Depofo Pty Ltd v Allan Charles Barnes & Ors

These proceeding are part of the winding up of a partnership known as “Wimbledon Worms” (the “Partnership”). The Partnership commenced in early 2005. While all of the surviving partners are joined in these proceedings, the only parties that took an active role before me were the plaintiff, Depofo Pty Ltd (“Depofo”) and the first defendant, Mr Barnes.

On 26 September 2017, the Court made orders by consent to dissolve the Partnership. Mr Alan John Hayes was appointed Receiver and Manager and as Referee.

As Referee, Mr Hayes was required to report on:

Mr Hayes delivered his “Second and Final Report” on 23 May 2018 (the “Final Report”). Two conclusions in the Final Report are the subject of the present contest as to how much of the Final Report should be adopted by the Court:

As to (1), the Court has concluded that there was evidence before Mr Hayes which rationally supported the factual conclusions he reached in relation to the Subsequent Advances and that none of the matters advanced by Mr Barnes would justify the Court in not adopting the Final Report without that part of the report.

As to (2), the parties themselves accepted that Mr Hayes’ ultimate conclusion in relation to rent owing by Mr Barnes to the Partners could not be supported and should not be adopted. It was therefore necessary for the Court to determine the question for itself. The Court has found that under the applicable rental agreement, Mr Barnes is liable for unpaid rent calculated at the monthly rate of $2,200 (GST inc) with interest to be paid thereon at Supreme Court pre-judgment rates.

The result is that the Court will adopt the Final Report with the exception of its conclusions about outstanding rent, in relation to which the result summarised in the preceding paragraph will be substituted.

Mr A Gotting of Counsel appeared for Depofo. Mr S O’Brien of Counsel appeared for Mr Barnes.

These are the Court’s findings on uncontroversial matters.

In 2005, Mr Barnes had interests in two properties, the Whyalla Circuit Property and Newcastle Place Property (the “Properties”).

At this time, Mr Barnes operated a business through a company known as Wimbledon Worms Pty Limited (later known as BMG Environmental Group Pty Limited (“BMG”)).

In 2005, Depofo (through its director Mr McCarthy) and the defendants (the “Partners”) agreed to form the Partnership.

Depofo and the defendants, with the exception of Mr Barnes (the “Investors”), agreed to invest in the Partnership by acquiring a 50 per cent interest in the Properties. They also provided funds to develop buildings and infrastructure on the Properties. This investment was made in 2005.

On 16 August 2005, the Investors paid $230,000 to acquire the interest in the Properties and transferred this interest to the Partnership. Similarly, by way of his contribution, Mr Barnes transferred his interest in the Properties to the Partnership. This resulted in the Partnership owning the Properties.

Later in 2005, the Investors paid $870,000. Mr Hayes referred to this as the “Subsequent Advances”, a term which I will also use. The Final Report determined that the Subsequent Advances were a capital contribution to the Partnership and not a loan to BMG. This characterisation of the Subsequent Advances is disputed by Mr Barnes.

Between 1 July 2006 and 30 June 2007, the Partners advanced an additional $472,000. This was referred to by Mr Hayes as the “Second Subsequent Advances.” The Final Report determined these to be a loan to BMG, as opposed to being a capital contribution from the Partners to the Partnership. This finding is not contested.

In September 2010, Mr Barnes entered into a lease arrangement for the Newcastle Place Property with the other Partners. He subsequently commenced paying rent to the Partners.

In May 2013, Mr Barnes ceased paying rent for the Newcastle Place Property but continued to remain in occupation. He did not pay rent again until October 2017, when a new rental arrangement was struck with Mr Hayes as Receiver and Manager of the Partnership. One issue for determination by Mr Hayes was how much Mr Barnes owed the Partnership for rent for the period when he had not paid any rent (the “Rent”).

In January 2014, the Partners leased the Whyalla Circuit Property to Bettergrow Pty Ltd (the “Bettergrow Lease”).

In February 2017, the Partnership sold the Whyalla Circuit Property.

On 21 September 2017, the Court appointed Mr Hayes as Receiver and Manager of the Partnership, as well as Referee to enquire and report into specified matters in connection with the Partnership pursuant to Part 20 r 20.23 of the Uniform Civil Procedure Rules 2005 (NSW).

In preparing his report, Mr Hayes was provided with copies of loan agreements from the Partners to NSW Liquid Recycling Centre Pty Limited (“NLRC”), a company which had conducted part of the business on the Properties. The loan agreements provided went from 2005 until 2008.

The loan agreements did not relate to the Subsequent Advances, however some of the loan agreements related to the Second Subsequent Advances.

Mr Hayes was also provided with financial reports, profit and loss statements, balance sheets and taxation returns for the Partnership for the period 1 July 2005 to 30 June 2012 by Mr Barnes’ solicitors. These reports, which were signed by the Partners, recorded both the Subsequent Advances and Second Subsequent Advances as capital contributions to the Partnership.

Mr Barnes’ solicitors also supplied Mr Hayes with copies of financial reports for NLRC for the period from 1 July 2010 to 31 January 2013.

In addition to the accounting documents Mr Hayes was also provided with a Shareholders’ Agreement dated 28 April 2005 in relation to BMG (the “Shareholders’ Agreement”).

Mr Hayes published his Interim Report on 21 December 2017. This report found that both the Subsequent Advances and the Second Subsequent Advances were capital contributions to the Partnership.

Mr Hayes published the Final Report on 23 May 2018. This included a finding that the Second Subsequent Advances were loans to NLRC and had been incorrectly recorded in the Partnership accounts as capital contributions.

I will next set out the relevant conclusions in the Final Report. These should be read bearing in mind that:

The Final Report included:

In addition to what he said in section 3.4.1 (reproduced above) about not having adequate information, Mr Hayes noted at section 3.3.1 of the Final Report the documents he was not provided with, despite requests to the parties involved. Those documents included:

The parties were in agreement about the applicable legal principles.

Pursuant to UCPR Pt 20 r 20.24, the Court has the discretion to adopt, vary or reject the report of the referee in whole or in part. Rule 20.24 specifies:

In Chocolate Factory Apartments Limited v Westpoint Finance Pty Ltd [2005] NSWSC 784 (“Chocolate Factory”) McDougall J provided what has become the generally accepted summary of the various authorities as to the Court’s approach when determining whether to adopt or reject a report (at [7]):

A report is not ordinarily rejected on the basis that a different finding of fact should have been made. To reject a report based on a finding of fact, it must be shown that the finding of fact was one which no reasonable tribunal of fact could have reached (Illawarra Hotel Company Pty Limited v Walton Construction Pty Limited [2013] NSWCA 6; (2013) 84 NSWLR 410 at [20]-[23], [58] per Barrett JA).

If the Court rejects the conclusions as to an issue in the report, the Court may refer the issue back to the referee for consideration in a supplementary report (Powers v Stoikos [2007] NSWSC 675 at [20]).

Mr Barnes submitted Mr Hayes’ finding in relation to the Subsequent Advances being capital in nature was incorrect on five grounds:

Rather than being capital contribution, it was Mr Barnes’ contention that the $870,000 Subsequent Advances were a loan to BMG.

The Final Report lists each of the interests of the Partners in the legal title of the Property in proportion to their initial contributions to the purchase of the Property. Those interests were:

If the Subsequent Advances were in fact capital contributions, then the proportion of legal title held by each of the Partners in relation to the Properties would have increased in accordance with the contribution of the Subsequent Advances. Similarly, if the Subsequent Advances were capital, the legal title held by Mr Barnes would have decreased down to 17.3 per cent. As this did not happen, it is fair to infer that the Partners themselves did not treat the Subsequent Advances as a capital contribution. Therefore, it was unreasonable for Mr Hayes to find that they were capital in nature, when the Partners themselves did not treat them as such. Instead, the Subsequent Advances were treated as a loan to BMG, and this finding should be substituted in the Final Report.

Furthermore, different sums of the Subsequent Advances were referred to in the Interim Report, as opposed to the Final Report. These changes can be summarised as follows:

There was an absence of reasons provided by Mr Hayes in the Final Report for these changing sums, suggesting the Final Report is arbitrary in its calculations.

Finally, the findings of Mr Hayes were perverse as they went against the weight of evidence which suggested the Subsequent Advances were not capital. Of particular relevance were the accepted practices of the Partners, namely profits and losses being distributed in accordance with the proportion of their interest in the Properties.

This reality is supported by clause 4.3 of the Shareholders Agreement which specifically makes reference to the Investors making an advance of $870,000, and that advance being treated as a loan. Clause 4.3 of the Shareholders’ Agreement provided:

Further to the Shareholders’ Agreement, reference was also made to the accounts of BMG, which included (for example, as at 30 June 2009) an entry under non-current assets for buildings of $866,944.

Mr Barnes submitted that both the practice of distributing profits and losses and the proportion in which they were distributed, as well as the existence of the Shareholders’ Agreement, outweigh any evidence which suggests the Subsequent Advances were capital in nature. The finding made by Mr Hayes in relation to the nature of the $870,000 was unreasonable and perverse, and as such, the Court should not adopt this finding of the Final Report.

Mr Barnes submitted that numerous pieces of evidence were misapprehended by Mr Hayes in the Final Report. These included:

The first misapprehension of evidence contended for related to these assumptions made in the Final Report:

In relation to assumption (a), Mr Hayes gave significant weight to the accounts of the Partnership, and assumed that those records were accurate. This was done because those accounts were the most current at the time the advances were made by the Partners. This reliance on the accounts of the Partnership is despite the fact that the Partners used an overly simplistic methodology in recording various financial transactions. This is particularly relevant when considering the financial records of the Partners listed both the Subsequent Advances and the Second Subsequent Advances as being capital contributions, when in fact the Second Subsequent Advances were later found to be loans. Furthermore, the Partnership distributions are recorded in the Partnership accounts and do not treat the Subsequent Advances as capital, because at no time did the interests in the Properties alter or change. Profits were distributed in accordance with each Partner’s interest in the Properties, despite the partner funds also existing in the same accounts. Therefore, the methodology of recording financial transactions in the Partnership accounts was flawed, any assumption that they were accurate was similarly flawed, and any findings based on the financial accounts of the Partnership should be given less weight.

