Contractual Right to Proceeds Does Not Create Equitable Interest

The court declared that the purported exercise of a call option was invalid and ordered a set-off of judgments, affirming that a contractual right to proceeds of a sale or to acquire property does not create an equitable interest in the property.

Supreme Court New South Wales

Medium Neutral Citation: [COMPANY] v [NAME] (No 2) [2016] NSWSC 10 Hearing dates: 18 August 2015 Date of orders: 02 February 2016 Decision date: 02 February 2016 Jurisdiction: Equity - Corporations List Before: Brereton J Decision: (1) judgment that the [NAME] pay the [NAME] plaintiff the sum of $81,486.95 (inclusive of interest);

(2) declare that the purported exercise by the [NAME] of the Call Option granted by the [NAME] plaintiff to the [NAME] by Deed of Call Option dated 13 October 2011, by notice of exercise dated 12 February 2012, was not valid or effective;

(3) judgment that the [NAME] plaintiff pay the [NAME], pursuant to UCPR r 25.8 by way of compensation in connection with the interlocutory order made on 25 June 2012, the sum of $604,670.88;

(4) order that the judgments in paragraphs (1) and (3) be set off, so that there is a net judgment that the [NAME] plaintiff pay the [NAME] the sum of $523,183.93;

(5) order that, from the moneys standing in court to the credit of these proceedings, the sum of $392,370.77 paid into court by the [COMPANY] on 10 July 2015 together with interest attributable to it be paid out to the [NAME] in part satisfaction of the judgment referred to in paragraph (4);

(6) order that the [NAME] plaintiff pay 80% of the [NAME]' costs of the proceedings;

(7) order that, from the moneys standing in court to the credit of these proceedings by way of security for the [NAME]' costs, the further sum of $110,000 be forthwith paid out to the [NAME], on account of and without prejudice to the costs to which they are entitled pursuant to order (6), subject to the [NAME]' undertaking to the court that they will reimburse any sum by which the amount so received by them may exceed the amount ultimately allowed to them on assessment under that order;

(8) order that there be liberty to apply in respect of the moneys remaining in court, and in the event of any difficulty arising in the implementation of these orders. Catchwords: CONTRACTS – construction – whether agreement grants equitable interest in property or its proceeds, or only a contractual right to proceeds of a sale or to acquire property pursuant to the call option – where agreement provides mechanisms for acquisition of equity in property with same expiry date – held, contractual right only and no equitable interest created

EQUITY – remedies – injunctions – interlocutory injunctions – undertaking as to damages – where interlocutory injunction prevented acquisition of equitable interest in land pursuant to contractual right which would otherwise have been exercised – loss quantified by reference to price achieved at later mortgagee sale

PROCEDURE – judgments and orders – set-off of judgments – where plaintiff entitled to damages on its claim and defendant entitled to damages pursuant to undertaking as to damages – held, judgments may be set-off

COSTS – where plaintiff partly successful but fails on major part of case – held, plaintiff should pay 80% of [NAME]' costs

PROCEDURE – funds in court – payment out – where plaintiff prima facie entitled in equity to funds paid into court by mortgagee from proceeds of sale of property but net judgment in favour of defendant substantially exceeds those funds – held, funds should be paid out to defendant by analogy with stop order or garnishee order. Legislation Cited: (NSW) Civil Procedure Act 2005, s 90(2)(a), s 100 (NSW) Real Property Act 1900, s 58(3) (NSW) Trustee Act 1925, s 95 (NSW) Uniform Civil Procedure Rules 2005, r 25.8 Cases Cited: Aquatic Air Pty Limited v Siewert [2015] NSWSC AT Air Group Pty Ltd v Siewert [2013] NSWSC 1993 [COMPANY] v [NAME] (No 3) [2014] NSWSC 1129 Edwards v Hope (1885) 14 QBD 922 European Bank Limited v Evans [2010] HCA 6; (2010) 240 CLR 432 Kostka v Addison [1986] 1 QdR 416 Mitchell v Oldfield (1791) 4 TR 123; 100 ER 929 Re a Debtor [1951] Ch 612 Reid v Cupper [1915] 2 KB 147 Residential Housing Corporation Ltd v Esber [2011] NSWCA 25; (2011) 80 NSWLR 69 Siewert v Aquatic Air Pty Ltd [2014] NSWCA 384 Watkins Ltd v Calcaria Pty Ltd (1985) 78 FLR 417 [NAME] v [NAME] (unreported, NSWSC, [NAME], 12 December 1994, [ID]) Category: Principal judgment Parties: [COMPANY] ([NAME] plaintiff) [NAME] (first defendant) [NAME] ([NAME] defendant) Representation: Counsel: [redacted] [NAME] & B De Buse ([NAME])

Solicitors: [redacted] [COMPANY] ([NAME]) File Number(s): 2012/169096

Judgment 1. HIS HONOUR: In the substantive judgment delivered in these proceedings on 27 July 2015, [1] with which this judgment should be read, I concluded that: 1. all [NAME]'s claims for relief in connection with the Share Sale agreements failed; 2. all [NAME]'s claims for relief in connection with the Security agreements failed; 3. [NAME] were liable to [NAME] for the amounts incurred by [NAME] in respect of outgoings of the [NAME] property accruing after 13 October 2011; and 4. there was no effective exercise of the Call Option.

1. It appeared that [NAME] was entitled to: 1. judgment against [NAME] for the amount of $60,360.71 (being the liabilities incurred by it in respect of outgoings in respect of the [NAME] property accruing on and after 13 October 2011), and interest; and 2. a declaration that the Call Option was not validly exercised.

1. I observed: [2] [NAME] might otherwise have been entitled to an injunction permanently restraining [NAME] from exercising any rights consequent upon the service of notice of exercise of the Call Option, this would not have prevented [NAME] from exercising such other rights as they may have under the Security agreements, including by sale pursuant to the power of attorney. However, as a mortgagee sale by [NAME] has intervened and the surplus has been paid into court, that question is now moot. Prima facie, the moneys in court should be paid out to [NAME], as they are entitled to the equity pursuant to the Security agreement, but I will afford the parties an opportunity to be heard on this question, and in respect of any consequential relief, including as to whether [NAME] may be entitled to an inquiry as to damages arising under the usual undertaking, and as to costs, when short minutes are brought in.

1. I directed that the plaintiff bring in short minutes of orders to give effect to this judgment on a date to be fixed. Ultimately, short minutes were circulated, and written and oral submissions were exchanged. A number of issues emerged, including some which require closer examination and revision of the matters to which I adverted in the paragraph extracted above. Those issues may be summarised as follows:

1. The amount for which [NAME] should have judgment against [NAME] in respect outgoings accruing after 13 October 2011. [NAME] contends that it is entitled to more than the $60,360.71 referred to in the substantive judgment;

2. Who is entitled to the surplus proceeds of sale of the [NAME] property, amounting to $392,370.77 together with interest thereon, which have been paid into court on 10 July 2015 by the mortgagee [COMPANY] following completion of the sale of the property and discharge of the mortgage. Each party claims to be entitled to this fund; 3. [NAME] are entitled to an inquiry as to damages pursuant to the usual undertaking, and if so whether that can be resolved summarily. [NAME] contend that they are entitled to an inquiry, and that it should be summarily determined that they are entitled to $307,629.23, being the difference between the equity of $700,000 which it is said [NAME] ought to have had in the [NAME] property and the amount of paid into court (which they also claim under (2) above); and 4. Who should bear the costs of the proceedings, and to what extent associated with this is the disposition of the funds in court by way of security for the [NAME]' costs.

The effect of the Security agreement of 13 October 2011 1. The argument in respect of entitlement to the balance proceeds of sale of the property (which was completed on or about 15 May 2015) paid into court by the [COMPANY] on 10 July 2015, pursuant to consent orders made on 6 July 2015, highlighted an issue which had not previously emerged as to the effect of the Security agreement, the outcome of which also influences other of the remaining issues.

2. In the substantive judgment, I described the arrangements which came to be reflected in the Security agreement as being to the effect that the purchase price would be reduced by $800,000 in return for the transfer to [NAME] of the equity in the [NAME] property, estimated to be $700,000 (after allowing for the mortgage by [NAME] to the [COMPANY], which then secured $1.8 million), and the proceeds of sale of a boat (up to $170,000), and that the remaining balance purchase money (after the deposit and a sum of $110,000 which had been appropriated by [NAME]) of $1,190,000 would be paid by [NAME] by 30 June 2014 by equal monthly instalments of $30,000, such payments being guaranteed by [NAME]. These arrangements were given effect by the Security agreements made on 13 October 2011 between [NAME] and [NAME] and [NAME], which comprised the Security agreement, a Charge, a Power of Attorney and the Call Option. I characterised the Security agreement as follows: [3] The Security agreement did not operate by charging payment of the balance purchase price on the [NAME] property; rather, in return for a reduction in price of $700,000, it gave [NAME] power to sell the property and retain the proceeds after discharging the [COMPANY] mortgage. In effect, [NAME] transferred the equity in the property (then estimated to be $700,000) to [NAME] in return for a reduction in the purchase price by that amount. The provision in respect of outgoings recognised that the effective date of transfer was the date of the Security agreement, namely 13 October 2011. Clause 5.4 required that [NAME] vacate and procure any occupier to vacate the [NAME] property upon being requested to do so by [NAME] in order to allow the purchaser to enter into possession upon completion of the sale by [NAME] under power of attorney.

1. Thus I described the Security agreement as effectively giving [NAME] the equity in the property, in return for the reduction in price of $700,000 under the main Share Sale agreement. However, closer analysis of the Security agreement – not previously required – reveals that that description does not entirely accurately reflect its effect. For reasons explained below, [NAME] did not acquire any equity in the [NAME] property under the Security agreement: what they received was a contractual right to receive the proceeds of sale if they sold the property under power of attorney, and a contractual right to acquire the property if they exercised the Call Option.

2. It will be recalled that by cl 3.2, [NAME] acknowledged that it was indebted to [NAME] in the amount of the "Secured Money" on account of the delayed payment of the purchase price, for which purpose "Secured Money" was defined as $1,190,000, being the remainder of the purchase price payable under the main Share Sale agreement and the Security agreement, after the $800,000 reduction.

3. Clause 3.3 provided as follows: 3.3 Repayment (1) The Secured Money must be paid in full by [COMPANY] to [NAME] on or before 30 June 2014 (Repayment Date). (2) The Secured Money is to be paid by [COMPANY] in the following manner: (a) equal monthly instalments of $30,000.00 plus interest with the first instalment payable on 31 October 2011; and (b) the remainder of the Secured money (including interest) by the Repayment Date. (3) The Secured Money must be paid in accordance with paragraph (2) by electronic funds transfer (on a direct debit basis) to the account nominated by [NAME] from time to time. If required, [COMPANY] and the Security providers must sign and authorise all necessary documents (including direct debit forms) to give effect to the preceding sentence. (4) [COMPANY] may pay the Secured Money or any part thereof and accrued interest to [NAME] prior to the Repayment Date without penalty or charge.

1. The "Secured Money" referred to in the Security agreement was the outstanding balance purchase price, after reduction by $800,000. By cl 4, [NAME] guaranteed payment by [NAME] of the Secured Money and performance by [NAME] of its obligations, and (by cl 6) agreed to grant a fixed and floating charge over their assets and undertaking in favour of [NAME]. [NAME], however, did not assume any obligation in respect of the Secured Money.

2. Clause 7 made provision in respect of the motor cruiser boat: [NAME] charged all its right title and interest in its boat, agreed to endeavour to sell the boat and to pay the first $170,000 from the proceeds to [NAME], and appointed [NAME] its power of attorney to sell the boat and retain the first $170,000, in return for which the balance purchase price under the main Share Sale agreement was reduced by a further $100,000 (upon the earlier of the sale of the boat or nine months from the date of the agreement) - from $1.29 million to $1.19 million.

3. Clause 5 made provision in respect of the [NAME] property. By clause 5.2, [NAME] granted to [NAME] an irrevocable Power of Attorney with respect to the [NAME] property "in the form set out in Annexure 1". By clause 5.3, [NAME] acknowledged and agreed that under the Power of [NAME] would sell the [NAME] property on such terms as they thought fit, using reasonable endeavours to achieve a price of $2.5 million. By clause 5.5, [NAME] acknowledged and agreed that the proceeds would be disbursed first in satisfaction of any costs of sale payable by [NAME], secondly to discharge the [COMPANY] mortgage, and as to the balance to [NAME]. Clause 5.5 must be read in the light of clause 5.3, and is concerned with the implementation of a sale under the Power of Attorney; it applies only in connection with such a sale, and does not otherwise create any entitlement to the proceeds of sale. Clause 5.6 provided that with immediate effect the balance purchase price under the main Share Sale agreement was reduced from $1.99 million to $1.29 million. By clause 5.9, [NAME] was bound to enter into the Call Option Deed, attached as annexure 2, with respect to the [NAME] property. By clause 5.10, [NAME] charged its right title and interest in the property to secure the proper performance of its obligations "under this document", and agreed that [NAME] may lodge a caveat to note its interest arising from that charge. The scope of the charge created by clause 5.10(i) is thus limited to [NAME]'s obligations under the Security agreement.

4. In distinction to the provisions in respect of the boat contained in clause 7, the Security agreement did not (except in the limited respect referred to in clause 5.10), charge any obligation on the [NAME] property. Nor did it in terms convey any interest in the [NAME] property to [NAME]. Rather, it provided two mechanisms for them to acquire the equity in the property. The first was by granting [NAME] the Power of Attorney to sell the [NAME] property (if possible for $2.5 million), to repay the outstanding mortgage to the [COMPANY] (then $1.8 million), and to pay the balance to [NAME] (theoretically $700,000), in return for which the balance purchase price under the main Share Sale agreement was reduced by $700,000. The [NAME] was by the Call Option deed, which enabled [NAME] to purchase the [NAME] property for any price they determined provided that the purchase price was not less than the amount required to discharge the [COMPANY] mortgage. Except to the limited extent of clause 5.10, nowhere does the Security agreement purport to give [NAME] a security interest or a beneficial interest in the property, as distinct from a contractual right to receive the proceeds of a sale under the Power of Attorney, or a contractual right to acquire the property upon exercising the Call Option.

5. As recorded in the substantive judgment, clause 3.1 of the Call Option deed provided that [NAME] may exercise the Call Option during the Call Option period (which was defined as the period commencing 43 days after the date of the document and expiring on 31 October 2012). What I did not then appreciate was that the irrevocable Power of Attorney (in the form of Annexure 1 to the Security agreement) also was expressed to expire on 31 October 2012. [4]

6. While the consequence that [NAME] would effectively lose the $700,000 if they did not exercise one or other of their powers by 31 October 2012 seems unusual, the explanation for adopting this structure may lie in fiscal considerations. The parties deliberately did not create an interest in the land, but instead created contractual rights which were intentionally limited in time. The coinciding expiry dates of 31 October 2012 in both documents leave available no other sensible construction. For reasons given in the substantive judgment, [NAME]' attempt to exercise the Call Option failed, and they never sought to exercise the Power of Attorney. The Security agreement gives them no other rights in respect of the property.

Accordingly, their rights in respect of the property expired on 31 October 2012.

Who was entitled to the surplus proceeds? 1. For [NAME] contended that pursuant to (NSW) Real Property Act 1900, s 58(3), upon the exercise of the power of sale by the first mortgagee, all surplus funds after satisfying the first mortgagee were to be applied to subsequent registered mortgagees, and the balance held absolutely for and accounted to the mortgagor; and that on the authority of [COMPANY] v [NAME], [5] the former view that unregistered mortgagees were entitled after registered mortgagees no longer prevailed. However, that case also shows that where there are unregistered interests, the procedure of payment into court under (NSW) Trustee Act 1925, s 95, is available and appropriate to permit the ascertainment of the rights and priorities of competing claims to the surplus proceeds. [6] It is that procedure that the [COMPANY] invoked. The question here is simply whether [NAME] have a superior claim to the surplus proceeds, or if they do not whether there is any other reason why they should not be paid out to [NAME].

2. For reasons previously given, all [NAME]' rights in respect of the [NAME] property expired on 31 October 2012. Thereafter, they had no surviving beneficial or security interest in the proceeds of its sale. They have no claim, in that sense, on the moneys paid into court by the [COMPANY]. [NAME] is entitled in equity to those moneys.

3. However, some reason for not disbursing the funds to [NAME] might be provided by considerations analogous to Mareva relief, or by analogy with a stop order in aid of enforcement, in connection with any liability of [NAME] to [NAME] pursuant to its undertaking as to damages or for costs.

The judgment in respect of unpaid outgoings 1. In the substantive judgment I found that there was evidence that $60,360.71 was incurred directly or indirectly by [NAME] in respect of outgoings accruing after 13 October 2011. [7] [NAME] now contends that the amount incurred greatly exceeded that sum, and in its submissions set out calculations producing a total sum of $550,121, said to be comprised as follows:

1. Period ended 30 June 2012: $110,938 2. Period ended 30 June 2013: $123,549 3. Period ended 30 June 2014: $148,343 4. Period ended 31 December 2015: $61,064 5. Extra interest to [NAME]: $44,102 6. Other settlement expenses: $99,585 7. Less adjustments: $50,627 8. Deductions from sale: $23,164 1. [NAME] claims those amounts "as damages under clause 5.7 or the orders", on the footing that "it was restrained by the orders from selling or leasing the property at commercial rates from 25 June 2012 until the date of sale", during which period the Security agreement – including clause 5.7 – remained on foot, so that [NAME] could claim for all property expenses incurred during that period, and interest. The reference to "the orders" is to those of 25 June 2012, which extended until further order the operation of the plaintiffs' caveat, and restrained [NAME] from transferring the property. In connection with those orders, the then plaintiffs – including [NAME] – gave undertakings, including the usual undertaking as to damages and an undertaking not to transfer or deal with the property, including by entering into any residential tenancy agreement. Unsurprisingly the [NAME], who were adversely affected by the orders, gave no undertaking as to damages. While the undertakings proffered by the plaintiffs to obtain the orders had the effect of preventing them from selling or leasing the property, that creates no basis for a claim for damages by them; it was the price of their obtaining interlocutory relief.

2.

Accordingly, the only basis on which [NAME] may be entitled to damages is, for [NAME]' breach of clause 5.7, as found in the substantive judgment. That clause relevantly provided as follows: 5.7 Outgoings (1) Subject to paragraph (2) and from the date of this document, [NAME] will pay for the following outgoings incurred in relation to the [NAME]: (a) Rates, taxes and charges (including but not limited to council rates, water rates and land tax) but excluding water, electricity, telephone, gas and other utility usage charges; (b) Strata or special levies; and (c) The minimum monthly repayments payable to [COMPANY] with respect to the [NAME] (Outgoings). (2) [NAME] must: (a) Not breach any term of the [NAME] but will not be responsible for the consequences financial or otherwise for any breach of that mortgage caused by [NAME]; and (b) Provide any notice it receives from the [COMPANY] (including [NAME]) in relation to the [NAME] to [NAME] immediately after receiving that notice.

1. Insofar as the amount now claimed by [NAME] includes selling agent's fees ($26,950), legal expenses (presumably of the mortgagee) ($11,701), property presentation ($4,403), valuation ($548) and insurance ($779), those items are outside the scope of clause 5.7.

2. For [NAME] submitted that if (contrary to his primary submission, but as I have accepted) their interest in the property evaporated on 31 October 2012, then their liability under clause 5.7 would not continue beyond that date. While nothing in the Security agreement expressly makes provision in this respect, in my judgment such a term must be implied, to give business efficacy to the contract. The reason there is no express provision to that effect is that the parties did not contemplate that [NAME] would fail effectively to exercise the Call Option and also fail to use the Power of Attorney. But it would make no commercial sense for [NAME] to remain liable indefinitely for the outgoings, after their right to acquire the equity expired; had the officious bystander inquired, "what happens if [NAME] do nothing by 31 October 2012", the answer could only have been, "in that almost inconceivable event, then [NAME] retains the property and would be liable for the outgoings thereafter".

Accordingly, I accept that [NAME]' liability for breach of clause 5.7 is limited to the period ending on 31 October 2012, and the claims in respect of subsequent periods fail. 3. [NAME] claims $110,938 for the period ended 30 June 2012, and $123,549 for the period ended 30 June 2013 (which on a pro rata basis would be $41,183 to 31 October 2012); thus a total of $152,121 is said to be attributable to the relevant period. However, no evidence was adduced at the trial to establish that amount. [NAME] submitted that evidence of it was included in the court book and was adduced and the subject of cross examination at an interlocutory hearing; however, that does not mean that it was in evidence at the final hearing, and it was not. 4. [NAME] ultimately conceded the amount of $60,360.71 referred to in the substantive judgment. There is no evidentiary basis for any other amount. Although it was not formally claimed or referred to in argument, I would allow interest under (NSW) Civil Procedure Act, s 100, at 10% from 31 July 2012 (the approximate mid-date of the period) to 31 January 2016, amounting to $21,126.25. Thus there should be judgment for [NAME] against [NAME] for $81,486.95.

Inquiry as to damages 1. On 25 June 2012, following interlocutory proceedings between the parties (in which [NAME] sought to restrain the exercise of the Call Option), a consensual interlocutory regime was established by orders of that date, relevantly as follows: Upon the undertakings to the Court by the plaintiffs set out below and given by their counsel, the Court orders that:

1. Caveat number AG 914346 is extended until further order.

2. The [NAME] are restrained from transferring the property known as 2/[ADDRESS], [NAME], being Lot 2 in Strata Plan 55795 ("the property"), where 'transfer' means the act set out in order 1(a) and (b) made on 30 May 2012. UNDERTAKINGS BY THE PLAINTIFFS 3. The usual undertaking as to damages.

4. The plaintiffs undertake to pay all outgoings and not default on any liability which would cause a breach of any agreement in relation to the property, including, but not limited to, the [COMPANY] mortgage, payment of council rates, water rates, strata fees, any such payments made being without prejudice to any rights the plaintiffs may have against the [NAME] and as an interim measure only.

5. The plaintiffs by their solicitors will, upon request from the defendant's solicitor, provide any and all information relating to the liabilities in order 4 above, including confirmation that payment has been made.

6. The plaintiffs undertake not to transfer or deal with the property, including entry in any residential tenancy agreement or use it or allow the property to be used as security and will not encumber or draw on any present encumbrance or security in relation to the property in any way. 7. [NAME] undertake to remain in possession of the property and keep it in good maintenance and repair.

1. There were other undertakings and provisions, but they are not relevant for present purposes. Orders 1A and 1B of 30 May 2012 referred to in paragraph 2 of the above order were in the following terms: (A) Exercising any rights consequent upon the service upon the [NAME] defendant of notice of exercise of option signed by the [NAME] and dated 21 February 2012. (B) Transferring, encumbering or creating an interest in the land known as 2/13B [NAME] being all that land in folio identifier 2/S55795. 1. [NAME] claim, pursuant to the undertaking as to damages, that they were wrongly restrained from selling the property pursuant to the Power of Attorney, and as a result suffered loss equivalent to the difference between the amount they would have received (being the equity in the property, namely $700,000), less the amount they will receive from the moneys paid into court (presumably, $392,370), the difference being $307,629.

2. At the outset, the assumption that [NAME] would receive the moneys paid into court amounting to $392,370 is misconceived, for reasons explained above. If the injunction is properly to be seen as having prevented sale of the property pursuant to the Power of Attorney as well as transfer pursuant to the Call Option, then it has prevented [NAME] from ever exercising their right to acquire the equity in the property. 3. [NAME] submitted that the injunction did not prevent sale pursuant to the Power of Attorney, but only transfer pursuant to the Call Option; and alternatively that if it prevented sale pursuant to the Power of Attorney, it was open to [NAME] to apply to have it varied to permit such a sale. As to the first, the reach of par (B) of the order of 30 May 2012, which was referred to in the order of 25 June as defining the term "transfer" in the later orders, was not confined to a transfer to [NAME] pursuant to the Call Option but extended to other dealings by them with the property including by way of transfer or encumbrance. [NAME] submitted that by purporting to exercise the Call Option, [NAME] elected to adopt that course to the exclusion of sale pursuant to the Power of Attorney. Exercise of the Call Option required [NAME] to transfer the property to [NAME], whereas resort to the Power of Attorney involved sale of the property in the name of [NAME]. If [NAME] complied with the Call Option notice, there would have been no room for exercise of the Power of Attorney. But until there was compliance with the Call Option, there was no such inconsistency as would create a situation of election.

4. As to the submission that [NAME] could have applied for a variation of the injunction to permit a sale pursuant to the Power of Attorney, there was no relevant change of circumstances as would have justified a variation between 25 June 2012 when the injunction was granted, and 31 October 2012. Given the resolute opposition of [NAME] to a sale, [8] it is unthinkable that such an application would not have been robustly opposed.

5. The injunction was granted, by consent, on 25 June 2012. This was in the context that in January 2012, [NAME] had purported to exercise the Call Option, and [NAME] disputed that the option was validly exercised, and claimed that the Security agreements were induced by a misrepresentation, namely the Bank Accounts representation, and ought to be avoided. The formal defect in the exercise of the Call Option, on which [NAME] ultimately succeeded, of itself would have justified only an injunction restraining [NAME] from relying on that particular purported exercise (order 1A of 30 May 2012). Only the claim to avoid the Security agreement, which ultimately failed, could have supported a restraint more generally on transferring or dealing with the [NAME] property (order 1B of 30 May 2012). In short, as things have turned out, [NAME] was not entitled to object to [NAME] exercising their rights under the Security agreement, though it was entitled to object to their doing so by the particular purported exercise of the Call Option in January 2012. [NAME]'s attack on the power of sale was primarily on the basis that the Security agreement was liable to be set aside for misrepresentation, which ultimately failed; the attack on the ground that the Call Option had not been regularly exercised was not at the forefront of its case. While the latter ground did not, the former ground supported an injunction which restrained exercise of the Power of Attorney in addition to the Call Option. The latter ground would also not have prevented an attempt to re-exercise the Call Option. Thus, as things have transpired, the injunction was wider than the injunction to which [NAME] was entitled: it was entitled only to an injunction restraining [NAME] from acting on the particular purported exercise of the Call Option, not to one which had the effect of restraining them from purporting to re-exercise it, or from exercising the Power of Attorney.

6. In my view it is inconceivable that, unless restrained, [NAME] would not have exercised the Power of Attorney (or re-exercised the Call Option) before they expired. There was a commercial imperative that they do so: if they did not, they effectively surrendered the $700,000 which they had conceded from the purchase price under the main Share Sale agreement in return for the rights given them by the Security agreement. They were wrongly restrained from doing so while the power to do so survived, and as a result have lost the power to do so. As the loss of that power flowed directly from the order of 25 June 2012, and could have been foreseen when the order was consented to and made, [NAME] ought be compensated for their loss pursuant to the undertaking as to damages. [9] [NAME] emphasised that the injunction was a consent order, that is beside the point; the defendant is equally entitled to an inquiry as to damages if it turns out that it was wrongly enjoined, whether by consent or after a contested interlocutory hearing.

7. However, the measure of [NAME]' loss is not necessarily the sum of $700,000. Their loss was the net amount that they would have realised upon a sale pursuant to the Power of Attorney (or by themselves having re-exercised the Call Option). The best available evidence of the price that would have been obtained on such a sale is the price that ultimately was obtained by the mortgagee, namely $2.45 million. [NAME] would have incurred costs of sale, which under cl 5.5 were payable out of the proceeds; the costs incurred and deducted by the mortgagee are a reasonable proxy for the costs that would have been incurred by [NAME]. They would also have had to discharge the mortgage, but had they been able to act in a timely manner it would not have exceeded $1.8 million. They would not have incurred the outgoings in respect of the period after 31 October 2012 which were debited by the [COMPANY] to the proceeds (at least, unless having re-exercised the Call Option, they held the property, in which case those outgoings would have been offset by the income or other benefits generated by holding the property).

8. Thus, bearing in mind that, to the extent it has incurred them, [NAME] will be compensated by the judgment in respect of the outgoings up to 31 October 2012. I can be satisfied that [NAME]' loss was not less than the sum of the (a) amount of the net proceeds paid into court by the [NAME] (being $392,370.77), plus (b) the amount by which the mortgage at the time of the mortgagee sale exceeded $1.8 million (namely $148,965.68), and (c) the net amounts deducted by the mortgagee for council rates, water rates, land tax and strata levies ($63,334.43). On that basis, [NAME] loss attributable to the injunction was not less than $604,670.88. As [NAME] asked that, if possible, this issue be determined without further inquiry in order to avoid the costs of further proceedings, and as I consider that this approach is a conservative one which if anything underestimates their loss, I propose to determine that sum as the amount of compensation payable by [NAME] to [NAME] pursuant to the undertaking as to damages.

Set off and payment out 1. I have found that [NAME] is entitled to judgment (in respect of the outgoings claim) for $81,486.95 (inclusive of interest), and that [NAME] are entitled to judgment against [NAME] for $604,670.88 pursuant to the undertaking as to damages. Whether or not (NSW) Civil Procedure Act, s 90(2)(a), which empowers the court to give judgment for the balance only where there are judgments in favour of different parties on a claim and cross-claim, extends to these circumstances (where the liability on the undertaking as to damages does not, strictly speaking, arise on a cross-claim), the court has inherent jurisdiction to set-off judgments between the same parties. [10] As [NAME], as his Honour then was, demonstrated in [NAME] v [NAME] (unreported, NSWSC, 12 December 1994, [ID] at 3-4, where the relevant authorities are collected and discussed, the court's power over the suitors includes an inherent power to direct set-off. [11] The set-off of judgments did not depend upon the Statutes of Set-Off; but on the general jurisdiction of the court over the suitors in it. [12] The common law courts always had an equitable jurisdiction, for the purpose of preventing absurdity or injustice in cases where there had been judgments for damages between the same parties in distinct actions, to set-off one judgment against the other, and to allow execution to issue in respect of the balance only. [13] Opposite demands arising upon judgments may upon motion be set-off against each other, whenever such set-off is equitable. [14]

2. This principle is not narrowly confined by any requirement that the countervailing judgments be in the same proceedings, let alone at the same stages of the proceeding: for example, it permits a judgment for costs to be set off not only against costs alone, but also against debt and costs. [15] It follows that it permits a judgment pursuant to an inquiry on an undertaking as to damages to be set off against a substantive judgment in the proceedings.

3.

Accordingly, the judgment in favour of [NAME] should be set off against the judgment against [NAME] in favour of [NAME], leaving a net amount payable by [NAME] to [NAME] of $523,183.93. As that sum substantially exceeds the funds paid into court from the proceeds of sale, I propose to order that those funds be paid out [NAME] in part satisfaction of the judgment in their favour.

Costs 1. For [NAME] submitted that each party should bear its own costs, on the basis that both parties had been partially successful - [NAME] having been unsuccessful on its misrepresentation and related claims in respect of the Security agreement and the Share Sale agreements, while [NAME] were unsuccessful in respect of the exercise of the Call Option and the outgoings of the [NAME] property.

2. For [NAME] submitted that the plaintiffs should pay the [NAME]' costs of the proceedings. It was submitted that the claims on which [NAME] failed occupied most of the trial and represented in time, effort, cost and commercial effect the substantial contest in the proceedings; that in addition [NAME] pursued a number of claims which were unsupported by evidence or pleadings; that the issue concerning the Call Option was of no practical significance because the property was sold by the mortgagee as a consequence of [NAME]'s failure to honour its undertaking to the court; and that [NAME]'s success in respect of the outgoings was offset by the detrimental impact on [NAME] of the injunction, and in any event occupied no more than 5% of the time and effort involved in the proceedings so that if recognised at all it should be reflected by only a minimal reduction in the costs payable to [NAME].

3. On any view of the proceedings, [NAME] were successful and [NAME] was unsuccessful on the main issues litigated. In net terms, the outcome will be a substantial judgment in favour of [NAME]. [NAME]'s submission - that the claims on which [NAME] failed occupied most of the trial and constituted the substantial contest in the proceedings, and that addition [NAME] pursued a number of claims which were unsupported by evidence or pleadings - is correct. The issues on which [NAME] succeeded accounted for but a small fraction of the time, effort and costs expended, and had marginal commercial consequences. However, I do not accept that [NAME]'s success on the Call Option issue is to be disregarded just because, after the hearing, it was rendered otiose by the sale of the property by the mortgagee; it accounted for a portion of the proceedings, albeit a small one, for which [NAME] must be regarded as responsible. Nor do I accept that [NAME]'s success on the outgoings claim is offset by the impact of the injunction on [NAME], as they will otherwise be compensated, pursuant to the undertaking as to damages, for that impact.

4. In my view, [NAME] should be regarded as having succeeded to the extent of 90%, and [NAME] to the extent of 10%. Netting off those positions, [NAME] should pay 80% of [NAME] costs.

5. On 7 August 2012, an order was made that the plaintiffs give security for the [NAME]' costs in the sum of $180,000. On 18 November 2013, an order was made that [NAME] give further security of $235,000. The order for security made on 18 November 2013 was founded on acceptance of the plaintiff's estimate of the [NAME]' costs on a party/party basis. [16] [NAME] submitted that as this was the plaintiff's estimate, it could safely be assumed that they would recover at least that amount on assessment. Having now reviewed the reasoning that resulted in that assessment, I am satisfied that the submission is correct, subject to the qualification that the assessment did not factor in the discount of 20% that results from the conclusion that [NAME] should pay only 80% of the [NAME]' costs. It follows that I am satisfied that of the amount held as security for costs, 80% should be paid out to the [NAME] on account, and subject to their undertaking to reimburse any amount by which it may exceed the amount ultimately allowed on assessment. The balance should remain in court pending the outcome of the assessment.

6. As at the hearing on 18 August 2015, of the total of $415,000 provided by way of security, some $90,000 had previously been paid out to satisfy interlocutory costs orders, and a balance of approximately $324,151.39 remained. On the foregoing reasoning, [NAME] should receive, on account, 80% of that balance, say $260,000. I was satisfied on 18 August that the [NAME] would be entitled to at least $150,000 in respect of their costs, and I ordered that that sum forthwith be paid out from the amount held as security for costs, on account of and without prejudice to their ultimate entitlement to costs on assessment. It is now appropriate that they receive a further $110,000, on the same basis.

Conclusion 1. The Security agreement gave [NAME] no equitable interest in the [NAME] property or its proceeds, but only a contractual right to the proceeds of a sale under the Power of Attorney, or to acquire the property pursuant to the Call Option. Both the Call Option and the Power of Attorney expired on 31 October 2012. [NAME]' attempt to exercise the Call Option failed, and they never exercised the Power of Attorney.

Accordingly, their rights in respect of the property expired on 31 October 2012, and they have no surviving claim to the net proceeds of sale which have been paid into court, to which [NAME] is entitled, although considerations analogous to Mareva relief or a stop order may afford reasons for not disbursing the funds in court to [NAME].

2. As to [NAME]'s outgoings claim, [NAME]' liability for breach of clause 5.7 of the Security agreement is limited to the period ending on 31 October 2012, and the claims in respect of subsequent periods fail. There is no evidentiary basis for any greater amount than the $60,360.71 referred to in the substantive judgment, which [NAME] ultimately conceded. With pre-judgment interest of $21,126.25, [NAME] is entitled to judgment against [NAME] for $81,486.95.

3. As to the undertaking as to damages, the injunction of 25 June 2012 prevented [NAME] not only from acting upon their purported exercise of the Call Option (which [NAME] was entitled to do), but also from selling the property pursuant to the Power of Attorney, or re-exercising the Call Option (which, as it now transpires, [NAME] was not entitled to prevent). As both the Power of Attorney and the Call Option have expired, the result was that [NAME] have lost their capacity to recover the net proceeds of sale of the property. The amount of that loss can be quantified by reference to the outcome of the sale by [COMPANY], adjusting for deductions which would not have been incurred in the event of a timely sale by [NAME]. On that basis, their loss was not less than $604,670.88, for which they should have judgment against [NAME]. 4. [NAME]'s judgment in respect of the outgoings claim, and [NAME]' judgment in respect of the undertaking as to damages, should be set off, and the proceeds of sale of the property now in court should be paid out to [NAME] in part satisfaction of the net judgment in their favour.

5. As to costs, [NAME] should be regarded as having succeeded to the extent of 90%, and [NAME] to the extent of 10%. Netting off those positions, [NAME] should pay 80% of [NAME] costs. Of the amount that was held as security for costs, 80% should be paid out to [NAME] on account, and subject to their undertaking to reimburse any amount by which it may exceed the amount ultimately allowed on assessment. As $150,000 was paid out pursuant to order made on 18 August 2015, a further $110,000 should now be paid out. The balance should remain in court pending the outcome of the assessment.

Orders 1. [ADDRESS] therefore:

1. Gives judgment that the [NAME] pay the [NAME] plaintiff the sum of $81,486.95 (inclusive of interest);

2. Declares that the purported exercise by the [NAME] of the Call Option granted by the [NAME] plaintiff to the [NAME] by Deed of Call Option dated 13 October 2011, by notice of exercise dated 12 February 2012, was not valid or effective;

3. Gives judgment that the [NAME] plaintiff pay the [NAME], pursuant to Uniform Civil Procedure Rules r 25.8 by way of compensation in connection with the interlocutory order made on 25 June 2012, the sum of $604,670.88;

4. Orders that the judgments in paragraphs (1) and (3) be set off, so that there is a net judgment that the [NAME] plaintiff pay the [NAME] the sum of $523,183.93;

5. Orders that, from the moneys standing in court to the credit of these proceedings, the sum of $392,370.77 paid into court by the [COMPANY] on 10 July 2015 together with interest attributable to it be paid out to the [NAME] in part satisfaction of the judgment referred to in paragraph (4);

6. Orders that the [NAME] plaintiff pay 80% of the [NAME]' costs of the proceedings;

7. Orders that, from the moneys standing in court to the credit of these proceedings by way of security for the [NAME]' costs, the further sum of $110,000 be forthwith paid out to the [NAME], on account of and without prejudice to the costs to which they are entitled pursuant to order (6), subject to the [NAME]' undertaking to the court that they will reimburse any sum by which the amount so received by them may exceed the amount ultimately allowed to them on assessment under that order;

8. Orders that there be liberty to apply in respect of the moneys remaining in court, and in the event of any difficulty arising in the implementation of these orders.

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Endnotes 1. Aquatic Air Pty Limited v Siewert [2015] NSWSC 928.

2. Aquatic Air Pty Limited v Siewert [2015] NSWSC 928 at [164].

3. Aquatic Air Pty Limited v Siewert [2015] NSWSC 928 at [139].

4. Thus the suggestion in the substantive judgment (at [158]) that although the Call option period had expired, that would not necessarily have meant that [NAME] were precluded from exercising their powers under the Security agreement pursuant to the power of attorney, was incorrect. 5. [2011] NSWCA 25; (2011) 80 NSWLR 69. 6. [2011] NSWCA 25; (2011) 80 NSWLR 69 at [106]-[109], [194], [205].

7. Aquatic Air Pty Limited v Siewert [2015] NSWSC 928 at [148].

8. See, for example, [COMPANY] v [NAME] (No 3) [2014] NSWSC 1129 and Siewert v Aquatic Air Pty Ltd [2014] NSWCA 384.

9. European Bank Limited v Evans [2010] HCA 6, [18], [29]; (2010) 240 CLR 432, 439, 442. 10. (NSW) Civil Procedure Act 2005, s 96, which authorises a court to order that countervailing judgments between the same parties be set off, does not apply to the Supreme Court: s 96(5).

11. Reid v Cupper [1915] 2 KB 147, 149-151 (Buckley LJ).

12. Mitchell v Oldfield (1791) 4 TR 123; 100 ER 929 (Lord Kenyon CJ).

13. Edwards v Hope (1885) 14 QBD 922, 926 (Brett MR).

14. Montagu on Set-Off (1825 American edition) at 6-8; see also Re a Debtor [1951] Ch 612, 618; Watkins Ltd v Calcaria Pty Ltd (1985) 78 FLR 417, 429; Kostka v Addison [1986] 1 QdR 416, 420.

15. Montagu on Set-Off, 6, referred to in [NAME] v [NAME], supra at 4.

16. AT Air Group Pty Ltd v Siewert [2013] NSWSC 1993.

Amendments 02 February 2016 - Para 4(3), change "(3) above" to "(2) above". Para 23, change "would not fail" to "would fail" 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: 02 February 2016