Brooker v Friend & Brooker & Anor

MASON P : I have had the benefit of reading in draft the judgments of McColl JA and Basten JA. I gratefully adopt McColl JA’s summary of the facts.

The claim ultimately pressed on behalf of the appellant was for contribution by Mr Friend (the respondent) with respect to all or part of the outstanding balance of the SMK loan still owing by the appellant. Friend & Brooker Pty Ltd (the company) is unable to assist the appellant to repay the balance of this debt which he incurred on its behalf.

The appellant incurred this debt in 1986 when he borrowed $350,000 from SMK Investments Pty Ltd, securing repayment by granting mortgages over two properties, one owned by himself and his wife, the other owned by himself and his mother. $250,000 was paid to SMK on account of outstanding interest in July 1993 when the company, at the joint direction of the appellant and the respondent, forwarded this sum directly to SMK out of the funds recently received from Eurobodalla Shire Council. The appellant appears (without reimbursement from the company) to have paid some additional money out of his own funds to SMK. But a large and growing sum remains outstanding to SMK. With the accrual of interest, the balance of the appellant’s indebtedness to SMK stood at approximately $1.3 million in November 2004.

It is not suggested by the respondent that the SMK mortgage debt is statute-barred or otherwise unenforceable. It is secured by mortgages. I interpret the trial judge’s finding that SMK is not “presently proposing to claim against [the appellant] for repayment of the SMK loan” as a statement that the creditor is not pressing, not as a statement that the creditor has released the debt. The passage from Mr Peterson’s evidence set out by Basten JA includes the statement: “I’m not planning to execute against him at the moment….” . The lender would appear to have a right to immediate payment from the appellant (cf Mahoney v McManus (1981) 180 CLR 370 at 376).

The SMK loan had been incurred by the appellant for the purpose of the ongoing business venture that was being conducted by the two men primarily through the company. The appellant borrowed the money from SMK with the prior concurrence of the respondent. The money was on-lent by the appellant to the company and, under the direction of the two men, applied by the company in discharging certain pressing debts. This happened at a time when the ANZ Bank had frozen the company’s account and when other creditors were pressing. If the company had been put into liquidation at that time then both “partners” would have been considerably worse off than eventuated. Neither wanted this to happen. The company’s obligation to reimburse the appellant was formally acknowledged in its balance sheet for the year ended 30 June 1987 which treated the on-lent SMK loan money as part of the appellant’s director’s loan account.

The trial judge correctly held that the respondent was not jointly liable at law to SMK to repay the SMK loan. The appellant was the only borrower (leaving aside the situation of his wife and mother). But this is not the end of the appellant’s contribution claim which is based on much more than the simple borrowing.

The appellant relies on the conversations that preceded incorporation in 1977 ( “the para 8 conversations” ). They are set out by McColl JA. He also points to the structure and operation of the company which, over many years, was conducted by the two men on the basis of shared ownership and control, mutual cooperation and close friendship. The company was only one of several corporate and trust entities used as the business expanded, but the pattern was maintained. There were frequent affirmations of equality, sharing and mutual reliance over the years, subject to particular projects being expressly stipulated as the concern of one only of the parties. All decisions of consequence were taken jointly by the two men who were friends as well as co-venturers in a business that expanded and contracted as opportunities presented themselves (Blue 19-27, 33). The respondent referred to the appellant as his “partner” in a 1987 letter (Blue 70).

Reliance is also placed upon the pattern of similarly structured borrowings involving the directors each from time to time borrowing externally (thereby pledging his own credit) for the purpose of on-lending to the company to meet its primary needs. The SMK borrowing was a very substantial one, but was otherwise typical in the manner in which finance was often acquired to keep the company afloat during the long years when Eurobodalla Council withheld payment of moneys that were due to the company.

The 1986 borrowing was preceded by a conversation between the two men that provided yet further evidence of the fact that the appellant acted with the concurrence of the respondent and for the purposes of the wider venture in which they were engaged. It included the following exchange: Brooker: Graham and Sue Peterson have offered to loan us $350,000 to take the pressure off until we finalise the claim against the Council. Friend: What do you think? Brooker: We do not have a choice. If we do not accept there is no way we can repay Alcon or the De Bakkers or maintain the Trade Credits loan. Friend: Well then, we should do it.

By 1990 the company had ceased to trade. Thereafter, it concerned itself exclusively in the pursuit of the bitterly contested claim for moneys owing by Eurobodalla Council. During the 1990s, discussions between the two men focussed upon the arbitration proceedings and decision-making as to the order in which company debts should be discharged. Some of the creditors paid off in the early stages were members of the respondent’s family (Blue 36). Costs incurred in the litigation were also given priority (Blue 37).

On 8 December 1993, the directors resolved that the company would pay themselves interest on the loan accounts at Supreme Court rates, backdated to 1984 (presumably on the basis that interest would run from the time of individual borrowings that remained undischarged). This was done so that “it will look better… to the Bank” (Blue 19).

The two directors eventually discharged all external company debts with the proceeds of the Eurobodalla claim. These included debts owed to the directors for on-lending transactions, except for the SMK loan involving the appellant.

As indicated, in July 1993 $250,000 was paid by the company directly to SMK in partial discharge of the appellant’s indebtedness to that entity. Both men knew that the payment (which was appropriated towards outstanding interest) left a substantial sum still owing by the appellant to SMK and by the company to the appellant.

In September 1994 there was a conversation deposed to by the appellant as follows: He said: I would like to draw $12,500 from the money now in the account. I suggest we draw equal amounts. I said: We must be careful as to how the money is disbursed. I don’t think there is enough to pay all our outstanding debts. He said: I need the money urgently. Mr Friend’s response was delivered in a forceful and what I perceived to be an angry tone. I said: Okay. I’ll go along with that provided we treat this as payment “on account” pending a full analysis of our position.

The two men met at the appellant’s home in about October 1994 where the following conversation took place: Brooker : There is not enough to pay all the debts. We have about $80,000 and other creditors, some smaller amounts and the debt to the Petersons is nearly a million dollars. We should pay out what we’ve got and then work out between us what we need to do to cover the shortfall. Friend: I don’t accept that. I don’t accept liability for the debt to the Petersons. I saw how much it had grown with interest when I was doing the calculations for the arbitration. Brooker: But that’s not right. That money went to pay debts of our business. Friend: You really should have serviced it and if you couldn’t, you should have sold your property. Brooker: That’s no good to me. I will have to think about where we go from here.

This belated denial by the respondent was pregnant with a concession that the SMK/Petersons loan represented a cost initially incurred by the appellant for the purpose of the venture as well as a qualified admission of the respondent’s obligation to contribute towards exonerating the appellant of this debt. The admission was qualified in that a spurious excuse was advanced by the respondent to justify his refusal to assist his colleague further. The excuse raised a point that was irrelevant, not pleaded, never established in the evidence and not relied upon in submissions in this Court. The excuse was irrelevant because there was nothing to indicate that the terms of the SMK borrowing (originally sanctioned by the respondent) were improvident or that the appellant had undertaken to discharge it within any time frame. Nor was it established that the appellant had ever disabled himself from paying off the balance of the loan. He simply lacked the cash resources to do so, having regard to various commitments. The respondent was not kept in the dark on this matter.

The picture that emerges is that the two men and their business were cash-strapped at the relevant time.

Between 1993 and 1998 the company disbursed effectively all of its funds. The details are set out in paras 20-24 of the judgment at first instance (see McColl JA’s reasons at [63]). The disbursements were effected pursuant to instructions from the appellant and the respondent jointly. Nothing in the terms of those discussions and instructions involved the appellant relinquishing his claim, repeated from time to time, that he anticipated a final adjustment as between the two men of the burden of discharging the outstanding SMK loan. The effect of these transactions was that the company effectively exhausted its assets in discharging all external obligations and making a series of agreed payments to the two men (in equal amounts) totalling $345,000 paid to each man.

The payments to the men during this period were expressed as “interest free loans” by the company repayable on notice (Blue 349ff). The reasoning behind this appellation is obscure. Perhaps the men realised that there might ultimately be a need for the company to recall the funds for some purpose. (If this was the case the respondent has never offered to join in the company demanding that he should repay his “interest free loans”.)

What is slightly clearer is that the terms of the loans left the directors free to spend the “borrowed” sums as they chose. In several instances it was the respondent who proposed a particular set of paired disbursements because he had a particular need for the money that was to be advanced to him. It is not suggested that the moneys were disbursed earmarked to be applied in a particular manner. I therefore agree with Basten JA (at [198]) that the fact that the appellant did not use the funds to repay this particular SMK debt is beside the point. (In fact he spent a portion of his payments in meeting other SMK borrowings that had been on-lent by him to the company in similar fashion to the major one still in question.)

In January 1995 the appellant presented the respondent with a list of calculations showing that his contribution exceeded the respondent’s by approximately $900,000. He proposed payment of the ANZ Bank and other small creditors with the balance of the money held in trust by the parties’ solicitor going to Mr and Mrs Peterson (SMK). The respondent refused point blank to accept any such proposal. Subsequently the parties met from time to time. They arranged to pay out the external creditors and endeavoured (ultimately without success) to reach agreement on the matter presently at issue.

The pattern of drawing smallish sums in equal amounts commenced after the third payment from the Council in the sum of $900,000 in about September 1994. It appears that this was done on the initiative of the respondent and the basis of his need for money urgently (Blue 38, 39). The appellant acquiesced, while making it clear that these payments were “on account” pending a full examination of the situation as between the two men (Blue 39). The consequence of these arrangements was that out of the final payment from the Council the parties received $345,000 each by various instalments paid over a three year period between 1995 – 1998.

The company has not been wound up, but its only remaining asset is approximately $6000 in the bank.

Had the parties cooperated in jointly recalling the “loans” made one or both of to them out of the proceeds of the Eurobodalla claim or in putting the company into liquidation so that preferential payments might be investigated and recovered, then an alternative solution to the present impasse might have presented itself. But this is neither here nor there because neither party seeks such a remedy. The basis of the appellant’s right to contribution

Undoubtedly the parties contemplated that the company would be the primary source for repaying all company debts, including moneys owing to the directors themselves. But the present issue presents itself because the company’s coffers are bare. The respondent says in effect that this is the appellant’s bad luck and he points to the absence of any contract or conversation addressing the personal claim now made.

I do not think that the analysis is greatly assisted by invoking the “fiduciary relationship” label. In Blythe v Northwood (2005) 63 NSWLR 531, I drew attention to authorities emphasising the need to delineate the subject matter over which any fiduciary obligation extends and I cautioned against discovering fiduciary obligations that are prescriptive rather than proscriptive in nature. The fiduciary label is often invoked in a conclusory sense and it frequently disguises as much as it reveals.

The facts need to be examined in detail to see if they disclose a broader arrangement that, consistently with the formal structures and contracts, generated an obligation in conscience requiring the respondent to contribute towards exonerating the appellant from the plight he finds himself in at the end of the venture.

The discussions and transactions summarised above were redolent of a broad and evolving joint venture in which two “partners” participated on terms of equality and mutual trust. Absence of an express or extant contract of partnership is not conclusive. In Bartels v Behm (1990) 19 NSWLR 257 one member of a partnership borrowed money at interest to enable partnership debts to be discharged. This occurred after termination of the partnership but before winding up was completed. The borrowing partner acted because he was being pressed by a bank that held a mortgage over his home to secure the repayment of the partnership overdraft. He was held entitled to contribution with respect to the interest incurred on the borrowing. The entitlement to contribution was not denied by the fact that the partnership was dissolved by the time the borrowing was made.

In Cummings v Lewis (1993) 41 FCR 559, Cooper J said (at 593), citations omitted): The circumstance which gives rise to an equity to compel contribution where there is a common liability or a common risk is that satisfaction of the liability or the loss occasioned by the risk has been borne by one of a number. Once the equity has arisen it is then that “the duty of contribution extends to all persons who are within the scope of the equitable obligation”. It is the equity which has arisen which the courts enforce. The principle of equity which operates to create the equity is: he who enjoys the benefit ought also to bear the burden.

I agree with McColl JA and Basten JA that “the para 8 conversations” that took place during 1976 and 1977 were not in themselves sufficient to generate the right now invoked by the appellant. But they are not irrelevant to its proper analysis, unless (by circular reasoning) one assumes that the creation of the corporate structure to which the conversations were primarily directed exhausted their materiality.

The appellant’s claim for contribution also bases itself upon the events surrounding the taking out of the SMK loan. Indeed, even later events are also relevant, because the claim depends to some degree upon the very fact that the primary obligee (i.e. the company) became unable to repay the appellant’s loan account, swollen as it was due to the on-lending of the SMK money, due to the parties’ decisions to pay all other external debts first and to the respondent having persuaded the appellant to make the series of “loans” to the directors in the context in which that happened.

Unlike the learned trial judge, I do not regard the appellant’s claim for contribution as contradicting any aspect of the corporate structure adopted by the two men as the vehicle for conducting the relevant part of their business activities. The appellant is not seeking to disturb the statutory scheme of distribution of assets for an insolvent company. Indeed the company’s inability to repay any more of its indebtedness to the appellant referable to the SMK loan is the critical starting point, though by no means the finishing point, of the appellant’s claim for contribution. The question at issue is whether the arrangements between the two men referable to their affairs generally and the SMK loan in particular were such as to generate a right of contribution in the circumstances that have come about.

The principles of contribution and recoupment are discussed authoritatively by Kitto J in Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342. After tracing the historical origins, Kitto J drew attention to the underlying doctrine of equality as the basis of the common law and equitable rules. He said (at 350-1): The right arises at law when one of several persons has paid more than his proper share towards discharging a common obligation … and it arises in equity when a liability of one of several to pay more than his share has been ascertained’ but for present purposes this difference is immaterial: what is important is the reason, namely that payment by the one discharges not only himself but each of the others, and qui sentit commodum sentire debet et onus.

There are well known categories (co-sureties, joint contractors, partners, trustees, insurers etc) to which this general principle has detailed application. I have endeavoured to summarise my understanding of the principles in Mason and Carter, Restitution Law in Australia chapter 6. There must be a common obligation ( Burke v FLOT Pty Ltd (2002) 209 CLR 282), but an equitable principle such as contribution is not confined by legal structures. In Ramsay v Lowther (1912) 16 CLR 1, Isaacs J said (at 23-4): Marshalling regulates the order of different classes of assets, and does not operate between assets of the same class. As between the latter the question is, properly speaking, one of contribution, and if that be borne in mind it supplies the answer to the problem we are considering. A few words of Knight Bruce VC, in Tombs v Roch [(1846) 2 Coll 490 at 499, 500; 63 ER 828 at 832] are instructive: “Contribution, … if it differs from marshalling, does so in species rather than generically, in form rather than in nature. “Marshalling and contribution are, each of them, the adjustment between several persons of their rights respectively, inter se, in respect of a charge or claim, which, affecting all of them, or properties belonging to all of them respectively, has been or may be enforced in a manner not unjust, as far as the person is concerned by whom it was or may be enforced, but not just as between the persons or properties liable.”

Of particular relevance to the present case is the principle that the right of contribution rests upon matters of substance, not form. Thus, it was established in the basal case of Dering v Earl of Winchelsea (1787) 1 Cox 318; 29 ER 1184 that a right of contribution between sureties could arise whether they were jointly bound, jointly and severally bound, or severally bound by the same or different instruments. The parties did not have to know of each other’s existence at the time they incurred their primary liabilities. What was critical was that the sureties had “a common interest and a common burthen” (at 273; 1278 per Lord Eyre CB). See also James Hardie & Coy v Wyong Shire Council (2000) 48 NSWLR 679; Belan v Casey (2003) 57 NSWLR 670.

The focus on substance over form is illustrated by the cases involving co-sureties where extrinsic evidence is permissible to show that the true arrangement was that one debtor was principally liable and the other liable as surety only ( Tate v Crewdson [1938] 1 Ch 869) or that two persons were in substance each sureties for another’s debt ( Sherwin v McWilliams (1921) 17 Tas LR 9).

