KHAFAM DEVELOPMENTS PTY LIMITED v ZEAITER SUPREME COURT OF NEW SOUTH WALES — COURT OF APPEAL HANDLEY JA, SHELLER JA and ABADEE AJA 18 September, 3 October 1996 [1996] NSWCA 303 APPEAL — findings of trial Judge — payment of share of profits to plaintiff — later denial of partnership — unconvincing explanations for payments. PARTNERSHIP — whether partnership to be inferred from course of dealing — payment of share of profits — effect of. The appellant sought orders declaring the existence and terms of an informal partnership for the acquisition and sale of two parcels of land to the New South Wales Land and Housing Corporation and the construction of units on that land under contracts with the Corporation. After completion of the building contracts the defendants paid the plaintiff by cheque amounts which they asserted were half the profits from the building contracts. They later denied the existence of any partnership. The trial Judge was not satisfied that an informal partnership which had existed for the acquisition of the sites had been extended to include the development of the sites after they had been sold to the Corporation. On appeal: - HELD, allowing the appeal: (1) The admissions made by the respondents when paying the cheques must be given great probative value which could only be displaced by convincing explanations: Voulis v Kozary (1975) 180 CLR 177 at 193 applied; (2) The facts relied on by the appellant were "incontrovertibly established" and the respondents' explanations were "glaringly improbable": Devries v Australian National Railway Commission (1993) 177 CLR 472 at 479 applied; (3) These facts led to the conclusion that an informal partnership existed for the development of the land under contracts with the Housing Corporation. Handley JA. This appeal arises out of a partnership dispute between persons who were formerly close friends. It is common ground that a partnership came into existence in or about October 1988 and the trial Judge so found. However he also found that the partnership had been abandoned at some stage and dismissed the appellant's amended summons which had sought declarations of the existence and terms of the partnership and an order for taking the partnership accounts. The question of abandonment was the central issue on the appeal. The Judge found that Mr Khamis, the principal officer of the appellant, and Mr Zeaiter, the first respondent, entered into an informal agreement to purchase land at 61-63 Rodgers Street, Kingswood as tenants in common, the appellant owning one half, and Mr & Mrs Zeaiter the other. The agreement was that the land would be purchased and developed by the construction of units onthe basis of an equal sharing of contributions, profits and losses. As the trial Judge held, this was a classic situation from which the law would imply a partnership. On 1 December 1988 the parties entered into a contract to purchase the Kingswood property for $215,000. The parties intended to build 12 units on the property and to retain them as investments, each taking half. 2 UNREPORTED JUDGMENTS The parties changed their minds, and on 20 February 1989 the Kingswood property was sold to the New South Wales Land and Housing Corporation (the Housing Corporation) for a slightly enhanced price which returned the parties a profit of about $8,000 which they shared equally. Special condition 2 in that contract provided that on or before completion Mr Zeaiter 'or some party procured by the vendor' and acceptable to the purchaser should enter into a contract with the Housing Corporation to construct 12 two bedroom units on the property within a period of 52 weeks for a price of $1,029,000 subject to adjustment for rise and fall in costs. Such a contract was entered into and the building was practically completed ahead of schedule on 25 May 1990 for a price of $1,100,542. The building contract is not in evidence, but it appears from the Department of Housing progress certificates that the builder may have been Mr Zeaiter. Earlier, and prior to the completion of the Kingswood purchase, Mr Khamis and Mr Zeaiter had inspected another property at 17-21 Coghlan Street, Doonside. On 27 January 1989 the appellant and the third respondent (the Zeaiter company) acquired an option to purchase this property for $350,000 at an option fee of $4,500. The parties hoped to interest the Housing Corporation in acquiring and building on this land and they were successful in doing so. On 25 May 1989 the Housing Corporation, as the nominee of the grantees of the option, entered into a conditional contract to purchase the property. On 3 September 1990, following the grantof development approval, the Housing Corporation entered into a contract with the Zeaiter company to build 31 one bedroom units on the property for $1,656,000, and shortly thereafter it completed the purchase of that property. On 11 July 1990 Mr & Mrs Zeaiter gave Mr Khamis two cheques totalling $71,795 drawn by their company. Mr Zeaiter's evidence was