honour found that George and Chris contributed substantially in time, effort and funds to the renovation but added that much of the funds they provided appear to have been reimbursed to them. His Honour rejected their claim that they did so on the faith of a promise of a share of the property or any other encouragement from their parents (at [9]). His Honour found that they did so for two reasons, namely:

George and Chris did not plead a contract or a right arising from proprietary estoppel that Mr and Mrs Pavlis would leave the property, or a substantial interest in it, to them by their wills after their death. Any such claim was disavowed on appeal.

The claim as framed during argument on the appeal was that the appellants had an immediate equitable interest in the Strathfield property that would take effect as an estate in possession only on the death of the last surviving parent, either by way of an equitable charge to secure the value of the contributions made to the renovation and restoration of the property, or by way of an as yet undefined beneficial interest.

The orders ultimately sought on appeal were as follows:

There was no challenge to the primary judge’s findings of credibility nor to his Honour’s findings of primary fact.

Before turning to the primary judge’s more detailed findings, I will summarise the events that led to a crisis for Mr and Mrs Pavlis and which, according to Mr Pavlis, contributed to a breakdown of relations between them and George and Chris.

As alluded to above, Mr and Mrs Pavlis were the sole directors and shareholders of Pavlis & Sons. Pavlis & Sons acquired land in South Granville on which it conducted a hardware business as a Mitre 10 franchisee.

George and Chris established a company called Pavlis & Sons Australasia Pty Ltd (“P & S Aust”) which acquired a hardware business in Blacktown. It also conducted business as a property developer. P & S Aust was incorporated on 7 February 1984.

The Blacktown hardware business was closed in 1987.

On 29 April 1988 Pavlis & Sons borrowed $560,000 from Citibank Limited to refinance an existing loan. Mr and Mrs Pavlis, Chris, George and P & S Aust guaranteed the borrowing.

For the purpose of its property development business P & S Aust obtained loan finance from CBFC Limited (“CBFC”). In 1988 Mr and Mrs Pavlis mortgaged the Strathfield property not only to secure a loan made by the Commonwealth Bank of Australia (“CBA”) to Pavlis & Sons, but also to secure funds to be advanced to P & S Aust associated with its property developments.

The South Granville hardware business was sold in 1991 and thereafter Mr Pavlis stopped working. He and Mrs Pavlis had no income except for their pension.

The securities held by CBA and CBFC were cross-collateralised. Following a decline in the property market in the early 1990s CBFC made a demand on Mr and Mrs Pavlis for $1,604,069.66. On 17 February 1992 CBA issued notices to Mr and Mrs Pavlis pursuant to the CBA mortgage requiring them to repay $275,439.34. In July 1992 CBA commenced proceedings for possession of the Strathfield property. In those proceedings George swore an affidavit in which he gave evidence to the effect that he caused Pavlis & Sons to be incorporated in late 1982; he was responsible for the day to day management and administration of the Granville shop; he decided that Pavlis & Sons should have an overdraft to enable it to increase stock levels; it was his decision to procure his parents to sign a mortgage to secure an overdraft in favour of CBA; he procured his parents to sign mortgages to secure debts incurred by P & S Aust and by another company with which he and Chris were involved (Ideal Enterprises); he did not explain the documents to his parents; and he asked them to sign guarantees and a mortgage so that CBA would lend his company moneys.

Koula and Emanuel swore affidavits to the effect that they did not know that by signing the documents proffered by George they were putting their home at risk, they did not know the extent of P & S Aust’s liability to CBFC and did not know that George and Chris’ companies were in financial difficulty.

Mr and Mrs Pavlis brought their own proceedings seeking to set aside the securities. The primary judge recorded:

Notwithstanding the entry of judgment, the parties negotiated a settlement. The primary judge found:

The Maroubra unit to which the primary judge referred at [145] quoted above was owned by Garry who sold it to free up funds to assist in paying the settlement moneys. The primary judge rejected Chris’ contention that he was the true owner of the unit (at [200]-[201]).

Garry, whose evidence the judge accepted, denied that George and Chris arranged for the settlement sum to be paid from their resources. He deposed that he arranged for the moneys to be paid either from his own resources or by borrowing from friends and associates.