In the present case, the whole venture was grounded on equality as between the two men who became the joint controllers of the company and who, until the falling out, reposed trust in each other, sharing all major decision-making. The general discussions in 1976 and 1977 and the particular discussions referable to the SMK transaction illustrate this mutuality, interdependence and basic equality. Undoubtedly, the men chose the company as the corporate vehicle for their “partnership”. It enabled them to function in particular ways as regards third parties and, to a large degree at least, it provided the juridical structure within which the rights of the two “partners” were to be worked out. The appellant’s willingness to trust the respondent continued during the 1993-1998 period when the appellant acquiesced in the respondent’s request to empty the corporate cupboard by disbursing all of the company’s assets in legitimate though apparently more pressing claims.

But the men were prepared to be flexible when it suited them and to move beyond the corporate structure when it was necessary or appropriate to do so. The SMK loan is an illustration of this, and it was not the only external borrowing that was procured by one of the men before being on-lent to the company common purposes being pursued through the company structure (see Blue 502ff).

None of these arrangements departed from the basic and enduring principle of equality that was spelt out in the “para 8 conversations” and reflected in the way that the company was administered over many years.

The respondent argues, in effect, that there was no right of contribution because the parties never squarely addressed the possibility that eventuated. But the absence of a contractual arrangement as between the parties to the contribution claim is never controlling ( Dering ).

Persons who embark upon a joint venture on terms of equality may be thinking more of division of profits rather than sharing of losses. Be that as it may, the principles of equitable contribution which come to the fore when a venture sours are designed to maintain the spirit of equality in the bad times as well as the good. The sky was already cloudy in 1986 when the SMK transaction was negotiated and put into place. The appellant assumed the primary risk of the borrowing, but with the prior approval of the respondent and for the mutual benefit of the two men who were concerned to keep the company afloat.

This was always a risk (burden) assumed by one venturer for the benefit of both. The two men must have contemplated the possibility that the company might prove unable to repay the money on-lent or otherwise reimburse the appellant for his costs of the borrowing. It is to me inconceivable that the appellant would have stuck his neck out to the extent that he did were it not on the basis that the two men were continuing to conduct their affairs generally upon the basis of equality. It is equally inconceivable that, if the possibility of ultimate company failure had been raised in 1986, the respondent would have said: “You alone bear that risk” . On the contrary, the parties proceeded to repose trust and confidence in each other to deal equitably with each other in all matters touching the business venture. It would have been unconscientious then, just as it is unconscientious now, for the respondent to have said: “You alone bear that risk if the unthinkable happens” .

The shared decision-making touching the administration of this loan and the application of the loan proceeds shows that the parties were still conducting the business on the basis of mutuality and equality.

There is no injustice in requiring the respondent to contribute towards exonerating the appellant as to half of the true cost of the borrowing. Interest-free loans outside family arrangements are rarities. The conversation between the two men that preceded the relevant SMK transaction gave notice, if notice were required, that the borrowing was going to be made. I infer that SMK required the appellant to pledge his credit and to provide the security of two mortgages because it was unwilling to advance money directly to the near-insolvent company. I also infer that the respondent always knew that the SMK borrowing involved interest obligations.

The subsequent arrangement whereby it was agreed that the company would pay interest at Supreme Court rates on the directors’ loan accounts was a further recognition that borrowing has a cost that is usually reflected in an obligation to pay interest. But this arrangement did not, in my view, alter or cap the underlying obligation now belatedly called upon (in the circumstances of the company’s insolvency) to share in the exoneration of his “partner” as regards the one remaining external debt arising out of the venture. A fortiori, in circumstances where the arrangements entered into by the respondent in the mid 1990s helped bring about the company’s repudiation of liability to pay the directors’ loan accounts.

Basten JA agrees with McColl JA that the relationship between the parties required an equality of contributions in relation to the financial accommodation provided to the company. So do I, for the reasons I have endeavoured to express. Basten JA nevertheless would withhold relief on the grounds set out towards the end of his reasons.

The first ground is that the appellant has not established that the proceeds of the SMK loan have not been repaid to him by the company. I disagree with Basten JA’s characterisation of the “interest free loans” to the directors in the mid 1990s as entailing repayment of moneys owing to the appellant and therefore effectively appropriated to the SMK transaction. The “loans” were not treated in this manner by the company, nor was there any discussion between the two men that imposed on the appellant any obligation to use the “loan” to pay off SMK. The very fact that identical, equally unappropriated “loans” were made to the respondent suggests that each man chose to receive the money on terms that left him free to spend the money as he wished, also bearing in mind that the “loan” label put each at risk of the funds being recalled by the company if the two men jointly resolved to require their return. Identical “loans” made in these circumstances in no way involved the adjustment of the appellant’s disproportionate burden stemming from the SMK transaction.

The second “problem” discerned by Basten JA is that the appellant has not established any factual basis for inferring that it is unconscionable of Mr Friend not to pay half the interest on the loan obtained by Mr Brooker from SMK. I disagree with this conclusion and with the reasoning upon which it rests. The conclusion proceeds, implicitly, from the starting point that the appellant’s claim is grounded on the basis of the “fiduciary relationship” discussed by McColl JA. I prefer the somewhat sharper equitable principles of contribution as the basis of analysing the rights of the parties. If those principles are established, there is in my opinion, no additional requirement for the plaintiff to establish unconscionable behaviour (cf Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 at 423 [20]-[26). But I do not shrink from labelling the respondent’s conduct as unconscientious in the circumstances.

Basten JA then moves to more detailed considerations. He instances the August 1984 decision to consolidate all loans sourced to third parties who were family members or friends of one or other of the directors, into the directors’ loan accounts, coupled with the 8 December 1993 decision to pay interest at Supreme Court rates on the directors’ loan accounts.

I would first point out that the 1984 decision preceded the SMK transaction. I acknowledge that the SMK loan was subsequently treated as a director’s loan account transaction as regards the appellant. But this matter of internal company accounting did not, in my view, impact upon the justice of the appellant’s claim to a just contribution in the event, which has happened, of the company being unable to meet the appellant’s loan account. Nor were the resolutions about loan accounts inconsistent with the proposition that the company would be responsible for the cost of funds to the directors. On the contrary, the resolutions showed the company’s awareness (and the parties’ awareness) that these external borrowings by the directors were nevertheless for company purposes.

I am equally unconcerned about the absence of contemporaneous accounts as regards the cost of funds to the directors and the spectre of accounting complications. The directors had other matters on their minds at the relevant time. And, in short, they trusted each other in many ways. They were not at that stage thinking of the “what ifs” that might eventuate if the company proved unable to meet its obligations under the directors’ loan accounts.

The appellant’s claim does not involve the taking of accounts, because the two men arranged matters in such a way that all external debts were discharged. The appellant’s claim is confined to equalising the burden of the SMK loan.

This is not to say that there may be no outstanding issues as regards quantifying the sum which the respondent should be ordered to pay. For one thing, the current balance of the SMK obligation will need to be ascertained. That will involve an inquiry as to the present state of the appellant’s indebtedness to SMK having regard to the terms of the mortgages, any renegotiation of its terms that has occurred, and such payments on account of capital or interest as have been made.

I do not, however, see the appellant’s claim being pegged by reference to the internally negotiated loan account arrangement. After all, the cost of the borrowing was always higher, and the company has (with the participation of the respondent) incapacitated itself from repaying the appellant’s loan account. The balance of the SMK loan has climbed rapidly since and at least partially in consequence of the respondent’s refusal to make contribution when first asked to do so in 1994.

I have already indicated why there is, in my view, no need to make allowance for what Basten JA describes as the personal use by Mr Brooker of the $345,000 repaid by the company, which was not used by him in immediate reduction of the SMK loan.

I agree with McColl JA that, for the reasons she gives, the defences of laches, acquiescence and delay should be rejected.

A declaration of entitlement should be made. I would not withhold declaratory or mandatory relief on discretionary grounds. SMK’s mortgage debt remains due and enforceable. I do not think it essential that equitable relief be withheld simply because judgment has not been entered against the appellant (cf Woolmington v Bronze Lamp Restaurant Pty Ltd [1984] 2 NSWLR 242 at 245). Disposition

For these reasons the appellant is, in my view, entitled to a declaration that the respondent is required to contribute equally to the discharge of the outstanding obligations under the SMK loan arrangements, with consequential orders for payment of the appropriate sum. The parties should be directed to file agreed short minutes no later than 10 February 2007. If agreement cannot by then be reached the parties should, within a further 14 days, exchange written submissions detailing their outstanding differences and indicating why their preferred orders should be made. Hopefully, this Court will be able to resolve any outstanding issues without the need to refer the matter to an Associate Justice.

Costs should follow the event with the respondent receiving a certificate under the Suitors’ Fund Act.

McCOLL JA: Frederick Clarkson Brooker, the appellant, sought a declaration that between May 1977 and January 1995 a partnership existed between Nicholas Macarthur Friend, the second respondent, and himself for the conduct of a building, construction and development business, alternatively a declaration that for that period a joint venture existed between them for the conduct of such a business. Friend & Brooker Pty Ltd, the first respondent, was said to be the corporate vehicle of either the partnership or the joint venture. Insofar as the joint venture was concerned the appellant asserted that he and the respondent owed each other fiduciary duties, to act in good faith in the interests of the business and of each other in arranging for the loan of funds to the “business” by friends and family and for the repayment of those loans and to co-operate in accounting to each other so that any profit or loss ultimately incurred by the business be shared equally between them. He claimed to be entitled to a full account of all dealings and transactions between the parties arising out of the partnership or joint venture and/or to damages or equitable compensation for loss he suffered by reason of the respondent’s refusal to make equal contribution to the repayment of his personal borrowings for the purposes of the business. Nicholas J gave judgment for the defendants and dismissed the proceedings: Frederick Clarkson Brooker v Friend Pty Limited & Anor [2005] NSWSC 395.

The first respondent ceased to trade in 1995, was deregistered on 26 July 1996 and took no part in either the trial or the appeal. I shall, therefore, refer to Mr Friend as the respondent. Statement of the Case

The only evidence at the trial, apart from documentary material, was given by the appellant and a Mr Peterson, to whom I shall refer in greater detail in due course. This is an aspect of the proceedings upon which the appellant strongly relies.

The facts are in large measure uncontroversial and can conveniently be taken from the judgment below: “ Background 7 The following narrative is of events which provide some background for the better understanding of Mr Brooker’s claims. Most of these matters were not in dispute and in any event there was ample evidence for the finding that each took place. 8 In about May 1977 Mr Brooker and Mr Friend resigned from their employment as engineers with John Holland Constructions Pty Limited with the intention of together establishing an engineering and construction business. 9 On 18 July 1977 the company was incorporated to which Mr Brooker and Mr Friend were appointed directors. Their respective family trusts became equal shareholders through a common trustee, Naya Nominees Pty Limited. 10 Between about July 1977 and about 1979 the principal activity of the company was civil engineering construction. In 1979 the scope of the business was widened to include property purchase and development. 11 In about 1980 Mr Brooker and Mr Friend were advised by their accountant, Mr Joslin, that carrying out property development through a trust structure would give them discretion as to the distribution of profits. The advice was accepted, and unit trust structures with corporate trustee companies were used for projects. These included the projects at No. 44 Bridge Street, Sydney and Doohat Avenue, North Sydney by Ilenace Pty Limited, and at No. 11 Hardie Street, Neutral Bay by Duvana Pty Limited. Syelight Pty Limited, a company in which Mr Brooker and Mr Friend each owned one half of the shares, undertook the development of the Neutral Bay property for Duvana Pty Limited. … 12 From time to time money was borrowed for use by the company in its business. Funds were obtained by way of direct borrowings from third parties including banks, family members, and friends. Mr Brooker and Mr Friend also, separately, borrowed funds which each on-lent to the company, which loans were reflected in the directors’ loan account as unsecured loans. 13 On about 16 January 1984 the company entered into a contract with the Eurobodalla Shire Council (the council) for the construction of a sewerage reticulation work at Narooma for the sum of $2,531,062.48 (the Narooma contract). To finance the works the company arranged an overdraft facility for $350,000.00 with the ANZ Bank. Funds were also obtained by way of loans from other parties. 14 In about August 1984, at Mr Brooker’s suggestion, it was agreed that all loans from family members and friends should be consolidated into the directors’ loan account, and he instructed the company’s accountant to proceed accordingly. 15 In September 1985 the Narooma contract reached practical completion. In about January 1986 the company submitted a claim for the sum of about $1,000,000.00 to the council for quantities underpaid. The claim was rejected in about April 1986. 16 By early 1986 the company’s account, and the account of the associated company, Syelight Pty Limited, with ANZ Bank had been frozen. In order to fund a construction contract in Canberra which the company then had with Blue Circle Southern Cement Limited arrangements were made to use the account of Ilenace Pty Limited with another bank. 17 In November 1986 SMK Investments Pty Limited (SMK) through its director Mr Graham Richard Peterson agreed to lend Mr Brooker the sum of $350,000.00. These monies were on-lent by Mr Brooker to the company and were applied, inter alia, to repay loans from various lenders. 18 From mid-1987 to mid-1990 Mr Friend secured and managed to completion a number of small construction contracts for the company. Funds were provided through Ilenace Pty Limited and the personal accounts of the directors. Since about July 1990 the company has not been involved in construction work or other trading activity. 19 During 1991 the company was engaged in litigation with the council in respect of its claim. On 6 September 1991 it was paid the sum of $193,680.00 by the council. 20 On 9 June 1993 the council paid the company the sum of $1,634,964.00 pursuant to the arbitrator’s award of 19 March 1993. At about the end of June 1993 various creditors of the company were paid from the proceeds of the first payment from the council. Mr Brooker and Mr Friend each were paid the sum of $63,638.00. 21 On 3 March 1994, after further litigation, the award was increased by the sum of $256,898.00. On 19 September 1994, pursuant to a deed of release the council paid the company a further sum of $900,000.00. 22 In about October 1994 and on 25 January 1995 there were meetings between Mr Brooker and Mr Friend during which Mr Friend denied personal liability for the SMK loan or an obligation to share equally in its repayment. It appears that the parties have been in dispute since then. 23 On 8 February 1995 Mr Brooker and Mr Friend met at the office of the company’s solicitors, Foulsham & Geddes. It was agreed that from the proceeds of the payment of $900,000.00 from the council the sum of $213,933.00 should be applied in payment of the ANZ Bank and small creditors. It was also agreed that the balance of about $687,000.00 be paid out equally to the parties by instalments by way of loans from the company.* 24 During the period 24 August 1995 to 3 March 1998 from the proceeds of the third payment received from the council advances were made to each of Mr Brooker and Mr Friend of the total sum of $345,000.00 in various amounts as interest free loans. The sum of about $6,000.00 remains as an asset of the company. The SMK loan 25 In these proceedings Mr Brooker claims that in November 1986 SMK lent to the joint venture or partnership and, in effect, to him and Mr Friend, the sum of $350,000.00. He asserts that he and Mr Friend personally borrowed money for the purposes of the business and hence are personally liable to the lender for it. Mr Friend denies the claim. It is convenient to determine this issue before turning to the others. 26 The circumstances of the loan were that in November 1986 Mr Brooker spoke to Mr Peterson about the financial difficulties of the company, and expressed a need for the sum of $350,000.00. Mr Peterson agreed to provide it. A few days later Mr Brooker had the following conversation with Mr Friend: “I said: ‘Graham and Sue Peterson have offered to loan us $350,000 to take the pressure off until we finalise the claim against the Council’. He said: ‘What do you think?’ I said: ‘We do not have a choice. If we do not accept there is no way we can repay Alcon or the De Bakkers or maintain the Trade Credits loan’. He said: ‘Well then, we should do it’.” 27 Thereafter arrangements were made pursuant to which SMK provided the funds to Mr Brooker. On 8 November 1986 the sum of $20,000.00 was paid to Mr Brooker in advance of settlement. On 23 December 1986 the balance of $330,000.00 was applied, inter alia, to discharge the company’s loans from Trade Credits Limited, Alcon Investments Pty Limited and G. A. and A. G. de Bakker, and to pay Mr Brooker the sum of $37,183.95. The monies were treated by the company as having been lent to it by Mr Brooker as its accounts show (TB 1270). 28 The loan was secured by first mortgage over the property of Mr Brooker’s wife at No. 12 Milner Street, Mosman for which Mr Brooker was guarantor, and by a second mortgage over the property jointly owned by Mr Brooker and his mother at No. 4 Selwyn Street, Artarmon. 29 In evidence Mr Peterson acknowledged that any claim for recovery of the loan would be made against Mr Brooker and not against the company or Mr Friend.” * [The appellant submits that this sentence does not accord with his evidence that the balance was used to pay outstanding loans advanced by various lenders to one or both of the parties]. The SMK Loan

