Damien v Combined Home Loans Pty Limited

These proceedings were commenced on 22 April 2016. Orders for short service were made by the Duty Judge, Sackar J, and the proceedings were stood over to 27 April 2016 when they came before me as Duty Judge. I heard the matter yesterday, and received some further submissions today.

The plaintiff, Mr Timothy Damien, seeks an order for rectification of a deed dated 15 August 2012 which he entered into (as assignee) with Combined Home Loans Pty Limited (as assignor). That company, which I will refer to as Combined, formerly carried on the business as a mortgage broker. It is now in liquidation.

The liquidator, Mr Stephen Michell, was originally named as the only defendant. By an Amended Summons filed in Court at the commencement of the hearing, Combined was added as a defendant. Leave was sought under s 471B of the Corporations Act 2001 (Cth) to proceed against Combined.

Mr Leong of counsel appeared for the liquidator and Combined. There was no opposition to the joinder of Combined. Indeed, Mr Leong submitted that Combined, as a party to the deed, was the proper defendant rather than the liquidator personally.

The formal position adopted by Mr Leong in relation to the granting of leave under s 471B and rectification of the deed was that such relief was neither consented to nor opposed. He nonetheless raised a number of matters which tended against a grant of such relief, which he urged the Court to take into account.

For reasons which I will come to, I consider that it is appropriate to grant leave to the plaintiff to proceed against Combined. It is convenient to deal first with the claim for rectification.

The subject matter of the deed is a cause in action that is based upon alleged negligence on the part of a solicitor, Mr Guy Rinaldi. The alleged negligence is a failure to inform Combined of the existence of an offer of compromise that was made by Mr Peter Pitson, the first defendant in certain proceedings brought by Combined. The offer of compromise was made on 30 April 2010. It is feared that the limitation period (or periods) for causes of action based upon that negligence will expire in the very near future, possibly within days.

The rectification sought concerns the definition of the claim that is the subject of the assignment effected by the deed. Resolution of the questions whether the deed should be rectified, and if so in what manner, may have a significant bearing upon decisions about whether to institute proceedings. It is for that reason that these proceedings were brought on for urgent hearing in the Duty List.

The deed provides in cl 2: “Combined hereby assigns the benefit of the Claim to Damien pursuant to s 12 Conveyancing Act 1919.” The Claim is effectively defined by recital A, which is in the following terms:

The plaintiff, by its Amended Summons, seeks an order that recital A be rectified to read as follows:

In its written submissions provided earlier today, the plaintiff proffered an alternative form of rectification, which referred to a potential professional negligence claim Combined has “against its legal representative/s and/or lawyers”.

In short, rectification is sought in circumstances where it seems that Rinaldi Lawyers would not be the proper defendant in proceedings based on Mr Rinaldi’s alleged failure to inform Combined of the existence of the offer of compromise. Whilst Combined (through the plaintiff’s father, Mr Karl Damien) was giving instructions throughout the Pitson proceedings to Mr Rinaldi, by 30 April 2010 Mr Rinaldi was no longer carrying on practice as Rinaldi Lawyers. Rather, he was a legal practitioner director of Nationwide Lawyers Pty Limited, and in that role he provided legal services to Combined. Mr Karl Damien was himself a director and shareholder of Nationwide.

It is alleged that the existence of the offer of compromise first came to the attention of Combined only about a day before the proceedings against Mr Pitson were to be heard in August 2011. By that time, new solicitors were acting for Combined. Nationwide Lawyers Pty Limited had ceased trading in about March 2011.

The proceedings against Mr Pitson were settled on the basis that the proceedings be discontinued with no order as to costs. Mr Karl Damien gave evidence that if he had been told of the offer of compromise (which was for $50,000 plus costs), he would have given instructions to accept it. He considered that Combined should sue Mr Rinaldi for negligence. There is evidence that in late 2011 Karl Damien told Timothy Damien about the matter and said: “Combined should sue Rinaldi.”

There was a gathering at Karl Damien’s home in about August 2012. His son, Timothy Damien, was present, as were Mr Hatem Merhi (who was then the sole director and secretary of Combined) and Mr Dean Alcorn, a former solicitor. Discussion turned to the Pitson claim. The evidence given about that discussion is the basis of the contention that recital A to the deed is not in accordance with the common intentions of the parties to the deed.

Mr Karl Damien deposed in paragraphs 14 and 15 of his affidavit as follows:

Mr Timothy Damien deposed in paragraph 9 of his affidavit as follows:

Mr Merhi deposed in paragraph 7 of his affidavit as follows:

Mr Alcorn deposed in paragraph 11 of his affidavit as follows:

Mr Alcorn further deposed that he prepared a Deed of Assignment and that it was signed by Timothy Damien and Mr Merhi (for Combined) in his presence on 15 August 2012.

Mr Alcorn gave evidence to the effect that he had at some stage been informed that Mr Rinaldi initially traded as Rinaldi Lawyers and subsequently traded as Nationwide Lawyers Pty Limited. Mr Alcorn also gave evidence that it was recently pointed out to him that he had failed to include a reference to Nationwide Lawyers Pty Limited in the Deed of Assignment and that when Mr Rinaldi received the offer of compromise, he was trading through Nationwide Lawyers, not Rinaldi Lawyers. Mr Alcorn deposed that unfortunately, before drafting the Deed of Assignment, he failed to check whether, at the time the offer was received, “Mr Rinaldi was working under his own name or that of Nationwide”, and thus referred only to Rinaldi Lawyers in the Deed of Assignment.

I note in passing that at the time the deed was entered into, Nationwide Lawyers Pty Limited was a deregistered company. It remains deregistered.

The principles applicable to the remedy of rectification have been comprehensively dealt with in relatively recent times by the Court of Appeal (see Ryledar Pty Limited v Euphoric Pty Limited [2007] NSWCA 65; (2007) 69 NSWLR 603; Franklins Pty Limited v Metcash Trading Limited [2009] NSWCA 407; (2009) 76 NSWLR 603; and Newey v Westpac Banking Corporation [2014] NSWCA 319).

There is a presumption that a written agreement that is executed by the parties is a true record of their agreement. However, if there is clear evidence of mistake in the recording of the agreement, the equitable remedy of rectification is available to reform the parties’ document but not to reform the parties’ bargain. In order to make out a case for rectification, it is generally necessary to establish that the parties had an actual common intention which existed right up to the point when the relevant instrument was executed, which intention is not accurately expressed in the instrument. That is, it must be shown that the instrument fails to give true effect to the actual common intention. It is well established that rectification will not be ordered unless there is clear and convincing proof that the written intention does not embody the final intention of the parties.

The evidence in this case establishes that the parties (relevantly Mr Timothy Damien and Combined) made an agreement that Combined’s claim against Mr Rinaldi would be assigned. The terms of the conversation deposed to by the relevant witnesses make it clear that the subject under discussion was a claim that Combined had against Mr Rinaldi for his failure to inform Combined of the making of the offer of compromise.

It was envisaged that the claim would be made against Mr Rinaldi himself. Statements were made that “Combined should sue Rinaldi” or “Combined should sue Guy.” No mention was made of any claim against any firm or company with which Mr Rinaldi was associated. No mention was made of a claim against the company’s legal representatives more generally. No mention was made of Rinaldi Lawyers or Nationwide Lawyers Pty Limited, even though Karl Damien, Timothy Damien and Mr Alcorn each had at least some knowledge of the existence of those entities, and Karl Damien had been a director and shareholder of Nationwide Lawyers Pty Limited. There is no evidence that Mr Merhi had any knowledge of those entities.

The existence of a claim against an entity other than Mr Rinaldi himself was not something that was addressed by the parties in their discussion. Neither was it something that might otherwise be regarded as a matter shared by the parties (see Ryledar Pty Limited v Euphoric Pty Limited (supra) at [281] per Campbell JA.)

In Franklins Pty Limited v Metcash Trading Limited (supra), Campbell JA at [444] spoke of the rationale for the remedy of rectification, namely, that it would be unconscientious for a party to a contract to seek to apply the contract inconsistently with what he or she knows to be the common intention of the parties at the time that the written contract was entered. His Honour continued at [445]:

In my opinion, the evidence does not establish, to the requisite standard, the existence of a common intention to the effect of the proposed rectification. The possibility of claims against Nationwide Lawyers Pty Limited, or professional indemnity insurers, or Combined’s legal representatives generally, was not adverted to by the parties in their negotiations.

I accept that Mr Timothy Damien and Mr Merhi are not lawyers and could not be expected to have knowledge about matters to do with the party or parties who might be sued in relation to the alleged negligence of Mr Rinaldi. However, that circumstance does not compel the conclusion that they actually intended to do more than assign a claim against Mr Rinaldi.

In my view, the proposed rectification, including the form of rectification set out in the plaintiff’s written submissions, would amount to a reforming of the parties’ bargain.

I do not accept the submission made by Mr Stitt of counsel for the plaintiff that the reference in the deed itself to Rinaldi Lawyers evinces a common intention that the subject of the assignment was intended to be a claim against whatever legal practice entity Mr Rinaldi was involved in at the time of his alleged negligence. The reference to Rinaldi Lawyers seems to have been inserted into the deed by Mr Alcorn without reference to the parties. There is no evidence that any of the relevant persons (Mr Timothy Damien and Mr Merhi) read the recital or the reference to Rinaldi Lawyers. There is the presumption arising through the execution of a deed that its terms truly record the parties’ intentions. However, the claim for rectification rests upon the contention that the reference to Rinaldi Lawyers on its own fails to accurately record the parties’ intentions.

It seems to me that the evidence does establish that the use of the words “Rinaldi Lawyers” was an error that caused the deed to fail to reflect the common intention of the parties that Combined’s claim against Mr Rinaldi be assigned to Timothy Damien. Moreover, it is my view that the evidence of the existence of such a common intention is sufficiently strong to warrant the making of an order for rectification – that is, an order to the effect that the words “Rinaldi Lawyers” in recital A to the deed be deleted and replaced with the words “Mr Guy Rinaldi”. In the course of argument, Mr Stitt indicated that if the Court was of the view that only such rectification was available, the plaintiff would seek it. The Court will make such an order.

I have taken into account the various matters raised by Mr Leong as to why rectification might be refused on discretionary grounds, including that the deed might embody an uncommercial transaction or an unfair preference. A suggestion was made that the transaction, or the suggested common intention, may be tainted with illegality. However, I do not think that the mere fact that the transaction might be an uncommercial transaction or unfair preference means that there is a taint of illegality, or otherwise gives good reason to withhold relief.

Mr Leong also raised a number of matters relevant to the question of leave under s 471B of the Corporations Act. These included whether granting leave would prejudice creditors and the delay in bringing the proceedings. I do not think that an order for rectification of the deed is itself likely to prejudice creditors of Combined. The transaction embodied in the deed might do so, but the liquidator remains in a position to take whatever steps he deems prudent in relation to the transaction in the interests of creditors. There has been a delay in bringing the proceedings and this has caused them to have to be dealt with on an urgent basis. However, having particular regard to the fact that the proceedings raised serious questions concerning rectification of the deed, I consider that in all the circumstances, it is appropriate for leave to be granted to the plaintiff to proceed against Combined.

The Court will therefore order: