FEDERAL COURT OF AUSTRALIA Links Golf Tasmania Pty Ltd v Sattler (No 3) [2012] FCA 1418 Citation: Links Golf Tasmania Pty Ltd v Sattler (No 3) [2012] FCA 1418 Parties: LINKS GOLF TASMANIA PTY LTD (ACN 096 711 661) v RICHARD GEOFFREY SATTLER and R.G. SATTLER NOMINEES PTY LTD (ACN 009 525 348) File number: VID 204 of 2010 Judge: JESSUP J Date of judgment: 14 December 2012 Catchwords: DAMAGES – plaintiff entitled to equitable compensation – where first defendant breached fiduciary obligations owed to plaintiff – where diverted benefit consisted of conditional government grant to construct wellness centre – where diverted benefit required fiduciary to expend his own financial resources – where net cost of constructing wellness centre alleged to exceed its capitalised value – where first defendant alleges that receipt of diverted benefit would have been to the detriment of plaintiff – whether quantum of equitable compensation should be determined by reference to amount of diverted benefit – whether adjustment should be made for conditional nature of diverted benefit or the cost of developing wellness centre – principles relevant to grant of equitable remedy Cases cited: Edmonds v Donovan (2005) 12 VR 513 Ferrari v Ferrari Management Services Pty Ltd [2000] 2 Qd R 359 Hill v Rose [1990] VR 129 Links Golf Tasmania Pty Ltd v Sattler [2012] FCA 634 O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Re Dawson (1966) 84 WN (NSW) (Pt 1) 399 Dates of hearing: 30 November 2012 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 24 Counsel for the Plaintiff: Mr J Santamaria QC with Mr J Smith Solicitor for the Plaintiff: Maddocks Lawyers Counsel for the Defendants: Mr M Roberts SC with Mr D Bongiorno Solicitor for the Defendants: Shields Heritage Lawyers IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 204 of 2010 BETWEEN: LINKS GOLF TASMANIA PTY LTD (ACN 096 711 661) Plaintiff AND: RICHARD GEOFFREY SATTLER First Defendant R.G. SATTLER NOMINEES PTY LTD (ACN 009 525 348) Second Defendant JUDGE: JESSUP J DATE OF ORDER: 14 DECEMBER 2012 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The defendants pay the sum of $361,500 by way of equitable compensation to the plaintiff, being – (a) $360,000 in respect of the matters covered by paras 652-663 of the reasons of the court published on 26 June 2012; and (b) $1,500 in respect of the matters covered by paras 672-673 of those reasons. 2. The defendants pay to the plaintiff the sum of $90,714.84 by way of interest on the sum payable pursuant to Order 1(a). 3. The defendants pay the plaintiff's costs of the assessment of equitable compensation referred to in Order 1 above including reserved costs. 4. The costs to be paid by the defendants under the previous order may be set-off against the costs to be paid by the plaintiff under Order 1 made on 16 November 2012. 5. The defendants' Interlocutory Application filed on 11 October 2012 be dismissed with costs. 6. The date by which the defendants may file a notice of appeal from these orders is extended to 1 February 2013. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 204 of 2010 BETWEEN: LINKS GOLF TASMANIA PTY LTD (ACN 096 711 661) Plaintiff AND: RICHARD GEOFFREY SATTLER First Defendant R.G. SATTLER NOMINEES PTY LTD (ACN 009 525 348) Second Defendant JUDGE: JESSUP J DATE: 14 DECEMBER 2012 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 On 16 July 2012, the court made a declaration in the following terms: The plaintiff is entitled at its election to an assessment of damages or an account of profits in respect of the findings made in the plaintiff's favour: (a) at paragraphs 652 to 663 of the reasons for judgment concerning the wellness centre; (b) at paragraphs 672 to 673 of the reasons for judgment concerning Phil Hill. By notice given to the defendants on 13 August 2012, the plaintiff elected to take up its entitlement to damages in respect of both para (a) and para (b) of the above declaration. The matter presently before the court is the assessment of those damages. 2 With respect to para (b) of the declaration, it is agreed that the damages to which the plaintiff is entitled are $1,500. 3 The matter dealt with in paras 652-663 of the court's reasons for judgment published on 26 June 2012 (Links Golf Tasmania Pty Ltd v Sattler [2012] FCA 634) related to the wellness centre which was originally intended to be built on, or immediately adjacent to, the land leased to the plaintiff at Barnbougle Dunes, and which was, in circumstances explained in those reasons, built at the defendants' second golf course at Lost Farm. The defendants received funding from AusIndustry in the sum of $360,000 to assist in the construction of the wellness centre. The plaintiff claims that this sum represents the amount of equitable compensation to which it is now entitled in consequence of the first defendant's breach of fiduciary duty as found by the court. The plaintiff also claims interest on that sum from the time that it was paid to the second defendant. 4 Because of certain submissions made on behalf of the defendants, to which I shall refer, it is necessary to reiterate certain facts to which I referred in my reasons of 26 June 2012, and to supplement those references with more detailed facts as established in the evidence in the case. 5 As mentioned in para 429 of my reasons of 26 June 2012, the AusIndustry grant was given pursuant to an agreement of 17 June 2009 between the Commonwealth and the second defendant. It is necessary to refer to the provisions of that agreement in some detail. 6 The agreement provided that the Commonwealth would provide the second defendant with "the Funding at the times and in the manner specified in clause 2 of Schedule 1". The core of the agreement was to be found in that schedule. The "Activity" for which funding was to be provided was the following: The project involves the construction and fit out of a new wellness centre facility and 30 room accommodation facility at 'The Lost Farm' property – the second golf course being constructed on Barnbougle Farm, Bridport. The wellness centre building will be approximately 146m2 in floor area in a combination of Colorbond custom-orb, Ecoply and western red cedar weatherboard materials. The internal fit-out will include a steam room, reception, two (2) treatment rooms, separate bathroom, waiting room, separate dual toilet shower room and a sun desk [sic] with an external spa. The centre will be funded in part by Our Funds and the remainder by Your Matching Cash. The accommodation will be a 30 room 5 star lodge incorporating restaurant and facilities for all Barnbougle guests. The accommodation lodge will be funded by You using your Matching Cash. 7 Under the schedule, funding was to be provided as follows: 2.1 The total funding for the Activity is $396,000 which represents $360,000, the amount of Funding to be provided by Us for the Activity, and $36,000, being the total GST payable in accordance with clause 4. Subject to clause 1.1 of this Agreement, the Funding will be paid as follows: (a) 50% of the Funding will be paid to You within 30 days of the commencement of the Activity Period; and [sic] (b) 20% of the Funding will be paid to You within 30 days of completion of Phase One of the Activity detailed in Schedule 2 to Our reasonable satisfaction, and receipt by Us of confirmation that You have contributed $245,000 [50% of Matching Cash amount] in Matching Cash on the Activity; (c) 20% of the Funding will be paid to You within 30 days of completion of Phase Two of the Activity detailed in Schedule 2 to Our reasonable satisfaction, and receipt by Us of confirmation that You have contributed $98,000 [20% of Matching Cash amount] in Matching Cash on the Activity; (d) the remaining 10% of the Funding will be paid to You within 30 days of Activity Finalisation. As will be apparent from para (b) of this clause, the "matching cash" to be provided by the second defendant was $490,000. How that, and the grant itself, were to be spent was the subject of the following table: Budget Item Our Funding Matching Cash Total Project Costs (categories of expenditure) $ $ $ Salary costs 130,000 245,000 375,000 Material costs 130,000 195,000 325,000 Contract costs 50,000 50,000 Other costs 50,000 45,000 95,000 Audit certificate costs 5,000 5,000 Total (excl. GST) 360,000 490,000 850,000 8 The schedule provided for three "phases" of construction, and for the dates within which they would be carried out. Phase 1 included the lodgement of plans and architect drawings with the local council, to be done in the period 17-30 June 2009. Phase 2 involved the commencement of the construction both of the wellness centre and of the lodge, to be done in the period 1 July – 30 October 2009. And Phase 3 involved the completion of the wellness centre, including the issue of council certificates and the opening of the centre to the public, and the continuation of building works on the lodge, to be done in the period 1 November 2009 – 31 March 2010. After each of these periods, the second defendant was required to provide a progress report. In the event, the Commonwealth paid the second defendant in three instalments more or less in accordance with the agreement between them: $180,000 on 19 June 2009, $144,000 on 16 March 2010 and $36,000 on 10 June 2010 (net of GST in each case). 9 Despite what I assumed in the second sentence of para 653 of my reasons of 26 June 2012, it seems that the funding received from the Commonwealth did not wholly cover the cost of the construction of the wellness centre and associated facilities at Lost Farm. I say "it seems that" because the evidence with respect to the actual cost of construction was unsatisfactory. After excluding items which I ruled inadmissible, the defendants proved that the cost was $471,273.81. Of that, $360,000 was covered by the funds received from the Commonwealth, and the balance, $111,273.81, was provided by the second defendant. 