Benzlaw & Associates P/L v Medi-Aid Centre Foundation Ltd [2007] QSC 233

SUPREME COURT OF QUEENSLAND CITATION: Benzlaw & Associates P/L v Medi-Aid Centre Foundation Ltd [2007] QSC 233 PARTIES: BENZLAW & ASSOCIATES PTY LTD ACN 071 381 452 (plaintiff) v MEDI-AID CENTRE FOUNDATION LIMITED ACN 001 313 853 (first defendant) 2040 LOGAN ROAD PTY LTD ACN 112 994 242 (second defendant) 148 BRUNSWICK STREET PTY LTD ACN 117 914 664 (third defendant) FILE NO/S: BS10416/05 DIVISION: Trial Division PROCEEDING: Trial ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 3 September 2007 DELIVERED AT: Brisbane HEARING DATE: 30, 31 July 2007, 1, 2 and 3 August 2007 JUDGE: Muir J ORDER: As per minutes of order to be settled CATCHWORDS: EQUITY – GENERAL PRINCIPLES – FIDUCIARY OBLIGATIONS – PARTICULAR CASES – where plaintiff mortgaged property to first defendant and was unable to meet repayments – where plaintiff and first defendant also entered into agreement to develop said property – where 1st defendant desired to terminate said agreement and sold mortgage to 2nd defendant – where 2nd defendant exercised mortgagee’s power of sale and sold mortgage rights to 3 rd defendant – whether 1st defendant breached its fiduciary duty to the plaintiff – whether fiduciary relationship existed between plaintiff and 2 nd defendant – whether a relation of confidence is conclusive of existence of a fiduciary relationship EQUITY – GENERAL PRINCIPLES – FIDUCIARY OBLIGATIONS – PARTICULAR CASES – where plaintiff mortgaged property to first defendant and was unable to meet repayments – where plaintiff and first defendant also entered -- 1 of 39 -- 2 into agreement to develop said property – where 1st defendant desired to terminate said agreement and sold mortgage to 2nd defendant – where 2nd defendant exercised mortgagee’s power of sale and sold mortgage rights to 3 rd defendant – whether 2nd and 3 rd defendants were in receipt of trust money and whether the rule in Barnes v Addy satisfied – whether plaintiff proved dishonest and fraudulent design MORTGAGES – MORTGAGES AND CHARGES GENERALLY – REMEDIES OF THE MORTGAGEE – SALE UNDER POWER – MODE OF EXERCISE OF POWER – REMEDIES OF MORTGAGOR – SETTING ASIDE THE SALE – where plaintiff mortgaged property to first defendant and was unable to meet repayments – where plaintiff and first defendant also entered into agreement to develop said property – where 1st defendant desired to terminate said agreement and sold mortgage to 2nd defendant – where 2 nd defendant exercised mortgagee’s power of sale and sold mortgage rights to 3 rd defendant – where 2nd defendant mortgagee called for tenders but had no intention to sell to successful tenderer – whether mortgagee breached its duty under s 85 Property Law Act – whether relevant that the mortgagee did in fact sell for market value – whether tender offers must be ignored when assessing the market value of the property – whether mortgagee breached its equitable duty of good faith – whether equitable duty of good faith co-exists with duty under s 85 – whether defendants breached s 51AA of the Trade Practices Act by engaging in unconscionable conduct Land Title Act 1994 (Qld), s 184 Property Law Act 1974 (Qld), s 84, s 85, s 88 Trade Practices Act 1974 (Cth), s 51AA ANZ Banking Group Ltd v Bangadilly Pastoral Co Ltd (1978) 139 CLR 195, cited Apple Fields Ltd v Damesh Holdings Ltd [1901] NZLR 586 (CA); [2004] 1 NZLR 721 (PC), applied Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd (2002) 10 BPR 19, 565; [2002] NSWSC 16, cited Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51, applied Australian Competition and Consumer Commission v Samton Holdings Pty Ltd [2002] 117 FCR 301, cited Baden v Société Générale pour Favoriser le Dévelopment du Barnes v Addy (1874) LR 9 Ch App 244, applied Barns v Queensland National Bank Ltd (1906) 3 CLR 925, cited Bropho v Western Australia (1990) 171 CLR 1, cited Cameron v Brisbane Fleet Sales Pty Ltd [2002] 1 Qd R 463, compared -- 2 of 39 -- 3 Coco v A N Clark (Engineers) Ltd [1969] RPC 41; (1968) 1A IPR 587, cited Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, applied Commerce et de l'Industrie en France SA [1992] 4 All ER 161, applied Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, cited Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2004] FCAFC 48, cited Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 81 ALJR 1107, applied Farrar v Farrars Ltd (1888) 40 Ch D 395, cited Forsyth v Blundell (1973) 129 CLR 477, cited Fractionated Cane technology Ltd v Ruiz-Avila [1988] 1 Qd R 51, cited Freestone v Parramatta City Council (1974) 34 LGRA 35, cited Goold v Commonwealth (1993) 114 ALR 135; (1993) 79 LGERA 407, cited Gregory v Commissioner of Taxation (Cth) (1971) 123 CLR 547, cited Heavey Lex No 64 Pty Ltd v Chief Executive, Department of Transport [2001] Qld Land Appeal Court A97-43, cited Hospital Products Limited v United States Surgical Corporation & Ors (1984) 156 CLR 41, considered Hurley v McDonald’s Australia Ltd (1999) FCA 1728, cited James Patrick & Co Pty Ltd v Minister of State for the Navy [1944] ALR 254, cited McDonald v Deputy Federal Commissioner of Taxation (1915) 20 CLR 231, distinguished McKean v Maloney [1988] 1 Qd R 628, cited Mir Bros Unit Constructions Pty Ltd v Roads and Traffic Authority of New South Wales [2004] NSW LEC 612, cited MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167, cited Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191, applied Pilmer v Duke Group Ltd (In liq) (2001) 207 CLR 165, applied R v Snow (1915) 20 CLR 315, cited Smith v FAI Leasing Finance Pty Ltd [2002] QSC 270, distinguished Stockl v Rigura Pty Ltd [2004] NSWCA 73, cited United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1, distinguished Yates Property Corp Pty Ltd v Darling Harbour Authority (1990) 70 LGRA 187, cited COUNSEL: K C Fleming QC with him R G Fryberg for the plaintiff P J Dunning SC with him N Ferrett for the first defendant -- 3 of 39 -- 4 M M Stewart SC with him S S Monks for the second and third defendants SOLICITORS: Morgan Conley Solicitors for the plaintiff Hopgood Ganim for the first defendant Lillas and Loel for the second and third defendants Introduction [1] The plaintiff, Benzlaw & Associates Pty Ltd, was at times material to these proceedings the proprietor of land situated at the corner of Brunswick Street and St Paul’s Terrace, Fortitude Valley, Brisbane, on which was constructed five commercial buildings, three of which were interconnected. Benzlaw financed the acquisition of the property in September 1996 by means of a secured loan from the first defendant, Medi-Aid Centre Foundation Limited. [2] The mortgage in favour of Medi-Aid was varied from time to time. On 4 February 1997 Benzlaw and Medi-Aid agreed that the amount of the loan be varied to $4,065,000 and that Benzlaw authorise and direct payment of rent by the major tenant Suncorp direct to Medi-Aid. On 30 October 1998 Medi-Aid served a notice of exercise of power of sale on Benzlaw. Suncorp vacated the premises in about November 1998 and the direct payments to Medi-Aid by way of rent ceased. [3] On 22 November 1999 Medi-Aid and Benzlaw entered into a joint venture agreement in respect of the property. The terms of the agreement are central to the dispute between Benzlaw and Medi-Aid and will be discussed later. Benzlaw borrowed $5,800,000 from Perpetual Nominees Limited (“Perpetual”) in December 2003. The loan was secured by a mortgage over the property and Perpetual, Medi- Aid and Benzlaw entered into a priority agreement under which it was agreed that Perpetual’s mortgage would rank ahead of the mortgage. From the proceeds of the loan, Benzlaw paid $5,000,000 to Medi-Aid in reduction of the monies owing under the mortgage. [4] On or about 26 May 2005, Medi-Aid served on Benzlaw a notice of exercise of power of sale alleging failure on the part of Benzlaw to pay principal of $5,870,977.38 on 23 December 2004 and interest thereon of $3,154,025.94. [5] Service of this notice precipitated a meeting between Mr Bennelli, a director and the guiding force of Benzlaw, Dr Knight, a director of Medi-Aid, and his son, Peter, at Brisbane airport on 7 June 2005. It is common ground that an agreement was reached at the meeting but what was agreed is disputed. [6] Prior to the meeting Mr Bennelli, through his finance broker, Mr McKenzie of Balmain Commercial, had been attempting, without success, to raise sufficient money to pay out the mortgage. Mr McKenzie had known Mr Bennelli since 2003 when he had procured the $5,800,000 loan referred to earlier. It is the undisputed -- 4 of 39 -- 5 evidence of Mr McKenzie that Benzlaw had no assets apart from the property to provide by way of security. Consequently, the sum which could be borrowed was dependent on the property’s value. It was Mr McKenzie’s belief at the time that it was unlikely that a lender would be prepared to lend more than 70%, or perhaps in the case of a first mortgagee 75%, of valuation. [7] Dr Knight deposed to a recollection that an agreement was reached on 7 June 2005 between himself and Mr Bennelli to the effect that: (a) Mr Bennelli would attempt to obtain finance in order to bring the mortgage payments up to date; and (b) If unable to do so, he would pay Medi-Aid $3,500,000 by 30 June 2005 in discharge of Benzlaw’s obligations to Medi-Aid. [8] Finance could not be raised and the $3,500,000 was not paid by 30 June 2005. [9] On 1 July 2005, Ray White valuers produced a valuation report for Benzlaw which valued the property at $11,500,000. It then became apparent, having regard to the monies owing to the first mortgagee, that Benzlaw would be unable to borrow the $3,500,000 on the security of the property necessary to pay out Medi-Aid. [10] In June and July 2005, Mr McKenzie had extensive contact with Dr Knight who was pressuring him about the payment out of the second mortgage. For some months Mr McKenzie had been attempting to get a long-standing customer of his, Mr Smith, interested in the property. His attempts were unsuccessful until 7 September 2005 when Mr McKenzie arranged for Mr Smith to meet with him and Mr Bennelli at the property. Before inspecting the property Mr Smith insisted on seeing a valuation of the property and one was provided on 5 September. [11] In the conversation between Mr Smith and Mr McKenzie which led to the 7 September meeting, Mr McKenzie informed Mr Smith that the property had potential for somebody in Mr Smith’s position, that Mr Bennelli could not raise the money to discharge the second mortgage and that Medi-Aid was pressing for its money. Mr McKenzie also told Mr Smith that the property was undervalued in as much as there were substantial vacancies in tenantable spaces in the property. In dealing with Mr Smith, Mr McKenzie was acting as agent for Benzlaw and also for Mr Smith. [12] In the course of the discussions on 7 September Mr Smith mentioned to Mr Bennelli that he wanted to “understand the full financial ramifications” of Benzlaw’s position and Mr Bennelli intimated the Benzlaw wished to stay in the property. Mr Bennelli advised that Medi-Aid wanted its money back urgently. [13] Mr Smith asserts that he was asked by Mr Bennelli at the meeting if he would do a joint venture with him to which he responded that he would not entertain a joint venture unless he owned the mortgage. He said that he told Mr Bennelli that Mr McKenzie had given him a copy of the valuation and that he would like to see copies of leases and property management reports. I accept Mr Smith’s evidence in -- 5 of 39 -- 6 this regard except that, whilst I consider it likely that Mr Smith expressed interest in acquiring the mortgage, I am not satisfied that he asserted that its acquisition was a condition of his entering into a joint venture agreement. [14] A further notice of exercise of power of sale was served on Benzlaw on about 8 September 2005. It alleged failure to pay $2,195,636.16 principal and interest of $9,387,105.33 on 23 December 2004. Also on 8 September Mr Smith collected from Mr McKenzie property reports in respect of the tenancies prepared by the letting agents. [15] With a view to attempting to acquire the mortgage Mr Smith telephoned Dr Knight on 29 September 2005. It was arranged that Mr Smith fly to Sydney to meet Dr Knight and discuss the proposed transaction. In the course of their conversation Dr Knight complained about Benzlaw’s failure to meet its obligations under the mortgage and its broken promises to repay. He complained also that Mr Bennelli had not honoured an agreement made in June that year to pay $3,500,000 in return for a discharge of the mortgage. Mr Bennelli telephoned Mr Smith and told him that he had received another notice from Dr Knight. Mr Smith swears that from this time he often received telephone calls from Mr Bennelli. [16] Mr Smith and Dr Knight met in Sydney on 4 October 2005 and discussed the purchase price of Medi-Aid’s interest in the mortgage. Mr Smith gave evidence that on 5 October, in a telephone conversation with Mr Bennelli, Mr Smith said that he was entering into an agreement with Dr Knight concerning the purchase of the mortgage. He reported Mr Bennelli as saying “I will be a very good partner for you and act in good faith”. Mr Smith says that he did not respond. A further discussion between Mr Bennelli and Mr Smith concerning Smith’s acquisition of Medi-Aid’s interest in the mortgage took place on 6 October. In the course of that conversation Mr Smith claims that he said words to the effect that he was not talking about a joint venture until he had “signed a deal with the doctor”. On 6 October 2005 Mr Smith’s solicitors forwarded to Medi-Aid’s solicitors a draft deed of assignment of mortgage for their consideration. [17] Mr Bennelli and Mr Smith met on 7 October. Mr Smith’s version of events is as follows. During the meeting Mr Bennelli asked Mr Smith how much he had paid for the mortgage. Mr Smith declined to answer. There was discussion about leases. Mr Bennelli said that he wanted a 50/50 joint venture. Mr Smith’s response, again, was that he would discuss options when he had a signed agreement with Dr Knight. He asked for cash flow figures for the building but Mr Bennelli declined to provide them saying that he would not provide more details until there had been a meeting with solicitors to “structure a deal”. [18] On 11 October 2005 there were discussions between Mr Smith’s solicitors and the solicitors for Benzlaw with a view to arranging a meeting to discuss a possible joint venture between Benzlaw and Mr Smith or an entity of his. A file note of 11 October 2005 of a solicitor in the employ of Benzlaw’s solicitors recorded Mr Bennelli as saying that “he had not said anything to Smith at this stage” as to the terms of a prospective joint venture and that Mr Bennelli would be guided by his -- 6 of 39 -- 7 solicitors as to the terms and conditions. On 14 October 2005 the solicitors for Medi-Aid forwarded to the solicitors for 2040 Logan Road Pty Ltd (the second defendant and a corporate vehicle directed by Mr Smith which he selected to acquire Medi-Aid’s interest in the mortgage) a deed of assignment of the mortgage executed by Medi-Aid. The solicitors for Benzlaw wrote to the solicitors for Logan Road on 18 October 2005 stating their instructions that there could not be a meeting about a possible joint venture until there was “full and frank disclosure …of all matters conveyed and discussed with Medi-Aid concerning the property”. That email was in response to a written communication from Logan Road’s solicitors stating that Logan Road had acquired the mortgage pursuant to a transaction which was due to “settle shortly”. [19] Nevertheless, a meeting between Mr Smith, Mr Bennelli and their respective solicitors took place on 20 October 2005 for the purposes of discussing a joint venture. On 25 October 2005 Benzlaw’s solicitors wrote to the solicitors for Logan Road referring to the “without prejudice discussions” on 20 October and recording Benzlaw’s requirements for the “key features” of the proposed joint venture. The letter concluded by stating that if there was agreement in relation to those matters, the solicitors could commence preparation of a draft joint venture agreement subject to outstanding issues concerning the assignment of the mortgage. [20] In a letter dated 26 October 2005 from Medi-Aid’s solicitors to Benzlaw’s solicitors it was asserted that the Joint Venture Agreement was at an end. On 7 November 2005 Benzlaw’s solicitors wrote to Logan Road’s solicitors noting that a reply had not been received to their facsimile of 25 October 2005. The letter asserted instructions that the clients of the firms had met and broadly agreed on commercial terms relating to the redevelopment of the site. It attached an explanatory memorandum in relation to a “hybrid family unit trust” which was a suggested “alternative to the partnership of discretionary trusts” referred to in previous correspondence. [21] On 10 November 2005 Benzlaw’s solicitors forwarded a draft joint venture agreement to the solicitors for Logan Road stating that the document “incorporates the commercial arrangement that our clients have reached relating to their intention to create a Joint Venture Agreement to improve and sell the abovementioned property”. The solicitors for Medi-Aid on 14 November 2005 wrote to the solicitors for Logan Road stating that they had advised their client not to enter into an agreement to sell the property by private treaty to Logan Road. They suggested that “the most logical method of proceeding would be for [Logan Road] to acquire the mortgage and then proceed to foreclose”. [22] It was part of Benzlaw’s pleaded case that a joint venture agreement between it and Logan Road had been concluded. The point was not pressed in final addresses. The evidence did not disclose the existence of an agreement as to any terms of the proposed joint venture, let alone as to the central or critical terms. I find that there was no concluded agreement for a joint venture between Benzlaw and Logan Road. -- 7 of 39 -- 8 [23] Settlement of the transaction under which Logan Road acquired Medi-Aid’s interest in the mortgage occurred on 30 November 2005. Also on that day receivers and managers were appointed to the property by Logan Road. On 2 December 2005 Benzlaw was served with a notice of exercise of power of sale under s 84 of the Property Law Act. [24] Mr Smith swears that by early November he had decided that he “wanted to sell the property as mortgagee in possession” and that Mr Loel, his co-director, agreed with him. With a view to the sale of the property, the receivers obtained marketing submissions and estimated sale prices from four firms of real estate agents. Based on the price estimates Mr Smith formed the view that the market value of the property was to the order of $15 million. A tender process was engaged in between about 19 January and 1 March 2006. Nevertheless, an agreement for the sale of the property by Logan Road to 148 Brunswick Street Pty Ltd (another of Mr Smith’s and Mr Loel’s companies) for a sale price of $13,100,000 was entered into on 27 January 2006. [25] The sale price was equal to the market value attributed to the property by Mr Bremner, a valuer, in a valuation report dated 12 January 2006 obtained by prospective lenders to Brunswick Street. [26] Despite the sale of the property the tender process was not terminated and no notice of the sale was given to tenderers. Mr Smith’s evidence was to the effect that if an offer was made under the tender process which was higher than the price paid by Brunswick Street, Brunswick Street probably would have sold the property to the offeror. I find that Brunswick Street would have been unlikely to have sold the property in the short term unless it stood to make a substantial profit as Mr Smith was reasonably confident that he could increase the market value of the property substantially through the exercise of his skills as a developer and property manager. The prices offered by tenderers ranged from $7.5 million to $14 million. The price of $14 million, offered by Valad Funds Management Limited, included a term that there be an “income guarantee totalling $700,000 to be held at settlement and used at Valad’s discretion.” Mr Smith, correctly in my view, regarded the offer as one for $13,300,000. He was also concerned about the genuineness of Valad as a result of recent experience of dealings with it in relation to another development and considered also that its offer to provide the deposit of 5% by bank guarantee suggested that Valad was not as serious as it could have been. [27] The next highest offer was $13,500,000 by Trinity Consolidated Group. It required a 45 days due diligence period. After consultation with the marketing agent, Mr Smith was concerned that the defects in the property which due diligence investigations would reveal would result in Trinity’s seeking a reduced purchase price. He was informed by the marketing agent and accepted that Trinity “frequently resorted to litigation and threats of litigation against parties with whom they were negotiating purchases”. I find that having regard to the terms of the Valad and Trinity offers, they were no more favourable than the $13,100,000 which Brunswick Street had agreed to pay. -- 8 of 39 -- 9 [28] Solrift Pty Ltd offered $12,750,000 with a deposit of $10,000. It sought a 30 day finance period and offered settlement within 90 days of the contract date. Mr Smith did not regard Solrift as a “serious bidder”. The next highest offer was $12,500,000 by Adnam Pty Ltd. It was seeking a 30 day due diligence period and a settlement date of 1 June 2006. An additional condition was that the contract be subject to the approval of the board of Ariadne Australia Limited. Benzlaw’s case against Medi-Aid, Logan Road and Brunswick Street [29] Benzlaw alleges that under the Joint Venture Agreement Medi-Aid owed Benzlaw a fiduciary obligation: (a) to observe good faith and to keep Benzlaw advised of all matters relevant to the joint venture known to Medi-Aid; and (b) not to benefit itself at the expense of Benzlaw, in particular, during any dissolution or attempted dissolution of the joint venture. [30] At a meeting at Brisbane airport between Mr Bennelli and Dr Knight it was agreed that: (a) Medi-Aid would accept $3,500,000 in settlement of the account between mortgagor and mortgagee; (b) Medi-Aid would release its mortgage over the property; and (c) the Joint Venture Agreement would be terminated. [31] What is said to flow from the alleged agreement did not emerge either from the pleading or from Counsel’s final address. [32] Logan Road owed a duty of good faith and a duty not to benefit itself at the expense of Benzlaw as “a joint venturer or proposed joint venturer”. [33] Medi-Aid and Logan Road acted in breach of their respective fiduciary duties in: (a) negotiating concerning an acquisition by Logan Road from Medi-Aid of the latter’s interest in the second mortgage; (b) agreeing that Logan Road pay Medi-Aid $3 million for the assignment of the second mortgage, and agreeing that Medi-Aid at Logan Road’s request would appoint a receiver over Benzlaw; (c) Medi-Aid assigning its interest in the second mortgage to Logan Road and Logan Road accepting such assignment; [34] Logan Road, in order to obtain the property for itself and to dispossess Benzlaw: (a) obtained a valuation of the property of $13.1 million on a forced sale basis without informing the valuer of the prospect of further tenancies which would have significantly increased the valuation; (b) sold the property in a private sale to Brunswick Street at a valuation of $13.1 million; and (c) sold to Brunswick Street on terms under which Logan Road lent to Brunswick Street the balance of the purchase price on an unsecured -- 9 of 39 -- 10 basis after payment out of the monies owing under the second mortgage. [35] The sale by Logan Road to Brunswick Street constituted a fraud on the mortgagee’s power as it was not for the purpose of s 84 of the Property Law Act. Logan Road breached its obligations to Benzlaw by failing to properly exercise its power of sale as mortgagee. [36] Brunswick Street was party to and had knowledge of the conduct alleged against Logan Road, the conduct of which was “contrary to ordinary conceptions of honesty and fair dealing between joint venturers and amounted to fraud for the purposes of s 184 of the Land Title Act 1994”. [37] Logan Road obtained a benefit from its breaches of fiduciary duty “to the extent if any that [Logan Road] purchased the debt owing by [Benzlaw] to [Medi-Aid] at a discount” and the exercise of its purported rights as mortgagee without being bound by the terms of the Joint Venture Agreement”. Brunswick Street knowingly assisted Logan Road in respect of the alleged breaches of fiduciary duties and is equally liable. [38] The conduct of each of Medi-Aid, Brunswick Street and Logan Road is “unconscionable”, “misleading and deceptive” within the meaning of the Trade Practices Act 1974. [39] Logan Road and Brunswick Street are liable for knowingly assisting Mr McKenzie in breaches of his fiduciary duties to Benzlaw. Credibility [40] I did not form the view that either Mr Bennelli or Mr Smith had particularly reliable recollections of the events in question. I concluded that much of Mr Bennelli’s professed recollections resulted from unintentional reconstruction and that, generally, his evidence was likely to be less accurate than that of Mr Smith. I considered also that neither Mr Smith nor Mr Bennelli was capable of giving a completely objective account of events. I concluded that Mr McKenzie’s evidence was generally reliable and that, subject to express observations about Dr Knight’s evidence in these reasons, Dr Knight gave his evidence carefully, considered matters objectively and made concessions where concessions were due. The Joint Venture Agreement [41] The Joint Venture Agreement recites that Benzlaw had mortgaged the property to Medi-Aid, that Benzlaw was in default under the mortgage and had received a valid notice pursuant to s 84 of the Property Law Act 1974. Recitals D, E and F provide: “D. Medi-Aid and Benzlaw have agreed to enter into this Agreement to permit Benzlaw to more effectively develop -- 10 of 39 -- 11 and/or sell the Property and to repay all monies owing under the Mortgage (“the monies due”) to Medi-Aid. E. Medi-Aid and Benzlaw have agreed to form a Joint Venture for the performance of the Building Works. F. Medi-Aid and Benzlaw desire to enter into a Joint Venture Agreement in order to fix and define between themselves their respective interests and liabilities in connection with the Joint Venture.” [42] The scope of the joint venture is defined in clause 2 of the Joint Venture Agreement as follows: “2.