Supreme Court New South Wales Medium Neutral Citation: HP Mercantile Pty Limited v Hartnett & Ors [2015] NSWSC 1475 Hearing dates: 14 September 2015 Date of orders: 08 October 2015 Decision date: 08 October 2015 Jurisdiction: Equity - Commercial List Before: Darke J Decision: Separate questions each answered affirmatively. Catchwords: CONTRACTS – construction and interpretation – loan agreements entered into to facilitate participation in investment scheme – limited recourse provision – whether condition for operation of provision satisfied – whether provision operates when events of default have occurred. Cases Cited: Electricity Generation Corporation v Woodside Energy Limited [2014] HCA 7; (2014) 251 CLR 640; Guo Hui Cai v Xiao Yan Guo (No 2) [2014] NSWSC 1416; HP Mercantile Pty Limited v Clements [2014] NSWSC 509; Mainteck Services Pty Limited v Stein Heurtey SA [2014] NSWCA 184; Pacific Carriers Limited v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451; Thompson v Smith (1976) 135 CLR 102; Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; (2004) 219 CLR 165; Undershaft (No 1) Limited v Commissioner of Taxation [2009] FCA 41 Category: Principal judgment Parties: HP Mercantile Pty Limited (Plaintiff) Gerard Hartnett (Defendant) Gary Robert Wilson (Defendant) Attila Bodonyi (Defendant) Oliver Fonda (Defendant) Anthony William Andrew (Defendant) Ross Alexander Mars (Defendant) Frank Alexander Watkins (Defendant) Campbell Faulds (Defendant) John Luies (Defendant) Peter James Christie (Defendant) Bacroy Pty Limited Trading As John Jansen Family Trust (Defendant) Cathrine Lesley Stewart (Defendant) Robert Scolaro (Defendant) Stephen John Noblett (Defendant) Peter David Chapman (Defendant) Donald James Duncan (Defendant) Alastair Roderick Hood (Defendant) Nicholas Rossetti (Defendant) Gary Groth-Marnat (Defendant) Alexander Leslie Alan Holmes (Defendant) Simon Gregory Pritchard (Defendant) Mark Venables (Defendant) Ronald Anthony Baldini (Defendant) Ross Douglas Jose (Defendant) Alan John Bradshaw (Defendant) Helen Marie Creaser (Defendant) Keith Alexander Wallis (Defendant) Wayne James Spindler (Defendant) Richard William Sutton (Defendant) Antonio Bartuccio (Defendant) Robin Clifford James O'Neill (Defendant) Jean-Michel Dominique Seneque (Defendant) Guilbert John Percival (Defendant) Anthony Kubicki (Defendant) Gregory Plevey (Defendant) Thomas McIntyre (Defendant) Matthew Christopher Wenke (Defendant) Christopher Michailidis (Defendant) Michael Foletti (Defendant) John Fitzpatrick (Defendant) David George Gourley (Defendant) John Jeffreys (Defendant) Sharon Kell (Defendant) Heather Kelly (Defendant) John William Dunn (Defendant) Robert John Terry (Defendant) Ross Jeffrey Smith (Defendant) Paul William McDermott (Defendant) Jonathon Sidney Lowe (Defendant) Arthur Jones (Defendant) Sean Hogan (Defendant) Holly Bryant (Defendant) Audrey Chang (Defendant) Paul Burke (Defendant) Neville Vernon Deague (Defendant) Graham Ellender (Defendant) Paul Anthony McCluskie (Defendant) Laurence Mitchell (Defendant) Valentine Vargassoff (Defendant) Kevin Raymond Vaughan (Defendant) John Anthony Van De Ven (Defendant) Jeremy Dale Simpson (Defendant) Douglas Roach (Defendant) David Ralph (Defendant) Noel Edward Quick (Defendant) Randall Kenneth Perry (Defendant) Graham Ronald Paterson (Defendant) Roberta O'Sullivan (Defendant) John Michael Fisher (Defendant) Steven Doyle (Defendant) James Noel Brickwood (Defendant) Sigrid Birzer (Defendant) Robert Arthur Handley Bailey (Defendant) Shane Allard (Defendant) Gregory Raymond Smith (Defendant) Andrew Norris (Defendant) Russell John Hawkins (Defendant) Craig Randall Hawkins (Defendant) Brian Walter Gray (Defendant) Peter Michael Deed (Defendant) Alexander Rex Cameron (Defendant) Paul Benbow (Defendant) Edmund Lawrence Woods (Defendant) Joe Galante (Defendant) David John Gray (Defendant) Ralph Young (Defendant) Sean Patrick O'Donovan (Defendant) Representation: Counsel: B Walker SC, P Knowles (HPM) CRC Newlinds SC, A D'Arville (defendants represented by Jonathon Eastoe Lawyers and/or Tiernan & Associates) A Leopold SC, E Holmes (defendants represented by DLA Piper) Solicitors: Versace McKenzie Lawyers (HPM) DLA Piper (various defendants) Jonathon Eastoe Lawyers/ Tiernan & Associates Lawyers (various defendants) File Number(s): 2012/001933752012/001933842012/001933912012/001939982012/001940102012/001940192012/001940282012/001941332012/001941412012/001941512012/001960702012/001960922012/001966522012/001966552012/002011492012/002011862012/002011952012/002012032012/002012282012/002012302012/002012322012/002012342012/002012352012/002012382012/002012392012/002012402012/002012412012/002012422012/002012432012/002012442012/002039412012/002039422012/002039432012/002039442012/002039452012/002039472012/002046742013/001661392013/001779612013/002569392014/000884872014/000884972014/000887102014/000887112014/000887142014/000887152014/000887162014/000887182014/000887192014/000887202014/000887222014/000887242014/000887252014/000887262014/000887272014/000887282014/000887302014/000887312014/000887322014/000887352014/000887362014/000887382014/000887392014/000887402014/000887412014/000887432014/000887442014/000887452014/000887462014/000887492014/000887502014/000887512014/000887532014/000887562014/000887592014/000887602014/000887612014/000887622014/000887632014/000887652014/000887662014/000887672014/000887682014/000887692014/000887702014/000887712014/000895212014/895502014/00089574 Publication restriction: None Judgment Introduction 1. On 31 July 2015 Hammerschlag J made orders by consent for the determination of three separate questions in numerous matters in which HP Mercantile Pty Limited ('HPM') is the plaintiff. On 15 September 2015 I made orders by consent in substantially the same terms in the matter involving HPM and Mr Attila Bodonyi. HPM, as the assignee of Tumut River Orchard Management Limited ('TROM') sues the various defendants to recover amounts allegedly owing by them as investors in certain horticultural schemes promoted by TROM, including amounts said to be owing under Loan Agreements entered into between TROM and the investors. 2. The litigation concerns four horticultural schemes that were promoted in the 1990s. These are the Coonabarabran Orchard Project, the Queensland Orchard Project, the Tumut River Orchard Project, and the Treetop Project. 3. The schemes were promoted through the issue of prospectuses. The Coonabarabran, Queensland and Tumut River schemes were each governed by an Investment Deed entered into by TROM and the Representative (which was either Permanent Trustee Company Limited or Australian Rural Group Limited). There was no Investment Deed for the Treetop Project itself. That project was a vehicle by which investors could invest in one or more of the other schemes. 4. Investors, or Growers as they were called, entered into various agreements with TROM, including a Deed of Licence (whereby an allotment of land was licensed to the Grower), a Farming Agreement (which concerned the carrying out of the horticultural activity and related matters such as the marketing and sale of the produce), and a Loan Agreement. Growers also became bound by the applicable Investment Deed or Deeds. 