In relation to assumption (b), evidence was presented to suggest the Partners would regularly make loans without security in a commercial setting. Mr Barnes submitted this lack of security was an express term of numerous agreements between the Partners and NLRC, which would then on-lend to BMG for the development of Properties. These agreements would contain a term that “no security” was to be given to the borrower for the loan. This evidence of the Partners making unsecured loans suggests the assumption of Mr Hayes was incorrect, and any findings which were made as a result of this assumption are baseless. Moreover, Mr Barnes argued that there appeared to be a pattern of conduct on behalf of the Partners in making unsecured loans. Mr Barnes submitted that pattern of making unsecured loans commenced with the Shareholders’ Agreement, being the first $870,000 payment. The Shareholders’ Agreement was silent on the question of security, and therefore it could be inferred that the parties proceeded with the making of an unsecured loan.

The second pieces of evidence which Mr Barnes submitted were misapprehended were the Shareholders’ Agreement and the practice of the Partners in distributing profits and loans. As previously outlined, this evidence was in relation to the $870,000 being advanced by Partners pursuant to the Shareholders’ Agreement, and the distribution of profits and losses being made in relation to the initial proportionate interests in the Properties. Mr Barnes submitted that this evidence was not given sufficient weight and had it been properly considered, it would have demonstrated how the Partners had proceeded with the Shareholders’ Agreement. This misapprehension of evidence also resulted in Mr Hayes wrongly determining the $870,000 was a capital contribution.

The third piece of evidence said to have been misapprehended by Mr Hayes was in relation to his findings based on the financial statements of the Partnership. In his Final Report, Mr Hayes found that the Second Subsequent Advances were not a capital contribution. However, the Partnership financial statements from FY07 onwards make no distinction between the Subsequent and Second Subsequent Advances in stating the amount of “Partner Funds”. As such, the distinction between the different classifications between each advance of funds is unclear, and the conclusion that the Subsequent Advances were a capital contribution cannot be drawn from the Partnership financial statements.

Mr Barnes submitted that Mr Hayes failed to apply the correct methodology in making his conclusions in relation to the Subsequent Advances, as he conflated advances to the Partnership and capital contribution. Mr Barnes relied on the same argument as previously mentioned, namely that the Subsequent Advances were found to be capital contributions, but those contributions did not alter the interest each partner held in the Property.

Moreover, the methodology employed by the Partners in recording advances in the financial accounts was simplistic and inaccurate, merely naming advances as “Partner Funds”. This methodology failed to distinguish between the Subsequent Advances and Second Subsequent Advances, as advances to the Partnership on one hand, and loans to NLRC on the other. Mr Hayes erred in relying on the records of the Partners, without scrutinising the nature of the payments made. Had Mr Hayes sufficiently scrutinised each of the transactions, rather than rely on the assumption that the records were accurate, it would have been revealed that the Subsequent Advances were incorrectly recorded as Partner contributions to capital, rather than as a loan to BMG under the Shareholders’ Agreement.

Similarly, as outlined above, the assumption made by Mr Hayes in relation to the Partners being unwilling to make unsecured loans in a commercial setting was reached without sufficiently analysing and considering the evidence. According to Mr Barnes, the evidence presented to Mr Barnes clearly suggested the Partners were willing to making unsecured loans in a commercial context, and the failure to consider this evidence resulted in inaccurate assumptions being drawn.

There was a failure by Mr Barnes to apply a basic principle of partnership law in the writing of the Final Report. This principle, as outlined in Lindley and Banks on Partnership 20th ed, 2017 at 711, [19-21], states that where partners agree to share profits in unequal proportions, it must therefore be inferred that they have agreed to share capital profits in the same proportions. As profits were shared in unequal proportions, capital profits should also be distributed in the same unequal proportions. If this principle were applied, the proceeds of sale of the Property should be distributed in proportion to the interests of the Partners in the Property.

Moreover, Mr Hayes failed to construe the Shareholders’ Agreement correctly, and consequently drew poorly informed conclusions in relation to the nature of the Subsequent Advances. The Shareholders’ Agreement should have been construed to show the objective intent of the parties in making the $870,000 payment. Rather than viewing the Shareholder Agreement in isolation, as Mr Hayes states he did in section 3.4.2(i)(f) of the Final Report, the broader commercial context of the Shareholders’ Agreement should have been considered. When viewed in the broader context, Mr Barnes submitted the following facts emerge:

When placed in this broader context, these facts suggested the payment made by the Partners was in performance of the Shareholders’ Agreement, and the payment should therefore be seen as a loan to BMG, rather than as a capital contribution to the Partnership.

Despite Depofo being given the opportunity to respond to Mr Barnes’ second submissions, Mr Barnes was not afforded this same opportunity in relation to Depofo’s second submissions. These submissions were in relation to the Interim Report. Consequently, Mr Barnes was not given the opportunity to be heard, which contravened procedural fairness to all parties.

Had Mr Barnes been given the opportunity to provide submissions in response, he suggests he would have done so for consideration before the Final Report. In particular, Mr Barnes would have sought the opinion of forensic accountant Ms Woods who had already provided a report that was before Mr Hayes, provided the Report of the joint administrators of BMG and NLRC and a letter from Depofo’s solicitors which sought to enforce the Shareholders’ Agreement.

Depofo submitted that the findings made by Mr Hayes in his Final Report were correct, and should be adopted by the Court.

In both Mr Hayes’ Interim and Final Reports, he found that the Subsequent Advances were capital contributions. In the Final Report Mr Hayes made these findings for reasons which I reproduce again here for convenience:

The Plaintiff submitted that these reasons were accurate and were supported by numerous pieces of financial documentation. As such, the facts found by Mr Hayes were reasonably open to him to find on the evidence he was presented with.

While there were other factors which suggested the Subsequent Advances could be characterised as loans, the amount of evidence suggesting the Subsequent Advances were capital in nature, and the weight given to that evidence, resulted in Mr Hayes finding that they were capital. He was entitled to do so.

Mr Hayes was provided with the most contemporaneous documents as evidence. The most contemporaneous document was the general ledger for the Partnership, which begins with the formation of the Partnership in 2005. This ledger recorded the $870,000 advance as being capital, and also recorded that it was paid to the Partnership, and not to BMG. This was the only general ledger before Mr Hayes when he wrote both the Interim and Final Reports.

This general ledger for the Partnership can be contrasted to the financial statements of BMG. The earliest financial statements for BMG were for 2011. Similarly, the earliest financial statements for NLRC were for 2011. Given the general ledger for the Partnership was the most current document by six years, it was appropriate for Mr Hayes to place greater weight on it as a piece of evidence, as opposed to other financial statements which were less current, and consequently could be less accurate. It was therefore incorrect to suggest the findings of Mr Hayes were perverse or unreasonable, as he relied upon the most contemporaneous evidence made available to him, and gave it more weight as such.

Moreover, it was submitted that the mere existence of other material such as the Shareholders’ Agreement and the BMG Administration Report, which may have suggested a different conclusion could be drawn in relation to the nature of the Subsequent Advances, was not enough to prevent the Court from adopting the Final Report of Mr Hayes.

Again for convenience I reproduce the relevant part of the Shareholders’ Agreement:

Depofo submitted that Mr Hayes considered the Shareholders’ Agreement directly in both the Interim and Final Reports. However, Mr Hayes gave the existence of the Shareholders’ Agreement less weight than other pieces of evidence, and provided justifications for doing so. Mr Hayes said at section 3.2.4 (viii) of the Final Report:

The Shareholders’ Agreement required the payment of $870,000 to be made as a loan, and to be recorded in the financial statements of BMG. However, the payment was recorded in the general ledger of the Partnership, the payment is not recorded as a loan but as capital, and it is not recorded as being paid to BMG, but rather to the Partnership. Depofo therefore submitted that it was open to Mr Hayes to conclude that despite there being a Shareholders’ Agreement, and despite it requiring an advance of $870,000, it had not been proceeded with by the Partners. Instead, the Partners made capital contributions to the Partnership and that reality is reflected in the accounts of the Partnership, which were all signed by the relevant Partners. As such, Mr Hayes’ finding about the nature of the Subsequent Advances being capital contributions was correct in accordance with the evidence provided to him.

The plaintiff also submitted the methodology employed by Mr Hayes was correct in making his findings in relation to the Subsequent Advances. Mr Hayes’ findings differentiated between the nature of the Subsequent Advances and the Second Subsequent Advances on two key grounds.

First, there was loan documentation in relation to the Second Subsequent Advances. There was no loan documentation for the Subsequent Advances, and this supported the conclusion that they were not a loan, nor were they intended to be a loan.

Second, the Second Subsequent Advances were recorded as loans in the accounts of NLRC, which again can be contrasted against the Subsequent Advances. The Subsequent Advances were not paid to NLRC, but to the Partnership, and were not recorded in any accounts as being loans. These differences between both the Subsequent Advances and Second Subsequent Advances suggest that they were treated differently by the parties, and as such, were intended for different purposes.

Furthermore, despite both the Subsequent Advances and Second Subsequent Advances being recorded as capital contributions in the accounts of the Partners, Mr Hayes did not find this to be the case in his Final Report. Therefore, it can be inferred that Mr Hayes employed a methodology which analysed the evidence made available to him, and made conclusions based on that analysis, rather than just accepting pieces of evidence at face value. As such, the findings that he made in his Final Report were not perverse or unreasonable, but were made through scrutinising evidence in a systematic way.