(1) Medi-Aid and Benzlaw hereby associate themselves as Joint Venturers upon the terms and conditions herein for the purpose of carrying out the Building Works and the Development Project, with a view to profit. (2) The Joint Venture shall be deemed to have commenced on the date hereof and shall continue until the completion of the Building Works and the Development Project and the distribution of the Net Profits (if any) to the Parties and shall be a venture restricted to the carrying on and carrying out of these matters and nothing in this Agreement or otherwise shall be construed as constituting a Party a partner or agent or representative of another Party hereto or to create any trust or partnership between or amongst the Parties.” [43] “Building works” and “the Development Project” are defined terms. The “Building Works” are defined as “the Works to be performed under the Building Contract”. The “Building Contract” is a Building Contract to be entered into between Benzlaw and a named contractor. [44] Clause 3 of the Joint Venture Agreement provides that upon sale of the property the Net Profit as defined is to be divided equally between Medi-Aid and Benzlaw. Until sale of the property Medi-Aid is to receive 25% of the Gross Income from the Property for a maximum of five years from the Date of Completion of the Building Works. The sale of the property was to occur within five years from the date of completion of the Building Works.1 [45] “Net Profits” is defined as the excess of joint venture income over “the total costs of the Joint Venture”. [46] “Costs of the Joint Venture” means: “all costs paid or payable and all costs and charges incurred by the Joint Venturers for the purposes of or in connection with the Joint Venture and including but without limitation the following: (i) all reasonable legal costs (on a solicitor and own client basis), stamp duty and other proper disbursements incurred 1 Joint Venture Agreement, Clause 3. -- 11 of 39 -- 12 by Medi-Aid relating to, inter alia, preparation and execution of this Agreement, carrying out the Joint Venture, any matter relating to the Joint Venture in any other manner, the Mortgage, Benzlaw's default under the Mortgage and the provision of any further finance facility, bank guarantee or otherwise in connection with the Building Works or the Development Project including all bank interest, charges or fees payable by Medi-Aid (but expressly excluding any such costs, charges, interest or other expenses incurred by Benzlaw; (ii) Any charges, tax or other fees payable to any Governmental or statutory authority in connection with the Development Project; … (v) All monies due to Medi-Aid by Benzlaw under the Mortgage together with any monies advanced, finance facilities arranged, bank guarantees or other securities provided or monies or monies worth in any other manner owed by Medi-Aid or for which Medi-Aid is or may become liable relating to the Joint Venture.” [47] Clause 3(1) provides: “3.(1) The Net Profit (if any) arising from the Joint Venture shall be divided as follows:- (a) After payment to the Builder under the Building Contract the Net Profit shall be ascertained and for that purpose the costs of the Joint Venture shall expressly not include any costs, charges, interest or other expenses incurred by Benzlaw unless expressly authorised in writing by Medi-Aid; (b) If the Property is sold (as hereinafter provided) the Net Profit shall be divided equally between Medi- Aid and Benzlaw. (c) Until the sale of the Property, Medi-Aid shall receive twenty-five per cent (25%) of the Gross Income from the Property to a maximum of five (5) years from the Date of Completion of the Building Works as defined in the Building Contract PROVIDED THAT: (i) such payment shall not be a deduction from the share of the Net Profit to be paid to Medi- Aid; and (ii) such payment shall terminate upon payment by Benzlaw or a financier of all of the monies due under the Mortgage; (d) Sale of the property must occur within five (5) years from the date of completion of the Building Works as defined in the Building Contract unless Medi-Aid agrees otherwise in writing; …” -- 12 of 39 -- 13 [48] Clause 5(5) provides: “(5) Medi-Aid shall defer recovery proceedings against Benzlaw under the Mortgage provided Medi-Aid is at all times satisfied that Benzlaw is proceeding with its obligations under this Agreement expeditiously.” [49] Clause 6(8) provides: “If Benzlaw is in default under any of the provisions of this Agreement or is at any time in default under the terms of the finance facility referred to in clause 5(6) and (7) above, Medi-Aid shall be entitled to forthwith require Benzlaw to sell the Property by such means and upon such terms and conditions and for a price reasonably stipulated by Medi-Aid.” [50] Clause 8 provides: “Neither Party shall lease, sell, assign or in any other way transfer, mortgage, deal with or in any way encumber its interest in the Joint Venture or any part thereof without first obtaining the written consent of the other Party, which consent shall not be unreasonably withheld in the case of a mortgage, charge or encumbrance where the same is created for the purposes of this Agreement or any obligation hereunder.” Construction of the Joint Venture Agreement [51] Benzlaw contends that the consequence of including “all moneys due to Medi-Aid by Benzlaw under the Mortgage…” in the definition of “Costs of the Joint Venture” was to “crystallise the amounts then owing under the mortgage” so that interest under the mortgage no longer accrued. In aid of its argument Benzlaw points to Recital D in which “all monies owing under the mortgage” are defined as “the monies due”. It is also pointed out that the instrument distinguishes between present and future liabilities in other places.2 [52] Recitals D and E of the Joint Venture Agreement explain the purpose of the parties in entering into the agreement. Recital E is only partly accurate as clause 2(1) provides that the parties “associate themselves … for the purpose of carrying out the Building Works and the Development Project, with a view to profit”. The “Net Profit” as defined is to be divided equally between the parties in the event that the property is sold. “Net Profits” means the excess of Joint Venture income over “the total costs of the Joint Venture”. The definition of “Costs of the Joint Venture” is set out above. The critical sub-paragraph of the definition is (v) which commences “All monies due to Medi-Aid by Benzlaw under the Mortgage…” [53] I accept that the words “monies …owed by Medi-Aid or for which Medi-Aid is or may become liable…” in sub-paragraph (v) provide support for the view that the words “monies due” refer to monies presently due. Any such indication, however, is 2 Clause 1.1(vi). -- 13 of 39 -- 14 slight. The definition’s introductory words include “all costs and charges incurred”. Those words are intended, quite plainly, to include future costs and charges. Elsewhere in the definition reference to charges costs or outgoings include reference to future charges costs and outgoings by necessary implication. [54] What other indications are there that “monies due” refers only to monies owing at the date of the Joint Venture Agreement? And, if this is so, why would it follow that Benzlaw is released from its obligation to pay interest which accrues after that date? One such possible indication lies in Medi-Aid’s right under sub-clauses 3(1)(b) and (c) to a half share of profits on sale and 25% of the Gross Income “from the Property”. On the face of things, it may seem unreasonable that Medi-Aid retain its right to interest and also share in profits and income. [55] Clause 5(2) provides that the value of the bank guarantee to be provided by Medi- Aid is to be added to the “Principal Sum under the Mortgage and shall form part of the monies due [under the mortgage]”. The provision acknowledges, implicitly, that the mortgage debt remains and may be increased. In contrast with this treatment, there is no deemed amendment to the mortgage to the effect that interest ceases to accrue. [56] Clause 5(5) is also consistent with the retention by Medi-Aid of its rights under the mortgage subject only to the qualification that recovery proceedings must be deferred whilst Medi-Aid is satisfied that Benzlaw is “proceeding with its obligations … expeditiously”. It is significant that sub-clause (5) does not limit the amount recoverable to the monies due and owing at the commencement of the joint venture. And it would be an unorthodox and somewhat surprising drafting technique to limit a mortgagee’s rights under the mortgage in respect of interest merely by providing in a joint venture agreement between mortgagee and mortgagor that only monies due under the mortgage at the date of the Joint Venture Agreement could form part of the costs of the joint venture. Without some compelling indication to the contrary such a provision would relate only to rights and obligations under the Joint Venture Agreement. [57] As there is nothing in the Joint Venture Agreement which expressly or by necessary implication prevents the mortgage from operating in accordance with its terms, Benzlaw can succeed only if it is possible for a term to be implied which prevents interest from continuing to run under the mortgage. Such a term would not meet the test for an implied term propounded in Codelfa.3 It is not something which “goes without saying” or which is “necessary to give business efficacy to the contract”.4 [58] Medi-Aid seeks to advance its argument by reference to a deed of variation of mortgage executed by the parties on 22 December 2003 in which it is acknowledged that Benzlaw was in default under the mortgage and that the amount outstanding on 17 December 2003 was $12,459,749. The acknowledgement operates as an admission as to the mortgage debt and as to the existence of a default. Also the deed 3 Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337. 4 Ibid, at 347. -- 14 of 39 -- 15 could have been relied on as grounding an estoppel by deed. Subsequent conduct cannot be relied on however as an aid to contractual construction. [59] Benzlaw contends also that it was a breach of Medi-Aid’s fiduciary duties for it to negotiate with Logan Road for the sale of its interest in the mortgage and for it to assign that interest. Contrary to Benzlaw’s contentions, clause 8 of the Joint Venture Agreement does not expressly restrict the right of Medi-Aid to deal with its interest under the mortgage: its interest in the mortgage is not its interest in the joint venture. Whether there is an implied term which prevents Medi-Aid from assigning its interest in the mortgage is not so clear. The fact that the Joint Venture Agreement contains restrictions on assignment 5 which do not relate to the mortgage makes the implication of a term more difficult. But unless such a term is implied Medi-Aid would be free to frustrate the Joint Venture Agreement by assigning its interest under the mortgage. [60] If however a term is to be implied against the assignment of Medi-Aid’s interest in the mortgage it cannot be in absolute terms. As in the event of default by Benzlaw, Medi-Aid can require the property to be sold under clause 6(8) and, under clause 5(5) Medi-Aid can exercise its rights under the mortgage, it would not appear to “go without saying” or to be necessary to give business efficacy to the Joint Venture Agreement that it could never assign its interest under the mortgage whilst it remained on foot. Consequently, if a term is to be implied along the lines of that alleged it would be to the effect that Medi-Aid could not assign its interest in the mortgage unless it was entitled to bring recovery proceedings against Benzlaw or to exercise rights under clause 6(8). The evidence establishes that Benzlaw was in breach of its obligations under the Joint Venture Agreement and under the mortgage throughout 2005. For example, it failed to comply with clause 3(1)(c), 5(4), 6(1), 7(2) of the Joint Venture Agreement and had failed to pay interest due under the mortgage. [61] For the above reasons, I find that any term which could be implied does not assist Benzlaw as it would not have prohibited Medi-Aid from assigning its interest in the mortgage at the time it did so. For generally the same reasons, Medi-Aid’s conduct in and about the assignment of its interest in the mortgage did not breach its fiduciary duties to Benzlaw. The 7 June Agreement [62] Dr Knight’s evidence concerning the 30 June payment requirement was shaken in cross-examination. He also appeared to be asserting that under the alleged oral agreement, payment of $3,500,000 would not extinguish Benzlaw’s obligation to pay arrears of interest. [63] In cross-examination Dr Knight, referring to that part of his diary note of the meeting of 7 June which dealt with payment of the sum of $3,500,000, said “these were my own notes for myself”. He added, “I think they were probably discussed 5 Clauses 8 and 14. -- 15 of 39 -- 16 with Mr Bennelli too…whether they are my thoughts or whether he used them … I don’t know…”. It was put to Dr Knight that Mr Bennelli said that “he couldn’t promise to give you money by the 30th June”. His response was “He always said he’d do