MENDEL v BENJAMIN SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MASON P, SHELLER and STEIN JJA 18, 19 November 1997, 19 December 1997 [1997] NSWCA 200 Contracts - construction and interpretation - offer and acceptance - whether letter constitutes acceptance of offer - Costs - discretion - whether trial judge erred The primary issue on this appeal was whether a letter the solicitors for the first respondent (Benjamin) wrote to the solicitors for the appellants (Mender, K Mendel Pty Ltd and Delta Sportswear Pty Ltd) was an acceptance of an offer made by a previous letter from Mendel on behalf of the appellants to the first respondent, so as to give rise to a binding contract between the parties. The appellants contended that this was not an acceptance of the offer, but a counter-offer which they never accepted, and that, accordingly, there was no binding contract. Also in issue, assuming such a contract to have been established, were the costs order made by the trial Judge and, in the cross-appeal by Benjamin and the other cross-appellant, Chesdeed Pty Ltd, questions about a claim to indemnity for accounting services performed for K Mendel as trustee, and how the amount due to Benjamin under the contract should be calculated. Held: The trial Judge was correct in finding that the letter was an acceptance of the earlier offer giving rise to a binding contract between the parties. The principal matter of contest during the hearing was whether there was a contract or not. On this the appellants failed. The contest about the construction of the contract was secondary. The respondents' failure at first instance to persuade the trial Judge that their preferred construction was correct was not in the circumstances a reason for saying that her Honour erred in exercising her discretion when she ordered the appellants to pay the respondents' costs. Cross-appeal allowed to the extent of making an adjustment to the amount in Declaration 1(a) and O04. Quadling v Robinson (1976) 137 CLR 192 applied. Mason P I agree with Sheller JA. Sheller JA INTRODUCTION Primarily this appeal is about whether a letter Hardings, the solicitors for the first respondent, Peter Julius Benjamin, wrote on 17 January 1996 to Speed & Stracey, the solicitors for the appellants, Charles Mendel, K Mendel Pty Ltd (K Mendel) and Delta Sportswear Pty Ltd (Delta), was an acceptance of an offer made by letter of 13 July 1995 by Mr Mendel on behalf of the appellants to Mr Benjamin so as to give rise, as the trial Judge, Bennett AJ, found, to a binding contract between Mr Benjamin and the appellants. Also in issue in the appeal, assuming such a contract to have been established, are the costs order made by the trial Judge and, in the cross-appeal by Mr Benjamin and the other cross-appellant, Chesdeed Pty Ltd (Chesdeed), questions about a claim to indemnity for accounting services performed for K Mendel as trustee and how the amount due to Mr Benjamin under the contract should be calculated. 2 UNREPORTED JUDGMENTS FACTUAL BACKGROUND Bennett AJ carefully set out the facts in her judgment. For present purposes I can restate them briefly. From about 1960 until 22 December 1995 Mr Benjamin was employed by K Mendel and Delta in a financial and managerial capacity and was a director of both companies. The companies were manufacturers and distributors of clothing. From the mid-1960s Mr Mendel was the managing director of both companies. In the 1970s discussions between Mr Benjamin and Mr Mendel, (or perhaps with Mr Mendel's aunt or in her presence), led to an understanding that if Mr Benjamin stayed with the companies for fifteen years he would receive a payment equivalent to 5 percent of the value of the companies when he left them or retired. In 1983 or early 1984 discussions between" Mr Benjamin and Mr Mendel led to a further understanding to the effect that, if Mr Benjamin committed himself to staying with the companies until the age of sixty-five, he would receive upon retirement a sum equivalent to 10 percent of the net assets of the companies, excluding a house at Leura. This arrangement superseded the 1970s arrangement. In the 1960s Mr Benjamin became a member of an employee superannuation fund. In the 1970s his entitlements were carried over to a National Mutual Managed Fund and he became a member of that Fund. The companies contributed 7.5 percent of his annual salary on his behalf to the Fund. These contributions came to be referred to as "base contributions". Contributions were also made on his behalf to a National Mutual Simple Super Scheme. In early 1987 Mr Mendel wanted to examine an appropriate and tax effective means of funding the future payment to Mr Benjamin on his retirement of an amount equivalent to 10 percent of the net assets of the companies, if Mr Benjamin stayed until then. The companies' external accountant, Christopher Arms, suggested a strategy by which Delta made extra contributions into the superannuation fund of which Mr Benjamin was a member. In the presence of Mr Mendel and Mr Benjamin, Mr Arms explained: "A tax effective means of providing for the payments would be to contribute large amounts to a superannuation fund. These large amounts would then fund the payments to be made upon [Mr Benjamin's] retirement." Mr Benjamin and Mr Mendel agreed that the proposal was suitable. During the financial years ended 30 June 1988, 1989, 1990, 1991 and 1992 contributions, in addition to the base contributions, were made to a separate superannuation fund of which Mr Benjamin was a member, called the Delta Superannuation Fund. These contributions have come to be referred to as "excess contributions". Bennett AJ observed that there was no dispute that the excess contributions were made to the superannuation fund on account of Mr Benjamin's ultimate entitlement to 10 percent of the net value of the companies. In 1992 the Mendel Superannuation Fund (the Fund) was established. K Mendel was the trustee of the Fund. In mid-1992 Mr Benjamin became a member and in April 1993 his wife, Megan, became a member. In 1993 all his accrued superannuation entitlements in the other funds (the two National Mutual funds and the Delta Superannuation Fund) were transferred to the Fund. Excess contributions were paid into the Fund for the financial years ended 30 June 1992, 1993 and 1995. Base contributions were also made to the Fund in each of the years from 1992 to 1995. The 1992 Deed establishing the Fund was amended by a Deed made on 16 March 1995. URJ MENDEL v BENJAMIN (Sheller JA) 3 In 1994 Mr Mendel decided to close down the businesses operated by K Mendel and Delta. As a result, Mr Benjamin anticipated that he would cease employment with