Hawes v Dean

1. [1]

   BATHURST CJ: I have had the advantage of reading the judgment of Barrett JA in draft. I agree with the orders proposed by his Honour and with his reasons. I make the following remarks in respect to what his Honour has described as issues (a) and (b) on the appeal.

2. [2]

   Clause 5.2 of the Clydesdale Deed must be considered in the context in which it arises. That was made clear by the High Court in Woodside Energy Ltd v Electricity Generation Corporation (trading as Verve Energy) [2014 HCA 7; 188 ALJR 447 at [35]; see also Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 at [86].

3. [3]

   In the present case the relevant context is provided by the recitals to the Clydesdale Deed and in particular recitals (f) and (g). These recitals make it clear that the Clydesdale project was to be the responsibility of the Hawes Group. The recitals also make it clear that what was envisaged was the obtaining of an extension of the options over the properties the subject of the proposed development, the obtaining of a Development Application and subsequent redevelopment or sale of the options.

4. [4]

   In that context cl 5.2, in providing that the hypothetical option sale price would be paid if the Hawes Group proceeded with the purchase of the land, extended to the Hawes Group proceeding in the name of either Mr Hawes or Glenside Group Pty Ltd or, by Mr Hawes or Glenside Group causing a nominee to purchase the land, which was what occurred. That construction not only gives effect to the context but is also consistent with the words "proceed to purchase". The clause does not require the Hawes Group parties to purchase the land but rather to proceed to purchase, which could be done either in their own names or in the names of a nominee.

5. [5]

   Further the context makes it clear in my opinion that the payment of the hypothetical option sale price is not conditional on construction commencing. The context envisaged is either Hawes Group selling the options or purchasing the land and proceeding with redevelopment. The Hawes Group effectively adopted the latter course by purchasing the land. It then became liable to pay the fee at the time specified in cl 7. From that time it was entitled to whatever benefit could be derived from the land either by way of sale or redevelopment.

6. [6]

   McCOLL JA: I agree with Barrett JA's reasons and the orders his Honour proposes.

7. [7]

   BARRETT JA: At various times from about 1988, Mr David Hawes and Mr Trevor Dean undertook a number of property development ventures together. Each used certain corporate vehicles. The individuals accept that neither they nor companies associated with them ever carried on business in partnership. Independence was maintained except to the extent that specific contracts were entered into from time to time in relation to particular ventures or investments.

8. [8]

   In 2005, Mr Hawes and Mr Dean began to unwind their investments. To that end, a number of separate contracts were entered into at different times over a period, each effecting separation in relation to a particular venture. One such venture concerned a development site at Pymble.

The Clydesdale deed

1. [9]

   On 8 September 2005, a deed referred to as "the Clydesdale deed" was made by Mr Hawes, Mr Dean, Hawden Property Group Pty Ltd ("HPG"), Leanwick Pty Ltd, Glenside Group Pty Ltd ("Glenside") and Gallwey Pty Ltd ("Gallwey"). The agreement evidenced by the Clydesdale deed was to the general effect that Mr Hawes and Glenside (referred to as "the Hawes Group") should have or retain the full benefit of such rights as the parties had in respect of the Pymble development site and that certain payments would be made as between the parties.

2. [10]

   The Clydesdale deed began by reciting the desire of Mr Hawes and Mr Dean to "excise" from their business and to "implement special arrangements" concerning "the Project" consisting of the development of a residential complex on Nos 2, 3, 4, 5, 6 and 8 Clydesdale Place and No 1190A Pacific Highway, Pymble. It was further recited that Gallwey was the grantee of certain call options to purchase the relevant land. Those options were referred to as "the Options". Persons unrelated to and independent of Mr Hawes, Mr Dean and associated entities had granted the options.

3. [11]

   The final recital was:

4. [12]

   Among the defined terms was "HPG Advances" - being $308,661 outlaid by "various HPG entities" in connection with the Project.

5. [13]

   The operative provisions of the Clydesdale deed were contained in Schedule 6. By clause 1:

6. [14]

   The deed continued as follows:

7. [15]

   Annexure A was a pro forma loan agreement between Glenside as developer, unspecified contributors, and Mr Hawes as covenantor, in respect of Nos 2, 4 and 6.

The Equity Division proceedings

1. [16]

   Differences concerning a quite separate property venture and a deed known as the "Gallwey deed" caused Mr Hawes and Hawes Investments Pty Ltd ("Hawes Investments") to commence proceedings in the Equity Division of the Supreme Court against Mr Dean and T & B Dean Investments Pty Ltd ("Dean Investments").

2. [17]

   Mr Dean and HPG sought leave under s 22 of the Civil Procedure Act 2005 (NSW) to file a cross-claim against Mr Hawes and Glenside in the proceedings thus commenced. The cross-claim concerned the Clydesdale deed and other matters. In particular, there was a claim by HPG under clause 4(a) of the Clydesdale deed and a claim by Mr Dean under clause 4(b). The former was one of several claims brought (or defended) by Mr Dean on behalf of HPG by leave granted under s 237 of the Corporations Act 2001 (Cth). The application under s 22 and the related applications under s 237 were opposed by Mr Hawes and Hawes Investments. In relation to the s 22 aspect, they said that there was no commonality of transactions or transaction documents and that different parties were involved. After a contested hearing, Ward J granted leave under both s 22 and s 237 on 6 July 2010.