In September 1999 the Citibank loan was refinanced and additional moneys borrowed through St George Bank so that the renovations of the Redmyre Road property could continue. St George required personal guarantees. George declined to provide a guarantee but Chris and Garry did.

The primary judge found (at [151]) that between 2001 and 2008 George and Chris oversaw and completed the second stage of renovations to the property. His Honour found that they undertook physical work and made financial contributions to the renovations but noted that much of their claim in this regard was disputed and it was accepted that if a precise determination were required it would have to be referred out (at [245]).

Garry’s evidence was that he assisted his parents in processing payments for the renovations and George took a greater role in coordinating the renovation works and arranging and coordinating trades. George obtained a builder’s licence in June 2001. Garry said that the invoices, once approved, would be paid either from the St George loan account or by him or his company. This was disputed and that dispute was not resolved by the primary judge. Chris said that he gave his parents moneys to assist with rates and outgoings and for living expenses, and that he paid $150,000 into Mr and Mrs Pavlis’ loan account in 2009 to assist with mortgage repayments after Garry, whom he was aware was assisting their parents with mortgage repayments, said he was struggling to make them. He withdrew the money a year later. He said the same happened in 2010 when he placed $240,000 into the loan account and withdrew it a year later. Chris said that in making payments towards the costs of renovations and other payments he relied on the representations he claimed were made to him by Mr and Mrs Pavlis.

On 17 November 1999 Mr and Mrs Pavlis made mirror wills under which each left his or her estate to the other, but if the other predeceased then the property was left to Chris and Garry as tenants in common. George was left property in Greece. The wills contained an explanation that Chris and Garry had been left a greater share of the estate because George was the cause of expensive litigation about the property without just cause or excuse.

Mr and Mrs Pavlis made new wills in 2010 under which Garry was the principal beneficiary with gifts of part of residue to the benefit of Chris and George’s children.

They made further wills in 2017 that the primary judge summarised as follows:

Mr Pavlis prepared a memorandum dated 28 June 2017 explaining his testamentary dispositions. He accused George of being “the protagonist of my financial disaster”. He praised Garry for his support and stated that George and Chris not only refused to attend their brother’s wedding but would not let their children talk to their uncle and godfather (Garry) or to him or their grandmother.

Having rejected the plaintiffs’ claim based on the alleged representations they claimed had been made to them, his Honour addressed their case based on their contributions. He found that George was the driving force behind everything which led to the litigation (at [222]) and Mr and Mrs Pavlis were “… at best, passive participants in and indirect beneficiaries of George and Chris’ activities” (at [224]). None of the financial transactions which precipitated the Bank litigation was for their benefit (at [225]). His Honour found:

In Muschinski v Dodds (1985) 160 CLR 583; [1985] HCA 78, land was acquired by an unmarried couple as tenants in common in equal shares, with the purchase price having been paid by the woman. The presumption of resulting trust was rebutted because both parties intended that each should enjoy from the time of purchase a beneficial half interest in the land. The proposed development of the land did not proceed and the man did not make the contributions the parties intended. Deane J, with whose reasons Mason J agreed, applied principles derived from partnership law and analogical doctrines of contractual frustration where a joint endeavour fails without attributable blame in stating (at 620) that it will be unconscionable for a person to assert a legal entitlement:

In Baumgartner v Baumgartner (1987) 164 CLR 137; [1987] HCA 59 that principle was applied to a domestic relationship with the parties’ contributions to be considered being not merely financial but extending to the making of their home (at 149-150). Mason CJ, Wilson and Deane JJ (at 148) referred to:

The appellants did not challenge the primary judge’s statement of the relevant principles. His Honour’s essential reasoning was that:

In relation to the latter finding the primary judge quoted from the cross-examination of George who gave the following evidence:

The primary judge made no finding on the issue of whether, if there were a joint relationship or endeavour, it came to an end (or its substratum was removed) without attributable blame. Neither party asked this Court to make findings on this issue if the appeal otherwise succeeded.