his best and Luke McKenzie acted very quickly, giving me the impression that it could happen”. In response to it being put to him again that Mr Bennelli did not agree that he would pay the money by 30 June, Dr Knight said “He assured me that he would – he led me to believe that he possibly would”. [64] Mr Bennelli’s recollection was that the agreement was that Medi-Aid would accept $3,500,000 is discharge of the mortgage, the Joint Venture Agreement would be terminated but that no time for the payment of the monies had been agreed. In other words, Dr Knight agreed to accept considerably less than the amount due in return for an offer by Mr Bennelli to use his best endeavours to perform following years of failing to perform. That may be considered unlikely. [65] Dr Knight’s contemporaneous diary note offers strong support for Medi-Aid’s case provided that it is not merely a record of his “thoughts” as Dr Knight speculated in cross-examination. There is nothing about the note which suggests that Dr Knight was not attempting to set out the substance of what passed between Mr Bennelli and him in the course of the meeting. Dr Knight’s diary note receives support from Mr Peter Knight’s evidence. Peter Knight had the benefit of being able to refresh his memory from a contemporaneous diary note which includes: “must be wrapped by 30/6/05 … if not by 30.6.05 we will have no choice”. [66] Mr Bennelli accepted, in cross-examination, that Dr Knight had stressed a number of times during the meeting that Medi-Aid needed the money before 30 June 2005. He claims to have said that he would do everything he could “to see if I can get it done by June the 30th ”. His solicitor, Mr Barnes, swore that Mr Bennelli spoke to him on 7 June 2005 and advised him that “…he had agreed with Dr Knight to discharge the obligations between Benzlaw and Medi-Aid for $3.5M, which would discharge all obligations under both the mortgage and the joint venture, and that Benzlaw had until 30 June 2005 to discharge those obligations”. The effect of Mr McKenzie’s evidence is that Mr Bennelli told him that there was a 30 June 2005 deadline for payment of the agreed sum of $3,500,000. He also agreed that Mr Bennelli was endeavouring to get a valuation as early as possible and displayed “a degree of anxiety” as 30 June 2005 approached. The purpose of the valuation was to assist in financing the payment of the $3,500,000. I regard Mr Barnes’ evidence, which is against the interests of his client, as of considerable evidentiary force. [67] It was not until 20 July 2005 that Benzlaw’s solicitors raised with Medi-Aid’s solicitors the alleged agreement of 7 June. Their facsimile of that date asserted, wrongly, that Medi-Aid had refused payment of $3,500,000 offered by Benzlaw. On 20 July 2005 Medi-Aid’s solicitors wrote: “Our client has not resiled from the agreement, as outlined in your facsimile. Our client has not refused to take payment of the settlement sum. Payment has not yet been tendered. Please advise when settlement will take place.” -- 16 of 39 -- 17 [68] The agreement asserted in Benzlaw’s solicitors’ letter of 20 July 2005 was that Benzlaw would pay to Medi-Aid $3,500,000 in return for which Medi-Aid would: “1. Release the mortgage …; and 2. Terminate the Joint Venture Agreement …” [69] There was no mention of the 30 June 2005 time limit. Medi-Aid’s solicitors must therefore have been unaware of their client’s version of the terms of the agreement or, if aware, they must have carelessly overlooked the desirability of correcting the terms alleged by Benzlaw’s solicitors. [70] Benzlaw’s solicitors prepared a five page deed of release which, amongst other things, contained the terms of the agreement alleged by Benzlaw and forwarded it to Medi-Aid’s solicitors on 25 July 2005. Medi-Aid’s solicitors sought a number of amendments to the draft in a facsimile of 2 August 2005 and requested confirmation of “when settlement is to take place”. Negotiations then took place between the solicitors as to the wording of the document. On 11 August 2005 Medi-Aid’s solicitors wrote to Benzlaw’s solicitors stating that unless settlement occurred by 4pm on 19 August “all negotiations and offers” by Medi-Aid would be withdrawn and that Medi-Aid would proceed against Benzlaw in relation to its default under the mortgage. On 2 September 2005 Benzlaw’s solicitors wrote to Medi-Aid’s solicitors advising: “Subsequent to the withdrawal of the notice of exercise of power of sale an agreement was reached between our clients, subject to Benzlaw being able to raise sufficient funds from a lender on the security of the property, to pay your client $3.5 million to: (a) discharge the second mortgage; and (b) buy out his interest in the Joint Venture.” [71] It may be seen that the letter introduces the further term or qualification that ‘Benzlaw be able to raise sufficient funds’. [72] The letter went on to advise that Benzlaw could not raise more than $2,100,000 on the security of the property and sought Medi-Aid’s acceptance of that sum in discharge of the mortgage. The response of Medi-Aid’s solicitors was a facsimile of 8 September accompanying a copy of a notice of exercise of power of sale served on Benzlaw that day. The communication also alleged that Benzlaw had failed to fulfil its obligations under the Joint Venture Agreement and that the agreement had ceased to exist. The letter concluded with the observation that Medi-Aid intended to list the property for sale. [73] On 23 September 2005 Medi-Aid’s solicitors sent a facsimile to Benzlaw’s solicitors stating their client’s requirement that the mortgage debt be repaid “forthwith”. Medi-Aid’s solicitors wrote to Benzlaw’s solicitors on 3 October 2005 withdrawing the notice of exercise of power of sale dated 8 September 2005 whilst reserving their client’s right in respect of monies owed. -- 17 of 39 -- 18 [74] I find that by 8 September 2005, at the latest, the 7 June Agreement was at an end. Benzlaw had manifested an intention not to be bound by it and Medi-Aid had accepted Benzlaw’s wrongful repudiation. The existence of a fiduciary relationship between Benzlaw and Mr Smith [75] Counsel for Benzlaw relied on the following passage from the reasons for judgment of Mason, Brennan and Deane JJ in United Dominions Corporation Ltd v Brian Pty Ltd in support of the existence of a fiduciary relationship between Benzlaw and Mr Smith:6 “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 arrangement between them. In particular, 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. Indeed, in such circumstances, the mutual confidence and trust which underlie most consensual fiduciary relationships are likely to be more readily apparent than in the case where mutual rights and obligations have been expressly defined in some formal agreement. Likewise, the relationship between prospective partners or participants in a proposed partnership to carry out a single joint undertaking or endeavour will ordinarily be fiduciary if the prospective partners have reached an informal arrangement to assume such a relationship and have proceeded to take steps involved in its establishment or implementation.” [76] For present purposes, it is unnecessary to distinguish between Mr Smith, Logan Road and Brunswick Street. Mr Smith was the guiding mind of those companies. [77] Whilst the above passage shows that a fiduciary relationship can exist between parties negotiating with a view to entering into a joint venture agreement, critical elements of the indicia relied on in it to establish the existence of a fiduciary relationship have no counterpart in the facts under consideration. The indicia to which I refer are the taking of steps towards the establishment or implementation of the venture, the embarking upon the conduct of the venture and the existence of mutual confidence and trust. [78] Reference was also made by counsel for Benzlaw to Smith v FAI Leasing Finance Pty Ltd7 in which, borrowing from the reasons of Mason J in Hospital Products,8 Dutney J said: “The relationship between the parties must give the fiduciary a special opportunity to exercise the power or discretion to the 6 (1985) 157 CLR 1 at 12. 7 [2002] QSC 270 at [36]. 8 (1984) 156 CLR 41 at 96-97. -- 18 of 39 -- 19 detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.” [79] This is not a case involving the exercise of a power or discretion. [80] In Hospital Products, Wilson and Dawson JJ warned against the undesirability of over readily importing fiduciary obligations into arms length commercial relationships.9 Dawson J said in that regard: 10 “The remarks of Bramwell L.J. in New Zealand and Australian Land Co v Watson (1881) 7 QBD 374, at p 382, have, I think, special application: ‘Now I do not desire to find fault with the various intricacies and doctrines connected with trusts, but I should be very sorry to see them introduced into commercial transactions, and an agent in a commercial case turned into a trustee with all the troubles that attend that relation.’” [81] Gibbs CJ, after discussing circumstances which had been held to give rise to fiduciary obligations expressed somewhat similar reservations:11 “On the other hand, the fact that the arrangement between the parties was of a purely commercial kind and that they had dealt at arm's length and on an equal footing has consistently been regarded by this Court as important, if not decisive, in indicating that no fiduciary duty arose: see Jones v. Bouffier; Dowsett v. Reid; Para Wirra Gold & Bismuth Mining Syndicate No Liability v. Mather; Keith Henry & Co. Pty. Ltd. v. Stuart Walker & Co. Pty. Ltd. A similar view was taken in Canada in Jirna Ltd. v. Mister Donut of Canada Ltd.” (citations omitted) [82] In determining whether a fiduciary relationship has arisen out of unconcluded negotiations, an obviously important consideration is whether a fiduciary relationship would have resulted from a concluded agreement. In the passage from the joint reasons in United Dominions Corporation Ltd v Brian Pty Ltd relied on by Benzlaw it will be seen that the underlying assumption was that an agreement, if concluded, would result in a fiduciary relationship. Where the negotiations are commercial in nature, at arms length and if concluded will not result in an agreement under which the parties assume fiduciary obligations, the position is necessarily different. In such a case, if any fiduciary relationship is to exist, it must be as a consequence of the negotiations themselves. [83] There is nothing in the evidence which suggests that the agreement Messrs Bennelli and Smith had in mind was one which would give rise to fiduciary obligations. Indeed, Mr Bennelli had not considered the terms and conditions of any agreement with Mr Smith by 11 October 2005. Mr Smith was in the same position. It was not until 25 October 2005 that Benzlaw’s solicitors stated, on behalf of Benzlaw, its 9 See the reasons of Wilson J at pp 118, 119 and the reasons of Dawson J at pp 149, 150. 10 At 149-150. 11 At 70. -- 19 of 39 -- 20 “key features” for the proposed joint venture. The draft Joint Venture Agreement submitted by Benzlaw’s solicitors to Mr Smith’s solicitors on 10 November 2005 did provide that a fiduciary relationship would be established by the agreement. But the evidence does not establish that Mr Smith would have accepted such a provision and it is likely that he gave no consideration at all to any of the draft’s contents. [84] If a fiduciary obligation then is to be imposed on either Logan Road or Brunswick Street through Mr Smith, it is necessary to identify those matters, in addition to the mere entering into of negotiations with a view to a joint venture, which caused the fiduciary relationship to arise. As appears from the following discussion, the most obvious factors suggestive of a fiduciary relationship are: the existence of mutual trust and confidence; reliance by one party on the other or reliance by the parties on each other and the obligation of one party to act in the interests of the other in the exercise of a power or discretion. [85] In Hospital Products, Gibbs CJ observed:12 “In the decided cases, various circumstances have been relied on as indicating the presence of a fiduciary relationship. One such circumstance is the existence of a relation of confidence, which may be abused: Tate v. Williamson (1866) LR 2 Ch App 55, at p 61, Coleman v. Myers, [1977] 2 N.Z.L.R., at p. 325.” [86] Dawson J placed emphasis on the role of reliance in establishing a fiduciary relationship. He said:13 “In ordinary business affairs persons who have dealings with one another frequently have confidence in each other and sometimes that confidence is misplaced. That does not make the relationship a fiduciary one. See Lloyds Bank v. Bundy [1975] 1 Q.B., at p. 341. A fiduciary relationship exists where one party is in a position of reliance upon the other because of the nature of the relationship and not because of a wrong assessment of character or reliability. That is to say, the relationship must be of a kind which of its nature requires one party to place reliance upon the other; it is not sufficient that he in fact does so in the particular circumstances.” [87] Dawson J had earlier stated the following broad proposition:14 “There is, however, the notion underlying all the cases of fiduciary obligation that inherent in the nature of the relationship itself is a position of disadvantage or vulnerability on the part of one of the parties which causes him to place reliance upon the other and requires the protection of equity acting upon the conscience of that other. See Tate v. Williamson (1866) 2 Ch App 55, at pp 60-61.” [88] Mason J, after observing that: “The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence …” explained:15 12 At 69. 13 Hospital Products at 147. 14 At 142. -- 20 of 39 -- 21 “The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions ‘for’, ‘on behalf of’’ and ‘in the interests of’ signify that the fiduciary acts in a ‘representative’ character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal. It is partly because the fiduciary's exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed. See generally: Weinrib, ‘The Fiduciary Obligation’ (1975) 25 University of Toronto Law Journal 1, at pp.4-8. “ The above passage was referred to with implicit approval by McHugh, Gummow, Hayne and Callinan JJ in Pilmer v Duke Group Ltd (in liq). 16 [89] There is nothing about the relationship between Messrs Bennelli and Smith which suggests that either reposed confidence in the other, that either had undertaken to act in the interest of the other in the exercise of a power or discretion or otherwise, or that one relied on the other in any relevant sense. Mr Smith had not received favourable reports of Mr Bennelli’s abilities or judgment before first meeting with him. The evidence does not disclose what Mr McKenzie may have told Mr Bennelli about Mr Smith but Mr Smith was a stranger to Mr Bennelli. It may be assumed that Mr Bennelli was told by Mr McKenzie that Mr Smith was a successful property developer with access to sufficient funds to bring about the removal of any interest of Medi-Aid in the property. Each of Mr Smith and Mr Bennelli would have commenced discussions believing, had he turned his mind to the matter, that he would look to his own interests in any prospective negotiations and that the other person would do the same. [90] As Mason J pointed out in Hospital Products17 “entitlement to act in one's own interests is not an answer to the existence of a fiduciary relationship, if there be an obligation to act in the interests of another”. But there is no basis for concluding that Mr Smith was obliged to act in Mr Bennelli’s interests. [91] It is desirable at this junction to return to Benzlaw’s pleaded case. It alleges that as a joint venturer or proposed joint venturer Logan Road owed Benzlaw a fiduciary obligation to observe good faith towards Benzlaw and not to benefit itself at the 15 At 96-97. 16 (2001) 207 CLR 165 at 196. 17 At 99. -- 21 of 39 -- 22 expense of Benzlaw. 18 For the reasons discussed above the mere status of Logan Road as a proposed joint venturer could not give rise to a fiduciary relationship. [92] Benzlaw’s case is not based on an obligation of confidentiality attaching to information imparted in the course of negotiations. If Benzlaw had based its case on the misuse of confidential information, as it appeared to be doing at some stages in the course of counsel’s submissions, it would have been necessary to identify the information relied on and establish that it had “the necessary quality of confidence about it”.19 The details of tenancies and much information about the property and improvements are normally available to a mortgagee and much of it can be obtained by search of the Land Titles Register. Matters relating to tenancy vacancies and the performance of tenants may be capable of being considered as being of a confidential nature. However, it is also information of a kind commonly imparted, without any obligation of confidence being imposed, to prospective purchasers and financiers. In disclosing such information to Mr Smith, Benzlaw was in a generally similar position to the one it would have been in had it disclosed the information to some other prospective financier or purchaser. If it wanted any information disclosed kept confidential and not used except for specific purposes, it was open to impose such a condition before the information was imparted. [93] A fiduciary relationship does not arise between two persons merely because information of a confidential nature has been disclosed by one to the other. As Dawson J observed in Hospital Products:20 “Where a relationship is such that by appropriate contractual provisions or other legal means the parties could adequately have protected themselves but have failed to do so, there is no basis without more for the imposition of fiduciary obligations in order to overcome the shortcomings in the arrangement between them.” [94] In a somewhat similar vein, Gibbs CJ said in that case:21 “However, an actual relation of confidence - the fact that one person subjectively trusted another - is neither necessary for nor conclusive of the existence of a fiduciary relationship… an ordinary transaction for sale and purchase does not give rise to a fiduciary relationship simply because the purchaser trusted the vendor and the latter defrauded him.” [95] An example of an unsuccessful attempt to impose an obligation of confidence in respect of information disclosed without an undertaking to maintain confidentiality is provided by Fractionated Cane Technology Ltd v Ruiz-Avila.22 In that case the plaintiff unsuccessfully sought to impose the obligation of confidence after the relevant information had been imparted. 18 Paragraph 16. 19 Coco v A N Clark (Engineers) Ltd [1969] RPC 41; (1968) 1A IPR 587 at 590. 20 At 147. 21 At 69. 22 [1988] 1 Qd R 51. -- 22 of 39 -- 23 [96] For the above reasons, I conclude that Logan Road owed no fiduciary duties to Benzlaw as a result of the joint venture negotiations. The pleaded case against Logan Road and Brunswick Street based on the “rule in Barnes v Addy” [97] In about September 2005 Mr Bennelli had “various meetings” with Mr McKenzie with a view to borrowing moneys from a financier or to entering into a joint venture with a developer to allow Benzlaw to terminate the joint venture and obtain a discharge of the mortgage.23 [98] Mr McKenzie informed Mr Bennelli that he would introduce Mr Smith for the purposes of entering into such a joint venture. Mr McKenzie had discussions with Mr Smith in which he and Mr Smith discussed a meeting with Mr Bennelli to canvass the opportunity of entering into “a transaction with Benzlaw in relation to the property”.24 In such discussions, Mr McKenzie acted as agent for Benzlaw and did not intend that Mr Smith enter into a transaction “in relation to the property without the consent of or contrary to the interest of Benzlaw”.25 Because of the foregoing, Mr McKenzie owed Benzlaw a duty of good faith, not to act to Benzlaw’s detriment and to use information received from Benzlaw solely for Benzlaw’s benefit.26 [99] Between April 2005 and early September 2005, Messrs McKenzie and Smith had the discussions referred to in paragraphs 4-11 of the affidavit of Mr Smith sworn 2 October 2006 disclosing therein matters without the consent of Benzlaw. On or about 5 September 2005 Mr McKenzie gave Mr Smith a valuation which had been procured for the benefit of Benzlaw and on 7 September 2005 Mr Smith met Messrs McKenzie and Bennelli at the property.27 [100] The actions referred to in the preceding paragraph were undertaken by Mr McKenzie in breach of his duty to Benzlaw and Logan Road and Brunswick Street “knowingly obtained benefit from those breaches by virtue of the matters pleaded”. [101] In the premises, Logan Road and Brunswick Street held by way of constructive trust Medi-Aid’s interest in the joint venture and any interest held by them in the mortgage and any interest held by them in or in respect of the property.28 The discussions between Messrs McKenzie and Smith relied on by Benzlaw [102] In the discussions between Messrs McKenzie and Smith relied on by Benzlaw the following is said by Mr Smith to have occurred. In April or May 2005 in the course 23 Statement of Claim, paragraph 11. 24 Statement of Claim, paragraph 12A. 25 Statement of Claim, paragraph 12B. 26 Statement of Claim, paragraph 12C. 27 Statement of Claim, paragraph 19A. 28 Statement of Claim, paragraph 20. -- 23 of 39 -- 24 of a discussion about other finance to be provided by Balmain to Mr Smith, Mr McKenzie said he had an opportunity for him and that he could “buy the mortgage”. Mr Smith said that he knew the property, that it was “a nightmare”. He had seen bad publicity in the media about it and was too busy to look at it. In June 2005 Mr McKenzie again mentioned that the owner of the property was looking for money to get out of a mortgage over it. Mr Smith said that he was too busy to consider the matter. [103] In July 2005 Mr McKenzie again raised the matter and discussed some of the dealings between Mr Bennelli and Dr Knight. Mr McKenzie said that Mr Bennelli had been unsuccessful in raising the $3,500,000 necessary to acquire the mortgagee’s interest in the second mortgage and that Dr Knight now wanted Mr Bennelli to pay $5,000,000. The matter was messy and Mr McKenzie wanted Mr Smith to buy the mortgage. Mr Smith said he was too busy to consider the matter whereupon Mr McKenzie suggested that with Mr Smith’s negotiating skills he could probably get the mortgage for as little as $2,000,000. He continued that Dr Knight claimed that the face value of the mortgage was over $11,000,000. As something in excess of $5,000,000 was owed to the first mortgagee, Mr Smith could acquire the mortgage, sell as mortgagee in possession and make a profit. Mr Smith said he was interested but not able to do anything about it then. Some time after 20 August 2005 Mr McKenzie told Mr Smith that the “opportunity” in respect of the property was still available and Mr Smith asked him to “organise something”. Consideration of Benzlaw’s case based on the principles in Barnes v Addy [104] In order to ground liability, Benzlaw relies on “the rule in Barnes v Addy” which is encapsulated in the following passage from the reasons of Lord Selborne LC in that case:29 “Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.” [105] The rule was the subject of extensive discussion in Farah Constructions Pty Ltd v Say-Dee Pty Ltd.30 Referring to the two “limbs” of the conditions for liability 29 Barnes v Addy (1874) LR 9 Ch App 244 at 251-252. 30 (2007) 81 ALJR 1107. -- 24 of 39 -- 25 contained in the last sentence of the above passage, it was said in the reasons of the Court: “It has become common to describe the first limb as involving ‘knowing receipt’ and the second limb as involving ‘knowing assistance’. … In recent times it has been assumed, but rarely if at all decided, that the first limb applies not only to persons dealing with trustees, but also to persons dealing with at least some other types of fiduciary. Since the appellants did not contend that the first limb was incapable of applying on the ground that neither Farah nor Mr Elias was a trustee, the correctness of this assumption need not be examined.”31 [106] I am content to proceed on the assumption that the first limb is not limited to persons dealing with trustees. An essential question to be answered then in respect of the first limb is whether Logan Road and/or Brunswick Street were in receipt of trust property. The conventional view is that “trust property” does not include information, whether confidential or not.32 Also, to come within the rule, the property in question must be trust property as opposed to property the subject of a fiduciary obligation. In the reasons of the Court it was said:33 “But it does not follow under the law as it stands that the information which third parties obtain from a fiduciary is trust property, or that land bought by using that information is trust property, and indeed counsel only relied on the passage as ‘an indication of the possible extension of the first limb’ to treat property acquired as the fruit of information misused by a fiduciary as trust property.” [107] No trust property was identified in any pleading and I find that Benzlaw has failed to establish that Logan Road or Brunswick Street were in receipt of trust property. In order to come within the first limb, Benzlaw must also prove notice on the part of the defendant of the existence of a trust in respect of property received. I find that it has done so. The question of notice is further discussed below. [108] I turn now to the second limb of Barnes v Addy of which it was said in Farah Constructions: 34 “As conventionally understood in Australia, the second limb makes a defendant liable if that defendant assists a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary.” [109] The concept of dishonesty was explained as follows: “As a matter of ordinary understanding, and as reflected in the criminal law in Australia, (Macleod v The Queen (2003) 214 CLR 230 at 242) a person may have acted dishonestly, judged by the standards of ordinary, decent people, without appreciating that the act in question was dishonest by those standards. Further, as early as 31 Ibid, [112]-[113] 32 Farah Constructions v Say-Dee Pty Ltd paragraph [120]. 33 Farah Constructions v Say-Dee Pty Ltd Paragraph [120]. 34 Farah Constructions v Say-Dee Pty Ltd paragraph [160] -- 25 of 39 -- 26 1801, Sir William Grant MR stigmatised those who ‘shut their eyes’ against the receipt of unwelcome information. (Hill v Simpson (1801) 7 Ves Jun 153 at 170 [32 ER 63 at 69]. See further May v Chapman and Gurney (1847) 16 M & W 355 at 361 [153 ER 1225 at 1228]; Jones v Gordon (1877) 2 App Cas 616 at 625, 628-629, 635; English and Scottish Mercantile Investment Co Ltd v Brunton [1892] 2 QB 700 at 707-708).”35 [110] Considering what was necessary or sufficient to constitute knowledge for the purposes of the Rule, the Court approved the following categories of knowledge listed in Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l'Industrie en France SA, with the exception of (v): 36 “(i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.” [111] It was observed in paragraph [177] of Farah Constructions that the decision in Consul Development Pty Ltd v DPC Estates Pty Ltd37 “supports the proposition that circumstances falling within any of the first four categories of Baden are sufficient to answer the requirement of knowledge in the first limb of Barnes v Addy”. [112] Arguably, paragraph 19B of the statement of claim falls short of an allegation that the conduct of Logan Road and Brunswick Street is within the second limb of Barnes v Addy. In particular, there is no allegation of a dishonest and fraudulent design on the part of Mr McKenzie let alone knowing participation in it by Logan Road and Brunswick Street. What is alleged is that such defendants “knowingly obtained benefit” from the breach by Mr McKenzie of his obligations to observe good faith, not to act to the detriment of Benzlaw and to use information received from Benzlaw solely for its benefit. [113] Assuming that the case against Logan Road and Brunswick Street has been adequately pleaded, the dishonest and fraudulent design on Mr McKenzie’s part must emerge from the provision of the valuation, the meeting at the property on 7 September and the discussions between Mr McKenzie and Mr Smith between April 2005 and the end of September 2005. There was nothing untoward about the provision of the valuation by Mr McKenzie to Mr Smith. It was provided with Mr Bennelli’s knowledge and consent. Even if it had not been given to Mr Smith with Mr Bennelli’s express consent, it was within the scope of Mr McKenzie’s implied authority to provide it. Mr Smith had told him, and he probably knew from previous dealings with Mr Smith, that without a valuation Mr Smith was unlikely to be 35 Farah Constructions v Say-Dee Pty Ltd paragraph [173] 36 [1993] 1 WLR 509 at 575-576, 582; [1992] 4 All ER 161 at 235, 242-243. The case was decided in 1983. 37 (1975) 132 CLR 373. -- 26 of 39 -- 27 interested in giving further consideration to an investment in relation to the property. [114] Benzlaw pleads that in or about September 2005 there were meetings between Mr Bennelli and Mr Smith with a view to Benzlaw’s borrowing money directly from a financier or entering into another joint venture with a third party in order to terminate the joint venture and obtain a discharge of the mortgage. It follows that it was within the scope of Mr McKenzie’s authority, no express restrictions having been imposed on him, to disclose the existence of the mortgage, the location of the mortgaged property, the joint venture and reasons why Benzlaw may be interested in paying out the mortgage, terminating the joint venture and/or entering into a new joint venture. [115] If the contents of the communications set out in the relevant paragraphs of Mr Smith’s affidavit disclose any breach of duty on the part of Mr McKenzie as Benzlaw’s agent it must be the disclosure of the dealings between Dr Knight and Benzlaw, the suggestion that Mr Smith could sell the property as mortgagee in possession and “make money” and, perhaps, the intimation as to the price for which he might be able to acquire Medi-Aid’s interest in the mortgage. But it has not been shown that the relevant communications with Dr Knight were had by Mr McKenzie as Benzlaw’s agent. It was relevant also to the fulfilment of Mr McKenzie’s role in soliciting Mr Smith’s interest in the property that Mr Smith be informed of matters relating to the mortgage. An obvious possibility was that any new financier such as Mr Smith acquire Medi-Aid’s interest in the mortgage. Any such prospective investor would wish to know the extent of the mortgage debt and the likely cost of acquiring the mortgagee’s interest. The possibility of a mortgagee’s sale and the financial outcome of such a sale should matters not be able to be resolved with the mortgagor before or after the entering into of a joint venture were also matters which a potential investor would wish to consider. [116] The existence of a dishonest and fraudulent design on the part of Mr McKenzie, if one is found, does not establish knowledge on the part of Mr Smith of such design by reference to any of the first four categories of knowledge listed in Baden. The evidence does not disclose what Mr Smith knew of the relationship between Mr McKenzie and Benzlaw. Mr McKenzie had acted for Mr Smith for some considerable time. He was a finance broker and there was nothing surprising about his raising with Mr Smith a business opportunity of the type in question. Nor would Mr Smith have any reason to conclude that in discussing the dealings between Mr Bennelli and Dr Knight, Mr Smith was disclosing information which either of those men wanted to keep confidential. Nor has it been established that Mr Smith was not of the belief that Mr McKenzie was acting in part for Dr Knight’s interests. Mr Smith’s oral evidence was that at the time he received the Ray White valuation he did not understand that Mr McKenzie was acting for Mr Bennelli. That response was left unchallenged. [117] For the above reasons there is insufficient evidence to sheet home to Logan Road and Brunswick Street liability under the second limb of Barnes v Addy. It was not established that he assisted a fiduciary with knowledge of a dishonest or fraudulent design on the part of the fiduciary. -- 27 of 39 -- 28 Was the property sold for less than market value? [118] Section 85(1) of the Property Law Act 1974 (Qld) provides: “85 Duty of mortgagee as to sale price (1) It is the duty of a mortgagee, in the exercise … of a power of sale conferred by the instrument of mortgage or by this or any other Act, to take reasonable care to ensure that the property is sold at the market value.” [119] Benzlaw’s case in this respect may be summarised as follows. [120] The market value of the property was $16,000,000 as at January 2006, as Mr Missingham stated in his valuation report dated 19 July 2007. Mr Missingham, because of the date of his valuation, had the benefit of actual sale figures at the time of or shortly after the time of the sale of the property. Therefore his valuation should be preferred to that of Mr Bremner’s of $13,100,000 made on 13 January 2006. That valuation was less than three months after Mr Bremner’s valuation of $12,100,000 as at 1 November 2005. The obtaining of the two valuations of the property from Mr Bremner by Mr Smith did not satisfy Logan Road’s obligations under s 85(1). They were merely part of an attempt by Mr Smith to assist his borrowings and to create an impression that he was acquiring the property at market value. The tender process was a sham as its timing illustrates. That sham and the appointment of the receivers also show a failure on the part of Logan Road to exercise its powers as mortgagee in a bona fide fashion and to take reasonable care to ensure the sale of the property at market value. [121] I will discuss the valuation evidence before addressing the allegations of breach of mortgagee’s duty. Although the tender process was submitted to be a sham there was no serious challenge to the methodology, content and implementation of the tender process itself. It elicited the offers discussed in paragraphs [26],[27] and [28] hereof. Ten offers were received and there is no suggestion that the higher offers were not genuine. [122] A number of the tenderers were substantial corporations active in the Queensland property market. They were plainly at arms length with Logan Road. Mr Missingham gave no weight to these offers. Was that correct in principle? [123] It has long been the orthodox valuation approach to disregard offers to purchase as evidence of market value. In McDonald v Deputy Federal Commissioner of Taxation38 the Court, which was considering the improved value of pastoral land for the purpose of the Land Tax Assessment Act 1910-1911, concluded that such evidence should not be received on the basis that it lacked sufficient probative value to warrant its reception and that its reception would have the potential to unduly prolong litigation. 38 (1915) 20 CLR 231. -- 28 of 39 -- 29 [124] Contrasting the evidentiary value of concluded contracts with offers to purchase the Court said:39 “But if the negotiations do not end in a concluded bargain, the field is at once open to a multitude of other considerations before the same point of opinion is reached. Excursions into the realm of collateral circumstances would be endless. They would so add to the cost, delay and uncertainty of litigation as on the whole to render a great disservice to the cause of justice. The Court might have to inquire whether the owner or the other party really terminated the negotiations, and, if so, for what reason. Had either of the parties discovered the true worth of the property or been misinformed by some means as to its real value? Did the owner mistrust the ability of the purchaser, or did the latter find an adverse claimant to the property, or did his circumstances change, or was there a personal quarrel? Or did he learn of a still better bargain? Or, again, was the offer a sham on either side, or both sides? Such inquiries would render litigation intolerable, and defeat the purpose for which they were permitted.” [125] The decision was applied by single judges of the High Court in Gregory v Commissioner of Taxation (Cth)40 and James Patrick & Co Pty Ltd v Minister of State for the Navy.41 [126] There is however a body of authority for the proposition that a genuine offer to purchase can have evidentiary value.42 McDonald was distinguished in Goold v the Commonwealth43 and more recently in MMAL Rentals Pty Ltd v Bruning.44 In that case Spigelman CJ, with whose reasons Mason P and Hodgson JA agreed, endorsed the observations of Wilcox J in Goold distinguishing McDonald and pointed out also that the statutory test in McDonald was not “the exchange bargain test of market value identified in Spencer”. [127] A more cautious approach was taken by the Full Court of the Federal Court in Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd 45 in which it was held that McDonald and the later single judge High Court decisions made it “clear that such evidence [ie of an unaccepted offer] is not permissible as direct evidence of value”. 39 At 239-40. 40 (1971) 123 CLR 547. 41 [1944] Argus Law Reports 254. 42 Freestone v Parramatta City Council (1974) 34 LGRA 35, 49; Yates Property Corp Pty Ltd v Darling Harbour Authority (1990) 70 LGRA 187; Goold v The Commonwealth (1993) 42 FCR 51, 57-60; Henderson v Amadio Pty Ltd (No 1) (1995) 62 FCR 1 at 122; Hall & Hedge v DOT, unreported, Land Court (Q) 14 November 1997, pp 74-75; see also Brown “Land Acquisition” 4 th ed para 4.12; Heavey Lex No 64 Pty Ltd v Chief Executive, Department of Transport [2001] Qld Land Appeal Court A97-43; Mir Bros Unit Constructions Pty Ltd v Roads and Traffic Authority of New South Wales [2004] NSW LEC 612; Stockl v Rigura Pty Ltd [2004] NSWCA 73 and MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167. 43 Ibid. 44 (2004) 63 NSWLR 167. 45 [2004] FCAFC 48. -- 29 of 39 -- 30 [128] As the above extract from the reasons in McDonald shows, the issue was treated in that case as an evidentiary one and the conclusion was reached that the expense and inconvenience of admitting such evidence warranted its general exclusion. The ruling in McDonald therefore can hardly have the force of legislation to exclude evidence of all unaccepted offers no matter what the circumstances and no matter how cogent the evidence provided by them. For the above reasons I do not accept the existence of a universally binding principle which requires that the tender offers must be ignored when assessing the market value of the property. At the very least they provide evidence of the level of interest in the property on the part of a range of potential purchasers and of the offers, capable of acceptance, they were prepared to make in a competitive tender process. Whilst Mr Missingham should not be criticised for applying orthodox valuation theory, it is nevertheless permissible to assess his retrospective valuation in the light of relevant contemporaneous evidence which he ignored. [129] In a somewhat different category is the evidence, relied on by Brunswick Street and Logan Road, that Mr Bennelli gave instructions to his agent in about December 2005 that if Trident were to offer $13,500,000 the offer was to be accepted. It is contended that this is “powerful evidence” of the market value of the property. It is, no doubt, powerful evidence of Mr Bennelli’s understanding of the market value of the property. But absent special circumstances, for the reasons discussed in McDonald, an offer by the owner of the subject land which does not result in a contract provides scant evidence of value. Intimations about attitudes to unmade offers are of even less relevance. [130] Another argument advanced on behalf of Mr Smith is that even if the property had been sold for $18,000,000 ($2,000,000 more than the highest valuation relied on by Benzlaw) after application of the proceeds of sale as required by s 88 of the Property Law Act 1974 (Qld) there would have been no surplus for Benzlaw. Benzlaw had no other assets and was insolvent. Consequently it suffered no loss from the sale of the property at $13,100,000 (leaving Benzlaw owing at least $4,900,000) or for $16,000,000 (leaving Benzlaw owing $2,000,000). There is no substance in that contention. The sale of the mortgaged property by a mortgagee does not extinguish the mortgagor’s personal covenants and the greater the sum obtained on sale by the mortgagee the more there is to reduce the mortgagor’s debt. That the mortgagor may have an excess of liabilities over assets and that the debt will not be extinguished no matter how much is realised on sale are immaterial. Plainly, the rights of creditors and of guarantors of the obligations of the mortgagor may be affected by the extent to which the mortgage debt is reduced. [131] Mr Missingham’s valuation report is dated 19 July 2007. It takes the form of a “review” of Mr Bremner’s valuation of the property as at 13 January 2006, and “commentary” on another valuation report of Mr Bremner’s dated 7 June 2007. In assessing the state of the market as at January 2006, Mr Missingham draws heavily on material which was unavailable at that time. That material has application in the determination of a market rent per square metre for tenancies within the property. It is relevant also to an assessment of the strength of the upward trend of market values which had been discerned by Mr Bremner at the time of his valuation as at 13 January 2006. -- 30 of 39 -- 31 [132] Mr Missingham, like Mr Bremner, valued on a direct comparison method and also by capitalisation of net income. In the latter exercise Mr Missingham used a market rental of $250 per square metre as opposed to Mr Bremner’s $231. Mr Missingham’s capitalisation rate was 7.5%. Mr Bremner’s was 8.5%. Mr Missingham concluded his report as follows: “In summary, we consider that the CCPA valuation [Mr Bremner’s] does not fully recognise the strength of the property market as at 2006 nor the potential of the subject property itself.” [133] I have no reason to doubt Mr Missingham’s competence but it does appear to me that his opinion has been aided to an appreciable degree by hindsight. That emerges to some extent from his report and was confirmed in cross-examination. [134] Mr Missingham, unlike Mr Bremner, was not familiar with the property or of the Brunswick Street area generally in January 2006. Also in my view Mr Missingham failed to give adequate consideration to the state of the improvements, the absence of a major tenant and the difficulty which Benzlaw had experienced in securing a major tenant. [135] Mr Bremner had a detailed knowledge of the general area and of the property at the time of his valuation and was aware of the state of the premises and the letting history. In his opinion, the departure of Suncorp from its tenancy as a result of faulty ducting had given the premises a certain stigma in the market place. His unchallenged evidence was that, historically, tenancies in the premises had been taken up very slowly. It was Mr Bremner’s opinion at the time of his valuation that “the market was reaching its cyclical peak”. He said that this was “the opinion of many valuers in the market”. [136] The evidence does not suggest that Mr Bremner in preparing his report as at 12 January 2006 was attempting to do other than give his professional opinion as to the market value of the property as at the valuation date. Indeed, it was suggested to him in cross-examination that in his second valuation he had inflated his earlier valuation of $12,100,000 as at 1 November 2005 at the request of Mr Smith to enable him to borrow more money on the security of the property. That valuation was prepared also on instructions from ING Bank and Balmain. No error in Mr Bremner’s valuation approach was revealed by cross-examination or otherwise. His valuation is consistent with the earlier Ray White valuation and with the tender offers. For the above reasons I find that the market value of the property in January 2006 was to the order of $13,100,000. Did Logan Road breach its duty under s 85 of the Property Law Act or its duties under the general law? [137] Benzlaw’s attack in the statement of claim on Logan Road in relation to the mortgagee’s sale consisted of allegations that: (a) the valuation for $13,100,000 was obtained without the valuer being informed of “any prospect of further tenancies which would have significantly affected the valuation given”; -- 31 of 39 -- 32 (b) the property was sold to Brunswick Street without “further marketing”; (c) the purpose of Logan Road in exercising its mortgagee’s power of sale was not for the purpose of s 84 of the Property Law Act but for the purpose of giving effect to its agreement with Medi-Aid and “its professed interest in obtaining the interest in the property for itself to the exclusion of” Benzlaw. [138] Reference in the pleading to the Property Law Act should have been to s 85(1). In closing submissions it was contended that Logan Road, rather than taking reasonable steps to obtain market value obtained valuations to satisfy its borrowing needs and to enable it to purchase at the lowest possible price whilst appearing to purchase at fair market value. The tender process was described as a sham and reliance was placed on the allegation that receivers were appointed so as to deprive Benzlaw of funds from which it could resist Logan Road’s activities. [139] The valuation for $13,100,000 was obtained in consequence of legal advice obtained by Mr Smith concerning a mortgagee’s duties. I infer that the valuation was obtained in part for the purpose of providing evidence that the proposed sale to Logan Road was at market value in the event that Benzlaw subsequently challenged the sale or the sale price. [140] The tender process was a sham in as much as Mr Smith, from early January 2006, had no intention that Logan Road would sell to the successful tenderer. That, of itself, does not establish that reasonable care was not taken to ensure that the property was sold at market value. It does provide further evidence however that the valuation was obtained in order to protect Logan Road and Brunswick Street and to advance the interests of Brunswick Street rather than as part of an endeavour to ensure the sale of the property at market value. [141] What Logan Road should have done in order to discharge its duty as mortgagee was left unexplored in the pleadings or in submissions. For example, it was not suggested to any witness that Logan Road could not have discharged its duty without marketing by means of a completed tender process or by attempting to negotiate a higher price with one or more of the tenderers. Despite these shortcomings, I infer from the fact that the tender process was instituted as a result of expert marketing advice and considered by Mr Missingham to be suitable (albeit of a duration which he regarded as too short) that some such marketing was necessary to enable “reasonable care” to be taken to ensure a sale at market value. [142] I am unable to accept that the obtaining of the two valuations from Mr Bremner or, perhaps more accurately, having recourse to them in the light of the Ray White valuation in order to ascertain a sale price constituted taking reasonable care to ensure that the property was sold at market value. Does it matter however that a mortgagee may have acted without “reasonable care” if, in the event, it does sell the mortgage property at market value? In Apple Fields Ltd v Damesh Holdings Ltd46 it 46 [2004] 1 NZLR 721 (PC). -- 32 of 39 -- 33 was held in respect of a New Zealand statutory provision requiring mortgagees to take “reasonable care to obtain the best price reasonably attainable at time of sale” that it did “not produce a duty breach of which is actionable without proof of damage”. In that case, however, the only remedy sought by the mortgagor was damages. Having regard to my conclusions in relation to the question of “good faith” I am prepared to assume for present purposes that s 85(1) provides no remedy to a mortgagor where there has been a sale of the mortgaged property at market value. [143] An equitable duty of good faith however coexists with the statutory duty.47 Section 85 is concerned only with a duty to exercise reasonable care to obtain market value. It does not address expressly, or in my view my necessary implication, the long established equitable duty of a mortgagee to act in good faith when exercising its power of sale. Clear language would be needed before the legislature would be taken to have abolished such a principle.48 [144] Walsh J in Forsyth v Blundell49 observed that “good faith” meant “in the language used in most of the authorities, that he should act without fraud and without wilfully or recklessly sacrificing the interests of the mortgagor”. [145] In Forsyth v Blundell Mason J equated lack of “bona fide(s)” with a mortgagee’s acting “recklessly, not caring whether the price obtained was in the circumstances a proper price or not”.50 [146] In Barns v Queensland National Bank Ltd,51 in the course of exploring the meaning of the content of a mortgagee’s duty to act in good faith, said: 52 “It was not contested that a power of sale under a mortgage, like any other power, must be exercised honestly for the purposes of the power, or, as expressed by Lord Westbury in Duke of Portland v. Topham ‘that the donee, the appointor under the power, shall, at the time of the exercise of that power, and for any purpose for which it is used, act with good faith and sincerity, and with an entire and single view to the real purpose and object of the power, and not for the purpose of accomplishing or carrying into effect any bye or sinister object; (I mean sinister in the sense of its being beyond the purpose and intent of the power which he may desire to effect in the exercise of the power).’ In the same case Lord St. Leonards said: ‘A party having a power like this must fairly and honestly execute it without having any ulterior object to be accomplished. He cannot carry into 47 Forsyth v Blundell (1973) 129 CLR 477 at 493; ANZ Banking Group Ltd v Bangadilly Pastoral Co Ltd at 224 per Aickin J, with whose reasons the other members of the Court agreed; Apple Fields Ltd v Damesh Holdings Ltd [1901] NZLR 586 (CA); [2004] 1 NZLR 721 (PC) and McKean v Maloney [1988] 1 Qd R 628. Cf Cameron v Brisbane Fleet Sales Pty Ltd [2002] 1 Qd R 463 in which it was held that the duty of good faith was subsumed in the duty imposed by s 85 of the Property Law Act. 48 R v Snow (1915) 20 CLR 315 at 322 and Bropho v Western Australia (1990) 171 CLR 1 at 17-18. 49 At 493. 50 At 506. 51 (1906) 3 CLR 925. 52 At 943, 944. -- 33 of 39 -- 34 execution any indirect object, or acquire any benefit for himself, directly or indirectly’.” [147] The sale to a company related to the mortgagee was not, of itself, a breach of the mortgagee’s duty.53 It is however a consideration which is highly relevant to a determination of whether the mortgagee has acted in good faith. [148] In ANZ Banking Group Ltd v Bangadilly Pastoral Co54 Jacobs J, with whose reasons Stephen J agreed, considered the existence of a conflict of interest on the part of the mortgagee a highly significant consideration in determining whether the mortgagee had acted “bona fide” in exercising its power of sale. In that regard, his Honour said: 55 “It is true that bona fides in this connexion is not concerned with the motive for exercising the power of sale but, once the decision to sell has been made, it is concerned with a genuine primary desire to obtain for the mortgaged property the best price obtainable consistently with the right of a mortgagee to realize his security. At the same time the mortgagee is concerned with his own interests and not with the interests of the mortgagor or subsequent incumbrancers, and therefore a wide latitude has been allowed to him in his manner of exercising his power of sale. However, when there is a possible conflict between that desire and a desire that an associate should obtain the best possible bargain the facts must show that the desire to obtain the best price was given absolute preference over any desire that an associate should obtain a good bargain. When those circumstances exist it may not be sufficient that steps are taken in the conduct of the sale which would suffice to support the validity of the sale when there was no conflict of interest. The steps taken or not taken in the conduct of the sale cannot be considered separately from the conflict of interest. Although conscious planning, deceptiveness or collusion to prefer the close associate would be conclusive of a lack of bona fides, it does not follow that a failure to conclude that any of these elements were present leads to a conclusion that the sale was bona fide unless it would be otherwise invalid even if no conflict of interest were present. The inevitable conflict of interest which arises on a sale to a close associate may be not only consciously but also unconsciously resolved in favour of the associate. The closer the association, the greater the conflict and the greater the possibility of unconscious preference. For this reason, if certain associations are found to exist, e.g. where the purchaser is trustee for the mortgagee, the sale cannot be allowed to stand in any circumstances. (at p202) 4. I am prepared to assume that in some circumstances not easily conceivable a sale by a mortgagee to a company as closely associated with that mortgagee as was the purchaser company in the present case might be a sale which could be allowed to stand. But before that 53 Farrar v Farrars Ltd (1888) 40 Ch D 395 and Apple Fields Ltd v Damesh Holdings Ltd [2004] 1 NZLR 721 (PC) and ANZ Banking Group Limited v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195. 54 (1978) 139 CLR 195. 55 At 202. -- 34 of 39 -- 35 could be so, it would need to appear from the objective facts that there was no shortcoming in the courses followed by the mortgagee or those acting on its behalf.” [149] Aickin J, in Bangadilly concluded that the existence of a relationship between the mortgagee vendor and the purchaser was a relevant consideration as was the fact that “the case cannot be described as an ordinary case of a mortgagee exercising his power of sale to recover his principal and outstanding interest.” 56 [150] In my view Logan Road was in breach of its duty to act in good faith. The primary purpose of the exercise of power of sale was not to secure payment of the mortgage debt but to place the property in the hands of a company which shared the same directors and shareholders as the mortgagee with a view to benefiting that purchaser company and, through it, the directors and shareholders of the mortgagee. The fact that the sale to Brunswick Street took place well before the end of the tender period and that none of the tenderers was approached with a view to negotiating a better price is further evidence that Logan Road was concerned with furthering its interests and those of Brunswick Street rather than the interests of the mortgagor. This conclusion is confirmed by Mr Smith’s evidence to the effect that, had a sufficiently good offer been made in the course of the tender process, Brunswick Street would have taken the benefit of it. [151] For the above reasons I have concluded that the sale should be set aside. Brunswick Street took with full knowledge of Logan Road’s breach of duty. Section 85(3) of the Property Law Act does not apply to a breach by a mortgagee of its equitable duty to act in good faith. The Unconscionable Conduct case [152] Benzlaw relies on s 51AA of the Trade Practices Act 1974 which provides: “(1) A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.” [153] The unconscionable conduct alleged against Medi-Aid57 is that without terminating the Joint Venture Agreement and without the informed consent of Benzlaw, it assigned the mortgage to Logan Road. The unconscionable conduct attributed to Logan Road58 is that knowing of “the circumstances of… [Benzlaw] and its dealings with [Medi-Aid] …through meetings with [Benzlaw] and [Mr McKenzie]” Logan Road took an assignment of the mortgage to the detriment of Benzlaw and sought to enforce it notwithstanding the existence of a joint venture agreement between Benzlaw and Logan Road. 56 At 541. 57 Statement of Claim paragraph 86. 58 Statement of Claim paragraph 93. -- 35 of 39 -- 36 [154] For the reasons given earlier the last limb of the allegations against Logan Road may be disregarded. [155] The argument mounted in final addresses centred on the following passage from the reasons of the Court in Hurley v McDonald’s Australia Ltd:59 “For conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable, must be demonstrated - Cameron v Qantas Airways Ltd (1994) 55 FCR 147 at 179. Whatever ‘unconscionable’ means in s 51AB and s 51AC, the term carries the meaning given by the Shorter Oxford English Dictionary, namely, actions showing no regard for conscience, or that are irreconcilable with what is right or reasonable - Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262. The various synonyms used in relation to the term ‘unconscionable’ import a pejorative moral judgment - Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 283-4 and 298.” [156] The case argued departed substantially from the pleaded case in that it was submitted that the following “conduct is so far removed from what can be considered moral or reasonable that it can only be described as unconscionable in every sense of the word”: “a) Mr Smith formed an intention to acquire the property beneficially for himself very early; b) Mr Smith conspired with a variety of persons in attempts to: i) purchase the property; ii) Starve Benzlaw of funds with which it could defend its rights and position; c) Mr Smith took steps to hide his intentions from Mr Bennelli; d) Mr Smith held out to Mr Bennelli (or knowingly allowed him to believe) that he was acting to the benefit of both he and Bennelli; e) Mr Smith took advantage of the position he held out in order to obtain information of a confidential nature; f) Mr Smith used this information for a purpose far from the purpose for which it was provided.” [157] The passage quoted from the reasons in Hurley v McDonald’s Australia Ltd is unhelpful for present purposes. As Gleeson CJ pointed out in Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Limited60 “…unconscionability is a legal term, not a colloquial expression. In everyday speech, unconscionable may be merely an emphatic method of expressing disapproval of someone's behaviour, but its legal meaning is considerably more precise”. [158] By concentrating on the colloquial meaning of “unconscionable”, Benzlaw has neglected to focus on establishing that the unconscionability involved in the conduct 59 (1999) FCA 1728 at [22]. 60 (2003) 214 CLR 51 at 63. -- 36 of 39 -- 37 complained of was such as to give rise to the right to equitable relief under the principles established by the general law. [159] Whether in order to come within s 51AA the unconscionable conduct must be such as to support the grant of relief on the principles underlying specific equitable doctrines,61 or whether the section may extend beyond such doctrines to include developments in common law principles62 was left open by Gummow and Hayne JJ in Berbatis.63 It is plain from the reasons of the majority in Berbatis however that in order to rely on s 51AA a plaintiff must establish more than inequality of bargaining power and legal or economic disadvantage flowing from a weak contractual position such as the impending expiration of a lease or the inability to remedy breach under a mortgage. [160] If the conduct alleged against Medi-Aid was not in breach of contract or in breach of any fiduciary duty owed by it to Benzlaw there was nothing unconscionable about it. It was merely exercising its rights as the holder of the mortgage. [161] The unpleaded case against Logan Road is relevantly unparticularised and, consequently, cannot be identified with any degree of precision. It was not explained in addresses how the conduct described above came together to produce conduct in respect of which a court would grant equitable relief. Some persons may consider aspects of the conduct complained of harsh or even unscrupulous but it is not conduct which placed Benzlaw in a position of “special disadvantage”. [162] The reference to the conspiracy to starve Benzlaw of funds is a reference to the appointment of a receiver. It is probable that an object of the appointment was to deprive Benzlaw of funds and thus make it more difficult for Benzlaw to resist actions Mr Smith may wish to take with respect to the property. It must be recalled though that Logan Road acquired Medi-Aid’s interest in the mortgage. Benzlaw was in default and there was no reasonable expectation that default would be remedied. In those circumstances the appointment of a receiver to get in the income of the property and take over its management was an obvious commercial course for Mr Smith to follow. [163] Even if Mr Smith hid from Mr Bennelli his intention to acquire the mortgage, that would not seem to be productive of any consequences. It is not suggested that had Mr Smith been more open about his intentions that Mr Bennelli could have done anything to thwart them. There is no evidence that Mr Smith, in any relevant way, held out to Mr Bennelli that Mr Smith was acting for the benefit of both of them or that Mr Bennelli did or failed to do anything in response to any such holding out. In case it is relevant to this claim, I find that in the early discussions between Mr Smith and Mr Bennelli, Mr Smith did make it known to Mr Bennelli that he was interested in acquiring Medi-Aid’s interests in the mortgage and that he was taking steps towards achieving that objective. The confidential information point has been 61 Australian Competition and Consumer Commission v Samton Holdings Pty Ltd [2002] 117 FCR 301 62 Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51 at 74. 63 At 74. -- 37 of 39 -- 38 dismissed earlier. For these reasons, the claim based on unconscionable conduct fails. Section 52 of the Trade Practices Act 1974 [164] The conduct relied on to support the allegations of breach of s 51AA is relied on in the alternative to constitute a breach of s 52 of the Trade Practices Act by each of the defendants. [165] Conduct, in order to be “misleading or deceptive” for the purposes of s 52 must induce or be capable of inducing error.64 If misleading or deceptive conduct is established, no damages are recoverable unless the plaintiff shows that the wrongful conduct was causative of loss. Section 82(1) of the Act operates where a person has suffered “loss or damage by conduct of another person”. [166] Benzlaw has identified no conduct on the part of Medi-Aid which can be said to be misleading or deceptive. Nor can it be said that any loss or damage claimed to have been suffered by Benzlaw was by any conduct of Medi-Aid in breach of s 52. [167] I find that at the time Mr Smith met Mr McKenzie at the property on 7 September he had an open mind as to how he would go about profiting from an investment in the property even though he then contemplated that he might acquire Medi-Aid’s interest in the mortgage. By the end of September he set about taking steps to that end but that is not necessarily inconsistent with his maintaining some interest in reaching agreement with Benzlaw. I am unable to find that Mr Smith had no intention of entering into a joint venture agreement with Mr Bennelli until on or about 20 October 2005. It is thus probable that for a short period in late October 2005 Mr Smith allowed Mr Bennelli to entertain the erroneous belief that Mr Smith continued to be interested in entering into a joint venture. It is not alleged however that Mr Bennelli did or refrained from doing anything in reliance on Mr Bennelli’s erroneous belief. Again, if there was any Benzlaw misleading or deceptive conduct on Mr Smith’s part it has not been shown that suffered any loss or damage by it. Logan Road’s claims and counterclaims [168] Logan Road’s claims against Benzlaw in excess of $12 million in accordance with the calculations of a chartered accountant, Mr Knight, there was no challenge to Mr Knight’s calculations and, on the face of things, Logan Road is entitled to judgment for a sum established by those calculations updated to today’s date. There is also a claim by Logan Road against Medi-Aid for breach of a warranty contained in clause 7 of a deed of assignment dated 17 October 2005 entered into between Medi-Aid and Logan Road. Having regard to the above findings I apprehend that the claim against Medi-Aid will not be pursued. If there was a breach of warranty it is 64 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 198 and the authorities collected in Miller’s “Annotated Trade Practices Act” 28 th ed, para 1.52.25. -- 38 of 39 -- 39 difficult to see that the breach was productive of any loss having regard to the value of the property and Benzlaw’s lack of assets. Medi-Aid’s counterclaim against Benzlaw [169] Medi-Aid claims “an account of the … joint venture agreement” and payment of any amount shown by such account to be due to [Medi-Aid]. [170] Nothing was said in final addresses about the counterclaim and I assume it was made as a precaution against a successful claim against Medi-Aid by Benzlaw. I can see no practical point in the counterclaim and unless persuaded otherwise by further submissions, I propose to make no order in respect of it. Conclusion [171] None of Benzlaw’s claims against Medi-Aid succeeded. [172] Benzlaw failed to establish that a joint venture agreement had been entered into between it and Logan Road or that a fiduciary relationship arose in the course of negotiations for a joint venture. [173] Benzlaw also failed to establish any liability on Logan Road’s part under the rule in Barnes v Addy. Nor was it successful in its Trade Practices Act claims. [174] Logan Road in exercising its power of sale did not act bona fide for the purpose for which the power was conferred and it is appropriate that the sale to Brunswick Street be set aside. [175] I will hear submissions as to the appropriate form of order and costs. -- 39 of 39 --