3. [18]

   The claim and the cross-claim proceeded to trial before Brereton J. His Honour published his decision on matters of liability on 12 June 2013: Hawes v Dean [2013] NSWSC 745. It is unnecessary to refer to the outcome concerning the Gallwey deed dispute and the aspects of the cross-claim that did not concern the Clydesdale deed - save to note that, in relation to the Gallwey deed matter, his Honour held that Hawes Investments was entitled to a money judgment against Dean Investments. As to the cross-claim and the Clydesdale deed, his Honour concluded that Mr Hawes and Glenside were liable to pay HPG the "HPG Advances" under clause 4(a) and to pay Mr Dean the "Fee" under clause 4(b).

4. [19]

   For reasons published on 3 September 2013 (Hawes v Dean [2013] NSWSC 1246), the primary judge held that:

5. [20]

   His Honour further held that "the judgment in favour of Hawes Investments in respect of the Gallwey deed and that in favour of Mr Dean in respect of the Clydesdale fee should be set off one against the other". These were the $321,386.01 judgment in favour of Hawes Investments and the $357,188 judgment in favour of Mr Dean.

6. [21]

   In the result, therefore, there was

Material issues before the primary judge

1. [22]

   It was accepted by Mr Hawes and Glenside that, in the circumstances that existed, there was no "Project Revenue" or "Profit" (as defined by clauses 5.4 and 5.6 respectively of the Clydesdale deed) unless clause 5.2 had operated to create "Project Revenue" calculated by reference to a hypothetical sale price of the Options as there envisaged. And, of course, if there was no "Project Revenue", there was no payment obligation under either clause 4(a) or clause 4(b) since, according to the opening words of clause 4, the sum payable under each of those provisions was payable "from Project Revenue" (in addition, clause 2 made it clear that neither sum was required to be paid "except from Project Revenue as herein provided").

2. [23]

   The parties took different views on the crucial question whether clause 5.2 operated to create "Project Revenue" calculated by reference to a hypothetical sale price of the Options. The issue was whether the opening words of clause 5.2 created preconditions to the operation of the clause and, if so, whether those preconditions had been satisfied. The words in question are:

3. [24]

   The primary judge made relevant findings as follows at [60] - [73] of the first judgment:

Decision of the primary judge - first alleged precondition

1. [25]

   The primary judge held that, on the true construction of the Clydesdale deed, the reference in the opening words of clause 5.2 to the "Hawes Group" was a reference to Mr Hawes and Glenside. That conclusion is not challenged. His Honour accepted that clause 5.2 operated "only if Hawes and/or Glenside purchased the land or part thereof". On the view his Honour took, "the purchase in the name of CPPL and 358PL" was a purchase by the "Hawes Group" within the meaning of clause 5.2.

2. [26]

   His Honour noted that, as expiry of the Options approached and further options (or extensions) could not be obtained, Glenside was not in a position to sell the Options themselves and did not wish simply to allow them to lapse. It therefore nominated 358PL to purchase Nos 3, 5 and 8 and CPPL to purchase Nos 2, 4 and 6. His Honour then said:

3. [27]

   On that basis, the decision of the judge was that the condition specified in the opening words of clause 5.2 had been satisfied: that is, that the Hawes Group had proceeded with the purchase of the land.

Decision of the primary judge - second alleged precondition

1. [28]

   The Hawes parties submitted before the primary judge that the opening words of clause 5.2 incorporated a second precondition, namely, that the "Hawes Group" should "proceed ... with construction of the Project". The Hawes parties further submitted that that condition had not been satisfied.

2. [29]

   The primary judge accepted that, in respect of Nos 3, 5 and 8 (which were on-sold to Dia Gabraa), no construction was ever undertaken by Mr Hawes, Glenside or any entity associated with them. In the case of Nos 2, 4 and 6, there was eventually construction by CPPL (one of the new companies formed by Mr Hawes), but only after the failure of repeated efforts to sell.

3. [30]

   After noting those facts, the primary judge focussed on clause 7 which fixed the time for payment of the clause 4(b) fee. Clause 7 stated that payment of that fee was to be made

4. [31]

   Clause 7 went on to provide that the fee "shall be calculated and paid by the Hawes Group to the Dean Group within seven (7) days from the relevant settlement".

5. [32]

   The primary judge said of these provisions (at [94]):

6. [33]

   His Honour continued (at [94] - [96]):

7. [34]

   His Honour's decision was that both the time specification in in clause 7 "and common sense" indicated that proceeding with construction was not intended to be a precondition to the operation of clause 5.2, the role of the clause being to provide a mechanism for attributing a value to the Options in the event that they were exercised, rather than sold or allowed to lapse.

Decision of the primary judge - set-off

1. [35]

   The desire of Dean Investments to see its liability under the $321,386.01 judgment set off against the liability of Mr Hawes and Glenside under the $357,188 was a product of the circumstance that, in the words of the primary judge, the latter parties "do not appear to have adequate resources to satisfy the judgment against them".

2. [36]

   Dean Investments accepted that statutory set-off under s 21 of the Civil Procedure Act 2005 (NSW) was not available and that equitable principle alone could be the source of the order it sought. The judge noted that it is not an essential requirement of an equitable set-off that the claim and counterclaim originate in the same contract or that there be identity between the parties to the set-off and the parties to the action. He referred to Commonwealth Trading Bank of Australia v Sidney Raper Pty Ltd [1975] 2 NSWLR 227 and Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439. Nor, in his Honour's view, was it necessary that there be an identity of beneficial interests. The "fundamental test", he said, is "that set-off will be permitted where it is inequitable for a creditor to take the benefit of a transaction without assuming the corresponding burden". His Honour continued (at [16] of the second judgment):

3. [37]

   The primary judge then turned to the facts, noting that Mr Hawes and Mr Dean had, over a period of about 17 years, engaged in some 15 property development projects on the basis of equality of interest, using a variety of corporate and trust structures, including Gallwey, Dean Investments (as trustee of the Dean Family Trust) and Hawes Investments (as trustee of the Hawes Family Trust). His Honour then quoted affidavit evidence of Mr Hawes, as follows:

4. [38]

   After referring to the fact that certain projects had been described as the "Hawden Investment Partnership", his Honour said (at [19] of the second judgment):

5. [39]

   The notice of appeal filed by Mr Hawes, Hawes Investments and Glenside and the amended notice of cross-appeal filed by Mr Dean raise issues as follows:

6. [40]

   Issues (a) to (c) arise from the Hawes parties' notice of appeal. Issue (d) arises from Mr Dean's notice of cross-appeal. Both parties raise matters concerning costs (issue (e)).

7. [41]

   The Hawes parties contend on appeal that there was no foundation for the judge's conclusion that purchase "in the name of CPPL and 358PL" was purchase "by" Mr Hawes and Glenside (or either of them). The judge's characterisation was explained by, first, his reference to purchase by Mr Hawes and Glenside "albeit through a nominee", secondly, a view that the purchase actually made was "of the character, in substance, of a purchase by Glenside" and, thirdly, a view that a strict and literal reading would "enable Dean's interest to be defeated by a stratagem". The Hawes parties say that a court is not justified in going beyond clear and unambiguous language merely because the contract would have a more commercial and businesslike operation if given an interpretation other than that dictated by the language used. Reliance is placed on the following passage in the judgment of Macfarlan JA (Young JA and Tobias AJA agreeing) in Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137 at [55]:

8. [42]

   The Dean parties emphasise the need to eschew a technical, narrow or pedantic approach to construction and to adopt a businesslike interpretation, having regard to the language used and the objects the contract is intended to secure as indicated by the context in which it was made, the genesis of the contract and the background to it. They rely on observations to this effect by Gleeson CJ in International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; 234 CLR 151 at [8].

9. [43]

   The Dean parties stress the definition of "Hawes Group" in the deed:

10. [44]

    The point is made that context may cause the defined term to have some modified or extended meaning so that it is not confined to Mr Hawes and Glenside. That is so, it is said, not only because the definition uses the words "unless the context otherwise requires" but also because of the overriding importance of context even in the absence of such words. The Dean parties refer, in the latter connection, to what was said by Leeming JA (with the concurrence of McColl and Gleeson JJA) in Perpetual Custodians Ltd v IOOF Investment Management Ltd [2013] NSWCA 231; 304 ALR 436 at [86]:

11. [45]

    In my opinion, the submissions of the Dean parties must be preferred on this matter.

12. [46]

    As the Dean parties observe, the primary judge recognised that the Clydesdale deed envisaged three possible courses of action by the Hawes Group in relation to the Options: first, that the Options themselves should be sold (a matter expressly referred to in clause 5.1); second, that the Hawes Group should raise finance "to take the project to DA stage" (something that is referred to in clause 3 and could not be achieved except through exercise of the Options); and, third, allowing the Options to lapse (the "absolute discretion" to let them lapse was referred to in clause 1). The clause further recognised that value would be realised only through sale or exercise of the Options (that is, the first course or the second). Clause 5.2 was concerned with the case where the Options were not allowed to lapse (ie, the third course was not taken) and were not themselves sold (ie, the first course was not taken). The concern of the clause was with the second possibility where the Hawes Group proceeded with purchase of the whole or a part of the land the subject of the Options "instead of selling the Options".

13. [47]

    Facilitation of dealing by the Hawes Group in ways envisaged by the deed was an objective of clause 1. It was there recognised that a nominee of the Hawes Group (rather than the Hawes Group itself) could either take an assignment of one or more of the Options or become the purchaser of land upon exercise of an Option. The introduction of nominees as part of the working out of the scheme for which the deed provided was thus part and parcel of that scheme.

14. [48]

    The Hawes interests say that there was, on the evidence, no basis for any finding that either CPPL or 358PL was a "nominee", in the strict sense of bare trustee, of either Mr Hawes or Glenside. They point out that those two companies borrowed the necessary money from Suncorp in their own right and proceeded as principals.

15. [49]

    These matters may be accepted. But they have no bearing on the question whether, in the sense relevant to the parties' contract, the "Hawes Group" effected the purchase of the land that was purchased upon exercise of options by CPPL and 358PL. In the circumstances of ensured flexibility of action that the deed secured for the Hawes Group, the parties embraced the possibility that, within the deed's general framework, transactions might be structured in advantageous ways to suit the convenience and interests of Mr Hawes. Purchase of the land (or part of it) by a so-called "nominee" was one of the possibilities expressly recognised as part of the mechanism of flexibility.

16. [50]

    The findings referred to at items 7 to 9 at [24] above established that the benefits accruing to CPPL and 358PL through purchase of land the subject of some of the options were benefits enjoyed by Mr Hawes. It was Mr Hawes who had introduced those companies to play the roles that they in fact played. He took advantage of the flexibility the Clydesdale deed provided as to the structuring of any purchase transaction.

17. [51]

    For the reasons the primary judge gave, the purchases by CPPL and 358PL were, in context, properly regarded as purchases by the "Hawes Group".

Issue (b) - analysis and decision

1. [52]

   The Hawes parties say that the judge was in error in finding that undertaking of construction by the "Hawes Group" was not a precondition to the operation of clause 5.2. Influential in his Honour's decision was the fact that, under clause 7 (and in the applicable case of a "Hypothetical sale"), the clause 4(b) fee was payable within seven days after the last settlement of a purchase of a lot by the Hawes Group and the view that construction on particular land could not reasonably be expected to have commenced within such a short time after completion of the acquisition of that land.

2. [53]

   The Hawes parties make three criticisms of the primary judge's reasoning: first, that the words "proceed . . . with the construction of the Project" are unambiguous; second, that there is no foundation for the judge's view that it is "inconceivable" that construction would be practically commenced within seven days of settlement of the purchase; and, third, that the judge's construction relied upon impermissible addition of absent words.

3. [54]

   The Dean parties again emphasise the purpose of clause 5.2, that is, to provide a mechanism by which the clause 4(b) fee might be calculated if the Options were exercised rather than sold. Consistently with that, the Dean parties argue that the words "and with construction of the Project" are no more than part of a general description that serves to distinguish the second of the courses described at [46] above from the first.

4. [55]

   I am of the opinion that the Dean parties' submissions should be accepted. The words "instead of" in clause 5.2 are significant, particularly when considered in light of the fact that the purpose of the clause is to give content to the concept of "Project Revenue" which has, as its central component "the sale price (if any)". The words "instead of selling the Options" show that clause 5.2 is concerned with a case where a sale as such has not generated a "sale price" that could be taken into account as a component of "Project Revenue" but there is nevertheless some other activity in which the Options are turned to account warranting resort to the value of the land as if it were a "sale price". That other event, of its nature, must be one that sees the value inherent in the development potential of the site somehow brought home to the Hawes Group.

5. [56]

   The parties must, in my view, be taken to have described that other event - in contradistinction to "selling the Options" - as the Hawes Group "proceeding with" (or, to put it another way, embarking upon) an undertaking consisting, in a prospective sense, of purchase and development of the whole or some part of the relevant land. It is the taking of the definitive step of purchase by way of initiation of the composite process and as a precursor to development that is the "event" with which clause 5.2 is concerned; and it is beside the point when construction following purchase commences or indeed whether it commences at all.

6. [57]

   The primary judge was right to concentrate upon clause 7 and to take notice of its requirement that the clause 4(b) fee be paid, in a clause 5.2 case, within seven days after the last settlement of a purchase of a lot by the Hawes Group (according to the meaning of that expression that includes CPPL and 358PL). Clause 7 tells strongly against any requirement that, in order for clause 5.2 to operate, there must be actual commencement of construction as distinct from the existence of future construction as an element of a composite process of purchase and construction which is embarked upon by completing the purchase.

Issue (c) - analysis and decision

1. [58]

   As has been seen, the decision of the primary judge on liability and quantum was that

2. [59]

   In relation to the second and third of these items, the natural consequence would have been entry of judgment for $357,188 in favour of Mr Dean against Mr Hawes and Glenside and entry of judgment for $321,386.01 in favour of Hawes Investments against Dean Investments. In allowing equitable set-off and holding that only one judgment should be entered (being a judgment for the difference between the two sums in favour of the party entitled to the larger sum), the primary judge necessarily took the view that, in the circumstances of the case, Dean Investments' liability of $321,386.01 to Hawes Investments referable to the Gallwey deed was of such a character that, to the extent of $321,386.01, it provided Mr Dean with "some equitable ground for being protected against" his liability for $357,188 (as against Mr Hawes and Glenside) on account of the clause 4(b) fee and acted to "impeach the title" of Mr Dean to that larger sum.

3. [60]

   The words just quoted are those used by Lord Cottenham LC in Rawson v Samuel (1841) Cr & Ph 161; 41 ER 451 at 458 in a passage approved by the High Court in Hill v Ziymack [1908] HCA 13; 7 CLR 352 at 361. The Lord Chancellor observed that, in every relevant case to that point (except one), equitable set-off had been allowed only where "the equity of the bill impeached the title to the legal demand". In England, the Court of Appeal decided in 2010 (in Geldof Metaalconstructie NV v Simon Carves Ltd [2010] EWCA Civ 667; [2010] 4 All ER 847) that the "impeachment of title" test "should no longer be used", noting disapproval of it in Bank of Boston Connecticut v European Grain and Shipping Ltd [1989] AC 1056 by Lord Brandon of Oakbrook who regarded the concept as "not a familiar one today"; while in Bim Kemi v Blackburn Chemicals Ltd [2001] 2 Lloyd's Rep 93, it was described by Potter LJ as "difficult to define and apply".

4. [61]

   The "impeachment of title" test remains applicable in Australia. In Norman; Re Forest Enterprises Ltd v FEA Plantation Ltd [2011] FCAFC 99; 195 FCR 97, the Full Federal Court noted several cases in which the test had been adopted and applied by Australian appellate courts in recent times, including Walker v Department of Social Security (1995) 56 FCR 354, J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 41 ALR 539 and Forsyth v Gibbs [2008] QCA 103; [2009] 1 Qd R 403 (to these must now be added HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479, a case to be referred to in greater detail presently, and Ozden v Commonwealth Bank of Australia [2014] VSCA 127). The Full Federal Court noted that, in Forsyth v Gibbs, Keane JA (with whom McMurdo P and Fraser JA agreed) said at [10] that equitable set-off does not depend upon an unfettered discretionary assessment of what is fair. Rather, it is essential that there be such a connection between the claim and cross-claim that the cross-claim can be said to impeach the claim.

5. [62]

   In Lord v Direct Acceptance Corporation Ltd (1993) 32 NSWLR 362, this Court accepted the impeachment test as explained at [3709(h)] of R P Meagher, W M C Gummow and J R F Lehane, Equity Doctrines & Remedies (3rd ed 1992, Butterworths), namely, that it is an indispensable requirement of equitable set-off "that the set-off actually go to the root of, be essentially bound up with, impeach the title of the plaintiff". The same test is stated in the 4th edition of that work at [37-045(h)]: R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow and Lehane's Equity Doctrines and Remedies, (4th ed 2002, Butterworths LexisNexis). The court said that the concept was "better stated" in Meagher, Gummow and Lehane than in Bank of Boston Connecticut v European Grain and Shipping Ltd (above).