The primary judge first dealt with the question whether the SMK loan was lent to the appellant and the respondent so as to render them personally (and equally) liable for its repayment. He made the following findings: · all the documents as to obtaining and securing the SMK loan demonstrated it was made to the appellant and/or his wife: [30]; · the appellant “himself had no doubt that he was liable” to SMK for the loan as demonstrated by ([30]): “… the separation of loan account document (FCB 16) prepared by him in which the disbursements made from the SMK loan are credited only to his loan account, as was the amount of $250,000.00 which was repaid to SMK in July 1993 from the proceeds of the payment from the council”; and ([31]): “…the letter from Mr Brooker’s solicitors to Mr Friend’s solicitors of 30 May 2002 (Exhibit 1) in which the following is stated: ‘7 In or about December 1986 the loan from, inter alia, Trade Credits Pty Limited and from Mr de Bakker was refinanced by a loan from SMK Investments Pty Limited to Mr Brooker. Mr Brooker remains liable to SMK Investments Pty Limited for the balance due under this loan and interest. The loan was secured by mortgage over Mr and Mrs Brooker’s property at 12 Milner Street, Mosman and 4 Selwyn Street, Artarmon’.”; · there was no evidence the respondent agreed to be jointly liable for, or to contribute to, the repayment of the SMK loan and that it was: “… difficult to accept that, if in truth he held the belief that Mr Friend was equally liable for this loan, Mr Brooker proceeded with the borrowing, and procured the securities from his wife and his mother, without first obtaining Mr Friend’s acceptance of such liability. That there is no evidence that there was even discussion as to liability is remarkable having regard to the financial difficulties then facing the company, and the likelihood that it may have been unable to repay Mr Brooker the monies which he had on-lent to it. The absence of evidence as to these matters is … further indication that there was no agreement to the effect claimed in these proceedings. This doubt is reinforced by the delay until about October 1994 when Mr Brooker first claimed that Mr Friend was equally liable for the loan.” ( [75]); · the fact that on 30 June 1993 the respondent agreed that the company should pay SMK the sum of $250,000.00 in partial repayment of Mr Brooker’s borrowing on an occasion when, according to the appellant, the respondent altered the amount referable to the loan but said nothing about it and there was no evidence that the issue of joint liability was raised, did not support the agreement alleged ([76]).

His Honour rejected, as implausible, in the face of the evidence to the contrary, the appellant’s evidence that “the monies were jointly borrowed by Mr Friend and himself”: judgment at [32].

The appellant submits that, in so finding, the primary judge failed to take into account his unchallenged evidence concerning the circumstances in which the SMK loan was arranged as set out in paragraph [26] of the judgment. The relationship between the parties

The primary judge then dealt with the relationship between the parties.

Mr Brooker’s case at trial, as recorded by the primary judge (at [33]) was that the relationship between the parties was either a partnership or joint venture which existed outside and beyond the company which was merely the vehicle through which the business was conducted. He said the parties’ agreement was as set out in para 8 of his affidavit of 25 November 2002 (described by his Honour, at [34], as “the para 8 conversations”): “34 The plaintiff’s evidence was that during 1976 and 1977, whilst working on the same project in Canberra, he and Mr Friend had a number of conversations in which they discussed establishing a construction business together, its operation, how it would be financed, and how contributions, losses and profits would be shared. In his affidavit of 25 November 2002 (para 8) he said: ‘8 In mid 1976 I was assigned to a new project in Queanbeyan, the Googong Water Treatment Plant and moved to Canberra for the purpose. Mr Friend also worked on the same project and lived in Canberra. I worked with Mr Friend on this project until in or about 1977. Whilst in Canberra I had discussions with Mr Friend in relation to establishing a construction business together. During these conversations we discussed in considerable detail the direction of the business, how it would be operated, how it would be financed and how contributions, losses and profits would be shared. During the course of these various conversations the following was said: (a) In relation to the structure of the venture and contributions: I said: ‘The partnership should be a 50:50 in every respect’. He said: ‘Yes of course’. I said: ‘There will not be a hierarchy between us with one in charge and the other subordinate. We will draw equal salaries and plough as much back as we can into the business, but of course we shouldn’t draw any salary until we have a cash flow to support it’. He said: ‘I agree with all that’. I said: ‘When we are drawing a salary I will need enough to support my family’. He said: ‘Well I won’t need that much. I can draw what I need and leave the rest in as loan’. I said: ‘When the business is at the point where it no longer needs any financial input from us and each of us has got back what we have put in, like undrawn salary and such like, then we can start drawing profits – sharing everything equally’. He said: ‘You know sometimes when two people are in business together it might appear as though one is working harder than the other but it is often the case that the other one is making an equally important contribution in a conceptual or creative way that is not so obvious’. I said: ‘Don’t worry Nick, we will each put in to the best of our ability but at the end of the day what we take out will be 50:50. There won’t be any argument about that’. (b) In relation to the business name: He said: ‘The business name should be Friend and Brooker’. I said: ‘I agree, we can’t have Brooker and Friend it sounds too much like a wedding invitation’. (c) In relation to incorporating a company: I said: We will have to run the partnership through a company structure. We will need to protect ourselves against bad debts and such like. To protect our personal positions we should establish a company and carry out all trading through the company’. He said: ‘Yes I agree’. (d) In relation to banking: He said: ‘We should approach the ANZ for banking services. My family has a long association with the bank’. I said: ‘I agree’. (e) In relation to the business premises: I said: ‘It makes sense that we use my house in Annandale. We can use the lower level as our office’. He said: ‘That is a good idea and I could live upstairs if that is okay by you’. I said: ‘Yes, of course’ ” [Counsel for the respondent conceded at trial that these conversations were “really not in dispute” but argued they were insufficient to establish the appellant’s case.]

His Honour also recorded the following evidence as relevant to the relationship issue: “39 The following is a relevant passage from the cross-examination (Tp 63): ‘Q. Just to understand then before I take you to the remaining conversations, your position is that you formed a company to trade through and your understanding was if in the end the company failed and, let's say, was wound up and you had undrawn salary or you had put money in that the company couldn't afford to repay you, that your understanding is that the agreement between you and Mr Friend was that each of you would pay to the other directly across the top of the company, even though it had failed, any amount which was necessary to equalise your contributions? A. Yes, that's exactly what I say. Q. And it doesn't matter that your sole source of business, the company, had failed and that either of you may not have had the money to pay, it would just be an obligation that would be there forever between you? A. It would be an obligation which if it could not be met immediately would be met in time’. And at Tp 64: ‘Q. … You tell his Honour that the arrangement between you was that one way or another if the company made a loss and there wasn't enough to repay either of you out of the company, your arrangement extended to one paying across the top the other the extent of his contribution unrepaid; is that right? A. As far as was necessary to equalise the losses, yes. HIS HONOUR: Q. Can I understand that your understanding was that this was the effect of a private arrangement between you and Mr Friend really outside the operations of the company? A. Yes. HAMMERSCHLAG: Q. And you derive that, you say, from conversations which are set out in your affidavit? A. Yes, and the way in which we conducted the business. Q. Well, the way in which you conducted the business was to accrue loan accounts and at all material times pay each other out 50/50, right, of what there was? A. Well, there were never any payouts. Q. In what way then do you tell his Honour that's the way you conducted it? A. By the way in which we kept records of contributions in order to have those records when the time came to equalise those before either sharing surplus or sharing loss’. 40 Mr Brooker relied upon the para 8 conversations (set out in para 34) as the evidence of the agreement. His evidence was (Tp 67): ‘Q. Just go back to para 8. In the middle of the page you say, ‘When the business is at the point where it no longer needs any financial input and each of us has got back what we have put in’. By that you meant from the returns of the business; correct? A. Yes. Q. ‘Like undrawn salary and such like we could start drawing profits sharing equally.’ A. Yes. Q. What you meant by that was you would each put in whatever, once the company was in a position to pay you back it would pay you back in accordance with your contributions, and then after that you would share equally? A. That's correct. Q. And that's what your understanding is. At the end of the day, if and when the company could pay each of you back the money it owed it would do so, and whatever was left over would be shared between you equally? A. Yes, that's correct. Q. There is nothing in this conversation that says anything about you being liable to him personally or he being liable to you personally across the top of the company for any ultimate shortfall in either of your contributions, is there? A. I believe that's implicit in that part of the conversation. Q. And that is the conversation which you under your oath tell his Honour from which you derive this agreement between you outside the affairs of the company, that one would be liable to the other for any shortfall when the company couldn't pay? A. Yes. Q. And you say you made that agreement at a time at which either of you had almost nothing to your names? A. Well, that seems to be a double question. We made it at that time, but neither of us had nothing to our names. Q. Each of you had very little, you have told his Honour, and also you were perfectly conscious of the fact that you were about to embark on an enterprise in a risky field of endeavour? A. Yes. Q. Let me put it to you squarely, Mr Brooker. I want to suggest to you that the evidence that you have given his Honour this morning, to the extent that you said the same thing yesterday, that you understood there was an agreement between you two young men at the time that either of you would be liable to the other on failure of the company to be able to pay each of you personally across the top, is untruthful? A. That's not right. That's exactly how I understood the relationship between us’.” (emphasis added)

The primary judge found: “42 [The appellant] could recall no discussions with Mr Friend pursuant to which he ever agreed with him that he would undertake personal liability for any debts of the company. He accepted that there was no discussion in which it was agreed that they would decide at some time whether or not to pay creditors which the company could not pay, or that each at some time would take responsibility for any debts owed by the company to any other person. … 50 In cross-examination, Mr Brooker said the agreement relied upon was as conveyed in the para 8 conversations. He agreed that during the conversations no reference was made to any loss in relation to loans or credit given, or to any guarantee or security. He claimed a specified amount from each defendant, but made no claim for account. He accepted that the first time when such a claim was made was on 26 April 2002 by the amended statement of claim.”

No partnership accounts were kept. All accounts concerning the business were kept by the company: judgment at [43].

When the company experienced financial difficulty after 1984, its activities were financed by funds raised from time to time by personal borrowings by the parties which were on-lent to the company, as well as by loans directly to the company: judgment [44].

The primary judge recorded the post-1984 events as follows: “45 In August 1984, at Mr Brooker’s suggestion, it was agreed to consolidate all loans from family and friends into their own account with the company. He said that business was then on the brink of insolvency and its books were to be inspected by accountants on behalf of the bank. He felt that the bank would look more favourably upon the balance sheet if those debts were shown as being to the directors. The balance sheet for the year ended 30 June 1987 gave effect to this treatment and reflects the SMK loan of $350,000.00 which had been on-lent by Mr Brooker. 46 On 8 December 1993 there was a directors’ meeting attended by the parties. A record of it is TB 301. It was resolved to accept interest on loans raised by directors at Supreme Court rates, calculated from 1 July 1984. Having regard to the time spent on company affairs, particularly in relation to the litigation of the claims against the council, it was also resolved to accrue for each director fees of $15,000.00 per annum for the years ended 30 June 1985 and 30 June 1986, and $5,000.00 per annum for the years ended 30 June 1987 to 30 June 1993. The priority for payment of debts of the company was also settled. 47 On 3 January 1995 the accountant provided to the parties a balance sheet as at 31 December 1994. It recorded the only assets as $732,818.00 which was the balance of cash received from the council after payment of some trade creditors. Liabilities included an item for creditors at $669,911.00 and an item in respect of directors’ loan accounts and superannuation at $2,055,181.00. In cross-examination (T pp 50-51) Mr Brooker agreed he had a moral obligation to take nothing for the directors but to pay out the trade creditors and the bank. He said it was his wish to pay SMK, being the one remaining creditor, all of the money that was available for each to contribute to ensure that it was paid out in full. He said it was his intention not to take any money for himself. 48 On about 20 November 1995 the parties met in Mr Foulsham’s office when Mr Brooker produced a copy of the separated loan accounts (FCB 16) and invited discussion about it. Mr Friend then left the meeting. It appears that there were no subsequent communications between the parties prior to the commencement of these proceedings. Mr Brooker asserts that the partnership was then terminated. 49 On 27 December 2000 these proceedings commenced with the filing of the statement of claim. It includes in para 2.3 the allegation that the agreement provided: ‘To the extent that either of them suffers any loss in relation to loans made or credit given to the Company or guarantees or security given for the benefit of the Company they shall make contributions one to the other to the intent that the losses are born equally’. 50 In cross-examination, Mr Brooker said the agreement relied upon was as conveyed in the para 8 conversations. He agreed that during the conversations no reference was made to any loss in relation to loans or credit given, or to any guarantee or security. He claimed a specified amount from each defendant, but made no claim for account. He accepted that the first time when such a claim was made was on 26 April 2002 by the amended statement of claim.”

At trial Mr R Forster of Senior Counsel, who appeared with Mr S White for the appellant, submitted that the relationship between the parties was a partnership in which they bore all losses equally, alternatively that their agreement was that upon payment of a debt by one, the other was obliged to reimburse him one half. The primary judge recorded (at [51] – [52]) that the basic structure of the relationship was to be found in the para 8 conversations which were also said to establish the agreement for the partnership to be run through a company, thereby protecting the parties from personal liability for debts incurred by the company, but with the consequence that each would share personal liability for the loans of the other which had been provided to the company. The relationship was said to entitle the appellant to a full accounting between the parties from 1977, that liability for repayment of the SMK loan should be borne equally and there should be an accounting to assess the amount contributed by each to enable equalisation of the losses incurred in their venture: see judgment at [54].

Mr D Hammerschlag of Senior Counsel who appeared for the respondent below with Mr H Packer, submitted, in substance, that whatever agreement existed prior to July 1977, did not survive incorporation of the company: judgment at [55] – [56]. He argued that the question of sharing liability for personal borrowings, which were on lent to the company, was not discussed and that it could not be assumed the parties “even turned their minds to this issue in a conversation in which all that was said about personal liability was that incorporation would protect them from it”. Mr Hammerschlag also contended that the proposition that a partnership continued after incorporation was insupportable, pointing out that thereafter there existed none of the necessary features of a partnership at law. He also contended that even if an entitlement to an account was found, no such order should be made relevantly for present purposes because of the appellant’s laches as demonstrated by the facts that: “… although on Mr Brooker’s case the alleged partnership terminated in about November 1995 no claim for equitable relief was made until the amended statement of claim was filed … on 26 April 2002. During the intervening period the interest claimed to be payable on the SMK loan increased the total debt substantially to the present amount of about $1,300,000.00. Furthermore, between 24 August** and 3 March 1998 Mr Brooker received from the company the total sum of $345,000.00 by way of loans, the proceeds of which have paid personal expenses and he is not in a position to repay them to the company. It is also submitted that a relevant consideration in the exercise of discretion is Mr Peterson’s evidence that having regard to Mr Brooker’s financial straits, he is not presently proposing to claim against Mr Brooker for repayment of the SMK loan”: see judgment at [59]. ** 1995: see judgment at [24]

The primary judge said that the question whether there was an agreement between the parties which established a fiduciary relationship as a partnership, or a joint venture, or one based on a relationship of trust and confidence turned on the para 8 conversations: judgment at [60], [65]. As to those conversations he found: “69 Analysis of the evidence in the para 8 conversations` shows that there were various conversations on the subject of establishing a construction business together. There is no indication as to whether the passage quoted is the whole or a part of the conversation. In respect of each there is nothing indicative of date, occasion, or context, although there is sufficient for the inference that the conversations took place between mid-1976 and sometime in 1977.”

He accepted (at [70]) “that the parties commenced business in partnership in May 1977” and inferred that “…was in accordance with the matters discussed in the para 8 conversations”. He then said: “The company was incorporated on 18 July 1977 but there is no evidence as to whether the conversation in para 8(c) in relation to incorporation took place before or after the commencement of the partnership in May 1977. It is uncertain whether it was always intended that the parties should operate through a corporate structure, or whether it was decided to do so after they began operating as a partnership and had seen the benefits of incorporation, and agreed to change the nature of their relationship in order to obtain those benefits. There is thus no evidence as to the context and circumstances in which the conversation as to incorporation took place, these being matters relevant to ascertaining the content of any agreement. 71 In the end, the court is left to consider the natural and ordinary meaning of the words in the para 8 conversations. It is to be kept in mind that Mr Brooker could recall no discussion with Mr Friend in which he agreed to undertake personal liability for any debts of the company. He agreed that there was no discussion with Mr Friend in which it was agreed that they would decide at some time whether or not to pay creditors which the company could not pay, or that each at some time would take responsibility for debts owed by the company to other persons. 72 In my opinion all that relevantly can be taken from the para 8(c) conversation with regard to the other conversations in para 8 is that at some time the parties agreed to establish a company in order to protect themselves from personal liability for debts incurred in the conduct of the business. It demonstrates the common intention to cease carrying on business in a relationship which exposed them to personal liability for its debts, and to replace it with a corporate structure under which there was no such exposure. In my opinion that is as far as the evidence goes. Mr Brooker’s subjective understanding of the arrangement is irrelevant. 73 In my opinion nothing in the para 8 conversations indicates that the parties turned their minds to the notion of continuing the partnership or any other relationship after the company had taken over the operation of the business, or that a business relationship should continue to operate outside the company under which each owed a fiduciary duty to the other. Furthermore, there is simply no evidence that the parties agreed that the business would be conducted by the company subject to each accepting personal liability for the debts of the other to a third party. 74 It seems to me that the parties, with the benefit of professional advice, incorporated their business because it was commercially advantageous to do so in that it protected the personal position of each. Mr Brooker impressed me as an experienced businessman well aware of what was required for the protection of his interests. It is reasonable to expect that there would have been some record of an agreement intended to operate outside the corporate structure whereby the parties preserved the risk of personal liability for the debts of each other where the proceeds were on-lent to the company. The absence of such evidence suggests that there was in fact no such agreement. 75 There is also no evidence that Mr Friend agreed to be jointly liable for, or to contribute to, the repayment of the SMK loan. It is difficult to accept that, if in truth he held the belief that Mr Friend was equally liable for this loan, Mr Brooker proceeded with the borrowing, and procured the securities from his wife and his mother, without first obtaining Mr Friend’s acceptance of such liability. That there is no evidence that there was even discussion as to liability is remarkable having regard to the financial difficulties then facing the company, and the likelihood that it may have been unable to repay Mr Brooker the monies which he had on-lent to it. The absence of evidence as to these matters is, in my opinion, further indication that there was no agreement to the effect claimed in these proceedings. This doubt is reinforced by the delay until about October 1994 when Mr Brooker first claimed that Mr Friend was equally liable for the loan. 76 In reviewing the evidence concerning the SMK loan I have not overlooked that on 30 June 1993 Mr Friend agreed that the company should pay SMK the sum of $250,000.00 in partial repayment of Mr Brooker’s borrowing. In his affidavit of 30 April 2004 (para 7) Mr Brooker says that at the meeting on that date Mr Friend altered the amount referable to the loan but said nothing about it. There is no evidence that the issue of joint liability was raised. This occasion provides no support for the existence of the agreement alleged. 77 What happened was that from the time of incorporation the partnership ceased, just as the parties intended. The effect of incorporation changed the basis upon which the business had been conducted since May 1977, not only with regard to third parties, but also as between themselves. Thereafter their relationship was as co-directors of the company, and the assets and liabilities associated with the business were the company’s. Exhibit B depicts the interrelationship of corporate structures and unit trusts by which the business operated. 78 As Mr Friend’s counsel submitted, it is apt to refer to the passage in Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 at p 691 per Young, J: ‘Unfortunately, it very often happens in cases in this court that a person has arranged his affairs for commercial or fiscal reasons employing a particular structure, which with respect to creditors and the Government he expects to be recognized as no sham, but when it comes to a dispute with his former wife or former business associates it is not in his interests to maintain the structure and he pleads before this Court that one must not look at the structure at all but rather at the ‘realistic’ or ‘practical’ effect of what has happened. I do not find this sort of submission attractive. So long as the law permits people to erect structures which have meaningful legal consequences then if a person elects to erect such a structure he must take the consequences of such erection for better, for worse, for richer or poorer, in commercial sickness or commercial health’.” (emphasis added).

His Honour concluded (at [79]) that the appellant had “failed to prove any agreement pursuant to which the existence of a fiduciary relationship with Mr Friend was established after the incorporation the company”. He dismissed the summons and ordered the appellant to pay the costs. He did not deal with the respondent’s claims that, if the appellant had established his claim, relief ought be denied to him on discretionary grounds. Grounds of Appeal

The appellant relies on a number of grounds of appeal which can be reduced to the following complaints: 1. The primary judge erred in finding that the parties’ agreement to establish a company in order to protect themselves from personal liability for debts incurred in the conduct of the business demonstrated a common intention to cease carrying on business in a relationship which exposed them to personal liability for its debts and to replace it with a corporate structure under which there was no such exposure. 2. The primary Judge erred in failing to find that the agreement initially reached between the parties remained in effect at all material times. 3. The primary judge should have found that the conduct of the parties subsequent to the making of their agreement was relevant in determining not only whether such an agreement had been formed, but also whether it remained in effect at any particular point of time and that the evidence of such conduct should have satisfied him that the said agreement remained in effect at all times. 4. The primary judge should have found that the agreement of the parties was that each would contribute equally to any loss incurred by the other party in respect of any personal liability undertaken by that other party for the purposes of the business. 5. The primary judge erred in restricting his assessment as to the existence or otherwise of a fiduciary relationship to evidence of an agreement, and then only to evidence of an agreement based solely on the para 8 conversations and failed to take into account other conversations and other evidence in assessing the existence and nature of any fiduciary relationship. 6. The primary judge should have found that there was a joint venture fiduciary relationship between the parties in relation to the business which included an obligation of the respondent to share equally with the appellant any loss incurred by the joint venture business. 7. The primary judge erred in not finding that the appellant had obtained the respondent’s agreement to the SMK loan and that the respondent had agreed that he would contribute equally to any loss personally incurred by the appellant by reason thereof.

The grounds of appeal did not expressly complain that the primary judge erred in failing to find a partnership existed between the parties, but the appeal was conducted on the basis that such a ground was relied upon and one of the orders sought was a declaration that a partnership had existed. I have proceeded on the basis that the issue of partnership has been squarely raised. Submissions on Appeal

The appellant’s submission focused on four topics: (a) the initial conversations between the parties about establishing a business; (b) the primary judge’s findings about what the appellant accepted in cross-examination about the available evidence about an agreement and the relevance and admissibility of evidence of conduct subsequent to the initial conversation; (c) the primary judge’s analysis of whether a fiduciary relationship existed between the parties; and (d) the evidence, or lack thereof, of any conversation between the parties about accepting liability for the SMK loan. The appellant’s submissions: the initial conversations

Mr Forster, who again appeared with Mr M S White for the appellant, noted that the appellant was not challenged, nor contradicted, on the para 8 conversations and the primary judge accepted they occurred. He accepted the para 8 conversations were important as they were directed to the nature and structure of the business the parties were to establish. Indeed, he submitted that the key to the parties’ relationships was the para 8(a) conversation that the business would be “50:50 in every respect”. Mr Forster argued that the para 8 conversations indicated the width of the agreement between the parties to treat each other in such a way as to achieve an equal outcome in the business. He submitted that the primary judge erred in failing to take that matter into account.

Mr Forster also submitted that the primary judge led himself into error in concluding (at [70]) the appellant had not established when the para 8 conversations (particularly the para 8(c) conversation) took place and, secondly, made inconsistent findings which depended on the time when that conversation occurred having been demonstrated.

Mr Forster argued that timing of the para 8 conversations was established by the appellant’s evidence that they occurred “whilst in Canberra” while he and the respondent were engaged on a project. As he had resigned from that project in April or May 1977 (para 9 of his first affidavit) and commenced business with the respondent in May 1977, Mr Forster contended the agreement to operate the business through the medium of a company was always part of the original agreement in which the partnership was established. Accordingly, the primary judge had erred (at [72]) in concluding the para 8(c) conversation demonstrated a common intention to cease carrying on business in a relationship which exposed the parties to personal liability for its debts, and to replace it with a corporate structure under which there was no such exposure.

Mr Forster argued, by reference to those portions of paras [70], [72], [73] and [77] of the judgment which I have underlined (see [77] above) that the primary judge had “progressed from being unable to identify the time or context of the conversation in para 8(c) to a finding that the decision to incorporate a company occurred after the establishment of the partnership in May 1977 and amounted to a decision to change the nature of the relationship between [the parties] so as to no longer constitute a partnership”. He argued that, in so finding, the primary judge failed to take into account, inter alia, the subsequent references by the appellant and the respondent to each other as partners, a term also used by their solicitor, as late as August 1983.

Mr Forster also argued that once the primary judge apparently accepted the para 8 conversations took place in Canberra before the establishment of the partnership in May 1977, the agreement to operate the business through the medium of a company was always part of the original agreement to establish a partnership. Mr Forster submitted that the company was simply a medium for the working of the joint venture between the parties, which operated “over the top of” the company.

He contended that the agreement to incorporate the company did not constitute a subsequent agreement to change the nature and basis of the original partnership but, rather, was always part of the agreement between the parties as, too, was the term that the “partnership should be 50:50 in every respect”. He submitted that, to the extent his Honour found otherwise, that finding was in error and contrary to the unchallenged evidence. The appellant’s submissions: the course of conduct case

Mr Forster submitted that the primary judge erred (at [68]) in construing the para 8 conversations as the only available evidence of the agreement, rather than having regard, too, to the appellant’s case that the parties’ agreement arose from, and was evidenced by, those conversations as well as by a course of conduct. He argued that the appellant gave considerable uncontradicted evidence of a course of conduct giving rise to an understanding between the parties from which an agreement should be inferred that they would equalise their contributions to the business, including personal borrowings of funds on-lent to it.

Mr Forster also pointed to other aspects of the parties’ conduct: their reference to each other as “partners”, the fact that they incurred personal liabilities to their friends and family in order to raise capital for the business and conversations between the two men in which, when drawings were discussed, it was agreed they be in equal amounts.

Mr Forster argued that the primary judge had not addressed the significance of the appellant’s evidence that the parties’ raised finance from time to time by personal borrowings on lent to the company as well as by loans directly to the company. It was this “type of liability which the appellant should be found to have had in mind when he was asked in cross-examination about why the business incorporated the company”. He submitted that it was apparent from the evidence that the appellant drew a distinction between trading debts/trade creditors and other borrowings for the purpose of the business. The company vehicle provided the “usual protection” to the principals behind the company against trade debts incurred in the operation of the business but, when capital raising was required, the company was not intended to be an obstacle to the parties’ agreement to equalise such personal liabilities incurred for the benefit of the business.

Mr Forster submitted that the primary judge had failed to address the appellant’s case that there was an arrangement between the parties outside the corporate vehicle, of which the corporate vehicle formed a part. He argued that in circumstances where the respondent, through his counsel, had accepted that the relationship between the parties was a quasi-partnership, his Honour ought to have applied the proposition that the relationship of mutual trust and confidence between the parties was not subsumed by the establishment of a corporate structure through which their business was conducted. The appellant’s submissions: fiduciary relationship

Mr Forster submitted that the errors in the primary judge’s approach to the question of the nature and content of the agreement between the parties infected his approach to the question whether a fiduciary relationship existed. Thus, he contended, his Honour erroneously confined his consideration of whether a fiduciary relationship existed to the para 8 conversation. He also argued the primary judge took too narrow an approach to the question of what constitutes, or what may constitute, a fiduciary relationship, contending such a relationship can be determined both by the terms of an agreement and/or the nature of the relationship between the parties: James Birtchnell v Equity Trustees Executors & Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384 at 408; Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at 97 per Mason J; Schipp v Cameron [1999] NSWSC 997 at [730]; Pizzale v Gumina Enterprises Pty Ltd (1994) 13 WAR 88 (esp at 120-121).

Mr Forster argued that the primary judge’s error in assessing the likely timing of the conversation between the parties about the incorporation of the company led to his erroneous conclusion (see judgment at [77]) that the parties intended to put an end to the existing fiduciary relationship when they incorporated the company. He submitted that the primary judge relied erroneously (at [78]) on Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 in holding (at [79]) that there was no evidence of any agreement pursuant to which “the existence of the fiduciary relationship with Mr Friend was established after the incorporation [of] the company.” He sought to distinguish Morgan on the basis, at least, that there the plaintiff sought to have the Court determine the parties’ rights by disregarding the corporate structure, whereas the appellant sought to establish an overarching relationship which recognised the role of the company.

Mr Forster argued that, having regard to the primary judge’s finding that a partnership came into existence in May 1977, he ought to have found that the relationship of trust and confidence he accepted had been formed by at least the majority of the para 8 conversations, and the conduct of the parties in commencing business in Sydney in May 1977, did not come to an end because the parties had implemented their agreement to operate the business through a corporate vehicle. He submitted the primary judge should have found that a fiduciary relationship had arisen because it was an ordinary incident of the relationship between prospective partners having regard to the mutual confidence and trust likely to be apparent at that time. He contended that even on the primary judge’s findings there was no further or other discussion at the time of incorporation, which had the effect of changing the basis of the business relationship established before the incorporation, particularly the sharing of everything “50:50”.

Mr Forster argued the evidence indicated the parties engaged in unequal, and seemingly ad hoc , arrangements for funding the business through family and friends and via various bank accounts and entities. He submitted that the appellant’s undisputed evidence of the parties’ conversations supported the submission that in separately, and unequally, personally incurring debts to financiers, friends and family, the parties relied on each other and trusted each other to conduct themselves and to apply the funds for the purposes of the business and to render an accounting to each other in due course, including in relation to personal liabilities incurred by them in respect of monies which they on-lent to the company. Were it otherwise, he contended, the parties would no doubt only have committed themselves to equal, or at least approximately equal, obligations to third parties.

Mr Forster submitted that the company’s accounts reflected, by agreement, these liabilities as loans owed to the parties as directors and shareholders, consistent with the primary judge’s finding that this type of funding was obtained by the appellant personally and on-lent to the company. He drew attention to the appellant’s evidence that he would not have engaged in this activity if he did not believe he could trust the respondent to adhere to their understanding in relation to the business that such liabilities were ultimately to be shared equally. He argued that there was ample evidence of a “partnership-like” fiduciary relationship between the parties in the conduct of the business and that such a relationship arose prior to, and continued in existence at the time of the SMK loan. He contended that the evidence indicated that the trust and reliance on which the parties’ relationship was based was particularly directed to their need to incur personal liabilities to assist the business to continue to operate and remain solvent during the prosecution of the claim against Eurobodalla Shire Council. He submitted that one of the fiduciary obligations attaching to the parties in this case was a duty to account to each other for the purpose of equalising the personal liabilities incurred in support of the business, such as the SMK loan: Schipp v Cameron (at [727]). The appellant’s submissions: the SMK loan.

Mr Forster criticised the primary judge’s finding (at [75]) that there was no evidence that the appellant had secured the respondent’s agreement to joint, or any, liability for the SMK loan. He pointed to the unchallenged evidence that the parties discussed the loan and the respondent said to the appellant: “well, then we should do it” (judgment at [26]), after reference to the need to repay other borrowings. He submitted this evidence was consistent with the appellant’s evidence as to the invariable practice of the parties when the parties discussed obtaining funds if the company had insufficient to pay for business expenses. He argued there would be no rational justification for the appellant to undertake to borrow such large sums of money for the benefit of the business, secured by personal assets, without an agreement with the respondent to equalise such liabilities in due course.

Mr Forster contended that once it was understood there was a fiduciary relationship between the parties based on a mutual understanding that liabilities incurred personally were to be the subject of equalisation through ultimate accounting, the primary judge should have accepted the SMK loan was to be included in that arrangement. He argued that to have sought more explicit agreement to an acceptance of the liability than the conversation set out in the primary judgment (at [26]) might have suggested no such relationship existed prior to the conversation. Accordingly he contended the primary judge’s reasoning was in error insofar as he relied on the absence of discussion as a basis for denying the appellant’s claim.

Mr Forster submitted that the SMK loan conversation continued the course of conduct manifested in such conversations over time and was consistent with the existence of the fiduciary joint venture. The respondent’s agreement to the appellant arranging and incurring liability for the SMK loan was given in the context of the agreement and/or fiduciary obligations already existing by December 1986 or, in the alternative, was a separate basis supporting the appellant’s claim. Respondent’s submissions

Mr R Newlinds of Senior Counsel, who appeared for the respondent on appeal with Mr H Packer, submitted that none of the findings challenged by the appellant either individually, or taken as a whole, were capable of affecting the outcome of the proceedings. He contended that even if the Court was satisfied that some or all of the grounds of appeal had been made out, it would not make the orders sought because they lacked utility and because of the appellant’s laches, acquiescence and delay in bringing the proceedings. He sought, and was given, leave to file a Notice of Contention seeking to resist the appellant’s appeal on these bases.

Mr Newlinds contended that the primary judge rejected the appellant’s case because of the absence of evidence, not because, as the appellant contended, he found there was a decision to incorporate a company after the establishment of a partnership in May 1977. His principal argument was that the appellant had failed to prove the relationship between the parties constituted either a partnership or a joint venture above and beyond the arrangement constituted by their relationship as shareholders in various corporate vehicles, or a binding agreement that, if assets available in the company were insufficient to repay all loan accounts to the directors, one would pay the other out of his own resources, such amount as was required to equalise their positions. He argued that the para 8 conversations did not establish either proposition, and that there were no later discussions that could assist.

Mr Newlinds submitted that the parties used corporate vehicles to obtain taxation and other operational benefits, to exclude their personal liability to creditors of the companies and to structure the affairs of the companies to successfully negotiate creditors’ acceptance of reduced payments by the company in full satisfaction of company debts.

Mr Newlinds challenged the appellant’s submission that the primary judge found there was a decision to incorporate a company after the establishment of a partnership in May 1977. He also disputed the appellant’s submission that the primary judge failed to take into account the references by the parties to each other as partners, and by their solicitor, as late as August 1983 in the same terms. He argued that the primary judge was alert to this issue and considered it appropriately: judgment at [64], [68], [72].

Mr Newlinds submitted that even if all the para 8 conversations occurred prior to May 1977, a matter he contended was not clear on the evidence, the primary judge was correct to conclude that the conversations did not evidence the agreement for which the appellant contended. He argued the para 8 conversations should be considered in the context that they were the best recollection of a witness in 2002 dealing with conversations some twenty-five years earlier. He contended that no person could possibly recall the details of such conversations especially in light of the fact that there was no corroborative document to “refresh” the appellant’s memory. He submitted the para 8 conversations were not reliable primary evidence of what was, in fact, said and that the absence of corroboration of those conversations was fatal to the appellant’s case. He contended the evidence went no higher than the appellant’s assertion as to his subjective, but irrelevant, understanding which was not supported by any recollection by him or by any objective fact which would support his subjective understanding. He argued it was critical to the appellant’s case to establish to the Court’s actual persuasion that the actual words were said in order that the primary objective facts might be found. Unless the Court was in a position to make such a finding, he contended, the claim must fail: Watson v Foxman (2000) 49 NSWLR 315 at 318 per McClelland CJ in Eq.

Mr Newlinds argued that even if the statement “the partnership should be 50:50 in every respect” was made in those precise terms, it did not assist the appellant’s case. This was because it was not the appellant’s case that the parties were to share all liabilities/contributions and profits “50:50”. Rather, for example, trade debts were to be borne by the company to the extent to which it had the financial capacity to do so. Moreover, he argued, when read in context the “50:50” statement appeared to have related to a discussion regarding hierarchy between the parties and the drawing of salaries. He pointed to the same conversation as demonstrating the parties had not intended their relationship would be “50:50” in respect of amount of hours worked in the business. In addition, he argued, the parties were not discussing, and had not turned their minds to, the circumstances of what would happen in the event the company failed leaving debts owing to third parties.

Mr Newlinds submitted it was inherently implausible that the appellant could reliably recall the detail of where the para 8(c) conversation occurred He argued the primary judge’s findings (at [70] - [72]) concerning the uncertainty of the para 8 conversations were correct. He contended the further finding (at [77]) that the decision to incorporate in fact occurred after the business commenced probably did not matter, but was readily supported by the lapse of time between commencement of business and incorporation (May to July 1977) which made it probable that the decision to incorporate was taken after the business commenced.

Mr Newlinds contended that once the primary judge concluded that the para 8 conversations did not support a finding that there was an agreement to the effect of that for which the appellant contended at the commencement of the relationship, the appellant’s case was hopeless. Without such an agreement the claims based on partnership, joint venture, fiduciary duty and the like fell away.

Mr Newlinds disputed Mr Forster’s submission that the primary judge had concluded the appellant’s case turned solely on the para 8 conversations and had failed to consider the course of conduct case. He argued that none of the appellant’s evidence concerning post–1977 conversations and conduct proved the agreement for which he contended. He argued that the primary judge properly reviewed that evidence (at [10] – [24], [39] – [42] and [74] – [77]) and rejected the appellant’s case which relied upon it.

Insofar as the appellant complained that the primary judge excluded from his consideration much of the evidence of the conduct of the parties during the operation of the business, Mr Newlinds argued that that had not been the case the appellant pleaded. The appellant’s case had been one of a concluded agreement in 1977, not one of a “developing agreement”. The respondent’s submissions: fiduciary relationship

Mr Newlinds did not dispute the proposition that there could be an “overarching shareholder’s agreement” as Mr Forster contended. He submitted that the question whether there was a fiduciary relationship between the parties turned on whether there was such an overarching agreement pursuant to which the parties undertook personal responsibility to equalise losses as the appellant contended, or conduct or a relationship which gave rise to the same obligation. He said no such agreement could be found, nor was there any conduct or relationship other than one of an ordinary two person company. He relied, in part, on the absence of any documentary record of the parties’ contributions to which reference could be made to determine their respective positions at any point in time. The respondent’s submissions: the SMK loan

Mr Newlinds submitted that the admittedly unchallenged evidence concerning the conversation between the parties about the SMK loan did not constitute evidence that the respondent agreed to be jointly liable or to contribute to the repayment of the SMK loan or that there was “discussion as to liability”. He submitted that the primary judge was entitled to reach his conclusion (at [75]) to that effect. He also argued that the primary judge’s conclusion was supported by the fact that the appellant’s case at trial was that the 1977 agreement governed the nature of the relationship between the parties throughout the business’ life, not that there were separate agreements post-dating 1977.

He contended that the parties agreed to repay as much as possible of the SMK loan (to the extent it benefited the company) out of company funds and that on a winding up of the company, the appellant could claim as a creditor of the insolvent company but that was as far as he could go. He contended that the parties’ agreement to divide the $690,000 left after all but the SMK loan had been repaid, constituted a preference. He appeared to suggest that if the company was wound-up and a liquidator appointed, the liquidator could take steps to recover those payments and, presumably, distribute the proceeds to the appellant. The respondent’s submissions: discretionary grounds

Mr Newlinds submitted that the Court would not accede to the appellant’s claim for equitable relief by way of an accounting consequent upon declaratory relief. The purpose of accounting was to facilitate the provision by the accounting party of information within his knowledge and referable to his dealings needed by the other party as a preliminary to the enforcement of some right to recover money from the former. He contended that there was no information the appellant required which he did not already have.

He also argued that as the entirety of the business relationship was conducted through corporate vehicles, the existence of a quasi-fiduciary relationship did not mean one assumed the company did not exist. He argued that where a quasi-partnership was conducted through a company, the law may wind up the corporate vehicle on the just and equitable basis or restrain a party from insisting on strict legal rights. He submitted that the appellant was not entitled to any claim for indemnity. As the company was still in existence, albeit deregistered, the rights and duties of the parties were to be determined by the existence of that structure.

Mr Newlinds also submitted that the Court would not grant the appellant relief because of his laches, acquiescence and delay. He argued that the large bulk of the monies from Eurobodalla Shire Council had been disbursed in 1995 pursuant to a consensual arrangement with the remainder being disbursed between 1995 and 1998. Thereafter the appellant had let the matter lie for personal reasons connected with rebuilding his house. He had not commenced the proceedings until 2000 and had only served the Statement of Claim under pain of an order that it be struck out for non-service. Thereafter he had served six versions of his Statement of Claim. More than eight years had elapsed since the last payment from Eurobodalla Shire Council and the appellant was not in a position to “put back the monies paid over”. Mr Newlinds submitted that “this is a classic instance of where a Court of Equity would not grant equitable relief in any event.” He argued that prejudice was obvious, if prejudice was required, which he contended it was not.

Finally, Mr Newlinds pointed to the inequity of the appellant’s inaction in circumstances where interest at extremely high rates had continued to accrue on the SMK loan, the fact that Mr Peterson testified he would not enforce any claim against the appellant, yet the appellant sought an indemnity from the respondent. Evidence at Trial

As I noted, Mr Forster contended the primary judge failed to have regard to critical parts of the appellant’s evidence. I set out most of the critical passages about whose omission he complained, as well as other evidence which, in my view, assists in resolving the issues.

Mr Forster asked the appellant in re-examination about his belief about the effect of incorporating the company on the parties’ liability inter se : “FORSTER: Q. In the same context, Mr Brooker, did you contemplate that such incorporation would give you protection against any liability that you may have to Mr Friend? A. No, not at all. Q. Did you contemplate that any such incorporation would provide Mr Friend with protection against any liabilities he may have to you? A. No.” ……… “Q. What do you mean by your agreements on equality going deeper than that? A. I meant that our agreements on equality were an agreement which was preceding and overriding the obligations or rights one might have in relation to the company.”

The appellant accepted that he and the respondent had not discussed undertaking personal liability for debts of the company in 1977, nor could he recall a discussion with the respondent pursuant to which he (i.e. the appellant) agreed to undertake liability for any debts of the company. He also accepted that there was no discussion between the respondent and himself that they would decide at some point in time whether or not to pay any creditors the company could not pay, nor any discussion between them that each of them would, at some point in time, take responsibility for any debts owed by the company to any other person. He said, however, that it was his understanding that he was equally liable to contribute to “all debts of the joint venture”.

Mr Forster submitted that the following passages in the appellant’s first affidavit demonstrated an agreement to share the losses of the business, or to accept personal responsibility to do: “[35] (In or about August 1992) … I said: ‘The business is in trouble Nick, I believe if we quietly complete the current contracts over the next 6 to 9 months and sell the property for the best we can get we should be able to hold the losses at $100,000. That will mean a loss to each of us of $50,000.’ He said: ‘Well if that is what you want to do, I agree.’ I said: ‘We should finish the outstanding contracts, which will take about 6 months and then set about selling the property.’ ………. [52] … I said: ‘Nick, we are getting in pretty deep with these borrowings now and the bulk of it is from Mary’s family. I really do not like it, especially when the situation is so uncertain. I am prepared to do it. I know you won’t let me down.’ He said: ‘Yes of course, we can rely on one another’. ” In cross-examination the appellant said he understood the respondent’s response to mean “...to make good our contributions to any losses we had.” (Black 63) “……. [98] During the period from 1986 up to at least 1994 Mr Friend and I continued to frequently discuss our financial position. On these occasions Mr Friend said words to the effect: ‘Isn’t it lucky we trust one another. We both know that after we have been through all of this difficulty we will have no arguments in settling up between us equitably’. ” In cross-examination, the appellant said paragraph 98 was “a typical conversation that occurred on a number of occasions between 1986 when the (Eurobodalla) claim was in progress right up until the dispute occurred. He denied that the reference to “settling up between us equitably” was a reference to settling up equitably the outcome of the Eurobodalla dispute, saying that it meant “we would settle our business equitably”, an agreement he believed “derived from the conversations we had before we established the business in 1977”, while the para 98 conversations “simply indicate that we were both accepting that those conditions applied to our business.”

Mr Forster relied upon the following underlined passages in the appellant’s cross-examination as evidence going to the conduct of the business case, to which I have added contextual material, some of which the primary judge quoted (at [39]): “Q. Just to understand then before I take you to the remaining conversations, your position is that you formed a company to trade through and your understanding was if in the end the company failed and, let's say, was wound up and you had undrawn salary or you had put money in that the company couldn't afford to repay you, that your understanding is that the agreement between you and Mr Friend was that each of you would pay to the other directly across the top of the company, even though it had failed, any amount which was necessary to equalise your contributions? A. Yes, that's exactly what I say. Q. And it doesn't matter that your sole source of business, the company, had failed and that either of you may not have had the money to pay, it would just be an obligation that would be there forever between you? A. It would be an obligation which if it could not be met immediately would be met in time”. Q. ….You tell his Honour that the arrangement between you was that one way or another if the company made a loss and there wasn’t enough to repay either of you out of the company, your arrangement extended to one paying across the top the other the extent of his contribution unrepaid; is that right? A. As far as was necessary to equalise the losses, yes. HIS HONOUR: Q. Can I understand that your understanding was that this was the effect of a private arrangement between you and Mr Friend really outside the operations of the company? A. Yes HAMMERSCHLAG: Q. And you derive that, you say, from conversations which are set out in your affidavit? A. Yes, and the way in which we conducted the business. Q. Well, the way in which you conducted the business was to accrue loan accounts and at all material times pay each other out 50/50, right, of what there was? A. Well, there were never any payouts. Q. In what way then do you tell his Honour that’s the way you conducted it? A. By the way in which we kept records of contributions in order to have those records when the time came to equalise those before either sharing surplus or sharing loss. Q. But what you have just told his Honour is not true insofar as nothing was ever taken. You each took $63,000-odd out of the first payment from Narooma; correct? A. Yes. Q. And you each took equal amounts of the remaining until you each had $345,000 from about 1993 to 1995. [sic, as in original]. A. Yes, but those sums are debited against the relative accounts of the two parties. Q. That’s right, correct? A. And we have never, because Mr Friend refuses to, sat down to review the relative contributions in order to equalise them .”

Mr Forster acknowledged that the primary judge had referred (at [39]) to much of this material (with the exception of the last answer), but argued he had failed to appreciate it went to the appellant’s case.

Mr Forster also argued that the primary judge failed to appreciate the significance of the evidence concerning the parties’ incurring personal liability to friends and family to raise monies to finance the business. That evidence was to the following effect.

The appellant said that from in or about 1980 when there were cash flow shortages he and the respondent started to borrow from friends and family to raise working capital and to pay running expenses. The monies borrowed from family and friends from 1980 ranged in amount from $1600 to $200,000. Some were secured over the company’s business premises, others by the parties’ personal guarantees. The appellant described these as being “usually short-term loans” arranged after a discussion between the two men along the lines: “I or He said: the overdraft has been drawn to its limit and there is no money due to come in for two weeks. We do not have sufficient funds to pay the wages. I or He said: I could approach my brother-in-law Glen (my brother David).”

From 1984 onwards the parties decided to obtain additional funds for the business by using their personal resources and by borrowing from friends and family, in order to carry out the sewerage works at Narooma and later to preserve the company in order that it could prosecute the litigation with the Council. The appellant said that in April 1984 he and the respondent discussed future borrowing as follows: “I said: ‘Mary’s mother and Sheelah know that we are in financial difficulties and have offered to lend us money. In the circumstances I do not want to borrow from them unless we are sure we can pay them back and that depends on whether we can quickly get the Narooma cash flow into the black.’ (Mary is my wife and Sheelah is her sister). He said: ‘I believe we can. We are just about on top of the problems there. It is about to turn around.’ I said: ‘Okay. Let us do that. Ian Foulsham has a client who may be prepared to lend us some money too but that will have to be secured.’ He said: ‘All right. Let us borrow that too.’”

Thereafter, according to the appellant, “the Joint Venture in the name of the Trading Entity” borrowed $30,000 from clients of Mr Foulsham, secured by mortgage over his family home in Mosman, which was used to finance the construction work in Narooma. In about May 1984 he borrowed $40,000 from his wife’s mother and $48,000 from his wife’s sister. Neither loan was recorded in writing. Both were used to finance the construction work under the Narooma Contract.

In about September 1984 in order to obtain further funds for the Narooma Contract the appellant apparently arranged for his mother-in-law to give security for a bank guarantee from Westpac which, in turn, was used to replace the retention and security funds of $143,000 held by the Council under the Narooma Contract. After receiving the bank guarantee it appears that the Council released the retention and security funds to the company. At about this time the appellant said he and the respondent had the following conversation: “I said: ‘Nick, we are getting in pretty deep with these borrowings now and the bulk of it is from Mary’s family. I really do not like it, especially when the situation is so uncertain. I am prepared to do it. I know you won’t let me down.’ He said: ‘Yes of course, we can rely on one another.’”

In December 1986 the respondent’s father and brothers paid the Company’s overdraft of about $182,000.

In June 1993 the company received the first payment of $193, 680.52 from Eurobodalla Council. The parties agreed to repay some creditors, including amounts which each had personally borrowed and the company’s solicitors and divided the balance equally, $63,638 each. According to the appellant, the respondent suggested they divide the balance between them “pending final settlement”.

In about June 1993 the company received a second payment of $1,634,964 from the Council. Again, the monies were disbursed, by agreement to the company’s creditors, including banks, legal representatives, family and friends. SMK Investments was paid $250,000.

After the $900,000 constituting the third payment from Eurobodalla Council was received in September 1994, the parties met and, according to the appellant, the respondent suggested they draw “equal amounts” of $12,500 from the money in the company account. He said he resisted this suggestion on the basis he did not think “there is enough to pay all our outstanding debts” but succumbed to what he perceived to be the respondent’s “forceful…and angry tone”. He said he agreed to “go along with that provided we treat this as payment ‘on account’ pending full analysis of our position’.” He said that over the following three weeks there were approximately three conversations with the respondent in which the latter said he needed more money and suggested they “each withdraw similar amounts from the trust account”, to which he acceded, again reserving the position by saying the withdrawals were “ ‘on account’ pending a full examination of the position.” As a result of these conversations each man received $31,000 from the company’s funds.

As to the SMK loan, the appellant said that, in his view, he and the respondent personally borrowed the SMK loan and used it to pay debts of the business, although he accepted that, at law, Mr Peterson could only claim against him. He agreed he had no prospect of repaying the SMK loan from his own assets, apparently excluding the equity in his house from this calculation. He said that when he took the $345,000 from the business (primary judgment at [24]) he was not able to pay that over to Mr Peterson because he had borrowed $500,000 to repay Mr Peterson and was in the process of rebuilding his house and needed the money for that purpose. Consideration

The appellant sought to establish a relationship with the respondent pursuant to which, notwithstanding the incorporation of the company to carry on the construction business they embarked upon in 1977, they would be personally and equally liable to meet any profit or loss incurred to pursue the undertaking. The relationship was said to be either a partnership, a joint venture or a quasi-partnership in the Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 sense. Whatever its precise juridical nature, it was said to be a relationship which required accounts to be taken between the parties of their relationship since they commenced business in May 1977 in order to equalise all personal contributions they had respectively made to the undertaking.

The appellant’s evidence was substantially unchallenged, however it was not incumbent upon the primary judge to accept evidence he found either unconvincing or incredible: Bulstrode v Trimble [1970] VR 840 at 848. In particular, to the extent the appellant’s case was based upon conversations, it was necessary that he prove those conversations with a degree of precision sufficient to enable the court to be reasonably satisfied that they supported the relationship for which he contended, so that the primary judge could “…feel an actual persuasion of its … existence”: Watson v Foxman (at 318-319); Lahoud and Ors v Lahoud and Anor [2006] NSWCA 169 at [91] (per Hodgson JA, Handley and Ipp JJA agreeing). Whether the appellant’s uncontradicted evidence should be accepted as establishing the relationship pleaded depended on all the circumstances, including its inherent probability: Moukhayber v Camden Timber & Hardware Co Pty Ltd [2002] NSWCA 58 at [23], [28] – [30] per Heydon JA (Beazley JA and Santow J agreeing).

When considering whether the appellant had established his case of an agreement to equalise all personal contributions made to the undertaking, it should be borne in mind that it is possible to find a contract “even though it is not easy to locate an offer or acceptance”: Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153 at [74] per Heydon JA. In Brambles , after observing (at [71]) that “[o]ffer and acceptance analysis does not work well in various circumstances”, Heydon JA referred approvingly (at [74]) to Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,117-11,118 where McHugh JA (Hope and Mahoney JJA concurring) said: “It is often difficult to fit a commercial arrangement into the common lawyers’ analysis of a contractual arrangement. Commercial discussions are often too unrefined to fit easily into the slots of ‘offer’, ‘acceptance’, ‘consideration’ and ‘intention to create a legal relationship’ which are the benchmarks of the contract of classical theory. In classical theory, the typical contract is a bilateral one and consists of an exchange of promises by means of an offer and its acceptance together with an intention to create a binding legal relationship … Moreover, in an ongoing relationship, it is not always easy to point to the precise moment when the legal criteria of a contract have been fulfilled. Agreements concerning terms and conditions which might be too uncertain or too illusory to enforce at a particular time in the relationship may by reason of the parties’ subsequent conduct become sufficiently specific to give rise to legal rights and duties. In a dynamic commercial relationship new terms will be added or will supersede older terms. It is necessary therefore to look at the whole relationship and not only at what was said and done when the relationship was first formed.” (emphasis added)

Heydon JA also said ( Brambles (at [77]): “77 One further observation of McHugh JA in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd is relevant: ‘it is an error ‘to suppose that merely because something has been done then there is therefore some contract in existence which has thereby been executed’. Nevertheless, a contract may be inferred from the acts and conduct of parties as well as or in the absence of their words. The question in this class of case is whether the conduct of the parties, viewed in the light of the surrounding circumstances, shows a tacit understanding or agreement. The conduct of the parties, however, must be capable of proving all the essential elements of an express contract.” See also, to the same effect, Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 at 611 (affirmed on appeal at 615). (emphasis added)

In like vein, in Industrial Rollformers Pty Ltd & Anor v Ingersoll-Rand (Australia) Ltd [2001] NSWCA 111; [2001] Aust Contract R ¶90-129 at [136] Giles JA, (with whom Priestley and Meagher JJA agreed) said (at [138]) “It is necessary, if one party is to be held to have bound itself in contract by its conduct, to be able to identify within the conduct of both parties the terms of the contract, and to be objectively satisfied that both parties agreed to be bound by those terms .” and (at [142]): “Consistency is not enough. There must be a positive conclusion of a tacit understanding or agreement.” (emphasis added)”

In Vroon BV v Foster’s Brewing Group [1994] 2 VR 32 at 81, in a passage cited by Heydon JA with apparent approval in Brambles (at [75]), Ormiston J said: “… I am prepared to accept … that agreement and thus a contract can be extracted from circumstances where no acceptance of an offer can be established or inferred and where the most that can be said is that a manifestation of mutual assent must be implied from the circumstances. In the language of para. 22(2) of the Second Re-statement on Contracts : ‘A manifestation of mutual assent may be made even though neither offer or acceptance could be identified and even though the moment of formation cannot be determined’.”

The significance of looking at the whole of a relationship, particularly having regard to the appellant’s fiduciary relationship case, is also illustrated by Re a Company (No 00709 of 1992); O'Neill v Phillips [1999] 1 WLR 1092 at 1101 where Lord Hoffmann said: “In a quasi-partnership company they will usually be found in the understandings between the members at the time they entered into association. But there may be later promises, by words or conduct, which it would be unfair to allow a member to ignore. Nor is it necessary that such promises should be independently enforceable as a matter of contract. A promise may be binding as a matter of justice and equity although for one reason or another (for example, because in favour of a third party) it would not be enforceable in law.” (emphasis added)

In my view it was open to the primary judge to conclude (at [72]) that the para 8 conversations demonstrated a common intention in 1977 to cease carrying on business in a relationship which exposed the parties to personal liability for trading debts, and to replace it with a corporate structure under which there was no such exposure. His Honour was entitled to conclude it was inherently improbable that two young men embarking on a business and agreeing to use a corporate structure to avoid exposure to personal liability for trading debts, should nevertheless agree that should the company be unable at some indeterminate time to repay all its debts, they would be personally liable to contribute equally to making the business’ losses good. There was no suggestion in 1977 that the parties contemplated the personal debts they subsequently incurred to family and friends when the company fell on hard times.

Accordingly in my view it was open to the primary judge to conclude a partnership did come into existence in May 1977, but was displaced by the incorporation of the company. It was also open to him to reject the appellant’s case that there was a partnership between the parties which attracted an obligation to bear all losses equally which subsisted despite the incorporation of the company. The question whether a partnership exists is a mixed question of law and fact: Keith Spicer Ltd v Mansell [1970] 1 WLR 333; app. Jolley v Federal Commissioner of Taxation (1989) 86 ALR 297. It turns on whether the substance of the relationship between the parties exhibits the indicia of partnership. The fact that the parties occasionally, or indeed constantly (although that is not this case) referred to each other as partners does not prove that was their legal relationship: Duke Group Ltd (in liq) v Pilmer; sub nom Duke Group (in liq) v Pilmer (1999) 153 FLR 1 at 402, applying Inland Revenue Commissioners v Williamson (1928) 14 TC 335 at 340; nor would a statement by them that they were not partners: Weiner v Harris [1910] 1 KB 285 at 290.

A partnership is the relationship which exists between persons carrying on a business in common with a view of profit: s 1(1), Partnership Act 1892. Here while the parties joined forces as shareholders in the company, any profit was to be derived through their equal shareholding and, presumably, by the payment of dividends.

It is difficult to conclude from a review of the evidence that there was a manifestation of mutual assent sufficient to prove a partnership agreement pursuant to which the parties undertook to assume personal, and equal, responsibility for some debts, particularly borrowings from family and friends. In particular insofar as personal borrowings were concerned, the appellant did not establish the essential elements of an express contract of partnership, in the sense to which McHugh JA referred in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd . While the parties clearly agreed that each should personally borrow amounts to contribute to the company’s coffers, they do not appear to have agreed on the terms, such as servicing and interest, upon which those borrowings should be undertaken, nor in particular, does the evidence demonstrate either turned his mind to how those borrowings would be dealt with in the event they could not be repaid by the company.

Indeed, on appeal, the argument that the relationship between the parties was a partnership was but faintly pressed. Rather Mr Forster’s submissions focused more on whether, having regard to the proposition that the relationship was one of quasi-partnership, as the respondent conceded through his counsel, there was a fiduciary relationship between the parties, exposing them to an obligation to account in relation to personal borrowings. He contended that that quasi-partnership relationship was established by the para 8 conversations and persisted despite the incorporation of the company, or came into existence as a result, in particular, of the course of personal borrowings undertaken when the company was in parlous financial circumstances. He relied upon the propositions that a fiduciary relationship with attendant fiduciary obligations may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled (United Dominions Corporation Ltd v Brian Pty Ltd [1985] HCA 49; (1985) 157 CLR 1 at 12) and that partners normally stand in a fiduciary relationship to one another: Birtchnell v. Equity Trustees, Executors and Agency Co Ltd (at 407) per Dixon J; Hospital Products Ltd v United States Surgical Corporation (at 68) per Gibbs CJ. He also argued that there was a joint venture between the parties with attendant fiduciary obligations. Having regard to the conclusion I have reached concerning the quasi-partnership argument, it is unnecessary to deal with the joint venture argument.

In Ebrahimi v Westbourne Galleries Ltd , Lord Wilberforce identified a class of companies in which the members are in substance partners, or quasi-partners, such that a winding up may be ordered if the facts are such as would justify the dissolution of a partnership. He said (at 379): “… a limited company is more than a mere legal entity, with a personality in law of its own: … there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure…The ‘just and equitable’ provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way. It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence—this element will often be found where a pre-existing partnership has been converted into a limited company…. It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves. To refer, as so many of the cases do, to ‘quasi-partnerships’ or ‘in substance partnerships’ may be convenient but may also be confusing . It may be convenient because it is the law of partnership which has developed the conceptions of probity, good faith and mutual confidence, and the remedies where these are absent, which become relevant once such factors as I have mentioned are found to exist: the words ‘just and equitable’ sum these up in the law of partnership itself. And in many, but not necessarily all, cases there has been a pre-existing partnership the obligations of which it is reasonable to suppose continue to underlie the new company structure. But the expressions may be confusing if they obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations. A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in.” (emphasis added)

In MMAL Rentals Pty Ltd (ACN 008 293 490) and Others v Bruning [2004] NSWCA 451; (2004) 63 NSWLR 167 (at [71]) Spigelman CJ preferred to describe the relationship between the parties (a majority and minority shareholder) as one “requiring mutual co-operation and a level of trust” avoiding what he referred to as the “often misleading terminology of quasi-partnership”, no doubt sharing Lord Wilberforce’s reservations about the potential of the term “quasi-partnership” to confuse. His Honour’s reservation appears to have been confined to that case which concerned the valuation of a minority shareholding, for he applied the concept of quasi-partnership in an oppression suit in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd and Others [2001] NSWCA 97; (2001) 37 ACSR 672. That is, so far as my researches reveal, the context in which the Ebrahimi notion of quasi-partnership has been applied. Nevertheless it is an apt analogy, in my view, in considering whether a fiduciary relationship arose in this case.

A fiduciary relationship may exist notwithstanding the fact that the parties are in a contractual relationship ( Hospital Products Ltd v United States Surgical Corporation at 97, per Mason J; Moorgate Tobacco Co Ltd v Philip Morris Ltd (No2) (1984) 156 CLR 414 at 436, per Deane J), as, too, may a joint venture attracting fiduciary obligations carried out through a medium other than a partnership, such as a company, a trust, an agency or joint ownership: United Dominions Corporation Ltd v Brian Pty Ltd (at 10 – 11), per Mason, Brennan and Deane JJ.

The primary judge regarded it as significant (at [71]) that the appellant could recall no discussion with the respondent that each, at some time, would take responsibility for debts owed by the company to other persons and (at [74]) that there was no record of “an agreement intended to operate outside the corporate structure whereby the parties preserved the risk of personal liability for the debts of each other where the proceeds were on-lent to the company”. However, a fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangements between them: United Dominions Corporation Ltd v Brian Pty Ltd (at 12), per Mason, Brennan and Deane JJ. It may be possible, for example, to imply or infer an understanding between shareholders which qualifies the legal relationship which flows from a literal application of a company’s articles of association: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd and Others (at [32]) per Spigelman CJ applying Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 WLR 413 at 417 – 418.

The essence of a fiduciary relationship is that one party pledges to act in the best interest of the other. The fiduciary relationship has trust, not self-interest, at its core, and when breach occurs, the balance favours the person wronged: Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 (at 543) per McLachlin J quoted with approval in the joint judgment of Gleeson CJ, McHugh, Gummow, Kirby and Hayne JJ in Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at [40].

Where it is said that a fiduciary obligation exists, a court must first carefully delineate the subject matter over which the obligation extends: Blythe v Northwood [2005] NSWCA 221; (2005) 63 NSWLR 531 at [187] per Mason P; Birtchnell v Equity Trustees, Executors and Agency Co Ltd, (at 408). It is necessary to determine the particular obligations owed and consideration of what acts and omissions amount to failure to discharge those obligations: see Maguire and Tansay v Makaronis [1997] HCA 23; (1997) 188 CLR 449 (at 464) per Brennan CJ, Gaudron, McHugh and Gummow JJ.

