New South Wales Supreme Court CITATION : Narui Gold Coast Pty Ltd v Charles Harrison Pty Ltd & Ors [2002] NSWSC 1090 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 4369/01 HEARING DATE(S) : 7 November 2002 JUDGMENT DATE : 7 November 2002 Narui Gold Coast Pty Ltd (Plaintiff) Charles Harrison Pty Ltd (First Defendant) Charles Harrison & Co Pty Ltd (Second Defendant) John Charles Harrison (Third Defendant) PARTIES : Charles Harrison Pty Ltd (First Cross Claimant) Charles Harrison & Co Pty Ltd (Second Cross Claimant) Narui Gold Coast Pty Ltd (Cross Defendant) Narui Gold Coast Pty Limited (Cross Claimant to Second Cross Claim) Barr Project Management Pty Limited (First Cross Defendant to Second Cross Claim) Timothy James Barr (Second Cross Defendant to Second Cross Claim) JUDGMENT OF : Campbell J LOWER COURT Supreme Court (Master) JURISDICTION : LOWER COURT 4369/01 FILE NUMBER(S) : LOWER COURT Acting Master Berecry JUDICIAL OFFICER : COUNSEL : M Einfeld QC, R Dubler (P) In person (D3) SOLICITORS : Jackson Smith (P) In person (D3) CATCHWORDS : EQUITY - general principles and maxims of equity - a person who comes to equity must have clean hands - need for "an immediate and necessary relation to the equity sued for" - application where equity sued for is to avoid a contract because of mistake - PROCEDURE - Supreme Court procedure - pleading - defence of estoppel - need for pleading to state with particularity facts showing why the estoppel arises - whether appropriate to grant leave to re-plead CASES CITED : Dering v Earl of Winchelsea (1787) Cox 318; 29 ER 1184 Tutt v Doyle (1997) 52 NSWLR 10 DECISION : See paragraph 38 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST CAMPBELL J THURSDAY 7 NOVEMBER 2002 4369/01 NARUI GOLD COAST PTY LIMITED v CHARLES HARRISON PTY LIMITED AND ORS JUDGMENT – (Ex tempore) Appeal from decision of Acting Master Berecry of 23 August 2002. 1 HIS HONOUR: There is before me today a notice of appeal from a decision of Acting Master Berecry given on 23 August 2002. The decision of the Master was a decision which related to whether certain paragraphs in a defence should be struck out. Rejection of Affidavit Showing Pleading had Factual Substance 2 There was tendered before the Master an affidavit which, in broad terms, sought to show that there was factual substance to those paragraphs of the defence. The Master rejected that tender. In the course of so doing, he said, at page 10 of the transcript: "This application is really a legal argument or debate over a technical aspect of the pleadings and that is whether or not the pleadings should stand. The document either complies with the pleadings regime or it does not. It is not a matter of introducing evidence to determine whether or not a particular part of the document is really a pleading of the material facts of the case." 3 In substance, the Master was saying that because it was a pleading dispute, it was not relevant for the purpose of that dispute for the Court to know whether the facts pleaded were correct or not. This was not a case where the plaintiff filed any evidence seeking to show that there was no substance, as a matter of fact, to the defendant's defence. The issue before the Court on such an application is whether the pleadings allege a case which, if ultimately proved at the trial, would arguably give rise to a defence. That question is determined by legal argument about the terms of the pleading document itself. 4 The Master was right to reject the tender of the affidavit. That aspect of the appeal is dismissed. (Discussion ensued between his Honour and counsel as to other aspects of the appeal.) Allegations in the Pleadings 5 There is another aspect of today's appeal which concerns a decision of the Master that two paragraphs of the various respective defences, be struck out. To deal with that part of the appeal, one needs to look at the pleadings in a little detail. The plaintiff is a company which had two lots of land on the North Coast. It agreed to sell those lots of land; one lot to the first defendant and the other lot to the second defendant. Those agreements to sell took the form of written agreements each made on 7 December 2000. The pleading referred to those contracts as the Primary Land Contract, and the Lot 7 Contract. 6 The amended statement of claim alleges that, for various reasons, there was not originally, or is not now, any obligation on the plaintiff to perform those agreements. There are various grounds on which this is put. In paragraphs 8 and 9, there is an allegation that each of the contracts is void at law for uncertainty. In paragraphs 10-21 the allegation is that each contract is voidable in equity because of a unilateral mistake on the part of the plaintiff, which was known to the respective purchasers. That mistake was one concerning whether the agreements for sale contained a requirement for payment of the deposit upon entry of that contract. 7 The next set of allegations is in paragraphs 22-33 of the amended statement of claim, which alleges that there has been a termination of the contracts at law by virtue of legal rights to terminate. Those rights are ones said to arise under a contractual power to terminate contained in the contracts themselves. 8 Paragraphs 34-36 contain an allegation that each contract has been terminated at law following a breach of the contract on the part of purchasers. 9 Paragraphs 37-44 say that each contract has gone off for reasons which are connected with the fact that the contracts contemplated that particular types of subdivision would be able to take place and that those subdivisions have not, in fact, been able to take place. The pleading relies in paragraphs 37-44 on that factual circumstance as alleging various legal routes to the conclusion that the plaintiff seeks. 10 The first is an allegation that the contract was always impossible. The second is that the contract was entered into under a mistake of both parties, that a subdivision of the contemplated type was possible. The third way in which it is put is that the inability to achieve the subdivision has resulted in frustration of the contract. 11 There are then some allegations of misleading and deceptive conduct, and a claim for removal of a caveat, on grounds that are dependent upon the other matters which have been pleaded in the statement of claim. 12 The point of the plaintiffs making these allegations is that the defendants assert, in a cross-claim, that the contracts remain on foot, and give the defendants a right to damages. 13 The defence of the defendants is in a form common to all three of them. I will take the defence of the first defendant as typical. The first allegation which is contested in these proceedings is that contained in paragraph 2(b) of the defence which says that: "The plaintiff's dominant purpose (of which the defendants were not aware) in entering into the contract(s) the subject of these proceedings was to obtain extra borrowings from, and/or to forestall foreclosure by, bankers of the plaintiff's Japanese associated company, Narui Norin Co Ltd, and after that knowingly breach, repudiate and/or break the said contracts with the first and second defendants. The plaintiff: (i) purchased land in northern New South Wales in or about 1990 for about $20 million using funds borrowed by its Japanese associated company from its bank; (ii) assisted its Japanese associated company in borrowing, the Japanese Yen equivalent of, about $65 million (at respective conversion rates and at the respective dates) of additional borrowing over a period of about 10 years: (1) which borrowing were stipulated by, and understood by, the said bank, to be used for land development by the plaintiff in Australia; (11) but were, in fact, siphoned off by directors of the plaintiff for other use; (iii) procured, in or about the middle of 2000, (about 70 pages of) fraudulent Tweed Shire Council ("Council") minutes dated 31 May 2000 purportedly granting Development Approval of the land the subject of the Primary Land Contract, which it passed off to Japanese bankers and/or to the Defendants as being genuine; (iv) executed an option agreement dated 8 September 2000 granting the second defendant an option to purchase land, the subject of the Primary Land Contract, which agreement fraudulently recited the that Development Approval had been granted by Council on 31 May 2000 and annexed(initialled) pages of the said fraudulent Council minutes; (v) fraudulently represented to Defendants that Development Approval had been obtained in respect of the land, the subject of the Lot 7 Contract -- presenting an artist's impression of proposed development on Lot 7 and misrepresenting that it was in accordance with the said purported Development Approval; (vi) executed the said: (1) Primary Land Contract; and/or (11) the Lot 7 Contract, knowingly and fraudulently representing to the Defendants that Development Approval had been granted in respect of the (respective) parcel(s) of land, the subject of the Contract(s); (vii) fraudulently misrepresented to the Defendants, at and before the signing of the said contracts, that the purported Development Approvals could and would be transferred to the name of the respective Defendants before Christmas 2000; and/or; (viii) obtained a fraudulent letter dated 8 January apparently on Council letterhead, purportedly signed by the Council Development Director, referring to a purported Development Approval granted 8 January 2001, and supported by fraudulent 8 January Council minutes, and entry plans in respect of a fraudulent completed and signed "Form 1 -- Development Application", which documents he gave to the Defendants in an attempt to convince the defendants that Development Approval had in fact been granted." 14 The other allegation in contest in the appeal is that contained in paragraph 6 of the defence: "6.(a) Before contracts were signed, the plaintiff fraudulently misrepresented to the defendants that Development Approval had been granted in respect of land the subject of: (i) the Primary Land Contract; and/or (ii) the Lot 7 Contract. (b) The said contract(s) was/were entered into by the purchaser in reliance on the said misrepresentations, and the plaintiff is estopped from asserting that Development Approval in accordance with the said misrepresentations is impossible and that it is entitled to have the respective contracts declared void because of frustration as alleged in paragraphs 37-44." The Unclean Hands Defence 15 Paragraph 2(b) of each defence is a paragraph which follows on a general allegation at the start of paragraph 2, that the defendant denies that the plaintiff is entitled to the assistance of the Court because it has not come to Equity with clean hands. Paragraph (b) is one of the ways in which it is alleged that there has been a failure to come to Equity with clean hands. 16 It is well established that before a defence of unclean hands can operate, it is necessary for the equity to be one which has, "An immediate and necessary relation to the equity sued for; it must be a depravity in the legal as well as in a moral sense": (Dering v Earl of Winchelsea (1787) Cox 318; 29 Er 1184. 17 In other words, it is not mere bad conduct in a general sense which disentitles a litigant to the assistance of Equity, but rather bad conduct which has, "an immediate and necessary relation to the equity sued for". That means that questions of whether an unclean hands defence is available or not can only be decided when one looks at the equity which is asserted. In the present case, there are many allegations in the plaintiff's amended statement of claim which assert legal rights, or which assert the absence of rights at law. These are the allegations concerning the contract being void for uncertainty, that the contract is terminated through breach, or pursuant to a contractual power, that it was impossible in the first place, and that it has been frustrated. 18 It is not completely clear to me whether the allegation of mistake contained in paragraphs 37-44 is an allegation which is intended to allege that the contract was void at law through an initial mistake, or whether it is intended to assert that there is an equity to avoid it by reason of that mistake but I will assume, for the purposes of the present judgments, that the latter is the case. 19 Thus, the only equities which the plaintiff is asserting in this case are equities to set aside a contract by reason of mistake. The basis on which the equity of mistake can operate has been recognised by the High Court in Taylor v Johnson (1983) 151 CLR 422. The ratio of that case appears at 432, namely, that: "A party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in Equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake, or misapprehension about either the content or the subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension." 20 While that was the ratio of the case, the majority (Mason CJ, Murphy and Deane JJ) recognised that there was a more fundamental principle at work, which is that a contract can be set aside when the Court is of the opinion that it is unconscientious for a person to avail himself of the legal advantage which he has obtained through the mistake. That more fundamental purpose of the equity to set aside for mistake has been recognised by the Court of Appeal in Tutt v Doyle (1997) 42 NSWLR 10 at 12 and 14. 21 The question, therefore, is whether bad conduct of the type which is alleged in paragraph 2(b) of the defence is one which has a necessary and immediate relation to the equity to set aside for mistake. Consistently with the reason why I rejected the affidavits, at the start of this judgment, I shall decide that question assuming that the facts pleaded in paragraph 2(b) are true. 22 There are, broadly, two types of allegation contained in paragraph 2(b). First there is the allegation which is contained in the opening sentence of the pleading, concerning the dominant purpose of the plaintiff in entering the agreement. I do not see how the fact that the plaintiffs intended to use this contract as a persuasive device for obtaining more money from their Japanese bankers, and that purpose having been achieved, to siphon the money off for some other purpose, and then not perform the contract, has a bearing on the conscientiousness of the defendant being able to enforce a contract which was entered into by the plaintiff under a mistake, being a mistake about which the defendant knew. The conduct on the part of the plaintiff which this part of paragraph 2(b) alleges, is seriously wrongful conduct, but it does not cut down or excuse any wrongfulness of the defendants in seeking to enforce a contract which they know the plaintiff entered under a mistake. 23 Second, it is alleged that the plaintiff made multiple fraudulent representations to the defendants. It is not specifically alleged that those fraudulent representations caused the defendants to enter the contract but I will pass over that deficiency as merely one of expression, for the purpose of the argument. The concept that the defendants are driving at, by this part of their pleading, is that the misrepresentations which the plaintiffs made to them and which caused the defendants to enter into the contract, are such that the plaintiff ought to be disentitled to rely upon the quite separate equity to set aside for mistake. 24 The equity to set aside for mistake arises from its own particular set of facts, which include that the contract was entered into by the plaintiff under a mistake and that the defendant knew that that was so. That set of facts has its own claim on equity for relief, quite independently of the fact that the defendant has another claim on equity, arising from the misrepresentations. 25 The way that this argument was characterised by Mr Dubler, who dealt with this part of the argument for the plaintiff, was that the defendants are saying that they ought to be able to get away with their unconscientious conduct in allowing the plaintiff to enter the contract under a mistake because the plaintiff has engaged in another and different type of wrongful conduct. 26 I think that way of putting it usefully illustrates the way that the bad conduct which is alleged in paragraph 2(b), consisting of fraudulent representations to the defendants, does not have an immediate and necessary connection to the equity of mistake that is sued for. 27 For these reasons, I would dismiss the appeal, insofar as it relates to paragraph 2(b) of the defences. There were some criticisms made of the minutiae of the pleading but in view of the decision I have come to, it is not necessary to deal with these arguments. The Estoppel Defence 28 The estoppel pleaded in paragraph 6, is one which needs to be read against the actual terms of the portion of the amended statement of claim to which it responds. The relevant allegation concerning one of the lots sold is: "The plaintiff and First Defendant entered into the Primary Land Contract in the belief and upon the basis that the Primary Land could and would be sub-divided into not less than 600 residential lots and that approval for such development could and would be forthcoming from the Tweed Shire Council. The Plaintiff has since learned, as is the fact, that the Primary Land at all material times was not and is not capable of sub-division into not less than 600 residential lots with the approval of the Tweed Shire Council for the development contemplated by the Primary Land Contract and the parties thereto." 29 The corresponding allegations concerning the other lot sold are: " 42. The plaintiff and second defendant entered into the Lot 7 contract in the belief and upon the basis that Lot 7 could be subdivided and that approval for such development could and would be forthcoming from the Tweed Shire Council. 43 The plaintiff has since learned, as is the fact, that Lot 7 at all material times was not and is not capable of subdivision with the approval of the Tweed Shire Council for the development thereof contemplated by the Lot 7 Contract and the parties thereto." 30 The amended statement of claim goes on concerning each of the lots to allege that the performance of the obligations of the parties under the contract in question was impossible, that the contract was void by reason of such impossibility and/or mistake or, alternatively, that performance of the contract was and is discharged for impossibility, mistake and/or frustration. 31 It will be seen that the estoppel allegation which is made is one which simply does not deal with the particularity of the allegations which are made in the amended statement of claim. Concerning both lots of land, the statement of claim alleges that a particular type of development could occur. Certainly, the allegation concerning the Primary Land Contract is more specific than that concerning the Lot 7 contract but, nonetheless, concerning the Lot 7 contract it is still alleged that it was believed it could be subdivided. 32 The allegation in paragraph 6 simply does not deal with that degree of specificity. All it alleges is a misrepresentation, "that development approval had been granted" in respect of the land. Development approvals can be granted for any one or more of a vast variety of activities. That lack of match between the allegations in the amended statement of claim and the allegations in the defence, which are said to provide a basis, in the law of estoppel, why the allegations in the amended statement of claim cannot be made, means that the pleading is one which must be struck out. It would be possible for the facts alleged in paragraph 6 to be true, if for example the representation of the plaintiff was that a development application had been granted to permit the land in question to be used to conduct some particular type of business, or to permit the erection on the land of some particular type of structure, but for that circumstance to provide no reason why the plaintiff was estopped from making the allegations in paragraphs 37-44 of the amended statement of claim. 33 I mention also that in relation to the pleading of estoppel that there is an allegation that, "the plaintiff fraudulently misrepresented ...". It is elementary that an allegation of fraud is one which must be distinctly charged and particularised. The pleading failed to do that. That provides another reason why this paragraph of the pleading was rightly struck out by the Master. Leave to Replead? 34 A question then arises as to whether leave to replead should be granted. So far as paragraph 2(b) is concerned, the reasons which I have given show that the pleading is unable to be repaired by better drafting. It is flawed at the conceptual level. Leave to replead that paragraph should not be granted. 35 Concerning the estoppel paragraph, it is not clear to me that the pleading is fundamentally flawed in a way that is incapable of cure. However, the errors which I have relied on as the ground for upholding the Master's decision are serious ones. It is not clear to me that the sorts of errors are ones which a competent lawyer, once the errors had been pointed out, would be fairly likely to be able to cure. 36 Under the circumstances, I do not think it is appropriate to simply grant leave to replead, without having seen a draft of a proposed pleading. However, neither ought the defendant be forever shut out from making an allegation of this type. 37 What I propose to do is to reserve liberty to the defendants to make application by notice of motion filed no later than 4 pm on Thursday 5 December 2002, to seek to file a defence which amends paragraph 6 of the defence of the first defendant, and paragraph 7 of each of the defences of the second and third defendant. Any such notice of motion must be accompanied by an affidavit which attaches a draft pleading. Orders 38 The orders of the Court are: 1. Appeal dismissed. 2. I grant leave to each of the appellants in the terms outlined in the final paragraph of my judgment. 3. I order the appellants to pay the costs of the respondents to the appeal. ********** Last Modified: 11/26/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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