when handing over these cheques he said to Mr Khamis: This is your half share from Kingswood. On 6 August 1991, after completion of the Doonside building contract, Mr & Mrs Zeaiter handed a cheque for $67,500 to Mr Khamis. Mr Zeaiter's evidence was that when handing over this cheque to Mr Khamis he said: Louie, this is your half share of the Doonside property. On 19 August 1989 the appellant and the Zeaiter company entered into a contract for the purchase of Lot 1 Braddon Street, St Marys. However the plans the parties had for the joint development of this property as an investment were later abandoned, and on 15 January 1990 the appellant and the Zeaiter company contracted to sell this property at cost to Mr & Mrs Zeaiter. The trial Judge's reasons for dismissing the appellant's summons were: It seems to me in this case that initially there was an arrangement which could be classed as a partnership for the development of the investment properties, but this was abandoned by the parties. The parties had the idea that they might be involved in a partnership involving the building contracts (sic) with the Department of Housing, there was some talk about this, there was the draft agreement with the solicitor, but the parties never got to the stage where they concluded an agreement on the new partnership, or where their various actsand conduct would make me come to the view that there would be, to use a shorthand expression, a partnership by estoppel. Mr Khamis did not contribute to the business either his energies or his money. The whole of the risk and the whole of the work was done, to the knowledge of Mr Khamis, by Mr Zeaiter, his family and his company. URJ KHAFAM DEVELOPMENTS PTY LIMITED v ZEAITER (Handley JA) 3 There was extensive oral evidence at the trial and Mr Khamis and Mr & Mrs Zeaiter were cross-examined. The Judge said that there were problems in accepting either Mr Khamis or Mr Zeaiter 'wholeheartedly', but that generally speaking he preferred Mr Zeaiter's evidence to that of Mr Khamis. However in relation to a meeting in the solicitor's office on 22 March 1989, and at the home of Mr & Mrs Zeaiter about 26 April, Mr Khamis" evidence was accepted, because it was supported by the evidence of Mr Shad, a solicitor, and Mr Manche, an accountant. This evidence is of considerable importance. If this appeal depended on reversal of the trial Judge's findings on credit it would be bound to fail. However Mr Robb SC for the appellant based his argument on the conduct of the parties between December 1988 and August 1991 which was not in dispute, admissions made by Mr & Mrs Zeaiter, particularly in cross-examination, and the Judge's findings in relation to the meeting in the solicitor's office and at the home of Mr and Mrs Zeaiter. These, it was rightly submitted, were facts 'incontrovertibly established'. It was also submitted that Mr Zeaiter's explanations for the payments made to the appellant were 'glaringly improbable' (Devries v Australian National Railway Commission (1993) 177 CLR 472 at 479), and that in combination these matters established the appellant's case and required this Court to allow the appeal. The appellant's argument starts with the Judge's finding that there was initially a partnership in relation to the Kingswood property. Although his Honour held that this was abandoned, he made no finding as to when or how this occurred. Mr McInnes QC, who appeared for the respondents, was asked when the partnership was abandoned. He submitted that this occurred in December 1988 when Mr Khamis and Mr Zeaiter agreed that Mr Zeaiter should approach the Housing Corporation to see if it would be interested in acquiring the land and contracting for the construction of 12 units on it. The first difficulty with this submission is that on 27 January 1989 the appellant and the Zeaiter company entered into the option to acquire the Doonside property. Another and greater difficulty is that Mr Khamis and Mr Zeaiter attended a meeting at Mr Shad's office on 22 March to discuss entering into a formal partnership agreement. The solicitor sent a draft agreement to the parties on 10 April but it was never executed and no attempt was ever made to use the draft as the basis for further negotiations. However on 25 May the companies joined in nominating the Housing Corporation to exercise the Doonside option. Their only immediate benefit was a refund of the option fee. In the light of these established facts, it is not possible to find that the original partnership had been abandoned in December. It was common ground that the parties changed their plans for the development of the Kingswood property during December. However this did not signal the end of their joint business arrangements either in relation to the Kingswood land or generally. The following month they investigated the Doonside site, and the two companies jointly acquired the option with a view to it being disposed of, for their joint benefit, to the Housing Corporation. Mr Zeaiter's evidence about the Doonside property is of some importance. In his affidavit of 6 March 1992 he said, referring to himself and Mr Khamis: After inspection at Doonside we were both hesitant about Doonside, we were not quite sure. Finally I said to Louie Khamis: "Tl ask the Department of Housing if they are interested in this area". He said: UNREPORTED JUDGMENTS "Good". After the Department showed an interest in this property we then decided to take an option'. In cross-examination he said (249): A. We bought an option to put a proposal to the Department of Housing to see if they are interested. Q. And if they were not interested, you were just going to let it go, is that correct? A. Well, we haven't decided at the time I will let go or not because very close to the station and we just had mixed feelings. Q. You were not prepared to commit yourself to $350,000? A. We just didn't know at the time. We just had a punt. Moreover on Mr Zeaiter's own evidence the change of plans for the Kingswood property did not involve the appellant's withdrawal from the project. Mr Zeaiter agreed that it was Mr Khamis who first suggested that the Housing Corporation be approached. (238) He said: OP o> Q. In any event, not long after the Rodgers Street, Kingswood property was purchased you and Mr Khamis started to have some discussions about the possibility of seeing if the Housing Commission would be interested in acquiring units developed on that site, isn't that correct? Yes sir. And the discussions you had would be that you would sell the land to the Housing Commission? Yes sir. 'You would build the units on the land for the Housing Commission? Yes sir. And that you would share the profit from it? Yes. And if for some reason things went bad, the same as with Quaker's Hill you would share the losses? Well, excuse me, sir. That is not quite — what happened is we have not — at the time when we — you are talking about the Housing Commission, we haven't entered into an agreement. It was a separate deal. The first deal we had done was a separate issue to entering into the Department of Housing. Pr OPOPOP OP 'You would go into a partnership and you would sell it to the Housing Commission and make your money that way? Yes. I think you were the one that had the face-to-face negotiations with the officers of the Housing Commission about negotiating the price per unit for the Kingswood property, isn't that correct? Yes. . Prior to having those negotiations, you and Mr Khamis would meet to discuss matters concerning that, wouldn't you? Yes'. The day after the parties had completed their purchase of the Kingswood property, Mr Khamis and Mr Zeaiter met by appointment at Mr Shad's office to discuss a formal partnership agreement. Mr Zeaiter's evidence about this meeting included the following: Q. So the discussion you had at Mr Shad's office, you would each put in half the money? Yes. URJ KHAFAM DEVELOPMENTS PTY LIMITED v ZEAITER (Handley JA) 5 That you would be the builder? That is right. You got a thousand dollars a week for being the builder? That is right. 'You say that you wanted the expenses paid as well? That is right. And that is how it was put in the meeting? That is correct. But you didn't want it to be a partnership because it was only a one-off thing, is that right? That is right'. Mr Shad's affidavit evidence about this meeting which the Judge accepted was as follows: > OPOPOPO>O Louie said, "My accountant has suggested that we should have a partnership agreement drafted to protect both of us". Tom said, "I have no objection". Louie said, "I trust this man George but I think we should have an agreement to protect both of us and our families". Tom said, "I have no problem with a partnership agreement". Louie said, "Tom will be building so he should have a set salary". Tom said, "What do you think Louie?" Louie said, "What about a thousand a week?" Tom said, "That sounds OK".' The draft partnership agreement provided that the parties were the appellant and Mr & Mrs Zeaiter. However the last page provided for the agreement to be executed by the Zeaiter company as well. The recitals stated that the parties had contracted to sell the Kingswood property to the Housing Corporation and included the terms of special condition 2 which provided that Mr Zeaiter 'or some party procured by the Vendor' (which included the appellant) would enter into a contract with the Housing Corporation for the construction of 12 units on the property. Other recitals referred to the Doonside option, and the fact (which had not yet occurred) that the appellant and the Zeaiter company had nominated the Housing Corporation as the purchaser on terms that Zeaiter builds the residential units for it. There was a further recital that: the parties to this agreement have agreed to joint (sic) in this agreement to associate as partners for the purposes of carrying out the contracts entered into by Zeaiter with the NEW SOUTH WALES LAND AND HOUSING CORPORATION for the purpose of building the residential flats at 61-62 Rodgers Street, Kingswood and 17-21 Coghlan Cres, Doonside .... Although a written agreement was never entered into, it is clear from the Judge's findings and Mr Zeaiter's evidence that the recitals reflected the consensus between the parties and the instructions given to Mr Shad. The failure to execute a written agreement neither reflected nor brought about a rupture in the business relationship between the parties. Mr Manche, whose evidence was accepted, spoke of conversations with Mr Zeaiter at a dinner party at his home about 26 April. After dinner he was present when Mr Khamis and Mr Zeaiter had a discussion about 'their' partnership. According to Mr Manche, Mr Zeaiter produced a copy of the draft partnership agreement prepared by Mr Shad and said: 6 UNREPORTED JUDGMENTS This is the partnership agreement George Shad prepared. I am not happy with one of the clauses, I am taking it to my solicitor to be re-written'. (66) He adhered to this evidence in cross-examination. (224) There was no suggestion that Mr Zeaiter was unhappy with the rest of the agreement, or his business relationship with Mr Khamis and the appellant. However in my judgment the decisive evidence was that relating to the payments made to the appellant out of the profits from the Kingswood and Doonside building contracts and the statements made by Mr Zeaiter to Mr Khamis when the cheques were handed over. This evidence did not stand alone. The butts for the Kingswood cheques are in evidence, and both state 'partnership Kingswood'. The company's cash book records the payments described as 'partnership'. When he received the cheques Mr Khamis asked Mr Zeaiter for a document explaining the breakdown of the figures, and such a document was later given to him. It was as follows: KINGSWOOD JOB CONTRACT PRICE 1020000 EXTRAS PAID 25579 1045579 MINUS 10% BUILDERS GUARANTEE 104557 941022 MINUS EXPENSES 797431 143591 DIVIDED BY 2 = 71795 The butt for the Doonside cheque is not in evidence but the company's cash book records the payment described as 'share of profit'. Mrs Zeaiter was employed by the Zeaiter company and wrote out the relevant cheques, filled in the butts, and wrote up the cash book. She said that she attempted to faithfully record payments made by the company and the purposes for which they were made. The Judge said that the payments were 'a significant factor in this case', but he did not think they were 'decisive'. He was not prepared to infer from the entries in the cash books and cheque butts that a partnership existed. There can be no quarrel with a provisional view to this effect because, as the Judge said, parties may not have 'analysed the matter in strict legal terms'. However these payments, Mr Zeaiter's statements when they were made, and the associated documentation, unless explained, strongly supported the appellant's case. As Jacobs J said in Voulis v Kozary (1975) 180 CLR 177 at 193: Admissions so made must be given very great probative value. Their value cannot be simply displaced by an unfavourable view of the credibility in his evidence or parts thereof of the party who seeks to rely on them. That value may only be displaced by a convincing explanation of how they came to be made. Mr Zeaiter's explanation of these payments was that the deal was he would give 'Mr Khamis' whatever he thought was fair. (121, 266-8) The trial Judge did not expressly accept this explanation, which is hardly surprising because it is totally unconvincing. It is inconsistent with Mr Zeaiter's evidence of what he said when the cheques were handed over. It is also inconsistent with the breakdown of the Kingwood figures that he gave Mr URJ KHAFAM DEVELOPMENTS PTY LIMITED v ZEAITER (Handley JA) 7 Khamis. It is an extraordinary coincidence that beggar's belief that 'a fair thing' in each case turns out to be a precise figure down to the last dollar which happened in each case to represent exactly 50% of what Mr Zeaiter said were the total profits. His explanation in cross-examination of the '10% builders" guarantee' which was shown as a deduction in the breakdown of the Kingswood figures is equally unconvincing.(266—7) Its credibility is not enhanced by considering the Department's progress certificates which indicate (480) that the maximum retention sum was $22,575 or 2.5% of the contract sum, the final contract price was $1,100,542 including extras of $40,548 and rise and fall. The defendant's explanation is also improbable for other reasons. Although Mr Zeaiter said in evidence that this was the arrangement, and that he had so asserted when first challenged by Mr Khamis, he did not give any evidence as to when, where and how that arrangement was originally made. It is true of course that Mr Zeaiter and his company did all, or practically all, the work involved in constructing these buildings for the Housing Corporation. The appellant provided no working capital, entered into no guarantees, and did not deal directly with suppliers or sub contractors. However the Court's assessment of the probabilities of the parties having agreed to an equal distribution of profits in these circumstances is irrelevant since such an entitlement was acknowledged by Mr Zeaiter when he handed over the cheques to Mr Khamis. The parties had also agreed that Mr Zeaiter should be paid a fee of $1,000 per week for doing the work, and he was not entitled to any further allowance for this. (See Partnership Act 1892 s 24 (VI).) Mr Zeaiter's other explanation for not having entered into a partnership with the appellant was that it was a $2 company. (111-2, 253) However on his own evidence on or before 19 August 1989 the Zeaiter company entered into an equal partnership with the appellant for the acquisition of Lot 1 Braddon Street, St Marys for development as an investment for both companies. (256) It is hardly necessary to go further but the appellant's case is also supported by the conduct of the parties at the time the Kingswood and Doonside land was transferred to the Housing Corporation. Neither transaction could proceed without the co-operation of the appellant which agreed to the Kingswood sale for a profit of only $4,000 at that stage, and to the nomination of the Housing Corporation in respect of the Doonside property for no immediate profit at all. Mr Khamis did not work on either building site, but according to Mr Zeaiter Mr Khamis was consulted about the negotiations with the Housing Corporation (239) and was at Mr Zeaiter's house 'every night' (253) seeing him about the documentation (109). I therefore have no difficulty in concluding that the respondents" explanations for the payments to the appellant, and for their verbal and documentary admissions about those payments, were utterly unconvincing. In my judgment the appellant proved the existence of an informal partnership with all three respondents evidenced by their course of dealing on the terms of the consensus acknowledged at the solicitor's office on 23 March 1989 and not repudiated until after the partnership had ceased to carry on business. The Zeaiter company's membership of the partnership is established by the course of dealing, particularly in relation to the Doonside property, the consensus acknowledged at the solicitor's office, and the draft agreement. (See Partnership Act ss 19, 24.) The appeal must therefore be allowed. UNREPORTED JUDGMENTS The Zeaiter company's cash books for 1990 and 1991 are in evidence (PX 318, 319) and it appears that the respondent's accounting records disclose what they claim were the profits derived from the building projects. This would appear to be a case where the convenient, and least expensive, course would be to refer the taking of the partnership accounts to an independent accountant acting as referee pursuant to SCR Pt 72. In any event the Equity Division should be asked to make directions pursuant to SCR Pt 49 r 4 as to the taking of the account including directions as to the extent to which the accounting records and accounts of the Zeaiter company should be treated as prima facie evidence with the appellant having leave to surcharge and falsify. The following orders should be made: dq) (2) (3) (4) (5) (6) (7) (8) Appeal allowed with costs. Judgment of the Equity Division set aside. In lieu thereof declare that a partnership existed between the appellant and the respondents for: (a) The purchase and sale of 61-63 Rodgers Street, Kingswood to the Housing Corporation; and (b) The taking of an option to purchase and the nomination of the Housing Corporation as the purchaser in respect of 17-21 Coghlan Street, Doonside (the properties) and the construction of home units on the properties for the Housing Corporation on terms that: (c) The partners would share profits and losses on the basis 50% to the appellant and 50% to the respondents; (d) The first respondent would be entitled to a payment of $1,000 for supervising the building works on the properties as a partnership expense payable prior to ascertaining the profits of the partnership; Proceedings remitted to the Equity Division for the making of appropriate orders and the giving of appropriate directions for determining the profits of the said partnership. The defendants to pay the plaintiff's costs of the proceedings in the Equity Division to date. Further costs and further consideration reserved for determination by the Equity Division. Exhibits PX 318 and PX 319 to be retained in Court subject to the further order of the Equity Division. The respondents to have a Certificate under the Suitors" Fund Act if qualified. Sheller JA. I agree with Handley JA. Abadee AJA. I agree with the reasons for judgment of Handley JA and the orders proposed by him. Orders accordingly. Counsel for the appellant: S D Robb QC/J T Svehla Solicitors for the appellant: Uther Webster and James Counsel for the respondent: A T McInnes QC/A L Hill URJ KHAFAM DEVELOPMENTS PTY LIMITED v ZEAITER (Abadee AJA) Solicitors for the respondent: Maclarens