Mr Forster argued that even if the relationship for which the appellant contended was not made good by the para 8 conversations, a fiduciary relationship was established by the course of the parties’ dealings, coupled with their undisputed agreement that “at the end of the day what we take out will be 50:50”. In my view the appellant’s submission that the primary judge focused too narrowly on the para 8 conversations and/or finding an express agreement between the parties should be accepted. The course of the parties’ conduct, and the inferences which could be drawn from that conduct, were also relevant to characterising their relationship. The same observation can be made about his Honour’s conclusion (at [77]) that there was no evidence the respondent agreed to be jointly liable for, or to contribute to, the repayment of the SMK loan. It was necessary to consider that transaction in context, including as part of the series of personal borrowings each party undertook from about 1980 to keep the company afloat.

It is apparent from the facts I have recited that the relationship between the parties was an evolving one. It is reasonable to infer, as the primary judge did, that their intention in 1977 was to conduct their business purely through the company and any other corporate structure as they may be advised would facilitate immunity from personal liability from trading debts. However, once the company’s financial circumstances deteriorated, they agreed to borrow from family and friends to keep the company afloat. By and large, particularly in the case of the SMK loan, those loans were treated as monies borrowed by each party and were reflected as director’s loans in the company’s books. There do not appear to have been any discussions about the terms of such borrowings (e.g. as to rate of interest, security etc) nevertheless by 1995 all the loans made by family or friends had been repaid with company funds by reimbursing the relevant director and crediting his loan account. Only the SMK loan remained outstanding. At the time all other debts were repaid, the company had $690,000 which was insufficient to repay the SMK loan and which the parties agreed (albeit the appellant says his agreement was under protest, subject to a final accounting) to divide equally, although it should be noted that the distribution of the $690,000 was eked out between 1995 and 1998 rather than distributed in a lump sum. The respondent says, in effect, that this is unfortunate, but it is the appellant’s problem.

In my view, however, the evidence established a fiduciary relationship between the parties arising from the mutual trust and confidence they reposed in each other from the outset of their business relationship. Their initial agreement that their relationship be conducted on a “50:50” basis was important. It demonstrated that despite their recognition that their respective contributions might differ, they were equal participants in the business. Their mutual trust was manifest in the conversations to which the appellant deposed concerning borrowing from family and friends. As Mr Forster submitted, the fact that each borrowed unequal amounts and incurred personal liability to the lenders to keep the company going supported the proposition that there was an understanding between them, based on their mutual trust and confidence, to equalise their contributions to the business at an appropriate time.

No doubt it was their primary intention that such borrowings would be repaid using company funds, but that does not preclude a finding that they were subject to a fiduciary obligation to be equally and personally liable to each other for losses flowing from personal borrowings. Such a finding is consistent with the understanding upon which they embarked upon the business in 1977 or, if not, could be inferred from their conduct once the company got into financial difficulties. They ensured by their joint, but unequal, borrowings from their family and friends that the business could be kept afloat. In this respect they undertook to act in the interests of each other in a manner which affected their interests in a practical sense and, to that extent, in my view stood in a fiduciary relationship: see Hospital Products Ltd v United States Surgical Corporation (at 96 – 97), per Mason J.

The circumstances in which the SMK loan was undertaken exemplified the relationship. It appears to have been one of the largest personal borrowings. It was undertaken at a time when the company needed to repay external creditors to remain financially viable to pursue the litigation against Eurobodalla Council. It was the success of that litigation (to which the appellant devoted his energies for many years) which brought $2,7286,44 into the coffers and enabled the parties to repay all but the SMK loan. It is unnecessary to find that the parties personally borrowed those funds to conclude that, by virtue of their fiduciary relationship, the respondent is prima facie liable to account to the appellant in relation to the SMK loan.

Accordingly, subject to the Notice of Contention point, I would propose the following declaration: “That there existed between the appellant and the respondent between 1977 and 1995 a quasi-partnership which gave rise to a fiduciary relationship and an obligation to account to each other to equalise contributions and losses arising from the SMK loan” Laches, acquiescence and delay

I turn to the respondent’s Notice of Contention. The essence of the case he seeks to establish is to deny the appellant relief on discretionary grounds is that, having regard to the lapse of time, it is impossible to grant equitable relief on just terms: see Meagher Gummow & Lehane’s Equity Doctrines & Remedies , Fourth Edition at [36 - 020].

As to delay, the appellant last sought to obtain the respondent’s agreement to equalise the parties’ contributions in November 1995: primary judgment at [48]. He commenced proceedings in 2000.

In 1995 the balance of the loan was approximately $1 million ( Blue 3/536) . The appellant repaid $420,000 in December 1995, apparently from the proceeds of the sale of a property he had constructed. ( AT 62) Other payments of $80,000 and $75,000 in reduction of the loan were made in 1996 and 2000 respectively, presumably by the appellant. Mr Peterson applied all these payments to reducing interest. As at November 2004 the loan balance was $1,349,423.

As to the claim of acquiescence, the appellant agreed (albeit he says under protest) to the distribution of $690,000 of the company’s funds between 1995 and 1998, leaving the SMK loan unpaid. At this stage the company had paid $250,000 towards the appellant’s liability to Mr Peterson.

The primary judge did not deal with either of the discretionary bases upon which the respondent sought to resist the appellant’s claim.

In my view neither the passage of time nor the appellant’s receipt of a distribution from the company instead of insisting on its payment to SMK prevents the Court from granting the appellant equitable relief. The respondent has been on notice of the appellant’s claim since at least 1995. He could not, in my view, properly have thought that it had been abandoned. While the respondent might be said to suffer detriment to the extent that interest has accrued on the SMK loan, any such detriment can be met by formulating terms as to, for example, the interest rate and the period for which the respondent should bear liability.

Since preparing these reasons I have read Mason P and Basten JA’s draft judgments. I agree with Mason P that the principles of contribution are an alternative route to the outcome I propose. I also agree, with respect, with his Honour’s analysis of Basten JA’s judgment and with the relief his Honour proposes.

BASTEN JA : In about May 1977 the Appellant, Mr Brooker, a civil engineer, reached agreement with a colleague, Mr Friend, who is the Second Respondent in these proceedings. The agreement involved each leaving his then employment in order to set up a construction business together. It was proposed to run the business through a company, of which each would be a shareholder and director. The company, Friend & Brooker Pty Ltd (“the company”), being the First Respondent in these proceedings, was incorporated on 18 July 1977. Background

Over approximately 10 years, the company carried on business, including a major construction contract for the Eurobodalla Shire Council. That contract involved the construction of a sewage reticulation plant at Narooma, for a sum in excess of $2.5 million. The contract reached practical completion in September 1985, but there were significant disputes with the Council in respect of sums payable by it to the company. A major payment of $1.6 million was not made until 9 June 1993 and a final payment, involving $900,000, was made on 19 September 1994. It is clear that the initial funding of the work stretched the company’s resources and that the slow payment by the Council largely put an end to the company’s trading activities.

The company funded its trading activities through a bank overdraft, an assortment of loans raised by the two directors, both personally and through family and friends, and through delayed payment of trade creditors.

One source of loan funds was a family investment company, known as SMK Investments Pty Ltd (“SMK”), a director and shareholder of which was an acquaintance of Mr Brooker, apparently from his time at university: Tcpt, 6 December 2004, p 52(30).

It is the third in a series of loans from SMK which is at the heart of these proceedings. That loan, provided in December 1986, was for an amount of $350,000. By the date of the hearing in December 2004, the amount, with interest, had increased to a figure of about $1.3 million: Brooker v Friend & Brooker Pty Ltd & Anor [2005] NSWSC 395 at [59]. The question in dispute was whether Mr Friend was jointly liable for that debt, or whether the liability was solely that of Mr Brooker.

There was no dispute that the bulk of the proceeds of the loan had been used to meet the company’s outstanding obligations, although Mr Friend did not concede that the whole had been so appropriated. The moneys were, in the language adopted by the trial judge, “on-lent by Mr Brooker to the company”: see [2005] NSWSC 395 at [17]. It was also not disputed that Mr Brooker had a loan account with the company. If the money was on-lent by him as a director, and credited to his director’s loan account, it would be a debt repayable by the company to him.

Mr Brooker sought to demonstrate responsibility on the part of Mr Friend for the interest payable to SMK in two ways. The first way in which the Appellant presented his case, was that whatever the scope of the contractual agreement reached in 1977, a further and specific agreement was reached in November 1986 in relation to the third loan from SMK.

The second way was that Mr Brooker and Mr Friend operated their construction business at all times as a partnership or joint venture. The legal vehicle through which the business was conducted was the company, but there was an overarching agreement as to the operation of the company, including the sharing of profits and losses and the contribution of financial accommodation to cover costs, expenses and liabilities.

Mr Brooker argued that the joint venture gave rise to a fiduciary relationship between him and Mr Friend. That relationship, based on mutual confidence and trust, required that each would share equally in the expense involved in putting the company in funds. The result of that mutual obligation was, according to Mr Brooker, to render Mr Friend liable to pay half the capital sum and half the cost of obtaining the loan funds from SMK, being half the interest payable on the loan, as it accrued over many years.

Mr Friend, on the other hand, contended that the agreement was effected by setting up the company as the vehicle for the joint venture. Thus, once the company was incorporated, profits and losses would be calculated by reference to the company’s accounts and each individual would be entitled, as an equal shareholder, to share equally in any distribution. To the extent that either Mr Brooker or Mr Friend paid a trade creditor of the company directly, the payment would be treated as having been made on account of the company and a debt due from the company to the director would thereby arise, as it would if the company were put in funds by a director, to cover its existing or on-going financial obligations.

This dispute would not have arisen had the loan from SMK been paid directly to the company, pursuant to an agreement between SMK and the company, with Mr Brooker and his wife putting up security pursuant to a guarantee. The liability to pay interest to SMK would then have been that of the company directly. If the company were unable to pay the debt, and if it were met by Mr Brooker personally, there might have been a claim for contribution from Mr Friend. However, that position did not arise because the company was not a party to any loan agreement with SMK. One reason for that may have been to keep the indebtedness off the books of the company, so as to make it a more attractive borrower to other lenders. Issues

The issues, as presented by the Appellant were: (1) Was there a contractual obligation on Mr Friend to contribute to the capital and interest payments required to be made by Mr Brooker to SMK arising out of: (a) a general oral agreement reached in 1977; (b) a specific oral agreement reached in or about November 1986 pursuant to which Mr Friend - (i) was a co-borrower from SMK, or (ii) agreed to pay half of the repayments on the loan? (2) Absent a contractual obligation: (a) would equity require Mr Friend to contribute half of the repayments because the joint business had received the benefit of the funds; (b) if so, would such an obligation arise only where payment by Mr Brooker was imminent; (c) if so, was such payment imminent, and (d) should relief be otherwise refused because of laches on the part of Mr Brooker? (1)(a) Oral agreement: 1977

The first basis upon which the Appellant sought to establish his entitlement to repayment of part of the loan from Mr Friend was the oral agreement between them as to the establishment of their joint venture, in about or prior to May 1977.

It may readily be accepted that there was an agreement to share equally the financial burden of running the business and thus to share equally the financial contributions to the company. However, there was no express agreement as to how the cost of any funds procured by each individual might be accounted for. Once the company was incorporated, it might have been expected that it would obtain funds by one of two means. The first and most direct means would have been for the company to borrow, possibly with the benefit of directors’ guarantees, secured over assets of the directors or their families. To the extent that the directors thereby became co-guarantors, according to established principle, each would be obliged to meet a half-share of the obligation guaranteed so that, if more than half of the debt were recovered from one, he would be entitled to a contribution from the other. However, the major debt to SMK did not fall within those principles, because there was no borrowing by the company directly from SMK.

A second means by which the company might obtain financial contributions was by way of a loan from a director. To the extent that the directors provided financial resources unequally, he who provided greater than 50% of the financial accommodation could recoup half of the difference from the other director. The directors did provide loans, and that principle may be relevant. However, the dispute does not engage at that level.

What in fact seems to have happened was that the company obtained funds from a number of sources, including family and friends of each of the directors. There was a stage at which, as described by senior counsel for the appellant, to clear the balance sheet, “the creditors related to Mr Friend would be pooled into Mr Friend’s loan account, while the creditors associated with Mr Brooker would pooled into Mr Brooker’s loan account”: Tcpt, C/A, 13 March 2006, p 16(45), and see [2005] NSWSC 395 at [14], set out at [RM 63] above. Whilst that may describe the result in colloquial terms, legally speaking there must have been a novation in each case pursuant to which the respective director was substituted as a borrower, in place of the company. What is not explained is whether there was interest payable on the loans to the company, and if so, whether interest remained payable under the novated arrangements and, if so, whether and to what extent the company became liable for those interest payments. One way of achieving liability on the part of the company for such interest payments would have been to make interest payable on the directors’ loan accounts. That was sought to be done by a somewhat cryptic resolution passed at a directors’ meeting on 8 December 1993, the minutes of which read: “1. Company Loans from Directors The interest brought to account in respect of certain loans raised by the Directors and applied for the benefit of the company. Further notes some interest had been paid for on behalf of the Company leading up to settlement and this had been accounted for and credited to Directors’ Loan Accounts. Resolved to accept interest on loans raised by Directors and for which interest had not been paid but was legally accrued. Further resolved the rate to be applied would be the rate of interest applied in the NSW Supreme Court and would be calculated on all such loans from 1/7/1984.”

If an overarching joint venture agreement were established, in 1977, which allocated equally the cost of funds required by the joint venture, one would have expected there to be some form of partnership accounts. Otherwise, it would not be possible for one partner to know what were the costs of funds which had been incurred by another partner in obtaining financial accommodation for the business. Nor would it be possible, without any documentation, to keep a running account over two or more decades. For the reasons given by McColl JA, the evidence failed to establish the existence of any relevant agreement to that effect in 1977. (1)(b) Specific oral agreement: November 1986

There were several loans obtained from SMK, two preceding the $350,000 loan obtained in December 1986, and two succeeding it. The later loans are not in dispute, because Mr Brooker appears to have accepted that they were not obtained on account of the joint venture. The two earlier loans are not in issue because they were paid out. The question is then whether there was any specific agreement in relation to responsibility for the $350,000 loan.

Mr Brooker gave evidence of a conversation he had with Mr Graham Peterson (on behalf of SMK) with respect to a possible advance of $350,000, whilst the dispute between the company and the Council was being resolved, being for a period which he hoped would not exceed 12 months: affidavit, 25/11/02, par 159. Two or three days later he had a conversation with Mr Friend which was said to include the following exchange (at par 160): “I said: ‘Graham and Sue Peterson have offered to loan us $350,000 to take the pressure off until we finalise the claim against the Council.’ He said: ‘What do you think?’ I said: ‘We do not have a choice. If we do not accept there is no way we can repay Alcon or the De Bakkers or maintain the Trade Credits loan.’ He said: ‘Well then, we should do it.’”

There are two objective circumstances surrounding the SMK loan. The first is that the proceeds of the loan were almost entirely (if not entirely) expended in meeting financial obligations of the company. Secondly, the documentation in relation to the loan was limited to the execution of a mortgage by Mr Brooker and two members of his family who were joint owners of the property over which the loan was secured.

According to the epitome of mortgage, interest was payable on the loan at the rate of 19.5%, reducible to 18.5% on prompt payment. Most of the quarterly payments of interest, however, were not made within the prescribed period and unpaid interest was capitalised. Mr Peterson gave evidence that he had later agreed to a variable interest rate: affidavit, 15 November 2004, par 13.

The primary case made by Mr Brooker was that Mr Friend was a co-borrower from SMK. Although it may be said that Mr Friend knew that a loan was being taken out and agreed to that course, there is no evidence that he knew of the interest rate or other terms of the loan. Put on that basis, the Appellant’s case failed at trial: see [2005] NSWSC 395 at [32] and [75]. In my view, the challenge to his Honour’s conclusions on this issue should be rejected.

Put more broadly, and assuming there was some overarching agreement in relation to financial accommodation, there is no significant evidence that, in any other case, the cost of funds incurred by one of the directors was brought into account. If the SMK loan were a special case, there is no evidence upon which to found an express agreement by Mr Friend to be responsible for half of the cost of the funds.

The final contractual possibility which appeared to derive some limited support from Mr Peterson’s evidence, was that the loan was made to the company, at least as a co-borrower, if not the sole borrower. In that event, the interest payable on the loan should have been recorded as an expense in the company’s accounts. There is no financial accounting by the company showing such an expense, from 1986 until the date of trial. But even if there were, that would undoubtedly render the company insolvent and the lender would be entitled to look to Mr Brooker, and the provision of security by him and his family, for payment of the outstanding debt. Again, Mr Brooker’s interests will only be served if he can demonstrate liability on the part of Mr Friend personally.

A final problem with respect to the claim by Mr Brooker is that the contractual liability sought to be established is to meet one-half of the actual cost of the loan obtained by the other director. The amount sought is, however, an unpaid debt. If Mr Friend’s contractual obligation is to account to Mr Brooker, it would seem to be a precondition to a payment by Mr Friend that Mr Brooker had in fact paid the outstanding debt to SMK. That has not happened.

It follows that the Appellant cannot succeed on his contractual claims, however formulated. (2) Equitable contribution

Alternatively, the Appellant asserted that he and Mr Friend had a fiduciary relationship which required the one to make good half of any costs or expenses incurred by the other in obtaining financial accommodation for the joint venture. This claim raises three issues on which Mr Brooker must succeed, namely that: (1) the equitable obligation extends to cover contribution to pay interest on funds raised by personal loans to a director; (2) an equitable right of contribution has crystallized where the primary debtor has not repaid his share of the loan, and (3) relief should be granted, absent proof that payment of more than the share payable by the primary debtor is imminent. (a) Existence of fiduciary obligation

For the reasons given by McColl JA, it was open to the trial judge to conclude that there was no partnership, in the legal sense, between Messrs Brooker and Friend after the incorporation of the company: see [141] above. However, the conclusion reached by the primary judge that, following incorporation, their relationship was purely one of co-directors of the company, understates the true nature of the relationship: see [2005] NSWSC 395 at [77]. Furthermore, his Honour’s comment at [79] that “Mr Brooker has utterly failed to prove any agreement pursuant to which the existence of a fiduciary relationship with Mr Friend was established after the incorporation of the company” places, with respect, too much emphasis on the notion of agreement. As explained by McColl JA, the conduct of the parties over the years demonstrated the existence of a fiduciary relationship, in the nature of a joint venture, which was not confined to the management of the company. That follows from the fact that it was Messrs Brooker and Friend who arranged funding for the company from their own resources.

The legal principles upon which the Appellant relied were stated by Warren J (as her Honour then was) in Mathieson v Booth [2000] VSC 385 at [105]-[108]. In particular, her Honour stated: “[105] It is well established that persons who combine in a joint business undertaking may owe each other fiduciary duties irrespective of the legal form of the undertaking: United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1; Hill v Rose [1990] VR 129. It does not matter that they have not formed a partnership: United Dominions at 10. Nor does the use of a company structure preclude the existence of a relationship among the investors in the company of a fiduciary nature: Re Yenidje Tobacco Co Ltd [1916] 12 Ch 426; Re Wondoflex Textiles Pty Ltd [1951] VLR 458; Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. In United Dominions the High Court considered the nature of joint ventures and the duties that may flow therefrom. In the joint judgment of Mason, Brennan and Deane JJ (at 10-11) it was held that the terms "joint venture" is not a technical term and connotes an association of persons for a variety of purposes including a financial undertaking with a view to profit. [106] In my view it is clear from the evidence that the business relationship between Mathieson and Booth was such that they owed each other fiduciary duties. They were involved in a number of joint investments over many years. Indeed, the very terms and effect of the restructure agreement were indicative of a relationship of mutual trust and confidence. In fact, a relationship of mutual trust and confidence was conceded by Booth in cross-examination. Booth said he expected Mathieson to do the fair thing by him and that, in turn, he expected Mathieson to be interested in Booth's financial well-being. Consideration of the authorities and commentaries in relation to the topic of joint ventures reveals that a fundamental [indicium] of a joint venture is the matter of trust: see United Dominions , supra; Biala Pty Ltd v Mallina Holdings Ltd (No. 4) (1993) 13 WAR 11, 57-8; also, Lehane, "Fiduciaries in a Commercial Context", in Finn, Equity and Commercial Relationships , pp.95-108. Furthermore, there was a constant usage by Booth of the expressions "partner" and "partnership" at various times in various documents. In my view this manner of expression conveyed the real nature of the relationship between Mathieson and Booth, that of a business partnership giving rise to mutual obligations. On these bases, therefore, I am satisfied that Mathieson and Booth mutually owed one another a fiduciary duty.”

It follows that an equitable right to equality of contributions will apply, although the content of the obligation will depend on the circumstances of the case. Support for this approach may be obtained more generally from the principles of unjust enrichment explained by Deane J, Mason J agreeing, in Muschinski v Dodds (1986) 160 CLR 583 at 621-623. That case involved a couple in a de facto relationship who purchased a property for both residential and commercial use. The funds to purchase the property were provided by Mrs Muschinski, although Mr Dodds was expected to provide further funds and labour in due course. That did not eventuate: both the personal relationship and the commercial venture collapsed. As stated by Mason J at p 599: “The circumstances of the case, viewed in the light of the common intention that Mr Dodds was to take an immediate and unconditional interest in the property, did not make it inequitable that he should retain that interest, notwithstanding the failure of the projected development. But it would be inequitable for him to retain his interest without crediting to Mrs Muschinski the contributions which she made to the acquisition and improvement of the property. … I agree with Deane J that the general principle underlying the proportionate repayment of capital contributions to joint venturers on the failure of a joint venture is wide enough to support this aspect of the constructive trust.”

At p 621, Deane J stated: “If the venture between Mrs Muschinski and Mr Dodds had been merely a commercial one involving the purchase, development, partial realization and use of the Picton land, there would be little room for argument about the appropriate characterisation, for the purposes of the relevant principle of equity, of Mr Dodds’ conduct in seeking to assert and retain the full benefit derived by him from Mrs Muschinski’s contribution without making any allowance to compensate her for the disproportion between those contributions and his own. The basis upon which Mrs Muschinski made her contributions was that Mr Dodds would, in due course, contribute, both in money and by labour, to the subsequent development. Their planned endeavour collapsed at a time when Mrs Muschinski had made all or almost all of her expected contribution to the overall venture, but Mr Dodds had made almost none of his. The parties had neither adverted to nor made special provision to deal with that situation. If no more than the commercial relationship had been involved, Mr Dodds’ conduct in seeking to catch and retain the unfair advantage of unforeseen circumstances by asserting his legal entitlement of a one-half interest in the property without assenting to any adjustment to compensate Mrs Muschinski for the unintended gross disproportion between their respective contributions would plainly be unconscionable for the purposes of the relevant principle of equity.”

The principles, affirmed in Baumgartner v Baumgartner (1987) 164 CLR 137 by all members of the Court, provide that, in general, equity will grant relief to equalise the contributions to a joint venture where the venture has failed, or prematurely ceased to operate, in circumstances for which the parties did not expressly provide. In the present case, that cannot be done by way of a constructive trust, because there is no valuable property in which the parties can share, the company being virtually insolvent.

Adopting that approach, the substantive issue is whether the business relationship extended to sharing the costs of any financial accommodation obtained for the purposes of the business, to the extent they were not met by the company, or whether those costs were to be met by the partner making the contribution. The fiduciary obligations imposed in accordance with equitable principles regarding unconscionable behaviour depend upon the existence of a relationship, and its scope, objectively determined, having regard to the intentions of the parties.

According to the Appellant’s pleading, the relationship between the parties terminated in January 1995, when he sought an accounting with Mr Friend as to their respective entitlements, a request which Mr Friend refused. For the reasons given by McColl JA, I accept that the relationship between parties required an equality of contributions in relation to the financial accommodation provided to the company. However, two problems remain.

First, it is common ground that, between 24 August 1995 and 3 March 1998, Mr Brooker received from the company an amount of $345,000. This was described by the trial judge as a payment “by way of loans”: [2005] NSWSC 395 at [59] and see [75] above. The fact that Mr Brooker did not use the funds to repay SMK, as noted at [132] above, is beside the point. It is unclear why the payments were said to be by way of “loans” from the company, presumably leaving Mr Brooker as a debtor of the company, rather than a payment in reduction of the directors’ loan account in Mr Brooker’s name. In any event, the relevant question for present purposes, is whether Mr Brooker, in his claim for equitable relief, should bring this payment into account in reduction of his claim for reimbursement by Mr Friend. If that were done, and subject to the question of liability for interest, it seems that the financial accommodation supplied by Mr Brooker, and ultimately sourced to SMK, has been repaid in full, or as to all but $5,000.

The second issue concerns the obligation to meet the cost of the loan to Mr Brooker. In my view, there are four factors which, taken together, militate against that being part of the mutual fiduciary obligations. First, the decision, taken in about August 1984, to consolidate all loans sourced to third parties who were family members or friends of one or other of the directors, into the directors’ loan accounts demonstrates that the directors gave express consideration to the method of accounting for these funds. Secondly, the directors had decided on 8 December 1993, that the company would pay interest at Supreme Court rates on the directors’ loan accounts. Thus, the company was required to pay a director interest on funds obtained by that director from any source, and regardless of whether interest was payable to the ultimate lender, and without regard to the rate of such interest. Thirdly, if there were an understanding that the directors would account, as between each other, not only for the capital element of any financial accommodation provided to the company, but also for the cost of funds to them, individually, such accounting would have required the preparation of separate and possibly quite complex accounts, so that the individual circumstances of each director could be known from time to time, and an attempt could be made to reconcile the different interest rates which might have applied to the loans from third parties to the directors and the directors’ loan accounts with the company. There is no evidence that any such contemporaneous accounts were kept. The fact that Mr Brooker provided material which constituted a reconstruction of such accounts provides no evidence that there was ever an understanding that such accounts should be kept. Nor was there a shred of evidence that any note had been taken of the cost of funds to a director with respect to the numerous other loans obtained from third parties for the business.

Fourthly, there is direct evidence of the intentions in the evidence of Mr Brooker. In his affidavit of 25 November 2002, Mr Brooker gave evidence of conversations with Mr Friend in October 1994 and on 25 January 1995. These conversations related to the expenditure of the third payment received from the Eurobodalla Shire Council, in the amount of $900,000. At a meeting stated to be in or about October 1994, at his home, Mr Brooker said he had explained that the amount would not pay “all the debts” and that “the debt to the Petersons [the SMK directors] is nearly a million dollars”. Mr Friend stated that he did not accept liability for the debt to the Petersons. However, at the meeting on 25 January 1995, Mr Brooker gave a somewhat different account of his own position, recording (affidavit, par 120), that he had said to Mr Friend: “My calculations show that my contribution exceeds yours by approximately $900,000. Therefore, after payment of the ANZ Bank and other small creditors, the balance of the money held in trust by [the solicitor] should go to Mr and Mrs Peterson. To ensure that we contribute equally you will have contribute $276,000 and I will have contribute $92,000. We will then have enough to completely pay out the Petersons, the ANZ Bank and the other remaining creditors.” The calculation of contributions to the SMK debt was apparently made on a 25:75 basis, in Mr Brooker’s favour. However, significantly, he seemed to be suggesting that the debt would be paid out with an amount of $368,000. Given the size of the debt with interest at that time, that statement appears to be inconsistent with an intention to recoup from the company (or Mr Friend) outstanding interest on the debt, at least at the rate claimed by SMK.

Taking this material as a whole, it should be accepted that each director was subject to a fiduciary obligation to meet an equal share of capital contributions. If such accounts were to be taken, they should make allowance for the personal use by Mr Brooker of the $345,000 paid by the company, which was not used by him in immediate reduction of the SMK loan. (2)(b) and (c) Payment not imminent

Even if the Appellant and Mr Friend were to be treated as liable to equitable principles of contribution of the kind applicable to co-sureties, absent an imminent threat by the creditor (SMK) to recover from Mr Brooker, with a real possibility that he would be required and able to pay more than 50% of the liability, Mr Brooker would have no right of contribution from Mr Friend: see Harpley Nominees Pty Ltd v Jeans [2006] NSWCA 176 at [36]-[44] and see Mason and Carter, Restitution Law in Australia (1995) at [637]-[639]. Even if this conclusion were wrong, absent imminent recovery, relief should be refused on discretionary grounds: see again, Harpley Nominees at [36]-[47].

Mr Brooker did not establish that recovery of the moneys payable by him to SMK was imminent, or even reasonably foreseeable. The loan was incurred 20 years ago, in December 1986. The Court was taken to no evidence which suggested that the directors of SMK had threatened to take steps against Mr Brooker to enforce the outstanding obligations to repay capital and interest. Mr Brooker did not say in his affidavits that it had. Furthermore, he filed an affidavit sworn by Mr Peterson, dated 15 November 2004, in which no hint was given that Mr Peterson intended to take steps to have SMK enforce its legal entitlements against Mr Brooker. In giving oral evidence, Mr Brooker was cross-examined to the following effect (Tcpt, 6 December 2004, p 54): “Q. Mr Peterson, your friend, has done nothing to try and recover the money from you, has he? A. No.”

If it be necessary for Mr Brooker to establish that payment or loss by him was “imminent”, in accordance with the authorities referred to in Harpley Nominees , one is entitled to ask when it became imminent? It could hardly be said that there was pressure on Mr Brooker to pay SMK in October 1994, when he was asserting that Mr Friend had an obligation to contribute, or he would surely have told Mr Friend that. If it had been imminent at any stage prior to the trial of the proceedings, one might have hoped for a pleading to that effect at least by the stage of the fifth amended statement of claim filed on 3 December 2004. None is to be found. The last opportunity to establish that point was the evidence of Mr Peterson, given on 7 December 2004. No question was asked of him in chief to that effect. In cross-examination he agreed that Mr Brooker was a long-time friend. It was put to him that, to the extent that his evidence suggested he had lent to Mr Brooker and Mr Friend jointly, that was untrue. Cross-examination continued (Tcpt, 7 December 2004, p 125-128): Q. Why haven’t you gone after him [Mr Brooker] for the money Mr Peterson? A. I suppose because he’s a friend and (b) he’s not in a position to repay it at the moment. … Q. You’re not going to go after him for that money, you know he isn’t worth a row of beans? A. Well, he’s not worth a great deal of money but he does have some assets, yes. Q. Well why aren’t you going after them? A. Well as pointed out he’s an old friend, I’m not particularly interested in throwing him out of his house at this stage, or any future stage. Q. The fact of the matter is you have effectively abandoned your claim against Mr Brooker because you know he’s got nothing and you’re not going to execute against him are you? A. I’m not planning to execute against him at the moment, no. … Q. Now is this the position Mr Peterson, that you’re not going to sue Mr Brooker for any money or turf him out of his house, but you’re here because you think you might get some money if Mr Brooker gets some money out of Mr Friend? A. Well put it this way, and I will answer the question … because I see that in two parts. The first part is, well, he is at the moment looking at putting his house on the market, as I understand it, it is on the market, and when that house is sold I will expect to get some of the proceeds from that house. That’s half the point. The second half of the point is yes, it is certainly true that the more assets he has the more money that he has, the greater it’s going to be his capacity to service the loan and that’s obvious. … Q. And at the end of the day apart from any security you hold for Mr Brooker you’re content to look at [the corporate vehicle] as the borrower of the money is that right? A. I can’t say it’s ‘content’ but yes that’s what I’d have to do.” There was no re-examination.

No finding was made by the trial judge as to whether recovery against Mr Brooker was “imminent” or not. In my view, the authorities establish that Mr Brooker is not entitled to relief against Mr Friend unless he can show that he is subject to imminent enforcement of his legal obligation. I am not satisfied that enforcement of any obligation to pay an amount in excess of 50% of the outstanding debt is imminent. Indeed, the evidence persuades me that Mr Peterson had no such intention. The authorities referred to in Harpley Nominees are either inconsistent with an entitlement to equitable relief in these circumstances or would indicate that such relief should be refused on discretionary grounds. There is no need to consider the issues of laches. In these circumstances, the appeal should be dismissed with costs.