Chickabo Pty Ltd v Zphere Pty Ltd

[2019] VSC 73

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE
COMMERCIAL COURT

S ECI 2018 00084

CHICKABO PTY LTD (ACN 074 576 186) AND OTHERS	Plaintiffs
v
ZPHERE PTY LTD (ACN 114 716 773) AND OTHERS	Defendants

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JUDGE:	Sifris J
WHERE HELD:	Melbourne
DATE OF HEARING:	12-15 and 19-20 November 2018
DATE OF JUDGMENT:	22 February 2019
CASE MAY BE CITED AS:	Chickabo Pty Ltd & Ors v Zphere Pty Ltd & Ors
MEDIUM NEUTRAL CITATION:	[2019] VSC 73  (First Revision 26 September 2019)

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EQUITY – Fiduciary duties – Whether fourth defendant owed fiduciary duties to the partners and principals of a partnership – Clauses of partnership deed required fourth defendant to act in the interests of all partners – Obligations of trust, confidence, loyalty and fidelity arise out of the relationship of the parties, conduct of its business and the partnership deed – Fourth defendant owed fiduciary duties – First and fourth defendants also owed fiduciary duties as partners of the partnership.

EQUITY – Fiduciary Duties – Duty to avoid conflict of duty and interest – Duty to avoid deriving an unauthorised profit from fiduciary position – Whether first and fourth defendants breached their duties – Fourth defendant procured a related company to invest in shares of a client of the partnership - Duty to disclose and offer opportunity to the partnership – Fourth defendant under conflicting confidentiality obligations to client -  Fourth defendant did not disclose the opportunity and caused a related company to make a substantial profit – First defendant in position of conflict of duty and interest - First and fourth defendants breached their fiduciary duties.

EQUITY – Accessorial liability – Whether fourth defendant knowingly induced or procured the first defendant’s breach of fiduciary duty – Fourth defendant induced or procured the breach and had knowledge of it as the directing mind and will of first defendant - Whether second and third defendants received property derived from fourth defendant’s breach of fiduciary duty – Fourth defendant is directing mind and will of second and third defendant – Knowledge of fourth defendant imputed to second and third defendants – Second and third defendant received benefits of the breach of fiduciary duty and are liable as accessories.

CONTRACT – Execution and signature – Fourth defendant signed partnership deed in capacity of director of first defendant – Whether fourth defendant personally bound by partnership deed – Provisions of partnership deed impose personal obligations – Evidence of objective intention of signatories to be personally bound – Clark Equipment Credit of Australia Ltd v Kiyose Holdings Pty Ltd (1989) 21 NSWLR 160.

CONTRACT – Interpretation – Whether fourth defendant is a partner of a partnership of corporations – Definition of ‘Partners’ refers to a schedule which includes the fourth defendant – Definition of ‘Partners’ includes fourth defendant ‘where relevant to actions required from individuals’ – Partnership deed imposes obligations on fourth defendant by labelling him a ‘Partner’ – Fourth defendant is a partner.

PARTNERSHIP – Partners and fiduciaries – Fourth defendant obtained shares in client without the consent of his co-partners – Benefit derived from a ‘transaction concerning the partnership’ and from the use by him of ‘partnership property name or business connexion’ – First and fourth defendants failed to render ‘true accounts’ or give ‘full information’ to the partners ‘of all things affecting the partnership’ - Partnership Act 1958 (Vic) ss 32 and 33(1) - Rochwerg v Truster (2002) 212 DLR (4^th) 498.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	J P Moore QC and J McComish	HWL Ebsworth
For the First to Fourth Defendants	A G Uren QC and R J Harris	Herbert Smith Freehills
For the Fifth and Sixth Defendants	B Ryde	Strongman & Crouch

HIS HONOUR:

A        Introduction

1. The plaintiffs are corporate Partners of the Moore Stephens (Vic) Partnership (Partnership) and the respective ‘Principals’ of those corporate Partners as provided for under the Partnership Deed referred to below.[1]

   [1]Whether the Principals (as individuals) are also Partners in the Partnership is an issue in the case.

1. The first defendant, Zphere Pty Ltd (Zphere), a company associated with the fourth defendant, Gary Graco (Graco), was a corporate Partner of the Partnership.  Graco was a Principal of the Partnership.

1. The plaintiffs allege that through his entity the second defendant, GFBR Nominees Pty Ltd (GFBR), Graco made an unauthorised profit in excess of $11,000,000 from an investment in Swisse Wellness Group Pty Ltd (Swisse), then a client of the Partnership (the Investment).

1. The plaintiffs allege further that through his entity the third defendant, Glenaldon Pty Ltd (Glenaldon), Graco received a payment of $4,861,000 from Fiske Pty Ltd (Fiske), which was also a client of the Partnership (the Additional Payment). Fiske was controlled by Stephen Ring (Ring), the long-time managing director and major shareholder of Swisse. Ring was also a client of the Partnership.

1. In addition to claims against the corporate Partner, Zphere, the plaintiffs allege that Graco personally owed fiduciary duties to the Partners and Principals of the Partnership.  This, it was submitted, was either because Graco was himself a Partner or, if not a Partner, because Graco stood in a relationship of mutual trust, loyalty and confidence with his fellow Principals and Partners.  Further claims, as identified more fully below, are also made by the plaintiffs. 

1. Having received the Investment and Additional Payment, Graco and his associated corporate entities cannot, it was submitted, in good conscience retain those benefits.[2]

   [2]Graco will be permitted, it was submitted, to retain his proportionate share. However, he and the corporate entities he controls must, it was submitted, disgorge the pro rata entitlement of the other Partners, including their share of any subsequent profits made.  Whether Graco and/or his associated entities are entitled to any allowances, in the event that the plaintiffs’ claims are established, was not part of the trial and will be dealt with, if necessary, at a subsequent hearing.

B        The Partnership

1. The Partnership was established pursuant to a Deed of Partnership dated 1 February 2006 (the Partnership Deed). The Partnership was formerly called the Nexia ASR Partnership.  The corporate Partners are all trustees. The Principals of the relevant corporate Partners (who are also identified and may themselves be Partners) are the related individuals, who since 2015 have been styled ‘Directors’.

1. The clauses of the Partnership Deed will be referred to where relevant. However, at this stage it is desirable to refer to the following clauses:

(a)   Clause 1.1, which include the following definitions:

(i)     “Partners” as “the entities set out in Schedule 1 (and where relevant to actions required from individuals the principals as noted in Schedule 1)”;

(ii)  “Partnership” as “the relationship of partnership constituted between the Partners as set out in this Deed”; and

(iii)             “Practice” as “the practice of Chartered Accountants carried out by the Partners under the firm name referred to in recital A and includes the business of the Partnership and any Practice Entities.”

(b)   Clause 9 – “[e]ach Partner must”:

(i)         be just and faithful to the other Partners and to the Partnership in all transactions relating to the Partnership;

(ii)  devote the whole of his time and attention to the Practice and no Partner may, without the consent of 75% in number of the other Partners, engage in or be concerned or interested in any way whatsoever in any other business or enter into any employment or hold any office or appointment otherwise than for the benefit of the Partnership;

(iii)             at all times give to the other Partners a just and faithful account of all transactions relating to the Partnership and upon every reasonable request furnish a full and correct explanation to the other Partners and afford every assistance in his power in conducting the Partnership to their mutual advantage;

(c)    Clause 11.1(a), obliging a Partner to disclose in a Statement of Interests “all interests and/or officeholdings held by the Partner in any entity associated with any client of the firm”; and

(d)  Clause 11.2(b) – no Partner “shall without the consent of 75% in number of the other Partners … engage directly or indirectly in any business other than the Practice or hold any honorary office or appointment.”

(e)   Clause 11.4(a) on “Permitted Activities”:

Each Partner must obtain the formal approval by Special Majority Vote of the Partnership prior to making any investment in association with a client of the Practice or with any entity in which a client of the Practice has an interest or with parties to whom the Partner was introduced through his involvement with the Practice or in holding any office in any entity in which a client of the Practice has an interest.

(f)     Clause 11.4(b):

Each Partner must offer to all the other Partners every opportunity of which he has knowledge to invest with a Client of the Practice or with an entity in which a client of the Practice has an interest. No Partner shall be compelled to enter into any such investment opportunity.

(g)   Clause 11.5 — by contrast with Clause 11.4 — providing that investments “outside the Practice but in which no client of the Practice has any interest” are permitted by simple majority vote of the Partnership.

1. Steve Sakkas (Sakkas) is and was at all materials times the CEO of the Partnership. John Higgins (Higgins) is its chairman. Kevin Mullen (Mullen) was its former managing Partner. Graco was formerly the chairman.

1. Zphere, as trustee of the Graco Practice Management Trust, is a Partner. As noted, Graco is a Principal of the Partnership and the sole director of Zphere.  Graco is valued by his colleagues as a skilled and trusted financial advisor.

1. The fifth and sixth defendants (DRP Consulting Pty Ltd and Mr David Polonsky) are former Partners and are joined as necessary parties.[3] The plaintiffs acknowledge their proportionate entitlement to any amount or asset recovered for the benefit of the Partnership as a whole, but take issue with the precise amount claimed by the fifth and sixth defendants.

   [3]Where the phrase ‘the defendants’ is used it refers to the defendants, excluding the fifth and sixth defendants. The fifth and sixth defendants, for the most part, joined issue with the plaintiffs. The sixth defendant is the Principal of the fifth defendant. However, for the reasons set out below, they are both Partners. Their precise entitlement will be determined, if necessary, at a subsequent hearing.

1. The business of the Partnership (as submitted by the plaintiffs) included:

(a)   providing a wide range of accountancy, tax, wealth management and corporate advisory services to a range of corporate and individual clients;

(b)   the holding, by Principals, of directorships in clients of the Partnership; and

(c)    offering to Partners the opportunity to invest in, and in association with, clients of the Partnership.[4]

[4]Whether paragraphs (b) and (c) form part of the business of the Partnership are non-critical issues in the case.  The evidence suggests that these activities were engaged in from time to time as an incident or consequence of the Partnership and whether part of its business or  not.  According to Graco becoming a director of a client or client-related entity was part of the service he regularly offered. 

1. On at least three occasions in the past ten years, the Partners have made use of the provisions of clause 11.4 of the Partnership Deed to invest with a client.[5]

   [5]Those occasions included Broo/Australian Draught in 2013 — an opportunity that was introduced to the Partners by Graco, HPQ Materials in November 2016, and various property syndication opportunities from Quintessential Equity. Graco acknowledges that those opportunities were offered to the Partners.

C        The Partnership’s Relationship with Swisse

1. At all material times, Swisse was an Australian producer of herbal and vitamin supplements. Ring was its long-time managing director and effectively its major shareholder.

1. In 1998, Swisse was introduced by Mullen as a client of the Partnership’s predecessor firm Alexander & Spencer. Ring and Mullen have been friends since they were at school together.

1. Swisse has been a client of the Partnership for over 18 years.  Ring, Michael Saba and Radek Sali (directors of Swisse) were also clients of the Partnership. A number of their private companies were also clients, including Ring’s company Fiske.

1. Ring was effectively the major shareholder of Swisse.  Fiske (as trustee for the Ring Family Trust) was the company through which he held most of his interest in Swisse.

1. Until October 2013, the Partnership was Swisse’s auditor; until September 2015, the Partnership continued to provide tax, accounting, advisory, corporate governance and other compliance services to Swisse; and thereafter the Partnership continued to undertake ad hoc work for Swisse.

1. Mullen was the original relationship Partner for Swisse. Graco took over the role of relationship Partner for Swisse on behalf of the Partnership in about 2000. Mullen did not wish to continue to be relationship Partner, because he believed that Swisse needed independent professional advice, unburdened by existing ties of friendship. Graco had no prior relationship with Swisse or its management.  He was introduced to Swisse by Mullen.

1. Graco, as a Principal of the Partnership,[6] advised Swisse for over 15 years, including attending board, management and shareholders’ meetings. As early as 2011, he accepted appointment as an alternate director of companies associated with Swisse and Ring, including Anmarin Pty Ltd and Fiske.

   [6]Of course, as pointed out, one of the issues is whether he was a Partner in his own right.

1. In November 2013, Graco was appointed as a non-executive director of Swisse and a number of its subsidiaries. The appointment was notified to the other Partners. Consistent with the Partnership Deed, Graco’s ‘[a]ttendance at board and other meetings’ was invoiced by the Partnership to Swisse, and recorded in work in progress narrations entered on the Partnership’s system.[7]  His services were encompassed within the fixed fee arrangements existing between Swisse and the Partnership. He was not separately paid directors’ fees. Nor was there any written agreement pursuant to which he was appointed as director.

   [7]The documentary evidence does not support Graco’s assertion that these attendances were not invoiced by the Partnership to Swisse.  The evidence establishes that they were recorded, with some precision, as work in progress and subject to the fixed fee arrangement between the Partnership and Swisse, and billed.

D        The Investment in Swisse

1. During 2014, Swisse was at risk of breaching its debt covenants.[8] It needed a capital injection to avoid the breach.  Swisse, after seeking capital from various sources, including hedge funds, decided to invite its executive team to subscribe for shares (the Opportunity).  Graco was included in the offer and took up the Opportunity.  He nominated GFBR to receive the shares.  It is common ground that the offer was not put to the Partnership. Graco said that he could not do so because he was under confidentiality restrictions. He accepted that he did not ask whether the offer could be extended to the Partnership. It is, however, like that if he had asked, the directors of Swisse would have said yes. He also accepted that but for the confidentiality restrictions he would have presented the Opportunity to the Partnership.

   [8]There is disagreement as to how serious the financial position of Swisse was. It is not necessary to resolve this disagreement. It should however be noted that Swisse had just made a record quarterly profit and its financiers were keen to obtain equity but their proposal was not acceptable. There is no dispute however that Graco, through GFBR made an equity investment. The risk profile of the Investment is not presently relevant, if at all relevant. It is also not without relevance to note that Graco, an experienced financial advisor used his superannuation fund to make the Investment.

1. In October 2014, Graco caused GFBR to invest $203,780 in the Investment.  There is a dispute about whether Graco told Mullen about the Opportunity before the Investment was made.  Mullen says he was told before the Investment was made, sometime in October 2014.  He says he responded by saying, ‘Can I have some?’ and then told Graco that he (that is Graco) had to take the matter to the Partnership board.  Graco denies that this conversation took place at the time and says it was a year later.  As noted later, it is not necessary to resolve this issue. 

1. As a result of the new capital and improving profits, Swisse was able to meet its debt covenants.  After a strategic review of Swisse’s business, Swisse was taken over when the majority of its shares were bought by Biostime, a Hong Kong company.

1. In September 2015, Graco caused GFBR to sell its Swisse shares.  The proceeds were said by Graco to be about $10,000,000.  However, in their letter of 27 February 2018, the solicitors acting for Graco stated that the total proceeds were $11,593,544.71.

1. Graco resigned as a director of Swisse in October 2015, following the sale to Biostime. As part of that sale process, Mullen was appointed as a director of a Biostime subsidiary.

1. After the takeover of Swisse, on 4 November 2015, Ring gave instructions for a payment of $4,861,000 to be made from the account of Fiske as trustee for the Ring Family Trust to the account of Glenaldon, a company nominated and controlled by Graco. The relevant documentation was prepared by Graco.

1. The Additional Payment represented what would have been received from the Biostime purchase had GFBR subscribed for 1 per cent of the shares in Swisse.[9] The defendants submitted that the payment was not made in respect of Graco’s duties or work for the Partnership. Rather, it was submitted that the nature of the payment is properly characterised by a letter from Ring to Mr and Mrs Graco in which he said that ‘we propose to gift to your family the sum of $4,861,000 in appreciation of your enormous financial, governance and mentoring support to our families over the last 17+ years’. The plaintiffs accept that the payment was motivated by generosity but contend that a duty to account for it still arises.

   [9]GFBR subscribed for approximately 0.07 per cent of the shares in Swisse. This decreased to 0.0649 per cent after Swisse executives received an increase in their shareholding. Therefore, the Additional Payment represents the difference in the proceeds of sale between a 1 per cent shareholding in Swisse, less the amount of the Investment.

1. As previously noted, and putting to one side the evidence of Mullen in this respect, Graco and Zphere did not disclose the Opportunity to the Partnership before making the Investment. It is, in my view, clear that had he asked, he would have been permitted to put the offer or the Opportunity to the Partnership. In fact, as noted, he conceded that but for the confidentiality restriction, he would have put the Opportunity to the Partnership. However, he decided not to ask. On 9 October 2015, Graco raised the issue of the Swisse shares with Sakkas, the CEO of the Partnership, and disclosed what he said was the amount of the proceeds.

1. Graco and his related entities have not made any payment to the Partnership in respect of the gains derived from the Investment and the Additional Payment.

E         The Plaintiffs’ Claims

1. The plaintiffs claim that as a Partner, Zphere is bound by the general law obligations of all fiduciaries, and also by the provisions of the Partnership Deed.

1. Graco is likewise, it was contended, bound by fiduciary obligations towards the Partnership and whether or not he was a Partner in his own right. 

1. Accordingly, the plaintiffs contend that the benefits derived from the Investment and the Additional Payment are unauthorised profits, receipt of which is a breach of fiduciary duty. Further, they contend that failure to disclose the Opportunity, and the unauthorised making of the Investment are themselves breaches of fiduciary duty. The precise formulation of these claims is dealt with below.

1. The plaintiffs claim further that each of Zphere and Graco owed duties to the Partnership:

(a)   to be ‘just and faithful to the other Partners’ (clause 9(a) of the Deed);

(b)   not to hold any office ‘otherwise than for the benefit of the Partnership’ (clause 9(b));

(c)    to give a ‘just and faithful account’ (clause 9(c));

(d)  forthwith to pay moneys received ‘in connection with or on account of the Partnership’ (clause 9(f));

(e)   to obtain the approval for an investment connected with a client of the Practice (clause 11.4(a));

(f)     to offer the investment opportunity to the other Partners (clause 11.4(b)); and

(g)   at general law:

(iv)not to place themselves in a position of conflict of interest; or

(v)   not to make an unauthorised profit;

(h) under s 32 of the Partnership Act 1958 (Vic) (Partnership Act) to:

(i)         render true accounts to the Partnership; and

(ii)  to give the Partnership full information of all things affecting the Partnership; and

(i) under s 33(1) of the Partnership Act, to account for a benefit derived without consent:

(i)          from a transaction concerning the Partnership; or

(ii)  from the use of a Partnership business connection.

1. As a result of their failure to disclose the Opportunity, and their failure to seek approval and then to account for the benefits derived from the Investment and the Additional Payment, the plaintiffs contend that each of Zphere and Graco breached each of those duties.

1. A further claim of accessorial liability is made against Graco in relation to the breach of fiduciary duties on the part of Zphere. 

1. Finally, the plaintiffs claim that each of GFBR and Glenaldon are accountable to the Partnership for their knowing receipt of property obtained in breach of fiduciary duty, and knowingly inducing or procuring a breach of fiduciary duty by Zphere or Graco. The precise formulation of these claims is set out below.

F         The Defences

1. The defendants contend that nothing done by Graco or any defendant in relation to the Investment or Additional Payment, or otherwise, was in breach of any fiduciary duty. The precise formulation of their contentions will be dealt with where relevant.

G        The Claim Against Graco – Breach of Fiduciary Duty

G1      Summary

1. It is convenient to deal with the claim against Graco first.

1. In my opinion, for the reasons set out below –

(a)   Graco owed fiduciary duties to the Partnership and the Principals (see section G2), whether or not he was personally a Partner. (See section G3).

(b)   I consider that, in any event and relevantly, Graco was a Partner in his own name and right. As such he clearly owed fiduciary duties to the Partnership which includes the Partners and Principals, who are in any event, Partners for the reasons set out below. (See section G4).

(c)    The nature, extent, scope and content of the fiduciary duty included the requirement, obligation or duty not to profit from the relationship with Swisse and not to place himself in a position of conflict.

(d)  Graco breached his fiduciary duties to the Partnership and the Partners and Principals and is liable to account.  (See section G5). Graco is also in breach of the Partnership Act and is liable to account under the provisions of the Act. (See section H).

1. It is necessary to consider each of these matters. Graco’s liability as an accessory to the alleged breaches by Zphere is dealt with below.

G2      Fiduciary Duties – Legal Principles

Fiduciary Duties – General Principles

1. The High Court has been reluctant to set out exhaustively the indicia of a fiduciary relationship.  However, it is well settled that the distinguishing obligation of a fiduciary is that of ‘absolute and disinterested loyalty’.[10]  Sir Anthony Mason, speaking extra-judicially, has said that fiduciary relationships are ‘a concept in search of a principle.’[11]  It is, however, at its core, an obligation to ‘serve exclusively the interests of a person or group of persons’. 

   [10]Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) (2018) 360 ALR 1, 19 [67] (Gageler J) (‘Ancient Order of Foresters’) quoting Phelan v Middle States Oil Corporation (1955) 220 F.2d 593, 602.

   [11]A Mason, ‘Themes and Prospects’ in P D Finn (ed), Essays in Equity (Law Book Co, 1985) 246.

1. Although fiduciary relationships are commonly referred to as ‘relationships of trust and confidence’, a person will be in a fiduciary relationship with another when and insofar as that person has undertaken to perform such a function for, or has assumed such a responsibility to, another as would thereby reasonably entitle that other to expect that he or she will act in that other's interest to the exclusion of his or her own or a third party’s interest.[12]  The duty arises because the principal is vulnerable to abuse by the fiduciary as the fiduciary has a special opportunity to use their position to the detriment of the principal.[13]  The High Court has previously pointed to other indicia that may be indicative of a fiduciary relationship, including:[14]

…the existence of a relation of confidence; inequality of bargaining power; an undertaking by one party to perform a task or fulfil a duty in the interest of another party; the scope for one party to unilaterally exercise a discretion or power which may affect the rights or interests of another; and a dependency or vulnerability on the part of one party that causes that party to rely on another.

[12]Grimaldi v Chameleon Mining NL (No 2) (2012) 287 ALR 22, 67 [122] (Finn, Stone and Perram JJ) (‘Grimaldi’).

[13]Hospital Products Ltd v United States Surgical Corp (1984) 156 ALR 417, 457 (Mason J) (‘Hospital Products’)

[14]Breen v Williams (1995) 186 CLR 71, 107 (Gaudron and McHugh JJ).

1. Ultimately, the critical feature of the relationship is the assumption of responsibility to act for, or on behalf of, the interests of another, in the exercise of any power or discretion affecting the interests of the principal in a legal or practical sense.[15]

   [15]Commissioner of State Taxation v Cyril Henschke Pty Ltd (2010) 272 ALR 440, 445 [21] (French CJ, Gummow, Hayne, Heydon and Kiefel JJ); Hospital Products (1984) 156 ALR 417, 454 (Mason J)

1. Allegations of breach of fiduciary duty are serious and the relevant considerations in Briginshaw v Briginshaw apply in considering whether they have been established to the reasonable satisfaction of the Court.[16]

Fiduciary Duties - Partnerships

[16]Briginshaw v Briginshaw (1938) 60 CLR 336, 361; Australian Securities and Investments Commission v Healey (2011) 278 ALR 618, [103] (Middleton J).

1. It is beyond controversy that partners owe fiduciary duties to one another and to the partnership at large.[17]  In Birtchnell v Equity Trustees Executors and Agency Co Ltd (Birtchnell), Dixon J observed: [18]

The relation between partners is, of course, fiduciary. Indeed, it has been said that a stronger case of fiduciary relationship cannot be conceived than that which exists between partners. ... The relation is based, in some degree, upon a mutual confidence that the partners will engage in some particular kind of activity or transaction for the joint advantage only. In some degree it arises from the very fact that they are associated for such a common end and are agents for one another in its accomplishment.

[17]Hospital Products (1984) 156 ALR 417, 454 (Mason J); see also Chan v Zachariah (1984) 154 CLR 178 (‘Chan’).

[18](1929) 42 CLR 384, 407 (Dixon J) (‘Birtchnell’); cited with approval by Deane J in Chan (1984) 154 CLR 178 at 196.

1. Dixon J held further that 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 ... but also from the course of dealing actually pursued by the firm’. His Honour continued:[19]

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. (See Dean v MacDowell [ (1881) 6 App Cas 79]; Aas v Benham [ (1891) 2 Ch 258, Bowen LJ]; and cf Trimble v Goldberg [ (1906) AC 499], and also secs 33 and 34 of the Victorian Partnership Act 1915.) Another duty of present materiality is that which requires a fiduciary to refrain from engagements which conflict, or which may possibly conflict, with the interests of those whom he is bound to protect. (Aberdeen Railway Co v Blaikie Bros [(1854) 1 Macq 461] (408).

…

[T]he partnership was entitled to avail itself of any opportunity to embark upon such a transaction which came to the knowledge of the partners or any of them, and knowledge and information acquired by a partner as to the readiness of a client to share such profits, as to the conditions upon which he would do so, and generally as to every fact bearing upon the terms which the partnership might negotiate with him were all matters which no partner could lawfully withhold from the firm and turn to his own account. The relation between such a client and the partnership is a matter affecting the joint interests which each member was bound to safeguard and protect, and no member could enter into dealings or engagements which conflicted or might conflict with those interests or which gave him a "bias against the fair discharge of his duty" in that respect (at 412).

[19]Birtchnell (1929) 42 CLR 384, 408 (Dixon J).

1. In the same case, Isaacs J observed that:[20]

For my purpose, I rely on part of s 33 and on the rules of Equity saved by s 4, which enable us properly to understand and apply s 33. Section 33 enacts that (1) "Every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction" concerning the business of the firm, etc. The section is not new law (see per Lindley LJ in Aas v Benham [(1891) 2 Ch at p 255], since that case, as pointed out in Pollock's Digest of the Law of Partnership [11th ed], p 95, was commenced before the Act was passed.) The section plainly cannot be confined to matters within the scope of the partnership. The contrary view would open a wide door to fraud, besides being opposed to what Lindley LJ says at the page mentioned. If, for instance, A and B are in partnership as wholesale grocers, and B arranges with C, a retail grocer, to share C's profits if B influences A to agree to supply C, I take it as clear that B's arrangement with C is a "transaction concerning the partnership," though C's business itself is wholly outside its scope. The case would fall within the observations of Cotton LJ in Dean v MacDowell [8 Ch D at 354], "acquired by him by reason of his connection with the firm" (394).

[20]Ibid 394 (Isaacs J).

1. It is critical to note that the fiduciary obligations between partners arise as a result of their position vis a vis one another, and the nature of the undertaking by each fiduciary, rather than necessarily arising from any partnership deed between them.  As observed by the High Court in United Dominions Corporation Ltd v Brian Pty Ltd:[21]

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….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.

[21]United Dominions Corporation Ltd v Brian Pty Ltd (1985) 60 ALR 741, 747 (Mason, Brennan and Deane JJ) (‘United Dominions’).

1. However, the High Court has observed that fiduciary duties ‘are not infinitely extensible’ and further that the scope of the duty must accommodate itself to the particulars of the underlying relationship.  The fiduciary duty should be consistent and conform to the scope and limits of that relationship (as may have been agreed between the parties), and should be moulded according to the particular facts of the case.[22]  It follows that a fiduciary relationship may be modified by contract. This may extend to excluding the operation of fiduciary duties in their entirety.[23]  Partners may therefore decide to make a commercial decision to adopt a corporate structure in which they owe duties to the corporation in their capacity as directors, but not necessarily to one another.[24]

   [22]Howard v Commissioner of Taxation (2014) 309 ALR 1, 12-13 [34] (French CJ and Keane J) (‘Howard’).

   [23]Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (No 4) (2007) 241 ALR 705, 751 [322]-[323] (Jacobson J).

   [24]Friend v Brooker (2009) 255 ALR 601, 620-621 [88] and [88] (French CJ, Gummow, Hayne and Bell JJ).

1. Where a partnership deed or some other instrument exists, it will be necessary to have regard to the terms of the instrument to determine the scope or ambit of the fiduciary’s undertaking.  The limits of fiduciary duties in the context of a partnership may be determined by ’the character of the venture for which the partnership existed, the express agreement by the parties, and the course of dealings’ pursued by the partnership.[25]

   [25]Chan (1984) 53 ALR 417, 431 (Deane J) quoting Birtchnell (1929) 42 CLR 384, 407-408 (Dixon J); Howard (2014) 309 ALR 1, 12-13 [34] (French CJ and Keane J).

1. Consequently, the partnership deed may be relevant insofar as it evidences the nature and extent of the undertaking by each partner to act in the interests of the partnership, thus defining the scope of the fiduciary relationship.  As observed by Professor P D Finn (as he then was) in Fiduciary Obligations:[26]

The all-important matter is the undertaking actually given by the fiduciary. Until the scope and ambit of the duties assumed by the fiduciary has been ascertained that no question of conflict of duty and interest can arise. You must ascertain what the fiduciary has undertaken to do, before you can say he has permitted his interest to conflict with his undertaking.

[26]P D Finn, Fiduciary Obligations (Lawbook Co, 1977) 542.

1. In Partnership and LLP Law, the learned author, in a section dealing with good faith and the fiduciary principle, concludes as follows: [27]

In addition, as we have seen, there is the pervasive good faith principle which underpins the fiduciary duties.

[27]G Morse, Partnership and LLP Law, (Oxford University Press, English ed) 163.

1. Further, at page 168, the learned author, after referring to a partnership as a relationship of utmost trust, concludes that a ‘failure to disclose will suffice for a breach of the duty’.  The section is headed Honesty and Full Disclosure.

1. In the Law of Partnerships in Australia, the learned author describes the nature of the partnership fiduciary obligation as follows: [28]

Fiduciary obligation is a complex body of rules developed by the court of Chancery over the centuries, which imposes higher duties of conduct on persons in special relationships of trust and confidence.  The duties of good faith and honesty, to provide full accounts of all information and assets in one’s possession or control, to preserve confidence, to avoid conflicts of interest and to avoid profiting personally from partnership opportunities and information and the obligation to account for benefits obtained in breach of these duties to the extent that they relate to partnership, apply and encourage partners to be loyal to the partnership.  All form part of the implied obligations of a partner, unless varied by agreement, whether generally or by full disclosure and the informed consent of partners in particular instances.  The Acts incorporate this body of rules by implication for the most part but detail the principles which are likely to have the most considerable impact on the partnership relationship.  (footnotes omitted).

[28]K Fletcher, The Law of Partnerships in Australia (Lawbook, 2007, 9^th ed) [4.10]

1. In Lindley & Banks on Partnership, the learned author, after dealing with the obligations of good faith, honesty and full disclosure, deals with the topic of ‘other benefits derived from connection with the firm’.  At paragraph 16-36 the principle is explained:[29]

   [29]R I’Anson Banks, Lindley & Banks on Partnership (Thomson Reuters, 2017, 20^th ed) [16-36]

However, the scope of the partnership business will not always be the determining factor.  There may also be circumstances in which a duty to account will arise in respect of a transaction unconnected with the partnership business, where a partner exploits an opportunity which comes to him only as a result of his membership of the firm.  As Lord Lindley explained:

“A partner … is not allowed in transacting the partnership affairs, to carry on for his own sole benefit any separate trade or business which, were it not for his connection with the partnership, he would not have been in a position to carry on.  Bound to do his best for the firm, he is not at liberty to labour for himself to their detriment; and if his connection with the firm enables him to acquire gain, he cannot appropriate that gain to himself on the pretence that it arose from a separate transaction with which the firm had nothing to do.”

The underlying rationale is, perhaps, that such gains fall within the potential scope of the partnership business so that it is logical that a duty to account should arise.  The operation of this principle has always been seen when considering the renewal of leases and the use of partnership property, and is further illustrated by the decisions in Russell v Austwick and Lock v Lynham. (footnotes omitted).

The 'No Conflict' and 'No Profit' Rules

1. In Chan v Zacharia, Deane J observed that the equitable rule involved two themes and that: [30]

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. Notwithstanding authoritative statements to the effect that the "use of fiduciary position" doctrine is but an illustration or part of a wider "conflict of interest and duty" doctrine (see, eg, Boardman v Phipps; N.Z. Netherlands Society "Oranje" Inc v Kuys), the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. 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.

[30](1984) 53 ALR 417, 434 (Deane J).

1. In Warman International Ltd v Dwyer (Warman), in respect of a claim by an employer against a former senior executive, the High Court observed that:[31]

A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position. The stringent rule that the fiduciary cannot profit from his trust is said to have two purposes: (1) that the fiduciary must account for what has been acquired at the expense of the trust, and (2) to ensure that fiduciaries generally conduct themselves "at a level higher than that trodden by the crowd". The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage.

[31](1995) 128 ALR 201, 209 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ) (‘Warman’).

1. In Pilmer v Duke Group Ltd (in liq), McHugh, Gummow, Hayne and Callinan JJ formulated the no conflict rule as follows:[32]

... [T]he fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is 'a conflict or a real or substantial possibility of a conflict' between personal interests of the fiduciary and those to whom the duty is owed.

[32](2001) 180 ALR 249, 271 [78] (McHugh, Gummow, Hayne and Callinan JJ) (‘Pilmer’).

1. In Streeter v Western Areas Exploration Pty Ltd (No 2), McLure P (with whom Buss JA agreed) observed that a fiduciary is under an obligation, without informed consent, not to promote his or her personal interest by making or pursuing a gain or benefit in circumstances in which there is a conflict or a real or substantial possibility of a conflict between the fiduciary’s personal interest and those whom he or she is bound to protect. Her Honour also observed that:[33]

When examining the case law, a distinction needs to be drawn between those cases in which the fiduciary was under a positive duty to acquire or seek to acquire a particular benefit or property for the company (Cook v Deeks [1916] 1 AC 554; Chan v Zacharia; Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443; Keech v Sandford (1726) 25 ER 223) and cases where there is no such positive duty. This case falls into the latter category. Whether there is a sufficient connection in those circumstances can give rise to difficult questions of fact. Indeed, where a complex course of dealing is in issue, as in this case, minds reasonably may differ as to the outcome of the application of the principles: Maguire v Makaronis (468). The principles in this area of the law are easier to state than to apply.

[33](2011) 278 ALR 291, 305 [76] (McLure P).

1. As the authorities clearly establish, a fiduciary relationship gives rise to two overlapping proscriptive obligations - to not obtain any unauthorised benefit from the relationship, and to not be in a position of conflict.  Each proscriptive obligation is ‘descriptive of circumstances in which equity will regard conduct of a particular kind as unconscionable and consequently attracting equitable remedies.’[34]  These obligations ‘stem from the fundamental obligation of loyalty’ that characterises the fiduciary relationship.[35]  The obligations are strict, and have a prophylactic function,[36] so as to preclude the fiduciary from acting in any other way than the interests of their principal.[37]   Courts are concerned to ‘enforce, not undermine, the strictness of the duty.’[38]  A fiduciary will be released from an ostensible breach of duty where the principal has given free and fully informed consent. The burden of proving informed consent lies with the defaulting fiduciary.[39]

   [34]Ancient Order of Foresters (2018) 360 ALR 1, 19-20 [67] (Gageler J) quoting Concut Pty Ltd v Worrell (2000) 75 ALJR 312 [26]; United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766, 799.

   [35]The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 225 FLR 1, 493 (Owen J).

   [36]Ancient Order of Foresters (2018) 360 ALR 1, 6 [9] (Kiefel CJ, Keane and Edelman JJ); G Jones, ‘Unjust Enrichment and the Fiduciary’s Duty of Loyalty’, (1968) 84 Law Quarterly Review 472, 474.

   [37]Grimaldi (2012) 287 ALR 22, 178 [178] quoting Chan v Zacharia (1984) 53 ALR 417, 433 (Deane J).

   [38]Ancient Order of Foresters (2018) 360 ALR 1, 16-17 [55] (Gageler J), 41-42 [166] (Nettle J).

   [39]Maguire & Tansey v Makaronis (1997) 144 ALR 729, 739 (Brennan CJ, Gaudron, McHugh and Gummow JJ) (‘Maguire’).

1. The first of a fiduciary’s obligations has been described as the ‘no conflict’ rule. A fiduciary is not permitted to enter into engagements ‘in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect’.[40]  In circumstances involving breach of the rule, the rule operates to appropriate for the beneficiary any benefit or gain obtained where there existed a conflict of personal interest and fiduciary duty, or a significant possibility of such a conflict.  This precludes the fiduciary from being swayed by considerations of personal interest,[41] thus reinforcing absolute loyalty to the beneficiary. The unconscionability which is said to justify the availability of equitable relief does not lie with the receipt by the fiduciary of the benefit or gain, as with the retention by the fiduciary of the benefit which ‘in conscience ought to be disgorged to the principal’.[42]

   [40]Aberdeen Railway Co v Blaikie Brothers [1843-60] All ER Rep 249, 252 (Lord Cranworth).

   [41]Ancient Order of Foresters (2018) 360 ALR 1, 20 [68] (Gageler J).

   [42]Ancient Order of Foresters (2018) 360 ALR 1, 20 [68] (Gageler J).

1. However, the bare repetition of vague statements of principle will be insufficient to establish the existence of a conflict. As observed in Howard v Commissioner of Taxation:

Much closer attention must be given to the duties, interests and alleged manner of conflict than is given by simply observing that directors owe fiduciary duties. It is necessary to identify the duties or interests which are said to conflict or present a real possibility of conflict.[43]

[43]Howard (2014) 309 ALR 1, 18 [61] (Hayne and Crennan).

1. The ‘duty’ to which the ‘no conflict’ rule refers is to ‘the function, the responsibility, the fiduciary has assumed or undertaken to perform for, or on behalf of, the beneficiary’.[44]  The scope of the duty is a question of fact to be determined by reference to the particular circumstances of the case and will inform any assessment of a potential conflict of interest.

   [44]Grimaldi (2012) 287 ALR 22, 68 [179] (Finn, Stone and Perram JJ).

1. The ‘no profit’ rule has been described as:

A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position.[45]

[45]Warman (1995) 128 ALR 201, 209 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ).

1. The rule aims to preclude the fiduciary from actually misusing their position for their own personal advantage.[46]  Consequently, whether a beneficiary was able or willing to avail itself of an opportunity (or whether the opportunity would have been available to the beneficiary) has no bearing on whether there has been a breach of fiduciary duty.[47]  In circumstances involving a breach of the rule, a fiduciary ‘will be ordered to render an account of the profits made within the scope and ambit of his duty.’[48] 

   [46]Ancient Order of Foresters (2018) 360 ALR 1, 20 [69] (Gageler J).

   [47]Warman (1995) 128 ALR 201, 211 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ).

   [48]Warman (1995) 128 ALR 201, 210 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ).

1. As pointed out, fiduciary obligations are generally proscriptive, not prescriptive.[49]  The law does not generally impose duties on fiduciaries to act positively in the interests of a person to whom the duty is owed.  However, this is not to say that there is no scope for discussion of positive obligations within the law of fiduciary relationships. [50]

   [49]Friend v Brooker (2009)255 ALR 601, 620 [84]-[85] (French CJ, Gummow, Hayne and Bell JJ); Breen v Williams (1995) 186 CLR 71, 93-94 (Dawson and Toohey JJ), 113 (Gaudron and McHugh JJ), 135-137 (Gummow J); Pilmer (2001) 180 ALR 249, 270-271 [74] (McHugh, Gummow, Hayne and Callinan JJ).

   [50]There are suggestions ‘that there is a level of unreality in any dichotomy which rests on acts and omissions.  The distinction is a slippery one and it is arguably dangerous for the limits of fiduciary principles to be based on such a shifting principle’, P Radan & C Stewart, Principles of Australian Equity and Trusts, (LexisNexis, 2^nd ed) at [9.13].  See also the cases and footnotes referred to therein and Meagher, Gummow & Lehane (5^th ed) at [5.380] ff. 

1. Consequently, it is prudent, in my opinion, to consistently return to the touchstones of ‘no conflict’ and ‘no profit’ when examining the contended breaches of fiduciary duty in this case, without focusing on whether the impugning conduct was ‘positive’ or ‘negative’ in character, an unnecessary diversion in the context and circumstances of this case.

G3      Fiduciary Duties – Analysis

1. Given the nature, conduct and operation of the Partnership, and its governing agreement, the Partnership Deed, it is not difficult to conclude that Graco and indeed each Principal stood in a fiduciary relationship to each other and to the Partnership.  All of the relevant indicia of such a relationship point that way.  Indeed, not without justification, they probably regarded themselves as partners and clients and the business community, having no knowledge of the Partnership Deed – and in particular the existence of corporate partners – would almost certainly have thought this to be the case.  Of course as a matter of construction of the Partnership Deed the Principals may well be partners.  Indeed I have found this to be the case.  This aspect is dealt with below.  Partners are of course subject to fiduciary duties.  However, a fiduciary relationship may well arise, as indeed it does in this case, without any necessary finding or conclusion that the Principals are Partners.  The fiduciary relationship (and most importantly its relevant scope) arises out of the peculiar features and circumstances of the case, as noted, above and below. 

1. All meetings and discussions relating to the Partnership and its conduct and business operations were entered into and decisions made by the Principals.  The very nature and context of these meetings, discussions and decisions and, in particular, the subject matter bespeaks of and evidences parties that rely on, trust, and have confidence in one another to each look after and do what is best for and in the interests of all of them in pursuit of their joint enterprise, which specifically included opportunities for investment through connections with clients and in totally unrelated businesses. This aspect, which is at the crux of the case is discussed in more detail below.  In fact, during the course of his cross-examination, Graco confirmed that the Principals reposed trust and confidence in each other. 

1. Although they may have been meeting, engaging in discussion and making decisions on behalf of each corporate Partner that they represented, or were Principals of, this does not mean they had no duties as Principals inter se, or only contractual duties.  To suggest that they were merely the representative and directing mind of the relevant corporate Partner and no more is to ignore both the reality and substance of the relationship and more importantly, the terms and obligations referred to in the Partnership Deed. 

1. Allowing professional partnerships to incorporate is a relatively recent phenomenon and does not necessarily absolve the related parties or Principals from partnership-type duties and responsibilities.  There are often qualification, registration and ongoing educational requirements and other professional and ethical requirements placed upon the individuals by agreement (in this case, the Partnership Deed) or by governing bodies.[51]  Not anyone can be a Principal.  The corporate Partners – entitled to a share of the profits – could not appoint several doctors to run the business of the Partnership.  They were required to and did maintain their involvement and decision making in the interests of the Partnership. 

   [51]Indeed, clause 4.5 of the Partnership Deed provides for reimbursement by the Partnership to each Partner of ‘the costs of professional association membership fees’. Clause 10 requires each Partner to maintain professional indemnity insurance.

1. The Partnership Deed is a critical document.  Indeed, on one view, as discussed below, it constitutes the Principals as Partners with the consequent fiduciary duties.[52]  However, even if it does not go this far there are substantial obligations on the part of the Principals.  These obligations are important, multiple, continuing and evidence parties certainly in a contractual relationship but, in my view, even further in a fiduciary relationship, that is, a relationship underpinned by the utmost good faith and loyalty and a requirement specifically on the part of the Principals (called Partners) to look after the interests of the others. Whatever the criticism of the Partnership Deed, these obligations, and in particular the obligation to ensure that each Partner has an equal right and opportunity to participate, are personal and fiduciary in nature. They cannot be ignored or swept away with a simple rhetorical flourish, highly critical of the drafting of the Partnership Deed. 

   [52]The individual Principals clearly in the circumstances intended to be, and are, bound by the Partnership Deed, notwithstanding their execution thereof only on behalf of their corporate entities. (See the analysis below).

1. There are numerous clauses that refer to the Partners, but can only properly be understood as referring to the Principals, that is the individuals.  Is the reference in these clauses to Partners simply to be ignored or are they to be read down to Principals?  The definition of Partners as potentially including the individual Principals where required further confuses and compounds the difficulty.  Ultimately it may not be necessary to resolve the confusion.  If these clauses are read in such a way as to refer to Principals (which the context suggests that they must), notwithstanding the definition of Partners, the substance and effect of the clauses serves to underpin the fiduciary relationship.  Ultimately, either the individuals are Partners (see below) or as Principals they are in effect akin to Partners so that either way the Principals are subject to fiduciary duties.  That such a fiduciary relationship exists between the Principals almost goes without saying.  It is more the context and scope of the fiduciary duty that is relevant.

1. The relevant clauses in the Partnership Deed require further consideration.  They are considered in greater detail under section G4 below. They cannot simply be ignored.  The following clauses refer to Partners, but clearly involve an obligation, involvement or conduct on the part of each relevant Principal:

·Partners expenses include a mobile phone, home computer, professional association membership, parking expenses … (clause 4.5);

·Each Partner shall be entitled to engage professional staff … (clause 4.6);

·Clause 4.6(b) refers to ‘the death or incapacity of any Partner’;

·Cheques and other like documents ‘shall be signed by any Partner’ (clause 6.2);

·Clause 7 deals with Partners leave (including annual, long service and sabbatical);

·Clause 8 deals with Partners illness and incapacity.

·Clause 15 deals comprehensively with the retirement of Partners and includes age, death and incapacity;

·Clause 16 deals with the sale of an interest in the Partnership.  Clause 16.5 provides that ‘no remaining Partner who exceeds 60 years of age shall be entitled to acquire any additional interest …’;

·Clause 20 deals with amendments and includes the following:  ‘Each Partner shall (and shall procure his related entity to) be bound by any such approved amendment to this Deed’. 

1. In addition to the clauses referred to, the following additional matters are relevant:

·In many cases and proximate to the word Partner, the word ‘his’ is used (clauses 4.3, 19.1);

·Schedule 1 is headed Partners and contains under this heading two columns, Partner and Principal;

·Schedule 4 refers to Partners’ long service leave entitlements as at 1 February 2007.  The individuals are named. 

1. Finally, clauses 11, 14 and 19 are of fundamental importance to the matter under discussion.

1. The substance and extent of clause 11 (opportunity to invest with clients), by its very nature, requires each Partner, in the circumstances referred to, to act in the interests of all Partners by not only disclosure and approval but by invitation to participate in the investment or opportunity.  Obligations of loyalty and fidelity and mutual trust are implicit. The effect of the clause is that the Partner[53] is required to look after the interests of the other Partners, who may not be aware of the opportunity, but are entitled to an equal opportunity to participate.

   [53]In context, it includes the Principals both expressly (see definition in clause 1.1) and implicitly as the analysis under this section posits.

1. The restriction on activities or restraint of trade contemplated by clause 14 clearly applies to the individuals or Principals (called Partners).  Again, the nature, extent and substance of the clause relates to and assumes individuals operating as Partners, which of course they are called.

1. Clause 19 is a related clause. It contains obligations and restrictions after leaving the Partnership.  Once again, the nature, extent and substance of the clause relates to and assumes individuals operating as Partners, which of course they are called. 

1. In my opinion, and having regard to the above analysis, it is not necessary to conclude that the Principals are Partners in order to find that they are subject to fiduciary duties, although there are powerful reasons for this precise finding (see below).  As Principals they are, on such analysis, clearly subject to fiduciary duties, and probably the exact same duties as the (corporate) Partners.  The conclusion is inescapable from the Partnership Deed itself and the way in which the Partnership indeed operated.  In particular:

(a)   As noted above, there are substantial, important, numerous and continuing personal non-delegable obligations on the part of the Principals (for the most part called Partner when referring to such obligations).  Although some may be regarded as purely contractual, the Partnership Deed taken as a whole evidences an ongoing relationship between the Principals.  The relationship is spelt out by the Partnership Deed and the terms ‘Principals’ and (corporate) ‘Partners’ are not only used interchangeably but in the identified clauses the Principals are in effect specifically referred to as Partners.  All of this points to a very close relationship of trust, confidence, loyalty and fidelity between individuals committed to each act in the interest of the others in their joint endeavour.  Such a relationship is not excluded by the Partnership Deed.  To the contrary it is highlighted and reinforced by the Partnership Deed and in particular the clauses referred to and most importantly, clause 11.4. 

(b)   The existence, and indeed the scope of the fiduciary duty is most evident when regard is had to clause 11, which is, in my view, critically relevant to the issues in this case.  As pointed out, the word ‘his’ in 11.4(a) and ‘he’ in 11.4(b) is highly suggestive of personal obligations.  However, it is the substance and nature of the obligation that is most relevant.  It regulates how a Partner (at the very least a Principal) must behave and act when faced with an opportunity to make any investment in a client, or together with a client ‘introduced through his involvement with the practice or in holding any office in any entity in which a client of the practice has an interest’ (clause 11.4(a)).  What is then required according to clause 11.4(b) is to ‘offer to all other Partners every opportunity of which he has knowledge to invest with a client of the practice …’.  Finally, prior to making any such investment ‘the formal approval by special majority vote of the Partnership prior to making any investment’ is required.  Special majority vote is defined as ‘a decision where at least 75% in number of the Partners holding at least 50% in value of the equity in the Partnership have voted in favour of the matter in question’. 

(c)    As noted, the clause has all the hallmarks of a fiduciary relationship.  It assumes and requires loyalty.  It also assumes and requires mutual trust and confidence.  It requires the Partner or Principal receiving the offer to look after the interests of the other Partners and Principals by disclosure, approval and most importantly, as noted, invitation to participate.  It effectively prohibits such Partner or Principal from pursuing any opportunity to the exclusion of the others.  To the contrary the requirement to include others and defer to their decision comprises part of the matters that give rise to the fiduciary duties.  Each of the other Partners or Principals would reasonably be entitled to expect that such party will act in their interests in the situation referred to, and not place themselves in a position where they exploit the opportunities for themselves or put themselves in a position where they are precluded, by their own voluntary act, from following from on their obligation to look after their partners.

(d)  Finally, clause 11.4 not only creates – together with other facts and circumstances referred to – the relevant fiduciary duty, but also self-evidently defines its scope and ambit.

1. Accordingly I find that whether or not he was a Partner, Graco as a Principal, and in the circumstances referred to, owed fiduciary duties to the other Principals and Partners and that such fiduciary duties specifically included the obligations referred to in clause 11.4.  Specifically, he was not allowed to place himself in a position of conflict or make a profit as a result of the pursuit of an opportunity for himself in breach of clause 11.4. 

G4      Was Graco a Partner – the Partnership Deed

1. If Graco was indeed a Partner in his own name and right, it must follow that he was subject to fiduciary duties, although I have found that he was in any event subject to these duties for the reasons set out above. However, the plaintiffs press their claim for an account to the Partnership for any secret benefit obtained by Graco pursuant to ss 32 and 33(1) of the Partnership Act. Their entitlement to this relief (dealt with under H below) necessarily requires me to find that Graco was a Partner of the Partnership.   

The Partnership Deed

1. For convenience and ease of reference, the relevant clauses of the Partnership Deed are set out again in this part. ‘Partners’ is defined as follows:

“Partners” means the entities set out in Schedule 1 (and where relevant to actions required from individuals the principal as noted in Schedule 1) …

1. Each ‘Partner’ listed in Schedule 1 to the Partnership Deed corresponds with one of the individual principals of the Partnership. Schedule 1 is set out below:[54]

   [54]The addresses of each entity and other unnecessary details have been omitted.

SCHEDULE 1

PARTNERS

Partner	Principal[55]
Chickabo Pty Ltd (ACN 074 576 186) as trustee for the Mullen Practice Management Trust	Kevin Joseph Mullen
Arrabi Nominees Pty Ltd (ACN 005 209 469) as trustee for the Borsky Practice Trust	Thomas Peter Borsky
Zphere Pty Ltd (ACN [114 716 773]) as trustee for the Graco Practice Trust	Gary Charles Graco
Grant Rose Investments Pty Ltd (ACN 061 290 507) as trustee for the Grant Practice Management Trust	Phillip Daniel Grant
Dakis Networth Pty Ltd (ACN 117 348 633) as trustee for the Dakis Practice Trust	George Samuel Dakis
Gataya Pty Ltd (ACN 088 653 785) as trustee for the Hammerschlag Practice Trust	Mark Mordechai Hammerschlag
Garex Pty Ltd (ACN 115 067 117) as trustee for the Rosenberg Practice Trust	Harry Rosenberg
(together, ‘the corporate Partners’)	(together, ‘the Principals’)

[55]‘Principal’ is not defined by the Partnership Deed.

1. The term, ‘Partner’ or ‘Partners’, carries a distinct meaning depending on which clause of the Partnership Deed it appears in. In some clauses the word ‘Partners’ refers to the corporate Partners. In others, it is clear that as a matter of construction, common sense or commercial necessity, it refers to the Principals.

1. These other clauses are set out below:

(a)        Clause 4.5, on Partners’ expenses:

The Partnership shall provide each Partner with one mobile telephone and a home computer and shall pay on behalf of or re-imburse to each Partner the costs of all mobile telephone charges, internet service provider charges, home computer expenses, professional association membership fees, income continuance insurance premiums … and parking expenses incurred by each Partner …

(b)        Clause 4.6(a), on the entitlement of Partners to engage professional staff:

Each Partner shall be entitled to engage professional staff of the Practice to assist in the preparation of personal financial and income tax returns …

(c)        Clause 4.6(b)(i), on the same:

Following the death or incapacity of any Partner no charge for professional services shall be made by the Practice or by any Partner for acting as Chartered Accountant for any estate or wife or any child or children of any deceased Partner …

(d)       Clause 7.1(a), on annual leave and public holiday entitlements:

Each Partner shall be entitled to take by way of annual leave 25 working days …

(e)        Clause 7.3(a), on long service leave entitlements:

At the completion of the first 15 years service as an employee or Partner, each Partner shall be entitled to take Long Service Leave …

(f)         Clause 8.1, on absences arising from illness and incapacity:

If any Partner shall at any time be prevented by illness or accident from performing his duties as a Partner …, then that Partner's entitlements … shall not be affected as a result of such absence. …

(g)        Clauses 8.2 and 8.3, on the same:

Where the period of illness or incapacity of any Partner exceeds a continuous period of 90 days … then during the further period that Partner shall have no entitlement to receive his notional salary …

…

Where the period of illness or incapacity of any Partner exceeds a continuous period of 12 months … the remaining Partners shall be entitled to resolve by Special Majority Vote that the ill or incapacitated Partner shall be deemed to have retired …

(h)        Clause 9, on the duties of the Partners:

Each Partner must:

…

(b) devote the whole of his time and attention to the Practice and no Partner may, without the consent of 75% in number of the other Partners, engage in or be concerned or interested in any way whatsoever in any other business or enter into any employment or hold any office or appointment otherwise than for the benefit of the Partnership;

…

(f) forthwith pay all moneys cheques and negotiable instruments received by him in connection with or on account of the Partnership (including any directors’ fees) into the Partnership account;

(i)         Clause 15.1, on the retirement of a Partner:

A Partner may cease to be a Partner in any of the following circumstances:

(i)        death or incapacity;

(ii)ordinary retirement from practice as a chartered accountant at or over age 55;

(iii) early retirement from practice as a chartered accountant below age 55;

(iv)      staged retirement from the Practice from age 61;

(v)       compulsory retirement from the Practice at age 65;

(vi) retirement from the Partnership to be engaged in or to carry on a competing practice;

(vii)      retirement from the Partnership by being expelled.

Clauses 15.2 to 15.6 further outline the circumstances listed above in which a Partner may cease to be a Partner in the Partnership.

1. Clause 11 governs the disclosure of financial interests and the restrictions imposed upon Partners while they continue act as a Partner of the Partnership. Clause 11.1, on disclosure of a statement of interests is in the following terms:

(a)If he has not done …, each Partner must submit to the Board of Management … a statement setting out the whole of the Partner's financial interests identifying the nature of each of the Partner's financial interests but not the value of those financial interests and identifying all interests and/or officeholdings held by the Partner in any entity associated with any client of the firm (“Statement of Interests”).

(b) The Board of Management must satisfy itself that no Partner is engaged in any activities which the Partners regard as incompatible with the objectives and/or ethical standards of the Practice or which create or have the potential to create a conflict of interest for the Practice.

1. Clause 11.2 governs the activities that a Partner is restricted from undertaking while continuing to act as a Partner of the Partnership:

No Partner shall without the consent of 75% in number of the of the Partners:

(a) engage directly or indirectly in any business which may adversely affect the good name and/or the goodwill of the Partnership;

(b) engage directly or indirectly in any business other than the Practice or hold any honorary office of appointment. Nothing shall prevent any Partner from:

(i)continuing to engage in any: business in which such Partner had an interest prior to 1 February 2006; or

(ii) holding any honorary office or appointment in circumstances where the holding by such Partner of such office or appointment would not reasonably be expected to adversely affect the Partnership or the Practice;

…

(g) accept or act for any client against the wishes of the other Partners;

…

(m) divulge any confidential information about the Partnership or the Practice to any person not authorised to receive that information.

1. Clause 11.4 governs the investment activities for which a Partner must obtain the consent of the remaining Partners:

(a)Each Partner must obtain the formal approval by Special Majority Vote of the Partnership prior to making any investment in association with a client of the Practice or with any entity in which  client of the Practice has an interest or with parties to whom the Partner was introduced through his involvement with the Practice or in holding any office in any entity in which a client of the Practice has an interest.

(b) Each Partner must offer to all the other Partners every opportunity of which he has knowledge to invest with a client of the Practice or with an entity in which a client of the Practice has an interest. No Partner shall be compelled to enter into any such investment opportunity.

1. Clause 11.5, on those business or investment activities not involving clients of the Partnership, is set out below:

Other than investments in listed securities or passive property investments, where a Partner wishes to engage in a business or investment activity outside the Practice but in which no client of the Practice has any interest he must first obtain the approval by simple majority vote of the Partnership by submitting a written statement of his intentions to the Partnership. The Partnership may not unreasonably withhold its consent from the Partner.

1. Clause 14 is a restraint of trade placed on outgoing partners:

If any Partner ceases for whatever reason to be a Partner in the Partnership, that Partner (“the Outgoing Partner”) covenants and agree with the other Partners that except with the prior written consent of 75% in number of the other Partners the Outgoing Partner and any entity with which the Outgoing Partner is directly or indirectly associated or has an interest shall not, whether directly or indirectly, by himself or jointly with or on behalf of any other persons or corporation or trust on any account or pretext by any means whatsoever within any of the areas specified in Clause 14.2 and for any of the periods specified in Clause 14.3:

(a) carry on or be concerned with directly or indirectly (whether as Proprietor, shareholder, employer, employee, trustee, consultant, adviser, beneficiary, agent, principal, director, partner or in any other capacity whatsoever) or otherwise engage or be interested or concerned in any manner whatsoever:

(i)        in a practice as a chartered accountant or auditor;

(ii) as a consultant or adviser consulting on or providing advice in any of the areas of work undertaken by the Partnership as at the date on which the Outgoing Partner ceases to be a Partner; or

(iii) in any business or activity, the same as or similar to any business or activity carried on directly or indirectly by the Partnership in any of the Practice Entities as at the date on which the Outgoing Partner ceases to be a Partner ("the Prohibited Business");

(b) hold or beneficially own whether directly or indirectly and whether absolutely or contingently or hold options over shares or interests in any person, company or trust itself conducting a Prohibited Business;

(c)induce or attempt to induce any employee or consultant to the  Partnership or the Practice Entities to leave the employment of or to terminate their engagement or relationship with the Partnership or any of the Practice Entities.

The Law

1. The question of whether a person or entity is a partner is one of fact. It is an issue ‘to be determined on the basis of the substance of the relationship between the alleged partners.’[56]  Merely because a person asserts that they are a partner will not make them so.[57]  However, a person may say that they not a partner yet the Court may find that they are, in fact, a partner.[58]

   [56]Attwell v Roberts [2013] WASCA 37 [182] (Pullin JA).

   [57]Duke Group Ltd (in Liq) v Pilmer (1998) 27 ACSR 1, 475 (Mullighan J).

   [58]United Dominions (1985) 60 ALR 741, 742 (Gibbs CJ), 746 (Mason, Brennan and Deane JJ), 749 (Dawson J).

1. Where the parties have reduced their agreement to writing, the question as to the identity of the partners falls to be determined in accordance with ordinary principles of contractual interpretation. It is, accordingly, necessary to construe the provisions of the Partnership Deed ‘in accordance with the general principles to be applied in giving commercial contracts a businesslike interpretation.’[59] These principles were not in dispute and were summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd:[60]

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.

In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.

Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.

However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice. …

Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.

Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.

[59]Reliance Franchise Partners Pty Ltd v Ford Kinter & Associates Pty Ltd [2018] VSCA 106 [17] (Whelan, Niall and Hargrave JJA) (‘Reliance Franchise Partners’).

[60](2015) 256 CLR 104, 116–17 [46]–[51] (citations omitted) (‘Mount Bruce’).

1. Further, the Court of Appeal has emphasised that ‘the Court should have regard to all of the words used in the agreement “so as to render them all harmonious one with another” and to ensure the “congruent operation of the various components as a whole.”’[61]

   [61]Reliance Franchise Partners [2018] VSCA 106 [18] (Whelan, Niall and Hargrave JJA).

1. Although these cases deal with the construction of terms of an agreement, they apply more generally and include issues of construction relating to the identity and status of parties, by reference to the agreement.  Although the subject matter is different, it is no less a matter of construction and interpretation of the document in context.

1. Another issue arises as the Principals (including Graco) did not sign or execute the Partnership Deed in their individual capacities. Each signed only as director of the relevant corporate Partner with which they were associated.  The defendants submitted that this was fatal to a finding that Graco was a Partner and bound by the terms of the Partnership Deed. 

1. Notwithstanding that a person may have signed a contract in a qualified or representative capacity (such as in the capacity of director or secretary of a company), the authorities support the proposition that they may be bound by its terms in their own name and right. This is so where the terms of the contract (viewed as a whole) and the admissible surrounding circumstances evidence an objective intention on the part of the signatory to be personally bound by the contract.[62] The Court eschews an approach that ‘concentrates upon the form of execution to the exclusion of [the] other provisions’ of a contract.[63]

   [62]See the discussion of authorities in Padstow Corp Pty Ltd v Fleming (No 2) (2011) 86 ACSR 636 [13]-[23] (Gzell J) (‘Padstow’).

   [63]Ibid 641 [26] (Gzell J).

1. Moreover, the benefits received were within, or incidental to, the scope of the partnership business. The Partnership has an interest in potential investment opportunities with clients. This much is reflected by clause 11.4 of the Partnership Deed, contemplating that from time to time there would be ‘investment[s] in association with a client of the Practice’ and in those circumstances, a formal approval by special majority is required. In circumstances where there were opportunities to invest with clients it was expected that the opportunity would be ‘brought home’ to the Partnership and offered to the co-partners as required by clause 11.4(b).

1. I am satisfied that the Investment and Additional Payment were benefits derived by Graco, without the consent of the other partners from transactions that concerned the Partnership.

1. As for the second limb, there is no reason to depart from the approach taken in Rochwerg.[100] Indeed, and as the plaintiffs have identified, the case here is stronger as Graco did not possess a connection to Swisse prior to being introduced to the company by Mullen.

   [100]See Rochwerg (2002), 158 O.A.C. 41 (CA); (2002) 212 DLR (4^th) 498 [101]-[106] (Cronk JA).

1. Graco became a director of Swisse only because he had served as relationship Partner, on behalf of the Partnership, from about 2000. Over this time, he acted as their trusted accountant and adviser, and in this capacity he regularly attended board, management and shareholders’ meetings.

1. Mullen had a personal connection to Ring (and by extension, Swisse) due to having been friends with Ring since they were at school together, however, Graco had no previous connection to Ring or Swisse. Mullen was replaced by Graco as Mullen believed that Swisse needed independent professional advice, unburdened by existing ties of friendship.

1. Swisse was always a client of the Partnership, and not of Graco personally. As a client of the Partnership, Swisse is plainly a ‘business connexion’ of the Partnership. The offer of Graco’s directorship derived from his association to the Partnership and its business connection to Swisse. By taking up the offer of shares, in his nominated entity, Graco used this connection.

1. It follows that the benefits derived by him, were benefits derived, without the consent of the other partners, from his use of a ‘partnership…business connexion’ within the meaning of s 33(1).

1. Furthermore, and for the reasons discussed above, the Opportunity, Investment and Additional Payment were also ‘things affecting the Partnership’. As discussed above, Graco failed to ‘render true accounts’ or give ‘full information’ to the Partnership in respect of these matters. He is accordingly, in breach of s 32 of the Partnership Act. It is neither necessary nor desirable to discuss the consequences of this breach for two reasons. First, the remedy provided for under s 33 is specific, appropriate and applicable. Any remedy under s 32 would provide no greater relief. Secondly, the matter was not specifically argued.

I          The Claim Against Zphere – Breach of Fiduciary Duty

1. It is beyond doubt and common ground that as a corporate Partner Zphere owed fiduciary duties to the corporate Partners.  Appreciating that this is only the start of the enquiry, in my opinion and contrary to the defendants’ submission, the scope and ambit of the fiduciary duties included the fiduciary duties embraced by and arising out of and pursuant to clause 11.4.  Zphere was clearly subject to this duty or these duties and for the reasons advanced above the duties were fiduciary in nature. 

1. As noted above (paras [67] to [68]), I do not propose to and it is not necessary to further and specifically characterise the obligations arising out of clause 11.4. The defendants submitted that as positive obligations they are not fiduciary in nature. I disagree and consider, as noted above, that such analysis is too simplistic. The simple fact is that the operation of the clause or its breach led directly to a breach by Graco of the ‘no conflict’ and ‘no profit’ principles, themes and of course obligations, which are at the very essence of, and constitute breaches of fiduciary duty. This is what the clause sought to regulate.

1. Further, the duty is no less on the part of Zphere because Graco was subject to the same duty, whether or not he was a Partner. In fact, the defendants accepted that any fiduciary duty was that of Zphere.  However, as pointed out they disputed there was any such duty.

1. Unlike Graco however, it cannot be contended that Zphere was in breach of its acknowledged fiduciary duties so far as they relate to any benefit derived from a breach of clause 11.4. Zphere was more remote from the transaction. It did not take up the Opportunity. It did not receive any unauthorised profit or benefit, notionally or otherwise. Whether as a matter of attribution (or imputation) Graco’s conduct was in effect that of Zphere with the corollary that it was Zphere that nominated GFBR and Glenaldon to receive the relevant benefits, resulting in the consequence breach by Zphere, was not sufficiently explored. It is unnecessary and undesirable to deal with this potentially complex issue.

1. However, Zphere was a Partner and clearly had full knowledge of all the relevant matters relating to the Opportunity, and the terms and operation of the Partnership Deed, and in particular clause 11.4. As such, Zphere was in breach of various obligations to the Partnership (contractual and fiduciary) pursuant to the Partnership Deed, the general law and as set out below, the Partnership Act. Most importantly, Zphere was in a position of conflict. With such full knowledge it owed a duty to the Partnership of disclosure, pursuant to the Partnership Deed, the general law and the Partnership Act. This duty was in conflict with its personal interest which was entirely aligned with that of its director, Graco. At the very least, there was in the circumstances a real or substantial possibility of a conflict. Full disclosure and consent was required to avoid such a breach of fiduciary duty arising from the conflict.[101] The consequences of such a breach may be similar to the consequences of a breach of s 32 of the Partnership Act, which I have found as set out below. I will hear from the parties as to the appropriate remedy.

J          The Claim Against Zphere – Breach of the Partnership Act

[101]See paragraphs [62], [67] to [68], [124] and [165]. It is neither necessary nor desirable to determine whether any of the other obligations, positive in nature, are fiduciary obligations, whether by analogy to the position of company directors or otherwise. (See Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1 [897]-[898] (Lee AJA), [1978] (Drummond AJA), [2733] (Carr AJA) (‘Bell (No 3)’)).

1. Unlike Graco, I do not consider that Zphere relevantly received any benefit ‘from any transaction concerning the Partnership or from any use [by Zphere] of the partnership name or business connexion.’ Zphere may have stood by while Graco and at his direction, GFBR and Glenaldon received a substantial unauthorised benefit, as I have found. As Zphere was more remote from the relevant transaction, it is not liable, pursuant to s 33(1) of the Partnership Act simply because it was a Partner.

1. However, Zphere is, in my opinion liable pursuant to s 32 of the Partnership Act. As explored above, the Opportunity, Investment and Additional Payment were each ‘things affecting the partnership’. Zphere, was a Partner and clearly had full knowledge of these matters. Like Graco, Zphere was obliged, by virtue of such knowledge, pursuant to clause 11.4 of the Partnership Deed and s 32 of the Partnership Act, to disclose them to the Partnership. It did not, and as such, its failure to render ‘true accounts and full information’ places Zphere in breach of s 32. The parties did not address any remedy relating to a breach of s 32 in circumstances where there is no breach of s 33 and a more confined breach of fiduciary duty. That is, a breach of the ‘no conflict’ obligation. I will hear from the parties as to the appropriate remedy.

K        The Claim Against Graco – Accessorial Liability (Zphere)

1. As I have found Graco to be a fiduciary and to have breached those duties (and whether or not he was a Partner) he is liable in the ordinary way as a primary wrongdoer. Consequently, it is not strictly necessary to deal with this issue. If he is liable as a primary wrongdoer it must follow that he is liable as an accessory in relation to the conduct and any breach by Zphere. However, if I am wrong in finding Graco owed fiduciary duties, including in relation to clause 11.4, (and whether or not he was a Partner, and that the only breach was by Zphere), it would be necessary to consider his liability as an accessory. In such event, and for the reasons set out I find that he is so liable.[102]

   [102]A more detailed analysis of accessorial liability is contained in the next section.

1. The fiduciary duties owed by Zphere and the relevant breaches are set out above.  Graco had knowledge of them as the directing mind and will of Zphere.

1. Graco is in my opinion, liable for knowingly inducing or procuring Zphere’s breach of fiduciary duty.  The elements are:

(a)   the existence of a fiduciary duty owed by the fiduciary;

(b)   a breach of duty on the part of the fiduciary;

(c)    inducement or procurement of that breach by the third party; and

(d)  knowledge on the part of the third party of the breach of duty.

1. The first two elements are satisfied as referred to in Section I above. In relation to the third element, Graco knowingly induced or procured Zphere’s breach by causing Zphere to be in a position of conflict of interest and failing to render true accounts and provide full information to the Partnership for its dealings with respect to any or all of the Opportunity, Investment and Additional Payment.

1. In relation to the fourth element, it is sufficient that an honest and reasonable person who had the same knowledge as Graco would have concluded that there was a breach of fiduciary duty.  It is not necessary for the purposes of this form of equitable liability to establish that the breach of fiduciary duty amounted to a dishonest and fraudulent design, a finding which I am not prepared to make. [103]  However, I find that an honest and reasonable person who had the same knowledge as Graco would have concluded that there was a breach of fiduciary duty.

   [103]Hasler v Singtel Optus Pty Ltd (2014) 311 ALR 494, 510 [77] (‘Hasler’) (Leeming JA).

1. It was submitted further that Graco is liable for his knowing assistance of Zphere’s breach of fiduciary duty under the second limb of Barnes v Addy.  The elements of knowing assistance are:

(a)   the existence of a fiduciary duty owed by the fiduciary;

(b)   a ‘dishonest and fraudulent design’ on the part of the fiduciary;

(c)    assistance by the third party in that design; and

(d)  knowledge on the part of the third party of the circumstances constituting that design.

1. It was submitted that Graco’s assistance was procuring for GFBR the benefit of the Investment, and procuring for Glenaldon, alternatively for himself and Mrs Graco, the benefit of the Additional Payment.

1. There is an unresolved difference in the authorities about the meaning of ‘dishonest and fraudulent design’.  The authorities are referred to in more detail below.  On the one hand, the Western Australian Court of Appeal held that it requires ‘more than a trivial breach and is also too serious to be excusable because the fiduciary has acted honestly, reasonably and ought fairly to be excused’.  On the other hand, the New South Wales Court of Appeal held that it requires dishonesty which ‘amounts to a transgression of ordinary standards of honest behaviour.’

1. It was submitted that on either view, Graco’s conduct constituted a dishonest and fraudulent design.  It was dishonest, it was submitted, in the following respects:

(a)   to act in deliberate breach of duty, having directly turned one’s mind to the terms of the relevant fiduciary duty;

(b)   to act out of financial self-interest, and adversely to the interests of the Partnership;

(c)    to act contrary to what Mr Graco himself acknowledged was the proper thing to do; and

(d)  to conceal the Additional Payment from the Partnership, with the intention of never disclosing it.

1. It is neither necessary nor desirable to resolve the different approaches. I am not prepared on the evidence before me to make any finding of a dishonest or fraudulent design (or dishonesty) on either test.

1. However, as an accessory for inducing or procuring Zphere’s breach, Graco is liable to account. I will hear from the parties as to the appropriate remedy.

L         The Claims Against GFBR and Glenaldon – Accessorial Liability

Accessorial Liability – General Principles

1. Where a fiduciary, such as a Partner (in this case, as I have found, both Graco and Zphere) uses a corporate entity as the vehicle by which an unauthorised profit is received, that corporate entity is also accountable where it either knowingly receives property obtained in breach of fiduciary duty or where it knowingly assists in the fiduciary’s breach. These are the two limbs of Barnes v Addy.[104] The duty to account in these circumstances is stringent, and the onus is on the errant fiduciary or participant to show that they should not account for the full value of the advantage they have received.

   [104](1874) LR 9 Ch App 244.

1. Aside from liability under either limb of Barnes v Addy, a party may also face accessorial liability for having knowingly induced or procured a breach of fiduciary duty.[105]  The High Court has previously drawn attention to this line of authority in FarahConstructions Pty Ltd v Say-Dee Pty Ltd (Farah).[106]  As has been emphasised by the Court of Appeal, ‘[t]here are different forms of accessorial liability for breach of fiduciary duty. They must be kept distinct’.[107]  Critically, unlike liability arising from the second limb of Barnes v Addy, it is not necessary to establish that the relevant breach of fiduciary duty was ‘dishonest and fraudulent’.[108]

   [105]Marriner v Australian Super Developments Pty Ltd [2016] VSCA 141, [69]-[72].

   [106]Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, 159 [161] (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ) (‘Farah ’).

   [107]Harstedt Pty Ltd v Tomanek [2018] VSCA 84, [68] (Santamaria, McLeish and Niall JA) (‘Harstedt’).

   [108]Ibid; Hasler (2014) 311 ALR 494, 510 [77] (Leeming JA).

1. Under the first limb of Barnes v Addy, a third party who knowingly receives property obtained in breach of trust or fiduciary duty will be rendered liable to account as constructive trustee in respect of such property.[109]   Liability under Barnes v Addy is fault-based and turns on conscience rather than property, and should therefore be distinguished from claims based on the vindication of proprietary rights.[110] 

   [109]Farah Constructions (2007) 230 CLR 89, 140-141 (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ).

   [110]Fistar v Riverwood Legion and Community Club Ltd (2016) 91 NSWLR 732 (CA), [44] (Leeming JA).

1. The second limb of Barnes v Addy renders a defendant liable where the defendant assists a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary.[111]  As has been recently noted by the Court of Appeal, the state of the law on accessorial liability has previously ‘been riddled with uncertainty and disunity’.[112]  The extent of disagreement has been variously described as ‘marked to the point of being Babel-like’[113] and ‘over-elaborate and myopic’.[114]  Nonetheless, as currently understood in Australia, and as noted earlier, the necessary elements of liability under the second limb of Barnes v Addy are:

   [111]Farah  (2007) 230 CLR 89, 159 (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ).

   [112]Harstedt [2018] VSCA 84, [67] (‘Harstedt’) (Santamaria, McLeish and Niall JA).

   [113]Grimaldi (2012) 287 ALR 22, 80 [249] (Finn, Stone and Perram JJ).

   [114]W Gummow, ‘Knowing Assistance’ (2013) 87 Australian Law Journal 311, 311.

(a)   The existence of a fiduciary duty owed by the fiduciary (as trustee or otherwise);

(b)   A 'dishonest and fraudulent design' on the part of the fiduciary;

(c)    Assistance by the third party in that design; and

(d)  Knowledge on the part of the third party of the circumstances constituting that design.[115]

[115]Harstedt [2018] VSCA 84, [70] (Santamaria, McLeish and Niall JA); Farah (2007) 230 CLR 89, 159 (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ);

1. With respect to determining ‘knowledge’ for the purposes of each limb of Barnes v Addy, courts in Australia[116] usually rely upon the first four of five categories of knowledge outlined in Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA.[117]  These are:

   [116]Harstedt [2018] VSCA 84, [87] (Santamaria, McLeish and Niall JA); Farah (2007) 230 CLR 89, 163–164 (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ. See also Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, 398 (Gibbs J), 412 (Stephen J). See also the recent decision of Silversea Cruises Australia Pty Ltd v Abellanoza & Anor [2018] NSWSC 1565 [27] (Sackar J).

   [117][1993] 1 WLR 509, 575-576.

(a)   Actual knowledge;

(b)   Wilfully shutting one’s eyes to the obvious;

(c)    Wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;

(d)  Knowledge of circumstances which would indicate the facts to an honest and reasonable man;

(e)   Knowledge of circumstances which would put an honest and reasonable man on inquiry.

1. The plaintiffs allege that GFBR and Glenaldon are accountable to the Partnership for their knowing and active participation or assistance in breaches of fiduciary duty, as well as their knowing receipt of property obtained in breach of fiduciary duty. Each company’s liability is said to arise under the first and second limbs of Barnes v Addy. It is well established that the principles under Barnes v Addy extend to property obtained in breach of fiduciary duty, and are not restricted to property obtained in breach of trust. The plaintiffs claim in addition that liability arises under the further ground of accessorial liability referred to above.

Accessorial Liability – ‘Fraudulent and Dishonest Design’ – Second Limb

1. The breach of fiduciary duty itself must be ‘dishonest and fraudulent’ in order to satisfy the second limb of Barnes v Addy.[118]  It is clear that this requirement excludes ‘well-intentioned’ or ‘trivial’ breaches of trust or fiduciary duty from the scope of ‘knowing assistance’,[119]  and something more than a mere breach of trust or fiduciary duty will be required to establish liability.[120]

   [118]Farah (2007) 230 CLR 89, 164 [179] (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ); Harstedt [2018] VSCA 84 (Santamaria, McLeish and Niall JA);, [84]; Grimaldi (2012) 287 ALR 22, 84 [259] (Finn, Stone and Perram JJ). See also Nicholson v Morgan (No 3) (2013) 8 ASTLR 277, 292–4 [61]–[68] (Edelman J).

   [119]Farah (2007) 230 CLR 89, 164 [180] (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ).

   [120]Bell (No 3) (2012) 44 WAR 1, [2112] (Drummond AJA).

1. However, beyond such a basic observation, the authorities diverge on the precise meaning of ‘dishonest and fraudulent design’.[121]  Writing extra-judicially, Black J has observed this requirement ‘raises issues of particular difficulty, at least for judges at first instance’.[122]

   [121]Harstedt [2018] VSCA 84, [81] ((Santamaria, McLeish and Niall JA).

   [122]A Black, ‘Directors' statutory and general law accessory liability for corporate wrongdoing (2013) 31 Company and Securities Law Journal 511, 529. 

1. In Hasler v Singtel Optus Pty Ltd (Hasler), Leeming JA astutely observed:

In short, the issue is recurring, important, and leading to inconsistent formulations of principle in courts across Australia. The issue is producing uncertainty in an area where it is highly desirable that there be no uncertainty.[123]

[123]Hasler (2014) 311 ALR 494, 507 [63] (Leeming JA).

1. Some courts have adopted an approach which requires conduct of a character approaching common law fraud. In Craigcare Group Pty Ltd v Superkite Pty Ltd, Hallen J declined to find knowledge of a fraudulent and dishonest design, finding ‘I cannot be satisfied that [the fiduciary’s] conduct was morally reprehensible’.[124]  Similarly, in Alexander v Burne, Young AJ stated:

Nevertheless, the words ‘dishonest and fraudulent design’ require something more than a serious breach of trust. There must be some plan on the part of the trustee to defraud the trust, knowing it to be a defrauding of the trust, for the trustee to be liable under this second limb of Barnes v Addy.[125]

[124][2014] NSWSC 326, [265] (Hallen J).

[125][2013] NSWSC 1953, [17] (Young AJ).

1. The circumstances of Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (‘Bell’)[126]  arose out of the collapse of the ‘Bell Group of companies’ in the early 1990s. The plaintiff liquidators of the Bell Group sought to recover funds from various banks who had realised securities given by members of the group. Inter alia, the plaintiff alleged the banks had received these proceeds whilst knowing that by giving the securities, the directors had breached fiduciary duties owing to the member companies, giving rise to liability under Barnes v Addy. Drummond AJA (which whom Lee AJA agreed) extracted the following relevant principles regarding the phrase 'dishonest and fraudulent design' from Farah:[127]

   [126](2012) 44 WAR 1 (Lee, Drummond and Carr AJJA).

   [127]Bell (No 3) (2012) 44 WAR 1, 381 [2112] (Drummond AJA).

(a)   A mere finding of breach of duty by the fiduciary will not be sufficient to show a dishonest and fraudulent design; some additional feature will be required;

(b)   It is not necessary to demonstrate the breach of fiduciary duty occurred in circumstances where the fiduciary acted with a conscious awareness that what he was doing was wrong: the breach of duty can be characterised as dishonest or fraudulent according to equitable principles;

(c)    The ‘additional feature’ will exist if the breach of duty is ‘more than a trivial breach and is also too serious to be excusable because the fiduciary has acted honestly, reasonably and ought fairly to be excused’.  Findings of honest and reasonableness require a ‘discretionary judgment having regard to all the circumstances of the case.’ A person may be fraudulent in the eyes of equity, even though he acted with subjective honesty.

1. Drummond AJA went onto find that Owen J, at first instance, had erred by holding ‘conscious wrongdoing’ on the part of the fiduciaries was required, and that the fiduciary’s conduct must ‘attract a degree of opprobrium raising it above the level of a simple breach’.  According to Drummond AJA, such a finding ‘suggests that there must be a level of misconduct on the part of the directors greater than I think Farah requires’.[128]

   [128]Ibid, 384 [2126] (Drummond AJA).

1. Hasler[129]  concerned alleged breaches of fiduciary duty by the former General Manager (Logistics) at Optus, Mr Leon Curtis, by causing Optus to pay for warehousing supplied by a company operated by Mr Cutis and Mr Craig Hasler. Mr Hasler was held to be jointly liable for the losses incurred by Optus, as a person knowingly involved in Mr Cutis’ dishonest and fraudulent design. Hasler challenged the findings at trial, contending that a finding of dishonest and fraudulent design was not open on the facts, and the correct approach to the second limb of Barnes v Addy was narrower than that stipulated in Bell.

   [129]Hasler (2014) 311 ALR 494 (Barrett, Gleeson and Leeming JJA).

1. Leeming JA acceded to the submissions criticising the approach adopted by Drummond and Lee AJJA in Bell, noting the meaning accorded to ‘dishonest and fraudulent’ by their Honours was ‘not itself well-defined, is unsupported historically and leads to anomalies’[130] Leeming JA went on to observe the formulation ‘dishonest and fraudulent’ avoids the potential for dispute as to the meaning of ‘fraud’ in equity, by also requiring there must be dishonesty - namely, ‘a transgression of ordinary standards of honest behaviour’.[131]

   [130]Hasler (2014) 311 ALR 494 , 515 [103] (Leeming JA).

   [131]Ibid 519 [124] (Leeming JA).

1. Whilst disagreeing with the majority in Bell as to the meaning of ‘dishonest and fraudulent design’, Leeming JA adopted Optus’ alternative submission that ‘on any view, Mr Curtis’ breach was serious enough to attract accessorial liability’.[132]  His Honour relevantly observed:[133]

Mr Curtis was throughout the period paid a salary by Optus and employed as a senior manager pursuant to a contract which required him to "serve [Optus] faithfully and diligently" and "not [to] act in conflict with [Optus'] best interests". He brought about a position where the company Sumo, of which he was a shadow director, was supplying warehouse services to Optus, not pursuant to any competitive tender, but at prices which (on behalf of Sumo) he set, and which (on behalf of Optus) he approved, with the result that Sumo derived many millions of dollars of revenue. That of itself is sufficient to answer the description of a dishonest and fraudulent design. There is a plain transgression of ordinary standards of honest behaviour. No honest employee would do such a thing without having first obtained the consent of his or her employer. Even if Mr Curtis is to be believed in his evidence that he did not appreciate that there was a conflict of interest, let alone dishonesty, his self-deception does not prevent his conduct from being dishonest.

Analysis

[132]Ibid 519 [126] (Leeming JA).

[133]Ibid 519 [127] (Leeming JA).

1. Graco is the sole director of Glenaldon.  He is obviously its directing mind and will.[134]

   [134]Although the concept or principle of ‘the directing mind and will’ as a basis of attribution of corporate liability has properly been criticised, it is not unhelpful in this elementary context: Reynolds, ‘Corporate knowledge: the search for the relevant  mind/s’ (2018) 92 Australian Law Journal 991.

1. Graco was likewise the directing mind and will of GFBR.  Mrs Graco’s evidence confirms that fact.  Courts take a pragmatic view in identifying the relevant corporation’s directing mind and will.  The existence of other directors does not detract from the fact that Graco had the management and control of GFBR.  Mrs Graco’s evidence was that Graco ‘generally runs the affairs of GFBR.’  In the face of that evidence, Graco’s pleaded denial (paragraph [7] of his defence) that he was the directing mind and will of GFBR is, in my opinion, unsustainable.

1. Each of GFBR and Glenaldon were the corporate vehicles of Graco.  They acted at the direction of Graco and his knowledge is clearly imputed or attributed to these corporate vehicles instructed to receive the benefits of the breach of fiduciary duty, which indeed they did receive with relevant full knowledge.  Thus:

(a)   GFBR as a knowing recipient is jointly and severally liable to account with Graco for the Investment and its proceeds; and

(b)   Glenaldon as a knowing recipient is jointly and severally liable to account with Graco for the receipt of the Additional Payment and its proceeds.

1. Where a third party and the fiduciary act in concert to secure a mutual benefit, they are jointly and severally liable to the wronged beneficiary or principal and are liable to account for the profits made.  Each of GFBR and Glenaldon caused, procured or induced, by their receipt with relevant full knowledge, Graco to fail to account for the Investment and the Additional Payment respectively. 

1. Finally, in my opinion, it is not necessary or desirable to decide whether GFBR and Glenaldon acted dishonestly or ‘knowingly and actively participated’ in the fiduciary’s breach and are liable to account, on whatever may be the appropriate test.

M       Disposition

1. In summary, I have found as follows:

(a)        Graco is liable as a fiduciary in breach of each of the ‘no profit’ and ‘no conflict’ obligations (at [122]).

(b) Graco is liable as a Partner in breach of ss 32 (at [163]) and 33 of the Partnership Act (at [162]).

(c)        Zphere is liable as a fiduciary in breach of the ‘no conflict’ obligation (at [167]).

(d) Zphere is liable as a Partner in breach of s 32 of the Partnership Act (at [170]).

(e)        Graco is liable, as an accessory, for knowingly inducing or procuring Zphere’s breach of fiduciary duty (at [173]).

(f)         GFBR is liable, as an accessory, for knowingly receiving property (the Investment) obtained in breach of Graco’s fiduciary duty (at [199]).

(g)        GFBR is liable, as an accessory, for knowingly inducing or procuring Graco’s breaches of fiduciary duty (at [200]).

(h)        Glenaldon is liable, as an accessory, for knowingly receiving property (the Additional Payment) obtained in breach of Graco’s fiduciary duty (at [199]).

(i)         Glenaldon is liable, as an accessory, for knowingly inducing or procuring Graco’s breaches of fiduciary duty (at [200]).

1. Proprietary remedies may well be available against each of GFBR and Glenaldon because they are recipients of property in breach of fiduciary duty. They may well hold that property on constructive trust for the benefit of the Partnership. I propose to deal with the nature, scope and extent of relief that flows from each of the breaches identified, any allowances, and any other matters, including the proportionate entitlement of the fifth and sixth defendants, at a separate hearing.