Battye v Shammall
[2005] SASC 138
•14 April 2005
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court: Civil)
BATTYE & ANOR v SHAMMALL
Judgment of The Full Court
(The Honourable Chief Justice Doyle, The Honourable Justice Duggan and The Honourable Justice Gray)
14 April 2005
PARTNERSHIP - RIGHTS AND DUTIES OF PARTNERS INTER SE - FIDUCIARY RELATIONSHIP
EQUITY - GENERAL PRINCIPLES - FRAUDULENT AND INNOCENT MISREPRESENTATION - THE REPRESENTATION - NON-DISCLOSURE AND CONCEALMENT
Appeal against order of judge dismissing an appeal by unsuccessful plaintiffs against decision of magistrate.
Plaintiffs and defendant entered into an agreement to purchase racehorses - plaintiffs agreed to pay defendant $A25,000 for a half interest in the racehorses - defendant failed to disclose that he had paid $A30,000 for the racehorses - magistrate rejected plaintiffs' allegation of positive misrepresentation and found that defendant owed no duty to make disclosure - plaintiffs' claim failed - on appeal judge found that defendant was under duty of disclosure arising from fiduciary relationship between parties, but as this claim had not been advanced before the magistrate the claim could not be raised on appeal.
Whether claim for breach of fiduciary duty was raised at trial - whether any prejudice arising from failure to raise fiduciary argument at trial - consideration of nature of fiduciary relationship between parties.
Held - fiduciary relationship existed between parties and gave rise to a fiduciary duty on the part of the defendant not to use fiduciary position to his personal advantage - duty to disclose - no prejudice to defendant established - appeal allowed - order of magistrate dismissing claim set aside - judgment entered for plaintiffs for $A10,000.
S P Hywood Pty Ltd v Standard Chartered Bank Ltd (Perry J, 22 December 1992, unreported); Bell v Lever Brothers Limited [1932] AC 161; Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384; United Dominions Corporation Ltd v Brian Pty Ltd (1985) 158 CLR 1; Chan v Zacharia (1983) 154 CLR 178; Tracy v Mandalay Pty Ltd (1953) 88 CLR 215; Fraser Edmiston Pty Ltd v AGT (Qld) Pty Ltd [1988] 2 Qd R 1; Coulton v Holcombe (1986) 162 CLR 1; Sutton v Gundowda Pty Ltd (1950) 81 CLR 418; Water Board v Moustakas 1988) 62 ALJR 209; Banque Commerciale SA v Akhil Holdings Ltd (1990) 169 CLR 279, considered.
BATTYE & ANOR v SHAMMALL
[2005] SASC 138Full Court: Doyle CJ, Duggan and Gray JJ
DOYLE CJ: I have had the advantage of considering the reasons of Gray J. There is no need for me to repeat the facts.
I do not agree that a claim was made at trial in the Magistrates Court for breach of a fiduciary duty, the breach being the profit made by the defendant as a result of the plaintiffs paying the defendant $25,000 for a half interest in the horses in question.
In the circumstances, and in particular because of the proposal that the plaintiffs and the defendant enter into a partnership, there was a fiduciary relationship between the plaintiffs and the defendant and a fiduciary obligation on the part of the defendant not to use his fiduciary position to his personal advantage. That was not disputed on appeal. In that respect I agree with Gray J and with the Judge of this Court whose decision is under appeal. But breach of fiduciary duty is not the claim that was made at trial.
The claim at trial was for damages for fraudulent misrepresentation or for false and misleading conduct or for non-fraudulent misrepresentation. Each of those claims failed.
During the trial an application was made by counsel for the plaintiffs to amend the particulars of claim to plead what has been referred to as “misrepresentation by silence”. The proposed amendment to the pleading claimed, in particular, that the defendant failed to inform the plaintiffs that he already owned the race horses, and that he had purchased them for a good deal less than $50,000. The application to amend was refused by the Magistrate.
In his reasons the Magistrate says at [148] that “Misrepresentation by silence has not been pleaded.” Presumably that reflects the consequence of his ruling. Later in the same paragraph the Magistrate said that there was no duty on the defendant “to disclose what he had paid for the horses”. A little later he said at [150]:
“There were no misleading or false representations made and no failure to disclose anything that ought to have been disclosed. This is not a case where a remedy in misrepresentation by silence lies.”
The proposed amendment is the closest that the plaintiffs came, as I understand events, to a claim for breach of a fiduciary duty that prohibited the defendant from making a profit at the plaintiffs’ expense, without disclosing that profit and without accounting to them for it. The proposed amendment, if allowed, probably would have led to a consideration of the fiduciary duty now relied upon, because the amendment would have exposed the issue of whether the defendant was under an obligation to inform the plaintiffs that he was already the owner of the horses and to inform them of the amount paid.
The final written submission by the plaintiffs to the Magistrate, to which Gray J refers, appears to have been disregarded by the Magistrate. The most likely explanation for this is that the Magistrate regarded it as going to an issue not properly raised before him. I do not consider that it shows that the plaintiffs were relying before the Magistrate on a duty of disclosure arising from a fiduciary relationship between them and the defendant.
In that respect I agree with the Judge whose decision is under appeal.
That is not the end of the matter. If the facts necessary to found a claim for breach of fiduciary duty were investigated at trial, and if the relevant and necessary findings of fact have been made, or can now be made on appeal, the claim for breach of fiduciary duty can be raised and decided on appeal. That is subject to one important further consideration, namely, that there be no unfairness to the defendant in now considering the claim on a basis not advanced at trial.
In particular, if the defendant might have been able to meet the claim now advanced with evidence at trial, had the claim been made then, it would be unfair to allow the plaintiff to raise the claim on appeal, to the disadvantage of the defendant: see Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438. That principle has been affirmed by the High Court in subsequent decisions: see Water Board v Moustakas (1988) 62 ALJR 209 at 210-211; Banque Commerciale SA v Akhil Holdings Ltd (1990) 169 CLR 279 in particular at 284 Mason CJ and Gaudron J.
In the present case Mr Slattery QC, counsel for the defendant on appeal, submits that had a claim for breach of fiduciary duty been advanced at trial, the defendant might have presented his case differently. In the course of argument he referred to evidence about when the partnership began, and the relationship in time between that event and conversations between the parties; to evidence about the value of the horses, and the plaintiffs’ knowledge of their value; to evidence about the impact on the plaintiffs of the information about the defendant’s purchase of the horses (this information they gained later), and to evidence bearing on whether the defendant made a profit of $10,000 as claimed. He was not able to be specific, meaning that he did not identify any particular or specific evidence that would have been led had the case been presented differently. Rather, he referred to issues that I have identified. But that is not decisive. It will not always be possible to say just how a case might have been reshaped had the plaintiff advanced a different case at trial.
It is incumbent on the plaintiffs, in a case like the present one, to demonstrate that there is no significant risk of prejudice to the defendant if they are permitted to reshape their case on appeal. A relevant matter also to be borne in mind may be the interests of justice, the relevant consideration being that ordinarily it is in the interests of justice to hold parties to the manner in which they have conducted a case: see Banque Commerciale at 284.
It is this aspect of the case that I find difficult.
The Judge below thought that had the plaintiffs put their case as they now put it, “… the action itself may have taken quite a different course in terms of the issues before the Court and indeed whether those issues were determined in the Magistrates Court or in this Court …”. The latter point is a reference to the possibility that had the plaintiffs based their claim on the partnership, the defendant might have brought proceedings for dissolution of the partnership and for an account, such proceedings being brought in this Court. Nor was the Judge satisfied that “the trial itself may not have taken a different course in terms of the evidence put before the Court had the defendant known that the plaintiffs were alleging a liability for breach of fiduciary duty.”
I have given careful consideration to the latter point in particular. An obvious line of defence to a claim for a breach of fiduciary duty would have been to prove that the defendant made full disclosure of the relevant circumstances and obtained the consent of the plaintiffs: see Meagher Gummow and Lehane’s Equity Doctrines and Remedies (4th ed, Butterworths, 2002) at [5-115]. But that was never the defendant’s case at trial. The defendant denied any duty to disclose how he acquired ownership of the horses and the amount paid. He made no suggestion that he told the plaintiffs about these matters. Another line might be to prove that the plaintiffs were aware from other sources that the defendant was already the owner of the horses, the circumstances under which the defendant had acquired that ownership and the amount paid. On appeal there was some suggestion by Mr Slattery that this is a line that would have been more fully investigated had a claim for breach of fiduciary been advanced. On the other hand, that line of inquiry was equally relevant to the claim as made before the Magistrate. Indeed, this topic was referred to by the Magistrate, reflecting some of the matters argued at trial: at [108] – [112].
I acknowledge the force of the point made by Gray J, to the effect that evidence of the kind foreshadowed by Mr Slattery would not have assisted the defendant at trial, had the claim been one for breach of fiduciary duty. There is also the point that there has been no suggestion by the defendant that he informed the plaintiffs of the circumstances of the purchase of the horses, and obtained their consent. As Gray J says, absent such evidence the defendant must account for the profit made. On the other hand, I must take into account the fact that the claim was pleaded on a specific basis, and the fact that an attempt to widen the basis of the claim was made before the Magistrate and rejected.
I agree with the reasons given by Gray J for finding that the rejection by the plaintiffs of the defendant’s offer of rescission is not a reason to refuse relief.
It is also relevant to bear in mind that the plaintiffs specifically denied that they sought any relief arising from or linked to the fact of the partnership. This submission was made when the plaintiffs were resisting a submission by the defendant, shortly before trial, that the claim advanced by the plaintiffs was one properly to be advanced in proceedings for dissolution of the partnership, and not to be advanced in the Magistrates Court (which lacked jurisdiction over dissolution proceedings).
I have considered carefully the submission made by Mr Slattery. The risk of unfairness to the defendant requires careful consideration. However, I am unable to identify any risk of prejudice to the defendant as a result of the case now being put on a new basis. Having regard to the case of the defendant at trial, which was in substance that he was under no obligation to inform the plaintiffs of the circumstances of the purchase of the horses, and having regard to the issues that arise if the claim is to be presented as the plaintiffs now wish to present it, I cannot identify any risk of prejudice to the defendant having regard to the manner in which the trial was in fact conducted. The matters identified by Mr Slattery were relevant to the claim as made. They are not matters giving rise to an obvious defence.
I am left with the fact that ordinarily it is not in the interests of justice to permit a plaintiff to depart from the manner in which a case has been conducted prior to appeal. The change here is a striking one. But if the plaintiffs are held to the conduct of their case at trial, an apparently good claim will be defeated. I do not think that the Magistrate’s decision to defer the trial of the defendant’s counterclaim, and to defer consideration of the plaintiffs’ reply and defence to counterclaim, would have been any different if the claim had been presented as one for breach of fiduciary duty.
For those reasons I agree with Gray J that the plaintiff should be entitled to advance their case on the basis on which they now claim to do so, and that on that basis they are entitled to succeed.
I agree that the appeal should be allowed, that the order of the single Judge dismissing the appeal for this Court should be set aside, and that there should be substituted an order allowing the appeal to this Court, setting aside the decision of the Magistrates Court dismissing the claim, and ordering that judgment be entered for the plaintiffs for the sum of $10,000.
It will be necessary to hear the parties on the question of costs.
DUGGAN J. I agree with the reasons for decision of the Chief Justice.
There was no claim at trial of breach of fiduciary duty. Furthermore it would appear that an application by the plaintiffs to amend the particulars of claim to add a claim of misrepresentation by silence was disallowed by the magistrate (AB 2/114).
The reference in the plaintiffs’ written submissions at the trial to fiduciary duty is puzzling in the light of the fact that this cause of action was not pleaded and the magistrate had disallowed an amendment which would have raised issues in common with such a claim. As the magistrate said nothing about fiduciary duty in his reasons for decision I agree that it is likely that he ignored the submission in this respect.
Nevertheless there appears to be no answer to a claim based on fiduciary duty. Considerable care is required in a case such as this to ensure that a defendant is not unfairly prejudiced by reason of a judgment delivered in favour of a plaintiff at the appeal stage on a cause of action which was not pleaded at trial: Coulton v Holcombe (1986) 162 CLR 1. However, I have reached the view that there is an unanswerable case against the defendant for breach of fiduciary duty and that the matter could not have been conducted at trial in such a way as to avoid a decision in favour of the plaintiffs on that basis.
In my view the appeal should be allowed. I agree with the orders proposed by Doyle CJ and Gray J.
GRAY J:
This is an appeal from an order of a Judge of this Court dismissing an appeal by unsuccessful plaintiffs against the decision of a magistrate rejecting their claim.
The Factual Background
The plaintiffs and appellants David John Battye and Glenda Joy Battye were interested in horses. The defendant and respondent David Maxwell Shammall shared a similar interest. The Battyes and Mr Shammall had known each other for many years. They shared an interest in trotting and met from time to time at a suburban trotting track. They were on good terms and trusted each other. They had a past history of jointly owning and racing horses. All were experienced in business.
In the early months of 1998 Mr Shammall approached Mr Battye at the trotting track. He told Mr Battye of a filly called Scherger Down. A discussion ensued about the Battyes and Mr Shammall jointly owning and racing the filly. At a later point of time whilst discussing Scherger Down, Mr Shammall also suggested that the Battyes join with him in owning and racing two Falcon Seelster colts. Mr Shammall informed Mr Battye that all the horses at the time were in New Zealand. He said that he had purchased Scherger Down and had an option to purchase the Falcon Seelster colts.
Mr Shammall discussed the issue of consideration and agreement was reached at or about the same time. The Battyes agreed to pay $A25,000 for a half interest in the three horses.
It was common ground at trial and on appeal that the preliminary discussions were with a view to the Battyes and Mr Shammall as partners owning training, racing and possibly breeding from the horses. On the payment of the $A25,000 the partnership came into effect.
Mr Shammall did not disclose to the Battyes that he had purchased Scherger Down for $NZ20,000 and the two Falcon Seelster colts for $NZ15,000. In total Mr Shammall had paid $NZ35,000 for the three horses and the Australian dollar equivalent of that amount was $30,000.
Accordingly, it can be seen that in accepting $A25,000 for a half interest in three horses, Mr Shammall had made a profit of $A10,000. No disclosure was made to the Battyes of this profit taken by Mr Shammall.
The Earlier Proceedings
The Battyes’ case at trial was that Mr Shammall had made positive misstatements about the payment he had made for the horses. Alternatively it was said that Mr Shammall failed to make relevant disclosures and had engaged in misrepresentation by silence.
Before trial interlocutory applications were heard concerning the adequacy of the pleadings. Initially the Battyes had pursued a claim in contract in addition to the other claims advanced. A counter-claim was lodged by Mr Shammall seeking payment of a share of the expenses incurred in the maintaining and training of the horses.
The parties acknowledged that a contract had been reached and that a partnership had been entered into. Debate ensued as to whether the relief being sought in the action should be pursued in partnership dissolution proceedings in the Supreme Court. The magistrate ruled that the claim in contract could not be pursued in the present proceedings. He ordered that the hearing of the counter-claim be adjourned as it appeared to be a dispute arising from the partnership agreement. The magistrate foreshadowed that the issues being raised by the counter-claim may have to be dealt with in dissolution of partnership proceedings. It was suggested that the Magistrates Court did not have jurisdiction to deal with that issue.
The outcome of the interlocutory proceedings was that the Battyes’ claim proceeded in respect of the allegations of misrepresentation by positive statement as well as misrepresentation by silence. Allegations of misleading conduct and deceit were also advanced. The underlying factual allegations were common to each claim. The trial proceeded against this background.
The magistrate rejected the allegation that there had been any positive misrepresentation. However, he concluded that Mr Shammall had not made disclosure of the purchase consideration for the horses. This accorded with Mr Shammall’s evidence. Mr Shammall considered that he was not under a duty to make any disclosure. The magistrate accepted this submission. Accordingly the claim failed.
On appeal the learned Judge took the view that there had been failure to make proper disclosure by Mr Shammall of his profit from the transaction. The duty to disclose was a result of the fiduciary relationship between intending partners. However, the Judge took the view that a claim had not been advanced for breach of fiduciary duty and that in the circumstances a new cause of action was being advanced on appeal. He considered that prejudice to Mr Shammall had arisen because of an inadequate opportunity to meet the new claim.
The Full Court Appeal
On appeal to this court the Battyes claimed that the issue of fiduciary duty had been raised at trial. It was submitted that, in any event, as a claim of misrepresentation by silence had been advanced all relevant evidence had been called. It was said that the justice of the case called for a judgment in favour of the Battyes.
Mr Shammall contended that the learned Judge was correct in refusing to allow a claim of breach of fiduciary duty to be advanced at such a late stage. It was further contended that the Judge was wrong to conclude that a fiduciary duty arose and even if such a duty did arise the quantum of damage had not been proven. However, during the course of argument counsel for Mr Shammall accepted that his client owed fiduciary duties to the Battyes. The challenge to the Judge’s conclusion that the parties were in a fiduciary relationship was not pursued.
Was the claim for breach of fiduciary duty raised at trial?
As earlier observed, it was also common ground at trial that the initial discussions between Mr Shammall and the Battyes were in contemplation of partnership. It was always intended by the parties that if agreement were reached it would lead to a partnership involving the ownership, training, racing and possibly breeding of the horses. A partnership eventuated. The allegations of non-disclosure misrepresentation by silence raised the question at trial of whether Mr Shammall had an obligation to make disclosure. The fact of non-disclosure was not in issue.
Considerable debate arose over the nature of the Battyes’ claim at trial. Counsel for Mr Shammall argued, on appeal, that a claim of an alleged breach of fiduciary duty had simply not been made. However, although the pleading itself did not assert the existence of fiduciary obligation, it was common ground from the start of the trial that the underlying relationship between the parties was that of intended partners and later of partners. During final submissions it was submitted by counsel for the Battyes that fiduciary obligations arose out of the intended partnership. This allegation appeared in the closing written submission:
Fiduciary Relationship
An intending partner, like a partner, owes a duty of the utmost good faith. United Dominions Corporation Ltd v Brian Pty Ltd 157 CLR 1 at 12 per Mason, Brennan and Deane JJ at 5, 6 and 7, per Gibbs CJ and per Dawson J at P16.
Each participant is under a “fiduciary duty to refrain from pursuing, obtaining or retaining for itself or himself any collateral advantage in relation to the proposed project without the knowledge and informed assent of the other participants” (United Dominions at 13).
In these circumstances Shammall is precluded from taking the financial benefits obtained by him.
The relationship requires each party to act with the utmost good faith. This involves full disclosure. See Butterworths, Section 305-355 p556,194.
As to the scope of the fiduciary obligations, see Butterworths Section 305-360, p556,195.
The situation is analogous to the promoter of a company. The only manner in which the promoter’s duty may be discharged in relation to his personal interest is fully informed consent. See Aequitas v AEFC (2001) CCH Australia Ltd 1006 at 1070 and 1071.
This written submission demonstrates that the Battyes had contended late in the trial that a duty of disclosure arose from the fiduciary relationship between the parties as intending partners.
Counsel for Mr Shammall objected at trial to this part of the written submission. It was said to raise new matters. Were prejudice to have arisen then that question could have been dealt with then and there. The evidentiary stage of the trial could have been re-opened. If other evidence was available it could have been led. Witnesses could have been recalled. If the magistrate had taken the view that the claim was being raised late in the proceedings, appropriate orders as to costs could have been made. It is unclear how the magistrate resolved the issue or whether in fact he did so. In his reasons he did not address the question of fiduciary obligations.
As earlier observed, the written submission to the magistrate at trial demonstrates that a claim of breach of fiduciary duty was being advanced. There was no ruling by the magistrate that the claim could not be advanced. It is apparent that the Battyes were pursuing claims of positive misrepresentation, misrepresentation by silence or non-disclosure arising out of the relationship of the parties as intending partners.
It was suggested on appeal that Mr Shammall was taken by surprise and had notice been given of the claim for breach of fiduciary obligations, then other evidence would have been called. However counsel could not identify any additional evidence that would have been relevant in any event to the misrepresentation by silence claim. This is all the more understandable when it is recalled that the intended partnership and the subsequent partnership were acknowledged. The contention of Mr Shammall was that he was not under any obligation to make disclosure.
Counsel suggested that evidence of the Battyes’ knowledge of the value of the horses would have been pursued had his client been aware of a claim for breach of a fiduciary duty. It is difficult to see how evidence that the horses were of greater value would have assisted. The parties would have shared jointly in the benefit of any increased value. Mr Shammall remained obliged to make disclosure of his profit on the immediate transaction. This is not a case where any risk of prejudice has been demonstrated.
It is also to be borne in mind that the rules of pleading require material facts to be pleaded. It is strictly unnecessary to plead causes of action, although this is often done. As earlier observed, it was common ground throughout that the discussions took place between Mr Shammall and the Battyes with a view to partnership, a partnership which later ensued. It could be said that in substance Mr Shammall was sufficiently aware of the case he had to meet. The observations of Perry J in S P Hywood Pty Ltd v Standard Chartered Bank Ltd[1] are apposite:
[1] S P Hywood Pty Ltd v Standard Chartered Bank Ltd (Perry J, 22 December 1992, unreported)
It is clear on the authorities that the trial judge is not limited to a consideration of the particular cause of action which might be identified by counsel. In Drane v Evangelou & Ors (1978) 1 WLR 455, Lord Denning MR said (458):
“Now there is an appeal to this court. The first point taken on behalf of the defendants was a pleading point. The amended particulars of claim alleged that the landlord had
‘interfered with the right of the plaintiff and his de facto wife Ann Watts to quiet enjoyment of the said premises by unlawfully evicting them from the said premises on Tuesday October 14, 1975.’
Counsel for the defendant submitted that that claim was for breach of a convenant for quiet enjoyment. He cited a passage from Woodfall on Landlord and Tenant, 27th ed. (1968), para 1338:
‘Since the claim is in contract, punitive or exemplary damages cannot be awarded.’
The judge at once said:
‘What about trespass? Does the claim not lie in trespass?’
Counsel for the defendant urged that trespass was not pleaded. The judge then said:
‘The facts are alleged sufficiently so it does not matter what label you put upon it.’
The judge was right. The plaintiff in the particulars of claim gave details saying that three men broke the door, removed the plaintiff’s belongings, bolted the door from the inside: and so forth. Those facts were clearly sufficient to warrant a claim for trespass. As we said in In re Vandervell’s Trusts (No. 2) [1974] Ch 269, 321-322:
‘It is sufficient for the pleader to state materials facts. He need not state the legal result. If, for convenience, he does so, he is not bound by, or limited to, what he has stated. He can present, in argument, any legal consequence of which the facts permit’.”
…
The trial judge is free to give judgment on any available cause of action whatever, irrespective of any mention of particular causes of action in the pleadings. Of course, it must be observed that the pleading of the material facts will often operate to confine the evidence in such a way as to have the practical effect of limiting the options of the trial judge in fashioning relief at the end of the trial.
But what must be kept steadfastly in mind is that all causes of action are at large at the end of the trial, in the sense that judgment may be given upon any cause of action open on the evidence as proved, irrespective of the manner in which the plaintiff’s case has been presented, or argued.
For the foregoing reasons the contention of Mr Shammall that the misuse of a fiduciary relationship had not been raised at trial should be rejected.
Fiduciary Relationship
The nature of the relationship between intending partners has been the subject of extensive judicial comment. It is the nature of the relationship that gives rise to the fiduciary obligation. The relationship requires the parties to act with the utmost good faith. It is the confidence and trust of the intending partners that give rise to the need for candour, fairness and good faith. As Atkin LJ observed in Bell v Lever Brothers Limited[2]:
Apart from special fiduciary relationships, contracts for partnership and contracts of insurance are the leading instances. In such cases the duty does not arise out of contract; the duty of a person proposing an insurance arises before a contract is made, so of an intending partner. Unless this contract can be brought within this limited category of contracts uberrimae fidei it appears to me that this ground of defence must fail.
[2] [1932] AC 161at 227
In Birtchnell v Equity Trustees, Executors and Agency Co Ltd[3], Dixon J observed:
The subject matter over which the fiduciary obligations extend is determined by the character of the venture or undertaking for which the partnership exists, and this is to be ascertained, not merely from the express agreement of the parties, whether embodied in written instruments or not, but also from the course of dealing actually pursued by the firm. Once the subject matter of the mutual confidence is so determined, it ought not to be difficult to apply the clear and inflexible doctrines which determine the accountability of fiduciaries for gains obtained in dealings with third parties. Of the duties imposed by these doctrines, one which is material for the decision of this case is that which forbids a partner from withholding from the firm any opportunity of advantage which falls within the scope of its undertakings, and from using for his own exclusive benefit, information, knowledge or resources to which the firm is entitled.
[3] (1929) 42 CLR 384 at 408
In United Dominions Corporation Limited v Brian Pty Ltd[4], Gibbs CJ noted:
In Lindley on Partnership, 15th ed. (1984), p. 480, it is said that the ‘obligation to perfect fairness and good faith’ is not confined to persons who actually are partners, but ‘extends to persons negotiating for a partnership, but between whom no partnership as yet exists …’. This statement, which also appeared in earlier editions, is criticised in Higgins and Fletcher, Law of Partnership in Australia and New Zealand, 4th ed. (1981), p. 50, on the ground that it is not supported by the authorities cited. The decision of Lord Lyndhurst L.C. in Fawcett v. Whitehouse is clear authority for the proposition that a person who is negotiating for himself and his future partners as an agent for the intended partnership, and who clandestinely receives an advantage for himself, must account for that advantage to the partnership when it is formed. Hichens v. Congreve is a similar case. Other authorities, cited by Lindley, concerned promoters of companies, but there is an analogy between the position of company promoters and that of persons who invite others to join in a partnership. The principle was stated generally in Directors, etc. of Central Railway Co. of Venezuela v. Kisch:
‘It cannot be too frequently or too strongly impressed upon those who, having projected any undertaking, are desirous of obtaining the co-operation of persons who have no other information on the subject than that which they choose to convey, that the utmost candour and honesty ought to characterize their published statements’.
Mason, Brennan and Deane JJ observed:[5]
To the extent that that submission involves a general legal proposition that the relationship between prospective partners or joint venturers cannot be a fiduciary one until a formal agreement is executed, it is clearly wrong. A fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangement between them. In particular, a fiduciary relationship with attendant fiduciary obligations may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled. Indeed, in such circumstances, the mutual confidence and trust which underlie most consensual fiduciary relationships are likely to be more readily apparent than in the case where mutual rights and obligations have been expressly defined in some formal agreement. Likewise, the relationship between prospective partners or participants in a proposed partnership to carry out a single joint undertaking or endeavour will ordinarily be fiduciary if the prospective partners have reached an informal arrangement to assume such a relationship and have proceeded to take steps involved in its establishment or implementation.
[4] (1985) 157 CLR 1 at 5 - See also Fraser Edmiston Pty Ltd v AGT (Qld) Pty Ltd [1988] 2 Qd R 1, where Williams J held that intending partners owed fiduciary duties to each other even though a partnership did not subsequently come into existence.
[5] (1985) 157 CLR 1 at 11-12
In the circumstances of this matter the acknowledged fact of the intended partnership gave rise to a relationship that should properly be characterised as fiduciary. In these circumstances the relationship gave rise to obligations of disclosure, candour, fairness and good faith. In Chan v Zacharia[6] Deane J summarised the nature of the fiduciary obligation in the following terms:
The variations between more precise formulations of the principle governing the liability to account are largely the result of the fact that what is conveniently regarded as the one “fundamental rule” embodies two themes. The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee: see Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd. That constructive trust arises from the fact that a personal benefit or gain has been so obtained or received and it is immaterial that there was no absence of good faith or damage to the person to whom the fiduciary obligation was owed. In some, perhaps most, cases, the constructive trust will be consequent upon an actual breach of fiduciary duty: e.g., an active pursuit of personal interest in disregard of fiduciary duty or a misuse of fiduciary power for personal gain. In other cases, however, there may be no breach of fiduciary duty unless and until there is an actual failure by the fiduciary to account for the relevant benefit or gain: e.g., the receipt of an unsolicited personal payment from a third party as a consequence of what was an honest and conscientious performance of a fiduciary duty. The principle governing the liability to account for a benefit or gain as a constructive trustee is applicable to fiduciaries generally including partners and former partners in relation to their dealings with partnership property and the benefits and opportunities associated therewith or arising therefrom: see Birtchnell v Equity Trustees; Consul Development Pty Ltd v D.P.C Estates Pty Ltd.
[6] (1983) 154 CLR 178 at 198-199
Mr Shammall was under an obligation to disclose to the Battyes his profit from the transaction. He did not do so. He believed that he was not under any obligation to do so. In that respect he misunderstood his obligations. Mr Shammall was in breach of his fiduciary obligations and was bound to account for the profit made. As earlier indicated, that profit amounted to $A10,000.
Quantum
A party in breach of fiduciary obligation has the obligation to account for any profit he has made as a result of that breach. On appeal, the relief sought was limited to the $A10,000 profit taken on the transaction. The Battyes were entitled to equitable relief in the amount of $A10,000 being the profit taken by Mr Shammall. In the ordinary course this would be accompanied by a claim to interest on that amount from the date of payment until the date of judgment.
A Further Issue
On appeal counsel for Mr Shammall contended that before proceedings were instituted, Mr Shammall offered to rescind the arrangement and to return the moneys paid by the Battyes, that is the $A25,000. The Battyes refused this offer.
Counsel for Mr Shammall submitted that in these circumstances the Battyes were not entitled to any further relief. Counsel relied on the decision of the High Court in Tracy v Mandalay Pty Ltd where the court observed: [7]
It is clear from these passages, and there are many others to the same effect, that in the absence of approval by an independent board after full disclosure sales by a promoter of his property to the new company are in the same position as any other sales by a trustee of his property to a person towards whom he stands in a fiduciary relation. That is to say they are voidable at the mere option of the purchaser. But if the purchaser decides to affirm the transaction he must affirm it according to its terms. He cannot ask the Court “to fix a proper price between vendor and purchaser, and estimate the damage with reference to such price. This is the Court cannot do” per Lord Parker of Waddington in Marler’s Case.
It is to be noted that the court emphasised the need for full disclosure.
[7] (1953) 88 CLR 215 at 241
The difficulty confronting this submission is that at the time of the suggested election by the Battyes to continue with the arrangement they were unaware of the circumstances surrounding the purchase of the horses and in particular the consideration paid by Mr Shammall. In these circumstances there had not been full disclosure. The Battyes were proceeding without knowledge of the relevant facts. Mr Shammall’s submission should be rejected.
Conclusion
This appeal should be allowed. The order of the magistrate dismissing the claim should be set aside. Judgment should be entered for the Battyes for $A10,000. The parties should be heard with respect to interest and costs.
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