Lewarne v Momentum Productions Pty Ltd

• Jurisdiction: Australia Federal only
• Court: Federal Court (Australia)
• Judgment Date: 07 August 2007
• Neutral Citation: [2007] FCA 1136

FEDERAL COURT OF AUSTRALIA

Lewarne v Momentum Productions Pty Ltd [2007] FCA 1136

CONTRACT – no clear evidence of offer and acceptance – examine conduct of parties to determine if they have agreed to incur reciprocal obligations – commercial arrangement may strongly suggest contract – agreement on essential elements only

PARTNERSHIP – application of s 2 of Partnership Act 1892 (NSW) – importance of agency and relationship of mutuality of rights and obligations in establishing partnership – agreement to make mortgage payments more consistent with profit sharing than with dividend payment – no agreement as to duration and therefore terminable at will – fiduciary obligations regardless of whether partnership agreement concluded or not

TRADE PRACTICES – misleading and deceptive conduct – representations as to existing fact and representations as to future matters – representation by silence – conduct directed toward particular persons examined from their perspective – operation of s 51A Trade Practices Act 1974 (Cth) – party making representation must establish reasonable grounds on balance of probabilities – representation of ownership without legal or equitable interest or prospect of acquiring such interest misleading – contributory conduct by other party irrelevant where no reasonable grounds for making representation at time it was made – damages and causation – carelessness of representee no basis for excluding relief

WORDS AND PHRASES – “evidence to the contrary” – “owns”

Trade Practices Act 1974 (Cth) ss 6, 51A, 52, 75B, 82, 87

Fair Trading Act 1987 (NSW) ss 41, 42, 68

Partnership Act 1892 (NSW) ss 1, 2, 26, 32

Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 distinguished

Australian Competition and Consumer Commission v Universal Sports Challenge Ltd [2002] FCA 1276 not followed

Birtchnell v The Equity Trustees, Executors and Agency Company Limited (1929) 42 CLR 384 applied

Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 cited

Butcher v Lachlan Elder Realty Pty Limited (2004) 218 CLR 592 applied

Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 applied

Duke Group Ltd (in liq.) v Pilmer (1999) 73 SASR 64 discussed

Edwards v Skyways Ltd [1964] 1 WLR 349 applied

Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 applied

Evans Deakin Pty Ltd v Sebel Furniture Ltd [2003] FCA 171 considered

First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194 referred to

GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Limited (2003) 128 FCR 1 cited

GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 applied

Henville v Walker (2001) 206 CLR 459 applied

Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 cited

John R Keith Ltd v Multiplex Constructions (NSW) Pty Ltd [2002] NSWSC 43 cited

Kimberly NZI Finance Ltd v Torero Pty Limited (1989) ATPR (Digest) 46-054 applied

Pilmer v Duke Group Ltd (2001) 207 CLR 165 discussed

Pobijie Agencies Pty Ltd v Vinidex Tubemakers Pty Ltd [2000] NSWCA 105 cited

Tesco Stores Ltd v Costain Constructions Ltd [2003] EWHC 1487 cited

Ting v Blanche (1993) 118 ALR 543 applied

Toyota Motor Corporation Australia v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 applied

United Dominions Corporations Limited v Brian Proprietary Limited (1985) 157 CLR 1 applied

Wardle Australia Limited v The State of Western Australia (1992) 175 CLR 514 applied

Wright v TNT Management Pty Ltd (1989) 15 NSWLR 679 discussed

RICHARD JOHN LEWARNE v MOMENTUM PRODUCTIONS PTY LTD AND RICHARD JAMES SCOTTS

NSD1985 OF 2005

STONE J

7 August 2007

SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD1985 OF 2005

BETWEEN:	RICHARD JOHN LEWARNE Applicant/Cross Respondent
AND:	MOMENTUM PRODUCTIONS PTY LTD First Respondent RICHARD JAMES SCOTTS Second Respondent/Cross-claimant

JUDGE:	STONE J
DATE:	7 august 2007
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1 This proceeding concerns the circumstances surrounding the purchase of a hotel named the East Village Hotel, which is at 234 Palmer Street, East Sydney. The purchase involved the assignment of a lease of the hotel premises as well as the purchase of the business carried on at those premises. The persons involved include the second respondent, Mr Richard Scotts, his brother Mr Anthony Scotts and the applicant Mr Richard (Ric) Lewarne. Mr Richard Scotts and Mr Lewarne were the main players. Although Mr Anthony Scotts was involved in the transaction, he is not a party to this proceeding, nor did he give evidence. In these reasons I shall refer to Mr Richard Scotts as Mr Scotts and to his brother as Mr Anthony Scotts. Although a significant number of the facts in the case are in dispute, the basic narrative is as follows.

2 The hotel business was purchased by the first respondent, Momentum Productions Pty Ltd, a company controlled by Mr Scotts. The original plan to purchase it had been formed by Mr Scott’s sister, Ms Wendy Hunter who is not a party to this proceeding. In 2003 Ms Hunter’s company, CitySun Holdings Pty Limited had purchased a strata unit in the ground floor of the building at 238 Palmer Street, East Sydney which adjoins the hotel. For convenience, I shall refer to this property as the adjoining building. It would seem that Ms Hunter’s intention was to purchase the hotel business and extend the hotel premises into the adjoining building According to Mr Scotts, Ms Hunter did not continue with her plan to purchase the hotel because she was not able to raise the necessary finance.

3 In March or April 2003, Mr Scotts, allegedly at the request of Ms Hunter, decided to purchase the hotel business through the vehicle of the first respondent, Momentum Productions, a company that he had previously used for other trading activities. Mr Scotts was the sole director and the only shareholder in Momentum. At the time the hotel business was owned and operated by Wellfox Enterprises Limited which also was the lessee of the hotel. Accordingly Mr Scotts also commenced negotiations for an assignment of the lease from Wellfox.

4 Mr Scotts also negotiated with Retemu Pty Limited, the owner and lessor of the hotel, for its consent to the assignment of the lease. In a report dated 11 April 2003 the valuers, Roberts Baker Magin valued the hotel business at $1.715 million. A contract for the sale of business at apurchase price of $1.7 million was concluded between Momentum and Wellfox on 14 April 2003.

5 Around thistime, Mr Scotts began to discuss with his brother, Mr Anthony Scotts and the applicant, Mr Richard Lewarne, the possibility of their becoming involved in the business. Mr Anthony Scotts and Mr Lewarne are business associates in other commercial ventures. According to Mr Lewarne, in their initial conversations about the business, Mr Scotts said he was looking to raise $400,000 in capital and that if Mr Lewarne were to invest $300,000 in the business he would give him “a 15% share in the equity of the pub and 15% of the profits”. He explained that he needed additional funds invested in the business because he had agreed to take over his sister’s legal costs and other expenses. In the course of their discussions, Mr Scotts outlined a plan to expand the hotel operations by demolishing the wall separating the hotel from the adjoining premises. Mr Lewarne now claims that in the course of their discussions Mr Scotts made misleading or deceptive representations that were influential in his decision to invest in the business. The nature of these discussions and the representations are discussed below.

6 Ultimately, on or around 7 July 2003, Mr Lewarne paid $300,000 and Mr Anthony Scotts paid $100,000 to Mr Scotts in respect of the hotel business. The nature of the contract, if any, formed between the parties and any interest acquired by Mr Lewarne is also a live issue in this proceeding.

7 The purchase of the hotel business was settled on 25 July 2003. To complete settlement Momentum arranged vendor finance of $200,000, and borrowed $1.53 million from the Commonwealth Bank of Australia. Neither Momentum nor Mr Scotts made any cash contribution to the purchase. On the same day, with Retemu’s consent, Wellfox assigned its lease to Momentum Productions and the East Village Hotel opened for business under the new management.

8 By early 2004, it became clear that there were significant structural problems with the hotel’s premises. Sydney City Council became involvedand for several months in 2004 the building was covered in scaffolding. Inevitably these problems affected the profitability of the hotel. Momentum Productions commenced proceedings against the landlord, Retemu, in the Supreme Court of NSW on 12 May 2005 seeking damages for the loss of trade in this period. At the time of the hearing these proceedings were still unresolved. In late 2004, Mr Lewarne began to express some concerns about his investment and the manner in which the hotel was being managed. This culminated in Mr Lewarne seeking to extract himself from the business and, the breakdown of the relationship between Mr Lewarne and Mr Scotts. The present proceedings were commenced on 20 October 2005.

9 Mr Lewarne’s case raises two key issues for determination. The first is the nature of the interest, if any, that Mr Lewarne has in the hotel business. Mr Lewarne claims that the agreement he reached with Mr Scotts was that he would pay $300,000 to become a 15% partner in the hotel business. It is a live issue in the proceeding as to who the other partners were in this alleged arrangement: in particular whether it included Mr Scotts and Momentum or only one of those two. Mr Scotts claims that the $300,000 payment was for Mr Lewarne to purchase 15 per cent of the shares in Mr Scotts’ company, Momentum Productions. The characterisation of Mr Lewarne’s interest has significant...