6. [63]

   A more recent statement of the principle in this Court is found in the judgment of Emmett JA (Beazley P and Meagher JA concurring) in HP Mercantile Pty Ltd v Dierickx (above). His Honour said (at [136]), referring to the decision of Gummow J in James v Commonwealth Bank of Australia (1992) 37 FCR 445:

7. [64]

   Emmett JA gave three examples of situations in which relevant impeachment will exist. The first is where a mortgage is granted to a solicitor as security for costs and the mortgagor client has a cross-claim against the solicitor for faulty work (the lien of a solicitor was referred to as "well known" in this connection in Simpson v Lamb (1857) 7 E & B 84; 139 ER 1179 at 1181). The second is where a builder has a claim for money due under a building contract and there is an unliquidated claim against the builder for damages for breach of that contract. The third case is where a lender fails to provide promised further advances for a development project and the borrower is unable to complete the development project and repay the advances actually made.

8. [65]

   In all the hypothetical cases to which Emmett JA referred, two wrongs or defaults are so closely connected that a net position or result ought in equity to prevail between the parties because it would be unconscionable to allow one of them to insist on its legal right without first accommodating the other's countervailing legal right. It is the existence of that unconscionability that causes the first party's claim to be "impeached" (that is, undermined and defeated) by the second party's claim.

9. [66]

   In the present case, two obvious factors immediately call into question the closeness of the connection between the two relevant claims. First, the person entitled to receive $357,188 was not the person liable to pay $321,386.01 and the person entitled to receive $321,386.01 was not the person (or even one of the persons) liable to pay $357,188. Mutuality is entirely lacking. Secondly, the respective liabilities and entitlements arose from different transactions entered into at different times (the Clydesdale deed in one case and the Gallwey deed in the other).

10. [67]

    The Hawes parties submit that, in those circumstances, there was no sufficient basis to allow equitable set-off. As they correctly point out, the fact that the defendant has a cross-claim against the plaintiff and both arise from the same transaction is not of itself sufficient to warrant set-off. Much less is set-off warranted, they say, when there were different transactions giving rise to different causes of action and the respective claims are between different parties in different rights.

11. [68]

    The Hawes parties also challenge certain factual findings relevant this aspect of the case. They point to several matters which, they say, indicate separateness or division between the relevant claims, in particular

12. [69]

    The Dean parties, being the beneficiaries of the set-off ordered by the judge, seek to uphold it. They emphasise that the equitable jurisdiction to order set-off is discretionary and that, in attacking the exercise of the discretion, the Hawes parties must, as required by House v The King [1936] HCA 40; 55 CLR 499 at 504, show that the judge acted upon a wrong principle, allowed extraneous or irrelevant matters to guide or affect him, mistook the facts, did not take into account some material consideration; or that, upon the facts, the decision is unreasonable or plainly unjust and therefore of itself indicative of failure properly to exercise the discretion.

13. [70]

    The Dean parties refer to the following as matters showing the true complexion of the factual context:

14. [71]

    It may be accepted that, in pursuing commercial opportunities together over an extended period, Mr Hawes and Mr Dean, to a very large extent, looked beyond the vehicles they used. And it may well be the case that, on the Hawes side, Mr Hawes himself was the decision-maker and that Mrs Hawes, although the sole shareholder, sole director and sole secretary of Hawes Investments played, at best, a very subsidiary or nominal role (on the evidence, she was not shown to have been actively involved in any of the relevant discussions and negotiations).

15. [72]

    At the same time, however, the business structures erected by the human parties were obviously intended by them to be real and to play defined roles. They were not mere fronts or shams. Had a creditor of one of the corporate entities brought a debt action against Mr Hawes or Mr Dean personally, the individual, relying on the corporate veil, would promptly have entered a plea of "never indebted". And if the taxation authorities had levied taxes on the basis that the income of all relevant individuals, companies and trusts should be treated as an agglomerated whole, there would have been immediate resort to statutory provisions that identify separate taxable entities and specify how the taxable income of each is to be calculated.

16. [73]

    The fact that, while the relationship continued, the parties were astute to adopt particular procedures and structures for what must have been sound commercial reasons and that each individual was content to see the other hold investments and incur liabilities in such a way as to reduce personal exposure militates against the notion that, in the context of a termination of the relationship, those aspects should be ignored or discounted as mere technicalities in favour of some approach based on economic reality or the substance of the matter. When it was put to the English Court of Appeal in Bank of Tokyo Ltd v Karoon [1987] AC 45n at 64l that it would be "technical for us to distinguish between parent and subsidiary company in this context" because "economically . . . they were one", Goff LJ pointed out:

17. [74]

    In this case too, regard must be had primarily to the separateness of entities. The primary judge was of the view that, as between the individuals, there were "two equal beneficial interests" and that a different position (involving separate entities and "a number of vehicles") pertained only "as against the rest of the world". I am not persuaded that that is a correct characterisation. The "vehicles" insulated particular assets and liabilities on one side of the enterprise not only from "the rest of the world" but also from the other side. The "vehicles" cannot be ignored; nor can it be said that the insulation they were obviously designed to achieve should somehow be overlooked when it came to ascertaining assets and liabilities. While equity will sometimes countenance set-off otherwise than between the same parties, some particularly compelling factor making reliance on separate rights unconscionable must be found to justify set-off in circumstances of glaring lack of mutuality.

18. [75]

    Because the respective rights of the parties arise from separate contracts (the Gallwey deed in one case and the Clydesdale deed in the other), the quest for any factor that causes Hawes Investments' right to $321,386.01 to be "bound up with and go to the root of, challenge, call in question, or impeach the title of" Mr Dean to $357,188 necessarily concentrates on the disengagement and separation arrangements in the context of which the two deeds were made.

19. [76]

    The primary judge took the view that the disputes litigated by Hawes entities and Dean entities were all "aspects of the overall dissolution of their relationship". As his Honour recognised, however, the various aspects of the separation proceeded independently of one another. It is instructive to note the judge's findings in that respect.

20. [77]

    His Honour found that, although negotiations for the division of the Gallwey investment began in January 2005, it was not until some ten months later that the parties' accountants presented a draft "term sheet". The judge referred to aspects of the Gallwey negotiation in March 2006 and correspondence in September and October 2006. "Working templates" were prepared by the accountants in November 2006, spread sheets followed and the Gallwey deed was executed on 20 November 2006.

21. [78]

    The Clydesdale deed was the product of a much less protracted process. The judge recorded simply that negotiations took place between May and September 2005 and that the Clydesdale deed was executed on 8 September 2005, that is, more than 14 months before the execution of the Gallwey deed.

22. [79]

    These findings are quite at odds with any notion of co-ordinated and concerted separation. The entities involved in the Clydesdale investment (including Mr Hawes and Mr Dean themselves) were content to commit to a scheme of separation in relation to that investment which was negotiated over a period of some six months and documented in contractual form on 8 September 2005. At that date, such of those parties (including Mr Hawes and Mr Dean) as were also investors in the Gallwey project were at what was obviously an early stage of attempts to find a basis for agreed termination of that separate project. Negotiation and correspondence continued into 2006 and it was not until 20 November 2006 that the Gallwey deed was executed. At that point, relevant parties had already been contractually committed to the Clydesdale division for some 14 months. They had undertaken their contractual commitments without any assurance - or even objectively based expectation - that they would ever find any agreed basis for termination of the Gallwey venture.

23. [80]

    In those circumstances, it was, in my opinion, incorrect to view all the relevant transactions as having taken place under the umbrella, as it were, of some "overall dissolution". While, in the end, a series of contracts was negotiated which, but for the ensuing litigation, allowed the parties to go their respective ways, the disengagement was, on the evidence, an uncoordinated and piecemeal affair. When the Clydesdale deed was executed on 8 September 2005 (and gave rise to new rights and obligations), it was not part of any "overall dissolution" and there was no indication that any "overall dissolution" would ever be achieved. It was, in a real sense, fortuitous that negotiations that apparently became more active after execution of the Clydesdale deed ultimately caused the Gallwey deed to be executed 14 months later.

24. [81]

    The question for the primary judge was whether Hawes Investments' right to the extent of $321,386.01 (as against Dean Investments) referable to the Gallwey deed went to the root of, was essentially bound up with and impeached Mr Dean's right to $357,188 (as against Mr Hawes and Glenside) on account of the clause 4(b) fee under the Clydesdale deed, such that it was inequitable to allow Mr Dean to recover that $357,188 without giving credit for the $321,386.01 owed by Dean Investments to Hawes Investments. In my respectful opinion, his Honour erred in giving a positive answer to that question. The separateness of the transactions from which the rights arose, both in time and as to subject matter, the lack of any overarching agreement and the lack of correspondence between parties entitled and parties liable were so pronounced as to preclude a positive answer. Keane JA reminded us in Forsyth v Gibbs (above) that equitable set-off does not depend upon an unfettered discretionary assessment of what is fair and that it is essential that there be such a connection between the claim and cross-claim that the cross-claim can be said to impeach the claim. That connection is lacking here and any sanctioning of equitable set-off can only be the product of impermissible resort to the kind of discretionary assessment against which Keane JA cautioned.

25. [82]

    I am therefore of the opinion that, in this aspect of the case, the primary judge misapplied the principles as to equitable set-off and that, upon the correct assessment of the facts, the decision to allow equitable set-off was unreasonable, with the result that the discretion in that respect miscarried.

Issue (d) - analysis and decision

1. [83]

   Mr Dean's cross-appeal raises questions about the calculation of the clause 4(b) fee.

2. [84]

   In general terms, the clause 4(b) fee was to be 30 per cent of "the Profit" (as defined by clause 5.6); and "the Profit" was "Project Revenue" (as defined by clause 5.4); less 'Project Costs" (as defined by clause 5.3). It is the contention of Mr Dean that certain items were wrongly included as elements of "Project Costs".

3. [85]

   The items in question (identified by numbers given to them in a Scott schedule dated 21 May 2012) are:

4. [86]

   As has been seen, CPPL became the purchaser of Nos 2, 4 and 6 Clydesdale Place and 358PL became the purchaser of Nos 3, 5 and 8. Items 36 and 55 represent legal expenses referable to those respective purchases, while Items 37 and 57 represent stamp duty for which the respective purchasers became liable on their purchase contracts. Items 39 and 59 are the expenses of incorporating CPPL and 358PL.

5. [87]

   The primary judge's decision concerning these items and the way in which they fell to be taken into account was as follows (at [118] of the first judgment):

6. [88]

   The judge thus held that the items in question were within the "Project Costs" definition in clause 5.3.