The judge’s second finding ([35] above) was not challenged. Two grounds of appeal were pressed:

The primary judge’s finding that George was the instigator and driving force behind the renovations was not challenged. Nonetheless Mr and Mrs Pavlis must have consented to the works being carried out. Mr Waugh SC, who appeared with Ms Hooper for the respondents, submitted that if an endeavour were to be truly a joint endeavour it must involve some common understanding to begin with. But there must have been a common understanding from the commencements of works between Mr and Mrs Pavlis and George and Chris that works would be embarked upon. Moreover, it was only stage one of the renovations that were for the commercial benefit of George and Chris by enhancing the value of the property which they offered as security for their company’s property development. After the conclusion of the bank litigation the property was not security for further business ventures of George or Chris. Garry’s evidence referred to above at [27] indicates that in respect of the second stage of renovations all of the brothers and Mr Pavlis were actively involved in completing the works through George’s work in coordinating tradesmen, Chris’ financial support through his guarantee, Garry’s financial support, and Mr Pavlis’ involvement in scrutinising and approving as appropriate the tradesmen’s invoices. At least in respect of the second stage, the parties were engaged in a joint endeavour to complete the renovations.

However, it was not enough for George and Chris to establish that they made contributions pursuant to a joint endeavour whose substratum was removed when their relationship with their parents failed and their parents changed their wills. In the words of Deane J in Muschinski v Dodds, they needed to establish that the contributions they made would be enjoyed by their parents in circumstances in which it was not specifically intended or specifically provided that their parents should so enjoy them. In the words of the majority in Baumgartner v Baumgartner, to be entitled to restoration of their contributions, they needed to establish that it was not intended that their parents should enjoy them if the relationship failed.

The relevant intention (or lack thereof) is as to how the beneficial ownership of property is to be enjoyed. In West v Mead [2003] NSWSC 161, Campbell J said at [74] that a Baumgartner-type constructive trust arises where the parties have no actual intention about how beneficial ownership would lie in the circumstances which have arisen.

As the primary judge found (at [9]) George and Chris’ expectation was that they would receive a fair share of their parents’ estate. Both George and Chris intended that Mr and Mrs Pavlis would enjoy the benefit of the contributions made by George and Chris during their lifetime. They had no intention that their parents would not have full beneficial ownership of the property that they could leave by will. To the contrary, George and Chris’ expectation and intention was that they would inherit the greater share of the property after the death of the surviving parent, which is inconsistent with their having an interest in the property which vests before their parents’ deaths, even if not vested in possession. The appellants did not claim that the equity they asserted interfered with Mr and Mrs Pavlis’ freedom of testamentary disposition.

The primary judge did not accept George and Chris’ evidence that their contributions were induced by Mr Pavlis’ representations that they would receive a greater share of the property than Garry. But that evidence was an admission against interest that the possibility of their parents’ not leaving them a greater share of the property was something they considered. Accordingly they did not show that it was not intended that their parents should enjoy full beneficial ownership of the property if the relationship failed. The appeal should be dismissed.

I would also dismiss the appeal for a second reason. The foundation of the imposition of constructive trust is that a refusal to recognise the existence of an equitable interest in the property amounts to unconscionable conduct (Baumgartner v Baumgartner at 147). Where the asserted failure of the substratum of the relationship is the parents not making wills to give effect to George and Chris’ expectations, it was incumbent on them to show that their parents’ testamentary provisions were unconscionable. That is essentially the same issue as demonstrating that the relationship failed without attributable fault on their part. The absence of attributable fault is one of the elements to be established in order to show that the defendants’ refusal to recognise the plaintiffs’ assertable equitable interest is unconscionable. The onus lay on the appellants to establish that the relationship failed without attributable blame on their part. There was evidence to the contrary. The judge did not make a finding on the issue but the appellants did not seek such a finding and did not complain of the judge’s failure to make one.

For these reasons, the appellants’ claim for a constructive trust over the property or an equitable charge to secure the value of their contributions based on the principles in Muschinski v Dodds and Baumgartner v Baumgartner was rightly dismissed.

I propose the following orders:

BASTEN AJA: I agree with White JA.