Drinkwater v Nadinic

In my judgment given on 30 September 2016, I held that the plaintiff had been induced to enter into a deed of settlement by reason of the defendant’s concealment of material facts. I noted that the core of the plaintiff’s complaint was that the defendant’s failure to disclose was misleading and deceptive, in the statutory sense as well as in the sense that it constituted equitable fraud. The further hearing to which this judgment relates was held to determine the relief which I should grant to the plaintiff.

The deed of settlement included an obligation by the plaintiff to pay $2,050,000 to the defendant secured by a second mortgage over her land. I held that the defendant’s concealment was fraudulent; that it was a deliberate choice by him; and that it was the product of the conflict between his fiduciary duty to the plaintiff and his interest in the payment of the GST refunds to a company known as Maxstra Constructions.

Pivotal to my reasoning was the following unchallenged evidence of the plaintiff, which I had no hesitation in accepting:

A brief outline of the relevant contextual facts is summarized in my earlier judgment:

Based on those findings of fact, I reached the following conclusions and made the following observations:

I also made reference to the well-known observations concerning the effect and consequence of non-disclosure in Brickenden v London Loan & Savings Co [1934] 3 DLR 465 at 469 by Lord Thankerton:

See also Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at [435]-[439] (CA).

Because the nature and legal effect of fraud are central to the question of the relief which the plaintiff seeks, I have added two further decisions that contain pithy observations pertinent to the subject. In Farley (Aust) Pty Ltd v J R Alexander & Sons (Qld) Pty Ltd (1946) 75 CLR 487, Williams J said at 493:

And in Reddaway v Banham [1896] AC 199 at 221, Lord Macnaghten said:

The question on which I have now heard further evidence and submissions is whether, in the circumstances, the plaintiff is entitled to have the deed of settlement and the mortgage set aside in whole or in part. The principles governing the grant of such a remedy were cogently expressed by Lord Wright in Spence v Crawford 1939 SC (HL) 52 at 76-7:

To that classic statement of principle, I should add reference to Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 at 115 in which the Court (Deane, Dawson, Toohey, Gaudron and McHugh JJ) stated, after making reference to the traditional concern of equity to mould relief between the parties ‘to prevent, nullify, or provide compensation for, wrongful injury’, that ‘If it appears that the other party would not have entered into the contract at all if the true position were known, the contract may be set aside in its entirety …’.

Although there are some complications in this case – none of which is, in my view, insurmountable – I have concluded that, as between the plaintiff and the defendant, the deed of settlement and the mortgage should be set aside. In support of the relief for which the plaintiff contends, her counsel pointed to the following factual features of this case:

These are all valid and important points, which tend to support the appropriateness of some form of rescission, at least as between the plaintiff and the defendant. A significant question in the particular circumstances of this case, is whether such an order will operate unfairly to the defendant. If the defendant is to be returned to the status quo ante, will he be unfairly prejudiced? I have concluded that he will not and that it is appropriate, as against him, to set aside the deed of settlement and the related mortgage. One way of looking at that question is to compare the defendant’s position immediately before the deed of settlement with the position in which he will be placed if the deed is set aside as between himself and the plaintiff. For that purpose, it is necessary to return to the facts.

The parties to the deed of settlement are the plaintiff, the defendant, Brooks Parade Pty Ltd (Brooks) and Maxstra NSW Pty Ltd (Maxstra NSW). Maxstra NSW was the builder. Brooks was the developer. The plaintiff was the owner of the land. Neither Brooks, which is now owned and controlled by the plaintiff, nor Maxstra NSW, which is in liquidation, are parties to these proceedings. The central effect of the deed of settlement was to remove the defendant from the development project, for a price, and to give control of the project and of Brooks to the plaintiff.