10 Elements of the cost of siting the wellness centre at Lost Farm were the costs of the construction of a 30 m covered walkway from the vicinity of the restaurant (the only access to the wellness centre) and the provision of utilities (water, communications, power and sewerage) over the same distance of about 30 m. Had the Wellness Centre been sited at Barnbougle Dunes, the corresponding distance would have been 204 m. The defendants placed before the court certain costings which indicated that the additional cost to construct the walkway and to provide water, sewerage and communications at Barnbougle Dunes, over and above the actual cost at Lost Farm, would have been $112,200, net of GST. There would also, it seems, have been an additional cost associated with the provision of power to the hypothetical Barnbougle Dunes wellness centre. In his affidavit of 8 October 2012, the first defendant referred to, and exhibited, an estimate of the cost of making the power connection, but the estimate exhibited consisted of two quotations, it not being clear whether they were to be understood as alternatives or as two parts of the same quotation. Further, it is not clear whether they purported to be estimates of the additional cost for the connection of power, over and above what it had actually cost the second defendant to provide power to the wellness centre at Lost Farm, on the one hand, or simply the costs of the hypothetical power connection at Barnbougle Dunes, on the other hand. Notwithstanding those problematic aspects of the evidence, in detailed written submissions filed on 11 October 2012, the defendants contended that the effect of the evidence was that an additional $121,120 would have been required to supply the hypothetical wellness centre at Barnbougle Dunes with power, over and above what had been spent at Lost Farm. The plaintiff responded to those submissions by written submissions filed on 8 November 2012, no point there being taken about the detail of the defendants' estimates or calculations. The subject was not broached at the hearing of the matter in court. In the circumstances, I accept the defendants' figure of $121,120 for additional power costs. 11 I find, therefore, that the construction of a wellness centre at Barnbougle Dunes would have cost in the order of $704,593 (ie $471,273 plus $112,200 plus $121,120). 12 The defendants also engaged Andrew Keith Cubbins, a registered valuer, to provide a hypothetical valuation of the extent to which the value of the plaintiff's leasehold interest in the golf course at Barnbougle Dunes would be enhanced by the construction of a wellness centre as originally proposed. The figure at which he valued such an enhancement was $190,000. Mr Cubbins was provided with the trading figures for the wellness centre at Lost Farm, but these revealed net losses of $57,222 and $56,050 for 2010/11 and 2011/12 respectively, even after Mr Cubbins had adjusted for certain overstatements of expenses which he perceived in the data which he had been given by the defendants. From a reading of his report, I cannot see any relationship between these adjusted trading figures and his valuation of $190,000. Rather, Mr Cubbins determined that the market rental value of the hypothetical wellness centre (ie if the plaintiff had built the centre and then rented it to a third party) was $20,000. Capitalising the value of that assumed income stream over the balance of the plaintiff's leases from the first defendant (30 years), Mr Cubbins derived a figure of $188,600, which he rounded to $190,000. 13 The defendants made use of the figures referred to above in the following way: Cost of development $704,593 Commonwealth funding ($360,000) Net cost of development $344,593 They submitted that, since the net cost of development would have been more than the capitalised value of the asset so developed, the plaintiff had lost nothing in being denied the opportunity to build the wellness centre at Barnbougle Dunes. For its part, the plaintiff advanced no serious challenge to the general order of the calculations to which I have referred but submitted that the use of them by the defendants involved, in effect, a fundamental misunderstanding of what was required in the assessment of equitable compensation at the conclusion of a case in which a fiduciary has been held to have been in breach of his obligations to his principal. 14 "The object of equitable compensation is to restore persons who have suffered loss to the position in which they would have been if there had been no breach of the equitable obligation": O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 272 per Spigelman CJ (Priestley and Meagher JJA agreeing); see also, to the same effect, Edmonds v Donovan (2005) 12 VR 513 at 544 [78] per Phillips JA (Winneke P and Charles JA agreeing). How that should be done will depend upon the circumstances of the case. It is to be done with the full benefit of hindsight. Thus, if the fiduciary has diverted to his or her own advantage some property of the beneficiary which subsequently becomes more valuable, the compensation should be paid at the later, higher, value: Re Dawson (1966) 84 WN (NSW) (Pt 1) 399. Conversely, if the fiduciary has so acted to impede the ability of the beneficiary to deal with his or her property, and the value of the property subsequently falls, the amount of compensation will reflect the original value of the property on the basis that the beneficiary might otherwise have disposed of it at that value: O'Halloran. 15 In the present case, it was not property as such which the first defendant appropriated in breach of his fiduciary obligation. Rather, it was an opportunity which belonged in equity to the plaintiff. Consistently with the principle referred to above, the object must be to restore the plaintiff to the position which it would have occupied had the first defendant taken up the opportunity on behalf of, and for, the plaintiff. But the $360,000 grant from the Commonwealth came with strings attached. Counsel for the defendants stressed that it was not even a grant made in anticipation of the funds being used in a particular way: it was funding retrospectively available to reimburse the grantee for the cost of building works already undertaken. That was a characterisation of the arrangement which overreaches the actual terms of the agreement between the Commonwealth and the second defendant: one-half of the funding was payable within 30 days of the execution of the agreement, and was in fact paid only two days after execution. But, on any view, the grant was to be used only for the construction of a wellness centre, and would have obliged the plaintiff to outlay its own funds, additional to the grant, in the order (as I would find on the evidence) of $344,593. The defendants submit that the position to which the plaintiff is presumptively to be restored is one in which the plaintiff would have incurred that outlay in order to acquire an asset worth $190,000. That is to say, there should now be no compensation. 16 In my view, the defendants' submission comes to grips neither with the reality of the situation which existed when the first defendant decided to go ahead with the wellness centre nor with the fact that he ultimately did so in breach of his fiduciary obligations. Had he observed those obligations, he would have obtained the grant for the plaintiff and used it to fund, in part, the construction of the centre by the plaintiff. Whether the plaintiff would have paused at some point and had Mr Cubbins provide a valuation of the centre as built is a question which the first defendant, by his conduct, made entirely moot. The Board of the plaintiff was not given the opportunity to address it. Rather, the funding was sought, and was used to build a wellness centre. The first defendant, of all people, is in no position now to contend that the Board, acting rationally, would not have built the centre because of an appreciation that it would cost the plaintiff more than its value as an asset. 17 The defendants did not so contend, of course. The counterfactual to which they tied themselves was that the centre would in fact have been built by the plaintiff notwithstanding that that exercise would have cost more than the value of the centre. The latter circumstance was, it seems, no part of the thinking of the Board at the time; nor of the first defendant himself, either with respect to his initial proposal to site the centre at Barnbougle Dunes or with respect to the course he ultimately followed. There is a reality about all of this which speaks loudly of the relatively inconsequential nature of the circumstance that the market value of the centre which ought to have been built at Barnbougle Dunes, assessed by reference to the rent that might have been paid by a third party lessee, was $190,000. I sense in the facts of the case a real interest in the enhancement of the range of experiences being offered to customers at the golf course, both on the part of the first defendant and, to the extent that they were allowed a look at the target, as it were, by other members of the plaintiff's Board, which went well beyond the matters upon which Mr Cubbins based his valuation. 18 However, it is not the court's place to opine that the value of a wellness centre at Barnbougle Dunes would have been more or less than a certain figure. If the Board of the plaintiff might well have chosen to go ahead with the construction of such a project, it does not lie in the mouth of the errant fiduciary to say that it would have done so only with a resultant reduction in the value of the business as a whole. The first defendant did not give the Board the opportunity to make that decision. Rather, he did for himself the very thing that he now contends would have made the plaintiff worse off. Whether the plaintiff would have been worse off depends very substantially upon the weight which its Board would have given to the benefits which a wellness centre would have added to its business. Of all people, the first defendant is in no position to say that those benefits would have been negative or negligible. 19 I do, therefore, proceed on the basis that the wellness centre was a project with which the Board of the plaintiff would have proceeded, for reasons which the defendants are in no position to say would not have been good ones. Rather than having to pay at least $704,593, for the centre, the plaintiff would have been able to build it for an outlay of $344,593 only. The difference, constituted, of course, by the $360,000 grant, is the benefit which the first defendant appropriated for himself. It was a benefit which would otherwise have been the plaintiff's. Subject only to considerations of windfall, to which I refer below, this is the sum which should be paid to the plaintiff to restore it to the position which it would have occupied had the first defendant observed his fiduciary obligations. 20 Another way of reaching the same result might be as follows. It involves notionally winding the clock back and forcing both the plaintiff and the first defendant to play out the events which would have taken place in 2009 had the wellness centre been built by the plaintiff as it ought to have been. Under such a scenario, the court would require the defendants to build a wellness centre for the plaintiff, at or near the original proposed site, in return for a payment by the plaintiff of $344,593. The defendants would then be out of pocket to the tune of $360,000, and the plaintiff would have come by a wellness centre for $360,000 less than the cost of construction. This scenario would be the equivalent of what ought to have happened in 2009, namely, the construction of a wellness centre by the plaintiff for a net cost of $344,593. 21 The reason why the scenario just referred to will not be played out, of course, is that there is no suggestion that the plaintiff might now build, or have built for it, a wellness centre. It is here that I must return to the windfall point which I mentioned above. If I order the defendants to pay $360,000 in compensation to the plaintiff without any requirement that it be used in the construction of a wellness centre, there is a sense in which the plaintiff will have received the Commonwealth funding without the strings which attached to it. This would, according to the defendants, be a windfall for the plaintiff, the delivery of which would not be contemplated by a court of equity. On the other hand, the alternative proposed by the defendants is one in which the plaintiff would receive no compensation, and there will have been no consequences for the first defendant of his breach of duty. Although the remedy of equitable compensation is not to be used as a penalty, it is easy to sympathise with the plaintiff's point that to award no compensation at all, as proposed by the defendants, could scarcely be viewed as equity holding a fiduciary to his conventional obligations. And, for reasons explained above, such an outcome would leave the plaintiff without the wellness centre which might have been its own. 22 The situation confronting the court is, therefore, one in which perfect justice for all concerned is unobtainable. However, there are two circumstances which, together, have persuaded me that the position for which the plaintiff contends most closely aligns with the principles which underlie equity's preparedness to award compensation. The first is that it is accepted that, in an appropriate situation, compensation may be calculated by reference to the fiduciary's gain: Hill v Rose [1990] VR 129 at 143, approved in Edmonds v Donovan, 12 VR at 544 [78]; Ferrari v Ferrari Management Services Pty Ltd [2000] 2 Qd R 359 at 370-372 [39]-[45]. In the present case, the first defendant derived a gain of $360,000. It is true that he had to use that money in a particular way, but he is in no position to say that it was not a beneficial way for him and his family company. It was money which he would not have had but for his breach of duty. 23 The second circumstance – and it is related to the first – is that the defendants' position is, at base, one which a court of equity should find unattractive. Because of his fiduciary position, the first defendant is not well-placed to resist the conventional obligation to compensate his principal upon the ground that the principal would have been worse off for having had the benefit of the funding which he misappropriated. Whether the plaintiff would, for whatever reason, have found it advantageous to receive the grant and to build the wellness centre were matters for its Board. However, because of the course followed by the first defendant, the Board was denied the opportunity to make that judgment. On any view, the Commonwealth grant would have been a significant circumstance to be considered by the Board. If the whole project, with that funding, was to be rejected on the ground that it would lead to a financially adverse result, or was to be accepted on the ground that the presence of a wellness centre at Barnbougle Dunes would be beneficial for a range of reasons, not all of which might have been capable of expression in dollar terms, it was the Board which ought to have made the necessary discriminations. It was not for the fiduciary effectively to pre-empt the Board by taking the grant for himself. And it is not now for him to say that it did not matter in the result because the plaintiff was no worse off financially from the way things were done. 24 For the above reasons, I accept the plaintiff's case that the equitable compensation to which it is entitled under my reasons of 26 June 2012 in relation to the wellness centre is $360,000. Together with the Hill aspect, the plaintiff will be awarded the sum of $361,500. I shall hear the parties on the questions of interest and costs. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jessup. Associate: Dated: 14 December 2012