5. The separate questions, which are to be determined on the basis of facts agreed for that purpose only, concern the Loan Agreements, and in particular clause 5.2(c) of such agreements, which is what may be described as a limited recourse provision. Broadly, separate questions 1 and 2 concern whether the condition for the operation of the limited recourse provision has been satisfied in each case. The relevant condition is satisfied when the Grower's income from his interest in the Project has been made available in its entirety by the Grower to the Representative for the purpose of meeting the Grower's payment obligations to the Lender under the Loan Agreement. If so, then the Lender shall have no other recourse to the Grower for certain amounts of principal and interest. 6. Separate question 3, which arises only if question 1 or question 2 is answered in the affirmative, concerns whether, upon the proper construction of clauses 4.1 and 5.2(c) of the Loan Agreements, and where an event of default has occurred under clause 4.1 of a Loan Agreement, HPM is precluded from claiming the relief it seeks against the Grower under the Loan Agreement. 7. There are some minor differences between clauses 4.1 and 5.2(c) as between the different forms of Loan Agreement. However, the parties agreed that these differences are not material to the questions to be determined. 8. The parties further agreed on the outcomes that should follow if all three questions are answered in the affirmative, and if any of the questions are answered in the negative. 9. Before turning to the questions themselves, it should be noted that similar issues in relation to the Queensland scheme were dealt with by Black J in HP Mercantile Pty Limited v Clements [2014] NSWSC 509. His Honour resolved the issues adversely to HPM (see especially at [43], [47] and [53]-[55]). The defendants contended, and HPM accepted (at least in relation to the Queensland scheme Loan Agreements), that principles of comity would operate such that the Court would not be depart from Black J's decision unless it was plainly wrong. There was some divergence between the parties as to what the plainly wrong test entailed. 10. The questions ordered to be determined separately are: 1. On the basis of the agreed facts in paragraphs 1-25, 26(a) and 27, on the proper construction of clause 5.2(c) of each of the Relevant Loan Agreements (as defined in the Statement of Agreed Facts), did each of the Relevant Defendants (as defined in the Statement of Agreed Facts) make available all their income in its entirety within the meaning of clause 5.2(c) of the applicable Relevant Loan Agreement (as defined in the Statement of Agreed Facts) from their interest in the Relevant Project(s) (as defined in the Statement of Agreed Facts) to the Representative? 2. On the basis of the agreed facts in paragraphs 1-25, 26(b) and 27, on the proper construction of clause 5.2(c) of each of the Relevant Loan Agreements (as defined in the Statement of Agreed Facts), did each of the Relevant Defendants (as defined in the Statement of Agreed Facts) make available all their income in its entirety within the meaning of clause 5.2(c) of the applicable Relevant Loan Agreement (as defined in the Statement of Agreed Facts) from their interest in the Relevant Project(s) (as defined in the Statement of Agreed Facts) to the Representative? 3. If the answer to question 1 or 2 above is in the affirmative, on the proper construction of clause 5.2(c) and clause 4.1 of each of the Relevant Loan Agreements, is the Plaintiff precluded from claiming the relief it seeks against any Relevant Defendant in respect of whom one or more events of default under clause 4.1 of the Relevant Loan Agreement has occurred? 1. The Statement of Agreed Facts is set out in a Schedule to these reasons. 2. It is agreed that if all questions are answered in the affirmative: 1. the actions against the defendants named in Schedule 1 to the Statement of Agreed Facts shall be dismissed with costs; and 2. those parts of the actions against the defendants named in Schedule 2 to the Statement of Agreed Facts which relate to the four projects shall be dismissed on the basis that the costs of those proceedings shall be determined by the Court. 1. It is agreed that if any of the questions are answered in the negative, the actions against the relevant defendants (being the defendants named in either Schedule 1 or Schedule 2 to the Statement of Agreed Facts) shall proceed towards trial. The Agreements 1. The oral submissions were primarily focused upon the provisions of the agreements applicable to the Coonabarabran Orchard Project. Despite the existence of minor differences between the agreements applicable to the different projects, no party suggested that the differences were substantial or should affect the way the questions are answered. In those circumstances, I will set out only the salient provisions of the agreements that concern the Coonabarabran Orchard Project, commencing with the Investment Deed. 2. The Investment Deed in evidence is a consolidated version of the deed as originally made on 26 May 1993 and as amended by deeds dated 11 June 1993, 11 May 1995, and 10 October 1995. The Investment Deed was made between TROM as the Manager, Permanent Trustee Company Limited as the Representative, and Growers who become parties to Project Agreements. 3. It was contemplated that Growers would become parties to Project Agreements (a Licence Agreement and a Farming Agreement) following the acceptance of an application for investment made pursuant to clause 4. Upon acceptance of such an application, the Investment Deed became binding upon the Grower (see clause 28). By clause 5 of the Investment Deed TROM could agree to provide finance to Growers who submitted an application for an Investor Loan. Approved applicants for finance would then enter into an Investor Loan Agreement. 4. For present purposes, the important provisions of the Investment Deed are clauses 16 and 17 that concern revenue from the sale of produce and the payment of various expenses and outgoings. 5. By clause 16.1 the Representative was required to open a bank account, called the "Investment Account", into which it was required to deposit the Gross Sale Proceeds (as defined), any income derived from investment of the Gross Sale Proceeds, and any other income received for and on behalf of Growers. 6. By clause 16.3, the Representative was entitled to pay certain costs and expenses out of the Investment Account, including payments to which the Representative itself, the Manager and the Auditor were entitled under the deed (see clauses 21, 11 and 15 respectively). 7. By clause 17.1, each Grower was entitled to a number of Income Entitlements, defined to mean entitlements to income which attach to the Farming Allotment (as defined) of the Grower. 8. Clause 17.2 provides that all Gross Sale Proceeds received by the Manager shall be paid to the Representative to be held by it in accordance with the deed. Clause 17.3 then provides: The Net Income in each Financial Year shall be the sum of the Gross Sale Proceeds and any other income in respect of that Financial Year including income derived from the investment of funds pursuant to Clause 16.6, less all costs and expenses (including remuneration) payable out of the Investment Account under this Deed in respect of that Financial Year. 1. By clause 17.4, the Representative could, upon the recommendation of the Manager, set sums aside out of the Gross Sale Proceeds to provide for contingencies. Such sums were to be invested in Authorised Investments (as defined). 2. Clause 17.6 provides that at the end of each financial year the Representative shall, in accordance with a formula, credit to the account of each Grower a share of the Net Income (being the amount determined under clause 17.3). 3. Clauses 17.7 to 17.19 then provide: 17.7 Upon an amount being credited to the account of a Grower pursuant to Clause 17.6, the Representative shall deduct from such account and shall pay to the person entitled thereto all costs, expenses and outgoings as are properly chargeable to the Grower under his Agreements. 17.8 The Representative shall, within sixty (60) days of the end of each Financial Year, cause any amount standing to the credit of the account of each Grower to be paid to the Grower less any negative amount carried forward from any period as referred to in Clause 17.9, PROVIDED HOWEVER that the Representative shall be entitled to deduct such amount as is reasonable in respect of tax which may be payable by the Representative pursuant to s 98 of the Income Tax Assessment Act, 1936 from any payment to a Grower who is a non-resident for the purposes of s 98 of the said Act AND PROVIDED FURTHER that upon the Representative making payment of all tax payable as aforesaid, any balance remaining from the amount retained for such purposes shall forthwith be paid to the Grower. 17.9 If in respect of any Financial Year subject to the Licence Agreement and the Farming Agreement the amount standing to the account of a Grower is a negative amount the Representative shall be entitled to offset that amount against the Grower's account for any subsequent period or periods. This provision shall not limit the right of the Manager or the Representative to receive payment pursuant to this Deed. 1. The form of Licence Agreement entered into by Growers (as Licensees) with TROM (as Licensor) recited that the Licensee was permitted to use and occupy a certain portion of land upon the terms of the agreement. The agreement further provided for the payment of a Licence Fee, payable as to $500 on the date of execution (see clause 2(a)(i)) and an amount at the end of each financial year equivalent to 5% of the share of the Gross Sale Proceeds (if any) to which the Licensee is entitled under the provisions of the Investment Deed (see clause 2(a)(ii)). 2. By clause 12 it was provided that the Licence Agreement was subject to the terms of the Investment Deed, the terms of which prevailed in the event of any inconsistency. 3. Clause 14 relevantly provided: 14(a) The Grower shall by his execution of this deed be deemed to have irrevocably authorised and directed the Representative to pay to the Manager, until the whole of the amounts referred to in Clause 2(a)(ii) have been paid, all amounts payable by the Representative to the Grower in pursuance to Clause 17.8 of the Investment Deed representing the income of the Grower in respect of the income of the Grower's Farming Allotment to be applied to the Manager in payment of the Licence Fee amounts referred to in Clause 2(a)(ii). (b) Only after 30th June 1998 and in the event that the Grower's income in any one subsequent year is insufficient, after the deduction of any other amount payable to the Manager, to pay the amount referred to in Clause 2(a)(ii) or part thereof then such amount or part thereof may be paid out of the Grower's income in any following year. (c) Subject to the Grower's income from his interest in the Project being made available in its entirety by the Grower to the Representative for the purpose of meeting the Grower's payment obligations to the Manager under the Licence Agreements the Manager shall have no other recourse to the Grower for the Licence Fee amounts referred to in Clause 2(a)(ii). 1. The form of Farming Agreement entered into by Growers with TROM (as the Manager) provided for the carrying out by the Manager of the horticultural activity and related matters, such as marketing and sale. By clause 11, the Grower appointed the Manager as his agent and nominee to sell the harvested fruit. The Manager was entitled to pool the fruit with other fruit of the same species harvested from adjacent or nearby lands. The Grower acknowledged that he had no interest in any particular fruit forming part of the pool but only a proportionate interest in the whole of the pool, being the proportion that the number of his trees bears to the total number of trees from which the fruit is pooled. By clause 11.5, the Manager under the Investment Deed was required to pay all Gross Sale Proceeds to the Representative to be dealt with in accordance with the Investment Deed. 2. By clause 19, the Grower was required to make various payments to the Manager. 3. By clause 29 it was provided that the Farming Agreement was subject to the terms of the Investment Deed, the terms of which prevailed in the event of any inconsistency. 4. Clause 30 relevantly provided: 30 (a) The Grower shall by his execution of this deed be deemed to have irrevocably authorised and directed the Representative to pay to the Manager, until the whole of the amounts referred to in Clause 19.2(b), 19.4 and 19.5 have all been paid, all amounts payable by the Representative to the Grower in pursuance to Clause 17.8 of the Investment Deed representing the income of the Grower in respect of the income of the Grower's Farming Allotment to be applied to the Manager in payment of the amounts referred to in Clause 19.2(b), 19.4 and 19.5. (b) Only after 30 June 1998 in the event that the Grower's income in any one subsequent year is insufficient after the deduction of any other amount payable to the Manager, to pay these amounts or part thereof, then such amounts or part thereof may be paid out of the Grower's income in any following year. (c) Subject to the Grower's income from his interest in the Project being made available in its entirety by the Grower to the Representative for the purpose of meeting the Grower's payment obligations to the Manager under the Farming Agreements the Manager shall have no other recourse to the Grower for these amounts referred to in Clause 19.2(b) and 19.4 and 19.5. 1. The form of Loan Agreement entered into by Growers (as Borrowers) with TROM (as Lender) provided that the Borrower authorised the Lender to remit the Principal Sum to the Representative to be applied by the Representative towards any obligation of the Borrower to make payments under the Project Agreements. 2. By clause 3.2(a), the Borrower was required to repay the Principal Sum in the amounts and on the dates set forth in Item 4 of Schedule 1. By Items 4A and 4B two small amounts were to be repaid three and six months respectively from the date of the agreement. By Item 4C the balance of the Principal Sum was to be repaid "by direct deduction from income of the Farm Business in accordance with Clause 17.7 of the Deed and Clause 3.3 and 5.2". I note in passing that it was suggested in argument that the reference in Item 4C to clause 17.7 was an obvious error, and that clause 17.8 was the provision intended to be included. 3. By clause 3.2(b) the Borrower was required to pay interest on the Principal Sum whilst it remained unpaid. Clauses 3.2(c) to 3.2(e) provided for various other amounts (such as stamp duty and monies paid to remedy defaults) to be paid by the Borrower. 4. Clause 3.3 provides: The balance of the Principal Sum and accrued interest and all other monies which may from time to time be owing under this agreement to Lender shall except as hereinafter provided be repaid to the Lender on the due dates for payment by direct deduction from the monies payable by the Representative to the Borrower in pursuance of 17.8 representing the income of the Borrower in respect of the Borrower's Farming Allotment and the Borrower by his execution hereof hereby authorises the Representative to pay the Lender all such monies subject to the operation of clause 5.2. 1. Clause 4.1 relevantly provides: The Principal Sum and interest thereon shall immediately become payable and each Security shall immediately become enforceable at the option of the Lender upon the happening of one or more of the following events without the necessity for any notice or demand: - (a) if subject to the operation of paragraph 5.2 below default be made by the Borrower in the due and punctual payment of the Principal Sum or interest thereon or any instalment of Principal or interest at any time due and payable by the Borrower to the Lender; (b) if default be made by any person other than the Lender of any observance or performance of any obligation contained on its part contained in this agreement or in any Security or on any other account or transaction between the Lender or the Borrower; (c) if the Borrower shall cease to carry on the Farm Business; (d) if the Borrower stops or suspends payment or states its intention of so doing; (e) if in relation to the Borrower any act or event mentioned in section 461 of the Corporations Law shall occur……; (f) if the Borrower without the prior consent of the Lender creates or attempts or purports to create any mortgage or charge over any part of the property the subject of any Security ranking or which might rank in priority to or pari passu with that Security; (g) if any Security becomes enforceable according to its terms (whether actually enforced or not). 1. Security is defined to mean "this agreement and any security now or hereafter given to or held by the Lender for the payment of the whole or any part of the Principal Sum and interest thereon". 2. Security is further dealt with in clause 5. By clause 5.1 the Borrower charges to the Lender its interest in the Farm Business and the Farming Agreements as security for the punctual repayment of the Principal Sum and interest. 3. Clause 5.2, the provision at the centre of the dispute, then provides: 5.2(a) The Borrower shall, by his execution of this Deed, be deemed to have irrevocably authorised and directed the Representative to pay to the Lender until the whole of the Principal Sum has been repaid and Interest paid, all amounts payable by the Representative to the Borrower in pursuance of Clause 17.8 of the Investment Deed representing the income of the Borrower in respect of the income of the Borrower's Farm Business (the Borrower's Farming Allotment), to be applied by the Lender in payment of the amounts referred to in Clause 3 and Items 3 to 6 of the Schedule 1 hereto. (b) In the event that the Grower's income in any one year is insufficient after the deductions of any other amount payable to the Manager, to pay the Principal and Interest amounts referred to in Items 4C, 5 and 6C of Schedule 1 hereto or part thereof then such Principal and Interest or part thereof may be paid out the Grower's income in any subsequent year. (c) Subject to the Grower's income from his interest in the Project being made available in its entirety by the Grower to the Representative for the purpose of meeting the Grower's payment obligations to the Lender under the Loan Agreement the Lender shall have no other recourse to the Grower for Principal and Interest amounts referred to in Items 4C, 5 and 6C of Schedule 1 hereto. 1. Clause 5.3 contains an acknowledgment by the Borrower that the provisions in clause 3.3 do not relieve it from any liability to make the payments referred to in Items 6A and 6B of Schedule 1, which are payments of interest in respect of financial years ending 30 June 1994 and 30 June 1995. Item 6C concerns the payments of interest in respect of subsequent financial years. Questions 1 and 2 1. The dispute arises from the fact that, at all material times for each of the four projects, there were Gross Sale Proceeds that were not remitted to the Representative as required (see Statement of Agreed Facts at [26]). HPM, for whom Mr Walker SC and Mr Knowles appeared, submitted that this had the consequence that the condition in clause 5.2(c) – that the Grower's income from his interest in the Project be made available in its entirety by the Grower to the Representative for the purpose of meeting the Grower's payment obligations to the Lender under the Loan Agreement – was not satisfied. Accordingly, the Grower was not entitled to the benefit of the limited recourse provided for in the clause. In brief, it was HPM's contention that "the Grower's income from his interest in the Project" within clause 5.2(c) should be taken as a reference to the Grower's share of the income generated by the Project prior to deduction of any amounts; that is, it is to be equated with the Grower's share of the Gross Sale Proceeds. 2. The defendants, in terms of their legal representation, formed two groups. Mr Newlinds SC appeared with Mr d'Arville for one group, and Mr Leopold SC appeared with Ms Holmes for the other, larger group. Despite some differences in approach and emphasis, the submissions made for each group were broadly consistent. In essence, it was the contention of the defendants that "the Grower's income from his interest in the Project" within clause 5.2(c) should be taken as a reference to any amounts payable to the Grower pursuant to clause 17.8 of the Investment Deed. It was then submitted that, by reason of the irrevocable authority and direction referred to in clause 5.2(a), each Grower had made such income available in its entirety to the Representative for the purpose of meeting the Grower's payment obligations under its Loan Agreement. Accordingly, the Growers were entitled to the benefit of the limited recourse provided for in clause 5.2(c). 3. Whatever the precise content of the "plainly wrong" test, I consider that I am required to come to my own conclusion on the questions of construction that arise (see Undershaft (No 1) Limited v Commissioner of Taxation [2009] FCA 41 at [68]-[74] per Lindgren J, as applied by Kunc J in Guo Hui Cai v Xiao Yan Guo (No 2) [2014] NSWSC 1416 at [46]-[47]). 4. The applicable principles of construction of written commercial contracts are to be found in the statements made by the High Court in Pacific Carriers Limited v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22], Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; (2004) 219 CLR 165 at [40], and more recently in Electricity Generation Corporation v Woodside Energy Limited [2014] HCA 7; (2014) 251 CLR 640 at [35] (and see also the discussion by Leeming JA in Mainteck Services Pty Limited v Stein Heurtey SA [2014] NSWCA 184 at [71]-[85]). 5. It is necessary to determine what a reasonable business person would have understood the terms of the Loan Agreements to mean. That determination requires a consideration of the language used, the surrounding circumstances known to the parties, and the commercial purpose or objects to be secured by the agreement. 6. The Loan Agreements were entered into by a Lender who was the Manager of a horticultural scheme, and a Borrower who was to invest in the scheme. It is common ground that such investment was designed to achieve taxation advantages for the investor. The Loan Agreements provided funds to facilitate the making of such investment, and were entered into by the investor in conjunction with other agreements made with the Manager, namely a Licence Agreement and a Farming Agreement. It is relevant to note that an investor in a scheme became bound by the terms of the applicable Investment Deed or Deeds. It is also relevant to note that each of the forms of Loan Agreement was contained in a prospectus issued under the Corporations Law, and that an Application for Investor Loan form had to be completed by the Borrower. 7. Turning now to the terms of the Loan Agreements, it should be noted that the obligation to repay the Principal Sum is found in clause 3.2(a). The clause must be read with Item 4 of Schedule 1 to the agreement which stipulates when repayments of the Principal Sum must be made. Item 4 operates so that two repayments have to be made within six months of the date of the agreement. Item 4C provides that the balance of the Principal Sum is to be paid by direct deduction from "income of the Farm Business" in accordance with clause 17.7 of the Deed and clauses 3.3 and 5.2 of the Loan Agreement. 8. Clause 3.3 refers in terms to repayment of the balance of the Principal Sum and accrued interest (and all other monies owing under the agreement to the Lender) "by direct deduction from the monies payable by the Representative to the Borrower in pursuance of 17.8 representing the income of the Borrower in respect of the Borrower's Farming Allotments". The reference to 17.8 is plainly a reference to clause 17.8 of the Investment Deed. It is then stated that the Borrower, by his execution of the agreement, authorises the Representative to pay all such monies to the Lender subject to the operation of clause 5.2. 9. Clause 5.2(a) itself refers to the authority of the Representative to make such payments to the Lender out of amounts payable by the Representative to the Borrower in pursuance of clause 17.8 of the Investment Deed "representing the income of the Borrower in respect of the income of the Borrower's Farm Business (the Borrower's Farming Allotments)". 10. The words "direct deduction" found in Item 4C should be regarded as a reference to the direct deduction expressly mentioned in clause 3.3, namely, direct deduction from monies payable to the Borrower pursuant to clause 17.8 of the Investment Deed. Whilst I do not think that anything turns on it, it is likely in my view that the reference in Item 4C to clause 17.7 is an erroneous reference to clause 17.8 of the Investment Deed. Direct deduction in accordance with clause 17.7 to pay outstanding amounts of Principal Sum seems inapposite, as clause 17.7 is directed to costs, expenses and outgoings. It would make much more sense to refer to clause 17.8, in conjunction with clauses 3.3 and 5.2 of the Loan Agreement, as those provisions expressly pick up clause 17.8. 11. The obligation to pay interest on the unpaid amount of Principal Sum is found in clause 3.2(b). The clause must be read with Item 6 of Schedule 1 to the agreement which stipulates when interest payments must be made. Item 6 operates so that an initial payment of interest has to be made on the date of the agreement, and another on or before 30 June 1995 (see Items 6A and 6B). Item 6C provides that thereafter interest is to be paid on or before 30 June in each financial year in respect of that financial year. 12. Clauses 3.2(c) to (e) contain obligations to pay various other amounts to the Lender, including stamp duty and other taxes, and the costs of remedying defaults. 13. In summary, the payment obligations contained in clause 3.2, read with clause 3.3, require repayment of the balance of the Principal Sum and accrued interest, and all other monies owing under the agreement to the Lender (amounts other than Principal or interest), by direct deduction from monies payable to the Borrower pursuant to clause 17.8 of the Investment Deed. That is, for amounts falling within clause 3.3, a particular source of payment is identified. The terms of clause 5.3 suggest that aside from the interest payments referred to in Items 6A and 6B, clause 3.3 thereby operates to relieve the Borrower to some extent from liability to make the payments. 14. Clause 17.8 of the Investment Deed requires the Representative (within 60 days of the end of each financial year) to cause any credit on the account of the Grower to be paid to the Grower less any negative amount carried forward from an earlier period pursuant to clause 17.9. At the end of each financial year, the account of the Grower is credited by the Representative with a share of Net Income (see clause 17.6). Amounts are then deducted from the account by the Representative to pay costs, expenses and outgoings properly chargeable to the Grower under his agreements (see clause 17.7). The amount of any remaining credit, less any negative amount carried forward pursuant to clause 17.9, is then paid to the Grower under clause 17.8. 15. An amount is only paid to the Grower under clause 17.8 if there is a credit on the Grower's account that exceeds any negative amount carried forward from an earlier period pursuant to clause 17.9. 16. As envisaged by clauses 3.3 and 5.2(a), the Grower, by execution of the Loan Agreement, irrevocably authorises and directs the Representative to pay any clause 17.8 monies to the Lender until the whole of the Principal Sum has been repaid and interest paid. Clauses 3.3 and 5.2(a) indicate that clause 17.8 monies "represent the income of the Borrower" in respect of the Borrower's Farming Allotments or the Borrower's Farm Business. 17. Clause 5.2(b) then refers to the situation where "the Grower's income" in any one year is insufficient, after deduction of any other amounts payable to the Manager, to pay the amounts referred to in Items 4C, 5 and 6C. Those "other amounts" would include, for example, amounts of Licence Fees and amounts of farming costs payable out of clause 17.8 monies (see clause 14(a) of the Licence Agreement and clause 30(a) of the Farming Agreement). The amounts referred to in Items 4C and 6C include the balance of the Principal Sum, and interest in respect of financial years after 30 June 1995. It is not clear why Item 5, which merely refers to a rate of interest rather than an amount of interest, is included alongside Items 4C and 6C. 18. In any event, given that the amounts in Items 4C and 6C are to be paid by direct deduction out of monies payable by the Representative to the Grower under clause 17.8 of the Investment Deed, and given further that such monies "represent the income of the Borrower" in respect of the Borrower's Farming Allotments or the Borrower's Farm Business, "the Grower's income" where it first appears in clause 5.2(b) should be read as a reference, albeit shorthand, to monies payable by the Representative to the Grower under clause 17.8 of the Investment Deed. 19. Clause 5.2(b) thus operates so that if any monies payable under clause 17.8 in any year are insufficient (after the deduction of any other amount payable to the Manager) to pay the amounts referred to in Items 4C, 5 and 6C, then those amounts or part thereof may be paid out of "the Grower's income" in any subsequent year. Again, "the Grower's income" should be read as a reference to monies payable by the Representative to the Grower under clause 17.8 of the Investment Deed. The effect of clause 5.2(b) is that the obligations to pay the amounts out of clause 17.8 monies may be deferred to any subsequent year. 20. Clause 5.2(c), the limited recourse provision, refers to "the Grower's income from his interest in the Project". In order for there to be limited recourse in respect of the amounts referred to in Items 4C, 5 and 6C, such income must be "made available in its entirety by the Grower to the Representative for the purpose of meeting the Grower's payment obligations to the Lender under the Loan Agreement". 21. The concept of "the Grower's income from his interest in the Project" is central to the determination of separate questions 1 and 2. It is immediately apparent that the language employed in clause 5.2(c) concerning the income of the Grower differs from that employed in the preceding paragraphs of the clause. Mr Walker, for HPM, drew attention to the contrast in this respect between clauses 5.2(a) and 5.2(c), and noted that the provisions performed different functions. The former identifies a source of payment from which the Borrower's liability can be satisfied; the latter concerns recourse to the Borrower. It was submitted that in circumstances where the relevant words in clause 5.2(a) were given a defined meaning, the different words in clause 5.2(c) must have a different meaning. It was put that the words in clause 5.2(c) were apt to include all of the Gross Sale Proceeds. 22. HPM further submitted that clause 5.2(c) should be construed harmoniously with its analogues in the Licence Agreements (clause 14(c)) and Farming Agreements (clause 30(c)), and it made no sense to construe those provisions as referring to amounts payable under clause 17.8 because licence fees and farming fees are taken out at an earlier stage (see clause 17.7 of the Investment Deed). Clause 5.2(c) and its analogues should thus be understood as requiring the Grower to make available income to meet obligations under all such agreements and such income was income prior to the various deductions contemplated by the Investment Deed. 23. This construction was said to be supported by the language of clause 5.2(b) and its analogues, where income is referred to in a manner which suggests that the Grower's income is something that exists prior to any deductions. 24. HPM submitted that its construction was also supported by the terms of the Investment Deed (including clauses 16.1 and 16.6) which indicate that project income is received "for and on behalf of Growers", is "the property of the Growers", and that Growers have an interest in income generated by the project prior to any distribution under clause 17.8. 25. As noted earlier, HPM submitted that as there were Gross Sale Proceeds in respect of each scheme that were not remitted to the Representative as required (see Statement of Agreed Facts at [26]), the Grower's income from his interest in the Project had not been made available in its entirety within the meaning of clause 5.2(c). It was put that the notion of making income available to the Representative entailed a requirement to pay or cause money to be paid. Merely giving the authority and direction as referred to in clause 5.2(a) cannot be sufficient, otherwise the condition for limited recourse in clause 5.2(c) would be rendered otiose. 26. Mr Newlinds submitted that clause 5.2(a) defined, for the purposes of clause 5.2 generally, what was meant by Grower's income. That is what was intended by the words "representing the income of the Borrower in respect of income of the Borrower's Farm Business (the Borrower's Farming Allotments)", which words would otherwise be redundant. Mr Newlinds also pointed out that it would have been easy to employ the term Gross Sale Proceeds in clause 5.2(c) had that been the intention. Further, he submitted that it made little sense to regard a share of Gross Sale Proceeds as the Grower's income when no part of Gross Sale Proceeds can be identified as belonging to a particular Grower. 27. Mr Newlinds also submitted that it would be absurd if the Grower could not obtain the benefit of clause 5.2(c) due to a default by the Manager (who was at the time of contract also the Lender) in its obligations under the Farming Agreement to pay all Gross Sale Proceeds to the Representative. It was submitted that a Grower, by irrevocably authorising and directing the Representative in accordance with clause 5.2(a), did all he could to make available to the Representative the entirety of the income from his interest in the Project. 28. Mr Leopold submitted that clause 5.2(c) should be read in a way that is harmonious with clauses 3.2(a), 3.3, 5.2(a), 5.2(b) and 5.3 of the Loan Agreement, understood against the background of clauses 16 and 17 of the Investment Deed. In summary, it was put that those provisions of the Loan Agreement draw a sharp distinction between certain intial payments of principal and interest (see Items 4A, 4B, 6A and 6B in Schedule 1) and the payment of the balance of principal and interest (see Items 4C and 6C in Schedule 1), and repetitively reinforce that the balance of principal and interest is only to be paid out of amounts payable to the Grower under clause 17.8 of the Investment Deed. That is to say, those provisions indicate that there is no other recourse to the Grower in respect of the balance of principal and interest. In this context, clause 5.3 was relied upon as a further indication that the provisions (particularly clause 3.3) relieved the Grower from liability for the balance of principal and interest, save for satisfaction out of amounts payable to the Grower under clause 17.8. 29. Mr Leopold submitted that "the Grower's income from his interest in the Project" in clause 5.2(c) should be understood (as should the reference to "the Grower's income" in clause 5.2(b)) as any amounts payable to the Grower under clause 17.8 of the Investment Deed. 30. It was then submitted that it was only at the clause 17.8 stage that a Grower had any control or power over the application of income from the project, and only then could a Grower make available any income to the Representative. It was put that it would be absurd to make the limited recourse conditional upon something which the Grower was not in a position to satisfy. 31. The question of construction raised in relation to clause 5.2(c) concerns the condition for the operation of a limited recourse provision. In approaching the question, it is appropriate to consider the language of the condition as a whole. That language mandates that certain income of the Grower must be made available in its entirety by the Grower to the Representative for the purpose of meeting the Grower's obligations under the Loan Agreement. It is important to notice that the condition requires not merely that such income be made available to the Representative, it must be made available by the Grower. This suggests that the income is something over which Growers have control, so that they can place it at the disposal of another (see Gibbs J in Thompson v Smith (1976) 135 CLR 102 at 105), and thereby satisfy the condition. 32. It is true that Growers have an interest in the pool of fruit, of which the fruit from the Grower's own trees forms part (see clause 11.1 of the Farming Agreement), and thus an interest in the proceeds of sale of the pool of fruit (that is, Gross Sale Proceeds). Nonetheless, Growers do not receive the Gross Sale Proceeds or any portion of them, and are not in a position to control how Gross Sale Proceeds are actually dealt with. Gross Sale Proceeds are received by the Manager as agent for the Grower, but the Manager is obliged to pay them to the Representative to be dealt with in accordance with the Investment Deed. No proceeds are paid to a Grower apart from amounts that are payable under clause 17.8. In contrast to the position concerning Gross Sale Proceeds, Growers are in a position to control how payments under clause 17.8 are actually dealt with. 33. The Loan Agreements provide that the Growers irrevocably authorise and direct the representative to pay such amounts to the Lender "until the whole of the Principal Sum has been repaid and Interest paid". The Licence Agreements and Farming Agreements similarly provide that the Growers irrevocably authorise and direct the Representative to pay such amounts to the Manager until certain annual licence fees and other payments to the Manager have all been paid. There is no suggestion that such authorities and directions are not effective. It is agreed that none of the directions have been revoked. The authorities and directions place any amounts payable under clause 17.8 at the disposal of the Representative to apply the money towards the Grower's payment obligations under the Loan, Licence and Farming Agreements. A Grower thereby makes available to the Representative any amounts that are payable to the Grower pursuant to clause 17.8 of the Investment Deed. Those amounts are made available for the purpose (albeit not the sole purpose) of meeting the Grower's obligations under the Loan Agreement. I do not think that this conclusion necessarily renders the condition for limited recourse otiose. The condition is directed to whether, in fact, such income has been made available to the Representative in its entirety. It is possible that, despite the direction, an amount could be paid to the Grower by mistake. There is no suggestion that any such mistake has ever occurred. 34. The question remains whether such amounts should be regarded as "the Grower's income from his interest in the Project" within the meaning of clause 5.2(c). In my view, notwithstanding the different language employed throughout clause 5.2 concerning the income of the Grower, such amounts should be so regarded. By clause 5.2(a), all amounts payable pursuant to clause 17.8 are said to represent "the income of the Borrower in respect of the income of the Borrower's Farm Business (the Borrower's Farming Allotments)". That suggests that out of all the income generated by the Borrower's farm, the amounts payable under clause 17.8 may be taken to represent the Borrower's income from the farm business. Further, as noted earlier, it seems to me that "the Grower's income" within clause 5.2(b) should be read as a reference to monies payable under clause 17.8 of the Investment Deed. The draftsperson could have, but did not, repeat the language that was used in clause 5.2(a). Instead, a shorthand expression was employed. I do not think that the reference in clause 5.2(b) to "deductions of any other amount payable to the Manager" indicates that the Grower's income is something that exists prior to any deductions. The reference can just as well be read as merely descriptive of what remains of any amounts payable under clause 17.8 after the deduction of any other amount payable to the Manager. 35. In clause 5.2(c) yet another expression, "the Grower's income from his interest in the Project", is employed. To my mind, when read in the context of clause 5.2 as a whole, the expression ought to be taken as a further reference to the Borrower's income from the farm business, being amounts payable under clause 17.8 of the Investment Deed. As a source of income, the Grower's interest in the Project does not seem to me to be a concept that is different from the Borrower's Farm Business. Language that differs from that found in clause 5.2(a) is once again used, but I do not think that the change signifies that clause 5.2(c) is dealing with a different concept of income. 36. In my view, this construction does not create disharmony between the Loan Agreement and the Licence and Farming Agreements. It is correct that Licence Fees and farming fees are intended to be deducted before any amounts become payable under clause 17.8. However, clause 14 of the Licence Agreements and clause 30 of the Farming Agreements expressly provide that such fees can be met out of amounts payable under clause 17.8. Those provisions seemingly cater for the situation where there are arrears which may be paid in any subsequent year. 37. In its written submission, HPM supported its construction of clause 5.2(c) by reference to parts of the prospectuses issued in relation to the schemes. It was said that these formed part of the relevant context, or the surrounding circumstances known to the parties. I was referred to summaries of the terms of the Investor Loans, and to parts of the taxation opinions contained in the prospectuses, as well as to one part of the Treetop Prospectus. 38. I found such material (assuming it to be properly receivable on the question of construction) to be of no real assistance. The summaries of contractual provisions, and the opinions about the operation of such provisions, say little about the known background or commercial purpose of the contracts, and by their nature are apt to distract from the task of construing the language of the contract itself. In any event, I do not think that the statements, which are of course only a selection from the material provided to potential investors, provide any clear support for the construction favoured by HPM. This is reinforced by the existence of other statements which, if anything, tend to support the contrary construction. I was referred to some statements contained in the Application for Investor Loan forms, about the operation of the Loan Agreements, which could be said to fall into that category. Again, however, I found such material to be of no real assistance. 39. For the foregoing reasons, I have come to the conclusion that the construction of clause 5.2(c) favoured by the defendants is preferable to that favoured by HPM. In my view, reasonable business people would have understood the terms of the Loan Agreements, and in particular clause 5.2(c), to mean that a Borrower would have the benefit of the limited recourse provided for in clause 5.2(c) if the Borrower in fact made available to the Representative any amounts payable to the Borrower pursuant to clause 17.8 of the Investment Deed for the purpose of meeting the Grower's obligations under the Loan Agreement. Reasonable business people would have further understood that so long as any amounts payable to a Borrower pursuant to clause 17.8 were dealt with in accordance with an irrevocable authority and direction as envisaged by clause 5.2(a), a Borrower would have in fact made available to the Representative all such amounts for that purpose. 40. The above conclusions are consistent with those reached by Black J in HP Mercantile Pty Limited v Clements (supra) at [26]-[49], albeit that our reasoning differs in some respects. His Honour's conclusions fortify me in my own. Far from thinking that his Honour's decision on these issues is plainly wrong, I consider it to be, with respect, correct. 41. It follows from the above that both Questions 1 and 2 should be answered "Yes". The difference between paragraphs 26(a) and 26(b) of the Statement of Agreed Facts does not dictate that the questions should be answered differently to each other. Question 3 1. This question concerns the relationship between clause 5.2(c) of the Loan Agreements and clause 4.1 which concerns default. In particular, an issue is raised as to whether a Borrower can rely upon the limited recourse provision if an event of default under clause 4.1 has occurred. 2. Mr Walker submitted that the text made it clear that only defaults the subject of clause 4.1(a) were subject to clause 5.2. Clause 4.1(a) is expressly made subject to clause 5.2, but none of the other paragraphs of clause 4.1 are similarly qualified. It was further submitted that where a default under clause 4.1 occurs, an obligation arises to immediately pay the Principal Sum and interest which is independent of the payment obligations contained in clause 3 and Schedule 1. It was put that clause 5.2(c) did not apply in respect of that independent obligation. 3. Mr Newlinds submitted that there was no indication in the text that clause 4.1 qualified the operation of clause 5.2(c). He submitted that the provisions can operate together, the former dealing with circumstances whereby principal and interest becomes payable, and the latter with the extent of enforcement of the obligation. Mr Newlinds further took issue with the suggestion that default under clause 4.1 gives rise to a new payment obligation. 4. Mr Leopold submitted that clause 4.1 was an accelerated payment clause that did not alter the nature of the amounts which thereby became immediately due and payable. He submitted that clause 4.1(a) being made subject to the operation of clause 5.2 reinforced that there was no default if clause 17.8 monies were insufficient to meet the balance of the Principal Sum and accrued interest (see Items 4C, 5 and 6C of Schedule 1). If there was a default under clause 4.1(a), recourse could be had to the security and to the Borrower personally for other amounts, leaving the Borrower with the benefit of clause 5.2(c). Mr Leopold emphasised that clause 5.2(c) was not in terms qualified, as it could have been, by reference to clause 4.1. It was subject only to the express condition concerning the making available of the Grower's income from his interest in the Project. 5. There is some force in the submission that only defaults under clause 4.1(a) are subject to clause 5.2. Nevertheless, in the context of defining an event of default in the prompt payment of principal or interest, the expression "subject to the operation of paragraph 5.2 below" is likely to have been employed to make it clear that there is no default in relation to amounts which are permitted to be rolled over into subsequent years (see clause 5.2(b)). Despite the existence of some overlap between paragraph (a) and later paragraphs, particularly paragraphs (b) and (d), the draftsperson may not have seen a need to make the clarification again. In any case, having regard to that overlap, there is no apparent logic in making defaults under paragraph (a) subject to clause 5.2 (including the limited recourse provision), whilst leaving other defaults free of clause 5.2. In these circumstances, one should be wary of placing too much significance on the presence of the qualification in clause 4.1(a) and its absence from the following paragraphs. 6. In my view it is more significant that the limited recourse provided for in clause 5.2(c) is expressly made subject to a condition, yet that condition says nothing about clause 4.1 or a lack of any events of default. Moreover, it is far from self-evident that a limited recourse provision would only operate for the benefit of a Borrower if the Borrower was not in default. I agree that clauses 4.1 and 5.2(c) can operate together. Events of default can bring forward the time for payment of the Principal Sum and interest, and make the security enforceable, whilst recourse to the Borrower personally is precluded in relation to certain amounts. Further, I am unable to accept that an event of default under clause 4.1 gives rise to a new payment obligation that is independent of the payment obligations contained in clause 3 and Schedule 1. In my opinion, the better view is that a Borrower can rely on the limited recourse provision even if an event of default under clause 4.1 has occurred. 7. I should note that there are some statements in the taxation opinions contained in the prospectuses which suggest that the Borrower has to comply with all of his obligations in order that the Lender only have recourse to the Grower's income "and not to the Grower personally". As mentioned earlier, statements of opinion about the operation of contractual provisions are apt to distract from the task of construing the contractual language. Even if such statements are admissible on the question of construction, I do not think that the statements relied upon here provide any real assistance for the task at hand. 8. I have come to the conclusion that Question 3 should also be answered "Yes", as contended for by the defendants. That conclusion is consistent with that reached by Black J in HP Mercantile Pty Limited v Clements (supra) at [50]-[55]. His Honour's conclusion fortifies me in my own. Again, I do not think that his Honour's decision on this issue is plainly wrong. Indeed, I respectfully consider it to be correct. Conclusion 1. The Court will therefore answer the separate questions as follows: Question 1: Yes Question 2: Yes Question 3: Yes 1. The parties are agreed that in these circumstances: 1. the actions against the defendants named in Schedule 1 to the Statement of Agreed Facts shall be dismissed with costs; and 2. those parts of the actions against the defendants named in Schedule 2 to the Statement of Agreed Facts which relate to the relevant projects shall be dismissed on the basis that the costs of those proceedings shall be determined by the Court. 1. The Court will so order. It is noted that Mr Attila Bodonyi has been added to Schedule 1 to the Statement of Agreed Facts. The Court will further order that HPM pay the defendants' costs of the determination of the separate questions. ********** 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: 14 December 2015