In response to Mr Barnes’ submission that he had not been afforded procedural fairness, Depofo submitted:

The Court accepts Depofo’s submissions on the substantive issue. I will separately consider below the issue raised concerning procedural fairness.

Mr Hayes was confronted with incomplete and inconsistent documents and assertions as to how the Partners conducted the Partnership. It seemed to me, with respect, that Mr Barnes’ attacks on this part of the Final Report really amounted to saying the same things in several different ways. His essential complaint was that Mr Hayes had given more weight to the Partnership accounts as signed by the Partners and providing the basis of the Partnership’s tax returns than he had to the Shareholders’ Agreement and other pieces of evidence.

The Final Report, in particular the conclusions as to the Subsequent Advances reproduced in paragraph [30] above, demonstrates a careful and rational assessment by Mr Hayes of such evidence as was available to him. He clearly explains why he did not give the Shareholders’ Agreement the significance for which Mr Barnes contended and there is otherwise a clear and rational basis exposed for the conclusion to which he (Mr Hayes) came. I respectfully apply McDougall J’s observation in Chocolate Factory (at [7(7)]) that “the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence”. This is such a case.

Turning to the question of procedural fairness, the starting point must be to recall that the content of the obligation to afford procedural fairness varies according to the circumstances. This point was, with respect, well made by Bryson AJ in Tranquility Pools & Spas Pty Ltd v Huntsman Chemical Co Australia Pty Ltd [2008] NSWSC 58 (“Tranquility”):

UCPR Part 20, r 20.20 provides:

In exercise of the power to give directions as to the conduct of the reference, the orders of the Court appointing Mr Hayes included these orders (which were substantially identical to those referred to by Bryson AJ in the passage from Tranquility quoted in paragraph [79] above):

It is then necessary to take into account what actually occurred. This is set out in the Final Report:

Mr Barnes’ complaint is that he was not given an opportunity to reply to Depofo’s submissions of 9 May 2018. As appears from section 3.1.2 of the Final Report (reproduced in the preceding paragraph), Mr Barnes’ additional submissions in response to the Interim Report were provided on 6 February 2018, 23 February 2019 and 21 March 2018. Depofo’s submissions came on 3 April 2018 and 9 May 2018. The submission of 9 May 2018 is one and a half pages long. Primarily it submits that Ms Woods’ expert report advanced by Mr Barnes was “of no evidentiary value and, at best, should be regarded as a submission”. It then, in four short paragraphs, challenges some of the assumptions made by Ms Woods, the most fundamental being the matter in issue that the Subsequent Advances were loans. It concludes that Mr McCarthy was prepared to swear certain matters that had already been the subject of Depofo’s submissions.

While the point was not taken by Depofo (and hence I do not take it into account for the purposes of the conclusion I have reached because it was not the subject of submissions), against the possibility that this matter goes further I record my view that the requirement for procedural fairness would not have extended to giving Mr Barnes an opportunity to reply to the submission of 9 May 2018. This is for both a general and a specific reason.

The general reason is that Mr Hayes was conducting an inquiry and not a trial, and he was doing so informed by the rules, direction and authority which I have set out in paragraphs [79] to [81] above. Furthermore, his inquiry had progressed to the point that he was inviting submissions in relation to his Interim Report. As appears from the extract of the Final Report set out in paragraph [82] above, he clearly understood what the parties had well and truly joined issue about in response to the Interim Report. In that context, procedural fairness required him to give each side a fair opportunity to make whatever submissions they wanted to make to him about his Interim Report. Precisely how this was done was a matter for him and did not automatically require one side to be given the chance to respond to the other.

The specific reason is that the shortness and nature of the submissions made in the submission of 9 May 2018 did not require, in the interests of fairness, giving Mr Barnes an opportunity to respond. This was because that submission did little more than reiterate how the parties were at issue, but now by reference to certain assumptions in Ms Woods’ report. It would have been a completely different situation if the submission of 9 May 2018 had attached an expert’s report in response to Ms Woods’ report. It did not do so.

I turn then to the argument actually made by Depofo, the gravamen of which was that there was no denial of procedural fairness because the matters which Mr Barnes said he would have done (see paragraph [60] above) would not have raised anything that was new and properly responsive to the points Depofo had raised. In other words, Mr Barnes had not been deprived of the opportunity to put something that would have led to a different result that was not already before Mr Hayes or which would have been relevant to his decision.

I accept Depofo’s submission. In doing so, I note that in considering whether or not to adopt the Final Report, the Court is not engaging in a process of administrative law review. Even if the Court were satisfied there had been a denial of procedural fairness (which it is not), this would not of itself vitiate the Final Report in whole or in part. It would, however, be a factor in the exercise of the Court’s discretion whether or not to adopt the Final Report in whole or in part.