the companies in about the second half of 1995 before he reached 65 years of age in 2002. There followed correspondence between Mr Benjamin and Mr Mendel about Mr Benjamin's entitlements. Mr Benjamin claimed that inadequate provision had been made for him now that he was faced with early retirement. OFFER, REJECTION OF OFFER AND RENEWAL OF OFFER In the letter of 13 July 1995 Mr Mendel, on behalf of the appellants, made what the parties agreed constituted an offer to Mr Benjamin. The letter ran to eight pages and sixteen paragraphs. The offer was set out in paral3 and was as follows: "13. PROPOSAL I believe an appropriate proposal to adjust your position would be as follows: (a) Payment to you of your base superannuation entitlement of approximately $378,330 (subject to reconciliation by Chris Arms). (b) Payment to you of 10% of the net value of the two operating companies calculated in accordance with the annexed balance sheet prepared by Chris Arms. The balance sheet was prepared as at 31 March 1995 and the 10% amount comes to a figure of $543,990. These figures should be adjusted to 30 June 1995. (c) Payment to you of one year's redundancy payment of $82,772. (d) Forgiveness of $150,000 of your present loan from the company. (e) The transfer to you of the red Jaguar that you drive. (f) The transfer to you for the use by your family of one of the existing company vehicles that I will nominate. (g) Payment to you of your long service leave entitlements which I understand are approximately $30,445.00 (Megan's long service leave entitlement of approximately $4,219.00 should be paid to her separately). (h) The payment to you of any outstanding holiday pay due." On 24 July 1995 Mr Benjamin wrote to Mr Mendel rejecting the offer and made a counter-offer. After further correspondence, on 20 December 1995, Mr Mendel wrote to Mr Benjamin in terms which the parties agreed revived the offer of 13 July. At some time before 17 January 1996 statutory long service and annual holiday leave entitlements were paid. LETTER OF 17 JANUARY 1996 Since argument has been directed to several parts of the letter of 17 January 1996 from Hardings to Speed & Stracey, which Mr Benjamin claimed and her Honour found amounted to an acceptance of the offer giving rise to a binding contract, I must set out most of it as follows: "We refer to your client's letter to our client dated 20th December 1995 and the offer set out in the third last paragraph on p4 which, in effect, reopened the offer set out in paral3 of your clients letter dated 13th July 1995. We are instructed by our client to accept that offer. We suggest the following mechanics for settlement (using your clients numbering): A. Superannuation Fund:: (i) The present trustee, K Mendel Pty Ltd is to resign as trustee and a new trustee is to be nominated by Mr Benjamin to be appointed as trustee of the Fund. (ii) The assets of the Fund comprise the following: (a) Shares in the following listed public companies: 4 UNREPORTED JUDGMENTS [There followed a list of eighteen public companies with the number of shares held in each] (b) Interest bearing term deposits: [One was particularised] (c) Bank account: [One was particularised] (iii) The present trustee shall, without any unreasonable delay, do and cause to be done all things reasonably necessary to transfer to the new trustee all of the abovementioned assets. (iv) The present trustee, shall deliver to the new trustee all of the records and documents relating to the said Superannuation Fund. B. Net Value of two Operating Companies: Our client has a copy of the balance sheets of both companies for 30th June 1995 which he accepts, subject to an adjustment being made for the value of plant and equipment to reflect the actual value obtained at their auction which was held in late 1995. C. Agreed. D. Agreed. E. Agreed. F. Agreed. G. We believe this has already taken place. H. We believe this has already taken place. We suggest that settlement take place within twenty one (21) days of the date hereof at your office, at which time the following matters should be completed: 1. The resignation of K Mendel Pty Ltd as trustee of the Superannuation Fund. 2. The appointment of the new trustee and the transfer to it of the assets of the Fund. 3. Your client deliver two (2) bank cheques for payment of redundancy as follows: i. $13,321.00 in favour of Megan Benjamin. ii. $69,451.00 in favour of Peter Benjamin. 4. Executed Deeds of Release by all parties to be exchanged and a bank cheque for the total of (b) and (d) of the offer, in favour of Peter Benjamin, be handed over. 5. A duly executed form of Discharge of Mortgage over the property situated at 3 William Street, Double Bay be delivered in registrable form together with the relevant Certificate of Title. 6. Our client shall, at the time of settlement, deliver a bank cheque in favour of Delta Sportswear Pty Ltd in the sum of $50,000.00 to discharge the abovementioned mortgage. 7. Your client submit duly executed transfers of motor vehicle of the two vehicles mentioned in para(e) and para(f) of the offer. Please advise us urgently on our proposed procedure for settlement and also provide us with a draft Deed of Release for our consideration." The appellants contended that this was not an acceptance of the offer but a counter-offer which they never accepted and that, accordingly, there was no binding contract between the parties. FURTHER CORRESPONDENCE Further correspondence followed. The appellants retained a new solicitor, Joe Ryan, who wrote to Mr Benjamin's solicitors on 28 February 1996 as follows: URJ MENDEL v BENJAMIN (Sheller JA) 5 "We have received instructions from our client to prepare a Deed of Agreement with respect to the offer made to your client which was accepted on the 17 January 1996."; and, a little later, "As the offer was only accepted in January 1996 our client can hardly be accused of delay". Mr Ryan's letter of 5 March 1996 to Mr Benjamin's solicitors went back over old ground, perhaps to explain and justify any delay but reiterated: "We have been instructed as we have advised you, to settle this matter substantially on the terms outlined in the July 1995 offer made by our client" and "This has not changed our client's view nor his instructions for us that we are to proceed to settlement" On 5 March 1996 Hardings wrote to Mr Ryan stating: "On the 19th February you advised the writer that you intended to prepare a Deed of Release for our client's consideration during the week-end of 24th and 25th February." and "The offer has been accepted. Our respective clients are bound by that agreement... all that is required is for the terms of the agreement to be fulfilled. This is all our client asks." A further letter of 7 March 1996 suggested a change of position by Mr Ryan though a timetable for settlement was proposed. Again on 13 March 1996 Mr Ryan wrote ".... we advise that as we have indicated through all our communications our client has instructed us to proceed towards completion." With a letter of 15 March 1996 Mr Ryan enclosed a draft copy of a deed and noted eleven points in relation thereto. This provoked the response of 18 March 1996 from Hardings that the Deed of Settlement submitted did not reflect the agreement struck between the parties. Demands were made that certain things occur including the resignation of K Mendel as trustee of the superannuation fund, the transfer of the assets of the Fund to Chesdeed as the new trustee and the payment to Mr Benjamin of the sum of $543,990 subject to adjustment down to $514,154. On 20 March 1996 Mr Ryan wrote back saying that although his client remained willing to settle the matter on the basis set out in the deed, "no binding settlement agreement exists between the parties." PROCEEDINGS IN THE EQUITY DIVISION On 27 March 1996 Mr Benjamin began these proceedings by issuing a summons in the Equity Division against the appellants. Chesdeed was later added as a plaintiff. The relief sought was a declaration that an agreement had been made between Mr Benjamin and the appellants on or about 17 January 1996, inter alia, that Mr Mendel would pay to Mr Benjamin the sum of $514,152 being 10 percent of the net value of each of Delta and K Mendel as at 30 June 1995. The claim did not suggest that any contribution to this payment should be made from the Fund, but an order was sought that K Mendel do and cause to be done all things necessary to transfer to Chesdeed all of the assets of the Fund. Some time later the respondents' solicitors filed a statement of issues which raised the question whether Mr Mendel was entitled to deduct, from the sum to be paid to Mr Benjamin under paral3(b) of the offer, an amount equal to contributions made by K Mendel to the Fund over and above the amount of the base contributions or alternatively entitled to cause to be deducted, from the sum to be paid under para13(b), an amount equal to the gross value of the Fund as at 31 December 1995, less the amount of the base contributions made by K Mendel. 6 UNREPORTED JUDGMENTS THE TEXTUAL CONTEXT OF THE OFFER In paral1.2 "Superannuation" of Mr Mendel's letter of offer of 13 July 1995 appeared the following sub-paragraphs: "(iii) The old National Mutual Fund was rolled over into the Delta Super Fund and Delta continued to make contributions to that superannuation fund from about 1988 to 1992. The contributions made by Delta were a continuation of the normal contributions made to the old National Mutual Fund relating to your employment, plus further contributions over and above that amount to build up enough money to be used as part of the funds necessary to pay to you at the end of your working life the amount equal to 10% of the net value of the two Delta operating companies. That strategy was agreed with you in 1987. (iv) In 1992 a new superannuation fund known as the Mendel Super Fund was formed to be used for you, as a repository, to roll into that fund your balance from the Delta Super Fund. Contributions then continued to the Mendel Super Fund on this same basis as the previous Deltas fund. Part of the contributions were in relation to your salary and employment and the other part of the contributions (the substantial part) was to build up the money to fund the payment to you of your entitlement in the net value of the two Delta operating companies. (v) These surplus contributions to be allocated to funding the payout to you for your entitlement, commenced in 1988, not 1991 as you say on p4 of your letter. (vi) The amount presently in the Mendel Super Fund, as at 31 March 1995, was approximately $571,000. Of that amount the contributions relative to your salary and employment accumulating from the National Mutual Fund and the Delta Super Fund and the Mendel Super Fund totals approximately $378,330. (Chris Arms has yet to finally reconcile that figure). You say that that amount of $378,330 is not adequate for an executive of your stature with duties and responsibilities similar to yours...... (vii) The base amount of approximately $378,330 made up of Delta contributions over the years of about 7.5% of your salary is representative of superannuation contributions made by employers for executives with 35 years of service and a final average salary of about $82,772 (averaged over the last three years) in a position with duty and responsibility similar to yours. What you have not done is make contributions yourself over the year by way of salary sacrifice equivalent to about half the contributions that Delta has made. If you had done that, which is the usual executive practice, then you would now have a fund which would have in it a base amount which would be on a par with a similar executive expectation. (viii) The surplus amount in your super fund of approximately $189,183 is the accumulation of contributions made by Delta since 1988, made to the fund on the clear understanding that it went into the fund for the purposes of being applied to the payment to satisfy your entitlement in the net value of the Delta operating companies on retirement. These figures were figures given to me by Chris Arms and applicable as at 31 March 1995. Obviously any changes to those figures since that date, once reconciled will be made." REASONS FOR JUDGMENT OF 5 MARCH 1997 On 5 March 1997 Bennett AJ delivered reasons for judgment. Her Honour observed that there was no dispute that K Mendel was properly removed as a trustee of the Fund, and that Chesdeed had been properly appointed as trustee and the assets of the Fund delivered to it. There was no outstanding issue in relation to the assets of the Fund apart from the question of whether K Mendel should be URJ MENDEL v BENJAMIN (Sheller JA) 7 reimbursed for accounting fees recorded in a journal entry made on 31 October 1996 in an amount of $6,800. Mr Arms, through his company, Arrowtown Pty Ltd, had done accounting work for and in respect of the Fund. Delta was billed for all work undertaken by Mr Arms as accountant to the Delta group. There was no entry of any fees charged to the trustee in relation to auditing or accountancy work carried out before the book entry in October 1996. After the proceedings began, Mr Arms prepared an invoice for accounting work done for the Fund. Her Honour concluded that the evidence of the surrounding circumstances was overwhelming in establishing that the parties clearly understood that the Fund contained payments of excess contributions which were to be used to pay the whole (if sufficient) or part (if not sufficient) of the 10 percent net value of the company. Thus the excess contributions in the Fund were to their extent a source of payment of the moneys due under paral3(b). "This was not the presumed intention of the parties at the tune of entering into the contract but the actual intention." Her Honour continued: "When the whole of the letter is read, the meaning is plain and unambiguous. There is a direct link between para13 of the letter and what precedes it. Paral3(a) is referable to paral 1.2; paral13(b) is referable to paral1.3; paral3(c) is referable to paral 1.4 and paral 3(d) is referable to paral1.5. Payment is to come in the first instance out of the Fund. If this is insufficient, the rest of the monies will be paid by Mr Mendel. In my opinion, a reasonable person in Mr Benjamin's position, on receipt of the offer, would have regarded para13(b) as referring to the payment of that amount as being satisfied in the first instance out of the excess contributions that had been made to the Fund." This brought Bennett AJ to the question of whether, for the purpose of assessing that part of the Fund to be used as a set off for the payment of the amount calculated in accordance with paral3(b), the accretion to the Fund by income earned from base and excess contributions was also set off against the total. Her Honour said: "T do not accept that the parties applied their minds to these monies at all. The income was earned by the efforts of Mr Benjamin, on the advice of Mr Arms. Any loss was at his risk There is no reason why Mr Mendel should have the benefit of those efforts or, indeed, the benefit of income earned from the base contributions. Reference in the evidence to a 'build up' of the excess contributions refers, in my opinion, to the addition of those contributions themselves and not to the income, if any, earned from investment of those monies. They did not, it seems to me, form a part of the proposal. Accordingly, they cannot form part of the set off." After referring to some of the authorities on the necessary coincidence of offer and acceptance and the various matters in the letter of 17 January 1996 claimed by the appellants to suggest a counter-offer rather than an acceptance, which the appellants relied upon in this appeal and to which I will return, her Honour said: "Tn my view, there was a correspondence of offer and acceptance and there is a binding agreement between Mr Benjamin and Mr Mendel in the terms of the proposal, as construed above (Quadling v Robinson (1976) 137 CLR 192 at 201). As was pointed out by McHugh JA (as he then was) in Prudential Assurance Co Ltd v Health Minders Pty Ltd (1987) 9 NSWLR 673 at 684: 'A distinction must be drawn between the case of a person purporting to exercise an option while attempting to vary its terms and the case of a person intending to exercise an option in accordance with its terms but who, in describing the terms of the option, mis-states them. In the first case the purported 8 UNREPORTED JUDGMENTS exercise is ineffective. In the second case the purported exercise will be valid unless the grantee purports to exercise 'the option' as misdescribed: (Quadling v Robinson at 201).' In my opinion, Mr Benjamin first accepted the offer and then mis-stated the resulting amount of the bank cheque. The purported acceptance expressed clearly and unequivocally that acceptance was what was intended (Ballas v Theophilos (No 2) (1957) 98 CLR 366). Propounding a wrong interpretation of the agreement in good faith is not a repudiation of the agreement because it does not evince an intention not to be bound (Trawl v Effem (1992) 27 NSWLR 326 at 357). Mr Benjamin clearly intended to be bound by his acceptance." On the cross-claim her Honour held that K Mendel, as trustee of the Fund, was enticed to recover the amount of $6,800 paid to the accountant. Her Honour stood the matter over for the parties to bring in short minutes. REASONS FOR JUDGMENT OF 9 MAY 1997 On 9 May 1997 Bennett AJ gave further reasons for judgment which dealt with the appellants' defence, based on estoppel by convention. The appellants submitted that if the offer properly construed meant that the set off extended to the excess contributions but not to the capital and income accretions thereon, it would be unconscionable for Mr Benjamin to rely upon such construction. Her Honour reiterated that apparently no thought was given to any accretion or loss to the Fund when the Fund was set up, or to where such profit or loss would fall. Her Honour said: "While the letter of offer makes no specific reference to accretions to the Fund, counsel point to the fact that the surplus amount in the Fund, after deduction of the base entitlement, was referred to as being applied to the payment to satisfy Mr Benjamin's 10% entitlement in the net value of the Companies. This amount included the excess contributions and the accretions to the Fund. In evidence, Mr Benjamin confirmed that, when he read the letter of offer of 13 July 1995, he understood that the whole of the excess in the Fund over and above the base contributions was to be used as a set-off against his 10% entitlement. This is consistent with the finding that the parties did not apply their minds to the accretion monies as a separate category. The terms of the offer did not specifically refer to the income earned from investment of the monies paid into the Fund. Mr Benjamin was aware, however, that it was Mr Mendel's belief and understanding of the offer that the whole of the excess monies in the Fund, over and above the base contributions, were to constitute the set-off, whether or not the accretion monies strictly formed a part of the proposal and he never sought to disabuse Mr Mendel of that belief. His own realisation of an alternative interpretation occurred 'several weeks after' acceptance. The parties to the contract both interpreted the offer the same way. It was the basis of the original offer, of the reopening of the offer and of the acceptance. There was silence in the subsequence correspondence and the terms of the acceptance as to any other interpretation. That was the conventional basis of the contract, the underlying assumption. Neither party can resile from that assumption; it would be unconscionable for either party to do so (Amalgamated Investment and Property Co Ltd (In Liquidation) v Texas Commerce International Bank Ltd [1982] 1 QB 84; Waltons Stores (Interstate) Ltd v Maher (1987-1988) 164 CLR 387; The Commonwealth of Australia v Verwayen (1990) 170 CLR 394). In the case of Mr Benjamin, it would, in my view, be URJ MENDEL v BENJAMIN (Sheller JA) 9 unconscionable for Mr Benjamin now to resile from that interpretation of the offer, the interpretation which he himself adopted, the interpretation which, to his knowledge, Mr Mendel adopted and that which applied in the minds of both parties at the time of acceptance. Accordingly, the set-off to be applied against the 10% entitlement is the whole of the excess in the Fund over and above the agreed base entitlement of $378,330." Her Honour then went on to deal with the costs of the hearing and, for reasons she gave, ordered that the costs should follow the event and that the appellants should pay Mr Benjamin's costs. Her Honour's orders included a declaration that: "1. On 17 January 1996 an agreement was made between [Mr Benjamin] and the [Appellants] pursuant to which: (a) [Mr Mendel] agreed to pay to [Mr Benjamin] the sum of $148,078.00;" and orders that: "4. [Mr Mendel] pay to [Mr Benjamin] the sum of $148,078.00 together with interest thereon pursuant to s94 of the Supreme Court Act 1970 as amended. 8. [Chesdeed] pay to [K Mendel] the nun of $6,800.00. 10. The [Appellants] pay the costs of the [Respondents'] claim." The appellants appealed from part of her Honour's decision and orders principally on the ground that there was no binding agreement between the appellants and Mr Benjamin, but also against the order for costs. The respondents cross-appealed principally against the finding of conventional estoppel but also against the order to indemnify K Mendel. The appellants filed a notice of contention to the effect that if there was a binding agreement but no conventional estoppel her Honour's decision should be affirmed on the ground that the excess in the Fund above $378,330 should be applied to the satisfaction of the appellants' obligation under cl13(b) of the letter of offer. THE FUND Before turning to the issues on appeal, I should say something about the amount and source of the money held in the Fund for the benefit of Mr Benjamin According to the trial Judge, the parties did not disagree that at 30 June 1995 the value of the Fund assets was $656,959. Mr Benjamin's base superannuation entitlement, that is to say the entitlement derived from the base contributions, was $378,330. The difference of $278,629 consisted of $264,501 which her Honour described as "the total of the excess contributions in the Fund" and $14,128 which her Honour described as "the total accretion at 30 June 1995." Bennett AJ said that the parties did not disagree that the appropriately adjusted 10 percent of the net value of the companies was $514,154. Ultimately, the parties agreed that the amount in the Fund additional to the base superannuation entitlement should to some extent be used to meet this payment with the balance being paid by the appellants. The appellants said that it should be used to its full extent, Mr Benjamin that it should be used only to the extent it represented the actual contributions made and that any accretions, whether of an income or capital nature, should remain in the Fund for his benefit. As at 31 December 1995 the value of the Fund assets was $744,406 and the total accretions $101,575. After taking out the base superannuation entitlement of $378,330, a surplus of $366,076 remained which, when deducted from $514,154, 10 UNREPORTED JUDGMENTS produced the amount of $148,078, which Bennett AJ ordered Mr Mendel to pay Mr Benjamin together with interest pursuant to s94 of the Supreme Court Act 1970. This set off or deduction of $366,076 wrongly, according to Mr Benjamin, included the accretions. The respondents tendered a calculation based on a corrected total of excess contributions without accretions. The total was $264,501. The correction included a deduction of $49,097 tax paid by the Fund on the contributions. If the amount of the tax paid was, as the appellants submitted it should be, added back, the excess contributions, without accretions, was increased by $49,097 to $313,598. This sum deducted from the $514,154 produced an amount of $201,556 to be paid by Mr Mendel. I observe without comment that in some calculations the amounts of $263,490 and $312,587 were used instead of $264,501 and $313,598 but nothing turned on this. ACCEPTANCE OF THE OFFER Standing alone, the statement in Hardings' letter of 17 January 1996 "We are instructed by our client to accept that offer", referring back to the offer set out in paral3 "of your client's letter dated 13 July 1995" mentioned in the first paragraph of the letter, is clear. The appellants' argument on appeal was directed to what followed. But the rest of the material using the numbering in the offer was introduced by the words, "We suggest the following mechanics for settlement", hardly the language of rejection of an offer combined with a counter-offer. The letter continued: "We suggest that settlement take place within twenty-one (21) days of the date hereof at your office, at which time the following matters should be completed". After the seven numbered matters, upon which the appellants in part relied, the letter concluded "Please advise us urgently on our proposed procedure for settlement and also provide us with a draft Deed of Release for our consideration." It is clear from the immediate correspondence that followed that the appellants and their solicitor regarded the letter of 17 January 1996 as an acceptance of the offer. In Quadling v Robinson, a case about the purported exercise of an option in a lease, Gibbs J said at 201: "However, it is not always easy to determine whether the purported exercise of an option should be understood as attempting to vary the terms of the option or as intending to accept its terms without modification, notwithstanding that they may have been misdescribed, or notwithstanding that the grantee of the option may have indicated that he intends to perform the contract in a manner for which the terms of the option do not provide. Thus although a notice misstates the terms of the option which it purports to exercise, it may nevertheless amount to an unqualified and unconditional exercise of the option: see Carter v Hyde (1923) 33 CLR 115 at 121-2, 126, 133. On the other hand, if the grantee of an option set outs his own erroneous understanding of the option, and then purports to exercise the option as so understood, there will (speaking generally) be no effective exercise of the option: see Cavallari v Premier Refrigeration Co Pty Ltd (1952) 85 CLR 20 at 26-7. It must of course depend upon the proper construction of the document by which the grantee purports to exercise an option whether it amounts to an absolute and unqualified acceptance of the rights and liabilities conditionally created by the option." URJ MENDEL v BENJAMIN (Sheller JA) 11 The appellants contended that Hardings' letter of 17 January 1996 contained several indications either that Mr Benjamin purported to accept the offer only on the basis of an erroneous understanding as to its meaning or alternatively, was prepared to make a contract only on terms different from those Mr Mendel had proposed in the letter of 13 July 1995. First the appellants submitted that the acceptance required transfer of the assets of the Fund and payment of $543,990 as adjusted to the sent 10 percent of the value of the companies. Bennett AJ found, and Mr Benjamin accepted, that the offer provided that the excess payments contained in the superannuation and were to some extent to be used to fund this amount with only the shortfall to be paid to Mr Benjamin. Despite the fact that the proposal in paral3(b) did not mention that part of the payment would come from the Fund, the parties agreed that in the context of the letter as a whole the sub-paragraph must be so read. That was the proper construction of the offer and the expressed acceptance of that offer must be treated as an acceptance of the offer properly construed, although the offeree in accepting might have thought it had a different meaning. The appellants' point was, however, that Mr Benjamin stipulated that K Mendel as the trustee of the Fund should transfer to a new trustee nominated by him all of the assets of the Fund. For reasons which I will give when I come to deal with the cross-appeal, in my opinion, properly understood Mr Mendel's proposal was that the trustee of the Fund would pay to Mr Benjamin his base superannuation entitlement said to approximate $378,330, and the balance of the Fund, which balance should be set off against the adjusted amount payable under paral3(b). Mr Mendel would pay Mr Benjamin any shortfall. In effect, Mr Benjamin would receive the whole of the a amount held for his benefit in the Fund. The letter of 17 January 1996 suggested the transfer of the assets to the new trustee as one of the "mechanics for settlement". In the light of what I have said, it seen a reasonable suggestion. But even if it were not, it is only a suggestion and does not derogate from the express acceptance of the offer. Paral3 (b) of the proposal referred to 10 percent of the net value of the two companies calculated in accordance with an annexed balance sheet prepared as at 31 March 1995 and said that these figures should be adjusted to 30 June 1995. In reference to this paragraph, Hardings responded that their client had a copy of the balance sheets of both companies for 30 June 1995 which he accepted subject to an adjustment being made for the value of plant and equipment to reflect the actual value obtained at their auction which was held in late 1995. The point was that whereas, it was said, Mr Mendel proposed that the net value of the operating companies be calculated by reference to the book values in the balance sheet, Mr Benjamin proposed that the actual sale value be used. The offer of 13 July 1995 referred to an existing balance sheet as at 31 March 1995 and "a figure" derived from this balance sheet and contemplated an adjustment to 30 June 1995. No doubt, properly construed, this meant an adjustment based on the balance sheet as at 30 June 1995. The respondents, while expressly accepting the balance sheets for 30 June 1995, suggested a different method for valuing plant and equipment. In my opinion, this suggestion does not derogate from the express acceptance of the offer. In their letter of 17 January 1996, Hardings suggested a time and place for settlement "at which time the following matters should be completed". These matters included the exchange of executed deeds of release by all parties the handing over of a bank cheque "for the total of (b) and (d) of the offer" in favour 12 UNREPORTED JUDGMENTS of Mr Benjamin. The terms of paral3(d), forgiveness of Mr Benjamin's loan from the company, made nonsense of the reference to (d) which can be ignored. The appellants argued that Hardings' letter introduced the requirement for releases, something beyond the terms of the offer. In the first place, in its context I do not think that Hardings were doing more than making a sensible suggestion. In the second, as the letter of offer made plain, the appellants' offer amounted to a compromise of what each side claimed was their or his entitlement and implicitly involved releases by either side even if these were not expressed in writing. The appellants submitted that, outside and separate from the offer, Mr Mendel had, in his letter of 20 December 1995 which revived the offer, stated that he found comments made by Mr Benjamin and his solicitors acting on his instructions regarding the use of company funds offensive and potentially defamatory and that he reserved his rights in relation to these comments. The appellants contended that the "requirement" for a deed of release was an attempt to obtain from Mr Mendel a release of these rights, something quite outside the offer. However, the letter from Hardings of 17 January 1996 said nothing about the content of the deeds of release. In my opinion, what was suggested was a deed of release which did no more than cover those matters dealt with by the appellants' offer. Finally, the appellants relied upon the requirement that a bank cheque for the total of (b) be handed over to support the contention that Mr Benjamin was requiring payment of the amount referred to in paral3(b) as adjusted without any set off from the Fund. There are two different ways in which para13(b) might be said to work where the excess in the Fund above the amount of the base superannuation enticement is less than the amount payable under para13 (b). One is that Mr Mendel should pay the whole amount but retain money in the Fund above Mr Benjamin's base superannuation entitlement. The other is that Mr Mendel should pay 10 percent of the value of the companies less the amount in the Fund above the base superannuation entitlement. It was consistent with either approach to suggest that Mr Mendel hand over a bank cheque "for the total of (b)...... of the offer", that is to say, the amount payable by Mr Mendel whichever way it was calculated. I agree with Bennett AJ that the letter of 17 January 1996 was an acceptance of the offer of 13 July 1995 giving rise to a binding contract between the appellants and Mr Benjamin. This ground of appeal fails. COSTS Bennett AJ ordered the appellants to pay the respondent's costs of the proceedings. The appellants submitted that her Honour erred in the exercise of her discretion and should have made an order that took account of the fact that for some period after beginning the proceedings the respondents contended unsuccessfully that under the contract no part of the contributions to the Fund should be set off against the amount payable under para13(b) of the offer. The respondents pointed out that at all times the appellants' ease was that there was no contract. Furthermore, from the time the respondents filed the statement of issues it was plain that they put the alternative construction of the contract which ultimately found favour with the trial Judge. The principal matter of contest during the hearing and on this appeal was whether there was a contract or not. On this the appellants failed at first instance and fail on the appeal. The contest about the construction of the contract was secondary. The respondents' failure at first instance to persuade the trial Judge URJ MENDEL v BENJAMIN (Sheller JA) 13 that their preferred construction was correct was not in the circumstances a reason for saying that her Honour erred in exercising her discretion when she ordered the appellants to pay the respondents' costs. This ground of appeal fails. CROSS-APPEAL Accretions The respondents contended that in setting off money in the Fund against the amount payable pursuant to paral3(b), the appellants were not entitled to have the accretions which amounted on 30 June 1995 to $14,128 and on 31 December 1995 to $101,575 taken into account. Bennett AJ in her reasons for judgment of 5 March 1997 upheld this contention. Mr Jackson QC, who appeared for the respondents, relied upon Mr Benjamin's evidence that he believed that only excess contributions themselves and not any accretions were to be set off against the payment to be made to him under the contract. However, this evidence, while relevant to the estoppel the appellants succeeded on, was not relevant to what the contract meant. Mr Jackson referred to paral 1.2(xiii) of Mr Mendel's letter of 13 July 1995 the statement therein that the surplus amount in the fund of "approximately $189,183" was the accumulation of contributions made by Delta since 1988. He suggested that this amount was the accumulation of actual excess contributions made by Delta and did not include any accretion. This contention was based on a comparison of the difference between what, in paral1.2(xi), was said to be the amount presently in the Mendel Super Fund, $571,000, and the base entitlement of $378,330. The difference was $192,670 and was said to demonstrate that $189,183 did not include accretions. However, the three, amounts were described in the letter as approximate. In my opinion, the difference of approximately $3,500 is more likely explained by the acknowledged imprecision in the calculations than by a decision to exclude accretions from the calculation of any set off for excess contributions. This conclusion can be even more confidently reached when it is remembered that the parties agreed that as at 30 June 1995 the total accretion was $14,128. It is not clear whether the amounts of the accretions, to which Bennett AJ referred, were accretions both on base and excess contributions, over what period they accrued or whether they included capital accretions. Mr Macfarlan QC, who appeared for the appellants, pointed out with force that the base contributions alone over Mr Benjamin's thirty-five years of service at 7.5 percent of his salary, which at its maximum during the three years preceding 13 July 1995 was less than $83,000, would not have produced much more than half of the amount of $378,330. As one might expect from the transfer of benefits on more than one occasion from one fund to another this would include income accretions and probably capital accretions. In her reasons for judgment of 9 May 1997 Bennett AJ concluded that the respondents were estopped from relying upon the contention that accretions were not part of the set off of excess contributions. As her Honour pointed out, para13(b) makes no reference to contributions to the Fund being offset against the payment proposed in the paragraph The parties accepted that by implication in the context of the whole letter the excess contributions must, to some extent, be taken into account. Those parts of paral1.2, which I have set out, stated, in Mr Mendel's language, the reasons for making the excess contributions, namely "to build up enough money to be used as part of the funds necessary to pay [to Mr Benjamin] at the end of [his] working life the amount equal to 10 percent of the 14 UNREPORTED JUDGMENTS net value of the two Delta operating companies." An intention to make excess contributions to build up money to fund an expected payment in the future is inconsistent with the proposition that the parties intended that only the actual contributions themselves shorn of accretions, were to be taken into account for this purpose or, in other words, that the parties intended to exclude the natural product of the process from furthering its object. Bennett AJ stressed that the income was earned by the efforts of Mr Benjamin on the advice of Mr Arms and that any loss was at his risk. She was of opinion that there was no reason why Mr Mendel should have the benefit of those efforts or, indeed, the benefit of income earned from the base contributions. I agree that the base contributions were made only for the purpose of establishing a superannuation fund for the benefit of Mr Benjamin. The excess contributions were not made for his benefit in that sense but, in the language of Mr Arms which I have quoted, to achieve a tax effective means to fund the payments that Mr Mendel had agreed to make to Mr Benjamin on his retirement. While Mr Benjamin may have been responsible for investing the contributions, he could have only done so on behalf of the trustee, K Mendel, which was responsible for ensuring that proper investments were made of trust money. I see no reason why any accretions to that fund should not be part of the amount intended to be available to make the payment to Mr Benjamin. To the extent to which the Fund was depleted by unsuccessful investment, there was less available for that purpose and a greater balance to be paid by Mr Mendel. Undoubtedly, as the arrangement was originally structured, if there was a surplus above the amount to be paid to Mr Benjamin that was held for his benefit under the superannuation trust. Accordingly, in my opinion, the accretions on the excess contributions should be set off against the amount payable under para13(b). Accretions on the base entitlement Any accretions on the base contributions fall into a different category. It was never suggested that any part of the base contributions or accretions on them should be used to build up the 10 percent of value ultimately payable. Those contributions were paid to the various funds to be applied to provide a superannuation benefit. There is no reason to suppose that they were intended to be or were applied for any other purpose. Mr Macfarlan argued that the acceptance of the offer contained in the letter of 13 July 1995 crystallised the base amount that was to be taken into account as part of the settlement at $378,330. However, it appears from paral 1.2(vi) that that amount was as at 31 March 1995. The proposal in cl13(a) was payment of "your base superannuation entitlement of approximately $378,330 (subject to reconciliation by Chris Arms)." I read this as a reference to the base superannuation entitlement, which, as at 31 March 1995, was said to total approximately $378,330. Any accretions thereto should be added to the amount of that payment and not taken into account as a set off against the payment provided for under cl13(b). This view, in my opinion, accords with the language of the document and with commonsense. Tax paid on contributions The appellants sought also to have brought in and treated as an offset, against the amount payable under para13(b), $49,097 representing tax paid in respect of superannuation contributions in 1994 and 1995. Whatever may have been the URJ MENDEL v BENJAMIN (Sheller JA) 15 historical intention, and, in my opinion it was that Mr Benjamin receive 10 percent of the net value of the two Delta operating companies upon retirement, the agreement was that Mr Benjamin be paid $543,990 adjusted to 30 June 1995. That was the amount that Mr Benjamin was to receive whether it was sourced from the excess contributions to the Fund or by the appellants. To the extent that payments had, from time to time, been made from the Fund for tax and, possibly, other purposes, the amount of such payments was not available to make the agreed payment and accordingly could not be set off against it. In my opinion, the agreement required that the amount be paid without regard to the tax of $49,097. Estoppel My conclusions make it unnecessary to consider the question of conventional estoppel except to say that the matters relied upon by Bennett AJ to support her finding of estoppel, do not, it seems to me, support any estoppel in respect of the base contribution fund. There is nothing to support the conclusion, either expressed or otherwise, that it was the intention that the base contribution fund or any accretion thereon should be applied as a setoff against the amount payable under paral3(d). Indemnity for the accounting services There remains for consideration her Honour's order that the second respondent, Chesdeed, pay to the second appellant, K Mendel, the sum of $6,800 on account of money paid to Mr Arms for accounting services to the trust over a period of some years. I am quite satisfied that her Honour was entitled to conclude that K Mendel, having paid this amount for services rendered to the trust, was entitled to be indemnified out of the Fund under para25 of the amended Deed dated 16 March 1995. The respondents submitted that Mr Arms had acted as accountant for the Delta group at relevant times and as part of his functions performed whatever accounting work was necessary in the administration of the Fund. For this work he rendered accounts to Delta. K Mendel was never charged for such work. In October 1996, after the proceedings had begun, Mr Arms made a journal entry in the records of K Mendel showing the amount of $6,800 debited to K Mendel and credited to Delta. In evidence Mr Arms admitted that the claim for $6,800 was made at Mr Mendel's instigation because the proceedings had begun. The submission was that the claim was contrived for the purposes of the case and not genuine. There is no dispute that the work was done for the Fund by Mr Arms. The account is not said to be excessive. There is no suggestion that Delta agreed to have the work done for K Mendel at no cost beyond the assertion that previously no charge had been made for it. In all the circumstances, I would not disturb her Honour's conclusion. CONCLUSION I would dismiss the appeal. I would allow the cross-appeal to the extent of making an adjustment to the amount of $148,078 in Declaration 1(a) and 04 so that accretions on the base contributions are not set off against the amount to be paid to Mr Benjamin. The only practical means of dissecting the accretions on the base contributions and the excess contributions is to apply to the total of the accretions the proportion which the base superannuation entitlement and the excess contributions bear to the total of those two sums ($642,831). This operates in money terms as follows: 16 UNREPORTED JUDGMENTS (a) Amount of accretions attributable to base superannuation entitlement = $101,575 x $378,330 was en ene nn ene nn ene = $59,781 $642,831 (b) Amount of accretions attributable to excess contributions = $101,575 x $264,501 wana enna nanan nnn ne = $41,794 $642,831 In the result, there is to be substituted in Declaration 1(a) and O4 the amount of $207,859, that is to say $148,078 plus $59,781. Otherwise I would dismiss the cross-appeal. In my opinion, the appeal should be dismissed with costs. Since the respondents succeeded only in one part of their cross-appeal they should have one-third of their costs of the cross-appeal. ORDERS I propose the following orders: 1. Appeal dismissed with costs; 2. Cross-appeal allowed in part; 3. Set aside declaration 1(a) and O4 and in lieu thereof declare and order as follows: 1. (a) The first defendant agreed to pay to the first plaintiff the sum of $207,859; 4. The first defendant pay to the first plaintiff the sum of $207,859 together with interest thereon pursuant to s94 of the Supreme Court Act 1970 as amended. 4. Appellants to pay one-third of respondents' costs of the cross appeal. Stein JA I agree with the reasons and orders proposed by Sheller JA. 1. Appeal dismissed with costs; 2. Cross-appeal allowed in part; 3. Set aside declaration 1(a) and O4 and in lieu thereof declare and order as follows: 1. (a) The first defendant agreed to pay to the first plaintiff the sum of $207,859; 4. The first defendant pay to the first plaintiff the sum of $207,859 together with interest thereon pursuant to s94 of the Supreme Court Act 1970 as amended. 4. Appellants to pay one-third of respondents' costs of the cross appeal. Counsel for the appellants: R B C Macfarlan QC/A Leopold Solicitors for the appellants: Hardings Counsel for the respondent: D F Jackson QC/J Van Aalst/M K Condon Solicitors for the respondent: Allen Allen & Hemsley