Peter Holmes Investments Pty Ltd v S&C Nicola Pty Ltd

1. [1]

   These proceedings involve a dispute between former joint venturers / partners.

2. [2]

   The plaintiff (“PHI”) and the first defendant (“S&C”) and the second cross claimant (“Manotik”) had for many years collaborated in the development of residential properties, mainly in Sydney’s Northern Beaches.

3. [3]

   The parties typically conducted their arrangements on the basis that PHI would fund the development, S&C would source the properties and co-ordinate the construction and Manotik would carry out the building work. Both S&C and Manotik are controlled by Mr Sobhy Nicola.

4. [4]

   Originally the proceedings concerned a dispute over five properties in Dee Why. The parties resolved a number of issues which led to settlement narrowing the issues in dispute but inviting adjudication on a smaller set of questions.

5. [5]

   At the commencement of the hearing further discussions took place between the parties and ultimately the court was invited to express views on the construction of the Partnership Agreement (CB3/51-62) and, contingent on the determination of that issue, make orders to send to a referee a series of questions. In my view that is an entirely appropriate course to adopt.

6. [6]

   The Partnership Agreement was entered on 10 April 2017 and follows chronologically a Joint Venture Agreement of 20 October 2016. Nothing turns upon the dates and it was accepted by counsel for both parties that the only item to which reference need be made is the Partnership Agreement and its terms.

Legal Principles

1. [7]

   In de L’Isle v Knight [2021] NSWSC 809 (“de L’Isle v Knight”), Gleeson J discussed the principles governing the construction of commercial contracts as follows:

2. [8]

   Traditionally, a different approach might be thought to exist in interpreting recitals in deeds as opposed to contracts which has been stated by Lord Esher MS in Ex parte Dawes; In re Moon (1886) 17 QBD 275 at 286:

3. [9]

   More recently, in de L’Isle v Knight, Gleeson J summarised the proper approach to recitals, which his Honour noted:

4. [10]

   An inconsistency arises where there are conflicting or contradictory provisions within the one instrument with the result that it is not possible to give effect to both (Forbes v Git [1922] 1 AC 256 at 259).

5. [11]

   There are multiple approaches that may be taken to reconcile such provisions (see J D Heydon, Heydon on Contract (Thomson Reuters, 2019) (“Heydon on Contract”) (at [8.640]). First, as courts must construct contracts as a whole, where these inconsistencies arise, they are to be resolved, if possible, on the basis that one provision qualifies the other and they both have the same meaning and effect (Re Media Entertainment & Arts Alliance; Ex parte Hoyts Corp Pty Ltd (No 1) (1993) 178 CLR 379; [1993] HCA 40 (“Re Media”) at 396-7). A second method is to read one provision down so that it does not deal with the field in which the second provision operates in apparent conflict (Re Media at 387). A third is to determine which the “initial and dominant” provision is and treat the other as giving way to it (Australian Guarantee Corp Ltd v Balding (1930) 43 CLR 140; [1930] HCA 10 at 151-152 per Isaacs J). Finally, a court may give effect to the provisions which best fit the construction of the contract as a whole and ignore the others (Taylor v Dexta Corp Ltd (2006) 14 ANZ Insurance Cases 61-712; [2006] NSWCA 310 at [1], [66] and [89]).

6. [12]

   Additionally, I note that in certain circumstances multiple presumptions may be called in aid to reconcile inconsistencies, however, these are not applicable in the current case (see Heydon on Contract at [8.640]; Herzfeld and Prince, Interpretation (2nd ed, Thomson Reuters, 2020) at [22.110]).

Submissions of the Parties

1. [13]

   The plaintiff submitted the Partnership Agreement must be construed as a whole and that any inconsistencies should be resolved on the basis that one provision qualifies another so that if at all possible both have meaning and to give effect to the intention of the parties as reflected in the language they have used.

2. [14]

   Further, PHL contributed all of the capital (cl.6(a)) notwithstanding cl.6(c) and despite the inferences from Recitals D and E.

3. [15]

   From the express terms of the agreement PHL is entitled to 5% on “all capital expenditure” because PHL agreed to fund the whole of the capital and therefore it is submitted before any net profits are distributable to each of PHL or S&C, PHL must first be repaid the whole of the capital or monies invested in the project and also is entitled to 5% on the whole PHL’s capital or monies invested into the project and again “before any profits are distributed”. The consequence is that S&C pays 5% interest on the whole of capital or monies invested in the project. This is because S&C contributed no capital to the project.

4. [16]

   In further reply the plaintiff submitted that to deny PHL of 5% interest on all capital or monies invested solely by it would undermine the obvious commercial logic underpinning the Partnership Agreement.

5. [17]

   The defendant submitted that there are a number of drafting problems with the agreement. For example, Recital D and the fact that cl.4(a) contemplates a step still to be taken by the partnership which Recital D appears to record having been undertaken by PHL. And there are other apparent inconsistencies. However the parties intentions it is submitted can still be discerned.

6. [18]

   The defendant accepts that PHL was and was to be the sole financier of what was a substantial development. It also accepted that if the partnership had funded the project externally there would have been repayment obligations. But the parties could not have intended PHL to make a windfall gain. It is submitted that the parties would have wanted notwithstanding PHL providing the capital that the two parties would want to be on an equal footing.

7. [19]

   Recital D should be seen as an inelegant attempt to recognise the notion of an equal footing. The Recital recognises the joint liability of the partners. That is also consistent with the parties’ intention elsewhere expressed that they would share profits and losses equally.

8. [20]

   Curiously, cl.6(c), does not like Recital E provide for the reimbursement of PHI’s capital merely interest on capital. Clause 6(c) should it is submitted be read consistently with Recital E as creating a distribution waterfall in which reimbursement of the capital expenditure and the payment of interest on the capital both sit at the same level with each other above the distribution of profit in the hierarchy.

9. [21]

   A regime that imposes an interest solely upon S&C would contradict the apparent intention that all costs and expenses would be borne equally. Further it could not have been intended that S&C would be jointly liable for all losses and in addition was liable for the cost of finance provided to the partnership.

10. [22]

    In its reply submission the defendant submits that the words “costs of the development” in Recital D should be understood as a reference to costs which had been paid or would be paid solely by PHL and the indemnity obligation is then discharged by the operative provision under cl.6(c). The interest should be seen as an expense which S&C would in the future pay as a member of the partnership. And the recital so it is submitted does not say that PHL alone would pay the interest.

11. [23]

    It is submitted that the source of the repayment of the capital and the interest is to be from the proceeds of sale and not from one party’s profit share. This is an entirely different fund than S&C’s profit share which only comes into existence once all costs including costs such as sales commission, advertising and GST are allocated.

12. [24]

    It is also submitted that Recitals D and E describe a distribution waterfall which is implemented by the operative provision in cl.6(c). The sum total of the Recitals D,E and cl.6(c) achieve the result that the project costs, including PHL’s capital costs and interest are ultimately paid by the partnership and the balance being the profit (if any) is distributed equally.

13. [25]

    It is therefore submitted that the reference be carried out in respect of the project by the referee treating the interest payable to PHL in respect of its capital expenditure as an expense of the partnership which is to be deducted from partnership income prior to the determination of either partner’s share of profits.

Consideration

1. [26]

   The Partnership Agreement is a relatively short document but to observe that it is not well drafted is an understatement. To start there are no definitions (except arguably of the word “Capital” in Recital B). Some of the clauses are clumsy and lacking in clarity.

2. [27]

   However in my view this is a contract where the Recitals play a very significant role. First, they depict the object of the agreement, namely the development of the named properties in Dee Why in Recital A.

3. [28]

   Secondly, Recitals B – F are arguably not only operative but set out the fundamental rights and obligations of the parties. Apart from cl.6, they set the relevant contractual parameters.

4. [29]

   What is significant as an overview of the contract as a whole is the unsurprising primacy which is given to PHL. The obvious reason for that is that it has agreed to fund “all of the costs and expenses for the Development”. This is in effect the definition of the “Capital”, although the word does not always appear capitalised in other places.

5. [30]

   Those expenses would include usually, the purchase price, agents commission if any, stamp duty, legal fees, and those of architects, engineers, certifiers and Council. There are construction costs and PHL’s borrowing costs (again if any), to identify the more obvious. It is to be noted that a beneficiary of the construction costs and associated profit, is of course Manotik Pty Ltd, an entity related to S&C, (see cl.2(d) and cl.4(c)).

6. [31]

   Recitals D and E are in my view, a clear recognition of the primacy financially to be accorded to PHL and importantly as to the timing of its recoupment of the costs and expenses it has agreed to incur for the purpose of the project. This is the unifying theme in this agreement.

7. [32]

   Recital D requires S&C to “support” PHL. The support as such is not defined but it is a term used in the context of S&C also agreeing to “indemnify [PHL] from [sic] half of the costs of the development”. In addition to that obligation, S&C has agreed to “pay [PHL] 5% interest per annum on all monies spent on the project by [PHL]”. Leaving aside the inelegance of the wording it bears some parallel to S&C’s obligations in cl.6(a), being its liability for 50% of the losses incurred by the project. I accept, however, Recital D is not entirely clear as to precisely what the indemnity is intended to involve.

8. [33]

   Recital E makes it plain, however in my view, that all units are to be sold and that from the “proceeds”, PHL is “first” to be paid a “return of the capital invested…then toward 5% interest” on that “Capital”. From a timing perspective the Recital, importantly in my view, states “…and finally distributed equally between the Partnership parties”.

9. [34]

   I am satisfied the better view of yet another inelegant clause is that PHL is to be immediately (first) paid its capital expended plus interest on that “Capital” calculated on a monthly basis, at a rate of 5%, before (finally) there is any distribution of what will be profits, if any.

10. [35]

    In my view that unifying theme as it were is continued into cl.6 of the agreement. I accept that cl.6(a) on one view makes no sense in the light of Recital B in particular, except perhaps in a notional sense.

11. [36]

    In any event it has to be read in the context of cl.6(c) which commences with the words “[d]espite (a) and (b) above [PHL] has agreed to fund the whole capital…..until completion”. The clause then expressly states that as a result it (PHL) is “entitled to be the sole owner of the project”. More to the point it is also according to the clause “entitled to 5% interest on all capital expenditure to be repaid before any profits are distributed” (emphasis added).

12. [37]

    Clause 6(c) determines the timing and method of PHL’s recoupment if its outlay and the sole ownership of the real estate is not only the legal but the commercial level of control PHL is intended to have over the timing and method of recoupment.

13. [38]

    In my view although not entirely beyond argument I consider the plaintiff has the better case on the construction of the agreement and I would find accordingly.