In particular, I have reviewed Ms Woods’ response that Mr Barnes says would have been provided to Mr Hayes. I accept Depofo’s characterisation that this was essentially repetitious of matters in her initial report, especially the submission recorded by Mr Hayes in section 3.1.4(iii) of his Final Report that “The Partners' acceptance of their profit share proportion indicates that they were at all times in agreement that whatever amounts were advanced to the Partnership or related entities were in the nature of loans which would have no impact on their interest in the Partnership”. The other material referred to by Mr Barnes appears either not to refer to the Subsequent Advances or is after the fact assertions by parties. None of it is primary, contemporaneous evidence that would have called into question Mr Hayes’ preferring the Partnership accounts over the Shareholders’ Agreement.

There is one final reason why the Court will adopt the Final Report in relation to the Subsequent Advances. If I were to have accepted any of the bases advanced by Mr Barnes as to why the Final Report should not be adopted on this point, I would have reviewed the matter myself in the light of all of the evidence referred to by Mr Barnes. I would nevertheless have come to the same conclusion as Mr Hayes, because when confronted with inconsistent documents and evidence as to how the finances of the Partnership actually worked, I would, like Mr Hayes, have preferred the Partnership accounts signed by the Partners and tax records as the best contemporaneous evidence of the Partners’ arrangements. In doing so I would have respectfully applied this observation of Young J (as his Honour then was) in Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at 694-695:

Mr Barnes acknowledges he owes rent to the Partners, however disputes the methodology used by Mr Hayes in determining the amount of rent owed. Mr Barnes was to pay rent at the rate of $2000 plus GST per month, with rent rising to $4,000 plus GST upon the completion of the warehouse on the Newcastle Place Property. This arrangement was noted by Mr Hayes in section 4.2.1 of the Interim Report: “It was initially agreed that Mr Barnes would pay $2,000.00 per month in rent and this amount would rise to $4,000 on the completion of the warehouse/amenities construction on the property”. The source for this statement is noted as paragraph 7 of a letter containing submissions from Mr McCarthy of Depofo to Mr Hayes dated 24 November 2017.

Mr Hayes’ reasons for his conclusion in relation to the Rent were set out in the Final Report:

Mr Barnes submits the calculation of the Rent should not be adopted by the Court for six reasons:

Mr Barnes ceased paying rent in May 2013. At this time, he was paying $2,200 per month in rent (inclusive of GST).

Mr Barnes resumed paying rent in October 2017.

The period of outstanding rent is therefore 54 months.

The correct methodology should therefore be $2,200 x 54 months = $118,000.

This amount rather than the $237,336.81 figure should be adopted.

As is set out in paragraph [91] above, the arrangement in relation to Mr Barnes’ was noted at 4.2.1 of Mr Hayes’ Interim Report.

Mr Barnes submitted that the warehouse on the Property was never completely constructed, and as such, the higher rental under the lease did not come into effect. It was not for Mr Hayes to imply any terms into the lease agreement which he believed should have been part of a commercial lease. This included outgoings, CPI increases and interest on unpaid rent.

These submissions from Mr Barnes were made in the context of no CPI increases being applied throughout the 2.5 year duration of his tenancy in which he paid rent and the fact that completion of the construction of the warehouse was a precondition of rent increasing. Despite this context, Mr Hayes still inferred the terms into the lease agreement, which showed a failure to identify the terms of the lease as they had been agreed between by the parties.

Mr Hayes relied on the figure of $237,336.81 as the amount of Rent owing from the PKF Report. This figure included rent increases, CPI increase, interest and outgoings.

Mr Barnes submitted that even if a formal lease were entered into between the parties, the amount of rent to be charged, $4,000 per month plus GST, was an inflated figure given the condition of the property. Numerous findings within the valuation prepared by Colliers suggested that the condition of the property was undesirable and a considerable amount of work would need to be invested in the property. These findings made the market value of the Property significantly less than the proposed $4,000 per month.

Specifically, Mr Barnes relied upon the finding in the Colliers Report that:

Alternatively, it was submitted that the arrangement between Mr Barnes and the Partners reflected the commercial reality of the property. The findings of Mr Hayes were based on hypothetical assumptions about the commercial market and lease terms which were not applicable to a unique property such as the Newcastle Place Property. The inclusion of those terms in the calculation of the Rent was inappropriate.

Additionally, the expert report from Ms Woods, on which Mr Barnes relied, contradicted the findings of the PKF Report. Her report noted:

Mr Barnes relied on the submissions outlined above in relation to the Final Report incorrectly interpreting the commercial market for the Property. It was submitted that the warehouse was never completed on the Property and therefore the higher rental under the lease did not commence. Additionally, CPI increases had not been applied to the rent throughout the duration of the period Mr Barnes was paying rent, and thus it was inappropriate to commence applying it as Mr Hayes had purported to do in his Final Report. Had the evidence been properly considered, Mr Barnes would have realised it was incorrect to imply what he considered to be usual commercial terms into the lease. As such, those findings should not be adopted.

It was submitted that Mr Hayes’ implication of the terms into the lease agreement, which were not agreed to by the parties, was unreasonable. These included the terms in relation to the CPI increase, paying outgoings and annual interest being charged for outstanding rent.

Moreover, applying the finding of the Colliers Report that the market value for the property was “minimal to non-existent”, Mr Barnes submitted that the lease agreement entered into between the defendant and the Partners reflected this commercial reality. To imply what were said to be the usual commercial lease terms into the agreement was unreasonable. Therefore, Mr Hayes’ conclusions in the Final Report as to the Rent were findings no referee acting reasonably would have reached.

Mr Barnes made the same submissions in relation to procedural fairness as are recorded in paragraphs [59] to [60] above concerning the Subsequent Advances.

Had Mr Barnes been given the opportunity to respond to Depofo’s submissions dated 9 May 2018, he submitted that he would have presented evidence in support of the terms of the lease, evidence of the incomplete construction of the Property and evidence as to the value of the Property. Importantly, the evidence in relation to the terms of the lease was the minutes of a meeting of the Partners held on 6 October 2010 (the “Minutes”).

While the terms of the Minutes had been referred to in Ms Woods’ report, I note that it does not appear that Mr Hayes had been given a copy of the Minutes as opposed to receiving secondhand evidence of their contents. The Minutes record Mr McCarthy as absent from the meeting and being represented by proxy. The parties agree that the Minutes are the only contemporaneous evidence as to the terms of the lease of which they are aware. The Minutes record:

Mr Hayes’ Interim Report noted there was a difference in the amount of rent owing according to two different reports, one prepared by R B Clements & Co (The Clements Financial Report), and one prepared by PKF (The PKF Financial Report).

The differences between the two reports can be summarised as follows:

The final amount recorded by the PKF Financial Report was $237,336.81. It is this amount to which Mr Hayes referred in his Final Report. In accepting this figure, Mr Hayes primarily relied upon the books and financial records of the Partnership, and the Minutes. (I interpolate that this does not seem to be correct because nowhere does Mr Hayes actually say he had seen the Minutes. He does expressly rely – see paragraph [91] above – on a submission from Mr McCarthy as to what had been agreed, notwithstanding that the Minutes record Mr McCarthy as absent from the meeting and commence “Signed proxy from paul mccarthy tabled at meeting”.)

Mr Hayes made his finding in accordance with the following reasoning:

Depofo submitted that the reference to a formal lease would have been in the form of a Law Society of NSW standard commercial lease because the Bettergrow Lease was in that form. As such, it would contain terms in relation to the increase of rent in accordance with CPI, obligations upon the lessee to meet any outgoings for the Property, and an obligation on the lessee to pay interest on unpaid rent, with that interest to be calculated at 10 per cent.

Prior to the Interim Report being handed down, submissions had been made to Mr Hayes by Depofo that a formal lease would “include usual commercial terms including provisions for CPI rent adjustments, annual rent reviews, make good provisions and payments of outgoings.”

It was therefore reasonably open for Mr Hayes to find the Newcastle Place Property was subject to a formal lease, containing terms on rental increase in accordance with CPI, an obligation of the lessee to meet the outgoings of the property and an obligation of the lessee to pay interest at a rate of 10 per cent for unpaid rent.

It was also reasonably open to him to accept the Rent as being $237,336.81.

In response to Mr Barnes’ submissions on the alleged lack of procedural fairness, namely that he would have produced the Minutes in relation to the lease to Mr Hayes, Depofo submitted that notwithstanding that the Minutes were never presented to Mr Hayes, both parties have accepted those Minutes existed and have argued for a particular interpretation of those Minutes. It was this email which was at the crux of the Depofo’s submissions that the lease would include terms such as CPI increases, meeting outgoings and imposing an obligation to pay interest on unpaid rent. As such, there was no procedural unfairness towards Mr Barnes in relation to his not being given an opportunity to provide a copy of the Minutes themselves to Mr Hayes.

Furthermore, the additional evidence which Mr Barnes said he would have filed of photographs and a valuation report was connected with the finding by Mr Hayes that the rental amount should increase to $5,333.33 per month, plus GST. However, because neither party was seeking the adoption of this finding, the absence of this evidence was irrelevant.

This is a case where, to minimise further cost and delay, the Court should come to its own conclusion on the evidence before it as to the Rent. While the parties did not acknowledge this in terms, the necessity to do so is the logical consequence of the position adopted by them that the last paragraphs of Mr Hayes’ conclusions should not be adopted by the Court. I reproduce those conclusions again here for convenience, including as struck through the part which the parties agree should not be adopted:

The parties were, with respect, correct to recognise that Mr Hayes’ conclusion was unsustainable. That is not to criticise Mr Hayes, who was trying to find a commercially sensible outcome in the face of conflicting and incomplete evidence. The difficulty is that his outcome is completely disconnected from any attempt to ascertain and apply the terms of the lease agreed between Mr Barnes and the other Partners. Mr Hayes’ conclusion is, in effect, a proposal – something which he recognises when he says “should the Court approve the rent increase”.

Once Mr Hayes’ conclusion is removed, then the Final Report does not fulfil one of its purposes, being to determine the Rent. It stops at his earlier conclusion, reproduced above, that for the reasons he gives, it is his opinion that the amount recorded as outstanding rent in the Partnership accounts prepared by PKF is “understated”. That conclusion does not, contrary to Depofo’s submission, amount to Mr Hayes “accepting” the figure of $237,336.81. He plainly does not accept it as representing the Rent.

Approaching the question afresh, Mr Barnes submitted that the only terms of the lease he made with the Partners are set out in the Minutes and that the condition for the rent to increase had never been met. Therefore the Rent should be calculated on the basis of $2,200 (GST inc) per month without any other adjustment. Depofo submitted that if the Court decided to consider the matter itself, it should find the Rent to be the amount in the Partnership accounts. For the reasons which follow, the Court accepts Mr Barnes’ submission.

The parties accept the Minutes are the only contemporaneous evidence of what was agreed. It will be recalled they record:

The terms of the Minute are clear. They identify the property, the rent and the term and there can be no dispute about the parties. Agreement on those terms is sufficient to give rise to a binding agreement for a lease.

The facts that Mr Barnes then paid and the other Partners accepted rental payments of $2,200 (GST inc) per month for 2.5 years and that no CPI or other increase occurred during that period has significance for three reasons, all relating to the fact that the agreement was never reduced to writing, other than as recorded in the Minutes and notwithstanding the statement that Mr Barnes would arrange for his solicitor to prepare a “formal lease”.

First, the payment and acceptance of rent is a sufficient act of part performance so that no objection can be taken for want of writing signed by Mr Barnes.

Second, subsequent conduct is relevant to whether there is a contract, what the terms are and whether there are implied terms (see the authorities referred to in J D Heydon, Heydon on Contract, Lawbook Co, 2019 at [9.1560]). The parties’ conduct makes it clear that there was an agreement and supports the conclusion that, in the absence of an express term, there was no implied term about CPI or other increases. Making this point in a slightly different way, notwithstanding the reference to a “formal lease” being prepared, the agreement evidenced by the Minutes was immediately binding on the parties as falling either within the first or fourth class of Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 at 360 as further developed in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 628. It is not necessary to decide which.

The Court rejects Depofo’s submission that any agreement was subject to implied “usual commercial terms” concerning CPI increases, interest on unpaid rent or the like. As Mr Gotting accepted (T54:2-7), this was not an arm’s length arrangement. As such, it cannot be assumed or implied that the parties intended that other “commercial” terms (whatever they may be) would apply. The agreement as evidenced by the Minutes is complete in its essential terms. No basis for the implication of any further terms of the kind asserted by Depofo is made out.

The reference to the preparation of a “formal lease” means no more than a written document prepared by the solicitor Mr Dunshea. The term “formal lease” does not say anything about what its other terms might be. Furthermore, the fact that four years later the Bettergrow Lease (which Mr Gotting accepted was an arm’s length transaction – T54:23-25) was in the form of a standard NSW Law Society document is not a basis on which the Court can infer that a similar form would have been used for the “formal lease” referred to in the Minutes and what its terms might have been.

Having accepted that the only terms of the lease between Mr Barnes and the other Partners were those set out in the Minutes, the next question is whether the “shed” referred to in the Minute was completed so as to cause the agreed rent to double. Mr Barnes submitted that this did not happen. The evidence on this question is scant and confused by references to “warehouse” and “warehouse/amenities”.

It is common ground that a building on the property was not completed. The Court finds that this is the “shed” referred to in the Minutes for two reasons. First, a doubling of the rent suggests that a significant improvement to an existing building was in contemplation. Second, the Colliers Report valuing the Newcastle Place Property based on an inspection on 16 October 2017 describes in Section 8 the improvements on the property as being only one building comprising a warehouse and incomplete office area:

It follows that the condition for the doubling of the rent set out in the lease agreement evidenced by the Minute was never satisfied and that Mr Barnes’ liability for the Rent must be calculated without CPI or other increase at the agreed rent of $2,200 (GST inc) per month. In the absence of any express agreement about interest on unpaid rent, the Court nevertheless accepts that the Partnership should have the benefit of interest to compensate it for being kept out of money to which even Mr Barnes accepts it was entitled. That interest should be calculated on each unpaid monthly instalment from when it was due at the Supreme Court pre-judgment interest rate applicable from time to time in accordance with Practice Note SC Gen 16.

The result is that the entirety of the Final Report will be accepted by the Court except in relation to the Rent. The Court substitutes its own findings on that issue. The parties will be given an opportunity to agree a form of orders (including, if possible, as to costs) to give effect to these reasons and to complete the winding up of the Partnership.