Briaroaks Pty Ltd & Anor v Fitzwood Pty Ltd

[2003] HCATrans 521

[2003] HCATrans 521

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M239 of 2002

B e t w e e n -

BRIAROAKS PTY LTD

First Applicant

MICHAEL DRAPAC

Second Applicant

and

FITZWOOD PTY LTD

First Respondent

MAPEKA PTY LTD

Second Respondent

MAPWOOD PTY LTD

Third Respondent

UNIQUE GOAL PTY LTD (In Liquidation)

Fourth Respondent

Application for special leave to appeal

GLEESON CJ
McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 12 DECEMBER 2003, AT 9.31 AM

Copyright in the High Court of Australia

__________________

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friends, MR D.M. MACLEAN, and MR P.G. WILLIS, for the applicants.  (instructed by Corrs Chambers Westgarth)

MR C.L. PANNAM, QC:   If the Court pleases, I appear with my learned friend, MR A.J. PATERSON, on behalf of the respondents.  (instructed by GSM Lawyers)

MR P.D. CRUTCHFIELD:   If the Court pleases, I appear for the fourth respondent.  (instructed by Cornwall Stodart)

GLEESON CJ:   There is a notice of motion.  Are the orders opposed?

MR PANNAM:   Yes, your Honour.

GLEESON CJ:   Yes, Mr Jackson.

MR JACKSON:   The notice of motion, your Honours, is, on behalf of my learned friend, Mr Crutchfield, to join the fourth respondent as an applicant in the matter.  Your Honours, may I proceed with the substance of the application?

GLEESON CJ:   Yes.

MR JACKSON:   Your Honour, special leave should be granted, it is submitted, because the reasons given for setting aside the finding of the primary judge on the central issue of good faith were based, in our submission, on significant factual errors.  In short, your Honours, the point which we would seek to make is that the appeal on this issue, which is the remaining issue in the case, was not properly dealt with by the Full Court.

We would also say in relation to that, your Honours, that the case is one where the result has been that Mr Drapac, one of the applicants, has been found to have acted other than in good faith in circumstances where the finding in his favour on that issue at first instance must have been based, at least in some significant part, on the judge’s view of his oral evidence.  Your Honours, it will take me a moment to demonstrate the point I am seeking to make.  May I proceed to do so immediately.

Your Honours, the issue in this case was related to the Trustee’s exercise of a power of sale.  The power is conferred by clause 20 of the trust deed, which is behind tab 31 in volume 2 of the materials that your Honours have and at a page which is numbered in the bottom right‑hand corner 821.

GLEESON CJ:   What is the tab number?

MR JACKSON:   Behind tab 31 and it is the page numbered in the bottom right‑hand corner 821.

GLEESON CJ:   I have not got tab 31, yet.

McHUGH J:   No, neither have I.

GLEESON CJ:   I have a bundle of materials that has tabs 1 to 12.

MR JACKSON:   I am sorry, your Honours, I really cannot explain.

GLEESON CJ:   Does it look like that?

MR JACKSON:   No, your Honour.  Unfortunately, it is a book like that – two of them.

McHUGH J:   No, I have not got it either, Mr Jackson.

MR JACKSON:   Your Honour, may I just say this, that in relation to the clause it provides in clause 20 that:

Notwithstanding anything herein to the contrary or otherwise contained –

so it says notwithstanding anything else in the deed, to put it shortly –

the Trustees shall have the power at their absolute discretion TO SELL transfer hire lease or dispose of any real or personal property of the Trust Fund –

and so on.  The Trustee is given by that an absolute discretion to sell.  The trust was a unit trust which, as your Honours will see in volume 2 of the application book, was established, but your Honours will see from volume 2 in the application book, page 278, paragraph 1 of the Full Court’s reasons at about line 17 it was:

established in 1994 to purchase, manage the leasing of and resell a property –

One of the tasks of the Trustee was to sell the property, and it did that.  The sale was not completed because the respondent, Fitzwood, which was a unit holder, obtained an injunction to restrain completion of the sale and the Trustee, in the result, incurred two liabilities.  One was for commission to the estate agent – that is at page 297, paragraph 62.  There was also for damages to the purchaser of a “breach of contract in the order of $25,000” in the same paragraph. 

Now, the central question was whether the Trustee was entitled to be indemnified in respect of those liabilities from the trust fund.  That involved the application of clause 36.1 of the deed of trust which is in the other volume at page 38.  Your Honours will see that it says:

The Trustees when acting in good faith shall be entitled to be indemnified out of the assets . . . in respect of all liabilities incurred by them relating to the execution or attempted execution or as a consequence of the failure to exercise any of the trusts authorities powers –

et cetera.  Your Honours will see that the provision gives an entitlement to indemnity from the trust assets:

in respect of all liabilities incurred by them relating to the execution or attempted execution –

of the trusts, et cetera.  The property, as I said, was sold.  There seems no doubt that the actual sale was within the ambit of the powers to sell and was at least an attempted execution.  In particular, there was no suggestion that it was a sham, subject to concealed conditions at an undervalue or between parties not at arm’s length.  There was an entitlement to indemnity, in those circumstances, provided the Trustee was acting in good faith. 

The primary judge held there had been a bona fide exercise of the power to sell.  His discussion your Honours will see commencing at page 231 in volume 1.  Your Honours will see at paragraph 157 where he set out the basis of the contention on the other side that it was not bona fide.  He expressed the view at paragraph 158 on page 232 that, in the end he was not persuaded that the Trustee – he spoke of Mr Drapac – was being dishonest and the finding was based on a number of matters which your Honours will see he lists in paragraph 158.  They were based, at least in part – and I refer particularly to their last sentence – on the view which he formed of Mr Drapac in the light of his oral evidence.

GLEESON CJ:   Did not the Full Court take the view in relation to Mr Drapac’s acting on the solicitor’s advice that the solicitor was not fully informed?

MR JACKSON:   Yes, your Honour, that is what I am about to come to.  It is in relation to that that we say the Full Court was simply in error in the matter.  Your Honours, could I just say in relation to that, that the Full Court’s reasons seem to fall into two parts.  The first, which sets out perhaps the essence of their reasons for setting aside the finding on good faith, is in volume 2 at page 309, paragraph 103.  I think that is what your Honour was referring to.

Your Honours, a number of reasons are set out there, one of them being the fact that Ms Bhatt was a junior solicitor, but the evidence was that it was not just Ms Bhatt who was involved.  There was evidence from Mr Cookes, who was the person who was supervising her work.  That was to the effect that he was fully involved in considering and giving the advice in question. 

Your Honours, could I just please indicate two references in that regard?  One is Mr Cookes’ evidence at page 110 in volume 1.  Your Honours will see paragraph 94 and 95 and, particularly in relation to paragraph 95, your Honours will see that he says in respect of Ms Bhatt’s affidavit, she was at all times acting under his supervision and he verifies the meeting and discussion with her to which she deposes in paragraph 24.  Those paragraphs can be seen in the same volume, particularly at page 105A.  Your Honours, if I could go immediately to paragraph 24 which is at the bottom of page 106 where one sees the advice that was given, which she says at the top of 107:

was the consequence of the discussion between Mr Cooke and me –

It is just incorrect, your Honour, to say that this was purely the advice of a junior solicitor.  It was the advice ‑ ‑ ‑

GLEESON CJ:   I thought the principal point they were making is that summarised in the last line of paragraph 103.

MR JACKSON:   Your Honour, could I say in relation to that, the first thing is that, if one looks at the things that are said not to have been disclosed, she knew that Cahill and Abrahams had not said yes to the sale.  You will see that at page 107 in paragraph (h) on that page.  The next thing was that the Full Court said Mr Drapac was obliged to tell the solicitors there was a likelihood that litigation might follow.  Your Honours, that seems quite extraordinary, with respect, when he was the person seeking the legal advice.  Could we refer again to paragraph (h) on page 107.  There was a reference to the possibility of a dispute. 

Fourthly, the next matter that the Full Court said that needed to be disclosed was that the Trustee might be seeking an indemnity in respect of any costs or liability for damages.  In our submission, it is very difficult to see any basis why it would be necessary to disclose that to solicitors because of course the Trustee would be seeking to be indemnified.  That would seem to be obvious.  Even without the terms of a trust deed, an indemnity would arise, naturally, from the Trustee’s office, Octavo Investments v Knight, for example. 

The Full Court appeared to advance some further reasons at paragraphs 107 to 109, at page 310 to 311.  That relates to a number of matters.  If I could go first of all to what is at page 311, about line 6.  There was no duty or requirement under the trust deed “to have regard to the interest of the unitholders”.  The Trustee was a trustee.  It had a discretion to sell.  It had an ability to sell the property at a proper price.  Your Honours, that is the point to which we refer in our written submissions as the Buttle v Saunders point, no necessity to give a form of natural justice in relation to it.  Your Honours, also we would submit there was no requirement to seek an extension of time from an offeror.

Your Honours, we would also say that at paragraph 111 the Full Court rationalises or seeks to support its conclusions by a finding about the Trustee’s conduct in connection with the contract after there had been an ex parte injunction granted.  The point that is sought to be made is that we should have said there had been no exchange.  But, your Honours, could we just say in relation to it, the terms of the offer required acceptance by the Trustee by 5.00 pm.  That is paragraph 57, about line 26 on that page.  The Trustee signed the contract at 4.00 pm.  That is paragraph 161.  The agent collected the executed contract immediately after signature.  Then, your Honours, the ex parte injunction was granted just before 5.  The

Trustee’s solicitor was told of the injunction but she was only asked whether the contract had been signed.  There was nothing that was asked about exchange.  Your Honours will see that at page 102 in volume 1, paragraph 40, and her file notes there also.  The short fact is that there was no inquiry about exchange.  The simple question was whether the contract had been signed and it was said, yes, it had been. 

Your Honours, what we would submit is that in relation to the view taken by the Full Court, first of all that their assessment of the identification of what the evidence was was incorrect and their assessment of it involves assumptions that really are entirely unrequired by the nature of the trust, and the third thing is in relation to it that what was said in relation to exchange is something that is really, again, a misapprehension of the evidence.

Your Honours, what has happened has been that the Full Court has made findings of fact on an issue of honesty, contrary to those of the trial judge.  They were crucial to the result of the appeal in that court.  They were not supported by the evidence and the appeal has not been properly dealt with, in my submission.

GLEESON CJ:   Mr Crutchfield, is it the case that your application only arises in the event that we consider special leave should be granted?

MR CRUTCHFIELD:   Yes, your Honour.

GLEESON CJ:   So it is probably convenient for us to hear Dr Pannam on the merits of the application?

MR CRUTCHFIELD:   Yes, if your Honour pleases.

GLEESON CJ:   Yes, Dr Pannam.

MR PANNAM:   If your Honours please.  Your Honours, in our respectful submission, this was a very unusual decision on a very special set of facts and it does not provide any platform for the grant of special leave.  In order to make that good can I make five short points in relation to the facts and they all revolve around a central theme which is this.  The dispute between the Trustee and the unit holder who wanted to purchase the remaining units in the trust revolved around the calculation of the manager’s management fee.

Mr Drapac was a director both of Unique Goal, the Trustee, and also the manager and the debate was whether the management fee was to be calculated on just cash in and cash out or whether it was to be calculated on the basis of cash in with an allowance being made in the expenditure side, before you got to a profit, of depreciation and Division 10 allowances for capital improvements to the works.  So that was the debate around which the whole of this dispute revolved. 

Now, can I make five short points about that.  First of all, it was found by Justice Finkelstein and by the Full Court that Mr Drapac knew that there was no basis for his claimed basis of assessment of the management fee.  Your Honours will see that in Justice Finkelstein’s judgment at volume 1 of appeal book 196 and the Full Court at volume 2 of the appeal book at 332 to 333.  So that is the first point. 

The second point is that as a director of both the manager and the Trustee he was, on any view, in November and December 1999 in a situation of hopeless conflict of interest because on the one hand he was taking the stance that he would not allow the transaction with the unit holder to go ahead unless he got the claimed management fee on the basis that he was contending for and as Trustee he had very different duties.  That conflict appears clearly, as was found by Justice Finkelstein.  The clearest is at volume 1, page 232 and certainly in the Full Court in the second volume of the appeal book at 305.  That was the second point. 

The third point is this, that on 30 November 1999 there was an agreement between the Trustee – that is Mr Drapac – and his company with at least Fitzwood, the principal unit holder who wanted to acquire the other units, to the effect that the property would not be sold without the consent of a committee that represented the unit holders.  They were Messrs Cahill and Abrahams.

The learned trial judge found at 1 AB 219 to 220 and again at 233 that there was a contract to that effect and the consideration for the contract was the promise not to sell pending the assent of those two persons, Cahill and Abrahams, was the background dispute of the removal of the Trustee company that was then very much a live issue and meetings had been called to consider that. The fact is that without the consent, and deliberately without the consent of the two who had refused their assent, the property was sold. That is the third point.

The fourth point is this, that it is perfectly clear that on 22 December 1999 the decision that was made by Mr Drapac to sell on behalf of Unique Goal, the Trustee, was done for principally the reason of the crystallisation of a situation where his management fee would become payable.  That was found by Justice Finkelstein at page 231 of the first appeal book, where his Honour said his overriding concern was to recover the management fee, and at page 310 of the second volume of the appeal book the Full Court drew attention to the fact that he sold it to crystallise the payment of the management fee, and they indeed were the words that Mr Drapac used in his evidence.

The fifth point is this, that the decision that was made to sell on the 22^nd was taken at a meeting of the directors of the Trustee at which Mr Drapac and his wife were present and not the other director, Mr Spiliotis.  The evidence was that his wife was only an alternative director.  The background, if I can take the Court to our outline of argument, is conveniently summarised at paragraphs 12, 16 and 21.

The point begins at 12 where back on 23 November there was a meeting of the directors and Mr Spiliotis was present at which he voted against the proposal to retain the agent to sell the property for $5.9‑odd million.  If I can go down to 16, on 21 December 1999 Mr Spiliotis wrote to Mr and Mrs Drapac in which he raised concerns in relation to the offer to purchase the property.  Those concerns were the existence of the committee of management. 

If I can go over to 21, the unchallenged evidence of Mr Spiliotis was that he was not ever notified of the meeting that took place at about 4.00 pm on 22 December – the meeting of directors of the Trustee – at which Mr Drapac and his wife, who on any view was an alternative director only – he simply was not given notice of that meeting and the reason is obvious enough.

Given those sorts of matters that were very peculiar to the facts of this particular case, it is submitted that any attempt to use the appeal as a platform to launch, for example, a Buttle v Saunders point will not get anywhere because, as is pointed out in that case, that is the general rule but everything depends on the facts of the particular case, and there were particular facts in this case. 

The Karger v Paul point that is referred to in our learned friend’s outline, namely, there is some duty on a trustee to afford natural justice to beneficiaries in a decision‑making process leading to the sale of trust property, does not arise.  We did not contend for it either below or before the Full Court and the Full Court did not say there was such a duty.  In any event, in this particular case, there was the interposition of the particular contract with one of the unit holders, at least, Fitzwood, whereby the Trustee bound itself not to sell without the approval of the two. 

So far as good faith is concerned in the indemnity clause, it is submitted that the test of whether good faith exists or not is well established.  The question is, on the facts – just those five facts that I put to the Court – really could the Trustee be said to be acting in good faith for the purpose of the indemnity clause?  We would say the answer to that is clearly no, but in any event it is not a point in respect of which this Court ought to grant special leave to appeal.

As my learned friend’s argument has shown, basically their argument really is what they want is a new appeal on the facts, as it were, in order to show that certain factual findings of the Federal Court were wrong.  In our respectful submission, that is not a basis for the grant of special leave.  If the Court pleases.

GLEESON CJ:   Mr Jackson.

MR JACKSON:   Your Honours, may I say, first of all in relation to my learned friend’s five points, turning to the fifth of them, that Mrs Drapac was not a director, this actually – and I will take your Honours to the references in just a moment – was a point which was sought to be raised at trial by amendment of the pleadings and refused.  An appeal on the point failed.  Your Honours will see that in volume 2.  At page 319, first of all paragraph 134 – the issue commences under the heading at page 317 between paragraphs 127 and 128.  Then you will see at page 320, paragraphs 139 through to 141 and, in particular, paragraph 140, that:

The learned primary Judge was correct in refusing the amendment . . . because it lacked prospects of success.

Now, your Honours, how one could take into account that issue at this point as against us is, in our submission, very difficult to see.  The second thing, your Honours, is that our learned friend referred to – this is the fourth point – the crystallisation of the management fee and referred your Honours to page 230 and 231 in volume 1, paragraph 157.  What your Honours will see is that that is a recitation of part of the argument.  At page 231, paragraph 157 your Honours will see at the third line:

Fitzwood’s case is that when the trustee made its decision . . . it was actuated by malice –

That is what it is said is and then your Honours will see the argument then referred to.  Then it continues through that page and at the top of paragraph 158, the next paragraph, his Honour says:

This is a very powerful argument, and one that I was attracted to for some time.

Then one sees that he does not accept the argument and found in favour of our side.  As to the other three points that were sought to be raised, the fact of the matter is of course that those were the matters that were the subject on which advice was sought from the solicitors and the advice given shortly, as I put it, is summarised at page 107, and it was in acting on that advice that the sale took place.

GLEESON CJ:   The decision of the Full Court of the Federal Court turned on the application of settled principles to the particular and peculiar facts and circumstances of the case.  The matter raises no issue suitable to a grant of special leave to appeal and we are not persuaded that the interests of justice require such a grant.

The application is refused with costs.

AT 9.58 AM THE MATTER WAS CONCLUDED