7. [89]

   His Honour proceeded on the basis that, in a clause 5.2 case, the "Project Costs" definition was supplemented by part of the regime created by clause 5.2 which applied in the case of "purchase of the Land or part thereof" by "the Hawes Group". That approach is, in concept, correct. Clause 5.2, dealing with the particular case of such a purchase by "the Hawes Group", says that "the Fee payable to the Dean Group" (obviously enough, the clause 4(b) fee) is to be "calculated by reference to a hypothetical sale of the Options"; and that, in order to "calculate the hypothetical profit or loss" (being, if a profit, the "Profit" applicable for the purposes of clause 4(b) to calculate the fee), it is to be assumed that the options had been sold for an amount produced by a particular valuation of the land "minus the Adjusted Purchase Price of the purchased lots".

8. [90]

   The expression "Adjusted Purchase Price" is defined by clause 5.5, but only as it applies to "an Option". It should be inferred, however, that the same expression, used in relation to "the purchased lots", is to have a corresponding meaning, subject to any adjustment necessary to accommodate relevant differences between "an Option" and "the purchased lots". In both cases, therefore, one must find "the purchase price" (in an undefined sense) of the relevant subject matter.

9. [91]

   The "purchase price" applicable to the "Adjusted Purchase Price" concept can only be that received by the vendor. The preoccupation is with the "sale price" achieved upon sale of lots instead of options. The purchase price will therefore not include expenses of purchase (including stamp duty) that fall exclusively on a purchaser.

10. [92]

    Having discovered the "Adjusted Purchase Price", one turns to the definition of "Project Revenue", the main component of which is "the sale price" or, in a clause 5.2 case, the price applicable to the hypothetical sale there mentioned, being "the Valuation" minus the "Adjusted Purchase Price" which is, in essence, the price received by the vendor (to which expenses of purchase incurred by the purchaser are irrelevant).

11. [93]

    The next step is to determine "Profit" as referred to in clause 5.6 - or, as it is expressed in clause 4(b) itself, "the Profit (as defined hereafter), if any, derived by the Hawes Group following valuation or sale of the Options as set out in clause 5 below".

12. [94]

    The words of clause 4(b) emphasise that the definition of "Profit" in clause 5.6 is to be applied in a particular context. The definition plays a part in discovering "Profit" that is "derived by the Hawes Group" at a particular time or during a particular period, that is (in a clause 5.2 case), "following" valuation pursuant to that clause.

13. [95]

    The deduction directed by the definition of "Profit" is deduction of "total Project Costs", that is, "all actual costs of the Clydesdale Project to the date of sale or Valuation as the case may be" (in a clause 5.2 case, of course, the reference to "sale" is irrelevant). The "Clydesdale Project", although it does not appear to be the subject of any formal definition is, clearly enough, the project described in Schedule 4 to the Clydesdale deed, that is:

14. [96]

    As has been noted, the clause 4(b) fee is fixed as a percentage of the "Profit" (as defined) "derived by the Hawes Group following valuation or sale of the Options as set out in clause 5 below" (emphasis added). In a clause 5.2 case, one element of the "Clydesdale Project" is the purchase of lots by the Hawes Group as envisaged by that clause. It follows that, in such a case, all expenses incurred by the Hawes Group in purchasing the lots are, of their nature, part of the "actual costs of the Clydesdale Project" as referred to in the clause 5.3 definition of "Project Costs" - subject only to the timing issue posed by the words "to the date of sale or of the Valuation as the case may be" in clause 5.3.

15. [97]

    As to that timing matter, it must be borne in mind that, because the case at hand is one of "Valuation" under clause 5.2 rather than "sale", the sequence of events is that which clause 5.2 itself identifies, that is, purchase of the land (or part of it) by the Hawes Group, followed by "the Valuation". The clause envisages valuation only if the Hawes Group has purchased the land or part of it. It must therefore be the case that the Hawes Group has effected a purchase of lots and therefore incurred all costs of purchase before the date of the valuation, with the result that those costs fall within the period delimited by the words "to the date of sale or of the Valuation as the case may be" in clause 5.3.

16. [98]

    For these reasons, the primary judge was correct in his conclusion that costs associated with the exercise of the options and the purchase of land by CPPL and 358PL were "Project Costs". Items 35, 36, 55 and 57 at [85] above are obviously within that category and were correctly recognised by his Honour as "Project Costs". In the case of stamp duty, liability arose upon first execution of the relevant purchase contract. There is, I suppose, a question about the two separate items of $963 for company formation expenses (items 39 and 59 at [85] above) but, because there is a plausible contention that the creation of the corporate entities was part of the purchase transaction undertaken through special purpose vehicles and the amounts are inconsequential, the primary judge's decision on those items should not be disturbed.

Issue (e) - analysis and decision

1. [99]

   Both the Hawes parties and the Dean parties contend that the judge's discretion as to costs miscarried. In order to explain the respective submissions, it is necessary to refer to aspects of the proceedings not so far mentioned.

2. [100]

   The cross-claim brought by Mr Dean and HPG against Mr Hawes and Glenside was, as to the aspect involving HPG, a statutory derivative action brought by Mr Dean on behalf of HPG pursuant to leave granted by Ward J under s 237 of the Corporations Act. This was one of several claims made or defended by Mr Dean on behalf of HPG pursuant to leave under s 237. Others were claims against Mr Hawes in respect of his HPG loan account and claims against a company called Warr Pty Ltd based on a deed referred to as the "Warrawee deed".

3. [101]

   Also before the primary judge were claims by Mr Hawes for winding up orders in respect of HPG and another company (Hawden Constructions Pty Ltd) on the just and equitable ground, it being alleged that each company was in a state of deadlock. Pursuant to leave granted under s 237, Mr Hawes defended these proceedings on behalf of the subject companies.

