Booth v Cerreto

These proceedings concern the working out of the consequences of a failed joint venture to develop land at Ryde.

A statement of agreed facts is set out in [18] below.

The third plaintiff, the late Mrs Maria Dominello (now represented by the co-executor of her estate) owned two adjoining properties in Ryde (Properties). Mrs Dominello was having difficulties meeting her obligations under mortgages she had granted over the Properties. The first and second plaintiffs (Mrs Booth and Mr Booth) are respectively Mrs Dominello’s daughter and son-in-law.

For the purposes of the hearing before me, there was no dispute that on 16 September 2011 the plaintiffs entered into an oral joint venture agreement (Venture) with Mr Cerreto (the first defendant) and Mr Salerno (the second defendant). The purpose of the Venture was to develop the Properties by subdividing them and building a number of residences (how many residences being in dispute).

Mrs Dominello’s contribution to the Venture was to transfer the Properties to entities controlled by Messrs Cerreto or Salerno in return for the payment out of her mortgages and a right to receive half the residences. Messrs Cerreto and Salerno were responsible in practical and financial terms for all other aspects of the Venture in return for a right to receive half the residences.

Mrs Dominello fulfilled her side of the bargain. Messrs Cerreto and Salerno did not. They took very few steps to progress the Venture. The parties fell into dispute and the plaintiffs terminated the Venture on 17 February 2016.

The proceedings, which were commenced in 2016, came on for hearing before Pembroke J in June 2019. The parties came to an agreed position that there should be a judicial sale of Properties after an accounting of their respective contributions to the Venture, which accounting they told his Honour was likely to leave few, if any issues, in dispute. The hearing was vacated and his Honour appointed an expert, Mr Troy Peisley, to undertake the accounting. Subject to some very limited questions which it fell to me to resolve, the conclusions reached by Mr Peisley were accepted by the parties.

Nevertheless, and despite the impression that was clearly given to Pembroke J, when the matter came on for hearing before me the plaintiffs also pressed their pleaded claim for contractual damages against the defendants for breach of the agreement which governed the Venture. The defendants accepted that claim remained open to the plaintiffs notwithstanding what had occurred before Pembroke J.

The Court has determined that the plaintiffs’ contract claim fails. In summary, this is because the Court has concluded (see [29] to [43] below) that it was a term of the Venture that 12 residences would be built on the subdivided Properties. By the time of the hearing before me, it had become common ground that:

This conclusion left the Court to resolve the remaining disputed issues arising from Mr Peisley’s report. That is done in [44] to [65] below. That resolution puts the parties in a position to bring in orders to give effect to the accounting between them and for judicial sale of the Properties. In the absence of agreement, there will have to be a further hearing as to costs, including all of the costs reserved by Pembroke J at the time of the hearing before his Honour.

Mr N J Kidd of Senior Counsel appeared with Mr J Darvall of Counsel for the plaintiffs. Mr A Cheshire of Senior Counsel with Mr C Carroll of Counsel represented the first to fourth defendants. As the parties did during the hearing, I shall refer to the plaintiffs and defendants as such without differentiating between them individually unless required.

A substantial part of the hearing was subject to what might be called, using neutral terms, a procedural conundrum. Unfortunately, to explain the conundrum, it will be necessary to set out aspects of the formal history of these proceedings in some detail. So that the reader of these reasons may understand the relevance of what follows, it is convenient to begin by setting out the Court’s overall conclusions about the conundrum:

It is necessary to set out in detail the procedural history which informs the conclusions summarised in the preceding paragraph.

Over the course of two hearing days (25 and 28 June 2019) the parties addressed Pembroke J in relation to their proposal that the dispute between them would be resolved by the appointment of an expert to enquire into their respective contributions to the Venture. They had reached agreement (as remained the case before me) that there should be orders for a judicial sale of the Properties.

At the conclusion of the second day his Honour delivered a short judgment recorded in the transcript but never separately published (Tcpt, 28 June 2019, 25(4)-26(17)) (emphasis added):

Conformably with his Honour’s reasons, on 12 July 2019 Pembroke J made orders including:

Annexure “A” to those orders was :

Importantly for the present purposes, the ASF was Annexure “B” to his Honour’s orders:

Pausing there, I have closely read the transcript of what occurred before Pemroke J, together with his Honour’s reasons and the formal orders. It is beyond contest the parties were representing to his Honour that, subject to any issues that arose from Mr Peisley’s report, the litigation between them would be resolved by the outcome of that report. It is clear that is what his Honour thought was happening. There was no mention by anybody before his Honour of a continuation of so much of the plaintiffs’ case as depended upon their claim in contract.

The parties and the Court were focussed on an accounting of contributions seen in cases of failed partnerships or other joint endeavours. That is perhaps explicable because it was the defendants’ abandonment of a cross-claim asserting a different form of contract from that alleged by the plaintiffs which was the catalyst for what to all intents and purposes was presented to the Court as the resolution of the proceedings. Nevertheless, Pembroke J was not invited to, and did not, make orders that would have had the effect of formally disposing of so much of the plaintiffs’ claim as was unrelated to the accounting exercise to be undertaken by Mr Peisley. Furthermore, as I have already observed (see [12(4)] above), Pembroke J made no findings of fact or law.

The case before me proceeded by reference to a Further Amended Statement of Claim filed on 6 February 2023. This pleaded the contractual form of the Venture to be:

It will be noted that while paragraph 10 refers to 12 lots, the pleading in paragraph 11 – presumably advisedly and, in my view, somewhat artificially – refers to “residential dwellings” either with or without the definite article, but not alleging any particular number.

The defence to these paragraphs pleaded:

Again, presumably advisedly, it is notable that the defence pleads back the relevant terms of the ASF, but otherwise does not admit the terms alleged by the plaintiffs.

In the course of a case management hearing (and at that point thinking for my part that all that remained for determination were issues arising from Mr Peisley’s report), I directed the parties to prepare an agreed statement of issues. The parties agreed on this list of issues (issue 1A being proposed by the defendants and referring to “the terms referred to in paragraphs 3 and 4 of” the ASF):

I should record at this point that, notwithstanding the list of issues, at the hearing before me the proceedings resolved into two issues: the plaintiff’s claim in contract and determining the remaining disputes between the parties arising from Mr Peisley’s report as to how the final accounting should be done between them.

Given that contractual damages are intended to put the innocent party, as far as money can do it, in the position they would have been in had the contract been performed, in the course of argument I sought to elicit from Mr Kidd SC what, if any, contractual term the plaintiffs contended for on the question of how many residences were to be built: for example, a reasonable number, the maximum number permissible, or that number which represented the highest and best use of the Property. Mr Kidd SC submitted that the agreement was to build “residences”, which meant at least two, but otherwise contained no obligation as to number.

In a further endeavour to bring some clarity to the question, during the course of the hearing I directed the plaintiffs to provide the Court with a definitive statement of the contractual terms for which they contended. The document which was provided relied on some, but not all of what is set out in paragraphs 3 and 4 of the ASF, and referred to “residences” without the definite article or any number:

The plaintiffs made clear that their case was for expectation damages based on the breach of the defendants’ obligation to build “residences” on the Property. There was no doubt that they had not build any. The case was not one seeking compensation for loss of a chance.

The plaintiffs submitted that because the defendants’ obligation was to build “residences”, damages should be assessed by the Court making a reasonable estimate, based upon such evidence as the Court had, of the number of residences that it is likely would have been developed had the Venture been performed.

The assessment of damages in contract can only proceed when the term which is said to have been breached is identified with precision. In this case, the starting point to identify that term is to consider the status of the ASF.

Assuming it may have been admissible, the Court had no evidence, for example, from the then legal representatives about what the parties thought or agreed was the status of the ASF. For the reasons set out in [19] above, the Court has no doubt that the ASF had no status beyond forming part of the agreed instructions to Mr Peisley. It is very unlikely that well advised parties (which these clearly were) would have produced a document like the ASF if their intent was to agree and record definitively the contractual terms of Venture. The fact that the plaintiffs pleaded those terms in the way they did in paragraphs 11 and 12 of the Further Amended Statement of Claim fortifies me in the conclusion that they (or, perhaps more relevantly, their legal advisers) did not regard the ASF as a binding and definitive statement of the contractual terms of the Venture for the purposes of the case for contractual damages.

In the absence of the ASF, it is necessary for the Court to find what was the relevant contractual term of the Venture. This must be by reference to the evidence. The defendants did not go into evidence. The only evidence before the Court as to the terms of the Venture (which were said to be oral) was these unchallenged paragraphs of an affidavit sworn by Mrs Booth (in which “Mum” refers to Mrs Dominello):

The Court finds based on that evidence that it was a term of the Venture that the defendants would build, or cause to be built, 12 residences on the Property. The Court accepts Mr Cheshire SC’s submission to that effect. Although not a dispositive consideration, I am fortified in this conclusion because it accords with common sense. While the Venture was conceived in an informal, perhaps even (with no disrespect intended) amateur, way, as a matter of common sense one would expect the number of residences to be an important matter for the parties to have agreed. With respect, the contention advanced on behalf of the plaintiffs that the agreement was for the building of “residences” with no attention to the number of residences struck me as being uncommercial and unrealistic, and which the Court would only find with the benefit of the clearest evidence.

However, practically the same result follows even if (contrary to the conclusion in the preceding paragraph) the ASF was the agreed, definitive statement of the contractual terms of the Venture. For convenience, I again set out paragraphs 3 and 4 of the ASF:

In this context, I have not overlooked Mr Kidd SC’s submission that by agreeing to question 1A in the list of agreed issues (see [25] above), the defendants had “admitted” that paragraphs 3 and 4 of the ASF contained the contractual terms of the Venture. While I do not accept that submission, the answer does not matter because, even if it did constitute such an admission, the Court must then resolve whether the contractual terms included the reference to the “estimated 12 residential units”.

With perseverance and ingenuity, Mr Kidd SC sought to persuade me that while other parts of paragraphs 3 and 4 were contractual terms, the reference to “an estimated 12 residential units” was not. I accept Mr Cheshire SC’s submissions as to why that approach is untenable, which I express as follows.

First, it may be accepted for the sake of the argument that paragraph 4 contains contractual terms. However, that paragraph says nothing about how the redeveloped lots were to be divided, which is dealt with in paragraph 3. Therefore, paragraph 3 must also contain contractual terms.

Second, and further and alternatively to the previous paragraph, “the residences” in paragraph 4(iii) must be understood as a reference to the “estimated 12 residential units” in paragraph 3. In other words, the answer to the question “what are ‘the residences’ referred to in paragraph 4(iii)?” must be “the estimated 12 residential units referred to in paragraph 3”.

Third, even if the previous paragraph is wrong, the natural and ordinary reading of everything after “for the purpose of” in paragraph 3 is that all of those words (including the reference to the estimated number of units) are contractual terms. It is for this reason that I do not accept Mr Kidd SC’s submission that the agreed fact concerned the purpose for which the parties had entered into the Venture, and did not set out contractual terms. “For the purpose of” is, in my respectful opinion, synonymous with saying the parties entered into the Venture to do the specified things (develop by subdividing, building and distributing). Furthermore, because the final section of paragraph 3 is the only reference to the distribution of the developed lots, Mr Kidd SC’s submission would compel the unnatural reading that “for the purpose of” governed all the words up to “and thereafter” but not the balance of the sentence.

Fourth, I do not accept Mr Kidd SC’s submission that the terms would not, properly construed, including something as uncertain as an estimate. There is no reason of principle or practicality why parties could not agree on producing an “estimated 12 residential units”, although there may uncertainty about what number would fall outside the range of the estimate. There was no dispute that if the estimate was a contractual term, to build only three residential units would be a breach of an obligation to build an “estimated 12 residential units”.

Whether the term was (as I have found in [34] above) for the construction of 12 residential units, or for an “estimated 12 residential units”, the plaintiffs claim for contractual damages must fail, even though there is no doubt the defendants breached such a term however expressed. This is because it was common ground, based on the expert town planning evidence, that the effect of the applicable planning laws and regulations was that no more than three residences could have been built on the Properties. Twelve (or an estimated 12) residences could never have been built on the Properties, so the plaintiffs have suffered no compensable loss by reason of the breach.

The plaintiffs did not resist that conclusion. Because there was no contest as to this outcome if the Court came to the view that the Venture required the construction of 12 or an “estimated 12” residences, the parties did not devote any attention to the legal analysis underpinning that result. For completeness, I note that it could have been reached by reference to principles of causation, or that the impossibility to obtain approval for that number of residences would have given the defendants a good defence to a claim for breach of the obligation (Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221 at 243-244), or because the Venture would have been frustrated because it was impossible to obtain the necessary development approval (Dalmia Dairy Industries Ltd v National Bank of Pakistan [1978] 2 Lloyd’s Rep 223 at 253).

There were three disputes arising from Mr Peisley’s report and how the proceeds of sale from the judicial sale of the Properties would be applied. The parties helpfully produced schedules and forms of order which enabled the Court to understand what the remaining issues in dispute were. I will deal with each of these in turn.

In determining how much should be allowed to the defendants as a contribution to the Venture, there was a significant difference between the parties as to how the defendants’ discharge of Mrs Dominello’s mortgages over the Properties should be treated.

The defendants relied on Mr Peisley’s finding that they had contributed $1,305,654 in paying out Mrs Dominello’s loans over the Properties. They then contended that they were entitled to interest at court rates on that amount, which was $820,075 calculated up to 3 October 2023. Mr Cheshire SC submitted that, as Mr Peisley had correctly done, the question of contributions was determined on a cash basis. The defendants had in fact paid out Mrs Dominello’s loans to the value of $1,305,654.

For the purposes of the defendants’ calculations, they then said that the borrowings from Westpac and ANZ which the defendants had made to finance the Venture, including to pay out Mrs Dominello’s loans, should be treated as personal borrowings, such that the primary amounts of those loans and the interest paid on those loans were matters for which the defendants should not receive a credit.

The plaintiffs submitted that because the defendants had funded the payment out of Mrs Dominello’s loans from the loans which the defendants had taken out over the Properties and which would be repaid upon their judicial sale, the defendants’ contributions to the Venture were relevantly limited to the interest payments referrable to the Venture on the loans, together with interest on that amount. Having regard to Mr Peisley’s report, as subsequently adjusted by him during the giving of oral evidence, the interest relevantly paid by the defendants on the loans that they had used to pay out Mrs Dominello’s loans was $355,071, with further interest thereon of $138,547.

Mr Kidd SC submitted that the Court should take the same approach as that adopted by Parker J in Makaritis v Makaritis (No 3) [2023] NSWSC 409, a similar case of a failed joint venture in which his Honour had to determine the parties’ respective contributions. In that case, his Honour said (emphases added):

I accept Mr Kidd SC’s submission. In my respectful view, the reasoning which commended itself to Parker J in Makaritis is equally applicable to this case. In assessing contributions, the Court must look at what actually left a party’s “pocket” as it were, as opposed to including amounts which will be paid back to secured lenders upon judicial sale.

It was common ground that the relevant loans were interest only and that the defendants had not made any capital repayments to the lenders. I agree with Parker J that for the purposes of determining contributions in a failed joint venture, the contribution is the interest the defendants paid on the loans, insofar as they were referrable to the Venture (it being accepted, and taken into account by Mr Peisley, that insofar as the defendants had borrowed money and paid interest not referrable to the Venture, these were not matters for which they could claim credit upon an accounting of the Venture or otherwise visit on the plaintiffs).

Finally on this issue, to the extent it may be relevant, I do not accept Mr Kidd SC’s argument that the defendants were contractually prohibited from borrowing on the Properties to pay out Mrs Dominello’s loans (as opposed to developing the Properties). I am unable to discern any such term (express or implied) by reference to any of the versions of the contractual terms of the Venture advanced by the plaintiffs which I have set out above in considering their claim in contract.

The plaintiffs sought to exclude all or half of council rates and land tax claimed by the defendants as contributions insofar as they related to one of the Properties, because Mr Salerno had transferred that property to the fourth defendant for his own reasons unrelated to the Venture. As Mr Kidd SC put it, nothing was done by the fourth defendant for the purposes of the Venture and therefore why should land tax and council rates paid by the fourth defendant in respect of that property be credited to the defendants as a contribution to the Venture?

I do not accept that submission. I prefer Mr Cheshire SC’s argument that someone had to pay those holdings costs pending sale of the Properties, and all parties were to benefit from those costs being paid by reason of the judicial sale of the Properties. The Court finds that the whole of those amounts are properly characterised as contributions of the defendants to the Venture. For ease of identification, those amounts are $12,635, $13,769 and $35,038, together with the interest calculated thereon.

In their calculation, the plaintiffs further sought to reduce the defendants’ contribution by deducting an amount of $1,435,346 which was said to represent the current balance of the defendants’ borrowings against the Properties less what they had borrowed to repay Mrs Dominello’s mortgages. Mr Kidd SC submitted that by using the Properties to borrow funds for their own purposes unrelated to the Venture, the defendants had “effectively taken away from [the Venture] by granting the mortgages to Westpac and ANZ for the purposes of loan moneys used for their purposes” (Tcpt, 3 October 2023, 143(32)-(34)). Mr Kidd SC went on to submit (Tcpt, 3 October 2023, 143(38)-(47)):

The effect of the plaintiffs’ proposed deduction was to produce a “total net contribution” by the defendants to the Venture in a negative amount.

Mr Cheshire SC submitted that to seek to bring to account the borrowings against the Properties in so far as they were unrelated to the Venture was not to compare like with like. Those borrowings had no negative effect upon the Venture, the defendants paid the interest on the amount and the calculations of both parties for the purposes of the accounting exercise excluded as between the parties the effect of repayment of those loans upon judicial sale of those amounts unrelated to the Venture.

The Court accepts Mr Cheshire SC’s submission. The deduction proposed by the plaintiffs is in respect of amounts irrelevant to the present accounting exercise. In no legally cognisable way can it be said that the defendants “took the joint venture for their own purposes” so as to give rise to a right to compensation of some kind (including by deduction) from the defendants.

The Court finds that the parties’ contributions are as set out in the defendants’ schedule attached to their outline of closing submissions dated 29 September 2023 subject to these adjustments to reflect the conclusions in [45] to [58] above:

Schedule A Schedule A (143420, pdf) to these reasons is a working out of the adjustments referred to in the preceding paragraph. The Court finds the parties’ financial contributions to the Venture to be as set out in Schedule A. The interest calculations will need to be updated at the time final judgment is entered.

The parties were in dispute about how any surplus proceeds of sale of the Properties remaining after payment out of all other amounts (including the parties’ contributions) should be divided.

Mr Cheshire SC submitted that any surplus should be divided in accordance with the parties’ percentage contributions to the Venture. The evidence did not support any inference of a common intention that if the Venture was not completed, each would benefit from any surplus equally. The parties simply had not turned their minds to it. Furthermore, while it was agreed that the result of the Venture would be to give each side half the residences that would have been built, that was a very different thing to the present exercise, which was concerned with returning the parties’ contributions and imposing a just solution as to any surplus. An entitlement to half the residences could not be converted into an entitlement to half the surplus. The just solution was to divide any surplus in accordance with the parties’ respective contributions.

Mr Kidd SC submitted that precisely because the parties had not turned their minds to the situation with which they were now confronted, equity was equality in relation to any surplus. He referred to Parker J’s approach to a similar question in Makaritis:

Mr Kidd SC also drew attention to Parker J’s decision in Woods v McKinlay (No 2) [2021] NSWSC 1510. His Honour said:

I accept there is force in the contention that any surplus should be divided in the same proportions as the parties’ contributions. As a result of the readjustment referred to in [59] above, on my calculations the contributions of the parties are 42.77% as to the plaintiffs and 57.23% as to the defendants. Nevertheless, on reflection, in my respectful opinion the better approach is that adopted by Parker J in the two cited cases, and that the just outcome is therefore that any surplus should be divided equally between the parties for these reasons:

The orders for judicial sale of the Properties should generally be in the form proposed at the conclusion of the hearing by the defendants and refined in the course of argument. I will circulate a draft to the parties for their consideration upon publication of these reasons.

It was not entirely clear if there was a dispute between the parties as to the treatment of capital gains tax. For the avoidance of doubt, I accept the approach proposed by the defendants in their draft orders that capital gains tax on the sale of the Properties was to be deducted before payment to the parties of their contributions and any surplus. I accept Mr Cheshire SC’s submission that the parties had contemplated an arrangement, upon which they had in fact embarked, that would inevitably have led to a liability for capital gains tax in the companies to which the Properties were transferred by Mrs Dominello upon any transfer back of the completed residences. In other words, the parties contemplated that capital gains tax would be shared or, putting the matter colloquially, “come off the top”.

The Court will give directions in relation to submissions as to costs to the extent the parties are unable to resolve that issue.