New South Wales Supreme Court CITATION : Surf Road Nominees Pty Limited & Ors v Tass Alexander James & Ors [2003] NSWSC 1218 HEARING DATE(S) : 16/12/03 JUDGMENT DATE : 16 December 2003 JUDGMENT OF : Einstein J DECISION : Application for leave to amend refused. CATCHWORDS : Practice and procedure - Application for leave to amend summons - Prejudice - Separate determination of issues under Supreme Court Rules Part 31 Rule 2 - Experience of the Court in relation to separate question issues LEGISLATION CITED : Corporations Act Supreme Court Rules Surf Road Nominees Pty Limited (First Plaintiff/First Cross Defendant) Chris Burke & Co Pty Limited (Second Plaintiff)/Second Cross Defendant) I G Martyn Real Estate Pty Limited (Third Plaintiff/Third Cross Defendant) WIT Investments Pty Limited (Fourth Plaintiff/Fourth Cross Defendant) DJZ Construction Pty Limited (Fifth Plaintiff/Fifth Cross Defendant) Tass Alexander James (First Defendant/First Cross Claimant) Janet Margaret James (Second Defendant/Second Cross Claimant) PARTIES : New South Wales Road Nominees Pty Limited (Third Defendant/Third Cross Claimant) Michael Christian (Sixth Cross Defendant) Katherine Christian (Seventh Cross Defendant) Cottenham Nominees Pty Limited (Eighth Cross Defendant) Vincent Palmieri (Ninth Cross Defendant) Terry Ian Wilson (Tenth Cross Defendant) Andrew Peter Mortimer (Eleventh Cross Defendant) FILE NUMBER(S) : SC 50108/01 Mr T A Alexis SC, Ms K Sainsbury (Plaintiffs) COUNSEL : Mr CRC Newlinds SC, Mr A Coleman (Defendants) Mr A Bulley (Sixth, Seventh and Eighth Cross Defendants to the First Cross Claim) Pritchard Law Group (Plaintiffs) SOLICITORS : Argyle Partnership (Defendants) Dibbs Barker Gosling (Sixth, Seventh and Eighth Cross Defendants to the First Cross Claim) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Einstein J Tuesday 16 December 2003 ex tempore Revised 17 December 2003 50108/01 Surf Road Nominees & Ors v Tass Alexander James & Ors JUDGMENT - On application to amend the third further amended summons. See page 143 of transcript The application for leave to amend 1 There is before the Court an application by the plaintiffs for leave to file a third further amended summons in these proceedings. I propose to commence by broadly outlining my general understanding of the issues which had been raised by the second further amended statement of claim and then to go to the matters which are the subject of the application for leave to amend. Nothing that I say in relation to my general broad understanding of the issues in the case should suggest that there has been any decision of fact or principle in relation to those matters and what I am about to say generally is to be found either in the pleadings or in the overview submissions which the parties have helpfully furnished to the Court. The proceedings 2 Apparently, the plaintiffs' case is that for a number of years two licensed real estate agents, Mr Tass Alexander James and interests associated with him and Mr Michael Christian and interests associated with him personally and/or through their corporate vehicles or trusts, carried on business as real estate agents in Caringbah and Cronulla. 3 Apparently, during the 1990s at a certain point in time each of Mr James and Mr Christian, by themselves or their corporate vehicles or trusts, became a 50 percent shareholder in James Christian Pty Limited, which conducted the business Raine and Horne Cronulla. Apparently at some time in the mid to late 1990s or the wives of each of Mr James and Mr Christian, namely Mrs Janet Margaret James and Mrs Katherine Christian, acquired the shares in I G Martyn Real Estate Pty Limited. Mr James and/or Mr Christian were approached for an expression of interest in relation to the then largest real estate agency in Cronulla, which carried on business as Chris Burke & Co. Pty Limited ["the Burke business" or "Chris Burke"], which was initially offered for sale, apparently, at approximately $1.7 million or thereabouts. The plaintiffs claim that ultimately those gentlemen were able, through their respective companies or trusts, and/or with the assistance of their wives, to acquire this business with the assistance of loan funds borrowed from the Macquarie Bank and from outside investors. 4 These proceedings concern the rights and obligations of a number of individuals, companies and trusts, arising inter alia from the complex of contractual arrangements generally entered into apparently upon the occasion of the acquisition in 1999 of the Burke business. 5 There is a degree of complexity in following: · the identity of the relevant parties and their inter relationships; · the parts which the parties played in relation to the circumstances giving rise to the relief claimed; · the interrelationship of: (1) the claims to relief made in the amended summons; (2) the claims to relief made in the first cross-claim; (3) the claims to relief made in the second cross-claim. 6 A deed dated 1 July 1999 ["the deed"] is said to be central at least to one group of claims. It is suffices in broad overview terms to note that, as the case has been opened, the acquisition of the Burke business required the setting up of a number of corporate entities and trusts as well as commitments flowing from extensive borrowings from a number of parties. 7 The first second and third defendants, namely, Mr James, his wife, and their family company, New South Head Road Nominees Pty Limited, are said under the second further amended summons, which is presently the operative pleading, to be jointly and severally liable. · Pursuant to clause 5(1) of the deed to guarantee the obligations of James Christian Pty Limited and the Surf Road unit trust ["SRUT"] in relation to: - The payment of the amount said to be due by I G Martyn Real Estate to Macquarie Bank; - The payment of preferential distributions by SRUT to the fourth and fifth plaintiffs respectively WIT Investments Pty Limited ["WIT"] and DJZ Constructions Pty Limited ["DJZ"]; · Pursuant to clause 5(2) of the deed to indemnify WIT and DJZ in relation to any loss or damage suffered by them in consequence of the defendants: - Failing to pay the IGM bank debt; - failing to pay the preferential distributions. 8 Other issues pursued by the plaintiffs concern: · The conduct of Mr James said to have been in breach of his director's duties owed to the first second and third plaintiffs, respectively Surf Road Nominees Pty Limited, Chris Burke and I G Martyn; · The defendants' alleged obligations in respect of moneys borrowed or said to have been borrowed from Chris Burke and/or the Burke Unit Trust ["BUT"]. 9 The cross-claims raise disparate issues. It may be noted, however, that the first cross-claims are by Mr and Mrs James and the James family company and inter alia seek sundry orders principally but not exclusively grounded upon the propositions that: · Each of the Surf Road company, Chris Burke and I G Martyn are being conducted in a manner oppressive to, unfairly prejudicial to or unfairly discriminatory against: - Mr and Mrs James as members of each of these companies; - The members of each of these companies. · Shares held by the cross-claimants in Surf Road, Chris Burke and I G Martyn, should be ordered to be purchased by any or all of the sixth to eleventh cross-defendants [who may be broadly described as "the investor cross-defendants"]. The occasion for the application for leave to amend 10 I return to the application for leave to file the third further amended summons. The occasion for the application for leave being sought follows the first day of a final hearing on which day senior counsel for the plaintiffs opened the plaintiffs' case and senior counsel for the first defendant briefly responded to that opening raising a number of matters and importantly raising certain questions of a pleading nature suggesting difficulties in the formulation of the plaintiff's case as it appeared in the second further amended summons. 11 Mr Bulley of counsel, who appears for the second cross-defendants, generally supported the overview submissions of the defendants in that regard, making clear that his clients were only interested in relation to the litigation in a particular subset of the matters which separated the plaintiffs and the defendants. The defendants' notice of motion 12 The defendants further obtained leave to file a notice of motion seeking an order striking out paragraph 12 of the plaintiffs' contentions contained in the second further amended summons and orders seeking leave to administer certain interrogatories to the plaintiffs and to the sixth, seventh and eighth cross-defendants. 13 The claim to the order striking out paragraph 12 of the second further amended summons was for the following reasons: · It was said that each of the relevant payments had been made out of Chris Burke, the operating company, and that there had, at all material times, only been two directors of that company, namely, Mr James and Mr Christian. · It was then said that the pleadings require to make clear whether the plaintiffs assert that Mr James' conduct pleaded in paragraph 12 took place without the consent of Mr Christian. Senior counsel for the defendants added the following in his submissions yesterday: "If [the plaintiffs] want to make a case that [Mr James] did it without the consent of directors of some other company, that is a matter for [the plaintiffs] and I submit eventually that such a pleading is obviously bad at law but I need to know, because I have…to plan cross-examination, which is going to go to a lot of trouble to get people to concede that Mr Christian knew all about these [matters], went along with, acquiesced and so on." · The next suggested problem with paragraph 12 was the difficulty of having subparagraphs (a), (b) and (c) in terms of the particulars which had been furnished. The complaint was made in relation to the use within paragraph 12 of the words "and/or". The plaintiffs' response 14 The plaintiffs having faced up to certain of those matters [albeit suggesting that certain of those matters were not of substance] have now sought to propound the third further amended summons. The complex issues 15 It has to be said, as will appear from the introduction to this judgment, that the transactions which underlie the plaintiffs' case and the whole of the template requiring to be understood in order to follow the plaintiffs' case, is complex in the extreme. I do not propose to travel into that detail save to make the point that the complex web of individual parties, companies and trusts who entered into the critical deed dated 1 July 1999 and their respective rights and obligations under that deed, require to be unravelled as part and parcel of certain of the pleaded issues. 16 Overlaid on that set of complex questions of principle and construction and ultimately, in some cases, fact, are questions which, in relation to the second further amended summons, may go to the locus standi of particular of the plaintiffs to make the claims sought to be advanced. Whether or not that is the case in relation also to the new amended summons sought to be propounded is open for debate. The pleadings under consideration 17 The convenient course is to append to this judgment both the second further amended summons and the document sought to be propounded as the third further amended summons. It is appropriate to note that senior counsel for the plaintiff has made plain that even the form of the third further amended summons which was the subject of the application for leave to amend and the contentions in that regard was not yet in final form, although the document, as I understood it, was sufficiently precise for all parties to be in a position to argue the application for leave to amend. The form of and complaints in respect of the second further amended summons 18 The defendants claim: · that the second and third plaintiffs [who were not parties to the deed and for this reason are said not to be entitled to sue upon it] have claimed that relevant defendants are liable to them in relation to the IGM bank debt; · that the fourth and fifth plaintiffs have claimed that relevant defendants are liable to them in relation to the payment of the preferential distributions; · that there is no pleading by the fourth and fifth plaintiffs of an entitlement to an indemnity for loss or damage, nor identification in particulars of what the loss or damage might be. 19 Other suggested problems with the pleading raised by the defendants concern the declaration in paragraph 1 which squarely relies upon a claimed joint and several liability pursuant to clause 5(1). The liability is said to guarantee particular obligations. The obligations are said to be obligations of James Christian and SRUT. Those obligations are said to be · "in relation to the payment of the IGM bank debt"; and · "in relation to the payment of the preferential distributions to the fourth and fifth plaintiffs." 20 Paragraph 10 of the pleadings seems to clarify the distinction between, on the one hand, the liability to the second and third plaintiffs and, on the other hand, the liability or alleged liability to the fourth and fifth plaintiffs. Here the allegation is that because of the failure of James Christian to pay the IGM bank debt and the failure of SRUT to pay the preferential distributions: · the defendants are liable to the second and third plaintiffs [the defendants making the point that neither of these plaintiffs was a party to the deed and asserting that they are unable to sue upon it] in relation to the IGM bank debt; · the defendants are liable to the fourth and fifth plaintiffs in relation to the preferential distributions pursuant to the deed. 21 Paragraph 2 of the summons in its present form seeks a declaration that the defendants are jointly and severally liable pursuant to clause 5(2). This is said to be a liability to indemnify the fourth and fifth plaintiffs. It is said to be a liability to indemnify the fourth and fifth plaintiffs: "in relation to any loss or damage suffered by them in consequence of the defendants' failure: · to pay the IGM bank debt, and · payment (sic) the preferential distributions." Net result in terms of the present formulation of the second further amended summons 22 The present form of declaration 2 seems to me to answer the defendants' complaint that there is no pleading by the fourth and fifth plaintiffs of an entitlement to an indemnity for loss or damage. Particulars of what the loss or damage might be may be sought and should be supplied as sought. 23 There is clearly an argument that paragraph 10 in its fourth line and fifth line could only amount to a claim that "each of the defendants are jointly and severally liable to the fourth plaintiff and to the fifth plaintiff in relation to the IGM bank debt". The argument is because the second and third plaintiffs are not parties to the deed and are said not to be able to sue on it. 24 The defendant additionally claims that there is no pleading that the new investors are entitled to any sort of indemnity and that the new investors do not claim an indemnity for loss or damage and that there are no particulars of what the new investors' loss or damage would be and that there is no evidence about this matter. 25 The fact is that there is a general claim advanced in declaration 2 and in the contentions at 9. I accept, however, that the defendants have a clearly valid point in the claim that there are no particulars of loss or damage claimed in paragraph 9. These can presumably be supplied. This is important because the logical steps, which as I understand it inhere in the plaintiffs' case, are arguably: Step 1: James Christian does not pay out the IGM bank debt. Step 2: The IGM bank debt is paid out by others [i.e. SRUT or Chris Burke and I G Martyn]. Step 3: The investors suffer loss for that reason. [this is, it seems to me, a significant factual issue and I readily accept that the defendants need to know whether this has happened and how, so that this would have been and arguably remains a proper matter for particulars.] Step 4: The investors claim an entitlement to recover from the defendants/guarantors on the clause 5(2) indemnity. 26 I would not have upheld a claim to strike out paragraph 12 for use of the words "and/or". I would however have required the plaintiffs to make explicit whether or not they assert that Mr James' conduct qua Chris Burke pleaded in paragraph 12 took place without the knowledge, consent or acquiescence of Mr Christian. The application for leave to propound the third further amended summons 27 The defendants and cross-defendants consent to the proposed amendment by way of the claims to the declarations sought in paragraphs 1 and 2 of the new pleading. The consent comes forward because these are said to be merely questions of the proper construction of the deed and for that reason to occasion no prejudice to the defendants. 28 It follows that leave to amend by substituting these two paragraphs claiming a cause of action under clause 5(1) of the deed should be granted. 29 The burden of the opposition to the balance of the amendments is that the new pleading is in part defective and should be struck out and/or that the Court should disallow the amendments for the reason that the defendants are prejudiced by the new issues now raised. 30 The defendants have submitted that under the second further amended summons quite simply: · the investors [that is to say relevantly here the fourth and fifth plaintiffs] were expressly claiming approximately $106,296; · the second and third plaintiffs [Surf Road and Chris Burke] were claiming close to $1.1 million or more. 31 The defendants submit that under cover of the amended summons now sought to be propounded the investors are claiming in excess of a million dollars. 32 The pleading runs as follows: · in the section seeking relief, the plaintiffs have now added a claim to an order for the entry of judgments against each of the defendants for money found to be due with respect to: "(c) The loss and damage suffered by the fourth and fifth plaintiffs in relation to the failure to pay the IGM bank debt and the preferential distributions." · the only particulars of loss and damage are to be found on page 6 of the document where it is now said that each of the defendants are jointly and severally liable [not as before, to the second plaintiff and to the third plaintiff in relation to the IGM bank debt] but now to the first plaintiff as trustee for the SRUT and to the fourth and fifth plaintiffs in relation to the IGM bank debt. An entirely new claim 33 I interpolate that it cannot be gainsaid but that this is an entirely new claim. Up to the time of the advancing of this claim all that the defendants were dealing with under the anterior pleading in terms of identifying the damages which the unit holders were said to have suffered as a result of this alleged breach, comprised the matters which the plaintiffs' senior counsel opened the case on. The matter was, the Court has been informed, to be defended by the defendants upon the proposition that there were never going to be any profits so that the unit holders had suffered no loss or damage. The effective claim of the investors had been that, being class A unit holders, they were entitled to preferential distributions pursuant to the deed of guarantee. Those distributions were said to be equal to any interest and principal paid to the bank by Surf Road Nominees. The amount that was paid in relation to the Surf Road bank debt could apparently be identified. Those amounts are said not to have been received. That amount, it is said, should have been the preferential distributions paid to the unit holders. That was, so it was said, the damages claim of the investors. 34 The defendants had intended to answer that claim by reference to the proper construction of the guarantee and to their contention that there was no loss because there were no profits. But now the plaintiffs, that is to say the fourth and fifth unit holders, wish to assert that they have suffered loss and damage, presumably as particularised in paragraph 10 in an amount in excess of a million dollars, because they allegedly claim to have suffered loss for the reason that one or other of James Christian or I G Martyn or perhaps some other company failed to pay out the IGM bank debt. Very importantly on this application this is, I accept, a wholly different claim. 35 The point is that many questions are raised by the new claim. Senior counsel described the new position and the defendants situation in that regard as follows: "It raises questions such as: If I G Martyn, for example, had paid the Macquarie Bank debt and therefore no one was called to pay any guarantee, then the damages, the causation question for the purpose of damages for unit holders becomes, if that had happened, would the unit holders be better off than they are today and, if they would be, in what quantum would they be better off than they are today? We have not thought about that. None of the experts have addressed that issue . It raises extraordinarily complicated questions of accounting and throws up difficult - perhaps interesting - questions of law such as at what date does one carry out the exercise? Some notional date when a payment should have been made? Today? One has to hypothetically work out what other business transactions the Surf Road trust would have become involved in, whether they would have been profitable or not, and the like . It is an impossible new case to meet on damages. I want to make it clear, your Honour: I would never oppose an amendment if I could deal with it and I can deal with the construction point. What I am saying is I cannot deal with, and this pleading does not even try to properly particularise and set out in a pleading form the steps involved in the chain of causation . I am not in a position to meet it because it is not explained in the pleading, it was not opened on yesterday. I would need to get expert advice. The plaintiff would need to put on further evidence and it just guarantees that the case will go off." 36 In this instance the need for particulars of loss to the fourth and fifth defendants become even more poignant. In contradistinction to every other payment made in the particulars the pleading does not state who paid the IGM debt. The second tranche amendments 37 Turning to the second tranche of amendments, one clearly here finds an explicit attempt to extend the catchment area of those to whom the first defendant is said to have owed duties pursuant to the Corporations Act and the general law and a fiduciary duty by the entirely new claims advanced qua the activities of the first defendant in relation to the affairs of the first plaintiff, the SRUT and the third plaintiff. These claims are extremely significant. It would be an entirely inappropriate exercise of the proper discretion of the Court to permit such amendments where prejudice is claimed in terms of the defendants not being in a position, presently at this late stage to deal with these new allegations. Naturally the stage of the proceedings presently reached by all the parties is after the exchange of lay evidence and expert evidence. The right to procure such lay evidence and expert evidence as is seen to be necessary to meet that changed set of parameters and claims is a fundamental right of the set of defendants against whom those claims are now sought to be pursued. 38 A further objection was taken by the defendants to the claims to relief to be found in paragraph 3 of the new summons sought to be propounded, the objection being that the defendants are entitled to know in whose favour the entry of judgments against the defendants is sought to be made. 39 A further objection was put in relation to the new subparagraph (c) as raising a new issue. Ultimate holding 40 For all of those reasons I have formed the very clear view that, save for the amendments producing the new paragraphs 1 and 2 of the claims to relief, the only appropriate exercise of the Court's discretion is to refuse the application for leave to amend. The way forward 41 The question arises as to whether or not the plaintiffs will now seek, as the price of the Court allowing those amendments, an adjournment of the proceedings. A tangential question would arise in that regard concerning the proper terms and conditions, if any, which should be imposed as a condition of permitting the leave to amend in circumstances in which, as I apprehend the position, it would be necessary for the hearing date to be vacated and there would doubtless be substantial costs of and occasioned by the need for a new bracket of directions and a future occasion when the final hearing would proceed or recommence. In that regard it is appropriate to enquire of counsel for the plaintiffs as to whether or not they do seek leave to amend on the basis that the hearing date would have to be vacated and I propose in a moment to ask Mr Alexis, leading counsel for the plaintiffs, that question and to invite the other parties to respond. 42 What I have said is not intended to prejudge the approach which Mr Newlinds had earlier indicated that the defendants wished to take if there was any question of the hearing date being vacated. He indicated that there was evidence he would wish to call relating to the health, as I understood it, of Mr James and his present business affairs which evidence would be put up in answer to any application by the plaintiffs to procure from the Court orders granting leave to amend, albeit conditioned on a vacated hearing and on the making of appropriate costs orders. If Mr Alexis seeks to have the amendments allowed on condition it seems appropriate to permit each side to call such evidence before making a decision. It is fair to say that the exercise of the Court's discretion, absent some evidence to be adduced from Mr Newlinds, may be entirely different to that which the exercise of the discretion would warrant, depending as that evidence comes forward. The intermediate positions 43 As the matter has been the subject of some address it is convenient to refer, albeit briefly, to what Mr Alexis put as an intermediate position should the Court generally be against allowing of the amendments whereby the case would continue in every parameter on every issue without the hearing date being vacated. That intermediate position was the Court should under Part 31 rule 2 of the Supreme Court Rules, order that a separate set of questions be first determined before the determination of any other questions in the case. 44 The matters which Mr Alexis submitted may be appropriate for such separation questions to be ordered were first, the important questions of construction raised by the pleadings; secondly, the liability of the first, second or third defendants as pleaded in paragraphs 1 to 10 of the proposed third further amended summons and, arising from those matters, declarations 1, 2 and 3 as sought in the proposed third further amended summons. 45 It was also submitted by Mr Alexis that certain paragraphs from the amended defence may be conveniently the subject of such a separate determination set of orders: he referred to paragraph 4(d)(iii), which is the defendants' answer to the plaintiffs' contention paragraph 10 that "in appropriating the defendants' units in the trust for their own use and not exercising the power of sale over the units provided for by the deed the plaintiffs elected to accept the value of the units in full satisfaction of any claim against the defendants pursuant to the deed and foreclosed any entitlement to claim any relief over and above the units". 46 In relation to the so-called intermediate position Mr Newlinds took the Court to the amended defence to the second further amended summons and in particular to the issues raised by paragraphs 4(d)(i), 4(d)(iii) and 4(e) making, advancing, it seemed to me, the substantial propositions that all manner of difficulty would be encountered by the Court if it sought to permit, as part of a separate set of determination questions under Part 31 rule 2, issues of that kind. 47 Importantly in relation to the proposed separate question orders Mr Alexis accepted that, even if the separate questions were ordered and answered, that would not by any means deal with all of the issues in the case and that there would be other substantial issues which may well require to be litigated unless, as I generally read him to say, the parties settled the proceedings after the important decision on the question of construction. 48 In relation to the so-called intermediate position I have the very clear view that it would be entirely inappropriate in this particular case and for very many reasons for the Court to accede to the intermediate proposition. The experience of the Court is that applications for the separation of questions in complex commercial litigation is fraught with peril. The parties in proceedings such as the present before the Court may be assumed to have expended very large sums indeed in preparation for the final hearing. The notion that a court may in certain circumstances by separation-out orders, set in train a position where, with all the best will in the world, the separation questions having been ordered and answered, the case may miscarry, obviously requires the most scrupulous scrutiny being given to separation questions. If ever I saw a case where there were complexities of the manner and type which make it entirely inappropriate to order the separation out even of the significant question of construction, this is that case. The intermediate position is therefore not one which the proper exercise of the Court's discretion would permit by way of orders. 49 For those reasons I now invite Mr Alexis to indicate whether he wishes to address submissions in support of the proposition that the amendments should be allowed conditional upon the hearing date being vacated and conditional upon such other conditions, including as to costs, as the Court may impose. I certify that paragraphs 1 - 49 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 16 December 2003 ex tempore and revised on 17 December 2003 ___________________ Susan Piggott Associate 17 December 2003 Last Modified: 03/19/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.