4. [102]

   The outcome in relation to the Warrawee deed aspect was described by the primary judge as follows (at [147] of the first judgment):

5. [103]

   The date of abandonment here referred to was 13 days before the commencement of the hearing. Because the claim under the Warrawee Deed had been abandoned by Mr Dean, his Honour gave judgment on that claim for the cross-defendants.

6. [104]

   The outcome in relation to the two winding up applications was recorded by the judge as follows (at [27] of the second judgment):

7. [105]

   In relation to costs, the judge approached the matter at two levels. First he had regard to "the overall outcome of the proceedings" which he assessed as being "a net adjustment, in favour of the Dean interests and against the Hawes interests, of just under $300,000", coupled with failure of the Dean interests "to achieve a further net adjustment in their favour of $450,000 on their unsuccessful Warrawee Deed and differential drawings claims". His Honour continued (at [24] of the second judgment):

8. [106]

   The primary judge then examined the matter on an issue by issue basis and recorded preliminary views about costs, as follows:

9. [107]

   Having made that assessment and referred to other submissions, his Honour said (at [36]-[38] of the second judgment):

10. [108]

    The order then made and entered was

11. [109]

    Neither the Hawes parties nor the Dean parties are content with this outcome. The Hawes parties say that the judge erred, first, in failing to award costs to Hawes Investments against Dean Investments (this is item 1 at [106] above); and, second, in failing to award costs to Mr Hawes against HPG and Hawden Constructions in respect of the winding up of those companies (item 2 at [106] above). The Dean parties say that the judge erred in not awarding Mr Dean the costs of the cross-claim or, at the very least, those costs to the extent that they related to the Clydesdale deed.

12. [110]

    On each side, therefore, it is put that regard should be had to particular aspects of or issues in what was, by any measure, a complex proceeding ranging over numerous transactions and factual situations and entailing a mixed outcome. The primary judge's discretion with respect to costs under s 98 of the Civil Procedure Act was a very broad discretion. He had had the advantage (if one can call it that) of hearing the several interrelated claims over three days in May 2012 and then for a further day in August 2012 and of absorbing and analysing the facts and issues in the detail necessary to produce two judgments totalling 205 paragraphs and 70 pages. It was obvious that there was no outright victor such as to facilitate simple application of the principle that costs should follow the event. It was also obvious that there were two economic groups, each of which had enjoyed a measure of success and suffered a measure of failure. Dissection of the entrails according to issues would have presented many difficulties.

13. [111]

    The submissions the parties have made in this Court with respect to the costs orders made by the primary judge proceed on the footing that some aspect or other of the overall dispute deserves to be singled out for special attention when it comes to costs. The Hawes parties identify two such matters. The Dean parties identify one. The corollary of the submissions made by both is that there must be some form of systematic breakdown of the whole into component parts, not necessarily restricted to the three the parties identify. Once a global approach is abandoned, the only alternative is complete and comprehensive segregation.

14. [112]

    Such a course is simply impossible unless a detailed and exhaustive breakdown is attempted and even then may be beyond realistic reach at appellate level. An appeal court should interfere with a costs order only if it is clear that the relevant discretion has miscarried at trial. There was no obvious miscarriage here. Indeed, the outcome that commended itself to the primary judge and the manner in which his Honour arrived at it represented unexceptionable and principled exercise of the discretion that was at his disposal.

15. [113]

    There is a question whether a party whose challenge on substantive matters fails at appellate level may, in the absence of leave to appeal, continue to maintain a challenge to a costs order: Supreme Court Act 1970 (NSW), s 101(2)(c). In the present context, having regard to the conclusions I have reached, that question does not affect the Hawes parties (which were successful in relation to the set-off matter) but is relevant to the position of the Dean parties whose only substantive challenge (concerning the Scott schedule items) was unsuccessful.

16. [114]

    Meagher JA pointed out in AF Concrete Pumping Pty Ltd v Ryan [2014] NSWCA 346 at [72] that the question whether an appeal which includes substantive grounds as well as grounds relating to costs is, when the substantive grounds are determined against the appellant, an appeal "as to costs only" within s 101(2)(c) is the subject of conflicting decisions in other intermediate courts of appeal, a number of which are referred to by Campbell JA in C G Maloney Pty Ltd v Noon [2011] NSWCA 397 at [104]. Meagher JA adopted the course that had been adopted by Campbell JA and addressed each of the grounds of appeal in order to decide whether the interests of justice require that leave be granted.

17. [115]

    In this case, such an exercise would produce a result corresponding with that I have already stated.

Disposition

1. [116]

   On the conclusions I have reached, the outcome of the appeal and cross-appeal should be that the orders of the primary judge are modified in one respect only. The judgment against Mr Hawes and Glenside in favour of Mr Dean in the sum of $32,801.99 should be set aside and there should instead be two judgments, one against Mr Hawes and Glenside and in favour of Mr Dean in the sum of $357,188 and the other against Dean Investments and in favour of Hawes Investments in the sum of $321,386.01. In that way, the set-off which I consider to have been wrongly ordered will be reversed.

2. [117]

   Finally, there is the question of costs in this Court. On the view I have taken, Mr Dean has failed in his cross-appeal and the Hawes parties' appeal has been successful in relation to the set-off issue only. In those circumstances, Mr Dean should be ordered to pay the Hawes parties' costs of the cross-appeal and, since the set-off issue may be regarded as having accounted for one-third of the subject matter of the appeal, there should be orders that the Hawes parties pay two-thirds of the Dean parties' costs of the appeal and that the Dean parties pay one-third of the Hawes parties' costs of the appeal.

3. [118]

   The orders I propose are accordingly as follows: