Supreme Court New South Wales Medium Neutral Citation: Champion Homes Sales Pty Ltd v JKAM Investments Pty Ltd; Hotray Pty Ltd v JKAM Investments Pty Ltd (JKAM Investments Pty Ltd v Karl Damien- First Cross Claim; Karl Damien v JKAM Investments Pty Ltd- Second Cross Claim) [2015] NSWSC 272 Hearing dates: 11 and 12 March 2015 Date of orders: 20 March 2015 Decision date: 20 March 2015 Jurisdiction: Equity Division Before: Rein J Decision: See [36] Catchwords: Construction of Deed between cross claimant and cross defendant dealing with obligations in connection with a Contract for Sale and Head Lease - what amounts due - assigned debt - whether assignor of debt was established to be the creditor Legislation Cited: N/A Cases Cited: N/A Texts Cited: N/A Category: Principal judgment Parties: JKAM Investments Pty Ltd (cross claimant on first cross claim and defendant on second cross claim) Karl Damien (defendant on first cross claim and cross claimant on second cross claim) Representation: Counsel: G. McDonald (cross claimant on first cross claim and defendant on second cross claim) J. Cohen (defendant on first cross claim and cross claimant on second cross claim Solicitors: JK Solicitors (cross claimant on first cross claim and defendant on second cross claim) Cambridge Lawyers (defendant on first cross claim and cross claimant on second cross claim) File Number(s): 2014/21077 and 2014/22761 Publication restriction: nil Judgment Background 1. These proceedings concern a property at Ironbark Avenue, Camden ("the Property") owned by Mr Karl Damien ("Damien"). A number of different parties claimed interests in the Property and the disputes between those different entities as to which had priority over the other was heard and determined by Darke J (see [2014] NSWSC 952). His Honour split off for separate determination a cross claim brought by one of the caveators JKAM Pty Ltd ("JKAM") and a cross claim brought by Damien against JKAM. 2. The other caveators were Champion Homes Sales Pty Ltd ("Champion") and Hotray Pty Ltd ("Hotray") and Darke J held that Champion had first priority Hotray the second priority and JKAM the third priority. 3. There was at all relevant times registered on the Property a mortgage to secure a debt given by Damien to the National Australian Bank ("NAB"). The NAB was not joined to these proceedings. There have been separate proceedings on foot brought by NAB against Damien and JKAM (as caveator) and in August last year NAB obtained, in separate judgment against Damien in the amount of $1.8 million approximately and obtained an order for possession of the Property and leave to issue a writ of possession. NAB's claims against JKAM in respect of the caveat were stood over until 13 March 2015. JKAM's caveat presents an obstacle to NAB proceeding to sell the property which it wishes to do, it being owed approximately $2.32 million and holding concerns about the true worth of the property. 4. Mr G. McDonald of counsel appears for JKAM and Mr J. Cohen of counsel for Damien. 5. On 11 March 2015 when the matter was called on Mr Bedrossian of counsel advised the Court of the fact that his client NAB has never been joined in the proceedings and had written to the solicitors for Damien and JKAM enquiring whether consideration had been given to NAB being joined. 6. When NAB's matter was listed on Friday 13 March there was agreement as between NAB and JKAM resolving the dispute between JKAM and NAB. 7. There are, it was agreed, three key documents recording the arrangements between JKAM and Damien: 1. A Contract for Sale of Land dated 21 December 2012 with Damien as vendor and JKAM as purchaser ("the Contract for Sale") 2. A Deed of 10 December 2012 between JKAM and Damien ("the Deed") 3. A Lease (described as a "Head Lease") of the Property dated September 2012 with JKAM as lesee and Damien as lessor ("the Head Lease") There was also a mortgage dated 21 December 2012 which was not in evidence and on the terms of which neither JKAM nor Damien relied. Nature of the claims 1. By its amended cross summons JKAM sought 1. an order for specific performance of the Contract for Sale 2. an order for payment of rent pursuant to clause 2(l) of the Deed 3. an order for payment of an amount of $71,500 for car park improvement pursuant to 2(g) of the Deed 4. payment of costs orders made against JKAM in these proceedings in connection with the hearing before Darke J 1. By his amended cross claim Damien sought to recover payment for mortgage repayments and outgoings from JKAM said to be due under clause 2(d) of the Deed. There was also reference to clause 2(j) and an amount of $60,000 calculated as owing by JKAM to Damien under that clause but it was not claimed as a debt due by JKAM to Damien presumably because that amount is payable only on completion of the Contract. 2. Mr McDonald, before evidence was received on the hearing, advised the Court that his client would not be pressing [6](a), [6](d) (and later [6](b)). He sought to amend JKAM's claim to include declaratory relief as to the amount that his client is required to pay, pursuant to clause 16.7 of the Contract for Sale on settlement, and JKAM abandoned its claim for specific performance. At that point the dispute between the parties was one which revolved around what amount had to be paid by JKAM to Damien on settlement of the Contract for Sale and what amounts were owed by JKAM and Damien to each other by reason of the Deed and Head Lease and by reason of an assigned debt. Neither side, on the pleadings or at the commencement of the hearing was contending that the Contract for Sale had, or should be held to have, come to an end, but the difficulty was that they could not agree on the amount to be paid by JKAM on settlement. The Contract for Sale described JKAM as having paid $528,000 as a deposit. Damien disputed that the $528,000 had been paid as a deposit contending that clause 2(q) of the Deed made it clear that, in effect, Damien was not required to give credit to JKAM for the $528,000 referred to in clause 13.1 of the Special Conditions to the Contract for Sale. I referred to the position at the commencement of the hearing. On the afternoon of the first day of the hearing (T 43.50 - T 46) Mr Cohen flagged the possibility that Damien would seek to terminate the Contract for Sale and I was informed on the second day that Damien had in fact, that day, sent a notice to that effect: T 98.7 - T 100.4. 3. Another major area of dispute was said to be clause 2(d) of the Deed which, on its face, required JKAM to pay Damien mortgage payments and outgoings under the lease from 1 January 2013. JKAM relied on clause 12.1 of the Special Conditions in the Contract for Sale to resist any obligation to make the payments under clause 2(d). 4. Another matter in dispute was JKAM's claim to enforce a debt of $555,000 said to be owed by Damien to Architectural Collections Pty Ltd ("ACPL"), which JKAM claimed had been assigned to it by ACPL and of which assignment notice had been given to Damien. 5. On the second morning of the hearing Mr McDonald advised the Court that JKAM was abandoning its claim that the $528,000 should be treated as a deposit. He also indicated that JKAM would not be pursuing its claim for rental under clause 2(l) of the Deed. Course of the proceedings 1. The case proceeded with affidavit evidence from Mr Joseph Elia ("Elia") an authorised representative (but not director or secretary) of JKAM (affidavits of 5 May 2014, 10 October 2014 and 6 November 2014) and an affidavit of Mr Johni Elia of 10 October 2014, who was not required for cross examination. Much of the affidavits of Elia were not read. There was a very brief cross examination of Elia, followed by evidence from Damien (affidavits dated 18 March 2014, 10 April 2014, 30 May 2014 and 10 October 2014) followed by cross examination. 2. At the end of re-examination of Damien, Mr Cohen tendered email correspondence that had not been included in any of the Court Books that had been provided for the hearing of the cross claim, going he said to the identity of ACPL and JKAM, but also relevant to another matter which he did not at that point identify (see T 91.25). It became apparent (See T 91 - 99) that Mr Cohen wished to rely on the emails to support an argument to defeat JKAM's case that ACPL (and hence JKAM as assignee) was entitled to recover the ACPL claimed debt. The argument was one which had not been pleaded, and had not been referred to by Mr Cohen in his written outline of his case or in his oral submissions at the commencement of the case. The new argument was to the effect that ACPL had, in 2012, implicitly assigned to JKAM from Damien its claims to the debt and that the debt had been subsumed into the agreements of December 2012. 3. Mr McDonald resisted the introduction of this new case on the basis that it had not been pleaded or previously referred to, that his client had abandoned the 'deposit' argument having regard to Damien's contention that the $528,000 could not be treated as a deposit and was not available on the settlement and that he had embarked on his cross examination of Damien unaware that this new argument would be launched. He also maintained after due reflection that he could not now comfortably cross examine Damien to defeat Damien's new contentions and on the topic of the deposit. In the light of the problems identified by Mr McDonald and accepting his assertions as to the predicament in which he would be placed by allowing Damien to run the new argument I rejected Mr Cohen's attempt to advance it, and rejected the tender of documents that had previously been admitted. 4. I should note that Mr Cohen did contend that he was in a similar position to Mr McDonald because he had taken the view that JKAM could not prove the ACPL debt there being, he said, no evidence of that debt in the Court Book (Exh C1, C2 and C3), and as he told me on the first morning of the hearing JKAM could not, without evidence, establish the ACPL debt. What Mr Cohen had omitted to consider was that his client might make admissions during cross examination which alone, or together with documents in one or other of the Court Books, would establish that ACPL was owed $555,000, or, as it turned out, the slightly lower figure of $528,000. I do not accept that the failure to appreciate direct evidence might be obtained from a barrister's own witness can be equated to the effect that a failure to plead or advance a case has on the other party to a case. The assigned debt 1. Mr Damien admitted that he had agreed to pay $480,000 plus GST for the works identified at pp 19 - 36 of Exh C1. He admitted that the agreement made was made with a company allied to Elia. There was no dispute that ACPL was a company allied with Elia: see T 60.21 - 29. Damien admitted that the work the subject of the agreement had been performed. What he did not admit, in fact denied (see T 64.19 - 36 although see T 60.26 - 29), was that the agreement he had made was one with ACPL. Mr McDonald drew attention to material which in his submission established that the company with which Damien contracted was ACPL namely: 1. the fact that JKAM was not incorporated until 20 June 2012 and the conversation which Damien deposed to as an agreement in respect of the amount $480,000 plus GST was May 2012 2. the fact that the only quote Damien received was from ACPL and all email communications from Elia was the email address of ACPL (see T 64.32) 3. the fact that the scope of work's appended to ACPL's letter Of 22 December 2012 (see pp 18 - 36 Exc C1) was the work which he required be performed T 64.50 - T 65.1 and it was only the price in the quote to which he did not agree: T 65.3 - 5 4. the fact that Damien organised for Champion, the previous builder, to provide plans and drawings for the site to ACPL (see p 39 Exh C1 and T 62.16 - 33) 5. the fact that an invoice from ACPL dated 7 March 2013 was provided by Damien's broker to St George: T 70 (and see Exh B) and the inference based on Damien's evidence (T 66.3 - T 69.29) that Damien must have sent that invoice, or authorised Elia, to send it to Damien's broker: see T 71.17 - 23, reflecting an understanding on his part that that is the entity which he had contracted, and that he sought as part of the loan from St George the amount of $550,000 to pay that bill 6. that Damien never received an invoice from JKAM: T 70 7. he agreed that had he seen an invoice from ACPL for $528,000 he would not have been surprised: T 69.46 - T 70.4 although see also T 70.23 - 34 8. the absence of any protest by Damien on receipt of the notice of assignment given to him by ACPL: see T 75 1. The Notice of Assignment of the debt is in evidence: see Exh C1 p 350. That Notice refers to that fact that ACPL had, by a Deed of Assignment of the same date, assigned the debt to JKAM. The Deed of Assignment was not itself in evidence but no point was taken about its absence, Damein's contention being that he had not entered into an agreement with ACPL, but rather some other entity controlled by Elia but which Damien does not specify. I proceed on the basis that there was no issue between the parties that Mr Johni Elia the sole director of ACPL did assign the debt to JKAM as the notice signed by him says he did. Mr Johni Elia was not required for cross examination, although it should be noted that he did not in his affidavit address the question of assignment by ACPL to JKAM. 2. There is one matter which might be seen to undermine JKAM's contention that the contract was with ACPL and not it and it was not referred to by either Mr McDonald or Mr Cohen. Clause 2 of the Deed provides: "Damien and JKAM agree that: (h) the value of the construction works undertaken by JKAM at the Property is $480,000.00 plus GST if applicable ("Construction Works Amount"), (i) to secure payment of the Construction Works Amount Damien agrees to grant to JKAM a second mortgage over the Property" When strictly construed the sub clauses are not inconsistent with Damien's contract being with ACPL even though the work was said to have been carried out by JKAM, and it even could be said that the parties were agreeing between themselves that the work had been done by JKAM even if it had not, but if the sub clause was taken to be an admission by JKAM that the contract for the works was with it (and an admission by Damien that the work had been performed by it) then JKAM would be entitled to recover the $528,000 not as assignee but as debtor in its own right, there being no dispute that the $528,000 has not in fact been paid. Mr Cohen appeared to accept that this would be so, at least if the Contract for Sale has been terminated following Damien's notice to that effect: see T 99.35 - T 100.4. 1. JKAM as I have noted initially propounded the claim that the $480,000 plus GST was agreed to have been paid by it as a deposit and hence that it should be given credit for that 'payment' but Damien firmly resisted such a contention. Of course JKAM could not recover $528,000 from Damien as a debt (whether assigned or direct) and also obtain the benefit of the $528,000 as a deposit and by abandoning any claim to the $528,000 as a deposit it eschewed the assertion that it could in effect recover the $528,000 twice. 2. I accept that the evidence identified by Mr McDonald establishes on the balance of probabilities Damien contracted with ACPL. 3. It follows that Damien is liable to ACPL and that JKAM as assignee of the debt is entitled to be paid that amount subject to any right of set off having regard to Damien's entitlement to monies from JKAM. The $411,000 claim by Damien against JKAM 1. The following clause of the Contract for Sale is relevant: "12.1 The Vendor (Lessor) agrees to obtain the consent of the mortgagee in order to register the Head Lease attached to this Contract for the sale of land as soon as possible and until the said Head Lease is registered on title the Purchaser (Lessee) is not obliged to pay any rent and outgoings under the terms of the Head Lease. If there are any inconsistencies between the terms of the special conditions and the attached Head lease then the terms of the special conditions will prevail. The Vendor (Lessor) agrees to be liable for all payments under the terms of the Head Lease and keep the Purchaser (Lessee) indemnified until the Head Lease is registered on title." 1. The following clauses/subclauses of the Deed are relevant: "2(b) Damien will sell the Property to JKAM or its nominee for a price of $2,081,000.00 plus GST if applicable ("Sale Price"), (c) up to and including 31 December 2012 Damien will be responsible for all mortgage repayments and outgoings for the Property including but not limited to council rates, water rates and land tax, (d) on and from 1 January 2013 JKAM will be responsible for all mortgage repayments and outgoings for the Property including but not limited to council rates, water rates, land tax, building insurance for full replacement value and public liability insurance for not less than $20m, (g) Damien will be responsible for making good the car park area and JKAM will be responsible for all other works to enable occupation of the improvements on the Property, (k) notwithstanding anything contained in the Lease to the contrary, the monthly payments to Damien pursuant to the Lease are limited to the amounts payable to the financier secured over the Property (currently NAB) as well as the outgoings referred to clause 2(d), (q) notwithstanding anything contained in the Contract referred to in clause 2(b) JKAM will pay Damien $2,081,000.00 plus GST on settlement." 1. In relation to the Head Lease it can be noted that what is required to be paid by JKAM is rent and outgoings but not mortgage payments due by Damien to NAB, see clause 4.1 and 21.1 of the Head Lease (part of Exh A). 2. In my view clause 12.1 does not assist JKAM in relation to mortgage payments, since by its terms it only deals "with rent and outgoings under the terms of the Head Lease". It does not say anything about the Deed or JKAM's obligations under the Deed and in any event the Head Lease does not deals with mortgage payments. I am unable to accept the interpretation urged upon me by Mr McDonald to the effect that clause 12.1 was relieving JKAM of payments of the mortgage for so long as the Head Lease was not registered. I am unable to accept that 2(k) read alone or together with 2(d), or 12.1, provide any support for the contention that repayment of the debt by Damien to NAB are affected by non registration of the Head Lease. 1. A further argument advanced by Mr McDonald is that if liable to reimburse the mortgage payments made by Damien to NAB the liability should cease as at the time that Damien failed to provide a payout figure to JKAM as JKAM through its lawyers had requested (see T 79.36 - T 80.18) an argument which was not advanced previously and not found in JKAM's defence to Damien's amended cross claim. 2. The Contract requires JKAM to reimburse Damien. JKAM did not issue a Notice to Complete and has not pressured Damien to settle. There is nothing to indicate that the operation of clause 2(d) has been suspended and JKAM has agreed to indemnify Damien for the amount paid to the NAB. 3. I am not satisfied that clause 2(d) can be read down in the manner for which JKAM contends and accordingly I find JKAM liable to Damien for $411,000. Other outgoings 1. This leaves the question of the outgoings for the property including the council rates, water rates and land tax. First I should note that the only outgoings for which JKAM established by the evidence and for which JKAM could be liable is the amount of council rate of $16,000 (see Damien's affidavit of 10 October 2014 Exh C3). Mr McDonald pointed out that a portion of it (approximately $2,300) is not yet due and payable. 2. Since the water rates are expressly the subject of the Head Lease there is some ambiguity in whether 12.1 is to be taken as suspending the operation of the obligation pending registration of the Head Lease, even though the obligation also arises under the Deed. When it is recognised that the Deed, the Contract for Sale and the Lease were all part of the one package I think this leads to construing clause 12.1 as applying to the obligation to pay outgoings even though clause 12.1 does not expressly refer to the Deed under which the obligation also arises. I therefore conclude that as a matter of construction the obligation of JKAM to pay outgoings did not commence until registration of the Head Lease. The car park 1. Damien agreed that JKAM had completed works to a value of $21,000 (see T 76.33 - 39) and JKAM claims that by virtue of clause 2(g) of the Deed Damien owes that amount to JKAM. I understand that Damien resisted JKAM's claim to $71,000 but given the implicit abandonment of the differential I do not understand the $21,000 to be in dispute. Hence this is an amount owing from Damien to JKAM to be offset. Balance owing 1. Thus Damien is liable to JKAM for $528,000 plus $21,000 ie $549,000 on the JKAM cross claim but JKAM is liable to Damien for $411,000 on the Damien cross claim. It was agreed that such debts as were established could be set off against any debt owed to the other. There is thus produced a net difference of $138,000 in favour of JKAM. Declaratory relief 1. In my view given that the Contract by its terms calls for payment of $2,081,000 plus GST leaving aside the usual adjustments for rates, utilities and the like, and since no argument is now advanced by JKAM that the amount described as a deposit is to be deducted and given that the other amounts with which I have dealt are not amounts due under the Contract for Sale I do not think there is any need or utility in declaring what amount is payable under the Contract. Conclusion 1. There should accordingly be judgment for JKAM against Damien in the amount of $138,000 having regard to the amount to be set off. I will hear the parties on the question of costs. 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. Decision last updated: 20 March 2015