In Makeig v Batterham [2009] NSWSC 344 Justice Ward of the Supreme Court of New South Wales considered and made findings about a number of disparate issues, including on principles of contractual repudiation, misleading or deceptive conduct, equitable estoppel, rights of termination, partnership and joint venture. The case highlights the danger of improperly documenting (and managing) a development project and the need to carefully consider the grounds for and method of termination of contractual arrangements.
FACTS
The plaintiff, Mr Makeig, provided 'project consultant' services to Mr Batterham and an associated company, in connection with the development of land owned or acquired by Mr Batterham.
In 2003, Mr Makeig and Mr Batterham entered into an oral agreement under which Mr Makeig agreed to provide services to assist in rezoning the land to enable residential development. Later, in early 2005, Mr Makeig and Mr Batterham signed a written document (drafted by Mr Makeig without the benefit of any legal advice) titled the 'Kitchener Project Agreement'. The Court found that this agreement did not encompass the whole of the agreement between Mr Makeig and Mr Batterham but rather was a document which set out the financial arrangements between them.
From 2003, Mr Makeig expended about $120,000 in connection with the project and was, according to the Kitchener Project Agreement, to receive a specified share of the net profit made by the project after a sum of $1.5 million was allowed to Mr Batterham for the purchase of the land.
Instead, Mr Batterham purported to terminate their agreement in January 2007 relying on various breaches of the agreement by Mr Makeig. These 'continued breaches' were alleged to constitute a repudiation of the agreement which Mr Batterham accepted by a letter written by his solicitors informing Mr Makeig that the agreement was at an end.
Despite reference to a number of breaches, the judge accepted that the real impetus for the termination of the agreement was that Mr Batterham felt he was unable to work with Mr Makeig any longer and had, rightly or wrongly, lost faith and confidence in him.
Mr Makeig in turn alleged that the termination of the agreement in this manner amounted to repudiation of the agreement and claimed damages for the loss of the benefit of the project.
Since the termination, Mr Batterham proceeded with the rezoning application and acquired further land for the project. At the time of judgment the rezoning of the land was found to be 'imminent'.
THE DECISION
Joint Venture
Although disputed by Mr Batterham, the Court found that the Kitchener Project Agreement was a binding legal agreement. The Court also determined that the arrangement was a joint venture (which was also disputed) even though that term had not been used by the parties because:
- Mr Batterham did not just retain Mr Makeig as a project development consultant for a fixed or hourly fee.
- Mr Batterham agreed to pay Mr Makeig a success fee, calculated by reference to the increase in value of the project land.
- Mr Makeig was funding at least part of the costs of the project.
As the agreement was found to be a joint venture, Justice Ward held that it gave rise to an implied obligation of cooperation and possibly also a duty of good faith.
Equitable Estoppel
Mr Makeig also claimed that Mr Batterham was estopped in equity from denying Mr Makeig the rights and entitlements due to him under the Kitchener Project Agreement. Mr Makeig argued he had expended time, energy and funds for the project over the course of several years relying on Mr Batterham's representations that he would abide by his end of the bargain and share the net profits with Mr Makeig. The judge expressed the view that, had he not found that the Kitchener Project Agreement was binding, he would have found that Mr Batterham was estopped from denying that he was bound by the agreement and from denying Mr Makeig the benefits of the project because of this conduct.
Repudiation
The Court found that only one of the breaches alleged by Mr Batterham against Mr Makeig was made out and that this was a minor breach. Importantly, the judge found that the general allegation that Mr Makeig had failed 'miserably' to manage the project and to perform the obligations on him under the agreement was not made out. His Honour stated that 'whether or not Mr Makeig was (as he may well have been) a difficult, rude or condescending person to deal with . . . and whether he was arrogant, aggressive or antagonistic, as was Mr Batterham's view by late 2006, this of itself does not amount to a breach of the Kitchener Project Agreement.' The judge found that there was no basis on which he could form the view that Mr Makeig's manner had caused any impediment to the project.
As the only breach made out was minor, it did not satisfy the 'test of seriousness' required to amount to repudiation of the agreement.
This meant that the purported termination of the agreement by Mr Batterham in January 2007 was wrongful and was itself a repudiation of the agreement.
Right Of Termination
The judge found that there was no basis as of January 2007 which entitled Mr Batterham to summarily (that is, without reasonable notice) terminate the Kitchener Project Agreement.
His Honour did state that, where an arrangement is that of partnership or unincorporated joint venture, then in the absence of a written agreement, reasonable notice is all that is necessary to bring the relationship to an end, and that a genuine lack of trust and confidence in one's joint venture partner or fellow participant would be a bona fide reason for doing so (whether or not the reason given was something which might reasonably have warranted such a failure in confidence). His Honour also expressed the view that the Kitchener Project Agreement, being an agreement for an ongoing project with no fixed term, would have such an implied right to terminate on reasonable notice, but noted that this was not argued before him.
Partnership
An alternative basis on which Mr Makeig put his claim was that the Kitchener Project Agreement gave rise to a partnership within the meaning of the Partnership Act 1892 (NSW), despite the fact that the document did not refer to a partnership and the participants were described as 'parties' not 'partners'.
The judge noted that, at common law, an agreement to share profits and losses was characteristic of a partnership. He concluded that, had it been necessary, he would have found there was a partnership between Mr Makeig and Mr Batterham arising out of the joint venture undertaken by them and that Mr Batterham had an obligation to account to Mr Makeig for the latter's share of any benefits derived from the partnership.
Misleading And Deceptive Conduct
Mr Batterham made a cross-claim asserting that he had entered into the arrangement with Mr Makeig relying on representations made by Mr Makeig about his experience, training and financial capacity and that he was a retired architect.
Although Mr Makeig conceded at trial that he was 'a little careless of the truth' in describing his experience with similar projects, the judge ultimately found that the representations as to Mr Makeig's experience, training and financial capacity were true.
There was a great deal of contradictory evidence about the alleged representation by Mr Makeig that he was an architect. The judge was satisfied that an implied representation to this effect was in fact made prior to the date of the Kitchener Project Agreement. However, the judge was not satisfied that Mr Batterham had relied upon the representation, which had been made more than a year before the agreement was entered into. Mr Batterham himself conceded that he did not necessarily need an architect for the project, just a person familiar with the interactions of the Council.
Final Orders
As a result of his findings summarised above, the judge ordered Mr Batterham to pay Mr Makeig contractual damages of approximately $2.4 million representing the loss of bargain arising from his wrongful termination amounting to a repudiation of the Kitchener Project Agreement. The sum was calculated according to the formula for the sharing of profit contained in the Kitchener Project Agreement.
Alternatively, if Mr Makeig wished, he could elect for an account of the partnership property. Such relief would result in a declaration that Mr Batterham held a share (calculated as above) of the benefit and/or proceeds of the Project on constructive trust for Mr Makeig.
Implications
Some of the implications of this decision are:
- Any commercial agreement proposed to have legal effect should be vetted by a lawyer. Agreements which have been drafted by the parties may have a very different legal effect to that intended, regardless of the language used in the document.
- Legal advice should be obtained prior to terminating an agreement as the wrong method of termination may have severe financial consequences.
- There is a high bar for allegations of misleading and deceptive conduct and proof of reliance is critical. Casual comments or exaggeration will not be misleading and deceptive conduct.
© DLA Phillips Fox
DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com
This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.