The mechanism by which this was achieved was that the defendant agreed to resign as a director of Brooks and transfer his one share to the plaintiff. The plaintiff was thus given sole control of the developer. In return, the plaintiff, the defendant and Brooks gave mutual releases to each other and the plaintiff agreed to give a second mortgage over her land to secure the payment of $2,050,000 to the defendant. In addition, the builder Maxstra NSW agreed to withdraw its progress claim No 21; terminate the building contract; make no further claims on Brooks; and release Brooks from future claims.

The price that the defendant negotiated for his exit was $2,050,000. The plaintiff’s decision to enter into the deed of settlement, and agree to the payment of this sum, was induced by the defendant’s deliberate concealment of the dishonest scheme by which the sum of $923,589 in GST refunds was transferred to Maxstra Constructions.

The parties to the joint venture agreement were the plaintiff and Brooks. At the time of entry into the joint venture agreement, Brooks was owned and controlled by the defendant and he and the plaintiff were the effective joint venturers. She was the ‘Owner’ and he was, in reality, the ‘Developer’. If the deed of settlement had not been entered into, the financial return to the plaintiff and the defendant would have been governed by the terms of the joint venture agreement.

In July 2013, when it seems that the bank was not satisfied with a personal guarantee from Brooks or the defendant, the plaintiff agreed to give a guarantee and the defendant agreed to allow the plaintiff to become an equal shareholder and director of Brooks. This had the effect of allowing the plaintiff an equal share of the net proceeds under the joint venture agreement to which Brooks was otherwise entitled. The defendant however maintained control of Brooks and the plaintiff did not have access to its books and records until November 2015 when the deed of settlement was entered into and the defendant ceased his involvement. He did not formally resign as a director until April 2016.

Separate from the joint venture agreement, but destined to play important roles in connection with its operation, were Maxstra NSW and Maxstra Constructions. They were Nadinic family companies established in 2010. The defendant and his father were the directors and controlled their operations. The companies were wholly owned by other Nadinic family companies. At the date of the hearing, one was owned by the defendant’s father and the other by his mother. The defendant had previously been a shareholder, at least of one of them. The defendant resigned as a director of Maxstra Constructions and Maxstra NSW in March 2015 and his father resigned in June and November 2015 respectively. Both companies went into liquidation within months of the entry into the deed of settlement.

Schedule B of the joint venture agreement provides that the income from the sale of units in the development project is to be distributed as follows:

The project has now all but completed. The majority of units have been sold. Unit 1 remains unsold. Units 8, 9, 12 and 13 are under contract and the construction finance loan from the ANZ Bank has been paid out. The evidence demonstrates satisfactorily, and certainly on the balance of probabilities, that the ultimate financial outcome of the project is likely to be as follows: The gross sale proceeds will be approximately $12,500,000. The net sale proceeds after deduction of sales commission ($227,677), conveyancing costs ($60,000) and GST on sales ($982,893) are likely to be approximately $11,229,430. From that net figure there should be deducted the items specified in paragraphs (a) to (d) in Schedule B to the joint venture agreement as follows:

The sum of $1,570,000 represents the agreed value of the plaintiff’s land. The sum of $430,000 appears to represent a payment supposedly made by Brooks at the outset of the project to get clear title. And the sum of $2 million appears to represent an initial takeout ‘profit’ for the parties, before reimbursement of Project Costs and the payment of any balance to Brooks.

It is apparent that there is no reasonable possibility of any significant reimbursement of Project Costs to the venturers, as contemplated by paragraph (e) of Schedule B to the joint venture agreement. And the payment of any balance to Brooks pursuant to paragraph (f) is a distant dream. Subject to a further payment required by Addendum dated 4 April 2013, it appears likely that only approximately $29,430 will be available for distribution pursuant to paragraphs (e) and (f) of Schedule B.

During the lengthy and bitter negotiations between the plaintiff and the defendant culminating in the deed of settlement, the latter’s contributions to Project Costs were naturally emphasized by him as part of the price for his exit from the joint venture. He was considerably experienced in the construction and property development industry, while the plaintiff was not. Recital E of the joint venture agreement stated that Brooks ‘is in the business of developing property for sale at a profit and proposes to contribute certain building works, funds and its expertise to the joint venture’. On the other hand, I formed the impression that the plaintiff was quite commercially naïve. She was clearly inexperienced. And she was certainly no match for the defendant.

On 25 March 2015, the defendant stated that ‘significant and substantial contributions in the amount of $863,076.65 have been made by or on behalf of Brooks’. By 30 October 2015, he contended that ‘As we discussed last week, my contribution totals c.$1,500k’. On 8 November the plaintiff offered him $1.31 million, to which the defendant responded by saying that he was entitled to $2.332 million. I summarized the course of the remaining negotiations in paragraphs [12]–[14] in my earlier judgment as follows:

The significance of those matters is that, not only was the plaintiff’s entry into the deed of settlement induced by the defendant’s concealment of the dishonest GST scheme in which Brooks, Maxstra NSW and Maxstra Constructions were involved, but the amount for which the defendant demanded payment was predicated on his presumed entitlement to reimbursement of a substantial sum for his contributions to the Project Costs.

As events have turned out, it is apparent that if the deed of settlement had not been entered into, neither party would have received any signifcant reimbursement of contributions to the Project Costs. For her part, the plaintiff’s evidence indicated that, in addition to providing the land and incurring the expense of obtaining the development approval, she made contributions to the Project Costs of $550,000 (March 2015) and $600,000 (December 2015). And in April 2016, she caused a further sum of $600,000 to be paid, which was characterized in a contemporaneous note as some sort of advance to the project by the plaintiff’s husband. These payments were made to enable the project to reach completion and will be almost wholly irrecoverable.

If the deed of settlement is set aside as between the plaintiff and the defendant, and the defendant is restored to the position in which he found himself prior to entry into the deed of settlement, including as an equal shareholder of Brooks, he will be entitled to receive his proportionate share of the amounts to which Brooks is entitled pursuant to paragraphs (b) and (d) of Schedule B to the joint venture agreement. I do not see any injustice in this, in the circumstances of this case.

Counsel for the defendant did his best for his client but his first point was procedural rather than substantive. He objected to the affidavit of the plaintiff’s solicitor, Mr Hewitt, dated 4 November 2016 (a month before the further hearing) and complained that the plaintiff herself should have given evidence of the amounts paid pursuant to the joint venture agreement and its likely financial outcome. However, the information put forward by Mr Hewitt had its source in business records and other documents already in evidence and there was no realistic prejudice to the defendant. He had the opportunity to put any countervailing evidence if there was any utility in doing so. There was no good reason for rejecting the affidavit or any part of it. I allow it.

The defendant’s other points went to the essential requirement of the remedy of rescission that it achieve ‘what is practically just’ between the parties. However, as Lord Wright noted wryly in Spence v Crawford at 77, ‘it is generally the defendant who complains that restitution is impossible’. One apparent complication raised by the defendant is that Maxstra NSW, the builder which is now in liquidation, was a party to the deed of settlement but is not a party to these proceedings.

I cannot, of course, make orders against Maxstra NSW. By the deed of settlement, it withdrew its progress claim No 21, terminated the building contract and agreed not to make further claims on Brooks pursuant to the building contract. Those obligations will not be affected by the orders I propose to make, which will be confined to an adjustment of rights as between the plaintiff and the defendant. As a result, there will be no injustice to the defendant.

Several other points raised by the defendant related to his position vis à vis Brooks. Brooks is also not a party to these proceedings and I cannot make orders against it. The orders I propose to make as between the plaintiff and the defendant will have the effect that the defendant will resume ownership of his half-interest in Brooks. He will therefore be entitled as a shareholder to a half-share of the monies from the project to which Brooks is entitled. The releases given by Brooks pursuant to the deed of settlement in favour of the plaintiff, the defendant and Maxstra NSW will not be affected. I see no injustice to the defendant from that outcome.

One of the least persuasive submissions of counsel for the defendant was that, if the defendant were to become a director of Brooks once again, he might be liable for any insolvent trading by Brooks. This is entirely speculative. There was no evidence which supports the likelihood that Brooks might have traded while insolvent. In any event, I do not propose to make an order that compels the defendant to consent to his re-appointment as a director of Brooks. He may not wish to do so and I doubt that it is essential.

I will order the plaintiff to transfer to the defendant one of the two issued shares in Brooks held by her since the deed of settlement. If she remains the sole director, she will have a statutory and fiduciary obligation to ensure that the defendant receives, as a shareholder, his proportionate share of the net proceeds to which Brooks is entitled pursuant to the joint venture. From the defendant’s perspective, the issue is money not responsibility. I doubt that he wants or needs the burden of once again becoming a director of Brooks. However, if he is willing to consent to his re-appointment, he should be entitled to do so. I see no injustice to the defendant in those circumstances.

Counsel for the defendant also contended that it was not practically just to impose on the defendant the consequences of events that took place after he ceased to be involved in the project following execution of the deed of settlement. Implicit in this submission was the contention that the project might possibly have been brought to completion at less cost if the defendant had not ceased his involvement. On this slender hypothesis, which was not developed and not supported by evidence, the net proceeds available for reimbursement of Project Costs might have been greater.

The object of the orders that I propose to make is to restore the plaintiff and the defendant to the position in which they were – vis à vis each other – immediately before the deed of settlement, without disturbing the rights and obligations which Brooks and Maxstra NSW have assumed pursuant to the deed. The fact that the evidence revealed that, if the deed of settlement had not be entered into, the defendant is unlikely to have received any significant reimbursement of his contributions to Project Costs, tends to fortify my conclusion that there is no unfairness to the defendant in making the orders that I propose, but it is not determinative.

In any event, there is no evidentiary basis for assuming that the financial outcome of the project would have been different if the defendant had remained involved. No such forensic enquiry was conducted. Nor was any application made to enable the defendant to pursue such an enquiry, let alone prove the relevant facts to enable such a conclusion to be reached. The defendant’s complaint on this issue is theoretical, it rests on supposition and there was no factual substance to support it. Absence a hint of any cogent evidence to the contrary, there is no reason for me to assume that the financial outcome of the project that now appears likely, is anything other than the natural and inevitable consequence of the state of affairs that existed at the time of the deed of settlement.

The defendant has only himself to blame. He negotiated a handsome financial benefit to himself and caused the plaintiff to agree to it by his concealment of material facts relating to the dishonest scheme in which he participated. His dishonesty in his dealings with the plaintiff was twofold – both in relation to the conduct of the GST scheme involving Brooks, Maxstra NSW and Maxstra Constructions and in relation to his concealment of that scheme during his negotiations with the plaintiff leading to the deed of settlement.

The effect of my orders will be to set aside the plaintiff’s obligations to the defendant pursuant to the deed of settlement, to set aside and cancel the mortgage and to restore both parties to the position – vis à vis each other – in which they found themselves immediately before the deed. The effect of such restoration to the status quo ante will be to deprive the defendant of a valuable benefit but the benefit is one which he procured by fraud – by his deliberate dishonesty intended to conceal and deceive. Instead, he will receive the benefits to which he is entitled pursuant to the joint venture agreement. There is no unfairness in such an outcome. Nor is there a good basis for contending that it is not practically just in the circumstances.

Finally, I should observe that this is not a case of ‘rescission’ in the strict sense. My orders are intended to operate personally as between the parties, without there being any collateral effect on third parties. I have moulded what I consider to be appropriate orders in accordance with the exigencies of this particular case. As Lord Wright said in Spence v Crawford at 77: ‘… in the case of fraud, the court will exercise its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying the benefit of his fraud at the expense of the innocent plaintiff’.

I make the following orders: